Matt Nolan

A great pile of links

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Economist’s View has put up the best daily link fest I’ve seen in a while today.

The two I’m 100% going back to when I get a chance are the links on inequality (pet interest issue of mine, and all economists) and the nice summary of the actions taken by the Fed over the past four years.

There is also a piece where an academic economist attacks some consultants who attacked an OP-Ed they did, which attacked some work done by the consultants (or at least came to a different conclusion).

This is all well and good, and when it is the specialist field of the academic economist I would place more weight on their words than on a consultant (this is coming from a consultant/forecaster).  But this doesn’t just cut one way – if the academic economist is correct that their “clients” are the community they work in, then I would expect more academic economists to come out to help educate the public, and analysts such as myself, about the issuess.  Given how little this actually happens, it appears that at least the consultant he is criticising serves his clients in a better fashion that much of academia serves theres 😉

This comment is not meant to be harsh at all – hopefully it illustrates the huge respect I have for academic economists, and my burning pashion for them to get more involved in the public discourse!  Because that is exactly how I feel.

Matt Nolan

Europe, what …

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Things were looking so good … and then this:

Spiegel Online leads with an update to its news story on Monday, according to which the interest rate threshold is likely to be top secret. The story said that a majority of central banks have rejected the idea of transparent interest rate caps.

The what … they will cap interest rates at an unknown level.  So they have no way of anchoring expectations?  So if this is an issue of “illiquidity” rather than “insolvency”, the benefit from announcing a target and not having to actually intervene just doesn’t take place.

I’m sorry but everytime the ECB does something that makes it look like a real central bank it contradicts it with something … well weird.

The justification is that they don’t want it to be “a one-way bet” … but if they introduce a target, and its credible, and the failure is one of illiquidity, the ECB takes on NO RISK – it just leads to a price change.  The losses/gains are between private sector traders, not the ECB.

So are they worried about their credibility, or do they think the banking system is actually insolvent?  Or is this just weirdness?

Matt Nolan

Banking panics and deflation

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When looking at the European debt crisis, and even before that the Global Financial Crisis, people constantly described the risks as being shown through deflation – if we experienced deflation monetary policy must do “all it can” to turn things around and help to boost the economy.

The lack of deflation around the world in the face of these “banking panics” was seen as an indicator that we were not facing the same sort of crisis, and that as a result there is no real role for central banks.  Now, in terms of direct monetary policy is may be the case, depending on our view regarding what is going on and how institutional settings are different from the Great Depression.  However, the idea that a banking panic would lead to deflation directly holds no weight.  From Essays on the Great Depression by Bernanke we have this result:

Banking panics had no effect on wholesale prices.  This … result is important, becuase it suggest that the observed effects of panics on output and other real variables are operating largely through nonmonetary channels.

The two large crises we have faced in recent years WERE NOT failures on monetary policy, and monetary policy models were not appropriate for trying to understand them.  They provided an example of a failure of the second function of a central bank – the lender of last resort function.  A lender of last resort is supposed to be sufficient to avoid these banking panics, and it was (and in the case of Europe is) the failure to appropriately take on this role that has led to these crises.

And the fact that deflation didn’t appear, but output fell sharply, is consistent with this explanation of the crisis.  And consistent with the mainstream economist worldview regarding policy.  That is nice.

Matt Nolan

Big news from Europe

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It should not be understated how important this would be for the world, and more importantly for New Zealand 😉

The suggestion that there is now a clear consensus for a plan that will essentially make the ECB a lender of last resort for the European financial system will help to knock the “financial crisis” element of what is going at the moment on its head.

If the ECB commits to limiting bond yields on government debt in the Eurozone, and backs that commitment with a statment saying it will do “unlimited purchases of bonds” we will finally have a conclusion to the bitter uncertainty that the European debt crisis has created for the world more generally.  As a result, Europe will continue to struggle, but the rest of the world can move forward.

Another thing that will become clear is the nature of the crisis – are peripheral governments facing a crisis of liquidity, or are they insolvent?  If it is liquidity, the ECB’s commitment will be enough to solve the problem – they won’t even need to actually buy many bonds!  If these countries are insolvent then the ECB is taking on a bunch of bad debt – a cost that will have to be faced by someone eventually.

If the ECB does come out full hog, we are going to see a significant improvement in the outlook for the global and New Zealand economies – albeit from the current incredibly negative outlook that most people currently have.

jamesz

Why don’t we work fewer hours?

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Posner hilariously skewers Skidelsky:

They have collaborated on a book arguing that people in wealthy countries like Britain and the United States work too hard and by doing so miss out on the “good life” — an ethical concept of a life as “worthy of desire, not just one that is widely desired.”
…
If you ask someone to work half as long for half the pay, you should have …answers to his question: What shall I do with my new leisure?

It’s definitely worth reading the whole thing. A small quibble: I agree with the general thrust of Posner’s argument, but do we really work because we can’t think of anything to do with our leisure time?!

jamesz

Unintended consequences

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I once read a great quote that I can no longer find. The gist was that there is no such thing as an unintended consequence, only a consequence you failed to understand. Economists, with a methodology centred on individual actions in response to incentives, are pretty good at picking the consequences of policies. That’s sometimes hard to persuade people of so it’s important to savour good examples like this when they come around:

Performance assessments are an important aspect of a healthy company. In order to maintain fighting weight, an organisation must honestly assay its employees’ contributions and cull the dead wood. … But Microsoft’s implementation plunged the company into internecine fights, horse trading, and backstabbing.

…every unit was forced to declare a certain percentage of employees as top performers, then good performers, then average, then below average, then poor…For that reason, executives said, a lot of Microsoft superstars did everything they could to avoid working alongside other top-notch developers, out of fear that they would be hurt in the rankings.

Employees quickly realised that it was more important to focus on organisation politics than actual performance.

In their pursuit of effective performance measurement Microsoft clearly forgot the effect that the act of measurement has upon employees.