• Brookings
• Harvard
• Brookings
• Brandeis
• Stanford
• Harvard
• Princeton
• Michigan
• Syracuse
• Brookings
• Princeton*
• MIT
• Boston
• Stanford
• USC (Southern California)
• MIT
• Michigan
• Urban Inst.
• Michigan
• Harvard
• CUNY
• Princeton
• Harvard
• UCLA
• UCSF
• Chicago
• Princeton
• George Mason
• Chicago
• Penn
• Princeton
• Harvard
• UC Berkeley
• Dartmouth College
• Michigan
• Harvard
• Chicago
• Emory
• UC Berkeley
• Center for Budget and Policy Priorities
• Harvard

Against:

• California State University, Northridge
• Columbia
• AEI
• Hillsdale
• AEI
• U. Mich, Flint
• Carnegie Mellon
• Memphis*
• Metropolitan State College, Denver
• Virginia
• Colorado
• Baylor
• Pacific Research Institute
• California State University, Northridge
• Robert Morris University
• Menlo College
• Western Kentucky
• Hudson Institute
• Univ. Wisconsin -Milwaukee
• South Florida
• Chapman
• Alabama
• Odessa College (TX)
• French, Wolf & Farr (Law Firm)
• American Action Forum
• Hillsdale
• Towson
• Baylor
• Denver
• California State University, Northridge
• Chapman
• Hillsdale
• Econforecaster (N.Carolina)
• Marquette*
• Colorado*
• Georgetown
• Barton College
• Georgia State
• California State University, Chico
• Northern Illinois
• Pacific Research Institute
• Michigan State
• Arizona
• Univ. Texas - San Antonio
• Trine University
• N. Carolina State
• New Mexico
• Montana*
• Texas
• Univ. South Florida
• Institute for Research on the Economics of Taxation (Wash., DC)
• Missouri
• Mercer University
• Franciscan University of Steubenville
• Hillsdale University
• Bellevue University
• Michigan State University
• AEI
• Columbia
• U. Mass Boston*
• Houston
• Missouri University of Science and Tech
• UCLA
• Carnegie Mellon
• Emory
• Classicalprinciples.com (Mich.)
• Lipscomb (Tenn.)
• North Dakota State
• Brigham Young
• Clemson
• Idaho
• Univ. Texas - Arlington
• Wainwright and Co.
• Center for University Studies (Texas)
• Journal of Regional Analysis and Policy
• Colorado
• Missouri Southern State
• Wake Forest
• Ohio
• Temple
• Clemson
• Delaware
• Univ. Texas - Dallas
• California State University, Long Beach
• Institute for the Research on the Economics of Taxation
• George Mason
• Univ. Missouri - KC
• Kennesaw
• Alaska, Anchorage*
• Indiana Wesleyan
• N. Carolina State
• AEI
• Minnesota
• Chicago
• Metropolitan State College of Denver
• Clemson
• Chicago
• FRB Atlanta*
• Univ. Texas - Dallas
• Northern Illinois
• AEI
• Cornell
• Chapman
• California State University*
• Univ. Illinois - Chicago
• Duke
• Center for Health Policy
• Nevada
• Metropolitan State College, Denver
• Wayne State
• Robert Niehaus, Inc.
• Penn State
• Penn
• Louisiana State
• Cornell
• Duquesne
• Montgomery County Community College (PA)
• Texas A&M
• Colorado at Colorado Springs
• Univ. Texas - El Paso
• Central Michigan University
• University of Denver
• SUNY - Buffalo
• UC Irvine
• Toledo
• St. Cloud
• Printing Industries of America
• Ball State University
• Mississippi
• Iowa
• Univ. Missouri - St. Louis

Where * denotes emeritus or retired or former status. I used the postal address for the institutions such as consulting firms, journals or think tanks, to determine geographical location.

I've excluded Missouri, Kentucky, Maryland, Delaware from the definition of the South; using the more expansive definition [0]raises the ratio to 45/131 = 34.4%.

Note that I used the CPI-all to convert to FY2010$. I used the CBO's January 2010 forecasts for calendar year CPI year-on-year inflation rates for 2010 and 2011, and projections for 2012-2019, as reported in the CBO, Budget and Economic Outlook, Fiscal Years 2010-2020 (January 2010).

What is quite remarkable is the fact that real consumption expenditures have been essentially flat for a year and a half -- even at a time when population has grown. (Since 08Q2, consumption has fallen 0.6 while population has risen 1.3%.) One question is whether the rebound in net wealth will support a resumption in consumption growth even as disposable income growth remains lackluster.

Another slide, pertaining to the rebalancing issue, is an update of my net exports/real exchange rate graph.

If previous patterns hold, then -- to the extent that the 08Q4-09Q2 dollar appreciation was understood to be transitory -- the trade balance (at least the ex-oil component) should not deteriorate substantially going forward. This conclusion is consistent with the October IMF WEO discussed in this post.

As I've mentioned before, continued progress in keeping the trade deficit relatively small depends in part upon the trajectory of consumption. A resumption of consumption growth would be -- all else held constant -- desirable, but would tend to worsen the trade deficit. An exogenous upward shift in US exports would relax that constraint (as would further dollar depreciation). This is why the Obama administration has stressed export promotion [1] [2].

On a slightly different matter, the IMF provided an interesting heat map summarizing growth across the G-20, in this Staff Position Note.

The map highlights the two-speed nature of the global recovery.

Update: 7:30am, Pacific

One of the graphs that didn't make it into the presentation is an elaboration of how certain fiscal measures -- EGTRRA, JGTRRA, and the total cost of operations in Iraq -- limited the fiscal space available to policy makers. In the absence of these measures, we would not have to worry so much about rising debt-to-GDP levels. In other words, deep recessions are the times to run deficits, not in non-recessionary times.

I first made this point about fiscal space (although I didn't use the phrase) in 2006 [3].

[The Fed's] involvement in supervising banks of all sizes across the country significantly improves the Federal Reserve's ability to effectively carry out its central-bank responsibilities. Perhaps most important, as this crisis has once again demonstrated, the Federal Reserve's ability to identify and address diverse and hard-to-predict threats to financial stability depends critically on the information, expertise, and powers that it has as both a bank supervisor and a central bank. Not only in this crisis, but also in episodes such as the 1987 stock market crash and the terrorist attacks of September 11, 2001, the Federal Reserve's supervisory role was essential for it to contain threats to financial stability.

Insofar as the Fed is expected to fulfill its function as a lender of last resort through the discount window, surely it needs detailed knowledge of the borrower's financial situation. And actionable information on the financial system's health and stability is just as surely essential for knowing when and how fast to change interest rates.

Second, Bernanke observed that no other agency has the Fed's breadth and depth of relevant expertise:

Federal Reserve staff members have expertise in macroeconomic forecasting for the making of monetary policy, which is important for helping to identify economic risks to institutions and markets. In addition, they acquire in-depth market knowledge through daily participation in financial markets to implement monetary policy and to execute financial transactions on behalf of the U.S. Treasury. Similarly, the Federal Reserve's extensive knowledge of payment and settlement systems has been developed through its operation of some of the world's largest such systems, its supervision of key providers of payment and settlement services, and its long-standing leadership in the international Committee on Payment and Settlement Systems.

The Fed employs hundreds of extremely bright and very well-informed economists. On my visits to the Federal Reserve, I've been amazed at how well the staff work together to assimilate information and perspectives. In my experience, you can ask any one of them a question about pretty much anything, and although the person you're talking with may not know the answer, he or she will know the name of the person within the Fed who does know. I've interacted with lots of different institutions over the years, and have never seen another one that functions so effectively as a single, cohesive neural processor. Certainly the objective record of Federal Reserve forecasts is pretty impressive; see for example the assessments by Christina and David Romer and Faust and Wright.

Doubtless others will be skeptical, trotting out the Fed's spectacular underestimation of financial problems during 2005-2007. That criticism is of course well taken, and both the Fed and the economics profession as a whole have much more work to do in terms of recognizing exactly what should have been done differently. But let's be practical. What other institution did a better job? Where in Washington today do you see an agency with the intellectual resources to get this right? Simply squawking that we need a change is not constructive leadership; it's political finger-pointing and CYA.

Indeed, it's striking that many of those who were instrumental in relaxing the oversight on Fannie Mae and Freddie Mac now believe that a regulatory body more directly under their political control could do a better job than the Fed. In the mean time, the FHA continues even today to dig us into a deeper hole.

Notwithstanding, the debacles of Fannie and Freddie and the perhaps soon-to-come trainwreck from the FHA also illustrate the primary concern I have about giving the Fed more supervisory authority. The more power the Fed is given in such matters, the greater the political pressures will be from the outside to satisfy certain constituencies, and the less the Federal Reserve will resemble the remarkable institution that Bernanke and I described above.

Or, rejoinder to Casey Mulligan, Joseph Lawler, david, tim kemper and others.

From the WSJ March survey survey of forecasters, the results indicate that instead of the 0.15% growth rate recorded in 09Q4 y/y growth, the growth rate would have been -0.93%. For 2010Q4 Q4/Q4 growth, they forecast 3% growth, and in the absence of the ARRA, they would have predicted 2.2% growth.

In Figure 1, I depict log GDP, the implied path for GDP according to the WSJ survey, along with the 20% trimmed hi/low, and the levels of GDP implied in the absence of the ARRA (i.e., the "counterfactual").

More on counterfactuals: [1], [2], and [3].

You can also enter in the parallel group of the Environmental Economics blog, if you think the competition there is going to be any easier.

May the best prognosticator have the best prognostications!

Dargay and Gately's new paper notes how different the recent experience was from the past:

compare two decades in which the price of crude oil has quintupled: 1973-84 and 1998-2008. After the price increases of the 1970's, per-capita demand fell by 19% for the OECD and by 13% for the world as a whole. In the past decade, with oil price increases similar to those of the 1970's, per-capita demand fell only 3% in the OECD; worldwide it actually increased, by 4%.

The authors note that the overall responsiveness of oil demand to the price increases of the 1970s masks some very different developments. While there were substantial reductions in OECD use of oil for non-transportation purposes, changes in transportation demand and demand outside the OECD were much more modest.

Source: Dargay and Gately (2010)

Those trends are even more dramatic when you look at the numbers in per capita terms.

Source: Dargay and Gately (2010)

Dargay and Gately conclude:

The factors most responsible for reducing demand since 1971 cannot be repeated. Almost all the low-hanging fruit has now been picked; it cannot be picked again. The OECD has already done the easy fuel-switching, away from oil used in electricity generation and space heating.

The authors' inference is not an optimistic one:

If annual per-capita oil demand growth rates to 2030 were assumed to be held zero in the OECD, 1% in the [former Soviet Union], and at its 1971-2008 historical rate (2.54% annually) in the rest of the world, total oil demand will be 138 mbd in 2030-- about 30 mbd greater than what is projected by DOE, IEA, and OPEC.

If you have a plan for how the world might produce 138 mbd, I'd like to hear it. If not, the challenges of 2007-2008 will return with a vengeance.

Transportation adjustments will be the key. Trying to make more use of natural gas as a transportation fuel should be a high priority for the United States.

The CBO and the Congressional Joint Committee on Taxation (JCT) have updated cost estimates for H.R. 3590, the Patient Protection and Affordable Care Act (PPACA), as it was passed by the Senate on December 24, 2009. The figures are here. I've incorporated the new estimates into the bar chart first reported in this March 1st post.

Note that I used the CPI-all to convert to FY2010$. I used the CBO's January 2010 forecasts for calendar year CPI year-on-year inflation rates for 2010 and 2011, and projections for 2012-2019, as reported in the CBO, Budget and Economic Outlook, Fiscal Years 2010-2020 (January 2010).

Durable goods represent a moderate share of the economy in most industrial countries -- in the U.S., for example, they accounted for 23.6 percent of real GDP in 2008. However, durable goods make up a large share of international trade. In the U.S., they accounted for more than 60 percent of trade in goods (excluding energy products) in 2008. The figure is 70 percent on average for the OECD countries, according to several studies.

For more on the collapse in world trade, see here as well as here.

Note that even as the CNY has been effectively fixed against the USD, it has depreciated against a broad basket of currencies. This is true in both nominal and real terms.

At the same time, it is interesting to look at recent developments in trade flows, in particular the trade balance.

Keeping in mind distortions in the trade flows due to the lunar new year, it does appear that there's been a stabilization in the Chinese trade balance, as predicted by the IMF. Nonetheless, it's of interest to see what is doing the bulk of the adjustment -- exports or imports (keeping in mind a lot of the imports are incorporated into exports).

It strikes me with exports recovering on a year-to-year basis, now is the time for an RMB appreciation. I have little insight into the thinking of the policy authorities in China, so let me turn it over to someone who does. Arthur Kroeber of Dragonomics, a business consulting firm based in China, agrees that the time has come for a change in the currency stance, and further argues for a discrete revaluation, as opposed to a resumption of gradual appreciation:

...the gradual appreciation of 2005-08 was problematic: because the renminbi moved only one way, lots of international capital flowed into China to play the apparent one-way bet. Inciting huge capital inflows at a time when Beijing is already battling the strongest inflationary pressure in years is unappealing.

Logically, the way around this is to start with a very quick appreciation of at least 10 per cent to take the one-way-bet calculation out of the market.

There is a strong case for making a move soon. The longer China waits, the more criticism it will attract for its undervalued exchange rate.

The criticism is likely to come to a head in March— when the US Treasury will need to make its determination about whether China is a currency manipulator—and April, when the G-20 next meets.

Mr. Kroeber has an interesting article in the most recent issue of China Economic Quarterly [not online] where he argues that the labor market tightening is a plus for labor income and hence consumption. That means the policy authorities in China have the space to allow for an yuan appreciation (which is in any case more desireable than constraining growth solely by money and credit restraint, as I argued here three years ago).

How much of an impact would a given appreciation have? Recalling that GDP (in China and Rest-of-world) matter, as do supply capacity, recent partial derivatives/elasticities are discussed in this post.

I would be remiss if I did not mention Eswar Prasad's recent testimony before the US-China Commission on the inter-relationships between China, the US and the world economy: see here. As per his usual work, it's an excellent and finely nuanced assessment of the current situation.

Additional Econbrowser posts on China here.

One hundred times the level of home mortgage debt (taken from Flow of Funds, Table B100, row 33) divided by nominal GDP (taken from Bureau of Economic Analysis, Table 1.1.5).

Taken literally, this view would imply that the huge run-up in debt over the last decade was largely benign, and that the core problem is that banks stopped lending in 2008. If that's your perspective, then it's very good news that the rapid growth of debt didn't end just because banks stopped lending.

Federal debt taken from Flow of Funds, Table L106, row 18. Central bank liabilities taken from Flow of Funds, Table L108, row 26.

My view is that the gross deterioration of underwriting standards suggests that it was the run-up in mortgage debt between 2001 and 2007, and not the failure of mortgage debt to expand further in 2008, that indicates a pathology in credit markets.

Here's another variable that I think played an important role in what we've observed. Robert Shiller's data imply that real home prices in the United States were remarkably stable for over a century. They began an unprecedented climb in the last decade, only to reverse course in equally dramatic fashion in 2006. One of the papers from the conference on which I was asked to comment took the perspective that credit markets were functioning essentially normally in 2008:Q3, with the goal of the research being to quantify the consequences of the disruptions that occurred in 2008:Q4. But surely those disruptions had a great deal to do with the decline in house prices that had been underway for several years at that point, and just as surely that decline in house prices had a great deal to do with the run-up in house prices that preceded the bust.

Shiller's real home price index, 1890-2009. Source: Irrational Exuberance, Princeton, 2005, by Robert Shiller.

I presume that everyone would agree that the dislocations of 2008:Q4 did not arise in a vacuum. But some might nevertheless defend modeling those disruptions as exogenous events, if the primary purpose is to try to understand how those events affected the rest of the economy. However, I worry that this is more than just a detail of what one chooses to model, but has the danger of becoming a prevailing paradigm of some in policy circles, who may interpret the core problem as the financial events in the fall of 2008, rather than viewing the core problem as the conditions that precipitated those financial events.

Understanding those precipitating conditions strikes me as a higher priority for this kind of research. Is our goal to know how policy should respond to these disruptions, or how to prevent them in the first place? In terms of the narrow objective of evaluating Federal Reserve policy over this period, should we ignore the potential contribution of the low interest rates and lax regulatory regime that accompanied the preceding real-estate price run-up? It is all well and good for the fire-fighters to ask us aren't we glad they have such a high-powered hose with which to douse the raging conflagration. I suppose that a reasonable response might be yes, but where were you four years ago, and who started this fire anyway?

My suggestion for the many researchers interested in adding to our understanding of credit market imperfections would be to focus not so much on 2008 as on 2004-2006. Any economists or policy-makers who believe that the goal of policy is to restore the economy to the conditions of 2005 may be missing the core lesson here.

Menzie Chinn invokes the CBO "estimates" to argue against those who say the stimulus didn't work. Did the stimulus help turn the economy around and create jobs? I'm skeptical on logical grounds but I confess that I do not have strong empirical evidence on my side.

But those who defend the stimulus have no empirical support either...

...The CBO "estimates" are not an analysis of what the stimulus actually did but rather what some predicted it would do. They have done NO independent non-partisan analysis of what actually happened.

Yesterday, I had a headache. I took a couple tablets of aspirin. (Actually, it was ibuprofen, but the point remains.) My headache subsequently disappeared. I have no direct empirical evidence that the headache disappeared as a consequence of the aspirin, but I have a plethora of studies that suggest that aspirin (or ibuprofen in this case) can relieve headaches.

As the foregoing example suggests, it does seem to me there is empirical evidence. It's just not the direct sort Professor Roberts desires. Admittedly, there is a dispute over the size of the multipliers -- that's why the CBO used ranges. For surveys of many studies of multipliers, see this Econbrowser compilation, especially this entry and this entry.

Note the last line, "Present value of future expenditures in excess of future revenue" (over a 75 year period). The figure is $7.2 trillion.

The report also has some interesting information about contingent liabilities [1] [2]. See Notes 18 and 19 (pages 99-101).

Most recently, researchers have tried to gauge the degree of financial stress using indicators such as the LIBOR-OIS spread ([1], [2]) or deviations of yields from predictions of interest rate models (e.g., the recent paper by Christensen, Lopez, and Rudebusch). There are also a number of composite indexes that various private-sector analysts rely on, such as the Bloomberg financial conditions index.

Two private-sector analysts (Jan Hatzius of Goldman Sachs and Peter Hooper of Deutsche Bank) have recently teamed up with three academics (Rick Mishkin of Columbia, Kermit Schoenholtz of NYU, and Mark Watson of Princeton) to produce a new financial conditions index that attempts to combine the information of 44 separate series including those mentioned above along with a great number of others. One of the differences between their approach and previous work is that HHMSW seek to isolate the separate information of the financial indicators from aggregate business cycle movements by looking at the residuals from a regression of each indicator on lags of inflation and real GDP growth rates. The researchers then extracted a variable similar to a principal component from the residuals across the 44 indicators. HHMSW demonstrate that the resulting series can be quite helpful for predicting real GDP growth, though there is evidence that these predictive relations may change over time.

Source: Hatzius, et. al.

Of particular interest at the moment is the fact that the HHMSW index, unlike most other indicators, shows a renewed deterioration subsequent to the initial recovery in the first part of 2009, a somewhat surprising result given the current steeply-sloping yield curve, low TED spread, and booming stock market. The surprising contrary inference from the HHMSW index appears to be due to two factors. First, the HHMSW index is based on the deviation of the financial indicators from what one would have predicted given recent economic conditions. Many indicators have not improved as much as one would have expected given the return to GDP growth, and the departure from a typical recovery pattern is viewed by the index as a highly pessimistic development. Second, the HHMSW index makes use not just of the yields themselves but also of the quantities of various assets, and many of these show little improvement so far. For example, issuance of new asset-backed securities remains quite low.

Source: Hatzius, et. al.

Will real GDP follow the HHMSW index back down? That's not what I'm expecting. But if it does, it wouldn't be the first time I've been wrong.