Archive for November 20th, 2009

Euroarea in Recessions- a comparison

November 20, 2009

ECB’s November monthly bulletin (heavy pdf file) has a short research note comparing the performance of Euroarea in previous recessions. To do a comparison of recessions in Euroarea is always a mighty job.

  • The decline in investments, consumption, employment, wages is much the same as in previous recessions. The wages actually don’t decline as much.
  • The decline is much sharper in exports which reflects in a much sharper decline in GDP

Useful stuff.

Fed’s role in Payments systems

November 20, 2009

Thomas Hoenig of Kansas Fed has an interesting speech on payments system in US. He points that much of the growth in payments system  is happening in private sector with no regulatory oversight. The payment system is also being run by a few large players and there is little competition. So far it is all good as there are no sisks. But as the crisis tells us we cannot take anything for granted. Hence time to move and reform this section. He argues for Fed’s increased role in oversight of payments system.

I can’t extract contents from the speech as there are security issues. So, just read on.

Lessons from New Deal

November 20, 2009

Lee Ohanian summarises the broad lessons from Great Depression and his huge research in this speech. He says the depression was mainly because of the New Deal.

The failure to recover is puzzling, because economic fundamentals improved considerably after 1933. Productivity growth was rapid, liquidity was plentiful, deflation was eliminated, and the banking system was stabilized. With these fundamentals in place, the normal forces of supply, demand, and competition should have produced a robust recovery from the Depression. Figure 3 shows the recovery in productivity, real bank deposits, and the level of the GNP deflator, which stops falling after 1933, and rises modestly afterwards. Why wasn’t the recovery stronger?

My research shows that one policy that delayed recovery was the National Industrial Recovery Act (NIRA), which was the centerpiece of New Deal recovery policy. The NIRA prevented market forces from working by permitting industry to collude, including allowing firms within an industry to set minimum prices, restrict expansion of capacity, and adopt other collusive arrangements, provided that firms raised wages considerably. These policies worked. Following government approval of an industry’s “code of fair competition”, industry prices and wages rose significantly.

Promoting collusion reduces employment and output, while setting the wage above its market-clearing level depresses employment by making labor expensive. Employers respond to high wages by reducing employment relative to the market-clearing level that is jointly determined by supply and demand. Figure 2 shows hours worked and the real manufacturing wage. The most striking feature of the graph is that the continuation of the Depression coincides with rising real wages. This fact stands in sharp contrast to standard economic reasoning, which indicates that normal competitive forces should have reduced industry wage levels and increased employment and output. This coincidence of high industry wages and low hours worked is one of the most telling signs that the market process was considerably distorted.

The broad lessons are that policies that are supposed to ease recession should not distort market incentives. This was a lesson from works of Prescott et al as well.

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