Archive for April 17th, 2009

Comparing Great Depression and current depression/crisis

April 17, 2009

CFR had a symposium on Great Depression learnings. Just check out the papers on GD from all top econs – Lucas, Bordo, Prescott, Ohanian, Cole etc. You name it and they have it. (Just move the mouse around the titles as links are not clearly visible; some are free and some are not). Apart from papers they have videos and transcripts of each session.

I was reading this sessionwith Lucas. He compares the two events by looking at GDP below the trend. In GD it fell by 34% in 4 years making it all the more difficult to recover. In this crisis it is expected to be around 8-10% enabling a faster recovery. The broad idea is:

The trend growth rate of the U.S. economy is 3 percent per year — I’m talking about total GDP, real GDP.  And we always — we keep returning to it, it’s been our — the norm for well over a century.  But, suppose right this minute GDP is 6 percent below the trend line?  Then to recover in three years, to get out of a recession in three years, we need three years of 5 percent growth — 3 percentage points just to keep up with the trend; and 2 percent, three times in a row, to get, to make up for the 6 shortfall.  So, that’s what it means to get out of a recession like this, roughly speaking.

His take on fiscal multiplier:

The Moody’s model that Christina Romer — here’s what I think happened.  It’s her first day on the job and somebody says, you’ve got to come up with a solution to this — in defense of this fiscal stimulus, which no one told her what it was going to be, and have it by Monday morning.  

So she scrambled and came up with these multipliers and now they’re kind of — I don’t know.  So I don’t think anyone really believes.  These models have never been discussed or debated in a way that that say — Ellen McGrattan was talking about the way economists use models this morning.  These are kind of schlock economics.  

Maybe there is some multiplier out there that we could measure well but that’s not what that paper does.  I think it’s a very naked rationalization for policies that were already, you know, decided on for other reasons.  I don’t — I’d like to talk about the Lucas critique but I don’t — I don’t think we can — (chuckles) — deal with that issue.  

Interesting throughout. We are in the middle of one of the worst crisis ever and still discussions over basics of economics continues. I am amazed to see how much bickering there is between economists wrt to measures for tackling crisis.

(IMF also had a conference on near similar topic).

A look at impact of crisis on Freddie/Fannie

April 17, 2009

Though, we know the developments broadly. Nevertheless it is always good to know more :-)  W. Scott Frame of Atlanta Fed has a nice paperon the developments in the twin GSE’s.

Fannie Mae and Freddie Mac are government-sponsored enterprises that play a central role in U.S. residential mortgage markets. In recent years, policymakers became increasingly concerned about the size and risk-taking incentives of these two institutions. In September 2008, the federal government intervened to stabilize Fannie Mae and Freddie Mac in an effort to ensure the reliability of residential mortgage finance in the wake of the subprime mortgage crisis. This paper describes the  sources of financial distress at Fannie Mae and Freddie Mac, outlines the measures taken by the federal  government, and presents some evidence about the effectiveness of these actions. Looking ahead, policymakers will need to consider the future of Fannie Mae and Freddie  Mac as well as the appropriate scope of public  sector activities in primary and secondary mortgage markets.

A nice overview. Those interested in more details can read it.

Chinese inequality is higher within coastal provinces!

April 17, 2009

FRBSF economists have written a short note on Chinese inequality. They report three broad findings all quite well known:

  • Urban incomes have increased higher compared to rural
  • Within urban, the inequality has risen with differences between high and low wage rising across time
  • Within provinces, the incomes in coastal regions is growing compared to inland regions. As Chinese growth is export driven, this is pretty well expected. The coastal regions would have ports etc for exports. The coastal regions have Trade Zones etc leading to higher incomes and more inequality.

However this was an additional finding:

A more surprising observation from the data in Figure 3, however, is that the difference between inland versus coastal provinces is less pronounced than that across coastal provinces. In fact, the highest average real wage among the coastal provinces increased dramatically, while the lowest average real wage among coastal provinces remained similar to the average real wage in inland provinces. It appears, therefore, that the benefits of China’s economic growth have been concentrated in a subgroup of all coastal provinces. This observation is consistent with the finding of Yao and Zhang (2001) that groups (or clubs) of Chinese provinces diverge in terms of real per capita GDP.

What could be the reasons?

One possibility is that, because China’s economic growth is largely driven by exports, the access of a province to shipping facilities could be important in determining its performance in general and its wage level in particular. Figure 4 presents a simple check of this hypothesis.

In support of the port hypothesis, the figure shows that coastal provinces without large commercial ports have a similar average real wage close to the average real wage in inland provinces (compared to Figure 3). That lends support to the idea that access to the coast boosts wages more in those provinces that have large commercial ports. However, there remain large differences in average real income among the provinces with large ports, indicating that increasing export activity is not the sole explanation for growing regional income inequality. Thus, further investigation of the reasons for such differences is needed.

In their recent study, Wan, Lu, and Chen (2007) show that, while globalization is a contributor to regional inequality in China, differences in physical capital, as well as speed of economic reform such as privatization, play a growing role in fueling regional inequality. Candelaria, Daly, and Hale (2009), moreover, find that cross-provincial differences in industry composition and availability of skilled and unskilled labor also account for some of the inequality.

A nice read on Chinese inequality.

Assorted Links

April 17, 2009

1. Krugman starts another interesting debate – Productivity difference between US and Europe. It has been argued for sometime that US is more productive that Europe. Research says half of the difference is because of the financial service industry. Then he adds:

And given recent events, are we even sure that the expansion of the financial system was doing anything productive at all? In short, how much of the apparent US productivity miracle, a miracle not shared by Europe, was a statistical illusion created by our bloated finance industry?

2. WSJ Blog points Fed Bal Sheet expands again

3. Mankiw has a great cartoon on economists.

4. Rodrik says recovery going to be difficult

5. FMB on inflation vs deflation

6. CTB takes on Krugman. Somewhere down the line the fancy for finance stays

7. MR points to latest on financial crisis

8. TTR says we should welcome boredom in banking


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