Archive for January 5th, 2010

Was the current crisis a currency crisis?

January 5, 2010

American Economics Association Annual meeting is on in Atlanta. The program details are here . WSJ Blog is covering the main papers presented.

Paul Krugman presnets a paper in AEA which obviously becomes a must read.  It is a paper presented at this forum: Nobel and Clark Lectures.

In this paper, he looks at currency crises (which is his brainchild) and the three generations. And then suggests in a way the current crisis is a currency crisis which has not impacted via liability side  (as seen in the previous crisis) but via the asset side.

As usual Krugman at his best. He should just write on economics. What simplicity he explains various eco issues is always refreshing.

Uncertainty and the Slow Recovery

January 5, 2010

Gary Becker, Steven Davis and Kevin Murphy write in WSJ (HT Mankiw):

In terms of U.S. output contractions, the so-called Great Recession was not much more severe than the recessions in 1973-75 and 1981-82. Yet recovery from the latest recession has started out much more slowly. For example, real GDP expanded by 7.7% in 1983 after unemployment peaked at 10.8% in December 1982, whereas GDP grew at an unimpressive annual rate of 2.2% in the third quarter of 2009. Although the fourth quarter is likely to show better numbers—probably much better—there are no signs of an explosive take off from the recession.

What are the reasons for this?

We believe two factors are behind this rather tepid rebound. An obvious one is the severe financial crisis that precipitated this recession, with many major financial institutions receiving large bailouts from the federal government. The confidence of bankers and venture capitalists has been shattered, at least for a while, and it will take time for them to recover from the financial turmoil of the past couple of years. The household sector also faces a difficult period of financial retrenchment in the wake of a major collapse in home prices, overextended debt positions for many, and high unemployment.

The second factor is less obvious, but possibly also of great importance. Liberal Democrats won a major victory in the 2008 elections, winning the presidency and large majorities in both the House and Senate. They interpreted this as evidence that a large majority of Americans want major reforms in the economy, health-care and many other areas. So in addition to continuing and extending the Bush-initiated bailout of banks, AIG, General Motors, Chrysler and other companies, Congress and President Obama signaled their intentions to introduce major changes in taxes, government spending and regulations—changes that could radically transform the American economy.

A nice political dimension of the slow recovery in US economy.

USSR would be a bigger economy than US

January 5, 2010

Tyler Cowen points to this amazing forecast from Samuelson:

In the 1961 edition of his famous textbook of economic principles, Paul Samuelson wrote that GNP in the Soviet Union was about half that in the United States but the Soviet Union was growing faster.  As a result, one could comfortably forecast that Soviet GNP would exceed that of the United States by as early as 1984 or perhaps by as late as 1997 and in any event Soviet GNP would greatly catch-up to U.S. GNP.  A poor forecast–but it gets worse because in subsequent editions Samuelson presented the same analysis again and again except the overtaking time was always pushed further into the future so by 1980 the dates were 2002 to 2012.

In subsequent editions, Samuelson provided no acknowledgment of his past failure to predict and little commentary beyond remarks about “bad weather” in the Soviet Union.

Cowen points to this paper by David M. Levy and Sandra J. Peart which analyse the forecast closely.

We examine the treatment of Soviet growth in successive editions of American economics textbooks published between 1960 and 1980. What we find repeatedly is over-confidence in the potential for Soviet growth and an asymmetric response to past forecast errors. More than this, the textbooks report faster Soviet income growth combined with a constant ratio of Soviet–US income. Textbooks that abstracted from these institutional details (thin) offered a wider range of application than those which focused on one society (thick). A simple way to distinguish these two traditions is whether the book used a productivity possibility frontier [PPF] for cross-societal comparisons. Thick accounts did not while thin ones did. It was in the institutional dimension that the account by Tarshis differed from that of Samuelson.

This is quite interesting. The paper makes it to the must read list. Having read Samuleson’s book long back, I don’t recall this forecast at all. Moreover, the day I discovered Mankiw’s textbook I never really got back to Samuelson’s textbook.

One lesson which I could draw from the above is the same kind of forecasts doing rounds for India and China. Well, growth rates are important but what is more important is the economic structure needed to achieve the growth. USSR clearly failed bigtime in this regard failing to provide good institutions and economic framework.

Though, Indian economy is not like USSR. But still we need more discussions on building the economic framework for achieving the high growth. However, all you get to read is India will achieve so much growth, India will become an economic superpower based on so much growth etc.

The faster we move to thinking (and executing) on how to build such a growth patter, the better it is. Otherwise, in 2050 someone will be looking at the rosy forecasts made by economists in 2010 on Indian economy and saying how it was all overhyped.

Economics of Happiness

January 5, 2010

Carol Graham of Brookings works on economics of happiness. I was reading her very interesting article on the same topic.

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