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  • Zachary Karabell on Making Statistics More Meaningful

    Zachary Karabell is on a quest. He wants us to have a healthier relationship with economic statistics. And that means not placing too much pressure on those statistics to tell us more than they are designed to. In his latest book, The Leading Indicators: A Short History of the Numbers That Rule Our World , Karabell knocks some of the magic shine off of GDP and other key data that we follow closely. He recently spoke about GDP, income per capita, and other headline stats at the Carnegie Council . Here is an excerpt: For more information on the event, and to listen to the full talk, click here .
  • Shiller on What Drives Markets

    Robert Shiller recently sat down with David Wessel and took a step back from current events to talk about how his thinking on markets and market behavior developed. The takeaway: academics can get caught up in "fadish" thinking, and good economists must be careful to always search widely for information. He also says it would be nice to "tame" bubbles, but "we don't want to do draconian things that would upset the whole system." From WSJ.Money :
  • Planet Money: Greece's Economy May Stop Shrinking

    Greece's economy has a had a bad six years. At times, very very bad. But it may be getting better. The latest Planet Money podcast focuses on Greece, because the government there has put out a less-than-bad economic forecast. If the forecast is accurate, "the amazing shrinking economy will finally stop shrinking."
  • CEA Final Report on the Effect of Recovery Act

    On the occasion of the fifth anniversary of the American Recovery and Reinvestment Act, the Council of Economic Advisers has released a report to Congress on the economic impact of the act. The CEA stands firmly behind the act, and the report points to several measures as signs of the effectiveness of the government's plan. Among the evidence presented: GDP per capita returned to pre-crisis levels in four years, an the economy has added over 2 million jobs a year since ARRA. The estimates for the long term impact of ARRA are bullish, with the CEA touting a significant multiplier effect from overall fiscal policy: CEA Estimates of the Recovery Act and Subsequent Fiscal Measures Combined. The combined effect of the Recovery Act and the subsequent countercyclical fiscal legislation is substantially larger and longer lasting than the effect of the Recovery Act alone. The Recovery Act represents only about half of total fiscal support for the economy from the beginning of 2009 through the fourth quarter of 2012. Moreover, as shown in Figures 7 and 8, the bulk of the effects of the other fiscal measures occurred as the Recovery Act was phasing down. These other measures thus served to sustain the recovery as effects of the Recovery Act waned. The CEA multiplier model indicates that by themselves these additional measures increased the level of GDP by between 1.0 and 1.5 percent per quarter from mid-2011 through the end of calendar year 2012. Altogether, summing up the effects for all quarters through the end of calendar year 2012, the Recovery Act and subsequent fiscal measures raised GDP by an average of more than 2.4 percent of GDP annually—totaling a cumulative amount equal to about 9.5 percent of fourth quarter 2008 GDP. The contribution of all fiscal measures to employment is equally substantial. Other fiscal measures beyond the Recovery Act are estimated to have raised employment by 2.8 million job- years, cumulatively, through the end of calendar year 2012. Adding these jobs to those created or saved by the Recovery Act, the combined countercyclical fiscal measures created or saved more than 2.3 million jobs a year through the end of 2012—or 8.8 million job-years in total over the entire period. Estimates from Private Forecasters. Private forecasters and domestic and international institutions have used large-scale macroeconomic models, mostly to estimate the effects of either the Recovery Act by itself or other policies in isolation. The models used by these individuals and organizations generally employ a similar multiplier-type analysis as is found in CEA and CBO work, although they vary considerably in their structure and underlying assumptions. Although no outside estimates of the total impact of all the fiscal measures are available, Table 6 displays the estimates of the impact of the Recovery Act offered by several leading private-sector forecasters before the Act was fully implemented. Despite the differences in the models, these private-sector forecasters all estimated that the Recovery Act would raise GDP substantially from 2009 to 2011, including a boost to GDP of between 2.0 and 3.4 percent in 2010. Read the full report here . For a helpful summary, read a summary from CEA chair Jason Furman here .
  • Draghi on Eurozone's 'Path from Crisis to Stability'

    Well, isn't this a change. At this year's annual World Economic Forum in Davos, European Central Bank President Mario Draghi spoke about reduced risks and "dramatic recovery" in Europe's economies. In this interview with Philipp Hildebrand , Draghi talked about how Europe has moved to more stable footing, and addresses the risks ahead (including deflation):
  • Bernanke Helps Open New Brookings Center for Fiscal and Monetary Policy Studies

    On Thursday the Brookings Institution opened the new Hutchins Center on Fiscal and Monetary Policy , and Ben Bernanke was one of the featured guests for the event. Bernanke spoke about the past, present, and future of monetary policy in the U.S. and the Federal Reserve in particular. With the Fed now in the early days of its centenary year, Bernanke is about to step down after being in charge for 8 challenging years. In this excerpt from his talk, Bernanke takes a moment from discussing the long view to address monetary policy during the global economic crisis, saying "we did the right thing": Here is the full talk: You can watch other sessions from the Hutchins Center launch here .
  • CFTC Chair Gary Gensler on Efforts to Regulate Derivatives Market

    Gary Gensler is wrapping up his tenure as chairman of the Commodities Futures Trading Commission . It has not been an easy ride, and one might imagine he's be happy to take it easy, maybe attend a few going-away parties, and then slip away. But Gensler is trying to tighten up the derivatives market by making sure there are strong measures in place for the reporting of transactions. As Gensler tells Knowledge@Wharton 's Steve Sherretta , his goal is to insure there is more transparency in the market:
  • Summers on Quantitative Easing, Fed Policy

    Larry Summers may not be the next Fed Chair, but it seems he is on the same page with current and future Fed leadership when it comes to quantitative easing. In an interview with Bloomberg 's Stephanie Ruhle , Summers seems pretty convinced that when we look back on this period years from now, we will be glad the Fed made the bold moves it did.
  • The Tenuous 'Quasi-Dominant Policymaking Position' of Central Banks

    Central banks have risen to positions of great power and responsibility in large developed economies. So much so that we watch their every move as if it has the potential to change everything. They not have planned on acquiring this "quasi-dominant policymaking position," as Mohamed El-Erian puts it, but this is where they are thanks to the global economic crisis. However, as El-Erian argues in a piece at Project Syndicate , they may lose their power quickly and with dangerous consequences if other policy making institutions (namely, elected leaders) don't stop relying on central banks to prop up economies, Comforted by the notion of a “central-bank put,” many investors have been willing to “look through” countries’ unbalanced economic policies, as well as the severe political polarization that now prevails in some of them. The result is financial risk-taking that exceeds what would be warranted strictly by underlying fundamentals – a phenomenon that has been turbocharged by the short-term nature of incentive structures and the lucrative market opportunities afforded until now by central banks’ assurance of generous liquidity conditions. By contrast, non-financial companies seem to take a more nuanced approach to central banks’ role. Central banks’ mystique, enigmatic policy instruments, and virtually unconstrained access to the printing press undoubtedly captivate some. Others, particularly large corporates, appear more skeptical. Doubting the multi-year sustainability of current economic policy, they are holding back on long-term investments and, instead, opting for higher self-insurance. Of course, all problems would quickly disappear if central banks were to succeed in delivering a durable economic recovery: sustained rapid growth, strong job creation, stable financial conditions, and more inclusive prosperity. But central banks cannot do it alone. Their inevitably imperfect measures need to be supplemented by more timely and comprehensive responses by other policymaking entities – and that, in turn, requires much more constructive national, regional, and global political paradigms. Having been pushed into an abnormal position of policy supremacy, central banks – and those who have become dependent on their ultra-activist policymaking – would be well advised to consider what may lie ahead and what to do now to minimize related risks. Based on current trends, central banks’ reputation increasingly will be in the hands of outsiders – feuding politicians, other (less-responsive) policymaking entities, and markets that have over-estimated the monetary authorities’ power. Read The Uncertain Future of Central Bank Supremacy here .
  • OECD Report Looks at Impact of Global Financial Crisis on Life Satisfaction

    How's Life? That's what OECD analysts researched across all OECD nations for an annual report on well-being. And they found that the global economic crisis has had a "profound impact" on how people feel about their jobs, job prospects, governments, and overall satisfaction. Not surprisingly, people who lived in countries where GDP and employment dropped the most have had the greatest drop in life satisfaction. For example, life satisfaction dropped 20% in Greece. OECD Secretary General Angel Gurría calls the report a "wake-up call." The chapter that caught our eyes is titled Well-being and the global financial crisis . You can read it here . The full report is available here .
  • 'What's Wrong With Europe?'

    At Vox , Isabella Rota Baldini and Paolo Manasse compare GDP in Europe and the U.S. and ask, "What's wrong with Europe?" In asking the question they point to the considerable disparity between EU member nations, and raise concern that the global economic crisis dealt a major blow to the very necessary "process of convergence." It is useful to compare the trend of per capita real GDP in the US (blue line) and in the Eurozone (yellow line), as shown in Figure 1. The graph shows a decline in real average incomes since 2007-2008 in both areas. The impact of the crisis on the US is larger, the decrease in per capita income is of - $2,459 at constant prices (-6 %), compared a fall of -€1200 euro (-4.7 %) in the Eurozone. However, in 2012 the average US income has recovered to pre-crisis levels, whilst Europe’s is still 2.5 points below. In order to understand why, it is useful to look at the state-level data. Figure 1 shows two bands – blue and yellow – for the US and the Eurozone respectively, whose upper and lower limits describe the per capita income in the richest and poorest state: the District of Columbia and Mississippi in the US; Luxembourg and Estonia in the Eurozone. From the graph it is clear that internal differences are much greater in the Eurozone than in the US. Between 2000 and 2012, real per capita income of the richest US state is five times that of the poorest state. In the Eurozone this ratio is 8.6 to 1. The data on unemployment confirms this pattern – both countries experience a sharp rise during the crisis years; however, aggregate unemployment rate in the US has been declining since 2010, whilst it is still increasing in Europe. In 2012 the gap between the lowest (4.3% in Austria) and the highest (25% in Spain) rate skyrocketed. According to the standard model of economic growth, poor countries should grow faster than rich ones. This is because in such countries capital, compared to labour, is relatively scarce, and thus more productive. Consequently, one would expect poorer countries to save and invest more, as return on capital is higher. This process of convergence has occurred in Europe between 2000 and 2007; however, the speed of convergence has halved in recent years. Read the full article here .
  • The Importance of Resource Reallocation, Crisis or No Crisis

    Change is hard. Change takes time. And in the short run, change can seem like a lot of work that distracts people from their daily work. And yet, long term success depends on regular change. In good times or in bad, companies that reshuffle or reallocate their assets with regularity outperform their competitors, according to research shared in the latest McKinsey Quarterly . Analysis by Mladen Fruk , Stephen Hall , and Devesh Mittal covers the last two decades. When we looked at companies sector by sector, the same broad pattern emerged: whether in basic materials, energy and utilities, information technology, or consumer products and retailing, the median TRS was consistently greater for the high reallocators than for the low ones. A similar story is apparent in the corporate-survival statistics. Over the new, longer period of our study, the survival gap between high and low reallocators increased to 22 percent, up from 13 percent in the original period. In addition, since our data now cover both of the major global economic downturns of the past 20 years (for our purposes, 1999 to 2002 and 2007 to 2010), we can divide companies into those slow to respond by reallocating resources in the two crises, those that actively reallocated in only one, and those that did so in both. The results speak for themselves (Exhibit 2). On average, a company that was a high reallocator during both downturns had a TRS 3 percent greater than a company that was a high reallocator in only one and 4.5 percent greater than a company that wasn’t in either. Realizing the benefits of resource reallocation during a downturn often requires shifting capital and other resources from one existing business to another: when times are tough, there is generally less new capital around, either in the form of growth in retained earnings or of new debt and equity capital. From 2007 to 2010, for example, the volume of new capital available to corporate-management teams in our sample declined by over 15 percent. In these circumstances, it is more incumbent than ever on companies to make difficult trade-offs between the funding of promising growth opportunities (which require nurturing with more capital) and of mature or underperforming ones (which may need pruning). We found that high reallocators in our sample tended to reallocate existing and new resources equally; low reallocators, by contrast, had a much harder time taking resources away from existing lines of business and tended predominantly to reallocate new resources. The willingness to rob Peter to pay Paul is one of the hallmarks of a dynamic top team. Read Never let a good crisis go to waste here .
  • IMF Global Financial Stability Report and 'New Risks to Financial Stability'

    The latest Global Financial Stability Report is out from the IMF . The good news cited in the report is that most markets are changing for the (long-term) better, as the global financial system "under[goes] a series of transitions along the path toward greater financial stability." The bad news is that periods of transition can also be periods of vulnerability. And so the report focuses a bit on what will happen globally when (and we now know this is not happening in the next few months) the U.S. pulls back from its accommodative monetary policy. IMF Financial Counsellor José Viñals shares the good news/bad news thinking: Here's more from the report. Financial stability challenges are also prevalent in many emerging market economies. Bond markets are now more sensitive to changes in accommodative monetary policies in advanced economies because foreign investors have crowded into local markets and may withdraw. Emerging market fundamentals have weakened in recent years, after a protracted interval of credit expansion and rising corporate leverage. Managing the risks of the transition to a more balanced and sustainable financial sector, while maintaining robust growth and financial stability, will be a key undertaking confronting policymakers. As central banks elsewhere consider strategies for eventual exit from unconventional monetary policies, Japan is scaling up monetary stimulus under the Abenomics framework, aiming to pull the economy out of its deflationary rut. Successful implementation of a complete policy package that features fiscal and structural reforms would reinforce domestic financial stability, while likely boosting capital outflows. But substantial risks to financial stability could accompany the program if planned fiscal and structural reforms are not fully implemented. Failure to enact these reforms could lead to a return of deflation and increased bank holdings of government debt, further increasing the already-high sovereign-bank nexus. In a more disorderly scenario, with higher inflation and elevated risk premiums, the risks to both domestic and global financial stability could be greater still, including rapid rises in bond yields and volatility, and sharp increases in outflows. In the euro area, reforms implemented at the national level and important steps taken toward improving the architecture of the monetary union have helped reduce funding pressures on banks and sovereigns. However, in the stressed economies of Italy, Portugal, and Spain, heavy corporate sector debt loads and financial fragmentation remain challenging. Even if financial fragmentation is reversed over the medium term, this report estimates that a persistent debt overhang would remain, amounting to almost one-fifth of the combined corporate debt of Italy, Portugal, and Spain. Assuming no further improvement in economic and financial conditions which would correspond to a more adverse outcome than the cyclical improvement built into the October 2013 World Economic Outlook baseline scenario, some banks in these economies might need to further increase provisioning to address the potential deterioration in asset quality of corporate loan books. This could absorb a large portion of future bank profits. Recent efforts to assess asset quality and boost provisions and capital have helped to increase the loss-absorption capacity of banks, but further efforts to cleanse bank balance sheets and to move to full banking union are vital. These steps should be complemented by a comprehensive assessment and strategy to address the debt overhang in nonfinancial companies. Read the full report here .
  • IMF's Lagarde: Key Transitions for Global Economy with 'Fog of crisis lifting'

    Christine Lagarde warmed up for the annual World Bank-IMF meetings in a speech to students at The George Washington University yesterday, and she foreshadowed two key areas of discussion for the summit. The IMF managing director focused on two transitions she says are currently under way in the global economy: " a transition in the patterns of economic growth, and a transition toward a different kind of financial sector." In addressing the second of these transitions, Lagarde emphasized the need for continued reform. From the speech: Under the old model, the financial sector took on outsized risk in pursuit of outsized rewards, causing outsized ruin—and precipitating the crisis we have been experiencing for the last five years. Since then, the international community has been struggling to build something better. This is not easy. It means throwing away old blueprints and designing new ones. It means dealing with the perverse incentives of financial firms and the inability or unwillingness of authorities to act. How is this transition doing? In the IMF’s assessment, it remains a case of “mission not yet accomplished”. Yes, we have seen progress. The tougher capital standards, agreed under Basel III, are being implemented. We have agreement on new liquidity standards, and plans for a leverage ratio to keep excess risk in check. We have moved forward in identifying the systemically-important financial institutions—the ones whose failure has the largest global fallout—and holding them to a higher standard for both regulation and resolution. Yet progress is still too slow. It is being held back by complexity, but also by delay and divergence across countries. Delay is a real problem. A key concern, for example, is the lack of progress in establishing effective cross-border resolution regimes—frameworks and agreements to unwind the global systemically-important institutions and market infrastructures in an orderly way. The same is true for derivatives market reform, where lack of transparency is still a huge issue. At the end of last year, total outstanding derivatives amounted to $633 trillion, of which only $24 trillion were traded on organized exchanges. Adequate supervision of the remaining part requires countries and markets to speedily implement the agreed derivatives reforms. Another danger zone is shadow banking, which is attracting a lot of riskier activity. In the United States, the nonbanking sector is now twice the size of the banking sector. In China too, about half of the new credit extended so far this year has come through the shadow banking system. Read the full speech here . Or watch it below (Lagarde's speech starts at 06:00)
  • Simon Johnson on Getting the Financial Sector on Safer Tracks

    Simon Johnson is required reading at The Watch, especially at the Baseline Scenario blog. For years now, Johnson has been speaking out against the failure of policy makers to adequately oversee the finance sector. His warnings did not steer us clear of the near meltdown five years ago, and he remains dissatisfied with the overall response to the global financial crisis. He recently sat down with Marshall Auerback of the Institute for New Economic Thinking to discuss what he believes needs to be done to protect citizens and economies (as opposed to the banks themselves) from future crises.
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