Economists have long had an obsession with physics, evidenced by the metaphors of utility indifference curves and production iso-quants that derive from 19th century force field physics. Recently (Financial Times, Friday 8 December – not The Onion, April 1), Harvard University economists Ricardo Hausmann and Federico Sturzenegger claim to have discovered financial “dark matter“ that shows that neither the U.S. nor the global economy suffer from international financial imbalances. Consequently, the U.S. trade deficit is no longer an issue of concern. Read the rest of this entry »
The U.S. Trade Deficit and Net Foreign Income: No Escaping the Problem
December 18th, 2005Exchange Rates, Labor Standards, and Democracy: Why China Must Change
December 10th, 2005For the past five years the global economy has been flying on one engine. That engine is the U.S. consumer who has been on a consumption binge financed by borrowing, in turn backed by a housing price bubble. This situation poses the threat of a serious hard landing when that engine eventually stalls, as it must. Ever inflating house prices and rising debt-to-income levels are not sustainable. And as the late Herbert Stein, Chairman of President Nixon’s Council of Economic Advisers, wryly observed: “If something cannot go on forever, it will stop.†Read the rest of this entry »
The Politics of Globalization: Why Corporations are Winning and Workers are Losing
November 20th, 2005Domestic political economy has historically been constructed around the divide between capital and labor, with firms and workers being at odds over the division of the economic pie. Within this construction labor is usually represented as a monolithic interest, yet the reality is that labor has always suffered from internal divisions. Globalization sharpens these divisions, which helps explain why corporations have been winning and workers losing. Read the rest of this entry »
Sabotaging Government: The New Politics of the Radical Right
November 20th, 2005Thirty years ago the economic debate between Democrats and Republicans was framed in terms of the case for bigger versus smaller government. Democrats emphasized market proclivities toward monopoly and inequality, failure of markets to efficiently provide public goods, market incentives to pollute, and above all the tendency of markets to produce less than full employment. Republicans countered that such market failures were over-stated. More importantly, using government to solve market failures could lead to even worse problems of government failure associated with bureaucratic inefficiency, policy misjudgments, and private capture of regulatory agencies. In an imperfect world, Republicans argued that it is better to live with the problem of market failure and opt for small government, than try and solve it by resort to big government. Read the rest of this entry »
Asset Bubble Keynesianism versus Economic Flexibility: Challenging the Greenspan Hypothesis
November 12th, 2005If you have a pulpit and say something over and over again, that something may eventually come to be believed. No one has a bigger pulpit than Alan Greenspan, Chairman of the Federal Reserve, who for the last decade has been saying that the secret of America’s prosperity is its economic flexibility. But there is another explanation, which is asset bubble Keynesianism. It too can make for a jolly old time – at least for a while. Read the rest of this entry »
Winner’s Curse: The Torment of Chairman-designate Bernanke
November 4th, 2005In economics there is a phenomenon known as the “winner’s curse†whereby the winner of an auction over-pays. The most that she should have paid is the second-highest bid, which is the highest value attached by all other bidders. This curse provides a useful analogy for thinking about the recent selection of Federal Reserve Chairman Alan Greenspan’s replacement. There is a good chance that the winner, Ben Bernanke, may end up with a bout of the winner’s curse. Read the rest of this entry »
Two Views About a Possible U.S. Hard Landing: Foreign Flight versus Consumer Burnout
October 23rd, 2005The current U.S. economic expansion is in its fifth year. At this stage, the possibility of its ending has raised two explanations that can be labeled the “foreign flight’ and “consumer burnout†hypotheses. While both predict a recession, they rest on very different reasoning and have different implications for interest rates and exchange rate policy. The foreign flight hypothesis is also politically troubling since it can be easily tinged with xenophobia. Read the rest of this entry »
Time for the Fed to Take an Inflation Chill Pill
October 18th, 2005September’s headline consumer price inflation was 1.2 percent and it was 4.7 percent for the past year. However, core inflation, which excludes volatile food and energy prices, was just 0.1 percent in September and was only 2.0 percent for the entire year. Despite core inflation holding at this subdued rate for the past five months, the Federal Reserve has embarked on an interest rate-raising crusade. This campaign is on the verge of killing the patient, and it is time for the Fed to take an inflation chill pill. Read the rest of this entry »
The Questionable Legacy of Alan Greenspan
October 16th, 2005Alan Greenspan will retire as Chairman of the Federal Reserve in January 2006, and his retirement promises a flood of swooning retrospectives. Writing anything else at this moment risks the charge of churlishly raining on the parade. However, there are good grounds for a more critical reading of Greenspan’s eighteen-year tenure at the Fed. Read the rest of this entry »
Global Imbalances: Stop Thinking Saving, Start Thinking Demand
October 10th, 2005The Economist magazine (September 24, 2005) recently ran a story about the threat posed by global financial imbalances. The front cover showed a picture of a teeter-totter (see-saw in English) atop the globe. On the upper-end of the teeter-totter was a small stars-and-stripes piggy bank representing thriftless America; on the lower-end was a plump piggy bank representing the thrifty rest of the world. The moral of the story was that the U.S. is saving too little, the rest of the world is saving too much, and the net result is a dangerous global saving imbalance that requires an adjustment of saving patterns. Read the rest of this entry »