Posts in category Free exchange


Business and financeFree exchange

The Nobel in economics rewards a pioneer of “nudges”

NOT long ago, the starting assumption of any economic theory was that humans are rational actors who maximise their utility. Economists summarily dismissed anyone insisting otherwise. But over the past few decades, behavioural economists like Richard Thaler have progressively chipped away at this notion. They combine economics with insights from psychology to show how heavily economic decisions are influenced by cognitive biases. On September 9th Mr Thaler’s work was recognised at the highest level when the Nobel Committee awarded him this year’s prize in economics. Mr Thaler thus becomes one of very few behavioural economists to win the prize.

Mr Thaler’s has been a prolific career, spanning over four decades, the last two of them at the University of Chicago’s Booth School of Business. His research has touched on subjects as varied as asset prices, personal savings and property crime. For example, Mr Thaler developed a theory of mental accounting, which explains how people making financial decisions look only at the narrow…Continue reading

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Business and financeFree exchange

Bitcoin is fiat money, too

FINANCIERS with PhDs like to remind each other to “read your Kindleberger”. The rare academic who could speak fluently to bureaucrats and normal people, Charles Kindleberger designed the Marshall Plan and wrote vast economic histories worthy of Tolstoy. “Read your Kindleberger” is just a coded way of saying “don’t forget this has all happened before”. So to anyone invested in, mining or building applications for distributed ledger money such as bitcoin or ethereum: read your Kindleberger.

Start with A Financial History of Western Europe, in which Kindleberger documents how many times merchants in different centuries figured out clever ways of doing the exact same thing. They made transactions easier, and in the process created new deposits and bills that increased the supply of money. In most cases, the Bürgermeister or the king left these innovations in place, but decided to control the supply of money and credit themselves. It is good for the king to be in charge of his own creditors. But also, it has…Continue reading

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Business and financeFree exchange

The case against shrinking the Fed’s balance-sheet

AS EXPECTED, the Federal Reserve announced on September 20th that it will soon begin reversing the asset purchases it made during and after the financial crisis. From October, America’s central bank will stop reinvesting all of the money it receives when its assets start to mature. As a result, its $4.5trn balance-sheet will gradually shrink. However, the Fed did not give any clues as to what the endpoint for the balance-sheet should be. This is an important question. There are strong arguments for keeping the balance-sheet large. In fact, it might be better were the Fed not shedding any assets at all. 

Most commentators view a large balance-sheet, which is the result of quantitative easing (QE), as an extraordinary economic stimulus. Janet Yellen, the Fed’s chair, seems to agree: at a press conference after the Fed announcement, she said the balance-sheet should shrink because the stimulus it provides to the economy is no longer needed. But the claim that the balance-sheet is stimulating the economy is far from an…Continue reading

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Business and financeFree exchange

Is there a wage growth puzzle in America?

TODAY’S labour market report showed that the American economy created 156,000 net new jobs in August. That was a bit less than expected, but payrolls are still growing comfortably faster than the working-age population. Despite having created over 2m jobs in the last year, pushing unemployment below 4.5% for the last five months, wage growth remains muted, at around 2.5%, compared to more like 3.5% the last time unemployment was comparably low. In a recent article for the print edition, I anlysed one potential explanation for weak wage growth: retirements of high-earnings baby-boomers.

Scott Sumner has taken issue with the premise of my piece. He says there is no puzzle at all. Instead, slow wage growth is being caused by slow growth in nominal GDP (cash-terms spending in the economy) —…Continue reading

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Business and financeFree exchange

The hubris of ten-year budgets

IN February of 2001, Alan Greenspan, then still the chairman of the Federal Reserve, and still called the “Maestro”, testified to the Senate Budget Committee. The committee wanted to get started on the tax cuts George W. Bush had promised during his campaign. Mr Greenspan gave them his qualified blessing, with an argument that now sounds incredible: he was worried that America would pay down its debt too soon. 

That week the Clinton administration’s Office of Management and Budget had released its final ten-year budget projections. Firms had just completed several years of capital investments in desktop computers, and workers had become more productive. This had increased corporate revenue, and consequently taxes paid to the government. A long bull market in stocks meant that the Treasury was taking in more in capital gains taxes, too. “The experience of the last five to seven years,” said Mr Greenspan, “has truly been without precedent.” The Clinton administration had apparently left Washington with a gift. The…Continue reading

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Business and financeFree exchange

Podcast: Vorsprung durch Angst

Germany is admired for a stable economy and holding on to blue-collar jobs but derided for its persistent trade surpluses. Our economics editor John O’Sullivan examines what Chancellor Merkel’s government might do next. Also, how “total immersion” could drive the masses to virtual reality. And why banks are de-risking to avoid penalties. Hosted by Simon Long.

 

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Business and financeFree exchange

Podcast: The Italian bailout job

Italy has been forced to bail out two banks at a cost of as much €17bn euros ($19 bn). Is that the end of the bleeding in Italy’s financial sector? Also, as the iPhone turns ten, we look at how Apple is evolving. And Catherine Mann, Chief Economist at the OECD, tells us how to government can help workers made jobless by globalisation. Hosted by Simon Long.

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Business and financeFree exchange

A new paper rekindles a tiresome debate on immigration and wages

WHAT effect do immigrants have on native wages? It’s perhaps one of the most important questions of labour economics. It’s also one that is largely unanswerable. The problem is that it’s almost impossible to separate cause and effect. If a country with high rates of immigration also sees strong wage growth, we can’t assume that immigrants are boosting wages—it may well be the case that the migrants are choosing to move to places with stronger economies.

One approach to getting around this problem is to find a natural experiment in which either the supply of or demand for labour changes exogenously. Perhaps the most famous example of such an event in labour economics is the Mariel Boatlift. In 1980, Fidel Castro, then president of Cuba, eased emmigration restrictions. Some 125,000 Cubans moved to the United States that year. Almost instantaneously, the labour supply of Miami increased by 55,000.

The Mariel migrants were overwhelmingly low-skilled workers—less than half had high-school degrees. In 1990, David Card, now an…Continue reading

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Business and financeFree exchange

Why the Fed is likely to raise rates, despite low inflation

CREDIBILITY is a thing you have to worry about with toddlers. You cannot reason with them. The best you can hope to do is respond consistently to undesirable behaviour. Get this wrong and your work becomes harder. If your correspondent doesn’t actually go and hide the box of Legos every time he has to count to three, for example, his child will not find his threats to be credible, and will fail to respond to them. 

This is the problem the Federal Reserve has now with financial markets. For six months the Federal Open Market Committee (FOMC) has been carefully managing its speeches, meeting minutes and economic projections to one end: convince debt markets that it will raise the benchmark interest rate by a quarter of a percentage point at its June meeting. It has succeeded. FedWatch, a tool that estimates how markets think monetary policy will go, pegs the probability of a June rate hike at 91%. This leaves the committee with a familiar…Continue reading

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Business and financeFree exchange

Europe inches closer to a plan for fixing its financial flaws

DONALD TRUMP and Theresa May may have done more to push Europeans together, and open up an opportunity for reform of its institutions, than any pro-European American president or British prime minister could ever have dreamt. The Commission’s “Reflection paper on the deepening of the Economic and Monetary Union”, issued on May 31st, points the way towards a package deal that could be acceptable to Northern and Southern euro area countries. But some key elements are still missing.

Encouragingly, the Commission sets out a tight calendar for completing the banking union, with the creation of a common deposit insurance scheme and a common backstop for the European Resolution fund intended to be in place by 2019. These two elements are crucial if we are to stop the banks posing an existential risk to the states where they operate.

But avoiding the “diabolic loop” between banks and states also requires cutting the…Continue reading

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Business and financeFree exchange

Donald Trump’s budget ignores what is actually ailing American workers

PRESIDENTIAL budget requests, all of them, are worth exactly nothing. They carry no force of legislation. They land, heavy, bound and shrink-wrapped, so they can be immediately binned as Congress continues its now yearly stumble toward a “continuing resolution”—a supposedly temporary legislative act that in recent decades has almost entirely replaced the statutory budget process. The request from the President is the least consequential part of something that is completely broken. It functions like a bumper sticker on an old car. It only tells you about the person who’s driving. 

Mick Mulvaney, a former congressman from South Carolina who won his seat in the Tea-Party wave of 2010, runs Donald Trump’s Office of Management and Budget. Mr Mulvaney has created the budget his wing of the Republican party always wanted: government as a service, paid for by its clients, the taxpayers. If you receive more than you pay, the system has failed, and must be fixed. The marketing copy that accompanied the budget calls this…Continue reading

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Business and financeFree exchange

Europe needs true fiscal integration, not its own IMF

THE euro-area debt crisis exposed a critical need for stronger European financial safety nets and institutions. In March 2010, Thomas Mayer and Daniel Gros, two German economists, made a strong case for the creation of a European Monetary Fund (EMF). In the end, European leaders agreed on a European Financial Stability Facility (EFSF) in May 2010. This was later transformed into the European Stability Mechanism (ESM), which today works alongside the IMF in Europe’s financial-assistance programmes. The creation of the ESM was a major step in the process of integrating and completing the euro area. It offered a powerful mechanism to backstop sovereign debt markets and deal with sudden stops in capital flows at a time of acute crisis. But over the years, as the more fundamental flaws in the architecture of European Monetary Union (EMU) have come to light, this approach has proved its limits. The ESM now needs to evolve.

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Business and financeFree exchange

America’s economic growth slows to 0.7%

THE news that America’s GDP growth slowed to 0.7% on an annualised basis in the first quarter of 2017 is no real surprise, for two reasons. First, although consumer and small business confidence have soared since Donald Trump won the presidential election, most measures of actual economic activity have failed to display the same vim (see article). Second, it is often the case that growth sags in the first quarter of the year, despite recent efforts by statisticians to purge the economic data of seasonality. Since 2010, excluding today’s release, first-quarter GDP growth has averaged just 1.1%, compared with 2.5% at other times in the year. Judged against that benchmark, the latest data are only a little disappointing.

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Business and financeFree exchange

Reducing rates for “pass-through” businesses will be tough to justify

THERE are two main reasons for a country to paw around in its tax code: to create more economic growth, or to repair a structural deficit. Any politician who wishes to quietly give money to friends or kill a troublesome programme will supply one of them. He will either say “businesses need tax certainty to grow” (meaning: “certainty that they will like the tax code”), or “we don’t have the money”. So as the Trump administration releases its tax plan on April 26th, there are only two questions to ask: whether it will speed up America’s current economic recovery, and whether it will begin to fill in the country’s long-term deficits. If the early leaks from the White House are any guide, it will do neither.

According to the Wall Street Journal, the White House wants to reduce the top tax rate on pass-through businesses to 15%. “Pass through” means the business itself has no…Continue reading

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Business and financeFree exchange

America has a retirement problem, not a saving problem

HOUSE Resolution 67, which Donald Trump signed last week, rolls back a rule that the Labor Department finalised late last year, which would have made it easier for cities and counties to run retirement savings plans for citizens who couldn’t get them through work. It is an odd choice for Republicans to kill plans that would encourage private, voluntary, tax-deferred saving, which they tend to approve of. But a trade group for investment funds opposes the city-run retirement plans. The Democrats on Capitol Hill, beset with other problems, are not picking a fight. 

They should. The resolution itself is nothing more than a kick in the shins for the three cities, all run by Democrats, that had considered setting up plans—New York, Philadelphia and Seattle. But it points to a larger problem, which neither party has confronted. The United States has a retirement crisis, which it is treating like a savings crisis. They are not the same thing. 

In traditional macroeconomics, all saving serves the same purpose: investment in the capital stock, or new machines to make stuff. Workers either spend from their paychecks on rent and food, or put money away in bonds, shares or savings…Continue reading

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Business and financeFree exchange

Podcast: The robot era is dawning

As robots grow more nimble, humans look increasingly vulnerable. Are the machines poised  to take over? Also: now that Article 50 has been triggered, is Ireland’s economy set to be damaged by Brexit? And despite Japan’s workforce growing by more than two million, wage gains aren’t enough to hit an inflation target of 2%. Why is this? Philip Coggan sits in for Simon Long.

 

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Business and financeFree exchange

Democrats should be more comfortable discussing economic growth

STEVE BANNON is right. This week, in a New York Times Magazine piece otherwise dedicated to the President’s dance with Congress, he offered this: 

I think the Democrats are fundamentally afflicted with the inability to discuss and have an adult conversation about economics and jobs, because they’re too consumed by identity politics. And then the Republicans, it’s all this theoretical Cato Institute, Austrian economics, limited government—which just doesn’t have any depth to it. They’re not living in the real world.

Lose the bit about identity politics, and you have a clear summation of American macroeconomics. Republicans are lost in theory, unburdened by empirical evidence. Democrats don’t seem to have much of a theory at all. And as Republicans dust themselves off and turn to rewriting America’s tax code, Democrats could use a working theory of economic growth. Judging from last year’s campaign, they aren’t ready to commit to one. Should they develop an interest, however, there are several to hand.

Grossly simplified, there are…Continue reading

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Business and financeFree exchange

Podcast: Luxury for the masses?

The Chinese middle class led a boom in demand for luxury goods. But a government crackdown made consumers wary about showing off their wealth. How has China’s new modesty affected the luxury business as a whole? Also: India’s power sector has until now been dependent on using dirty coal but things are changing. And sand has become a scarce resource, leading to a burgeoning trade in illegal mining. Simon Long hosts.

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Business and financeFree exchange

Podcast: A most unusual company

The one-time bookseller Amazon accounts for more than half of every new dollar spent online in the US. But how did it get to be the fifth most valuable company in the world? Also: why it costs the American government more to borrow money on the bonds market than European ones. And the big brands used to account for two-thirds of the tyre market. Now China has massively deflated their share. Simon Long hosts.

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