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Yearly Archives: 2009

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July 2021

South East Trip

Heading out to Southeast tomorrow morning: attending the annual AEA (American Economic Association) meeting in Atlanta. My department is hiring…also revisit New Orleans after my last trip in 2003, wondering how Big Easy looks like after the devastating Katrina…and finally meet friends in Orlando, FL.  Have a lot of fun, and a lot of sun.

I will keep posting lightly on the road, most likely some summary piece about year 2009.

Happy New Year!

Ireland and Greece

WSJ compares the two weakest links in the European economy:

Greece and Ireland face the biggest fiscal problems in Europe. But their responses couldn't be more different. Greece's lack of credibility has cost it dearly in the eyes of ratings companies, the European Commission and the bond market. That means it will have to go even further than Ireland if it is to win back confidence.

Both countries face double-digit deficits this year: 12.7% of gross domestic product in Greece and around 12% in Ireland. Greece's debt-to-GDP ratio is forecast to hit 120% next year; Ireland's headline ratio of 64% would also rise to more than 100% if the bad debt taken on by the government under its bank bailouts is included. The European Commission is demanding both cut their deficits to below 3% of GDP and reduce debt-to-GDP to less than 60%.

Yet both the commission and the rating companies are taking a notably more lenient attitude toward Ireland than Greece. Ireland proposes only to cut its deficit to 10.8% of GDP in 2010, compared to 9.1% in Greece. But Ireland has been given until 2014 to meet the commission's demands, while Greece must achieve its targets by 2013. And Ireland is still rated AA, while Greece has just been downgraded to BBB+, raising fears its bonds may not qualify as European Central Bank collateral in the future. That would push up Greek borrowing costs, making it even harder to restore its fiscal position.

Ireland has won this breathing space partly because it has shown far greater political courage. Its 2010 budget includes clear tangible spending cuts. Public-sector wages are to fall by between 5% and 15%, with the prime minister taking a 20% pay cut. Even child-benefit payments are under the ax. In contrast, Greece's budget relies heavily on one-time policies such as measures aimed at reducing tax evasion. Athens has shown a lack of will to embrace spending cuts beyond a partial freeze in public-sector wages and pensions.

But Ireland's past record earns it a degree of forbearance. Between 1994 and 2006, Dublin cut debt to 24% of GDP from 94%, according to Barclays Capital. Compare that to Greece, which has very little credibility when it comes to making tough political decisions: it cut debt only to 94% of GDP in 1999 from 108% in 1994 ahead of euro entry, before it started rising again. Even now, Dublin enjoys broad public acceptance of its austerity plans. But Greece faced riots last year and renewed clashes this past week.

Still, Athens has little choice but to bite the bullet. The credit default swap market is pricing in an appreciable chance of a Greek default. Most likely, the European Union would provide a rescue package, but this would come with strict fiscal conditions attached. The Irish lesson may be a hard one, but Greece needs to learn it fast.

The state of economic recovery

A nice overview of the current state of the economy, presented in a dashboard.

Senate Passes Landmark Health Bill

Now America needs to deal with one fundamental problem that Milton Friedman raised many years ago: the rising welfare and free entry of immigrants especially those unskilled. History shows every time after a big crisis policies will have big change… let’s just hope the change is for good—America not to become another Europe.

Senate Passes Landmark Health Bill


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Paul Samuelson dies at 94

Paul Samuelson, the great American economist, one of the true masters in the history of economics in the 20th century, along with J. M. Keynes, F. Hayek, Milton Friedman, dies at 94 yesterday (Dec. 13th) at his Belmont MA home. Here is eulogy piece from NYT:

Paul A. Samuelson, the first American Nobel laureate in economics and the foremost academic economist of the 20th century, died Sunday at his home in Belmont, Mass. He was 94.

His death was announced by the Massachusetts Institute of Technology, which Mr. Samuelson helped build into one of the world’s great centers of graduate education in economics.

In receiving the Nobel Prize in 1970, Mr. Samuelson was credited with transforming his discipline from one that ruminates about economic issues to one that solves problems, answering questions about cause and effect with mathematical rigor and clarity.

When economists “sit down with a piece of paper to calculate or analyze something, you would have to say that no one was more important in providing the tools they use and the ideas that they employ than Paul Samuelson,” said Robert M. Solow, a fellow Nobel laureate and colleague of Mr. Samuelson’s at M.I.T.

Mr. Samuelson wrote one of the most widely used college textbooks in the history of American education. The book, “Economics,” first published in 1948, was the nation’s best-selling textbook for nearly 30 years. Translated into 20 languages, it was selling 50,000 copies a year a half century after it first appeared.

A historian could well tell the story of 20th-century public debate over economic policy in America through the jousting between Mr. Samuelson and Milton Friedman, who won the Nobel in 1976. Mr. Samuelson said the two had almost always disagreed with each other but had remained friends. They met in 1933 at the University of Chicago, when Mr. Samuelson was an undergraduate and Mr. Friedman a graduate student.

Unlike the liberal Mr. Samuelson, the conservative Mr. Friedman opposed active government participation in most areas of the economy except national defense and law enforcement. He thought private enterprise and competition could do better and that government controls posed risks to individual freedoms.

Both men were fluid speakers as well as writers, and they debated often in public forums, in testimony before Congressional committees, in op-ed articles and in columns each of them wrote for Newsweek magazine. But Mr. Samuelson said he always had fear in his heart when he prepared for combat with Mr. Friedman, a formidably engaging debater.

“If you looked at a transcript afterward, it might seem clear that you had won the debate on points,” he said. “But somehow, with members of the audience, you always seemed to come off as elite, and Milton seemed to have won the day.”

Mr. Samuelson said he had never regarded Keynesianism as a religion, and he criticized some of his liberal colleagues for seeming to do so, earning himself, late in life, the label “l’enfant terrible emeritus.” The experience of nations in the second half of the century, he said, had diminished his optimism about the ability of government to perform miracles.

If government gets too big, and too great a portion of the nation’s income passes through it, he said, government becomes inefficient and unresponsive to the human needs “we do-gooders extol,” and thus risks infringing on freedoms.

But, he said, no serious political or economic thinker would reject the fundamental Keynesian idea that a benevolent democratic government must do what it can to avert economic trouble in areas the free markets cannot. Neither government alone nor the markets alone, he said, could serve the public welfare without help from the other.

As nations became locked in global competition, and as the computerization of the workplace created daunting employment problems, he agreed with the economic conservatives in advocating that American corporations must stay lean and efficient and follow the general dictates of the free market.

But he warned that the harshness of the marketplace had to be tempered and that corporate downsizing and the reduction of government programs “must be done with a heart.”

Despite his celebrated accomplishments, Mr. Samuelson preached and practiced humility. The M.I.T. economics department became famous for collegiality, in no small part because no one else could play prima donna if Mr. Samuelson refused the role, and, of course, he did. Economists, he told his students, as Churchill said of political colleagues, “have much to be humble about.”

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Something about Joe Stiglitz

A brief yet very interesting piece on economist Joe Stigliz (source: IMF). Here are some excerpts:

Realizing Stiglitz’s potential, his professors encouraged him to leave Amherst after his third year and start graduate work elsewhere; they were nevertheless devastated to see him go. “Frankly, seeing Stiglitz leave is like watching the disappearance of one’s right arm,” one of them wrote. The Massachusetts Institute of Technology (MIT), however, was overjoyed to get him as a student. The institution’s admissions committee sent his information to the economics department and asked what the amount of his stipend should be, listing choices ranging from no stipend to $12,000. The professor assessing Stiglitz’s application scribbled on the folder: “Offer him Department Head’s salary.”

In the 1960s, MIT was the center of a revolution in economics. “The department placed mathematics—not philosophy or ideology—at the heart of policy analysis,” says Stiglitz, but it sought to bring about “an interface of careful mathematical models and the practical problems of the economic world.” Stiglitz went on to excel at this work, so much so that MIT made him an offer right away on his graduation. The job came with strings attached, though. Stiglitz had to agree to sleep in an apartment instead of his office—MIT wanted to see a lease as proof that he had an apartment—and to start wearing shoes around the office. MIT was not able to retain Stiglitz for long—over the next two decades his wanderlust took him to Cambridge, Yale, Oxford, Stanford, and Princeton—but MIT was right about his potential. Stiglitz unleashed an intellectual effort that earned him the 1979 John Bates Clark medal—awarded to the most influential U.S. economist under the age of 40—and made him a shoo-in for a Nobel Prize.

In 1993, Stiglitz abandoned his comfortable perch in academia for the rough-and-tumble of the policy world. He became a member of Clinton’s CEA and later its chairman. Alan Blinder, a Princeton professor and a fellow CEA member, describes it as “a gutsy move for a purely academic superstar.” Stiglitz was instrumental in pushing through several initiatives, including persuading a somewhat reluctant U.S. Treasury to issue inflation-indexed government debt. But Chait wrote in The American Prospect that Stiglitz’s style of argument—making his case publicly even after losing internal debates on issues—led to wintry relationships with other presidential advisors, such as Larry Summers. Blinder says politely that “Joe’s behavior . . . might perhaps be considered a little quixotic.”

This style grew even more pronounced after Stiglitz moved in 1997 from the White House to become World Bank chief economist. He was critical of the economic advice to the transition economies to carry out a speedy move to markets and capitalism. Stiglitz favored a much more gradual move, with legal and institutional reforms needed to support a market economy preceding the transition to markets. Kenneth Rogoff, a Harvard professor and former chief economist of the IMF, doubts that Stiglitz’s approach would have succeeded. He says it is “unlikely that market institutions could have been developed in a laboratory setting and without actually starting the messy transition to the market.” Rogoff adds that because the institutions underpinning communism had collapsed, “some new institutions had to be created quickly,” and it is inevitable that mistakes were made in this haste. But “institutions take a long time to nurture and the ones that are there today, however imperfect, might well not be there if the effort had not been started” immediately when communism fell.

During the financial crisis of 1997–98, Stiglitz publicly criticized the programs put together by the IMF and the governments of some Asian countries. Stiglitz argued that raising interest rates to defend the currencies in these countries was counterproductive: the high interest rates reduced confidence in the economy by increasing loan defaults and corporate bankruptcies. Not everyone agreed with Stiglitz. The late MIT economist Rudiger Dornbusch defended the high-interest-rate strategy as essential to restoring confidence, adding that “no finance minister will opt for the Stiglitz Clinic of Alternative Medicine. They [will] have the ambulance rush them to the IMF.” J. Bradford DeLong, a noted macroeconomist at the University of California, Berkeley, wrote that following “Stiglitz’s prescriptions [to] lend more with fewer conditions and have the government print more money to keep interest rates low . . . would have been overwhelmingly likely . . . to end in hyperinflation or in a much larger-scale financial crisis as the falling value of the currency eliminated every firm’s and bank’s ability to repay its hard [foreign] currency debt.”

After exiting the World Bank in 1999, Stiglitz repaired to Columbia University and wrote what became a best-selling book titled Globalization and Its Discontents. Many reviewers of the book noted that its narrative power came from having a clear villain: the IMF. The book’s references to the IMF—almost all critical—totaled 340. Tom Dawson, the IMF’s external relations head at the time, quipped: “That works out to over one alleged mistake committed by the IMF per page. You’d think by sheer accident we’d have gotten a couple of things right.”

Despite the financial crisis, Stiglitz remains optimistic about the future of markets and capitalism. In contrast to “the 19th century owner-operated capitalism, in the 21st century capitalism will be operated by the people,” he says. But to make it a success, people have to be more economically literate and there has to be greater civic participation in economic policymaking. With these goals in mind, Stiglitz founded the Initiative for Policy Dialogue (IPD) in 2000—a global network of economists, political scientists, and policymakers that studies complex economic issues and provides policy alternatives to countries. IPD also conducts workshops to enable the media and civil society to participate effectively in policy circles. Dawson applauded the effort: “It’s a tough business—you almost have to be a Bono to have an impact on policy.”

Indeed, to reach wider audiences, Stiglitz has branched out into film with a documentary called Around the World with Joseph Stiglitz about how the fruits of capitalism can be shared more equally. Will it give filmmaker Michael Moore a run for his money? “No,” laughs Stiglitz, “I think Moore is very effective,” but “frustration doesn’t do any good.”

Unlike Moore, Stiglitz says he hasn’t lost his “Midwestern optimism” that things improve over the long run. Many people, he says, express their dismay to him that, with the financial crisis barely over, the bankers and their boosters seem to be back calling the shots. But if genuine reform of the financial system is not undertaken, “there is a reasonable risk of another crisis within 10–15 years, and the likelihood that the banks will win the next round is lower.” Every crisis provides “an impetus for deeper democratic reform. The game isn’t over.”

Taking stock

Another chart on 2009 rally in historical perspective:


Best performing stocks, watch Ford, Capital One, AIG, and Bank of America.


(graph courtesy of bespoke)

Oliver Williamson Nobel Speech

Nobel speech by Oliver Williamson. Professor Williamson will be here at Copenhagen Business School on Dec. 15.