I have to beg, as someone whose replicated many Fama/French papers, keeps the factors bookmarked, and even started drafting the why Fama should get the Nobel article when it seemed likely it would go to finance this year, that Eugene Fama stops talking about macroeconomics. He makes all academic finance people look like they don’t know what they are talking about, and finance has enough headaches with the credibility of their theories (to put it gently) than trying to take on Macro people with the Treasury View...
JIM MANZI has touched off a debate on the economic dynamism of America versus that of "social democratic" Europe with an essay in National Affairs. Much of the initial response to Mr Manzi focused on his abuse and misuse of statistics in making (or failing to make) his case.... I don't know that the debate is all that helpful. Northwest Europe is, for all intents and purposes, every bit as rich as America. Greg Mankiw puts up a list of European countries which have smaller GDP per capita (in PPP terms) than America, but he conveniently leaves out those (Norway, Ireland, the Netherlands, Switzerland) with per capita levels above or just under America's. Growth rates have been almost identical. Some have noted that America's figures are distorted by massive immigration of low-wage workers, which is true. On the other hand, the focus on per capita figures obscures the extent to which wealth in America is more concentrated than in Europe. Europe also manages to generate its wealth with far lower levels of energy use and carbon emissions.
Ideally, you'd want to control for a range of other factors. Hours worked and externalities are certainly two factors that should be considered. Geography may also be hugely important. While the European and American markets are of similar magnitudes, the American market is far more unified than the European market, allowing for greater interstate trade and specialisation. And then you'd also want to think about whether it's the social democratic part of the European economic model that inhibits growth, or something else entirely. Perhaps it's not the social safety net, or higher tax rates, that constrain growth, but instead the more rigid labour markets, or industrial interventions.
It seems to me that it's difficult to impossible to conclude, based on a detailed survey of Western Europe, that social democracy is fundamentally unable to produce American levels of wealth. At the same time, it's very easy to identify policy choices made within Europe, or America, that do constrain growth and mobility. Why focus the debate on sweeping and misleading generalisations across policies, when you can take things on a policy by policy basis, and have quite a specific and effective discussion?
The Obama administration tipped its hand today – they are planning a new tax of some form on the banking sector. But the details are deliberately left vague – perhaps “not completely decided” would be a better description. The NYT’s Room for Debate is running some reactions and suggestions. The administration is finally getting a small part of its act together – unfortunately too late to make a difference for the current round of bonuses. We know there is a G20 process underway looking at ways to measure “excess bank profits” and, with American leadership, this could lead towards a more reasonable tax system for finance. In the meantime, my point is that taxing bonuses – under today’s circumstances – is not as bad as many people argue, particularly as it lets you target the biggest banks.
Household leverage in the United States and many industrial countries increased dramatically in the decade prior to 2007. Countries with the largest increases in household leverage tended to experience the fastest rises in house prices over the same period. These same countries tended to experience the biggest declines in household consumption once house prices started falling.
Could Obama’s dip to new lows on health care be driven partly by the fact that the reform proposal isn’t ambitious enough? The internals of the new CBS poll suggest that this could be the case: They show that more people think reform doesn’t go far enough in multiple ways than think it goes too far. The CBS poll finds that Obama’s approval rating on health care has dipped to 36%. But the poll also asked whether people think the reform proposal, in various ways, goes too far, is about right, or doesn’t go far enough.... In every one of those polled — covering Americans, controlling costs, and regulating insurance companies — more think the bill doesn’t go far enough. To be sure, Americans seem close to evenly divided on the question of whether the proposal goes too far or not far enough. But the latter category outnumbers the former, suggesting that the desire that reform be more ambitious is a key factor driving dissatisfaction with Obama — even though that possibility is rarely discussed by the big news orgs or by top-shelf pundits.
As health care reform nears the finish line, there is much wailing and rending of garments among conservatives. And I’m not just talking about the tea partiers. Even calmer conservatives have been issuing dire warnings that Obamacare will turn America into a European-style social democracy. And everyone knows that Europe has lost all its economic dynamism. Strange to say, however, what everyone knows isn’t true. Europe has its economic troubles; who doesn’t? But the story you hear all the time — of a stagnant economy in which high taxes and generous social benefits have undermined incentives, stalling growth and innovation — bears little resemblance to the surprisingly positive facts. The real lesson from Europe is actually the opposite of what conservatives claim: Europe is an economic success, and that success shows that social democracy works. Actually, Europe’s economic success should be obvious even without statistics. For those Americans who have visited Paris: did it look poor and backward? What about Frankfurt or London? You should always bear in mind that when the question is which to believe — official economic statistics or your own lying eyes — the eyes have it. In any case, the statistics confirm what the eyes see....
The point isn’t that Europe is utopia.... But taking the longer view, the European economy works; it grows; it’s as dynamic, all in all, as our own. So why do we get such a different picture from many pundits? Because according to the prevailing economic dogma in this country — and I’m talking here about many Democrats as well as essentially all Republicans — European-style social democracy should be an utter disaster... while reports of Europe’s economic demise are greatly exaggerated, reports of its high taxes and generous benefits aren’t. Taxes in major European nations range from 36 to 44 percent of G.D.P., compared with 28 in the United States. Universal health care is, well, universal. Social expenditure is vastly higher than it is here. So if there were anything to the economic assumptions that dominate U.S. public discussion — above all, the belief that even modestly higher taxes on the rich and benefits for the less well off would drastically undermine incentives to work, invest and innovate — Europe would be the stagnant, decaying economy of legend. But it isn’t.
Europe is often held up as a cautionary tale, a demonstration that if you try to make the economy less brutal, to take better care of your fellow citizens when they’re down on their luck, you end up killing economic progress. But what European experience actually demonstrates is the opposite: social justice and progress can go hand in hand.
I do want to point out this section about Raghuram Rajan (whose Saving Capitalism from the Capitalists is a book that I enjoyed and is relevant today). It’s pretty interesting: "In a new book he is working on, entitled “Fault Lines,” Rajan argues that the initial causes of the breakdown were stagnant wages and rising inequality. With the purchasing power of many middle-class households lagging behind the cost of living, there was an urgent demand for credit. The financial industry, with encouragement from the government, responded by supplying home-equity loans, subprime mortgages, and auto loans. (Notwithstanding the government’s involvement, this is ultimately a traditional Chicago argument: in response to changing economic circumstances, the free market provided financial products that people wanted.) The side effects of unrestrained credit growth turned out to be devastating-a possibility that most economists had failed to consider." I didn’t expect to read that line of thought from Rajan. I’ve talked about this before, both housing equity as the new social contract, as well as the way excessive debt smoothed out the high-risk income-trapped structure of current families. Rather than focusing on how nice of a refrigerator the poorest can buy, it might be worthwhile to look at how inequality has played out in the middle-and-working classes here (which ultimately effects mobility among the poorest too). I’m curious as to the drivers he finds between inequality and a middle-and-working-class squeeze. Spending on housing and education are the obvious ones. As I eventually want to work on a “yes, we really do need to worry about inequality” piece, I’m really interested in seeing what Rajan finds; his book is out in June.
8) BEST NON-ECONOMICS THING I HAVE READ TODAY: Fareed Zakaria: Don't panic. Fear is al-Qaeda's real goal.:
Terrorism is an unusual military tactic in that it depends on the response of the onlookers. If we are not terrorized, then the attack didn't work. Alas, this one worked very well. The attempted bombing says more about al-Qaeda's weakened state than its strength. In the eight years before Sept. 11, al-Qaeda was able to launch large-scale terrorist attacks on several continents. It targeted important symbols of American power -- embassies in Africa; a naval destroyer, the USS Cole; and, of course, the World Trade Center. The operations were complex.... On Christmas an al-Qaeda affiliate launched an operation using one person, with no special target, and a failed technique tried eight years ago.... But al-Qaeda succeeded in its real aim, which was to throw the American system into turmoil. That's why the terror group proudly boasted about the success of its mission.... Overreacting to terrorist attacks plays into al-Qaeda's hands. It also provokes responses that are likely to be large-scale, expensive, ineffective and possibly counterproductive...
9) WORST THING I HAVE NOT READ TODAY : Felix Salmon writes: Matt Stevens unloads on Donald Luskin." I'm not going to read Luskin. I'm not even going to read Stevens--the danger is just too great...
10) HOISTED FROM THE ARCHIVES: DeLoong (June 2006): Judd Gregg Tries to Revive Gramm-Rudman:
The problem with Judd Gregg's proposal is that Gramm-Rudman didn't work when we tried it in the 1980s. It, I think, made matters worse--members of congress became more eager to vote for budget-busting measures when they could claim that Gramm-Rudman placed a cap on the total deficit, and then the congress was unwilling to apply the cap medicine when the dose turned out to be unexpectedly high, and so the process died. The Budget Enforcement Act framework seemed to work much better in the 1990s than Gramm-Rudman worked in the 1980s.