Tag Archives: macro

Don’t Blame Ben!

The Economist has a comment on central banks financing governments in the wake of the financial crisis. Basically, the point is that central banks that did QE bought tons of government bonds. At the same time, at least some of them – the Bank of England, for example, but the Fed as well – wrote their respective governments a yearly check, transferring any profits they made (after paying salaries). They always do that, but now, some of the money they made was from interest earned on their huge government bond positions. So the government paid them interest, they collected it, and at the end of the year sent it back to the government. Which, you know, isn’t too far from monetizing government debt – i.e. financing the government.

But what’s the problem? In the continued absence of hyperinflation, you might conclude that there really isn’t much of an issue here. However, says the Economist:

But another reason why monetisation has always been frowned upon is that it is an easy option. Why should governments finance spending with unpopular taxes or borrow from suspicious bond investors when they can get the money from a friendly central bank? The process makes democratic leaders less accountable; by boosting asset prices, which are mostly owned by the rich, it may well have led to a rise in inequality, without the sanction of any vote. Perhaps in ten or 20 years’ time, recent events will be seen as the moment the world crossed a line.

I have a couple of miscellaneous points on this, and one bigger point on the idea that this promotes inequality.

Why government bonds?

One of the questions we have to ask ourselves in this context is obviously, why only allow the central bank to buy government bonds (and a very limited set of other ‘save’ assets)? We obviously had this discussion in class: the Fed (or BoE, or other central bank of your choice) being able to buy stocks would give them a lot more firepower. They could reduce interest rates that are much further from zero than a three-month T-bill. Beyond that, buying stuff that isn’t issued by the government also means you’re not monetizing government debt. So here’s another argument for giving the Fed freer reign with regards to asset purchases!

Who’s afraid of government financing?

The Fed, BoE, and central banks around the world generally pay their governments yearly checks, even in times when none of their profits come from interest on government bonds. Something has to happen with their profits! Sure, if the US, England or other places had a sovereign wealth fund, that would be one place to put them, and it might be at least semi-autonomous from the government. So that’d be nice. But nobody has those, so not an option right now. But yet another reason to have them!

By the way, in better times, central banks raising interest rates hurts the government, in so far as that it has to pay higher interest on newly issued bonds. So it’s not clear that the government generally benefits from central bank actions, at least not directly (although it does reap the benefits of a smoothly running economy if the central bank does a good job and doesn’t have to worry about the ZLB).

Inequality and all that

The point about QE raising asset prices and helping the rich is actually quite interesting. For one thing, QE also reduces interest rates (that’s just the flip side of higher asset prices), so it’s not quite clear that all rich people benefit from it. Specifically, the classic rentier would actually suffer. On the other hand, people sitting on tons of assets may of course benefit. but the question is: when did they acquire those assets?

If they held them throughout the financial crisis, chances are they’re about back to break-even now, because they probably copped huge capital losses throughout the crisis. If they bought them right in the depth of it, well… smart investment on their part, but some of their profits were certainly subsidized by the central bank. The question is: did the Fed (BoE, any other central bank) have an alternative strategy, given the ZLB? Not in the absence of electronic money. And not doing anything would have prolonged the crisis. It’s not obvious to me that the middle class or the poor would have preferred a longer crisis to what we had. So as long as we’re unwilling to have electronic money – this is as good as it gets!

I think that next time (which I’m sure will be different) we should have a new set of tools at the ready. That may contain a sovereign wealth fund, a more powerful central bank, or electronic money. And maybe that way, expansive monetary policy – which was absolutely necessary, macroeconomically speaking – won’t have as many side-effects as it may have had this time around, and be more effective. But ultimately, it’s difficult to fix the economy without the rich taking their share of the recovery. And more importantly, that’s not the central banks domain; distribution is government’s domain. And if it’s unwilling or unable to act, don’t blame Ben (Bernanke, or really any other central banker)!

[Revised] Don’t Fear the Reaper (of Unemployment Benefits)

So the GOP met today to discuss strategy for the upcoming House and Senate elections. I encourage you to read the whole piece; it’s full of hidden gems (“policies incentivizing people to work” may be one of my all-time favorite euphemisms). One of the things that people seemed to like was the implementation of “tough love tactics” (that one also immediately made the list). Call me European (no really, that’s okay; I am German, after all), but what are certain people afraid of when it comes to making sure everybody has a baseline income to fall back to? What’s so bad about indefinite unemployment insurance? Is everybody just going to stop working? Will total economic collapse ensue?

While I get that the “paying people to be unemployed won’t help the economy“-argument holds a lot of sway with a lot of people (horrible article, by the way), it’s quite frankly wrong. Let’s take a look at labor force participation rates around the ‘developed’ world (although if you really want high participation rates, look at who’s leading the charge in 2009-2013: Tanzania and Madagascar, both with rates above 89%. Now there’s some role-model labor market policies). The US makes its appearance in the lower middle of the pack, with a solid 63% participation rate. Sure, you scroll past countries such as Iceland, Norway and Sweden on your way there (at 74%, 66% and 64% respectively). These places all have a pretty decent welfare state, which doesn’t seem to make all their citizens want to stay at home, smooching and mooching their lives away. Also, take a look at their unemployment rates compared to the US:

Sure, there may be some measurement issues here, although a more generous welfare state will, if anything, mean that you’ll estimate a higher unemployment rate. That’s because everyone who receives benefits will be counted as unemployed, rather than some of them eventually just dropping out of the statistics as their benefits expire. And even allowing for some measurement error, these countries are, if anything, doing better than the US rather than worse.

But is this a fair comparison to begin with? I’ll grant you the benefit of the doubt and say these countries are much smaller than the US, Norway is extremely resource rich, they’re sparsely populated… let’s pretend they’re exceptions.

Moving on to some more “core” European states then. Now I won’t compare the US to countries that are still in recession, such as Spain or Greece. That’s a pointless frame of reference. Let’s take some of those that were fortunate enough – like the US – not to have to undergo completely crippling austerity. Germany comes to mind, so does Switzerland and the Netherlands. All three have more generous welfare states than the US, but look at how they stack up unemployment-wise:

Not doing so bad, are they? Granted, Germany’s labor force participation rate is three percentage points below the US. But Switzerland gets 68% of its working age population to apply themselves, and the Netherlands brings it in at a whopping 83%! Must be their socialist working spirit.

By the way, even countries that are still in recession and have substantially higher unemployment rates than the US at the moment still don’t do much worse for labor force participation. Portugal is at 61%, Ireland at 60%, Spain at 59%, and even Greece (Greece, I tell you!) is still at 53% (and those guys are currently at 27.8% unemployment). And these countries should be doing worse than the four mentioned above, if anything. Not only are they still in recession, not only should their own welfare states be providing incentives for people to stay off work, their citizens can also freely move to other countries and live there if they feel like it, whether to work or to collect benefits.

And sure, the US is set to spend a little under $530 billion on welfare. But that’s easily trumped by the roughly $830 billion it’s going to spend on defense! Even leaving aside veterans’ payments (funny how that’s not part of welfare spending, but I’ll go along with it), there’s still $626 that’s being spend on the US military, which is 39% of global military spending! So maybe, just maybe, unemployment benefits and the broader welfare state aren’t the costliest items on the menu here.

Now this was a blog post, not a formal economic analysis. And if you can show me a detailed economic analysis showing how providing for the unemployed is going to ruin the United States, I’ll take that into consideration. But I think it’s a little too simple to say that unemployment benefits = paying people to be unemployed = a really, really bad idea. And so far, I’ve only been trying to show that other countries, which have more extensive unemployment benefits, aren’t doing worse than the US. That’s not even making the argument that unemployment benefits are probably actually beneficial, especially in an economy operating below potential.

How to Dismantle a Gross Domestic Product

This post isn’t going to be so much about some great insight (in fact, there’s nothing totally new in here at all). It’s about an observation I made that I never really spent too much time thinking about before, and I figured chances are some others might find this interesting as well. The basic realization I had was this: the US and Europe (or, more accurately for my purposes, the Eurozone) both cover massive areas of land, inhabited by millions of people. Yet for one of them, we get one ‘core’ statistic: US GDP. For the other, we get 17 different national GDP figures, one for each member state. Imagine the news stories if instead of focusing on Greece (Greece, I tell you!), we focused solely on aggregate Eurozone GDP vs. US GDP:

I mean sure, the US gets going much faster and the Eurozone has a double dip recession, which is a fundamental difference. And it’d still make for bleak forecasts and depressing headlines. But it’s not nearly looking as bad as Spain, Italy or Greece do when compared to the US individually:

The difference is even stronger when looking at unemployment (feel free to check FRED, but this post really can’t take any more graphs than these two and the next one). The Eurozone as a whole stacks up a lot better compared to the US than some of its members do on their own. So I’ve been asking myself why it is that we choose to look at the GDP and unemployment figures of single European countries instead of looking at the Eurozone as a whole. Likewise, why is it that we choose to look at aggregate US GDP, instead of dividing that up by state?

It’s not that the US moves totally in tandem, and so policy recommendations wouldn’t differ depending on which measure you use. There are really strong differences in states’ reactions to the financial crisis:

Michigan not looking so great, and even California wasn’t quite back on track in 2012 (these data tend to be available a little later than the aggregate figures for the US as a whole). But look at Texas, only a short period of stagnation (beginning before the crisis), and that’s basically it. And North Dakota just breezes past everybody else, not even noticing the crisis.

If these states had all had separate central banks and fully independent governments, I’d wager their reactions to the crisis would have been vastly different. Yet because the US has a federal government, they all implemented the same policy. They all got the same federal funds rate, the same QE, and the same stimulus bill. Which means that this policy probably wasn’t exactly ideal for any of them.

Europe didn’t really have individual policies either, because there’s only one ECB and austerity measures were enacted across the continent. Which definitely wasn’t ideal for anybody (by a long shot).

I don’t want to discuss here whether the aggregate figures are better or worse than the more detailed state-level figures. I haven’t thought about this enough myself to really render judgement here. At this point, I just find it fascinating to see how big the differences in GDP movements are when looking at either aggregate or lower-level measures. And maybe someone else shares that sentiment.

Don’t Fear the Reaper (of Unemployment Benefits)

Our classmate gaochen has an interesting post on unemployment benefits. I feel the need to engage with this in a more detailed way than a comment, so consider this post a reply, of sorts, but also just part of my own personal musings on the matter. We’ve actually had quite a few posts on the latest jobs report, minimum wages and macro policy in general (I especially enjoyed this one but can’t comment on it, so if anyone knows what’s going on there, feel free to let me know); this might make for a good ongoing discussion throughout the semester.

Anyway, turning to unemployment benefits and the US job market situation. While I see the appeal that the “paying people to be unemployed won’t help the economy“-argument (by the way, how horrible was that article?) has to some people, it’s quite frankly wrong. Let’s take a look at labor force participation rates around the (developed) world (although if you really want high participation rates, look at who’s leading the charge in 2009-2013: Tanzania and Madagascar, both with rates above 89%; now there’s some role-model labor market policies). The US makes its appearance in the lower middle of that pack, with a solid 63% participation rate. Sure, you scroll past places such as Iceland, Norway and Sweden on your way there (at 74%, 66% and 64% respectively). These places all have a pretty decent welfare state, which doesn’t seem to make all their citizens want to stay at home, smooching and mooching their lives away. Also, take a look at their unemployment rates compared to the US:

Sure, there may be some measurement issues here, although a more generous welfare state will, if anything, mean that you’ll estimate a higher unemployment rate. That’s because everyone who receives benefits will be counted as unemployed, rather than not receiving anything and dropping out of the statistics. And even allowing for some measurement error, these countries are, if anything, doing better than the US rather than worse. But is this a fair comparison to begin with? I’ll grant you the benefit of the doubt though and say these countries are much smaller than the US, Norway is extremely resource rich, they’re sparsely populated… let’s pretend they’re exceptions.

Moving on to some more “core” European countries then. Now I won’t compare to the US to countries that are still in recession, such as Spain or Greece. That’s a pointless frame of reference. Let’s take some of those countries that were fortunate enough – like the US – to not have to undergo crippling austerity. Germany comes to mind, so does Switzerland and the Netherlands. All three have more generous welfare states than the US, but look at how they stack up unemployment-wise:

Not doing so bad, are they? Granted, Germany’s labor force participation rate is three percentage points below the US. But Switzerland gets 68% of its working age population to apply themselves, and the Netherlands brings it in at a whopping 83%! Must be their socialist working spirit.

And even countries that are still in recession and have substantially higher unemployment rates than the US at the moment still don’t do much worse for labor force participation. Portugal is at 61%, Ireland at 60%, Spain at 59%, and even Greece (Greece, I tell you!) is still at 53% (and those guys are currently at 27.8% unemployment). And these countries should be doing worse than the four mentioned above, if anything. Not only are they still in recession, not only should their own welfare states be providing incentives for people to stay off work, their citizens can also freely move to other countries and live there if they feel like it, whether to work or to collect benefits.

And sure, the US is set to spend a little under $530 billion on welfare. But that’s easily trumped by the roughly $830 billion it’s going to spend on defense! Even leaving aside veterans’ payments (funny how that’s not part of welfare spending, but I’ll go along with it), there’s still $626 that’s being spend on the US military, which is 39% of global military spending! So maybe, just maybe, unemployment benefits and the broader welfare state aren’t the most pressing concerns facing the CBO and the Treasury.

Now this was a blog post, not a formal economic analysis. And if you can show me a detailed economic analysis showing how providing for the unemployed is going to ruin the United States, I’ll take that into consideration. But I think it’s a little too simple to say that unemployment benefits = paying people to be unemployed = a really, really bad idea. And so far, I’ve only been trying to show that other countries, which have more extensive unemployment benefits, aren’t doing worse than the US. That’s not even making the argument that unemployment benefits are probably actually beneficial, especially in an economy operating below potential.