Felix Salmon

This blog became a locus, in my absence, for a fascinating debate about economics and economists, which wended its way from David Segal to Stephen Gandel to Barbara to Justin to Brad DeLong and back to Barbara again.

My favorite part of the discussion was Brad’s response to Justin. Justin made a simple point: the central tenet of economics is that incentives matter, and financial incentives in particular; economists get paid lots of money by financial institutions; and yet they get strangely touchy when anybody links these two facts.

Justin had John Cochrane in mind as the strangely touchy economist, as following his link would have shown, but Brad thought he was the person being referred to, and launched into a defense of Larry Summers and his response to Raghu Rajan at the 2005 Fed meetings in Jackson Hole.

Here’s Paul Krugman on the debate in question:

The 2005 Jackson Hole event was a sort of Greenspan celebration; still, it does come across as excessive — dangerously close to saying that if the Great Greenspan says something, it must be so. Second is the extreme condescension toward Rajan — a pretty serious guy — for having the temerity to suggest that maybe markets don’t always work to our advantage. Larry Summers, I’m sorry to say, comes off particularly badly.

Brad sees it differently; he says that Summers “did not ‘dismiss’ Raghu’s concerns”. But Summers did start off with this:

I speak as a repentant, brief Tobin tax advocate, and someone who has learned a great deal about the subject, like Don Kohn, from Alan Greenspan, and someone who finds the basic, slightly Luddite premise of this paper to be largely misguided.

Summers fits three things into this opening sentence. First, he renounces his previous dalliance with a Tobin tax — a tax based on the idea that a tiny amount of fettering of unlimited and virtually cost-free financial transactions might be a good thing. Second, he pays obligatory obeisance to Alan Greenspan. And third, he says that Rajan’s entire paper is based on a “slightly Luddite premise”.

All of these are things that Summers would do if he had been captured by the financial services industry: they’re entirely consistent with such capture. As were all of Summers’s deregulatory impulses when he was at Treasury, including overseeing the Commodity Futures Modernization Act.

Brad stands up for Summers’s intellectual honesty:

If you think that Larry pulled his punches in August 2005 on the importance of reforming compensation schemes because fourteen months later he was going to take a job at the hedge fund of D.E. Shaw, you attribute an extraordinarily degree of precognition–back in August 2005 I thought Larry had weathered the storms at Harvard and would be president until 2010 or so.

But this misses the point: Summers had already been captured when he was Treasury secretary, and he was hired by DE Shaw partly because he was captured.

Being captured is not some kind of intellectually dishonest overt bribe, where you truly believe A but profess to believe B because doing so makes you rich. It’s much more subtle than that, based partly in the wealth and success and sterling reputations of those (like your mentor Bob Rubin, perhaps) who believe B. And it’s a survivorship-bias thing, too: if you don’t believe B, you’ll never rise to the kind of position where your opinions matter as much as Larry’s do and did.

And as Barbara says, there’s a lot of framing going on too:

We have all, to a large extent, adopted this world view as our own—and that has altered both the way we perceive problems, as well as the way we analyze and try to solve them. But this way of understanding the world is, ultimately, only one of many. In certain circumstances it will fail.

Summers has a pretty unique way of perceiving, analyzing, and solving problems. Many policymakers, including Barack Obama, value his particular insights. But the fact is that most of the time Summers seems to end up doing and proposing exactly what Wall Street would most want him to do. Pace Brad, he might well be fully aware of the problems with Wall Street. But yes, by using words like “Luddite”, he does dismiss those concerns, or persuade himself that the costs of acting on them are greater than the benefits. And given that incentives matter, it’s silly to believe that his conclusions are wholly unrelated to his status as an extremely powerful multi-millionaire.

There's been some interesting discussion in response to my earlier post about why we expect too much from economists, although a lot of the comments miss my larger point. What I was trying to say is that economics might not entirely be up to the task of explaining what we generally consider to be economic phenomena because we are overconfident about what the discipline has the ability to account for. You might call this the Freakonomics Fallacy. Whatever it is in the world we are trying to explain—crime, climate change, test scores—economics has the answer.

If this isn't in fact true, then why would we think it? Again, to underscore a part of my earlier argument that I probably didn't make forcefully enough: we think economics has all the answers because economics has become our major mode of understanding the social world around us. Charities are social businesses. Policy makers are cost-benefit analyzers. Education is a market.

This has not always been the case. In earlier eras, we were often more likely to understand human behavior and social dynamics through other prisms, such as political science, sociology, psychology, anthropology or biology. Indeed, for better or for worse, many of these fields took a turn being the dominant social science. I'm not saying that one frame gives a more accurate or useful picture of the world than another. Just that each leads to a different way of understanding why things happen the way they do because each comes with its own set of assumptions and simplifications.

Now here is the part I didn't talk about earlier. Using one frame over another may also lead to changes in perception and behavior. As economist Robert Frank once wrote, "Our beliefs about human nature help shape human nature itself." I am indebted to Joe Magee for pointing me to this fantastic paper (PDF), which explains how the economic world view might be influencing us to act more in line with its assumptions—such as the primacy of self-interest in how people make decisions. The paper includes a number of great examples, including how the Chicago Board Options Exchange wound up conforming to option-pricing theory and why companies often think layoffs are the path to maximum value. Here's a more trivial, although particularly salient, illustration that involves people playing the prisoner's dilemma:

[The] game was called, in one instance, the Wall Street Game and, in the other, the Community Game. This simple priming using different language produced differences in participants’ choice of moves, as well as differences in the moves subjects anticipated from their counterparts. When the game was called the Community Game, “mutual cooperation was the rule. . .and mutual defection was the exception. . . . whereas the opposite was the case in the Wall St. Game” (Liberman et al., 2003: 15). Both participants and those that nominated them did not anticipate the extent to which this simple labeling or naming affected responses, and subjects’ responses to the situation were much more strongly predicted by the name of the situation than by the person’s presumed likelihood and reputation for being cooperative or defecting.

This is not an indictment of the economic world view, nor a way of complaining about how it has won out out above all others for all time (it hasn't). Rather, this is simply a friendly reminder that we have all, to a large extent, adopted this world view as our own—and that has altered both the way we perceive problems, as well as the way we analyze and try to solve them. But this way of understanding  the world is, ultimately, only one of many. In certain circumstances it will fail. Economics cannot explain everything that comes our way. But sometimes we're too enmeshed in economic thinking to see that.

Over at the Curious Capitalist, my former colleague Steve Gandel asks me to react to this NYT article about how economists manage to disagree on such fundamental questions as whether the government should spend more or less money in response to economic malaise. I've been perplexed by this sort of thing before. In this post from August, I worried about the influence of ideology, and then decided that maybe the bigger take-away is that we should spend less time listening to economists, who, after all, represent just one possible lens onto the world of human behavior, decision-making and social dynamics:

[T]he economy is as much a product of sociology and policy as it is pure-form economics. Yet we'd not expect a sociologist or a political scientist to be able to write a computer model to accurately capture system-wide decision-making. The conclusion I've come to: while economists may have an important perspective on whether it's time for stimulus or austerity, maybe we should stop looking to them as if they are people who are in the ultimate position to know.

After rereading my post, I started to wonder how economics and its famously flawed assumption of rational behavior came to dominate the discussion. If confidence is such an important part of getting the economy growing again, then why aren't we taking advice from legions of social psychologists? If multinational corporations are back to profitability but still not adding jobs, then why aren't we asking the organizational behavior experts for their models?

In search of an answer, I took a cue from Steve: I called Justin. He had all sorts of interesting things to say, like how economists after WWI thought long and hard about why they hadn't played a larger role in the war effort (ostensibly hoping to do better next time), and how in the 1960s economists moved to get everyone working from the same basic model partly because a unified voice would be more influential. That is to say, economics won out over other social sciences, at least in part, because the discipline got its act together. (Justin may fill in more of the details later, but, if not, you've always got his history-packed book to turn to.)

So what do we do now that economics doesn't, in fact, have all the answers? Well, some of us try to shoe-horn other approaches, like psychology, back into the picture. And some of us denounce academic economics altogether. But most of us just listen to the debate among economists and don't quite understand how it can be happening because these are the guys and gals who are supposed to know this stuff. We have so completely absorbed the economic world view in so many aspects of our lives—public policy is determined by cost-benefit analysis, doing good in the world has become return on social investment, efficiency has morphed from the best way to reach a goal to the goal itself—that it doesn't even occur to us that there could be a more illustrative starting point for asking a question or framing a debate.

That's one idea, anyway. The economists disagree because they don't have the tools to see the big picture. And most of us can't see that.

Charlie Gasparino takes a swing at Nouriel Roubini today; I’m not sure why, beyond general unhappiness at the fact that Nouriel still gets a lot of respect both inside and outside Washington.

Gasparino apparently conducted an “informal survey”, in which, he says, he couldn’t find a single investor who regularly uses Roubini’s research. He tells us nothing about the participants in this survey — who they are, how many of them there are — and neither does he tell us what he would consider “regular use”. (Note what he doesn’t say: that his survey turned up no subscribers to Roubini’s research.)

It’s not entirely clear what the point of this “informal survey” was, since all he needed to do was phone up Nouriel’s spokesman, who was happy to tell him that Roubini has over 1,000 institutional clients. Maybe it was just an excuse to start bashing Nouriel’s research output:

Roubini’s record shows that while he was predicting doom and gloom for the US in 2004, his initial call had nothing to do with a runaway housing bubble…

It wasn’t until about August 2006 that Roubini began talking about a housing crisis, and he was hardly alone. Several economists and investors, from John Paulson to Stan Druckenmiller and around this time Goldman Sachs, were also predicting the housing decline…

Last year he predicted that the rising price of gold was in fact a bubble, just like the housing one a few years earlier, and like housing, it would burst as well. But as we all know gold prices remain strong.

Someday, Roubini might be right about gold’s demise, but what good does that do me as an investor now?

This doesn’t even make internal sense. Gasparino implies that Nouriel’s bearish prediction in 2004 would have had value if he had tied it to the housing bubble, even though the housing bubble didn’t burst for a good three years after that. But then he slams Nouriel for talking about the gold bubble last year, on the grounds that identifying a bubble more than a year in advance doesn’t do him good “as an investor now”.

If Gasparino spent time on the phone with Nouriel’s spokesman, he surely knows that there’s a great deal more to Nouriel’s research product than Nouriel’s own predictions. Those are highly publicized in any case: you don’t need to pay Roubini.com thousands of dollars to find out what Nouriel thinks about, say, Greece. Instead, his product gives you access to a large team of smart economists, who do a lot of very useful aggregation, analysis, and strategy. And if you pay enough, you also get access to Nouriel himself, which means he’ll answer your questions and have interesting and provocative conversations with you, which in turn will be informed by all the other interesting and provocative conversations that he’s constantly having with clients, policymakers, and other smart and important people.

Does Gasparino really believe that the reason to subscribe to Nouriel’s research product is so that you can find out where Nouriel thinks that asset classes are moving, place bets in those directions, and then make money when he turns out to be right? I can’t imagine that he does, but clearly he’s happy to pretend to believe that if doing so will give him anti-Roubini ammunition.

The truth is, of course, that Gasparino’s only real beef with Roubini is that he’s a successful liberal. But the secret of Nouriel’s success is only partially a function of his early and loud insistence that the collapsing housing bubble would prove catastrophic. If Gasparino considers himself a student of how to successfully navigate Wall Street, he should take a much more serious look at Roubini.

(Full disclosure: I was fired from Roubini’s shop in early 2007, but he did give me enough exposure as an econoblogger that I was soon hired by Portfolio.com.)

Update: Watch Gasparino stammeringly recapitulate his argument on air, adding for good measure that “the only person that has disagreed with my analysis so far is Felix Salmon of Reuters, who — besides that he has a screw loose — is maybe the worst reporter in the world”. He says all this while bashing Roubini and while sitting right next to Mike Norman of John Thomas Financial. About which you might want to learn more here or here.

Mohamed El-Erian delivered this year’s Per Jacobsson lecture at the IMF annual meetings, and was very clear that the international community has failed in its job over the past year or so:

The impressive degree of global coordination highlighted by the April 2009 G-20 meeting did not last long. It only took a few months for that moment of extraordinary collaboration to give way to solely domestic agendas.

The result of that, he says, is going to be ugly indeed:

Having won the war, industrial country societies are in the process of losing the peace. Indeed, absent some important mid-course corrections, industrial countries confront the prospects of low growth; high unemployment that is increasingly structural in nature; welfare losses, including a growing number of citizens falling through the large gaps created by overly stretched safety nets; and a rising risk of protectionism.

El-Erian is characteristically vague on exactly what those corrections should be, beyond saying, unhelpfully, that “structural reforms are key”. But the question’s probably moot in any case: countries are moving further apart, and tail risks are higher than ever.

El-Erian gave his speech on the same day that the ECB’s Lorenzo Bini Smaghi said that “if Greece restructures it would have a total collapse of the economy” — exactly the tail risk which is preventing Greece’s spreads from coming down to a sustainable level.

But if you want a clear visual of what the new world of higher tail risk looks like, you could do a lot worse than this chart, from the Bank of England’s latest inflation report, pointed to by El-Erian:

This is most emphatically not your typical bell curve, with the most likely outcome being represented by a peak in the middle. In fact, it’s inverted: the chances of inflation being outside the central 1.5% to 2.5% range are significantly higher than the chances of inflation falling within that sweet spot. And the UK’s central bank is, if anything, even more pessimistic:

The Committee judges that, given the scale of the risks in both directions, at both the two and three-year horizons there is only around a one-in-four chance that inflation will be within 0.5 percentage points of the 2% target.

This is a world which is out of the control of governments and central banks, where everybody is getting used to expecting the unexpected, and where uncertainty breeds a high degree of risk aversion even as monetary policy tries to push companies and investors to take ever-greater risks with their capital.

I’m inclined to agree with the message of El-Erian’s lecture: infighting between the world’s governments has failed the global economy, and we’re all going to be buffeted by unpleasant and unforeseeable consequences as a result. Fasten your seatbelts: the New Normal is going to be very bumpy.

Bill Easterly thinks that inequality is fractal:

Income inequality behaves like a fractal: income is very uneven at large scales and at small scales…

We are going to go from global to the US to the New York City metro area to the neighborhood of NYU in Manhattan. At each scale, there is a remarkably high level of inequality across space.

The rich coastal cities in the US and the poor rural South. Rich lower and midtown Manhattan and poor South Bronx. Rich West Village and Soho and poor Lower East Side.

This is true, as far as it goes, but I think it misses the fact that the degrees of inequality at various different scales are changing in important ways. Over the past few decades, the gap between China and the US, to take one obvious example, has narrowed sharply — even as the degree of inequality within both China and the US has increased markedly.

The trend, then, I think, is for inequality to increasingly ignore national borders. You can get rich clusters across borders, as in say the area between Porto Alegre, Montevideo, and Buenos Aires, or any number of megaregions in Europe. At the same time, the gaps between the richest and the poorest areas of most countries are only growing larger.

Easterly’s map of the world, where every country is a uniform color, conceals more than it reveals. Once upon a time, national borders were useful boundaries to use when measuring per-capita income across the planet. And given that statistical agencies are still national, that’s not going to change any time soon. But those numbers are going to be less and less informative as pockets of wealth spring up in poor countries, and pockets of poverty persist in middle-income nations.

This is the most depressing poll you’re likely to see this electoral season, and it’s not even political. StrategyOne decided that ordinary Americans can’t possibly be worse economic forecasters than economists, so they asked whether we’re going to have a double dip. 65 percent said yes, we are. And the rest of the answers are entirely consistent with that: 48 percent of Americans think that our best days are behind us. 71 percent think that “America is fundamentally broken and not working”. 79 percent are planning to spend less money at Christmas this year than they did last year:

“The American public — characteristically optimistic and resilient — is looking around and seeing more and more dark storm clouds approaching on the horizon,” said Bradley Honan, senior vice president of StrategyOne. “Not only has confidence in the economy been severely undermined, there are now real, significant doubts emerging about our country.”

When such dark forecasts are so widely held, of course, they become self-fulfilling. I see only two grounds for hope: either the poll is fundamentally flawed in its design (I have no reason to believe that it is, but it would be great to see someone else trying to replicate these results); or else Americans might actually behave in a relatively high-consuming and optimistic manner, even if they don’t actually think that way when asked.

In any case, it would be nice to see the bulls out there come up with some good explanation of how their forecasts are consistent with these survey results. Because on the strength of these answers, the double dip is coming. And it’s going to be a nasty one, too: 77 percent of Americans think it’s going to be at least as bad as the current recession.

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.

Just in time for the new year, Ian Bremmer and Nouriel Roubini have delivered a 4,000-word thumbsucker on the global political economy. Essentially, they take Mohamed El-Erian’s idea of a “new normal” and start getting very specific about where and how it’s going to fall apart. And it’s hard to disagree with things like this:

G-20 heads of state will gather in Seoul in November, and there will be plenty more such summits in years to come. Yet policy responses to transnational problems will continue to be improvised and incomplete. U.S. negotiators will resist any institutional framework that allows foreign leaders to impose binding rules on Washington. China will stoke growth to create new jobs, managing development to try to prevent crises that could provoke the kind of social unrest the state can’t contain. Russian leaders will continue to try to attract foreign investment while extending state control across strategic sectors of the domestic economy and using the country’s energy resources as geopolitical leverage. India will pursue trade liberalization at its own pace. Brazil will try to use its newly discovered offshore oil to enable state-run oil company Petróleo Brasileiro to become an ever-more useful tool of economic policy. Saudi Arabia will use its still-considerable reserves to help manage oil prices and will act as producer and lender of last resort when it finds good value for its money. Efforts to move these governments toward harmonious and effective policy responses to problems that extend beyond the financial crisis — collective security, counterterrorism, climate change and global public health emergencies — will fall short.

The result is that the historical guardians of prosperity and growth will shrink in importance, to be replaced by mechanisms which are much more likely to fail.

State capitalism will produce a reversal in the trade and capital account liberalization of the past several years as protectionism breeds more protectionism…

The emergence, virtually overnight, of the formerly obscure G-20 as the world’s preeminent economic policymaking body provides a glimpse into a more chaotic future. It also suggests that the old levers of hegemonic stability and influence exercised so expertly by the British in the first golden age of globalization (roughly 1880 to 1914) and by the U.S. in the second (1989 to 2008) will have far less purchase in the new, postcrisis age.

By the time that Bremmer and Roubini work out what this all means for markets, the line of hypothetical causality is long and therefore no prediction can carry any great degree of certainty. But there’s no good reason why this shouldn’t be true:

The reopening of the fire hoses of credit and capital that occurred during the bubble years will happen again and intensify the boom-and-bust cycles. Driven by ever-more- desperate policymakers in the U.S., Europe and Japan, these cycles will both shorten and magnify. Political, policy and regulatory uncertainty will increase, and as a result, financial crises will become more frequent and costly, while risk aversion, volatility and uncertainty will rise. The illusions of the Great Moderation — a phrase coined by Harvard University economist James Stock to describe the two-decade period that started in the late ’80s, with its quasireligious embrace of market efficiency and infinite American power — will have created the era of the Great Financial Instability. And nothing could hasten the decline of American influence more than another self-inflicted catastrophe of global market capitalism.

Investors don’t even need to believe this; they just need to protect against it in order for it to start becoming self-fulfilling. The dot-com crash came from people taking too much risk, and was relatively harmless. The recent financial crisis was a consequence of too much risk-aversion — everybody piling into paper carrying the magical “AAA” branding. That kind of crisis is much more damaging. And risk-aversion is at least as prevalent now as it was during the Great Moderation: just look at the disconnect between fluffy bond prices and modest stock prices.

In order for capitalistic animal spirits, especially in fast-growing economies, to rescue us all from a series of horrible financial earthquakes, everybody’s going to have to become a lot less risk-averse. And I don’t see that happening any time soon.

Everybody was so nervous going in to this morning’s payrolls report that even though employment fell and unemployment rose, markets are looking extremely exuberant.

There’s definitely reason here for a small sigh of relief. The private sector added jobs in August — not enough to keep up with population growth, and not even enough to counteract the effects of census workers being laid off. But hey, the private-sector employment number was positive rather than negative, that’s gotta count for something.

The big picture here is, as Tony Fratto says, that the job market is basically flat. The official release generally has a pretty good take on things, and the language there is clear: the unemployment rate and the 14.9 million number of unemployed are “little changed in August”. Break it down by race or age, you still see “little change”. The labor force participation rate and the proportion of the population with jobs? “Essentially unchanged.” The number of people who want a job but didn’t actively look for one in the previous four weeks? Again, “little changed”.

The big number, total nonfarm payrolls, “was little changed”. Retail employment “was about unchanged over the month”. Elsewhere, employment “showed little change in August”. You get the picture.

Flat, then, is the new up — which only goes to demonstrate just how worried the markets are about a double-dip recession. The syllogism is easy. This payrolls report would never be good news in a growing economy; this payrolls report is good news; therefore, the economy isn’t growing. So don’t get too excited about bond yields rising today. We’re not remotely in full-bore recovery mode yet.

Ricardo Caballero has an interesting idea:

The economy is barely muddling through. While some of this is unavoidable given the magnitude of the financial shock that is slowly working its way out of the system, macro-policy still has an important role to play in preventing a relapse. Unfortunately, the Federal Reserve has the resources but not the instruments, while the US Treasury has the policy instruments but not the resources. It stands to reason that what we need is a transfer from the Fed to the Treasury.

Caballero doesn’t give an indication of how big this transfer should be. But presumably he thinks the transfer should be substantially larger than the sums that the Fed is already remitting to Treasury.

And remittances are pretty large, and they’ve been growing sharply since the Fed started expanding its balance sheet. Remittances from the Fed to Treasury ranged from $19 billion to $34 billion between fiscal 2000 and fiscal 2008. In fiscal 2009, they were $34 billion — that’s the amount of money the Fed sent to Treasury between October 2008 and November 2009, about $2.8 billion a month. But if you look at calendar 2009, the Fed ended up remitting $46 billion to Treasury — that’s a rate of $3.8 billion a month. And in fiscal 2010, the CBO projects that total remittances will reach a whopping $77 billion — that’s $6.4 billion a month.

(The historical CBO data comes from this CBO report; the projections come from this one.)

The CBO, back in January, took the Fed at its word and projected that remittances would start falling after fiscal 2010, to $74 billion in fiscal 2011, $52 billion in fiscal 2012, and a low point of $41 billion in fiscal 2013 before they started rising again. But remittances are largely a function of the size of the Fed’s balance sheet, and given that the Fed is dipping back into its QE arsenal, the chances are they’ll be higher than that in actuality.

Put it all together, and the present value of the Fed’s remittances to Treasury is surely well over $1 trillion. I’m sure there’s some way that the Fed could front-load its remittances, paying out a few hundred billion dollars now, and paying less in future. That way Treasury wouldn’t need to “commit to transfer resources back to the Fed once the economy returns to full employment”, as Caballero suggests — it would just get lower remittances going forwards.

Treasury would still need to spend that money, though, and I do wonder whether it might need some kind of Congressional approval to do so. Anybody care to weigh in on the constitutional implications of this idea?

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.

I’m not entirely clear why Matt Yglesias has suddenly come over all bah-humbug at the presence of Mohamed El-Erian on the Washington Post op-ed page:

If there’s a clash between what policies would be good for PIMCO’s investment positions and what policies would be good for the global economy, El-Erian has a responsibility to push for policies that would be good for PIMCO’s investment positions. Is there such a clash? Well, readers of The Washington Post op-ed page have no way of knowing. So what’s the point of publishing it?

The oversimple answer to the question is that El-Erian controls over $1 trillion in assets: if you wanted to put a face to the famous bond vigilantes, it would probably feature that famous moustache. If you care what the bond vigilantes might be thinking, then you can probably get a pretty good sense of it by reading El-Erian’s frequent op-eds.

A better answer is that there simply isn’t a clash between what’s good for the global economy and what’s good for Pimco, which is overwhelmingly a long-only investment house. Pimco’s long-term health is a function of there being a strong global economy which generates lots of savings for Pimco to manage. If you’re running a few million or even a few billion dollars, then you can significantly grow your assets under management by taking bold bets which pay off. If you’re running a trillion dollars, that’s no longer the case. At that point, your assets under management are much more a function of the global savings rate than they are of your own expertise as a fund manager.

The best answer, however, is that it doesn’t really matter who wrote the op-ed: it should stand or fall on its own merits. El-Erian makes the case that we’ve lost the global cooperation and determination to change our ways that we saw 18 months ago: essentially, we’ve wasted our crisis.

An already polarized political environment is becoming even more fractured by real and far less substantive issues. There is virtually no political center that can anchor consensus and enable sustained implementation of policy. Meanwhile, as anti-Washington sentiments rise, interest in a national agenda is increasingly giving way to the election cycle. Internationally, the impressive degree of cross-border coordination seen during the global financial crisis has been reduced to inconsistent — and at times contradictory — national responses.

This worrisome trio of increasingly ineffective national and global policy stances, intense political polarization and growing social pressures speaks to the risk that the economy’s recent soft patch will evolve into something even more troublesome and sinister.

El-Erian has a global perspective, and from that point of view it’s pretty clear that another one-off stimulus package, even if it’s a big one, isn’t going to achieve very much. Instead, the former IMF technocrat is looking for something much more coordinated and strategic, where the G8 construct a vision of where they want to be, and then work out how on earth they’re collectively going to get there from here.

It’s not like El-Erian’s prescriptions are those of a fiscal cheapskate. Quite the opposite: this kind of shopping list comes extremely expensive.

Specific measures would include pro-growth tax reform, housing finance reform, increased infrastructure investments, greater support for education and research, job retraining programs, removal of outdated interstate competition barriers and stronger social safety nets.

The point is rather that when Republicans can’t agree with Democrats, and Germans can’t agree with Americans, on any of this, the prospects for the global economy dim. And when the world is sick, the US can’t thrive. That’s not a function of who El-Erian is, or whether he’s conflicted. It’s just international geopolitical reality.

If you’re going to have a sluggish growth figure, this is the best sort of sluggish growth to have:

Growth in the last quarter was stifled by a 32.4 percent surge in imports, the largest since the first quarter of 1984, dwarfing a 9.1 percent rise in exports. That created a trade deficit, which sliced off 3.37 percentage points from GDP, the largest subtraction since the fourth quarter of 1947.

Obviously, a trade surplus would be better than a trade deficit, especially in terms of generating employment growth domestically rather than abroad. But exports did rise, at quite a healthy clip. They were just eclipsed by this whopping rise in imports — which are a sign that there’s still a lot of demand in the economy.

This is a subject which came up at the Treasury blogger meeting last week: while no one at Treasury is exactly overjoyed at seeing imports rising so much faster than exports, any sign of increased economic activity is being taken as a good sign. Certainly this kind of thing is preferable to seeing the opposite happen, where exports fall and imports fall faster. Even if that would have a better effect on GDP.

Brad DeLong places himself squarely in the camp of the Cycs rather than the Strucs when it comes to Jim Ledbetter’s distinction between economic unemployment theorists. The Cycs think that unemployment is cyclical and will fall as demand grows; the Strucs think it’s structural, and the result of a mismatch between the jobs available and the unemployed workers looking for employment.

DeLong reckons that there can’t be much of a mismatch, because there’s precious little evidence of excess demand for labor in any industry. But this ignores, I think, globalization: companies which can’t fill jobs domestically simply outsource them, or set up shop abroad. Rather than looking just at U.S. employment figures, it would be helpful to look also at the total number of people employed by U.S. companies, and see whether that’s showing a different trend.

I also think it makes sense to break the Struc argument down into its component parts: the inability of the unemployed to find work, on the one hand, and the inability of employers to find good employees, on the other. The first part seems to be undeniable, and it’s surely getting worse as the length of time that people have been looking for work rises inexorably. The longer you’ve been without a job, the harder it becomes to get one, until you become unemployable.

Meanwhile, just because it’s hard to find good employees doesn’t mean that your business is booming and that there are lots of incentives for the unemployed to join your industry. The Cycs could well have a point here — if we get an uptick in total demand, then that might help increase employment in the parts of the economy with tight labor markets. But for the time being, employers who can’t find the employees they want seem to be resigned to simply keeping on going with the employees they’ve got: dreams of expansion have given way to grim survival and a refusal to take on extra debt or risk. And they certainly don’t want to risk raising their prices in this economy, even if they suspect they could get away with doing so.

And then there are all the stickinesses in the labor market: people like to stay where they are, rather than moving to where the jobs are. (This fact is only exacerbated by high homeownership rates.) They tend, certainly in the first instance, not to even look for jobs which pay much less than they were last earning: if you used to be a high-producing subprime mortgage originator, it’ll take a while before you consider training to be a yoga instructor. And then, by the time that you capitulate to the new economic reality, you’ve been unemployed for so long that your chances of getting any job at all have dissipated significantly.

Empirically, there’s no doubt that the Cycs have been proved wrong in their forecasts: unemployment now is significantly worse than the Obama administration forecast even without the benefit of the stimulus package.

Yes, at the margin, government stimulus can create jobs. Especially if its carefully targeted towards things like small-business lending and arts subsidies. But job creation is more of an art than a science, and there’s always a chance it’ll fail. Especially if you attempt it in the face of full-bore Republican obstructionism in Congress. So the political reality is that high unemployment is going to be with us for the foreseeable future. Which is something that I’d guess both the Cycs and the Strucs would agree with.

(Via, and for, Heidi)