Felix Salmon

Counterparties: The hourglass economy

Peter Rudegeair
Apr 15, 2013 22:35 UTC

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What’s a retailer to do with a widening gap between rich and poor customers? Starbucks is the latest chain to target America’s “hourglass economy.” By cutting 10% off its grocery-store coffee bags while keeping in place the price hikes it put in place in its cafés last year, Starbucks is simultaneously pushing both its discount and premium products.

It’s a sensible strategy: low-wage occupations have dominated new jobs in the last few years, even as high-earners captured 121% of the income gains of the economic recovery. In 2011, the WSJ noted Procter & Gamble’s “high and low” approach to consumers by promoting its expensive Olay and Gillette products, while introducing a bargain dish soap for the first time in 38 years. The shrinking of the middle class “required us to think differently about our product portfolio and how to please the high-end and lower-end markets,” a P&G executive told the WSJ. “That’s frankly where a lot of the growth is happening.” Frito-Lay, Anheuser-Busch InBev, and ConAgra have also developed or expanded their offerings at both ends of their product lineups, according to LEK Consulting.

This is a strategy recently-ousted JC Penney CEO Ron Johnson would have been wise to pay attention to, writes Rita McGrath. Johnson’s goal of turning the retailer into “Bloomingdale’s for the mass market” was a non-starter “because the mass market is gone.”

Which isn’t to say this approach works for everyone. After trying to go high end with smoothies and salads, McDonald’s has now reverted to emphasizing its Dollar Menu more aggressively this year after promotions of its more expensive menu items failed to  “resonat[e] with consumers,” in the words of CEO Don Thompson. – Peter Rudegeair

On to today’s links:

EU Mess
Can we all admit the Euro is an economic failure? – Tim Duy

Why you should be thrilled by the collapse of the price of gold – Joe Weisenthal

Warren Buffet on gold: bandwagon investors  ”create their own truth – for a while” – Ivan Hoff
Five reasons that might explain the yellow metal’s price collapse – Matt Phillips

Corporate governance runs on a “system unworthy of Soviet-era sham democracies” – James Stewart

Elizabeth Warren’s statistically savvy dismantling of regulators’ $9.3 billion foreclosure settlement – Lisa Pollock
More people doesn’t necessarily equal higher land prices – Noah Smith

New Normal
The terrifying, self-perpetuating reality of long-term unemployment – Matthew O’Brien
“If you’ve been out of work for more than six months, you’re essentially unemployable” – Brad Plumer

How to cash in on your time in the Obama administration: tastefully – Noam Scheiber

Goldman Sachs may have just inadvertently strengthened the case for breaking up the big banks – Simon Johnson
The full GS research report on the Brown-Vitter bill – Hamilton Place Strategies
Already overpaid board members get a $75,000 pay raise – DealBook

Dish Network offers to buy Sprint for $25.5 billion in cash – Reuters
A $13 billion merger would create the biggest company in the field of genetic testing - Reuters

A lesson in Finnish bus lines and creativity – Guardian

Activist investors promote destructive, short-term thinking – Jill Priluck

The top 25 hedge fund managers earned a total of $14 billion in 2012 – Institutional Investor

Citi reports 31% increase in quarterly profit – Reuters

“Income is the new Facebook” – Stephen Gandel

And, of course, there are many more links at Counterparties.


I love how subtle and relatively small shifts in the distributions in incomes can be characterized as “because the mass market is gone”.

Marketers sure love hyperbole.

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Counterparties: The Sandy economy

Oct 29, 2012 23:18 UTC

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If you live on the East Coast, we trust you are reading this safe and dry – and from home. New York shut down the largest mass transit system in North America last night, ordered mandatory evacuations in the lowest parts of the city, and is preparing to pre-emptively shut down power in lower Manhattan. Millions more are likely to lose power across the region.

Banks implemented contingency plans to keep critical businesses running, but stock and options markets were closed today, and will be closed again tomorrow. Bond markets were open for half a day today and will likely be closed tomorrow. The storm may cause $18 billion in damage. The Washington Post’s Sarah Kliff has a great piece explaining why it is getting harder and harder for insurance companies to estimate how much they will have to pay out in losses.

Productivity loss is murkier still. Industries like travel and cargo shipping are obviously slowed (More than 12,000 flights have been canceled across the country.) But experts note that a backlog isn’t the same as completely lost business: “The cost of the cargo disruptions probably won’t be large…While cargo gets backed up it eventually gets delivered”.

The economy at large appears at least as resilient. The NYT’s Binyamin Appelbaum takes a look at a 2010 study from the Inter-American Development Bank (full report here). His summary:

For all the devastation wreaked by natural disasters, economists say that the long-term impact on a nation’s economy is generally negligible — particularly in countries with strong institutions and deep pockets.

Moody’s calls the impact “noticeable but temporary”. Yet, as economist Justin Wolfers tweeted, “Asking what a hurricane does to GDP is about as pointless as asking what a war does. Tells you more about problems with GDP than anything”. Unless you’re a property insurer, you almost certainly have more important things to worry about than the economic, as opposed to human, cost of Sandy. — Ben Walsh

How stock pickers are looking to game the fiscal cliff – WSJ

Size Matters
Without too-big-to-fail policies “there is no longer evidence of economies of scale at bank sizes above $100 billion” – Bank of England

Data Points
BLS: Friday’s jobs report “will be business as usual” – Huffington Post

Green Shoots
Where the US GDP growth is: housing and defense spending – Matt Philllips

“Do you know more about Enron’s secret accounting? Tell us IN THE COMMENTS” – Choire Sicha

Now is the time to overdraw your Chase checking account without those pesky fees – JP Morgan
25 retailers plan “Bitcoin Friday” – American Banker

Personal finance expert MC Hammer couldn’t make Cash4Gold a success – Dan Primack

Tax Arcana
The “charitable remainder unitrust” – how to get tax breaks for money which is coming back to yourself – Jesse Drucker

A Russian ship with 700 tons of gold ore has gone missing – NYT


So, is Andrew Haldane of the Bank of England related to the noted Marxist biologist J.B.S. Haldane?

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Counterparties: The state of the economy, restated

Ben Walsh
Sep 27, 2012 22:23 UTC

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Are you better off than you were 24 hours ago? The US labor market is, according to the Bureau of Labor Statistics.

The BLS released revised employment data that shows the US added 386,000 more jobs from January to March than previously thought. That variation, 0.3% of total nonfarm jobs, is exactly average: “the annual benchmark revisions over the last 10 years have averaged plus or minus three-tenths of one percent of total nonfarm employment”. This revision won’t be the last: another will be released in February 2013, covering all of 2012. But as Bill McBride at Calculated Risk notes, the preliminary revision we got today is usually “pretty close to the final benchmark estimate”.

US GDP for the second quarter of 2012 was also restated today. The Commerce Department announced the economy grew at a rate of 1.3% in the second quarter, a downward revision from the previously announced 1.7%, and below the first quarter’s 2%. The single biggest revision was in drought-hit farm inventories, and economists at Morgan Stanley expect agricultural output to “continue to be a drag on growth in the second half” of the year. The bad news, says the WSJ’s Paul Vigna, with a stall-speed economy, ”is that it’s exposed, and liable to be knocked over by any sort of exogenous shock” like the euro crisis, or a diplomatic crisis with Iran or China.

Today’s jobs revision was immediately pulled into the narrative of whether or not President Obama can claim net positive job creation since he took office (now, barring further revision, he can). As Jared Bernstein writes, that doesn’t change the fact that “we’re still way behind where we need to be to tighten up the job market”. And the GDP numbers show that growth is “still a slog”. – Ben Walsh

On to today’s links:

Why “it’s good to be a mortgage originator right now” – Sober Look

The value of the revolving door: political appointees and the stock market – Vox EU

Tax Arcana
How Romney used the gift tax to avoid millions in taxes with an “I Dig It” trust – Bloomberg
A record 1 in 5 households, and 40% under 35 years old, owe student debt - Pew Social Trends

New Normal
Lending is booming in Cedar Rapids, for some reason – WSJ
“For three years in a row, more people have been convicted of immigration offenses than of any other type of federal crime” - Chris Kirkham

EU Mess
Spain announces 40 billion euros in budget cuts and plans to draw down pension reserves to “cover some treasury needs” – WSJ

Popular Myths
“Meritocracy, at least as normally understood, does not exist and probably cannot exist in a free market” – Stumbling and Mumbling

The United States is way behind the rest of the world in cracking down on high-frequency trading – NYT

North Korea has secretly sold more than 2 tons of gold to China to make up for a currency shortage – China Post

What the new NYT public editor reads – Atlantic Wire
“Social ad units” or no, the Web media economic model is still broken – David Pakman

1,000-plus Nigerian women stranded at the Saudi airport because they weren’t accompanied by men – Raw Story

Bring back Build America Bonds – Bloomberg

“Tech plays a role in structuring” the divide between rich and poor – Alexis Madrigal


The state of the U. S. economy can be described with one word, “fear”. The average citizen’s real income has dropped and his/her insecurity and fear has risen. The result has been anemic demand in general and almost no demand for long term consumption items like houses. A similar situation exists for businesses as they hoard cash and invest only cautiously. Consumers will go out to dinner and pay for their expensive cell phone bills but don’t have the confidence to make lifetime investments. Until our leaders put us on a sustainable path, the fear will be holding back the recovery.

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Why fuel-economy standards make sense

Felix Salmon
Sep 12, 2012 14:04 UTC

Eduardo Porter has a very good explanation, today, of why it makes much more sense, from an economic perspective, to simply start raising gasoline taxes than it does to implement ever-tougher fuel-efficiency standards. But before we get to the meat of his argument, it’s worth correcting his numbers. Here’s his conclusion:

In Britain, where gas and diesel are taxed at $3.95 a gallon, the American automaker Ford sells a compact Fiesta model that will go nearly 86 miles on a gallon. In the United States, where gas taxes average 49 cents, Ford’s Fiestas will carry you only 33 miles on a gallon of gas.

This is an apples-to-oranges comparison on not one but two different levels. I’m not sure about the gas taxes, I think they’re correct. But the mileage figures are misleading. Yes, UK Fiestas are more fuel-efficient than US Fiestas. But not by nearly as much as Porter suggests.

For one thing, the mileage tests are different. The test you use makes a huge difference, to the point at which the 2025 fuel-economy standard of 54.5 mpg actually corresponds in the real world to cars bearing window stickers advertising 36 mpg. The US Fiesta is already there, or extremely close. On top of that, UK gallons, also known as Imperial gallons, are significantly larger than US gallons. (Which is why a pint of beer in the UK is larger than a pint of beer in the US.) As a result, 85.6 miles per Imperial gallon is 71.3 mpg in American. And only one expensive “ECOnetic” Fiesta model gets that mileage in the UK; the other ones go as low as 42.8 miles per Imperial gallon, which is 35.6 mpg in the US.

I’s hard to say for sure which cars are more efficient, because the tests are different. To be sure, any UK fleet will be more efficient than any US fleet, for three main reasons: the UK has smaller cars, with more manual transmissions, a higher proportion of which are diesel. These are consumer choices driven by high gasoline taxes, and that really makes Porter’s point for him: raise taxes, and people will automatically start driving more efficient cars. But let’s not kid ourselves that Ford could simply import UK Fiestas into the US and overnight start shipping cars getting 86 mpg.

Porter’s central point is absolutely right: there are two ways to reduce the amount of fuel that people use. The first is to make cars more efficient; the second is to reduce the number of miles that people drive. Higher gasoline taxes work on both fronts, while higher fuel-economy standards only work on the first. Indeed, at the margin they increase the number of miles people drive: since more efficient cars cost less to drive per mile, people drive further when they get more efficient cars.

Porter is also right that in countries with higher gas taxes, fuel economy tends to be much higher. But he’s not necessarily right that the higher gas taxes alone are responsible. Porter implies that the US only has fuel-economy standards just because “a tax on gasoline doesn’t stand a chance” of being passed. But the fact is that even countries with very high gas taxes have fuel-economy standards as well. And, guess what, they’re significantly tougher than ours, and they always have been.


The fact is that the US has pretty much the lowest fuel-economy standards in the developed world, and it still will in 2025, even after the new standards are fully phased in. If US carmakers want to be internationally competitive, they’re going to need to develop more fuel-efficient cars anyway, no matter what happens in the US.

As a result, I really don’t buy Porter’s scaremongering about the cost of the higher standards:

According to the government’s analysis, the additional production and maintenance costs made necessary by the mileage rules will rise gradually to about $31.7 billion in 2025 — which will add about $1,900 to the average price of cars and light trucks. There are other costs, too. Some Americans will not be able to afford a new car. Profits of some automakers and dealers are likely to decline. Greater congestion will impose an added burden on health.

The idea here is that the average price of cars will go up over the next 13 years; it’s far from clear why that would decrease profits at automakers rather than increasing them. What’s more, it’s equally far from clear that the average price of cars would go up significantly less if the new standards were not put into place. The question isn’t how much cars in 2025 cost compared to cars in 2012; it’s how much cars in 2025 will cost under various possible future regimes.

And when Porter starts talking vaguely about the health burden of greater congestion, you know he’s grasping at straws. Auto emissions pollution was a problem in the 70s and 80s; it’s not a problem now, with today’s much cleaner cars.

The fact is that fuel-economy standards are a pretty good way of ensuring that carmakers can plan for a more fuel-efficient future, without worrying about competitors undercutting them with gas-guzzlers. If the US government ever comes to its senses and increases the gas tax, or if it — wonder of wonders — actually implements a broader carbon tax, then at that point you would have three different forces conspiring to make America’s fleet more efficient. You’d have the tax, you’d have the fuel-economy standards, and you’d have the general global increase in fuel efficiency.

Without new taxes, we’re down to two; and without new fuel-efficiency standards either, we’d be down to just one. And that’s dangerous, because the US market is big enough that at that point there’s always a risk that we could replay the era of SUVs and Hummers, with manufacturers of small, efficient cars running a risk that they might get crushed if oil prices fall.

Fuel-efficiency standards are a way of preventing car companies from being forced to hedge their bets by working on gas guzzlers as well as efficient runabouts. As a result, those companies can take the money they’d otherwise spend on developing six-ton monsters, and invest it instead in the efficient cars of the future. Everybody wins, and the cost — contra Porter — is negligible. He’s absolutely right that higher gas taxes are a very good idea. But that’s no reason at all not to implement higher fuel-economy standards as well.


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Counterparties: The global economy’s Scarlet A

Apr 30, 2012 21:44 UTC

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Less than a week ago, we suggested that austerity, Europe’s great experiment in cutting its way out of an economic slump, was coming to an end. Now every bit of economic data, including today’s news that Spain, like the UK, is officially back in recession, seems to come with a gigantic Scarlet A across it.

“The tide appears to be turning” on fiscal austerity, Reuters declares, as European Central Bank President Mario Draghi has called for a “growth compact” to complement the last two years of mass budget cutbacks. The ECB’s internal markets chief agrees and, in characteristically European fashion, is calling for a plan-to-make-a-plan for economic growth.

There’s a flood of anti-austerity op-eds. Larry Summers writes that Europe’s maladies were misdiagnosed: “High deficits are much more a symptom than a cause of their problems,” he argues – and calls for the world to make EU aid contingent on a plan for growth. Mohamed El-Erian slams austerity in Spain, and calls for a focus on both “the deficit containment (numerator) and growth (denominator).” Christina Romer, former top economic adviser to President Obama, argues for a “backloaded consolidation” version of budget cuts in Europe; essentially, spending cuts and tax increases that are slowly implemented as economic growth recovers.

Of course, all of this anti-austerity talk comes much too late. But there’s some reason for optimism: The European Investment Bank may get more funds for real, growth-driving investments. Marc Chandler lays out the early speculation, noting that EIB funds could rise to $264 billion, which could go to infrastructure, technology and renewable energy.

European spending of any kind is politically fraught, and the EIB’s is definitely not a quick fix. Compare, as Reuters did, the EIB’s reported size with the 1 trillion euros created by the ECB to prop up the economy. These are baby steps during a crisis, in other words.

And on to today’s links (scroll down for readers’ suggestions for Occupy Wall Street’s future):

Tax Arcana
How Apple sidesteps billions in taxes – NYT

Occupy Wall Street now “fighting the man through the Byzantine regulatory process” – WashPost

Your latest highly levered, possibly Too Big to Fail nonbank entity: Mortgage REITs – Bloomberg

New Normal
Welcome to housing’s “prolonged bottom” – WSJ

Crisis Retro
Dick Fuld, in an email: “The Bros Always Wins” – Dealbreaker

Welcome to Adulthood
Congress is rethinking the idea that student debt should follow you to the grave – WSJ
Dealing with student loans and a mortgage: It really, really sucks – NYT

EU Mess
Spain is the latest European country to fall back into recession – Macroscope
Spain is the new Greece, except possibly worse – EconoMonitor

Microsoft buys a 17.6% stake in Barnes & Noble’s nook unit – NYT
Microsoft enters the e-book wars – Felix

Our depressed fiscal situation in 4 charts – Krugman
2030: The world in 5 graphs – Finance Addict

The “no-revenue formula” for startups is a real, proven strategy that works (for investors) – Nick Bilton
Yes, there’s a tech bubble, but it’s not that simple – Chris Dixon

The Economist‘s exquisitely refined example of “globollocks” – Crooked Timber

Now He Tells Us
Kashkari: America needs to quickly figure out how to help homeowners – WashPost

Madoff trustee’s legal fees are dwarfing the amount he’s recovered for Madoff Victims – Bloomberg

Financial Arcana
Models don’t cause crises, people do. And models help – FT Alphaville

Romney fundraiser a large crowd of “older white people, mostly men” – The Daily Beast

Your Daily Outrage
NYC considering banning Happy Hour, for some reason – NY Post

Old Normal
A map of LA when streetcars, not freeways, dominated – Flickr

#OWS’s Second Act: Your reactions

Last Thursday, ahead of mass protests planned in hundreds cities on May 1, we asked Counterparties readers to tell us the one issue the Occupy Wall Street movement should hang its hat on. We’ve included the best responses below; they’ve been edited for length. We’ll be sending along books from Felix’s desk to the winners!

Bill writes:
It seems pretty clear to me that Occupy should, at least for the moment, sharply focus on student debt and higher education financing. The iron is hot, with the issue in front of Congress right now, so there is an opportunity to push through a substantive political victory that Occupy never quite had during the first go-round…
That victory would also come on an issue that is acutely important to the constituency the movement is clearly going after – if you think back to a year ago, the “stereotypical” protestor was a recent graduate having trouble finding work, and weighed down by immense educational debts… By starting off the season with an issue of much more direct relevance to its strongest constituency, OWS can 1) make a difference, 2) demonstrate its commitment to effecting actual policy change, and 3) in the process, draw the people and positive media coverage that will give it serious political momentum moving forward.
I don’t even like the Occupy, but I think it’s plainly obvious what they need to do.

Roger writes that it’s still too early for Occupy to rally around a single cause:

OWS and Tea Party together have public support approaching 75%, though neither alone has the power to produce anything meaningful. The forces of the status quo will continue to prevail unless and until both movements unite on a common theme. The movements are so ideologically different that their only area of common ground lies in opposition to the status quo. “Opposition” must, at this time, be the one and only objective of all insurgents. We’ll deal with what replaces the status quo AFTER the status quo has been displaced from power, not before then.
Andrew adds:
The one single issue that the OWS movement should concentrate on is very simple, but at the same time controversial, and that is the idea of debt relief. By removing at least a large percentage of the outstanding personal debt pile, OWS would be able to have an issue that is controversial for most media outlets and a significant amount of the population, but at the same time a serious proposal that resonates with a large minority of the population and actually works to decrease the last decades’ increases in inequality.




@MrFox: Yeah, the system has been falling back on its third line of defense (riot cops) more than usually lately. Still, the main challengers to the system, OWS and TEA, are divided along the usual American political faultlines, and aren’t likely to start working together. I have a hard time imagining Tea Party activists taking OWS types seriously. OWS, for its part, seems to actively try to prevent leadership from emerging that could organize it into anything capable of challenging the powerful; squatting just doesn’t get it done.

Like I said earlier, I think the best analogy is the Soviet Union circa 1970. The system is losing legitimacy, but it will be a while before it comes down. Just as well, because it’s very likely that what comes next will be worse.

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A topological mapping of explanations and policy solutions to our weak economy

Sep 21, 2011 18:45 UTC

This was originally posted at Rortybomb

For the next few posts I need to allude to an ongoing battle of ideas about what is troubling our economy and what solutions are available. I figured it might be a good idea to try and create some sort of topological map of the various clustering of ideas and policies that constitute these arguments as well as the overlap among them. This is a preliminary version of this map: I’d really appreciate your input about what is missing and how to make this better.

From those who think that the problem is related to demand and Keynesian ideas, there tends to be three areas of focus: fiscal policy, monetary policy and the debt hangover in the broken housing market. One can think all three are important – I certainly do – but most think one has priority over the others. Many will think one of the three isn’t in play or particularly useful as a focus of policy and energy. Here’s a rough map. Quotations are ideas, non-quotes are policies and parentheses are people associated with each:

This war of ideas is being fought in white papers and articles, and at academic institutions, policy shops and the blogosphere. As a general resources, here are the best one-stop resources online for most of the bulletpoints above:

Fiscal Policy as Expectation Channel: Woodford on Monetary and Fiscal Policy, Paul Krugman.

Quantatitive Easing: The World Needs Further Monetary Ease, Not an Early Exit, Joe Gagnon.

NGDP Targeting: The Case for NGDP Targeting: Lessons from the Great Recession, Scott Sumner.

Mass Refinancing: Economic Stimulus Through Refinancing — Frequently Asked Questions, R. Glenn Hubbard and Chris Mayer.

Inflation to help Deleveraging: U.S. Needs More Inflation to Speed Recovery, Say Mankiw, Rogoff, Bloomberg. Overcoming America’s Debt Overhang: The Case for Inflation, Chris Hayes.

Higher Inflation Target: A 2% Inflation Target Is too Low, Brad Delong.

Bankruptcy Reform/Cramdown: January 22nd, 2008 Testimony, Adam Levitin.

Foreclosure Spillovers: Foreclosures, house prices, and the real economy, Atif Mian, Amir Sufi and Francesco Trebbi.

Balance Sheet Recession: U.S. Economy in Balance Sheet Recession: What the U.S. Can Learn from Japan’s Experience in 1990–2005, Richard Koo.

Housing Backlog: There is a Boom Out There Somewhere, Karl Smith. Yes, Virginia, Our Housing Stock Is Now Way, Way Below Trend, Brad Delong.

Debt-for-Equity Swaps: Why Paulson is Wrong, Luigi Zingales.

Debt, Deleveraging, and the Liquidity Trap: Debt, deleveraging, and the liquidity trap, Paul Krugman. Sam, Janet and Fiscal Policy, Paul Krugman.

The flip-side to a demand crisis is a supply crisis, and there’s been a large effort to explain our high unemployment and below-trend growth as the result of supply-side factors. Having surveyed the arguments, I’ve split them into two categories. There are those who think that the government has created an increase in uncertainty. This is from a combination of deficits that scare bond vigilantes/job creators, new regulations that have killed all the potential new jobs as well as the government creating disincentives to work. The second area of focuses is on the productivity of the labor force, with special emphasis on skills mismatch, the characteristics of the long-term unemployed and the idea that something has changed fundamentally in our economy that will keep so many unemployed for the foreseeable future.

I’m making the productivity circle conceptually expansive enough to include “recalculation” stories, though I suppose I could add a third circle in the next version. I tend not to find these arguments convincing, but here are the arguments made in full as best as I could find them online:

European Policies: The U.S. Recession of 2007-201?, Robert Lucas. The classical view of the global recession, Gavyn Davies.

Expansionary Austerity: A Guide for Deficit Reduction in the United States Based on Historical Consolidations That Worked, AEI. Large changes in fiscal policy: taxes versus spending, Alesina and Ardagna.

Liquidate the Homeowners: Are Delays to the Foreclosure Process a Good Thing? Charles Calomiris and Eric Higgins.

Stimulus is Sugar: Geithner Finds His Footing: Zachary Goldfarb.

Two-Deficit Problem, Bond Vigilanties: Spend and Save, Noam Scheiber.

Great Vacation: Compassionate, But Inefficient, Casey Mulligan. The Dirty Secret of Unemployment, Reihan Salam.

Long-Term Unemployed: Potential Causes and Implications of the Rise in Long-Term Unemployment, Andreas Hornstein, Thomas A. Lubik, and Jessie Romero. 10 Percent Unemployment Forever?, Tyler Cowen, Jayme Lemke.

Great Stagnation: The Great Stagnation, Tyler Cowen.

Patterns of Sustainable Specialization and Trade (PSST): PSST vs. the Aggregate Production Function, Arnold Kling.

Labor Mobility: Housing Lock is not a Major Part of this Crisis, Plus Scatterplots of Deleveraging!, Mike Konczal.

So what did I miss? What should go in the next version of this chart?

Read the original post here


The world is flat. I know that Friedman’s concept is simplistic, overused, and dated, but I am intrigued by the notion that the education and industrialization of the developing economies are leveling the production playing field, lowering barriers to entry for just about any productive or intellectual endeavor, and evening out wealth across much of the world. Some of this may be refected in your long term unemployed category, but I think it’s broader than that.

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How stocks react to the macroeconomy

Felix Salmon
Aug 5, 2011 12:22 UTC

Mohamed El-Erian has the best explanation of what happened in the markets yesterday. First and foremost, there were “technical factors”. This doesn’t mean lines on charts and head-and-shoulders patterns and similar astrological nonsense, but rather the dynamics of where investors’ money was being held and the amount that the market would fall given a modest downward nudge. Sometimes that number is tiny, but it can fluctuate a lot, and yesterday it just happened to be huge.

Then there are four long-term factors which conspired to give the markets their current bearish outlook.

First of all are concerns about a double-dip recession and broad weakness in the US economy; Floyd Norris has a good column on this today.

Secondly there’s the end of QE2, with no indication that QE3 might appear any time soon. In English, the Fed isn’t pumping money into the stock market and sending prices upwards any more.

Thirdly, there’s a distinct lack of faith that the federal government might be able to step in where the Fed fears to tread. Indeed, the base-case scenario at this point is that the government is going to make things worse rather than better. QE2, at heart, was a monetary response to a problem much better addressed with fiscal policy; right now we have no more help on the monetary side of things, and the fiscal response has been — astonishingly — to cut spending rather than raise it.

Finally, ever and always, there’s Europe:

By failing to act decisively, policymakers have allowed the Euro-zone’s crisis to morph from the outer periphery (Greece, Ireland and Portugal) to also include much larger (and, therefore, harder to solve) countries (Italy and Spain), as well as the continent’s banking system.

Now none of these factors are exactly new, which is why it feels a little bit silly to use them to explain a stock-market drop on Thursday August 4. They were there on Wednesday, they’re there today, and they’ll be there tomorrow too. I very much doubt that some large number of institutional money managers all woke up yesterday morning in synchronicity and decided that they were worried enough about US economic growth that they should sell a significant part of their stock portfolios.

But the stock market is far from efficient at reflecting economic expectations. Remember 2007, when we were in the midst of a brutal credit crunch, the housing market was imploding, and bond markets were all but frozen solid — the stock market continued to set new all-time highs. Stocks tend to lag bonds when it comes to pricing in macroeconomic pessimism, and when they do start pricing it in, they tend to do so violently. Stocks rise slowly and steadily; they fall dramatically and with great violence. Over the long term, the slow-and-steady tortoise wins the race. But in the short term, anybody who bought stocks in the past few weeks is very unhappy right now, and has no appetite to buy more.

It’s instructive to take a step back, here, and look what happened to stocks since that 2007 high. For about a year, they slid back slowly to roughly their current levels. Then, when Lehman Brothers collapsed, stocks imploded, and kept on falling through the first quarter of 2009. That violent sell-off was followed by a super-strong year-long recovery, to, again, roughly current levels.

Think about it this way: if the S&P is trading at around 1,200, that’s an indication that the economy is going to be reasonably healthy going forwards. Nothing special, but nothing disastrous either. We got ahead of ourselves in 2007 and fell to about 1,200. Then came the financial crisis, stocks plunged, and subsequently rebounded back to about 1,200. Over the past year or so we’ve traded at 1,200ish; momentum trading and QE2 helped to push us up, and now economic pessimism is pulling us back.

If you think that we really are going to enter a double-dip recession, then stocks are not remotely attractive at these levels: they have a ways further to fall. If you think that wise and proactive economic policy in the US and Europe can help prevent such a thing, then likewise it’s a good idea to stay on the sidelines right now: there’s no chance of that happening any time soon. On the other hand, if you genuinely believe that less government is better government and that the private sector, left to its own devices, will create jobs and economic growth, then maybe what you’re seeing right now is a buying opportunity.

For most of us, however, I can only reiterate that the volatile expectations market known as the the stock exchange is really nothing to get too excited about. Over the long term, stocks are a good place to place savings — and right now they’re cheaper than they were quite recently, which is good news for any long-term savers. In the short term, stocks are unpredictable and volatile, which means that only the very brave or the very idiotic attempt to time the market and do the buy-low-sell-high thing.

Every so often, we get reminded of that unpredictability and volatility with a massive stock-market swoon. It’s probably a helpful reminder, just so long as you don’t let it worry you too much. If you want to be really worried, look at the things we’ve known for ages: that unemployment is stubbornly high, that governments in both the US and Europe seem powerless to help, and that the entire developed world is burdened with far more debt than it can ever comfortably repay. It’s the global economy which matters, not the vagaries of intraday stock-market moves.


The house always wins.

Posted by silliness | Report as abusive

Why Basel III won’t hurt banks or the economy

Felix Salmon
Sep 10, 2010 04:24 UTC

The new Basel III capital ratios are going to be announced this weekend, and the banks are going to complain about how much the new ratios are going to raise lending costs and hurt economic growth. The BIS, of course, has taken these complaints seriously, and has released two monster reports calculating exactly what the impact of higher capital standards will be.

The first report looks at the long-term effects of higher capital standards. They look something like this:


On the x-axis, you have the capital ratio; on the y-axis, you have the long-term effect on GDP growth rates. (The effect is zero at a 7% capital ratio, since that’s what the BIS is assuming we have, globally, right now.) As you can see, at just about any realistic point on the graph, higher capital ratios increase the long-term growth rate. The green line is the conservative one: that’s the line which assumes that while financial crises are harmful in the short term, they have no long-term repercussions. The red line, more realistically, assumes that financial crises result in a permanent, if moderate, reduction in GDP.

Most of the benefit comes from smaller and less harmful financial crises. But there is cost, if a modest one, in higher loan spreads: the report calculates that each 1 percentage point increase in the capital ratio raises loan spreads by 13 basis points. And that’s assuming that banks keep their return on equity at a high 15%. If the new safer banks are OK with a 10% return on equity, then the rise in lending spreads drops to just 7bp for every percentage point increase in equity.

The second paper looks at the effects of how we get there from here. Won’t there be economic consequences to forcing banks to raise all that extra equity? Yes:

A 1 percentage point increase in the target ratio of tangible common equity (TCE) to risk- weighted assets is estimated to lead to a decline in the level of GDP by a maximum of about 0.19% from the baseline path after four and a half years (equivalent to a reduction in the annual growth rate of 0.04 percentage points over this period).

That’s barely enough to be measurable.

As an excellent story concludes in the latest issue of Global Risk Regulator,

The two reports, released in mid-August, represent a powerful counterblast to banking industry claims that the credit and liquidity reform proposals, issued by regulators on the Basel Committee last December, are likely to significantly reduce economic growth in some countries that are still recovering from the devastating financial crisis.

GRR got some reaction to the reports from banker types, and they make for pretty hilarious reading. Here’s Simon Hills, executive director of the British Bankers’ Association:

“What if they have got the analysis wrong? It is bit like the global warming question. Even if you are a global warming skeptic the impacts are so potentially catastrophic you would want to be doing something just in case you were wrong. In the same way, the authorities should err on the side of caution in calibrating the new Basel framework and determining the period over which it is to be phased in, just in case the macro economic analysis has made some simplifying assumptions that turn out not to hold true,” Hills argues.

Well, yes. But it’s pretty obvious that the potentially-catastrophic impacts are much more likely to be felt if we do too little, in terms of raising capital requirements, than if we do too much. Catastrophes come from crises, not from raising capital ratios to a level which most US banks already comfortably exceed.

The banks have their own report, of course, which paints a much more doom-and-gloom scenario — but, crucially, it assumes that their funding costs will rise if capital requirements are tightened. That doesn’t make much intuitive sense: after all, if banks have more capital, they’re safer, and if banks are safer, their funding cots should fall. But the BIS report, conservatively, doesn’t assume any decrease in funding costs: it just reckons they’ll stay where they are.

I can see the banks’ argument: if lots of banks are all forced to raise lots of new capital at the same time, then demand for new capital could exceed supply, and costs could go up. But I’m not convinced, especially since the BIS will give the banks at least four years to raise the new capital through securities issuance or just through making profits.


The Basle reports make the popular assumption that increased borrowing costs hurt economic growth. There is actually a very good reason for supposing that the effect is exactly the opposite, that is to boost economic growth, and for a reason that has nothing to do with reducing the chance of another credit crunch. The reason is thus.

Banks indulge in maturity transformation which results in artificially low interest rates for borrowers. This results in more than the optimum amount of investment. Higher capital standards effectively reduce the extent of maturity transformation, thus the result is something nearer the optimum amount of investment. I go into this point in more detail at the following URL, see point No 4 in particular:

http://ralphanomics.blogspot.com/2010/07  /brad-delong-is-wong-on-maturity.html

Posted by RalphMusgrave | Report as abusive

How increased immigration would help fix the economy

Felix Salmon
Aug 30, 2010 21:32 UTC

Never mind the stimulus vs austerity debate: here’s something that both sides should be able to get behind. It’s a simple legislative fix which increases tax revenues without raising taxes; which increases the demand for housing; which increases the economy’s productive capacity; and which boosts wages for American workers. It’s about as Pareto-optimal as legislation gets. So let’s open the borders, and encourage much more immigration into the US!

The SF Fed’s Giovanni Peri has the latest research on the subject:

Statistical analysis of state-level data shows that immigrants expand the economy’s productive capacity by stimulating investment and promoting specialization. This produces efficiency gains and boosts income per worker. At the same time, evidence is scant that immigrants diminish the employment opportunities of U.S.-born workers.

The effects of immigration on US wages are large, positive, and significant:

Over the long run, a net inflow of immigrants equal to 1% of employment increases income per worker by 0.6% to 0.9%. This implies that total immigration to the United States from 1990 to 2007 was associated with a 6.6% to 9.9% increase in real income per worker. That equals an increase of about $5,100 in the yearly income of the average U.S. worker in constant 2005 dollars. Such a gain equals 20% to 25% of the total real increase in average yearly income per worker registered in the United States between 1990 and 2007.

It’ll be interesting to see how much debate this paper receives. Anti-immigration forces are more likely to ignore it than attack it, I think, if they don’t like what it says. And George Borjas seems to have stopped blogging over a year ago, which is a shame, because he would be the perfect foil for Peri.

Is there any chance of significantly liberalizing America’s immigration regime? I doubt it, not while unemployment is over 9%. No matter how convinced economists are that immigration creates jobs, voters aren’t going to believe them. And so politicians aren’t going to vote for it. Talk about ignoring the low-hanging fruit.

Update: Cardiff Garcia provides background here.


Immigration – at current or at increased levels – does not increase wages of low-wage (esp minimum wage) workers and harms them by driving up the rents they must pay in an environment where there is already a severe shortage of affordable rental housing for low-wage workers.

Immigration IS good for homeowners but bad for renters and especially for low-income renters who pay too much for housing.

Posted by newunderclass | Report as abusive