links for 2009-12-18
Will Wilkinson on the Pringles Problem

Five Economics Paragraphs Worth Reading: December 18, 2009

1) Menzie Chinn: Teaching Macro, after the Great Recession:

The last time I taught this course in the Spring of 2007, the key topics were inflation, the possibility of stagflation, and the possibility of containing the ongoing housing slowdown.... [This] semester... [the] two big concerns were (1) dealing with the Taylor rule, and (2) dealing with the banking sector. A less difficult-to-deal issue is the consumption function.... Over the past ten years, the trend in macro textbooks has been to dispense either partly or fully with the IS-LM construct... and substitute in a monetary reaction function... This was a useful innovation, but was difficult to apply... as of late 2008 as the zero interest bound became a reality for American policymakers.... So, IS-LM still seems to be a useful construct for analyzing fiscal and monetary policy efficacy... [for it] can accommodate the fiscal policy pessimists (as I discuss in my post here), and (of course) the liquidity trap critique of monetary policy (keeping in mind Joe Gagnon's point). Of course, conveying the idea of credit easing is still hard to convey in this simple construct. Which leads me to challenge number (2), namely how to incorporate different aspects of the financial sector. I chose to use a fairly simple framework, namely the Bernanke-Blinder CC-LM model... provide[s] a rationale for Fed actions in terms of quantitative easing shifting out both the CC and LM curves.... Finally... discussion of how consumption depends on both current disposable income and net household wealth is essential.... Of course, in adding new material to the undergrad course, some material has to be dropped... the New Classical models (the Lucas supply curve, and Real Business Cycle models).

2) Simon Johnson: Paul Volcker Picks Up A Bat:

Volcker, legendary former chairman of the Federal Reserve Board with much more experience of Wall Street than any current policymaker, was blunt: We need to break up our biggest banks and return to the basic split of activities that existed under the Glass-Steagall Act of 1933.... Volcker is basically saying that what the administration has proposed and what Congress looks likely to enact in early 2010 is essentially — bunk. Speaking to a group of senior finance executives... Volcker made his point even more forcefully.  There is no benefit to running our financial system in its current fashion, with high risks (for society) and high returns (for top bankers).  Most of financial innovation, in his view, is not just worthless to society – it is downright dangerous to our broader economic health. Volcker only makes substantive public statements when he feels important issues are at stake...

3) Free Exchange: From the horse's mouth:

Brad DeLong had asked: "Why haven’t you adopted a 3% per year inflation target?" And Mr Bernanke responded.... I can't imagine getting a more direct answer from the chairman than that. Mr Bernanke does not want to risk a de-anchoring of inflation expectations. He is willing to accept 10% or greater unemployment and the resulting economic and political fall-out in order to avoid that risk. Personally, I think that Mr Bernanke owes us all a better explanation of why he has opted to place so much more emphasis on the price stability aspect of his mission than the full employment aspect. And, there should be a policy debate on this question, the resolution of which should inform the choice to reappoint (or not) Mr Bernanke. But that's clearly not going to happen. It's unfortunate. But it is what it is. Best to focus on the next question—how to minimise the fall-out from five or more years of high unemployment.

4) Helmut REisen: How to assess the renminbi’s undervaluation:

To gauge a converging country’s degree of undervaluation, the appropriate yardstick cannot be purchasing power parity; it should rather be the regression (over 145 countries) that provides the best fit for the Balassa-Samuelson effect. While the renminbi was undervalued by 60% in PPP terms, it was merely undervalued by 12%, if the regression fitted value for China’s per capita income level is compared to the current value in 2008. Note that India and South Africa (which had a current account deficit) were more undervalued than China by that Balassa-Samuelson benchmark, by 16% and 20%, respectively, in 2008. The currencies of Brazil and Russia were appropriately valued, i.e. close to the regression line...

5) Stan Collender: Stan Breaks With The Deficit Hawks: A Very Personal Story:

I’m having increasing trouble identifying with the religious-like fervor many deficit hawks are expressing these days.  I also don’t think the hawks are advancing the debate by their take-no-prisoners attitude that often seems to cross the line to zealotry. I need to emphasize from the start that I’m talking about real, substantively based deficit hawks rather than those who condemn deficits only when it suits their political purposes. This definitely does not include those who only think the deficit is terrible when the other political party is in the majority. In my mind you don’t qualify as hawk if you talk about the deficit but then fail to support the spending cuts and tax increases that would actually reduce it. In case anyone is wondering, you also aren’t a deficit hawk if all you do is support largely symbolic efforts like process changes. But I’m getting ahead of myself. Let me start from the beginning...