Archive for November 14th, 2009

Krugman on US vs Germany

November 14, 2009

Paul Krugman has an interesting article on the policies used by US and Germany. US uses GDP boosting policies and Germany uses unemployment policies. The same were followed in the recession. The result is both seem to be out of recessions GDP wise but unemployment is not a problem in Germany but it is in US. And US policymakers need to fix this rising unemployment fast.

Should America be trying anything along these lines? In a recent interview in The Washington Post, Lawrence Summers, the Obama administration’s highest-ranking economist, was dismissive: “It may be desirable to have a given amount of work shared among more people. But that’s not as desirable as expanding the total amount of work.” True. But we are not, in fact, expanding the total amount of work — and Congress doesn’t seem willing to spend enough on stimulus to change that unfortunate fact. So shouldn’t we be considering other measures, if only as a stopgap?

Now, the usual objection to European-style employment policies is that they’re bad for long-run growth — that protecting jobs and encouraging work-sharing makes companies in expanding sectors less likely to hire and reduces the incentives for workers to move to more productive occupations. And in normal times there’s something to be said for American-style “free to lose” labor markets, in which employers can fire workers at will but also face few barriers to new hiring.

What should be done?

Just to be clear, I believe that a large enough conventional stimulus would do the trick. But since that doesn’t seem to be in the cards, we need to talk about cheaper alternatives that address the job problem directly. Should we introduce an employment tax credit, like the one proposed by the Economic Policy Institute? Should we introduce the German-style job-sharing subsidy proposed by the Center for Economic Policy Research? Both are worthy of consideration.

The point is that we need to start doing something more than, and different from, what we’re already doing. And the experience of other countries suggests that it’s time for a policy that explicitly and directly targets job creation.

Interesting comparison between Germany and US.

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Eichengreen says Asian Central Banks move fast

November 14, 2009

Barry Eichengreen in this article on Eurointelligence says that developed economy’s central banks can wait but asian central banks should start hiking rates to dampen asset bubbles:

Commentators are on firmer ground when they warn that dangerous asset bubbles are developing in emerging Asia and in China in particular.  And it is not only independent critics: the World Bank, in its recent semi-annual report on East Asia, warned darkly of unsustainable asset-market conditions.  Asset prices are frothy.  Property prices are booming, especially in the big cities.  All this is alarmingly reminiscent of the United States in 2006.

The mechanism inflating these bubbles is exceptionally accommodating monetary policies.  Low interest rates in the advanced countries provide an incentive to borrow there and invest in higher-yielding assets in emerging markets

No lessons being learnt:

It is as if we have learned nothing from the experience of the last three years.  Central banks are still blowing bubbles.  Focusing narrowly on inflation, they continue to ignore their responsibility for financial stability.

These worries are creating strong pressure for central banks to turn off the tap.  Australia and Norway have already moved in this direction.  There is growing pressure for others to follow. 

He adds bubbles in Asia pose a serious threat and it is not Fed but Asian Central Banks that need to tighten the noose:

Leaning against them is a task for Asia’s central banks and regulators, not for the Fed or the ECB.  With U.S. and European unemployment continuing to rise, accommodative monetary policies remain appropriate for the Fed and the ECB.  With financial markets still in the recovery ward, both central banks are right to pause before unwinding their accommodating policies. 

It could pose problems as higher interest rates could mean more capital flows and appreciation of the currency:

There is also the worry that if Asian central banks tighten, signaling that they are prepared to see their exchange rates rise, they will just attract more capital inflows from speculators betting that their currencies will strengthen.  Here regulators need to step in to prevent inflows from fueling more asset-market excesses.  In countries like China where they control the allocation of credit directly, regulators need to impose stricter ceilings on bank lending.  They need to tighten collateral requirements in property markets.  More governments might also consider taxes on financial capital inflows like those imposed in October by Brazil.

 The danger posed by Asia’s financial bubbles is real.  But it is important to take the right steps to combat it.  This is appropriately a task for emerging market central banks, not for the Fed or the ECB.  It is not helpful to amputate the patient’s right foot when it is the left foot that is infected.

Hmm….Will Asian Central Banks act?


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