Just in case it isn't completely obvious, macroblog is on a temporary hiatus as I make the transition to my new position at the Federal Reserve Bank of Atlanta. For those of you who have asked -- and really, thanks so much for asking -- this blog will indeed live on. Hope you hang tight, and don't delete me from your feeds -- I'll be back in action before you know it,
From Austin Goolsbee, via Mark Thoma:
... The United States miracle of the 1990s was that our productivity began growing faster than that of other countries, even though we were the richest to start with...
To explain the experience in the United States, one would have to believe that Americans have some better way of translating the new technology into productivity than other countries. And that is precisely what [London School of Economics] Professor [John] Van Reenen’s research suggests.
His paper “Americans Do I.T. Better: U.S. Multinationals and the Productivity Miracle,” (with Nick Bloom of Stanford University and Raffaella Sadun of the London School of Economics) looked at the experience of companies in Britain that were taken over by multinational companies with headquarters in other countries. They wanted to know if there was any evidence that the American genius with information technology transfers to locations outside the United States. If American companies turn computers into productivity better than anyone else, can businesses in Britain do the same when they are taken over by Americans?
And in the huge service sectors — financial services, retail trade, wholesale trade — they found compelling evidence of exactly that. American takeovers caused a tremendous productivity advantage over a non-American alternative.
When Americans take over a business in Britain, the business becomes significantly better at translating technology spending into productivity than a comparable business taken over by someone else. It is as if the invisible hand of the American marketplace were somehow passing along a secret handshake to these firms.
Sound familiar? If you can't quite put your finger on it, here's a refresher from Ricardo Hausmann and Federico Sturzenegger:
There is a large difference between our view of the US as a net creditor with assets of about 600 billion US dollars and BEA’s view of the US as a net debtor with total net debt of 2.5 trillion. We call the difference between these two equally arbitrary estimates dark matter, because it corresponds to assets that we know exist, since they generate revenue but cannot be seen (or, better said, cannot be properly measured)...
At least three factors account for the accumulation of dark matter. The first refers to foreign direct investment (FDI). Consider a simple example. Imagine the construction of EuroDisney at the cost of 100 million (the numbers are imaginary). Imagine also, for the sake of the argument that these resources were borrowed abroad at, say, a 5% rate of return. Once EuroDisney is in operation it yields 20 cents on the dollar. The investment generates a net income flow of 15 cents on the dollar but the BEA would say that the net foreign assets position would be equal to zero. We would say that EuroDisney in reality is not worth 100 million (what BEA would value it) but four times that (the capitalized value at our 5% rate of the 20 million per year that it earns). BEA is missing this and therefore grossly understates net assets. Why can EuroDisney earn such a return? Because the investment comes with a substantial amount of know-how, brand recognition, expertise, research and development and also with our good friends Mickey and Donald. This know-how is a source of dark matter. It explains why the US can earn more on its assets than it pays on its liabilities and why foreigners cannot do the same. We would say that the US exported 300 million in dark matter and is making a 5 percent return on it. The point is that in the accounting of FDI, the know-how than makes investments particularly productive is poorly accounted for.
That story might only go so far, as the Federal Reserve Bank of New York's Matthew Higgins, Thomas Klitgaard, and Cedric Tille claim...
... we review the argument that the United States holds large amounts of intangible assets not captured in the data—assets that would bring the true U.S. net investment position close to balance. We argue that intangible capital, while a relevant dimension of economic analysis, is unlikely to be substantial enough to alter the U.S. net liability position.
... but it's apparently more than a fairy tale.
Today at Angry Bear, my friend pgl is doing some back-of-the-envelope econometrics:
From 1980QIV to 1992QIV, average annual real GDP growth = 3.0%.
From 1992QIV to 2000QIV, average annual real GDP growth = 3.6%.
From 2000QIV to 2006QIV, average annual real GDP growth = 2.6%.
Notice something? During the low tax eras (Reagan-Bush41 and Bush43), we witnessed lower growth rates. During the Clinton Administration – which began with its fiscally responsible policies with a tax rate increase – we saw strong growth. Maybe part of the explanation has to do with the impact on national savings from fiscal irresponsibility justified by phony free lunch promises.
I have a bit of a problem with the evidence here. To get the gist of my objection, take the following quiz:
Which one of these time periods did not include a recession?
a. 1980QIV to 1992QIV
b. 1992QIV to 2000QIV
c. 2000QIV to 2006QIV
If you answered b, you win the gold star. And if you knew that, are you really surprised that the period from 1992 through 2000 had higher average growth than the other two periods, which did include recessions? Suppose we instead make the comparisons including only the expansion years of the Reagan-Bush41 and Bush43 administrations? Here's what you get:
From 1983 to 1989, average annual real GDP growth = 4.3%.
From 1992 to 2000, average annual real GDP growth = 3.7%.
From 2002 to 2006, average annual real GDP growth = 2.9%.
You could just as well look at those numbers and conclude that potential GDP growth -- measured cycle to cycle -- is declining through time. And if you accept pgl's characterization of irresponsible policy, followed by responsible policy, followed by irresponsble policy, you might then conclude that policy has very little to do with that trend.
Perhaps you would want to argue that I shouldn't exclude recessions because the absence of a downturn in the 1992-2000 period is itself evidence of the superior growth effects of the fiscally responsible policies of the Clinton administration? Let me try to talk you out of that with a few more questions:
1. Do you really want to blame the Reagan fiscal policies for the 1980-82 recessions -- which are almost universally attributed to the Volcker Fed's fight against double digit inflation inherited from the policies of the 1970s?
2. Do you really want to characterize Bush41 as a tax cutter? And would you maintain that position knowing that Clinton's major piece of fiscal policy -- the Omnibus Reconciliation Act of 1993 --was pretty much of copy of the Omnibus Reconciliation Act of 1990, the legislation in which President Bush the Elder famously broke his "no new taxes" pledge?
3. Do you really want to finger the Bush43 tax cuts for the 2001 recession which began a scant two months into the administration and was over even before the tax cuts took effect?
Look -- It might very well be that "fiscal responsibility," as pgl defines it, is a central ingredient of pro-growth policy. But those GDP comparisons don't make the point.
UPDATE: pgl responds --to no particular objection from me -- here and here.
The recent spate of relatively good economic news has some people thinking rosier scenarios. From the Wall Street Journal (page A3 in yesterday's print edition):
The latest data show employment and manufacturing growing at a vigorous rate, suggesting the U.S. economy is regaining momentum after a slow start to 2007...
Nonfarm employers added 157,000 jobs to their payrolls in May, nearly double the 80,000 new jobs recorded in April, the Labor Department said Friday. Led by the service sector, the rebound brought the three-month average job gain to about 137,000, a pace strong enough to keep unemployment low and wages rising. The unemployment rate held steady at 4.5%.
Meanwhile, the Institute for Supply Management, a purchasing managers' trade group, reported that its index of manufacturing activity came in at 55 in May, up from 54.7 in April, indicative of expanded factory production. That is a stark contrast to earlier this year, when manufacturing activity was contracting.
Economists saw the reports as confirmation that the economy is regaining momentum despite the pain that high gasoline prices and the housing slump are inflicting on the consumer...
How quickly the economy rebounds will depend to a large extent on how U.S. consumers, whose purchases make up more than two-thirds of all economic activity, respond to the conflicting influences of high gasoline prices, falling house prices, a robust stock market and rising incomes. Friday, the latest reading on the University of Michigan's consumer sentiment index suggested they were still in relatively good spirits: The index rose to 88.3 in May from 87.1 in April.
It does feel like we've gained a little breathing room, but this picture sticks in my mind:
That second quarter of 2000 should remind us that it sometimes looks pretty sunny before the storm.
UPDATE: The broken link is fixed.
Think about a dollar bill.
If you’re hungry, you can’t eat it; in a rainstorm, it won’t keep you dry. But you can trade it for an apple or an umbrella. If you lived in a world without money, how would you get the things you want and need?
Play Escape from the Barter Islands to find out!
If you are a young student, a teacher presenting economic concepts to young students, or simply someone who feels like a young student, give it a shot.
This morning's email from the Goldman Sachs Global Markets Research Group contains this assessment:
The recent industrial news, including April US industrial figures yesterday, have been positive, especially as it reduces the probability of one of the tail risks in the market, i.e. too soft growth. Nevertheless, we think the market remains too optimistic about US growth trends going forward. This is highlighted in the current Blue Chip Consensus, which shows US GDP growth rebounding from 1.3% in Q1 (which as the US Daily discusses overnight is likely to be revised down) to 3% as soon as second half of this year.
If our US growth views prove correct, the market may yet need to revise down its growth expectations. In that regard, it is striking how growth expectations in the equity markets (as captured by our Wavefront US growth basket) have continued to grind higher.
So, while we are comfortable with our view of a US soft landing, markets may need to adjust to a less optimistic macro reality than is priced in. This potential downward adjustment could prove to be one of the several road bumps for risky assets in coming quarters.
Not everyone will have to revise down those expectations. The economists queried for last week's Wall Street Journal forecasting survey seem to (at least broadly) share the Goldman view:
On the whole, the 60 economists predict gross domestic product, the broadest measure of economic output, will grow at a 2.2% annual rate this quarter. Over the second half, they expect growth of about 2.6%, which is a slight reduction from what they had forecast in a survey conducted last month. They don't expect growth to reach 3% until the second quarter of 2008.
Certainly the voices of Fed chairs past and present, while not endorsing a particular forecast, are aligned with the no-tailspin crowd. From Bloomberg:
The Fed chairman maintained his forecast that the slump in housing won't have a broader impact on the economy. "We do not expect significant spillovers from the subprime market to the rest of the economy or financial system,'' Bernanke said.
Fed officials this year have cited the housing recession as a main risk to growth, which was the weakest in four years last quarter. Bernanke's comments today reflect the consensus of policy makers that the downturn in housing is unlikely to cause consumers to cut spending. Former Fed chief Alan Greenspan also said that subprime problems aren't spreading to lower-risk loans.
"The prime market is doing reasonably well,'' Greenspan, who retired in January 2006, said today at a meeting hosted by the Atlanta Journal-Constitution in Atlanta. "Some people are holding off on purchasing homes. Even so, we are getting a gradual rise in the prime market.''
Meanwhile, the rest of the world seems to be doing pretty well, thank you. Back to the Goldman boys:
We do not expect the prolonged period of sub-trend US growth that we foresee to cause major problems for the rest of the world. Recent data has shown further evidence of global decoupling with softer US economic news on the one hand (soft retail sales), and robust growth dynamics in the rest of the world, particularly in Europe and China (Q1 GDP growth in Euroland was above consensus and the April activity data for China have been strong).
However, this begs the question of how bad it would have to get for the global decoupling theme to unravel?
In our latest Global Economics Weekly, we extended the spill-over analysis we conducted last year to study the growth experience of other major economies (Japan, Germany, UK and France) conditional on whether US economy is contracting (i.e. real growth on qoq terms is negative) or expanding (i.e. real growth on qoq terms is positive)...
... Overall, our analysis supports our thinking that as long as US growth remains in expansion mode (which we forecast), other major economies should be able to decouple.
According to a report in todays the Wall Street Journal, some rather astute folks think it may be the other way around:
Early last year, [chief investment officer at Pacific Investment Management Company William H.] Gross's outlook for the U.S. bond market hinged on housing. "We did our homework," he says. "We sent out scouts into middle America, down to Florida." They did make some correct calls, such as predicting a drop in long-term interest rates last summer.
What Pimco didn't foresee was the impact on the U.S. of the strength in the global economy, led by China and the rest of the Asia. Mr. Gross says they recognized there was inherent strength abroad. But they counted on issues such as the U.S. trade deficit and increasing leverage around the world to have "snapback potential like a rubber band" that would restrain growth and allow the Fed to lower rates. That didn't happen.
Either way, the soft-landers appear to be feeling their oats.
Ever wonder who you should turn to for expert economic prognostications? My colleagues Mike Bryan and Linsey Molloy (future Chicago MBA!) remind us that the answer is everybody and nobody:
... we examine economists' year-ahead growth and inflation predictions since 1983 to see whether any have distinguished themselves as particularly good (or bad) forecasters over time.
We find little evidence that any forecaster consistently predicts better than the consensus (median) forecast and, further, we find that forecasters who gave better-than-average predictions in one year were unable to sustain their superior forecasting performance—at least no more than random chance would suggest.
Not that consensus forecasts are all that great:
... we summarize the track record of the median economist’s year-ahead predictions for real GDP growth and CPI inflation since 1983. (Forecasts were compiled by the Livingston Survey.) If we arbitrarily define an accurate prediction as being within 1/2 percentage point of the realized outcome, we would say that since 1983 the median forecast was accurate in only seven years, or about 30 percent of the time... The accuracy of the median forecaster’s prediction of inflation was a bit better over the 23-year period. Inflation predictions were accurate—that is, within 1/2 percentage point of actual inflation—39 percent of the time...
... So suppose the median forecaster expects the economy to grow 3.4 percent next year (its average since 1983). You could conclude—with 90 percent confidence—that the economy will grow between a robust 5.8 percent and a sluggish 1 percent. Similarly, the RMSE of the median economist’s inflation prediction over this period was 1 percent, which means that given an average inflation rate of 3.1 percent, you could be about 90 percent confident that prices will rise between a stable 1.4 percent and an uncomfortably rapid 4.8 percent over the coming year.
Fair warning, I think.
My colleague Joe Haubrich writes about "Some Lessons on the Rescue of Long-Term Capital Management":
... the LTCM episode raises many key issues about the resolution of financial crises: How far should the involvement of the central bank extend, what is the scope of action each of the various players should be responsible for, and what are the costs and benefits of the differing options? ...
Joe starts with two distinct views of the event and the Federal Reserve's involvement. First, from Myron Scholes:
Although the Federal Reserve Bank (FRB) facilitated the takeover, it did not bail out LTCM. Many debtor entities found it in their self-interest not to post the collateral that was owed to LTCM, and other creditor entities claimed to be ahead of others to secure earlier payoffs. Without the FRB acting quickly to mitigate these holdup activities, LTCM would have had to file for bankruptcy—for some, a more efficient outcome, but a far more costly outcome for society. If there was a bailout, it failed: LTCM has been effectively liquidated.
On the other side of the fence is Kevin Dowd:
The Fed’s intervention was misguided and unnecessary because LTCM would not have failed anyway, and the Fed’s concerns about the effects of LTCM’s failure on financial markets were exaggerated. In the short run the intervention helped the shareholders and managers of LTCM to get a better deal for themselves than they would otherwise have obtained.
After more discussion of arguments pro and con, Dr. Haubrich concludes with his own take on the lessons learned:
Lesson 1: Context matters. Large losses at a financial firm do not by themselves create a need for Federal Reserve action: there must be a systemic component...
... Federal Reserve Board Chairman Alan Greenspan explained:
The scale and scope of LTCM's operations, which encompassed many markets, maturities, and currencies and often relied on instruments that were thinly traded and had prices that were not continuously quoted, made it exceptionally difficult to predict the broader ramifications of attempting to close out its positions precipitately.
In that passage, Mr. Greenspan continued:
It was the judgment of officials at the Federal Reserve Bank of New York, who were monitoring the situation on an ongoing basis, that the act of unwinding LTCM's portfolio in a forced liqudiation would not only have a significant distorting impact on market prices but also in the process could produce large losses, or worse, for a number of creditors and counterparties, and for other market participants who were not directly involved with LTCM. In that environment, it was the FRBNY's judgment that it was to the advantage of all parties--including the creditors and other market participants--to engender if at all possible an orderly resolution rather than let the firm go into disorderly fire-sale liquidation following a set of cascading cross defaults.
Joe goes on:
Lesson 2: Details matter.
That the problem was resolved successfully depended, in a large part, on “the orderly continuation in the risk arbitrage business of the newly recapitalized LTCM” (Bank for International Settlements, 1999, p. 9) which in turn depended on getting the details of the recapitalization right. In the LTCM case it meant retaining the management, giving enough stake in the firm to provide an incentive for efficient liquidation, and bringing in outside oversight.
Even after taking the intermediate step of “providing good offices,” the amount and type of moral suasion had to be decided on. Each choice in turn faced trade-offs...
Which brings us to:
Lesson 3: Look for the minimum effective intervention; or work with the market not against it.
... there is some evidence that even more reliance could have been placed on the market in the LTCM case. Stock prices and federal funds rates incorporated substantially correct information about exposures to LTCM. Fed intervention, despite its limited character, may have indeed increased moral hazard by increasing the perception of too-big-to-fail.
Oops.
The blogger epicenter of the free-trade debate is rumbling at Harvard, with Greg Mankiw and Dani Rodrik engaged in a terrific -- and important -- conversation about winners, losers, and how (or whether) economic theory divides the two. You can check-in on the state of the debate at Angry Bear, where pgl provides the appropriate links. It is highly recommended reading, but I think it ought to come with a few warning labels. For example, Professor Rodrik responds to Professor Mankiw with this claim:
... there is no theorem that guarantees that the partial-equilibrium losses to import-competing producers “are more than offset by gains to consumers from lower prices.”
In a related vein, pgl opens his post with:
As we were applauding Dani Rodrik, Greg Mankiw was defending the Dan Drezner lower prices from free trade benefits everyone fallacy.
Let's be perfectly clear: There are no theorems in economics that guarantee anything about the real world. Economic models are not descriptions of physical realities but formalizations of stories about how social interactions deliver particular outcomes. Different, equally coherent, stories deliver different predictions about the world. The claim that "free trade benefits everyone" is not a fallacy, but a particular outcome based on a particular model. Different models deliver different answers, so theory alone does nothing beyond eliminating stories that are internally inconsistent.
Or, perhaps, unconvincing. The missing ingredient in this most recent installment of the free-trade discussion is evidence in favor of one story or another, a task that is a good deal messier than writing down models. What makes matters worse is that adjudicating the issue is not a mere matter of counting up winners and losers. In the court of determining what is "good" or "bad", economists have standing to address one question, and one question only: Can someone be made better off without making anyone worse off? That too depends on the model at hand, and in fact it's even worse than that. The Rodrik-Mankiw debate revolves in part around a result known as the Stolper-Samuelson theorem. Greg Mankiw does a good job explaining Stolper-Samuleson and its relevance to the subject at hand, but I'll note one item from the Wikipedia description of the theorem:
If considering the change in real returns under increased international trade a robust finding of the theorem is that returns to the scarce factor will go down, ceteris paribus. A further robust corollary of the theorem is that a compensation to the scarce-factor exists which will overcome this effect and make increased trade Pareto optimal.
In simple terms, there are losers, but the winners can win enough to more than match those losses. All would be well with the world if the winners and losers could be easily identified, and an appropriate compensation scheme implemented. But what if that is not feasible? What is the right move then? To protect the losers at the expense of significant opportunity cost to potential winners? The other way around? I've yet to encounter an economist trained to answer those questions, and you should be very suspicious of any who speak as if they are.
The Financial Times has uncovered some stumbling blocks on the road to carbon neutrality. Its multi-part report starts with a useful tutorial:
Offsetting is a fundamental principle of the Kyoto protocol – an agreement among more than 160 countries that came into force in 2005. It allows developed nations to meet emissions reduction targets by funding projects such as wind farms or solar panels in poorer countries through the so-called “clean development mechanism”. This awards such projects “carbon credits”. The credits, which can be traded on the international carbon markets, sell for between $5 and $15 (€3.66-€11, £2.50-£7.50) per tonne of carbon dioxide. To aid comparison, other greenhouse gases – such as nitrous oxide and methane – are measured as equivalents of CO2.
Carbon markets have grown rapidly since they were brought into being by the Kyoto treaty and the start of the European Union’s emissions trading scheme in 2005, under which companies were issued with tradeable permits to emit carbon. The price of carbon in the EU scheme more than halved last year after it was revealed that more permits had been issued than were needed in the first phase, from 2005 to 2007.
In the first nine months of 2006, according to the United Nations and World Bank, up to $22bn of carbon was traded. About $18bn of this was through the EU’s emissions trading scheme, and $3bn through the Kyoto mechanism.
The third element, the voluntary market, is where most offsets are bought. Businesses participating in this are not bound to reduce emissions, unlike companies under the EU trading scheme or governments under Kyoto. In 2005, the World Bank estimates, the voluntary market formed under 1 per cent of global dealings, trading fewer than 10m tonnes of carbon a year. But by 2010, the consultancy ICF International forecasts it will grow 40-fold to be worth $4bn.
Most companies going carbon-neutral use intermediaries to buy offsets on their behalf.
According to the FT, however, all has not gone well:
The FT investigation found:
■ Widespread instances of people and organisations buying worthless credits that do not yield any reductions in carbon emissions.
■ Industrial companies profiting from doing very little – or from gaining carbon credits on the basis of efficiency gains from which they have already benefited substantially.
■ Brokers providing services of questionable or no value.
■ A shortage of verification, making it difficult for buyers to assess the true value of carbon credits.
■ Companies and individuals being charged over the odds for the private purchase of European Union carbon permits that have plummeted in value because they do not result in emissions cuts.
In the end, the FT editors conclude that it's time to join the Pigou club:
The Kyoto protocol to fight climate change expires in 2012. The shape of a successor treaty is still in doubt, but one aspect seems certain: carbon trading will play a major role. A Financial Times investigation today reveals that carbon markets leave much room for unverifiable manipulation. Taxes are better, partly because they are less vulnerable to such improprieties.
I'm waiting to hear a good case made to the contrary.
UPDATE: More on the topic, from Greg Mankiw and from Felix Salmon.
UPDATE AGAIN: Yet more at Reviving Economics: Here, here, and here.
The Nattering Naybob has been thinking about this story ...
Vonage Holdings Corp. must pay $58 million plus monthly royalties to Verizon Communications Inc. for infringing three patents on Internet-telephone service, a federal jury ruled...
The jury found that three of five disputed patents were infringed and all five are valid.
... and he is not happy. Naybob's post contains a long and detailed discussion of what the disputed patents are about. Most of it is beyond me, but I do get the drift:
To allow a patent like this to stand would be analogous to allowing Verizon to patent the common practice of placement and use of salt and pepper shakers on public restaurant and cafeteria tables.
If these patents and their claims are found valid, Vonage would find it difficult to design an alternative way of hooking its network to the [PSTN].
And so would any VoIP provider as the entire VoIP industry has built its back on the ENUM standard in RFC 3761. Therefore, the entire VoIP industry would have to shut down, and the ENUM internet standard as defined would also be dead.
OK, I don't exactly understand that last part. Nor do I feel competent to judge Naybob's claim that the patent system is in this specific case being used to restrain competition rather than protect legitimate intellectual property rights. But it does bring to mind Adam Jaffe and Josh Lerner's "Innovation and Its Discontents." Say Jaffe and Lerner:
Over the course of the nineteenth and twentieth centuries, the United States evolved from a colonial backwater to become the pre-eminent economic and technological power of the world. The foundation of this evolution was the systematic exploitation and application of technology to economic problems: initially agriculture, transportation, communication and the manufacture of goods, and then later health care, information technology, and virtually every aspect of modern life.
From the beginning of the republic, the patent system has played a key role in this evolution. It provided economic rewards as an incentive to invention, creating a somewhat protected economic environment in which innovators can nurture and develop their creations into commercially viable products. Based in the Constitution itself, and codified in roughly its modern form in 1836, the patent system was an essential aspect of the legal framework in which inventions from Edison’s light bulb and the Wright brothers’ airplane to the cell phone and Prozac were developed.
All good, right? Nope.
In the last two decades, however, the role of patents in the U.S. innovation system has changed from fuel for the engine to sand in the gears. Two apparently mundane changes in patent law and policy have subtly but inexorably transformed the patent system from a shield that innovators could use to protect themselves, to a grenade that firms lob indiscriminately at their competitors, thereby increasing the cost and risk of innovation rather than decreasing it...
The origin of these pathologies goes back to 1982, when the process for judicial appeal of patent cases in the federal courts was changed, so that such appeals are now all heard by a single, specialized appeals court, rather than the twelve regional courts of appeal, as had previously been the case. And in the early 1990s, Congress changed the structure of fees and financing of the U.S. Patent and Trademark Office (PTO) itself, trying to turn it into a kind of service agency whose costs of operation are covered by fees paid by its clients (the patent applicants).
It is now apparent that these seemingly mundane procedural changes, taken together, have resulted in the most profound changes in U.S. patent policy and practice since 1836. The new court of appeals has interpreted patent law to make it easer to get patents, easier to enforce patents against others, easier to get large financial awards from such enforcement, and harder for those accused of infringing patents to challenge the patents’ validity. At roughly the same time, the new orientation of the patent office has combined with the court’s legal interpretations to make it much easier to get patents. However complex the origins and motivations of these two Congressional actions, it is clear that no one sat down and decided that what the U.S. economy needed was to transform patents into much more potent legal weapons, while simultaneously making them much easier to get.
An unforeseen outcome has been an alarming growth in legal wrangling over patents. More worrisome still, the risk of being sued, and demands by patent holders for royalty payments to avoid being sued, are seen increasingly as major costs of bringing new products and processes to market. Thus the patent system -- intended to foster and protect innovation -- is generating waste and uncertainty that hinder and threaten the innovative process.
Jaffe and Lerner summarized their reform proposals in a Wall Street Journal op-ed piece last year:
Our proposed reforms start with the recognition that much of the information needed to decide if a given application should be approved is in the hands of competitors of the applicant, rather than the [U.S.Patent and Trade Office]. A review process with multiple levels efficiently balances the need to bring in outside information with the reality that most patents are unimportant. Multilevel review -- with barriers to invoking review increasing at higher levels, along with the review's thoroughness -- would naturally focus attention on the most potentially important applications...
And to the litigation issue discussed in the Naybob post:
... there are always going to be mistakes, and so it is important that the court system operate efficiently to rectify those mistakes, while protecting holders of valid patents. Today, the legal playing field is significantly tilted in favor of patentees.
The reliance on jury trials is a critical problem. The evidence in a patent case can be highly technical, and the average juror has little competence to evaluate it. Having decisions made by people who can't really understand the evidence increases the uncertainty surrounding the outcome. The combination of this uncertainty with the legal presumption of validity -- the rule that patents must be presumed legitimate unless proven otherwise -- is a big reason why accused infringers often settle rather than fight even when they think they are right.
Both Jaffe and Lerner and Mr. Naybob make the argument that the stakes in getting all this sorted out are high. On that, I concur.
It hasn't been a good week. From new home sales to residential housing prices to durable goods, you have to dig pretty hard to unearth a little positive spin. So, it's as good a time as any to conjure up comparisons to the last recession -- which, as reported at Economist's View and at Calculated Risk, is exactly what Evan Koenig does in an article published on the Dallas Fed website. Evan concludes:
There are several disturbing similarities between the U.S. economy's recent behavior and its behavior in 2000–01, but also some reassuring differences.
There is nothing amiss in Evan's analysis, but I like to make the comparison in a slightly different way. Let's conjecture that, if a recession is in the cards, it will arrive sometime next quarter -- say, July. To me, then, the best comparison is made by considering what the data looked like in December 2000, three months before the business cycle peak in March 2001. If we do this, the reassuring news looks considerably less so. For example, Evan says:
In 2000–01, consumption spending’s contribution to GDP growth fell by about 2 percentage points. Over the past couple of years, in contrast, consumption’s growth contribution has held comparatively steady.
True, but here is a variation on a type of picture I have shown here before:
The blue line represents the data known as December 2000 -- that is, data through the third quarter of that year. The yellow line illustrates what happened next -- which was, of course, a recession. And the red line is the data we are looking at today, through the fourth quarter of 2006. Reassuring would be if the blue line was clearly signaling some sort of weakness that the red line is not. Reassuring is not what I see.
What about employment?
It is striking that while goods-producing job growth has slowed by about as much as it did in 2000, service-providing job growth has held up much better than it did in the lead-up to the 2001 recession.
To the pictures:
If you are working at, you might find some comfort in the downward drift of employment growth leading into 2000. But there certainly was not much hint of what was about to unfold. So to me those are pretty scary pictures. In fact, just about every graph I look at gives me the willies:
Sleep tight.
UPDATE: Kash does a similar experiment, in prose, for the 1990-91 recession.
I received this notice, from the Wall Street Journal:
The Wall Street Journal is launching a new online discussion forum for students!
Noted WSJ journalists will host discussions on WSJ.com to answer questions about topics and events important to students. This new forum is a unique opportunity for your students to interact with WSJ journalists, discussing current events and helping them connect classroom theory and the real world.
Students can visit our forum page on http://WSJstudent.com/forum to connect to the discussion.
Our first discussion is scheduled for Wednesday, March 21st. Featured Journal Economics writers David Wessel and Greg Ip will discuss the Federal Reserve Bank's announcement regarding short-term interest rates. Students can join David and Greg to talk about what the Fed did or didn't do, why and what difference it makes.
Be sure to let your students know about the discussion, scheduled for March 21st! Please visit http://WSJstudent.com/forum to learn more!
I'm not sure how limited the access is going to be, but it's a great idea.
From The Wall Street Journal (page A4 in the print edition):
Former Federal Reserve Chairman Alan Greenspan toned down his warning that the U.S. might slip into a recession later this year, saying he doesn't think such a slowdown is "probable," according to investment bank CLSA Asia-Pacific Markets, which hosted Mr. Greenspan's speech.
"It is possible we can get a U.S. recession toward the end of this year, but I don't think it's probable," Mr. Greenspan was quoted by CLSA as telling the audience here. Mr. Greenspan spoke via satellite from the U.S. Associates of Mr. Greenspan in Washington confirmed the remarks...
"Things look reasonably good in the short run for the U.S. and the world," he was quoted as saying. But, "we can't just assume that this extraordinary period of recovery can extend indefinitely."
Actually, I think that is just what he said in the first place.
After months of reflection, the overseers of the U.S. financial system have concluded that current regulations, administered carefully, are sufficient to prevent hedge funds, private-equity investors and other "private pools of capital" from threatening the stability of the broader financial system.
The report by the President's Working Group on Financial Markets -- the heads of the Treasury, Federal Reserve, Securities and Exchange Commission and Commodity Futures Trading Commission -- is their first comprehensive statement on hedge-fund risks since a study that followed the near-collapse in 1999 of giant hedge fund Long Term Capital Management.
The "principles and guidelines" released Thursday said that while hedge funds "present challenges for market participants and policymakers," the risks can be maintained through a combination of "market discipline" and limiting the private pools of capital to wealthy investors. It urged policy makers to scrutinize hedge fund counter-parties, such as banks and mutual funds, and rely on investors and their financial advisors to help mitigate risks.
...Mr. Paulson said. "What we've emphasized is market discipline."
Of course, it ain't over until it's over...
Rep. Barney Frank (D., Mass.), chairman of the House Financial Services Committee, said his panel will hold hearings on hedge funds this spring. He called the working group's report "a first step in addressing questions presented by the significant growth of hedge funds," but added "further study and monitoring" of systemic risk and investor protection were needed.
... but for now, the view is that the players are big boys and girls and that the exposure of banks, for example, are being contained through the prudent exercise of current oversight. Or, in the workds of the headline writers at Forbes.com: Caveat Emptor.
This, from John Irons, seems to sum up the general reaction to the President's 2008 budget proposal:
According to news.google.com, there are currently 306 stories on: “dead on arrival” bush budget
Am I the only one finding this sort of reaction increasingly wearisome? I'm all for critical analysis -- I like to think that that is what macroblog is all about. But maybe if we start insisting that the first thing out of the ever-moving mouths of pundits and lawmakers alike is about what is doable rather than what is not, we might actually some day make some progress.
As I said, just a thought.
This story, from the Wall Street Journal Online's Davos World Economic Forum blog, seems like one of them:
Mircosoft Corp. is developing on an online payment system that will be cheaper than credit card transactions, making it possible for companies to charge small fees for Web-based content and services they now offer for free...
Mr. Gates described a system that would undercut credit card fees, making it profitable for an online newspaper to charge small fees for an individual article, for example. “If you want to charge somebody $0.10 or $1 a month, that will just be a click … you won’t have to manage some funny thing or pay some big credit charge, where half of it goes to the clearing,” Mr. Gates said.
I have seen the future.
You know what side of the fence Nouriel Roubini is on:
Among the hard landing pessimists, David Rosenberg – U.S. economist for Merrill Lynch – is very thoughtful. While he is – like me – pessimistic about 2007 he has recently argued that a series of six factors may keep Q1 growth better than expected. These factors include: “a delayed boost to retail sales as consumers use their holiday-season gift cards, the upcoming introduction of Microsoft's Vista operating system (which is shifting the timing of some capital spending plans), the late Chinese new year (which influences the timing of exports), government spending patterns and distortions introduced by the weather. Another reason is the decline in energy prices, which is giving a lift to real income.”
Of these six factors I see low oil prices and the unseasonably warm weather as the most important ones that may temporarily boost growth to 2.5% in Q1.
Well, OK, but wouldn't it be just as fair to say that the rapid acceleration in oil prices suffered over the first three-quarters of the year temporarily restrained growth in the last part of the year? And though it seems reasonable to argue that favorable weather may be providing a winter boost to economic activity, and though it may very well be that this in whole or part represents a shift in business activity that would have otherwise been realized in the spring and summer, doesn't that at least imply that the business was there to shift? And doesn't that imply that the more pessimistic scenarios were not quite on target?
It's all how you look at it.
As I look back over the past year, I tend to see a stumbling asset market (in this case the asset being residential housing), a contractionary energy-price shock (at least through summer), and relatively tight monetary policy (as evidenced by the inverted Treasury yield curve). I might normally associate such a confluence with a tipping point in economic activity (in the wrong direction), but it increasingly looks like it isn't going to happen.
Perhaps, as suggested in today's Wall Street Journal (page A1 in the print edition), the hero of the story is the recent reversal of the earlier oil and energy shocks:
Oil prices fell sharply yesterday and are now hovering at their lowest levels since mid-2005, raising the prospect of significant changes in the outlook for corporate profits, consumer spending and the global economy.
... oil's pullback "is coming at a great moment for the U.S. economy," says Ethan Harris, chief U.S. economist at Lehman Brothers in New York, who estimates that each $10 reduction in oil prices adds about a half percentage point to annualized growth in inflation-adjusted gross domestic product -- a broad measure of economic activity.
"You're worried about this one-two punch from housing -- first construction collapses, and then the consumer collapses. Lower energy prices are acting as a sort of smelling salt," Mr. Harris said.
I'm sympathetic to that view, but I also have to believe that part of the story is that the underlying "fundamentals" in both the US and global economy are incredibly strong. What are those fundamentals? I think Martin Wold nailed it:
Evidently, the underlying engine of the world economy is immensely powerful. So, indeed, it is. Today’s world economy is being driven by four closely interconnected forces: technological innovation, above all the collapse in the cost of collecting, analysing and transmitting information; entry into the world economy of the vast majority of human beings and, above all, of the half of humanity that lives in east and south Asia; the “catch-up” process in these economies; and the integration of global markets in goods, services and capital that we call globalisation...
To these forces should be added the background condition of monetary stability. We seem to know how to make a world of man-made (as opposed to commodity-based) money stable. This then has delivered low nominal interest rates. Combined with strong profits, rapid growth across the world and improved fiscal and trade positions in emerging market economies, spreads on risky assets have fallen to low levels...
The implication of this perspective is that any slowdown – or “mid-cycle correction” – will be short-term and shallow...
Provided the broad story of economic dynamism remains credible, the world economy will probably overcome temporary difficulties, including any needed adjustment of external imbalances or volatility in oil prices. But if the credibility of that broad story came into question, then such optimism must vanish.
So how plausible is maintenance of the underlying dynamic? For economic policy, this raises two big questions: the first is whether inflation will be contained; the second is whether globalisation will be sustained. On the former, there is no reason to forget what we have so painfully learned. On the latter, however, there is greater uncertainty.
On the latter, those lessons have an even longer and more painful history -- here and here, for example. If we don't forget them, we'll be just fine. If we do...
The early returns from the end of 2006 and the start of 2007 have been making it easy to be an optimist. The housing market is enjoying a bit of a bounce, and though not everyone was impressed, last Friday's employment report elicited reactions more along the lines of "solid." The Capital Speculator sees "reasons to be cheerful", Tim Duy insists "the numbers are telling us that the year ended on a much more positive note than the permabears loudly insisted was happening", and Barry Ritholtz concludes that it all looks to be "reducing the odds of a rate cut [by the Fed] anytime soon."
There was plenty of discussion -- by Duy, by Ritholtz, by Calculated Risk, by Jim Hamilton (here and here), by Felix Salmon, for example -- on how to interpret the apparent mismatch between the job creation numbers implied by estimates from Automatic Data Processing (a private payroll processing firm that "contracted with Macroeconomic Advisers, LLC (MA) to create and maintain from this rich, timely data set a new measure of total nonfarm private employment") and the official government numbers from the Bureau of Labor Statistics. And Nouriel Roubini is usually a reliable curb on any enthusiasm that might be building.
If there are not enough cautionary tales out there for you, from today's Wall Street Journal (page C1 of the print edition) comes another reason to hold your breath:
This year's warm weather means economic activity that would normally be put off until spring is happening now instead, says Goldman Sachs economist Ed McKelvey. That is probably going to make economic indicators look artificially strong.
Consider housing. Builders don't break ground on many new homes in the winter. To avoid having their charts bounce around unintelligibly because of seasonal swings, government statisticians adjust winter housing starts figures upward so December is comparable with May. But if warm weather keeps more construction crews on the job, the adjusted figures could indicate a level of housing activity that isn't really there.
There are certainly offsetting factors...
On the other side of the ledger, the warm weather has made some retailers suffer. This hasn't been a good winter for selling sweaters and other cold-weather fare -- one reason why many apparel stores have posted tepid sales.
but:
... the money that shoppers don't spend on sweaters probably gets spent on other items, says Northern Trust economist Paul Kasriel...
Mr. Kasriel thinks the warm-weather boost to economic activity will prove illusory. If he's right, investors who trust the latest economic figures could discover they didn't know which way the wind was really blowing.
Shoot. Just when I was starting to feel all warm and fuzzy.
That, according to a weekend article in The New York Times by Louis Uchitelle (brought to my attention by way of Economist's View), is what Nobel Prize winning economist George Akerlof wants to resurrect:
“I am trying to effect a return to sensible economics,” Mr. Akerlof said in an interview. “And what is sensible economics? It is very pragmatic. You think about problems in the world and you ask: can government do something about that? At the same time, you maintain your skepticism that government is often inefficient”...
More than most economists, Mr. Akerlof goes far afield to gather information that he considers to be played down or ignored in ways that leave mainstream economics divorced from real life.
In his speech, he encourages others to follow his lead, rejecting the focus on what he calls “parsimonious modeling” inspired by [Milton] Friedman. Everyday experience and observation must be returned to a prominent place in the profession, he argues.
With a hat tip to to Max Sawicky for the link, this is all a reference to the material in Dr. Akerlof's presidential address at this year's annual meeting of the American Economic Association:
The discovery of five neutralities surprised the economics profession and forced the re-thinking of macroeconomic theory... However, each of these surprise results occurs because of missing motivation. The neutralities no longer occur if decision makers have natural norms for how they should behave. This lecture suggests a new agenda for macroeconomics with inclusion of those norms.
This is a provocative and very accessible paper, and a good read (especially if you are interested in discussions about the way economists ought to go about doing economics). But I'm not sure where it all leads, and not at all sure I'm convinced by Professor Akerlof's arguments.
The Akerlof "five neutralities" are all important ideas of that last 40 years that collectively constitute theoretical benchmarks -- though not necessarily the conventional wisdom -- for a whole lot of modern macroeconomics. To explain my confusion/skepticism, I'll focus on one of them, Ricardian equivalence:
According to Ricardian equivalence, under somewhat special conditions, a representative consumer who receives a lump-sum intergenerational transfer (for example, in the form of a social security payment) will not spend a single dime extra. Instead she will pass on the whole extra income, dollar-for-dollar, to her heirs, who will have to pay the higher tax bills necessary to retire the increased debt incurred in funding the transfer to the previous generation.
The transfer is neutral in its effect on current consumption.
It's a strong result and, although the evidence is not unambiguous, I think it safe to say the consensus view is that the Ricardian equivalence does not hold as a general proposition. The Akerlof address identifies several reasons why this might be the case:
A vast literature explains why such Ricardian equivalence is unlikely to be empirically descriptive. The long list of reasons includes (1) infinite, rather than finite, horizons; (2) strategic bequests to obtain the attention of one’s heirs while alive; (3) childless families; (4) uncertainty, including bequests made because of uncertainty about the age of death; (5) differential borrowing rates between the government and the public; (6) growth of the economy in excess of the interest rate, allowing steady debt issuance; (7) lack of foresight regarding the effect of social security on future taxes; (8) foreign ownership of debt; (9) tax distortions;(10) constraints on the consumption of parents (so they do not leave bequests); (11) myopia of the parents regarding children’s future tax payments.
That's a long list, and you'd think it would be plenty explanation for why the predictions of Ricardian equivalence might fail. But it doesn't seem to be enough for Professor Akerlof:
The preceding list gives empirical reasons for failure of Ricardian equivalence; but lengthy as it is, it still ignores its theoretical challenge. According to that challenge, under economists’ standard assumptions, with perfect certainty and with perfect foresight, Ricardian equivalence will occur. Such a result had previously been unsuspected by economists.
Perhaps this is a semantic difficulty, but this where I start to lose the thread of the argument. The theory isn't just about preferences -- that is,it isn't just about whether parents internalize the desires of their children. The theory also includes assumptions about constraints (such as whether private and social borrowing rates differ), technologies (such as the methods of taxation available to the government), information sets (such as knowledge about the path of future taxes), equilibrium concepts (such as whether the behavior of people is strategic). In other words, I'd argue that all of the items on the Akerlof list are theoretical elements that in turn affect the empirical predictions of the model. Dr. Akerlof seems to have something else in mind, and I don't know what it is.
In the text, the view seems to be that we should judge a theory by guessing what we would actually observe in a world that doesn't exist, and then reject that theory if those predictions don't conform to what we expect:
In this view Ricardian equivalence is a tell-tale: because we do not believe that even in the presence of perfect foresight and perfect certainty that the parent will make an equal and opposite offset of her social security transfer in terms of an increased bequest to her child. Something must be missing from the motivation in Barro’s model; otherwise it would not have given rise to results that are so surprising.
But who says we don't believe that a "parent will make an equal and opposite offset of her social security transfer in terms of an increased bequest to her child"? Imagine this scenario: You are taking your daughter out to dinner, and it is your intent and desire to pick up the tab. But when you excuse yourself to go to the bathroom, the waiter brings the bill, gives it to your daughter, who dutifully hands over her credit card for payment. Because this frustrates your intentions, you will likely respond by simply reimbursing her.
Barro's formulation of the Ricardian equivalence hypothesis invites you to think about government-created transfers from parents to children in exactly this way, and in this light my "everyday experience and observation" makes the Ricardian equivalence idea seem pretty darn plausible. Of course, I might quickly start coming up with all the reasons that social security transfers are not like a face-to-face dinner, and those reasons would look very much like the list above. But I wouldn't reject Ricardian equivalence because it is "bad motivation" to assume that my well-being depends on the well-being of my children. I would reject it because the assumption of perfect certainty, perfect markets, and so on, seem inappropriate to the circumstances of the question, and lead to bad predictions -- that is, predictions that do not conform to what we observe in the real world.
That, in simple terms is what Friedman's 'parsimonious modeling' is all about -- not truth arrived at through some process of introspection, but a useful set of assumptions that help us explain the "facts" we endeavor to understand. In the balance of his discussion on Ricardian equivalence, Professor Akerlof speaks approvingly of thinking about people as being driven by the "warm glow" of giving:
[James] Andreoni thus describes the utility missing from the standard utility function as that arising from the “warm glow” from giving... We know that the “warm glow” does not come from the utility the parent derives from her own consumption; nor, yet more utility of her child (as the child’s utility depends on its own tellingly, it does not derive from the consumption). It enters the utility function as a separate term.
I can imagine an argument that proceeds as follows: 1) The predictions of the benchmark Ricardian equivalence hypothesis do not appear to be consistent with the existing evidence on things like social security transfers -- such transfers are not neutral in their effects on consumption; 2) The failure of the benchmark hypothesis could be wrong because the assumptions about parents' preferences are "wrong", or because any number of other maintained assumptions (such as the assumption of perfect certainty) are "wrong"; 3) However, other evidence--such as the observation that people seem to prefer giving presents to giving money, even though the latter would seem to provide the best chance of maximizing the happiness of the recipient -- argues in favor of a "warm glow" view of preferences rather than one in which parents fully internalize the wishes of their children.
Now that's an argument I understand, but it is one that seems like completely standard operating procedure for most economists. I'm just not sure what the "missing motivation" adds to the mix.
Barry Ritholtz catches the general theme of the latest Economic Forecasting Survey from the Wall Street Journal (page A1 in the print edition):
Economy Poised For '07 Rebound,Forecasters Say
Weakness in Housing, Manufacturing Is Likely To Take a Lighter Toll
Other than a few economists, the overwhelming consensus view is for a soft landing and GDP growth of 2.5% to 3.0% in 2007.
The Economic Cycle Research Institute, an independent forecasting group, said its Weekly Leading Index slipped to 138.5 in the week ending Dec. 22 from 139.7 in the prior week, due to higher interest rates and more jobless claims.
However, annualized growth in the week ended Dec. 22 rose to 3.8 percent from 3.4 percent in the prior period, a reading not reached since last February.
"Given the steady improvement in the WLI, recession is no longer a serious concern," said Lakshman Achuthan, managing director at ECRI.
Ten-year Treasuries and mortgage rates have not gone through the roof. As a result, housing is going to be OK -- and a thousand doomsday forecasts must be put aside.
... the next few months will show whether my mid-2006 forecast of a US hard landing in 2007 will be proven true or not. Certainly some of my more recent forecasts for financial markets (equities fall, fixed income rally), about Fed easing in 2007, lack of real economy decoupling in the rest of the world are highly conditional on this US hard landing call. I am still of the view that the risks of a hard landing are high.
The economists surveyed expect year-to-year inflation to decline to 1.7% in May from 2.0% in November. As a result, they expect the Fed to shift its focus from fighting inflation to helping the economy grow, lowering short-term interest rates to 4.75% by the end of 2007 from the current 5.25%.
It looks like the Bank of England may not be done with interest rate hikes. Not with the continued house price increases reported by Reuters...And there could be more rate hikes from the European Central Bank as well. Reuters reports:The case for more euro zone rate hikes got a boost from stronger than expected November money supply data on Friday and from comments on Thursday by ECB Governing Council member Yves Mersch, who said rates remain low in historical terms...
At Eurozone Watch, Daniela Schwarzer and Sebastian Dullien concur:
Is the ECB going to raise interest rates towards 4 percent?
Yes. The strong growth outlook will push the ECB to raise its interest rates to 3.75 percent in the first half of the year and by a further 25 basis points later on. As inflationary pressure is still limited, the ECB will refrain from tightening much faster. Risks to this call are, however, a stronger than expected US downturn or a strong appreciation of the euro. In these cases, the ECB might delay a further hike beyond 3.75 percent.
They also predict:
The euro will most likely further gain in value. There is a significant risk that it rises above 1.40 $ in 2007. Two factors are supporting the young currency: With further interest rate hikes by the ECB, investment in the Eurozone will become more attractive. Moreover, the possibility of a rate cut by the US Federal reserve still remains. Finally, there is a risk that central banks in Asia and from OPEC countries continue to diversify their portfolios and buy euros.
For their part, the consensus among WSJ group is that the dollar will stabilize near 1.3 per euro, about where it is today (though Claus Vistesen thinks there has already been enough appreciation and monetary policy to make a "dent" in eurozone growth).
Now we'll all wait and see how it is we will be wrong.
UPDATE: Cotango is going to "hold to my view that 2007 is going to be a rough year for the US economy: 1.5 % GDP growth" and beleives that "If it does get rough, the Fed will have to open the liquidity valves full blast". David K. Smith reports on forecasts for the UK (where projected growth is close, but still higher, than expectations for the US).
I was admittedly sticking my neck out when I attempted to lend some respectability toward the late President Ford's ill-fated WIN campaign. Sure enough, Jim Hamilton was all over it, and in fact I find it hard to argue with very much of what he has to say (as usual):
...I think one great disservice of [the Whip Inflation Now] campaign was to cultivate the misperception that inflation is somehow the responsibility of ordinary U.S. citizens. In my view, maintaining the purchasing power of a dollar is instead exclusively the responsibility of the people who control how many dollars get printed.
As I hope my first post on the issue made clear, I really do agree with that. To quote myself:
Seen through contemporary eyes, it is clear that the President Ford's speech hopelessly entangled shocks to relative prices with ongoing inflation of monetary origins.
Where I think the Econbrowser/macroblog debate might get interesting is here (sampling again from the Hamilton post):
The current academic consensus, which has emerged from some very well done research such as Northwestern Professor Giorgio Primiceri's forthcoming study in the Quarterly Journal of Economics or respected Fed researcher Athanasios Orphanides' 2002 paper in American Economic Review, has concluded pretty clearly that at least part of the cause of the 1970s inflation was bad data and a misunderstanding of how the economy works. But I am forced to conclude also that, in the face of such uncertainties, Nixon and Burns appear to have been wanting to err on the side of doing whatever would most help them win the next election.
I don't think that is a mischaracterization of the academic consensus, but what I am not so sure of is the leap to the conclusion that Burns was largely, and inappropriately, motivated by political concerns.
In part, the consensus that mistakes were an inevitable consequence of the state of knowledge at the time makes the appeal to other motivations almost unnecessary. And I would add to the list of the real-time uncertainties the unsettled question of how the Federal Reserve fit into the overall scheme of government policy making. The primacy of central bank independence was an idea that was at least a decade away -- the first systematic study cited in Carl Walsh's New Palgrave entry on central bank independence is Robin Bade and Michael Parkin's 1984 working paper (although Parkin's CV does contain a reference to an early version from 1978). It is also worth noting that Wright Patman was fully devoted to bringing the Fed under the Congressional heel, a reality that any good steward of the central bank could not have ignored.
On top of that, the conclusion that Burns spent a good part of his time in Nixon's hip pocket is not a slam dunk. Consider this passage from Martin Mayer's excellent book, The Fed (page 144):
Wright Patman, the shrewd, charming, lazy populist from Texarkana, was chairman of the House Banking Committee from the 1950s into the 1970s. He was no friend of the Federal Reserve, which he felt had extended the Great Depression by reducing bank credit in 1937... In the 1970s, when I knew him, he liked to say that the Constitution gave the House of Representatives the power to "coin money and regulate the value thereof" -- and that Congress farmed out its power to the Federal Open Market Committee."
One notes the exactitude of Patman's placement. Not the executive branch, for there is no law requiring or even suggesting that the Fed report to the president or the secretary of treasury, and the most either of them can do is bitch about the Fed's failure to be a team player -- as Harry Truman and Lyndon Johnson and Richard Nixon did. (Nixon, typically, did it through an unprecedented campaign of personal vilification of Chairman Arthur Burns, anonymously out of the White House.)
That does not sound like the stuff of wink-wink political accommodation.
Honestly, I don't know the truth of Burns' tenure. I don't even know what I think the truth to be. What I do know is that it is a lot more complicated than is often suggested.
If you simply insist on looking for the worst in the early returns on holiday retail sales, there are dismal headlines galore posted at The Big Picture and at the Nouriel Roubini Blog. But might I suggest that it is a bit premature to be drawing conclusions? From the Chicago Tribune:
As gift cards gain in popularity, the week after Christmas has taken on greater importance for retailers keen on meeting year-end financial goals.
This year, gift cards are providing a glimmer of hope that stores will be able to make up for what has so far been a slower-than-expected holiday season...Consumers are expected to spend a record $24.81 billion on gift cards this holiday season, up from $18.48 billion for the same period last year, a 34 percent spike, according to the National Retail Federation. Consumers spent an estimated 20 percent of their holiday gift-giving budget on gift cards this year, up from 6.6 percent in 2003, the Washington-based trade group said.
The change in shopping habits has forced retailers to re-evaluate the way they look at post-Christmas sales. They want to encourage shoppers to redeem gift cards right away because a gift card doesn't count as a sale until it is exchanged for merchandise.
And some similar thoughts from MSNBC.com:
Marshal Cohen, industry analyst with NPD Group, said his research shows that 51 percent of consumers planned to give someone a gift card this holiday. That’s up from 39 percent just a year earlier...
As more people turn to gift card giving, analysts say gift cards are starting to change how retailers think about their all-important holiday sales strategy, especially after Dec. 25.
“It also means that the holiday season really is longer than this November-December" time period, said Michael Niemira, chief economist with the International Council of Shopping Centers. "It really is a November-to-January story, with January being more important in recent years."
And from ABC News:
Robert Drbul, retail analyst at Lehman Bros., said that Dec. 26 to New Year's Eve now represents 10 percent of holiday sales, while January makes up 20 percent of holiday sales for the season...
The International Council of Shopping Centers, a retail trade group, estimated in October that gift cards in 2006 would account for $30 billion to $40 billion in holiday sales. Last holiday, customers redeemed nearly 40 percent of gift cards between Dec. 26 to Dec. 31st. In January, 38 percent more were redeemed.
The National Retail Federation, however, estimated that gift card sales would be slightly less, reaching just under $25 billion, for this holiday season. That represents 8 to 9 percent of holiday sales for the year.
Daniel Horne, a professor at Providence College who has studied gift cards extensively, estimated that the average gift card value would be around $37-$38 this year but could vary depending on the retailer. More important, Horne calculates that people spend about 40 percent more than the value of the gift card.
Horne believes that 25 percent of