Felix Salmon

Treasury’s blogger meeting on Monday has been covered by quite a lot of the participants — see Lounsbury, Tabarrok, and Smith.

On Wednesday, there was another meeting, this time with professional, salaried bloggers, with a decidedly center-left bias. (Tim Fernholz, Mike Allen, Derek Thompson, Shahien Nasiripour, Nick Baumann, Ezra Klein, me. Matt Yglesias was literally left out in the rain, unable to get past Treasury security.)

I half understand why Treasury makes the distinction between the two types of bloggers, but Ezra and I both felt a little jealous that we had to compete with Mike Allen asking about politics when we could have listened to a detailed and wonky discussion between Steve Waldman and Tim Geithner on the subject of bailout incentives.

The discussion was all held on deep background, so I can’t quote anybody. I can tell you that Geithner looked healthier than the past couple of times I’ve seen him: I daresay he’s actually getting some sleep these days, which has got to be a good thing. I also learned a fair amount about how Treasury views the world.

The big picture, at least as I grokked it, is that although the recovery started off stronger than Treasury had hoped, the broad economy is still in a pretty weak position. The Fed is doing its part to try to keep a certain amount of momentum going, but fiscal policy is harder, because it needs the cooperation of Congress. And it’s far from clear what kind of fiscal legislation can be passed at this point.

On housing, the main message from the big conference on Fannie and Freddie is that there’s a broad-based consensus, Rick Santelli rants notwithstanding, that large-scale government participation in the housing market is necessary to prevent further house-price declines. And yes, Treasury would very much like to make sure that house prices don’t fall any more than they have already. There’s no Bush-style policy of trying to maximize homeownership, or anything like that, and indeed Treasury now seems pretty resigned to the fact that its much-vaunted loan-modification program is going to have only a pretty marginal effect, doing more to delay foreclosures than to prevent them. But the very powerful government guarantee on Frannie’s bonds is here to stay, you won’t be surprised to hear. And even delaying foreclosures can be a good thing if it helps to give the broader economy a bit of time to recover.

In terms of markets, Treasury has no worries about bond bubbles. If corporate debt is trading at low yields, that’s great: it makes it easier for companies to borrow money to employ more people. There also didn’t seem to be much concern about the failure of the Chinese yuan to strengthen visibly against the dollar, even after the authorities there said that they would allow it to do so. Of course the US wants to see a stronger yuan. But it seems happy for China to get there in a relatively slow and unpredictable manner.

On unemployment, there’s definitely concern that the longer people stay out of work, the less employable they become, turning a cyclical problem into more of a structural one. But again, it’s hard to see what Treasury can actually do about that, given political realities.

Finally, I detected a change of rhetoric on the subject of Basel III, as various end-of-year deadlines approach and seem certain to get missed. A few months ago, there was real hope that the US and Europe would be able to agree on tough new standards for bank capital and liquidity requirements. Today, there are real fears that they won’t be able to come to an agreement, and that the toughest standards acceptable to the Europeans will still be too lax for the Americans, whose banks are much better capitalized right now.

Negotiations are still ongoing, and no one yet is spending much time worrying about what might happen if they fail. The aim, very much, is to come out of the process with a set of strong global regulatory benchmarks. And the groundwork seems to be there: the Basel technocrats have done an excellent job of closing loopholes and defining both capital and liquidity in a rigorous manner. The only question now is to fill in the all-important blanks, and to agree on actual numbers for those ratios. That won’t be easy.

George Loewenstein and Peter Ubel are about as expert on behavioral economics as it gets, so it’s interesting that they’ve taken to the op-ed page of the NYT today to urge politicians to spend less time on nudges and more time making substantive policy changes.

The problem here is that although behavioral economics can result in policies with positive effects, it can also mean that those policies get put into place instead of ones which really have teeth.

Prime Minister David Cameron of Britain recently promoted behavioral economics as a remedy for his country’s over-use of electricity, citing what he claimed were remarkable results from a study that reduced household electricity use by informing consumers of how their use compared to that of their neighbors.

Under closer scrutiny, however, tests of the program found that better information reduced energy use by a mere 1 percent to 2.5 percent — modest relative to the hopes being pinned on it.

Compare that with the likely results of a solution rooted in traditional economics: a carbon tax would instantly bring the price of energy into line with its true cost and would unleash the creative power of the marketplace to generate cleaner energy sources.

Behavioral economics should complement, not substitute for, more substantive economic interventions.

You can quibble with the specific example here — Barbara Kiviat notes that other studies show greater effects — but conceptually it’s easy to see that any behavioral-economics solution carries with it a potential problem, which interestingly enough might be exactly the kind of thing best studied by behavioral economists.

Consider an issue with two possible lines of attack: a cheap behavioral-economics solution, B, and a more expensive and politically-fraught substantive solution, S. Does implementing B make implementing S less likely? If B didn’t exist, would S be more likely to come about? Surely there are cases where the answer to both questions is yes — and where therefore behavioral economics is a bad thing, not a good thing. The ability to cover up issues with a behavioral band-aid is often just a way of doing as little as possible while appearing to tackle the issue at hand.

That said, in a lot of cases S would never happen anyway, and in those cases B is better than nothing. And in other cases S will happen either way, and again adding B to the mix is going to be a good thing. So the only cases we’re worried about are the ones where the existence of B significantly changes the likelihood of implementing S. I wonder how common that is.

If Matt Yglesias can wonk out with meditations on the velocity of money, then I can wonk out with a chart:

The red line, here, is the total US money supply, and as you can see it’s started leveling off recently. (Source data here.) In fact, in many months it has actually declined — a rare occurrence, historically speaking. The blue bars are the month-on-month change in M2; it declined as much as 0.65% in January 2010, and in the first five months of this year — all that we have data for so far — it has fallen in three and risen in only two. The money supply in April 2010, at $8.5 trillion, was lower than it was in November 2009: it’s almost unheard-of for the money supply to shrink over so many months.

More generally, I’d take issue with Matt’s assertion that the Fed’s response to the crisis has “involved a sharp increase in the M2 money supply”. Yes, M2 rose in the wake of the crisis. But the sharp rise in M2 dates back much further than that — in fact, you can trace it all the way back to the mid-1990s. The red line doesn’t start rising more sharply when the crisis hits, nor do the blue lines get noticeably larger. There’s one big jump in M2 between August 2008 and January 2009, right at the height of the Lehman collapse, during which it rises from $7.79 trillion to $8.32 trillion, a rise of just under 7%. But we’ve seen that kind of thing before: between November 2000 and May 2001, M2 grew by more than 5%, and then between May 2001 and October 2001, it went on to grow another 4% on top of that.

But I do agree with Matt that we should start publishing M3 data again. If America’s economic statistics are “arguably the most robust in the world”, as Emily Kaiser says, then we should be able to know what’s happening to broad money, without using narrower money as a proxy. These things are very wonky, and only one part of a much bigger puzzle. But they’re still important.

Just as I was headed down the pub to drown my sorrow at Ghana’s gut-wrenching defeat in the World Cup, the shop steward of the International Brotherhood of Econobloggers instant messaged me to remind me that I still haven’t written about Kartik Athreya. Apparently this is grounds for expulsion, and so I thank Heather Horn, with a smart little essay against the close reading technique often being found in English classes, for giving me an angle. (I’m not even going to attempt a list of everybody else who’s written great stuff contra Athreya, but for starters try Thoma, DeLong, Yglesias, Sumner, Cowen, Kling, Avent, Wilkinson, Konczal, Wade, Merkel, Harding, Evans-Pritchard, and Ritholtz.)

Anyway, Horn’s point is that any organized attempt to look deeply at something risks being self-defeating: you can end up disappearing down all manner of silly dead ends, and understanding less than you would with a more-is-more approach.

This absolutely rings true to me. For reasons which today elude me, I decided when I was doing my A-levels in England to do what they call “double maths” — essentially taking two mathematics exams (Maths and Further Maths), in the same two years you’d normally spend studying for just one. As a result, we had a highly accelerated mathematics curriculum, and there was no time to circle back and make sure the class had understood something before moving on to the next thing. It was all rather sink-or-swim.

And at any given point in time, I was sinking — along, I think, with most of the rest of my class. I was pretty fuzzy about what we’d been taught in previous weeks, and I was very unlikely to understand what the teacher was trying to say at any given time. Maths class, for me, was a combination of panic and incomprehension, combined with a desperate attempt to bluff my way through as much as I could. (Needless to say, if you’re reduced to trying to bluff, mathematics is not the best subject to choose.)

Yet somehow my classmates and I all did very well, at the end of the two years, when it came time to taking the actual exams. As I recall, nearly everybody taking double maths wound up getting an A in their Maths A-level, and most of us got an A or a B in Further Maths as well. Somehow we had managed to gain a pretty good grasp of the subject by dint of sheer velocity: the mechanism, I think, was that a desperate attempt to understand a new concept had the effect of making earlier ideas drop into place. And that the best way of mastering the Maths curriculum was not so much to study it directly, but rather to try to study the Further Maths curriculum: even getting halfway there would bring you pretty much up to speed on the stuff that went before.

Something similar, I think, happens with blogging. Bloggers tend to be foxes, rather than hedgehogs; it’s pretty clear that Athreya is an archetypal hedgehog and has a deep-seated mistrust of foxes. We skip around a lot of different things, and much of the time we don’t really understand them. But somehow the accumulated effect of all that skipping around is to make connections and develop understandings which hedgehogs often lack. What’s more, we live, as Athreya admits, in a highly complex world — one which there are serious limits to what economics can do on its own.

So I’ll continue to have a healthy skepticism when it comes to everything I read, whether it comes from people with deep immersion in economics PhD programs or whether it comes from an anonymous blog. But most of the smart and relevant insights I find will come from bloggers: they might not fully grok the mathematical underpinnings of the economics that they’re talking about, but they are useful and thought-provoking and germane in a way that economists often are not. And by dint of sheer velocity, they achieve a very modern kind of knowledge — one very well suited to the blogging platform. Maybe that’s what I really learned in those mathematics classes — the ability to synthesize bits of information that I’d picked up in the prior weeks and months. It turns out to be quite a handy skill.

Remember David Harvey, the chap with the book-length critique of the financial crisis through an explicitly Marxist lens? I’d be surprised if the number of readers of this blog who read his book ever broke into the double digits, but hey, what if I told you that there’s a fabulous little YouTube video from RSA Animate which illustrates a lecture that he gave with inventiveness and verve? That’s more like it:

This is one of the most gripping ways I’ve yet seen of presenting complex and dry ideas: it’s Paddy Hirsch with better drawing skills, higher production values, and two months rather than two hours to put it all together. There’s more where that came from: try Barbara Ehrenreich, Dan Pink, or Jeremy Rifkin. I’m trying to think who I’d most like to see given this treatment: Matt Ridley would be very interesting, I think, or Paul Collier, or — getting very geeky and financey — how about Riccardo Rebonato? Even Nouriel Roubini might be a lot of fun. More, please, RSA!

(HT: NC)

Mike Mandel has an interesting nominee for the most significant economic event of the past decade: the failure of the Human Genome Project to become the medical and financial blockbuster that everybody expected ten years ago.

If the project had met its expectations, says Mandel, we might be looking at spending much less money on treating incurable diseases like cancer and diabetes; we would have created a lot more great jobs in the pharma industry; and the US would have a trade surplus in pharmaceuticals, rather than a trade deficit of more than $30 billion.

Still, hope springs eternal, for Mandel, at least:

Here’s how I see it: The U.S, and more broadly the “advanced” countries, did what they were supposed to. They invested heavily in the cutting-edge new technology, biotech, which promised to make the biggest difference in the most important areas–health, food, energy. The research has gone great, tremendous progress has been made. Commercialization thus far has sporadic–but the gap between research and commercialization is one which has been repeatedly bridged in the past. So I’d say that the odds are good that the Human Genome Project will have a significant economic impact over the next 5-10 years.

Mandel does worry whether “a misguided patent system” is a “structural impediment in the U.S. innovation system”; I’d be interested in that too. But the big picture is that the US made a multi-billion-dollar bet on genomics, and so far that bet has failed to pay off. That doesn’t mean it was a bad decision, but it’s still worth thinking about what might have been. Maybe we were just unlucky.

Richard Florida has long been in the same camp as me on the homeownership front: it’s too high, and creates problems like labor immobility and rental ghettoes populated only by people who can’t afford to buy. Today he says that we’ve already had a “great homeownership reset”, based on a paper by Andrew Haughwout, Richard Peach, and Joseph Tracy of the NY Fed. Take into account all the people who are underwater, on their mortgages, he says, and you’ll find that “US homeownership is already lower than you think” — just 61.6%.

But the problem is that this is exactly the kind of reduction in homeownership that we don’t want. Homeownership isn’t all bad: there are upsides to it, as the authors of the paper explain.

Because owners have a financial interest in their property, they have incentives to take measures that will maintain or increase the value of that property. Some of these measures—such as fixing a leaky roof—are closely related to the house itself. Others, such as investing resources in the betterment of the neighborhood and the community, have broader beneficial effects on the local area, creating what economists call “positive externalities.”

It’s possible to argue for hours about just how big these upsides are, and whether or not they outweigh the downsides of homeownership. But it’s undeniable that when homeowners go underwater on their mortgages, a lot of these upsides disappear: you’re not going to invest in your house if the return on that investment accrues to your lender rather than yourself.

At the same time, the downside of homeownership hardly goes away the minute you go underwater on your mortgage — to the contrary, it’s exacerbated. The serious problems associated with those crumbling exurbs get much worse with each extra underwater homeowner: now, alongside the rental ghettoes, we have to deal with foreclosure ghettoes as well. If you’re living in a home with negative equity, then you have all the downside of renting, (not being willing to invest in your house, for instance) alongside all the downside of owning (like not being able to easily move to where jobs are).

Tracy Alloway, blogging the Fed report, explains why homeownership is very likely to fall over the next five years: those underwater homeowners would have to save an extra $1,222 a month, on average, if they’re going to close out their existing negative equity and buy a new home in five years’ time. And that’s not going to happen. As a result, we face essentially two choices: either the misery of America’s millions of underwater homeowners is likely to continue for the foreseeable future, or else the walking-away trend will continue to rise, and we’ll have another fully-fledged solvency crisis in the US financial system.

When the NY Fed starts talking about the effective homeownership rate falling, then, there isn’t much in the way of a silver lining, even for those of us who want to see the homeownership rate fall. All we’re really talking about is the personal insolvency rate rising. And that does no one any good.

Mark Siegel, the executive director of media relations at AT&T, was upset that I didn’t phone him before posting my blog entry yesterday on his company’s new data plans. He phoned me this morning, and I told him that I assumed the official AT&T press release — which I linked to from my blog — had all the information that the company wanted to release, but that if he wanted to tell me anything else, he was more than welcome to.

And indeed, he did clear up one thing for me. If you’re on the Data Plus plan, that costs you $15 for 200 MB no matter how much data you use. If you use 201 MB in a month, that’s $30; if you use 401 MB, it’s $45, and so on. If you go up to say 1.9 GB in a month, that’s $150 — six times the $25 you would pay to consume the same amount of data on the Data Pro plan.

Is there any point, I asked Siegel, at which AT&T will help a brother out and automatically switch a heavy data user from Data Plus to Data Pro? No, he told me: “Our assumption is that people are intelligent enough to see that they’re going over. People are way smart enough to manage their own usage.”

This puts a large and unnecessary onus onto people with phones, especially phones with WiFi capability. If you only use data-heavy applications like YouTube or Pandora when you’re connected to a WiFi hotspot, you should be fine with the lower data plan — until that fateful day when your WiFi craps out without you noticing, and you rapidly rack up a huge amount of data usage inadvertently.

I also asked Siegel what plan I should use, in the light of my detailed list of how much data I’ve consumed over the past eight months. “In your case it might be a toss-up”, he said, unhelpfully. “It’s up to you to decide.”

Well, that’s one choice I don’t want. Siegel thinks — or at least he told me — that “people don’t want one plan”, and that something along the lines of the plan I proposed in my post ($15 for the first 200 MB, and then $10 per GB thereafter) would constitute trying to fit all of AT&T’s customers into one mold — something he says that, after “months and months of speaking to consumers”, AT&T has learned that they don’t want.

So I asked him who would lose out from that kind of plan. He said: “For somebody who is a relatively light user, a gigabyte would be a much much much higher level of usage than that person would ever engage in, and why would you charge that at all.”

Somehow he forgot that AT&T, with its new plans, is asking anybody who’s likely to go over 200 MB in one month to get charged for two gigabytes of data each month — or face paying more for 201 MB than they would otherwise have to pay for 1.9 GB.

Siegel’s message, which I’m happy to pass on, is this: “One of the things we found is that people don’t want one plan. They don’t want one size that fits all.” Well, I want one plan, and it’s clear to me that AT&T new pricing scheme is deliberately constructed to ensure that a lot of people end up making unnecessary payments — either for using more than 200 MB when they’re on the Data Plus plan, or for using less than 200 MB when they’re on the Data Pro plan.

Of course, if AT&T weren’t evil, it could fix all this at a stroke, and it wouldn’t even need to change the plan pricing. All it would need to do is charge people for data usage ex post, rather than ex ante: if you used less than 200 MB in one month, it would charge you on the Data Plus plan, and if you used more than 200 MB it would charge you on the Data Pro plan.

But that would be far too easy for AT&T’s customers, and it would deprive AT&T of all that extra revenue from people who guess their data-usage needs incorrectly. Obviously AT&T prefers to make life harder for its customers, if that’s going to give it a little bit more money.

On the London Underground, you don’t need to decide whether it makes more sense to buy an individual ticket or to buy a daily or a weekly or a monthly pass. With the Oyster card, you just tap in and tap out around the system, and it charges you whatever’s cheapest. You only make one journey? You only get charged for one journey. The minute that your journeys in one day add up to more than the daily-pass rate, you get charged the daily-pass rate, and no more. Similarly for your journeys in one week, with the weekly pass. And so on. Really, there’s only one plan, and there’s no way to get inadvertently ripped off.

When AT&T decided to abolish unlimited data usage on its smartphones, that’s the kind of of plan it should have implemented. Instead, it went the evil route, and it’s forcing its current customers to make one of three different choices, based on limited information. Whatever they choose is quite likely to be the wrong choice, and AT&T will chortle as it collects all that extra money which its customers didn’t need to pay.

The first choice is known as Data Plus, and gives 200 MB of data for $15. If you go over the 200 MB cap, you pay another $15 for another 200 MB. If you go over that cap, it’s not clear what happens, but you’ve already paid $30 and will certainly be asked to pay more.

The second choice, Data Pro, gives you 2 GB of data for $25, and then $10 per GB thereafter.

And the third choice is to stay grandfathered in to the current plan, which is $30 per month for unlimited data usage.

You can switch as much as you like between Plus and Pro, but once you leave the unlimited plan, you’ve left forever; you can’t go back.

AT&T is good at disingenuous statements like this:

Currently, 65 percent of AT&T smartphone customers use less than 200 MB of data per month on average.

This is disingenuous on two levels. First, as John Gruber points out, it carefully talks about “smartphones” rather than iPhones: the number for iPhone users is surely significantly lower.

But second, just because you’re using less than 200 MB of data on average doesn’t mean that you should necessarily choose Data Plus. I’ve just had a look over my most recent iPhone bills, and here’s my monthly data usage over the past 8 months: 202, 120, 160, 143, 89, 39, 333, 287. On average, I’m using 172 MB of data per month, and even with the overage charges I would have been better off with Plus rather than Pro. But for the past couple of months I’ve been significantly over 200 MB, and would be better off with Pro rather than Plus. And then, if I get the new iPhone 4G, is that going to raise my data consumption? Who knows.

At least with the subway you’re in control of how much you use it. With data usage on a phone, it often comes down to questions consumers can’t be expected to understand: how much data does say Google Maps use? And, more generally, if the AT&T network is good, and doesn’t time out on a regular basis, you’re going to use it more. And consumers can’t reasonably predict how good the AT&T network is going to be next month.

AT&T could easily have saved consumers all the trouble of having to try to predict their next month’s data usage by having a single plan: $15 for the first 200 MB, say, and then $10 per GB thereafter. They didn’t, because they’re looking forward to getting $30 per month from people exceeding 200 MB of data but who use nowhere near the 2 GB that “Pro” users get for $25. That’s where AT&T is evil, even if you think (contra Jeff Jarvis) that it makes sense to abolish unlimited plans.

Mike Mandel has the chart of the day, asking why the finance industry has lost so many fewer jobs than much of the rest of the private-sector economy:

I don’t agree with Mandel’s theory, which is this:

As long as the U.S. is running a big trade deficit, financial sector jobs are going to do very well. The rest of the world has to lend large amounts of money to the U.S. to keep the global economy going, and all of that money has to be funnelled through Wall Street, which creates well paid jobs.

The US twin deficit is more weighted than ever towards the public sector these days, rather than the private sector, and the number of jobs on Wall Street involved in dealing in Treasury bonds is pretty constant, and pretty small. More generally, while Wall Street does do quite a lot of debt finance, I don’t think that activity explains big headcount trends nearly as well as Mandel thinks it does.

So what’s my theory? If you look at the chart, it turns out that the job losses in finance are put into two buckets. There’s “commercial banking”, on the one hand, which has had very small job losses: people have just as many checking accounts and bank loans as they always did. And then there’s “finance and insurance”, which is what we generally think of as Wall Street, but which also includes the enormous number of employees in the insurance industry. And just like commercial banking, the insurance industry is pretty steady, and is going to have seen very few job losses indeed. What’s more, it’s probably bigger, in terms of total headcount, than the investment-banking industry.

So assume that insurance has seen even fewer job losses than commercial banking, and that it accounts for most of the jobs in “finance and insurance” — in that case, the job losses on Wall Street alone could be very large indeed to get to that final 7.3% figure.

Before reading too much into these numbers, then, I’d like to see a bit more disaggregation. It might be true that Wall Street hasn’t seen condign punishment in terms of job losses. But on the other hand, it might not.

Note the circular reasoning in Martin Wolf’s latest column:

Greece is likely to restructure its debt at some point, as John Dizard has argued in the FT. That would not be the worst outcome. Once a country is in the “junk bond” category, no reputation is left.

Or, to put it another way, Greece got downgraded because it is likely to default, and it is likely to default because it got downgraded. This is yet another reason to start ignoring credit ratings.

The main point of Wolf’s column is a very good one:

European orthodoxy is that the crisis is, at root, fiscal. Marco Annunziata of UniCredit summarises it in a recent note: “In hindsight, it seems obvious that the flaw in the eurozone’s institutional setup is both extremely serious and extremely simple: first, a currency union cannot work without sufficient fiscal convergence or integration; second, the eurozone has been unable to create incentives for fiscal discipline.” Mr Annunziata’s chart shows that this view is wrong. Just consider the frequency of breaches of the rules requiring fiscal deficits of less than 3 per cent of gross domestic product. Greece is a bad boy. But Italy, France and Germany had far more breaches than Ireland and Spain. Yet it is the latter that are now in huge fiscal difficulties.

The fiscal rules failed to pick up the risks. This is no surprise. Asset price bubbles and associated financial excesses drove the Irish and Spanish economies. The collapse of the bubble economies then left fiscal ruins behind it.

It was the bubbles, stupid: in retrospect, the creation of the eurozone allowed a once-in-a-generation party.

This, in hindsight, was the biggest weakness of the Maastricht rules, capping debt at 60% of GDP and deficits at 3%. It’s not that the rules were broken: it’s that they were insufficient to prevent the kind of debt-fueled boom which leads inevitably to a fiscal crisis. As Wolf points out, the countries in fiscal trouble, like Spain, aren’t necessarily the ones with the highest sovereign debt ratios: they’re the ones with the highest debt ratios overall, including private debt. (Spain’s public debt is just 56% of GDP; its private debt, however, is 178% of GDP.) And private debt was never included in the Maastricht rules.

In a way, Greece has it easy: a sovereign default and devaluation solves a lot of its problems at a stroke. Spain, on the other hand, has a much tougher task ahead of it, since private-sector defaults won’t make the country any more competitive. And it’s already got unemployment over 20%. Only tough structural reforms have any chance of working, and those will take a long time, and face enormous political opposition. As Andrew Eatwell says:

Having squandered the opportunity to embark on unpopular economic, labour and pension reforms when his popularity ratings were relatively high after the 2008 general election –a period in which he fervently denied that Spain was facing an economic crisis– Zapatero now faces the prospect of tackling those issues while trailing the main opposition centre-right Popular Party in the polls and with a string of potentially tight regional elections around the corner. Necessary but unpopular measures may therefore be put on the backburner or at least kept to a minimum for fear of a voter backlash that could cost the governing Socialist Party dearly in regions such as Catalonia, where the Socialists lead a coalition government and elections are due this autumn. Zapatero also faces a general election in early 2012.

With regional governments accounting for 57 percent of total public spending in Spain, there is a serious risk that national interests and the economy as a whole may find itself subordinated to entrenched regional interests, crowd-pleasing promises and partisan politics.

All of which is different only in degree, not in kind, to what we’re seeing in the US right now.

Tim Duy has a provocative thesis: the Europe crisis is good for the US economy, at least for the next few quarters.

Bottom Line: The European crisis, by keeping US interest rates in check and oil prices low, may do more to help the US recovery than hurt it. In the process, however, we would expect the flip side of the resulting capital inflows into the US to emerge – namely, a rising external imbalance. Arguably, this simply shifts the ultimate adjustment to sometime in the future. Again.

Is this really true? Interest rates can hardly be any lower than they are, so for the time being they’re exactly where they would be even if there wasn’t a European crisis. The situation in Europe might at the margin make the Fed slightly more reluctant to start tightening, but it’s not going to make any real-world difference for a while yet, if ever.

As for the price of oil, again I think the influence of European news is marginal, and only secondarily due to fundamentally lower demand from Europe. Mostly, I think that the option value embedded in the oil price — the idea that you might be able to buy now and then sell in the future at a profit — has fallen, as the prospects for serious oil-price appreciation have eroded. In other words, the fall in oil is financial, rather than fundamental. Which still helps US growth: the price of oil is the price of oil either way. But I think the connection with Europe is a second-order effect.

More to the point, if the European crisis really does end up delaying and therefore exacerbating the way that the US is going to have to deal with its twin deficits, that bodes ill for future interest rates, and is likely to keep the yield curve steep for the foreseeable future. If global liquidity embarks on another flight-to-quality trip to the US, that’s a nice short term boost on this side of the pond. But it’s not at all sustainable, and I’m not even sure it can reasonably be considered a “net positive” if it only increases the likelihood of a W-shaped recovery.

It’s going to be another panicky weekend in Europe after today’s torrid market action: the positive effects of last weekend’s emergency meetings clearly didn’t last even until Friday, and the ever-weakening euro is now dragging down the continent’s bourses. This isn’t (just) a sovereign-credit issue any more: the financial markets have worked out that there’s a pretty simple trade-off between fiscal austerity and economic growth.

At the same time, markets clearly don’t believe that fiscal austerity is going to be a reality either: Greece’s CDS spreads are now back out over 600bp, and the rest of sovereign Europe seems to be gapping out too.

Most worryingly of all, the biggest losers today on European stock exchanges have been the banks — which means that we could be heading for a reprise of the 2007 credit crunch.

The big picture here is that risk, in Europe, is being replaced by uncertainty. The difference is that risk can be priced, while uncertainty can’t, and a market dominated by uncertainty is always going to be jittery and dangerous. No one knows whether the trillion-dollar bailout package announced last weekend will ever actually exist in practice; no one knows whether there’s a Trichet Put or not; no one knows whether the historic alliance between France and Germany, in which both of them do whatever it takes for the sake of European unity, still really exists; and everybody knows that the UK now has the most eurosceptic government since Margaret Thatcher resigned 20 years ago.

Meanwhile, on this side of the pond, we’re seeing large stock swings yet again, with the Dow down over 200 points and the VIX at 33: the uncertainty in Europe is clearly spilling over to the U.S., and this time a phone call from Barack Obama to Angela Merkel is unlikely to do much visible good.

This isn’t a second financial crisis yet. But the fact is that the world’s governments and central banks have much less ammunition than they did last time around if such a thing were to emerge. So the possible downside is enormous, especially given how much markets have rallied in the past year. If you can’t stand a lot of heat, then this particular kitchen is one to avoid for the time being.

Mohamed El-Erian has released his 8-page summary of the medium- and long-term outlook for the global economy, and while there are few surprises, it makes for a most worthwhile read.

The big picture is of a world which (a) can’t afford to make more mistakes, and (b) is certain to make more mistakes, thanks in part to the increasingly important role of politics in national economies. The world seems to be converging on a model of “state capitalism”, but no one really knows what that model looks like, and with national and international politics becoming increasingly fractious, tail risks are increasing even as the base-case outlook remains underwhelming.

We seem to be leaving the era of independent central banks behind us, as they are now the only institutions capable of taking on the debt which moved during the most recent crisis from banks to now-overburdened sovereigns. The last major holdout, Jean-Claude Trichet, threw in the towel last weekend, and we’re now in a world where the only real guarantee of central bank independence is a small government debt. (Think Australia, which, alongside Canada, is one of the few relatively bright spots in the non-EM Pimco universe.) El-Erian is not happy about this development:

I am inclined [to warn] against the long-term implications of additional steps to turn monetary authorities (with revolving balance sheets) into fiscal agencies (with more permanent exposure to dubious assets). An even larger-scale use of central bank balance sheets, if it were to materialize, would provide only a temporary respite, and the collateral damage and unintended consequences would be serious, including the impact on inflationary expectations.

But in an overleveraged world, inflation is maybe preferable to default as a means of getting rid of the massive debt burden which Pimco sees weighing down all of the G3 economies for the foreseeable future. In any case, Pimco is looking at what it thinks will happen, rather than what it thinks should happen, and it sees inflation coming back first in some emerging economies, and then, looking out a few years, in the U.S., then Europe, and finally in Japan.

As far as the U.S. is concerned, El-Erian sees a vicious cycle playing out in the high unemployment figures:

Unemployment is high and will likely remain so for the foreseeable future, accentuating concerns about skill erosion and loss of labor market flexibility.

I’m hopeful this isn’t the case. It’s true that most important skills are learned and honed on the job rather than at schools and colleges, and it’s also true that a labor market where professionals are jumping from one great opportunity to the next has more inherent flexibility than one where they care mostly about holding on to their present position. But on the other hand, I suspect that geographical labor-market flexibility is increasing, as the unemployed become more willing to move to where the jobs are, and also to simply walk away from their underwater mortgages. Meanwhile, all those people going back to school while they wait for the labor market to pick back up have to be learning something useful.

There’s not a lot of what you might call investment advice in this paper, beyond a general idea that it’s important to stay alert and that a set-it-and-forget-it buy-and-hold strategy of any description is prone to failure. But there are two interesting long-term ideas at the end of the piece:

- It is a world where the currencies of the emerging (as opposed to submerging) economies will continue to warrant a greater allocation over time; and

- It is a world where the safest of carry will come from duration and curve in sovereigns that, due to their economic and financial fundamentals, are truly core countries in the midst of this global paradigm shift.

If a retail investor was interested in playing these trends, the first one is relatively easy: you buy a emerging-market local-currency bond fund. The second one, however, is harder: how do you put on a trade where you basically borrow short and lend long in the biggest global economies, without inadvertently becoming a bank and taking on all the credit risk that entails, especially in a world where it’s becoming increasingly difficult to differentiate credit and rates?  I daresay that El-Erian is right when he implies that the U.S. yield curve is going to remain pretty steep for the next few years. But I suspect you need to be a big company like Pimco to make money from that trade.

Manhattan incomes rose by 35.5%, in real terms, between 2000 and 2008. Manhattan, Kansas, that is. Meanwhile, in much more educated and vibrant cities like Raleigh and Austin, real incomes fell substantially. What’s going on here? Mike Mandel looks at the numbers:

Brains and education did not seem to count too much in success in the last business cycle. Overall, the top ten cities, measured by growth in per capita income, had an average college graduate rate of 17.7% The bottom ten cities had a college graduate rate of 31.8%.

My feeling is that this is a historical anomaly, and largely a product of the beginning and end points that Mandel used: 2000 was the peak of the dot-com bubble, which artificially inflated tech salaries, while 2008 came at the end of a commodity boom which helped oil-rich states. The long-term trend is inescapable: the returns to education are large and growing, and if you’re not a college graduate and you don’t own your own company, it’s becoming increasingly difficult to maintain a middle-class lifestyle.

What’s more, Mandel’s outliers have to bee seen in the context of the bigger story about real wages, which he noted back in April: real wages in general have been falling, for the first time since the Great Depression. And with unemployment still at 10%, there’s not much hope that they’ll start rising again any time soon. If you want to see incomes go up in your city or region, your best hope is frankly just to get lucky, like Manhattan did. Because wages in the U.S. as a whole aren’t going anywhere.

(HT: Cowen)

Update: I had lunch today with Allison Schrager of the Economist, and she asked a good question: how did the percentage of college graduates in these cities change from 2000 to 2008? And what happened to the student population in Austin?

Update 2: Mark Beauchamp of EMSI makes some excellent points via email:

Mr. Mandel’s lead example of Metro Areas with the Biggest Real Per-Capita Income Gains was Houma-Bayou Cane- Thibodaux, LA — a metropolitan area that had 11% of the population of the San Jose MSA in 2002.

Between 2002 and 2009, its population grew 5.08% while its total employment grew 19%.  You have to have an income-per-capita increase in jobs like that.  An income-per-capita ratio favors regions that have explosive income growth (especially jobs that pay above the previous average), and population growth that lags behind the job growth. Conversely, the ratio will not favor areas that have a high amount of population growth with concurrent losses in total income.

The  biggest “loser” by this metric is the San Jose MSA, and during the same time period  its population grew by 86,269 people (5.16% growth) and lost 43,314 jobs (a 5% loss).  For purposes of scale, the San Jose MSA added the equivalent of half of the population of the Houma MSA and lost the equivalent of half Houma MSA’s workforce between 2002 and 2009.

Tying this in to education level is pretty silly — these are boom towns (oil and military), and likely with a high amount of young workers, early in their careers who didn’t bring spouses or children (extra, non-income-producing population, thus dampening the ratio).  This is like comparing the boom towns of the Western US with the established cities of the Eastern US during the Long Depression at the end of the 1800’s.

He also has some numbers for college graduates in Austin: they were 46% of the population in 2002, and 44% in 2009. So that doesn’t explain very much.