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Zhu Min
One clear lesson for oil-exporting countries in recent years, and especially in 2016, is that they should be adjusting their public policies to promote innovation and diversify their economies. Their agreement in late November to cut production— the first such accord in eight years—doesn’t change this, regardless of the short-term increase in prices.
To be sure, oil revenues appear to have magically boosted oil-exporting countries’ gross domestic products (GDPs) over the last quarter-century, especially in the Gulf region. And bustling, cosmopolitan cities—featuring dazzling skylines, world-class infrastructure, and higher-than-average living standards —have emerged in many of these countries.
But the world in 2017 and beyond will be very different. Downward pressure on oil prices reflects not just lower global energy demand, owing to slower economic growth; it also stems from technological changes in hydrocarbon production, the recent rise of renewable-energy sources, and global commitments to fight climate change, not least the December 2015 Paris climate agreement.
As a result, many oil-producing countries’ sole growth engine—hydrocarbon revenues—is running in low gear, and could continue to do so for a long time, if not permanently. Yet, as their recently agreed production cap suggests, oil-exporting economies remain overly dependent on it.
When oil prices stayed low during the 1980s and 1990s, oil-exporting countries’ living standards and employment rates fell, while their public debts skyrocketed. The same thing has happened since 2014, with countries burning through financial reserves and some forced to cut spending. This time, the oil-exporting countries have amassed ample financial reserves to weather an oil-price decline. Yet they remain under oil’s spell.
''More from The Year of Surprise''
A recent book published by the International Monetary Fund, Breaking the Oil Spell: The Gulf Falcons’ Path to Diversification (which I co-edited), sheds important light on how governments can reorient their countries’ economies. The book distills insights from countries such as Brazil, South Korea, Malaysia, and Singapore, where economic diversification has been successful.
These countries are not major oil exporters, but they provide powerful lessons nonetheless. In each country, economic diversification efforts have focused on high value-added industries that compete in international markets. These industries then generate productivity gains, producing a positive impact on other economic sectors. For example, in Malaysia, primary-commodity exports, as a share of total exports, fell from about 80% to about 20% between 1980 and 2012, while electronics exports increased from less than 10 % to more than 30%.
According to Breaking the Oil Spell, governments that have diversified their economies have done so with policies to improve “access to financing and business support services through venture capital funds, development banks, and export promotion agencies, and the creation of special economic zones, industry clusters, research-and-development centres, and start-up incubators”.
For example, Singapore has established manufacturing, science, and high-tech parks to promote research and development and the emergence of industry clusters; and Brazil has made substantial progress, with the support of the Brazilian Development Bank, in building its pharmaceutical, sugarcane, and software industries. Malaysia, for its part, has supported the industries that harvest, produce, and export its natural resources, including palm oil and rubber, while also venturing into the electronics market.
In all of the countries that have successfully diversified their economies, the state played a leading role, by promoting innovation and integrating the public and private sectors in order to support export-driven firms and human-capital development.
Oil-exporting countries’ governments should take the lead too and create incentives for individuals to develop skills needed in the private sector, particularly in high-value-added export industries. They should improve governance, transparency, competition, and, especially, education by implementing social development programmes and by keeping public-sector wages and employment in check, to avoid crowding out private firms from the labour market. And, of course, they should always take these steps with an eye toward macroeconomic and financial stability.
The prospect of persistently low oil prices should be a wake-up call for oil-exporting countries. ''Their governments must put economic diversification at the top of their policy agendas.'' Some already have: Saudi Arabia recently released its Vision 2030 plan, which establishes a blueprint for transforming the economy, by reducing its dependence on oil, increasing the role of the private sector, and creating more jobs for Saudi nationals.
Vision 2030 is a good first step, but translating these goals into reality will require carefully prioritized and sequenced policies and government interventions in the coming months and years. This is true not only for Saudi Arabia, but for all oil-exporting countries – and a new year is as good a time as any to break the spell that oil has long held over their economies.
Zhu Min, a former deputy managing director of the International Monetary Fund, is deputy governor of the People’s Bank of China.
PROJECT SYNDICATE
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#Gross Domestic Product (GDP) is defined as the market value of all final goods and services newly produced within a nation during a fixed period of time, typically a year. The important principles are: avoid double-counting; do not count asset appreciation; and do not count goods and services produced outside of the country.
#What is the difference between Real and Nominal GDP? To compute nominal GDP, we use current prices. To compute real GDP, we use constant prices, namely, the prices at base year. Therefore, every time we mention real GDP, we need to be explicit about the base year.
#GDP deflator = 100*Nominal GDP / Real GDP. We can compute the inflation rate in year t as the growth rate of the GDP deflator from year t-1 to t. For example, suppose the GDP deflators from 2001 to 2005 are given by 100, 99, 101, 105, 108. Inflation rate in 2002 is given by (99 – 100)/100 = - 0.01 = -1%.
#There are quite a few measures of inflation rate. As long as a price index is available, you can compute the growth rate of that index and obtain one measure of inflation rate. The inflation rate calculated based on the GDP deflator is one popular measure of inflation. The other popular inflation is called CPI inflation, based on the consumer price index (CPI). CPI measures the cost of a fixed consumption basket, which may contain food, clothing, energy, articles for daily use, and services.
#Gross National Product (GNP) = GDP + Net Factor Payments from abroad (NFP), where NFP is defined as income paid to domestic factors of production (labor and capital) by the rest of the world minus income paid to foreign factors of production by the domestic economy. In some countries, GNP is also called GNI (Gross National Income).
#Gross National Disposable Income (GNDI) = GNP + Net Transfers. Transfers include the official assistance as well as remittances from families residing abroad.
#National Saving (S) = Gross National Disposable Income – Consumption (Private and Government Consumption)
#Current Account Balance include the following items (in US Dollars)
##Balance of trade in goods (export of goods – import of goods)
##Services net (services income – services payments). These services are the ones involving foreign individuals, foreign companies, and foreign governments. They include freight on exports and imports, passenger services, port services, travel expenditures, insurance services
##Investment income net (investment income – investment payments)
##Compensation of employees net (compensation received from residents working abroad – compensation paid to foreign residents working in the country)
##Current transfers net (explained in Item 6).
#If Current Account Balance is positive, the current account is said to be in surplus. If negative, it is said to be in deficit.
#Capital and Financial Account include the following items (in US Dollars)
##Direct Investment net. It is equal to Foreign Direct Investment in China (FDI) minus China’s Direct Investment abroad.
##Portfolio Investment net. It equals to the increase in foreign holdings of assets in China such as stocks and bonds minus the increase in China’s holding of assets abroad. If a foreign entity holds 25% or more of the stock of company XYZ in China, this investment should be recorded as FDI rather than Portfolio Investment.
##Other Investment. It includes trade credit, loans, etc.
#Balance of Payment Table includes Current Account Balance, Capital and Financial Account Balance, Errors and Omissions, and International Reserve Assets (a negative sign means an increase in International Reserves).
##If Current Account Balance + Capital and Financial Account Balance = a positive number, the Balance of Payment (BOP) is said to be in surplus. If negative, then BOP in deficit.
#Government budget balance = Total Fiscal Revenue (tax and non-tax) – Total Fiscal Expenditure
##If the budget balance is negative, the government is said to be running a fiscal deficit.
##If for example, total fiscal revenue = $100 billion, total fiscal expenditure = $110 billion, the government budget balance =100 – 110 = - $10 billion. In this case, the government budget deficit is said to be $10 billion.
#Primary Government budget balance = Total Revenue (tax and non-tax) – (Total Expenditure – debt service payment). In the above example b, if debt service payment is $2 billion, then the primary government budget balance = 100 – (110 – 2) = - $8 billion. Thus the primary fiscal deficit is only $8 billion. Namely, in computing primary fiscal deficit, the expenditure on debt service is excluded.
#Sometimes, we focus more on primary budget deficit because the debt service payment is the legacy from budget executions in the past. The current government, if newly elected, should not be blamed.
#What is expansionary fiscal policy?
##An increase in government consumption relative to GDP; an increase in government investment relative to GDP; a tax cut. According to Keynesians, all of these tend to increase aggregate demand and are therefore called expansionary fiscal policy.
#When to use expansionary fiscal policy?
##Answer: when the economy is in recession or is slipping into recession. The expansionary fiscal policy stimulates economic activity.
#Nominal Interest Rates measure the returns in nominal terms (in a currency) to interest-bearing assets. For example, if US 10 year government bond carries a nominal interest rate of 4.43 percent per year and Hong Kong 5 year government bond pays 3.2 percent per year, then the 4.43 percent and 3.2 percent are all nominal interest rates. Different instruments, for example, instruments with different issuers and different maturities, pay different rates of interest. Therefore when we talk about a nominal interest rate, we need to be explicit about which instrument we are referring to.
#Real interest rates measure the returns in purchasing power to interest-bearing assets. Real interest rate = Nominal interest rate – inflation rate.
##Using the Hong Kong example above, if inflation rate is 2 percent, the real interest rate on 5 year government bond would be 3.2 – 2 = 1.2 percent.
#Money is defined as those assets that are widely used and accepted in payments. Monetary aggregates measure the amounts of money in an economy. Three most widely used monetary aggregates are called M0, M1 and M2.
#M0 is also called the monetary base or high powered money. It includes currency in circulation outside of banks, vault cash in banks, the deposits at the central bank by the depository institutions.
#M1 includes:
##Currency
##Travelers’ checks
##Demand Deposits (non-interest-bearing checking accounts)
##Other checkable deposits
#All the components in M1 are actively used and widely accepted for making payments.
#M2 includes:
##All components of M1
##Savings deposits
##Small-denomination (less than $100,000 in the case of USA) time deposits
##Money Market Mutual Funds (non-institutional) and MMDA (Money Market Deposit Accounts)
#What is an expansionary monetary policy?
##If the central bank or monetary authority increases money supply (say M2) at a rate higher than in the recent past, the aggregate demand will be increased. The rapid increase in M2 is thus called an expansionary monetary policy.
#How can a central bank increase M2?
##By a reduction in reserve requirement. This will allow the commercial banks to have more resources for their lending programs. Hence M2 will be increased.
##By cutting the discount window rate. This reduces the cost of borrowing by the commercial banks at the central banks’ discount window. Hence, this type of borrowing will increase and more money will be circulating in the banking system.
##By an open market purchase (purchase of government bond or central bank bills from the financial sector). This will inject new money into the circulation.
#Doing the opposite of a, b, c above reduces M2 growth rate and therefore is meant for a monetary tightening.
#RMB appreciation would reduce the cost of imports and therefore enhance China’s purchasing power. So why would China resist the pressure for further appreciation? Answer: RMB appreciation shrinks the profit margin of the exporting firms and hurts China’s export industry.
!Macroeconomic "CAMEL"
''Concepts''
*@@GDP, CPI, real interest rate, money demand function, money supply formula, short-run aggregate demand, long-run aggregate demand, natural rate, current account@@, @@Purchasing Power Parity (PPP)@@, budget deficits
''Arguments''
*How do classical economists argue that rules are important and are better than discretion?
*@@Why is the money supply hard to control?@@
*How come the simple Phillips curve disappears?
*@@Why does an increase in domestic GDP drive down the value of domestic currency?@@
''Models''
*@@IS - LM model in closed economy@@
*@@IS - LM model in open economy and policy effectiveness under@@
**Flexible Exchange Rate System
**Fixed Exchange Rate System
*Endogenous Growth Theory: Rules that raise efficiency and encourage innovation, imitation, knowledge accumulation, and human capital accumulation,
*Convergence Hypothesis
''Evidences''
*Paul Volcker’s disinflation program
*USA Tax reforms in 1981 and 1986
*Business cycle regularities
*The J-curve
*The money supply during the Great Depression
*Convergence
*Growth Accounting
''Laws''
*Laffer curve, Phillips curve, Interest Rate Parity, Purchasing Power Parity
Jeffrey Frankel
MAY 5, 2014
China is Still Number Two
CAMBRIDGE – Headlines around the world this week trumpeted a watershed moment for the global economy. As the Financial Times put it, “China poised to pass US as world’s leading economic power this year.” This is a startling development – or it would be if the claim were not essentially wrong. In fact, the United States remains the world’s largest national economy by a substantial margin.
The story was based on the April 29 release of a report from the World Bank’s International Comparison Program. The ICP’s work is extremely valuable. I eagerly await and use their new estimates every six years or so, including to look at China.
The ICP data compare countries’ GDP using purchasing-power-parity (PPP) exchange rates, rather than market rates. This is the right thing to do when looking at real (inflation-adjusted) income per capita in order to measure people’s living standards. But it is the wrong thing to do when looking at national income in order to measure the country’s weight in the global economy.
The bottom line is that, by either criterion – per capita income (at PPP exchange rates) or aggregate GDP (at market rates) – the day when China surpasses the US remains in the future. This in no way detracts from the country’s impressive growth record, which, at about 10% per year for three decades, constitutes a historical miracle.
At market exchange rates, the American economy is still almost double the size of China’s (83% larger, to be precise). If the Chinese economy’s annual growth rate remains five percentage points higher than that of the US, with no significant change in the exchange rate, it will take another 12 years to catch up in total size. If the differential is eight percentage points – for example, because the renminbi appreciates at 3% a year in real terms – China will surpass the US within eight years.
The PPP-versus-market-exchange-rate issue is familiar to international economists. This annoying but unavoidable technical problem arises because China’s output is measured in renminbi, while US income is measured in dollars. How, then, should one translate the numbers so that they are comparable?
The obvious solution is to use the contemporaneous exchange rate – that is, multiply China’s renminbi-measured GDP by the dollar-per-renminbi exchange rate, so that the comparison is expressed in dollars. But then someone points out that if you want to measure Chinese citizens’ standard of living, you have to take into account that many goods and services are cheaper there. A renminbi spent in China goes further than a renminbi spent abroad.
For this reason, if you want to compare per capita income across countries, you need to measure local purchasing power, as the ICP does. The PPP measure is useful for many purposes, such as knowing which governments have succeeded in raising their citizens’ standard of living.
Looking at per capita income, even by the PPP measure, China is still a relatively poor country. Though it has come very far in a short time, its per capita income is now about the same as Albania’s – that is, in the middle of the distribution of 199 countries.
But Albania’s economy, unlike China’s, is not often in the headlines. That is not only because China has such a dynamic economy, but also because it has the world’s largest population. Multiplying a middling per capita income by more than 1.3 billion “capita” yields a big number. The combination of a large population and a medium income gives it economic power, and also political power.
Similarly, we consider the US the number-one incumbent power not just because it is rich. If per capita income were the criterion by which to judge, Monaco, Qatar, Luxembourg, Brunei, Liechtenstein, Kuwait, Norway, and Singapore would all rank ahead of the US. (For the purposes of this comparison, it does not matter much whether one uses market exchange rates or PPP rates.) If you are shopping for citizenship, you might want to consider one of those countries.
But we do not consider Monaco, Brunei, and Liechtenstein to be among the world’s “leading economic powers,” because they are so small. What makes the US the world’s leading economic power is the combination of its large population and high per capita income.
It is this combination that explains the widespread fascination with how China’s economic size or power compares to America’s, and especially with the question of whether the challenger has now displaced the long-reigning champion. But PPP exchange rates are not the best tool to use to answer that question.
The reason is that when we talk about an economy’s size or power, we are talking about a broad range of questions – and a broad range of interlocutors. From the viewpoint of multinational corporations, how big is the Chinese market? From the viewpoint of global financial markets, will the RMB challenge the dollar as an international currency? From the viewpoint of the International Monetary Fund and other multilateral agencies, how much money can China contribute, and how much voting power should it get in return? From the viewpoint of countries with rival claims in the South China Sea, how many ships can its military buy?
For these questions, and most others involving total economic heft, the indicator to use is GDP at market exchange rates, because what we want to know is how much the renminbi can buy on world markets, not how many haircuts or other local goods it can buy back home. And the answer to that question is that China can buy more than any other country in the world – except the US.
Read more from "China's Challenges"
https://www.project-syndicate.org/commentary/jeffrey-frankel-pours-cold-water-on-the-claim-that-the-us-economy-has-been-surpassed
Read more at http://www.project-syndicate.org/commentary/jeffrey-frankel-pours-cold-water-on-the-claim-that-the-us-economy-has-been-surpassed#UFIMWHzwgmigjsja.99
Simon Johnson and Jonathan Ruane, December 29, 2017
WASHINGTON, DC – China has achieved much since 1978, when Deng Xiaoping initiated the transition to a market economy. In terms of headline economic progress, the pace of China’s transformation over the past 40 years is unprecedented. The country’s GDP grew by nearly 10% per year on average, while reshaping global trade patterns and becoming the second-largest economy in the world. This success lifted 800 million people out of poverty, and the mortality rate of children under five years old was halved between 2006 and 2015.
The question now is whether China, well positioned to become the world’s innovation leader, will realize that opportunity in 2018 or soon after.
China’s transformation has been underpinned by an unprecedented manufacturing boom. In 2016, China shipped more than $2 trillion worth of goods around the world, 13% of total global exports. It has also pursued economic modernization through massive infrastructure investment, including bridges, airports, roads, energy, and telecoms. In less than a decade, China built the world’s largest bullet train system, surpassing 22,000 kilometers (13,670 miles) in July 2017. Annual consumption is expected to rise by nearly $2 trillion by 2021, equivalent to adding another consumer market the size of Germany to the global economy.
Earlier this month, Apple CEO Tim Cook declared that, “China stopped being a low-labor-cost country many years ago, and that is not the reason to come to China.” The country’s manufacturing strengths now lie in its advanced production know-how and strong supply-chain networks. Understandably, China’s leadership wants to increase productivity and continue to move further up the value chain.
Building on its 13th Five Year Plan (in May 2016), the authorities established objectives for China to become an “innovative nation” by 2020, an “international innovation leader” by 2030, and a “world powerhouse of scientific and technological innovation” by 2050. It also committed to increasing its expenditure on research and development to 2.5% of GDP and almost doubling the number of patents filed per 10,000 people by 2020.
To enable this innovation, municipal governments are building technology hubs, hoping to attract talent. The city of Guangzhou is encouraging researchers, entrepreneurs, and corporations to base themselves there. General Electric recently committed to build its first Asian biopharmaceutical project in an $800 million bio-campus. The southern city of Shenzhen is already known as the “Silicon Valley of Hardware,” and the greater Shenzhen-Hong Kong area is ranked second in terms of global inventive clusters (measured by patents).
Business in China often operates at a speed and nimbleness unlike anywhere else in the world. China is fully embracing digital models, not just digitizing old models. Its lack of legacy systems has already enabled it to leapfrog the West in areas such as digital payments, the sharing economy (dockless bicycles are sweeping the world), and e-commerce.
Total spending on R&D in China (as a percentage of GDP) more than doubled from 0.9% in 2000 to 2.1% in 2016. To date, the increase has mostly been focused on applied research and commercial development, with only 5% dedicated to basic science. Nevertheless, China ranked 22nd in the 2017 Global Innovation Index (a survey of 127 countries and economies based on 81 indicators) ahead of Spain, Italy, and Australia. China’s share of high-impact academic publications (the top 0.1% of papers in Scopus, which rates by citations) has grown, from less than 1% in 1997 to about 20% in 2016.
The sheer volume of university graduates (6.2 million in 2012, six times the 2001 total) combined with an internationally trained, highly skilled diaspora whose members return home in large numbers – there are 800,000 Chinese students in tertiary education abroad – is likely to produce enough talent to achieve the desired effect.
American workers are still considerably more productive than their Chinese counterparts. On average, each Chinese worker generates only about 19% of the amount of GDP that an American worker does. But this lead is being eroded.
Other factors in America’s favor include 30 of the top 100 universities in the world, a risk-taking, entrepreneurial culture, and its companies’ heavy exposure to market forces. Traditionally, this has driven US firms to compete aggressively, often relying on innovation.
But American industry is not as dynamic as it once was. Between 1997 and 2012, two-thirds of America’s industries experienced an increase in market concentration, and a record 74% of employees are working at these aging (16 years or older) incumbents.
US President Donald Trump’s administration seems to have completely misunderstood what is needed. Trump favors a more protectionist future, which would take the pressure off US companies to be globally competitive or truly innovative. American universities are being undermined by changes in the tax code and impending spending cuts – part of what appears to be a broader war on science. And immigration – an essential source of talent and ideas – looks likely to be restricted.
Given its own policies, and those of the US, China is on track to become the world’s innovation leader. By the end of 2018, it will be more apparent just how quickly and easily this latest chapter in the Chinese success story will be written.
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[[Color Slides for Better View of the Charts|http://pan.baidu.com/s/1pKQePbP]]
!General
#[[Tradingeconomics|https://tradingeconomics.com/]]
#[[National Bureau of Statistics of China|http://www.stats.gov.cn/english/statisticaldata/annualdata/]]
#[[Weekly Calendar|https://wallstreetcn.com/calendar]]
#[[中国月度数据|http://data.eastmoney.com/cjsj/xfp.html]]
#[[US Economic Statistics Monthly|https://home.treasury.gov/system/files/226/monthly_ECONOMIC_DATA_TABLES.PDF]]
#[[Federal Reserve Beige Book (8 Publications/Year)|https://www.federalreserve.gov/monetarypolicy/beige-book-default.htm]]
!Fiscal
#[[USA: Fiscal Expenditures|https://www.usaspending.gov/#/explorer/budget_function]]
#[[USA: Major Foreign Holders of Treasury Securities|http://ticdata.treasury.gov/Publish/mfh.txt]]
!Housing
#[[USA New Home Sales|https://www.census.gov/econ/currentdata/dbsearch?program=RESSALES&startYear=1963&endYear=2018&categories=SOLD&dataType=TOTAL&geoLevel=US¬Adjusted=1&submit=GET+DATA&releaseScheduleId=#line]]
#[[Hong Kong Property Market Data|https://data.gov.hk/en-data/dataset/hk-rvd-tsinfo_rvd-property-market-statistics]]
!Money
#[[Historical Federal Funds Rate Target|http://www.fedprimerate.com/fedfundsrate/federal_funds_rate_history.htm#current]]
#[[Libor USA and others|http://www.economagic.com/libor.htm#US]]
#[[USA: Treasury Yield Curve|https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield]]
#[[St. Louis Fed Real Interest Rate|https://fred.stlouisfed.org/series/DFII5]]
!Capital Flow
#[[USA Treasury International Capital Monthly Data|https://www.treasury.gov/resource-center/data-chart-center/tic/Pages/ticpress.aspx#1]]
!Leading Indicators
#[[Economic Cycle Research Institute Weekly Leading Index|https://www.businesscycle.com/ecri-reports-indexes/all-indexes#]]
#[[Philadelphia Fed Business Outlook Survey|https://www.phil.frb.org/research-and-data/regional-economy/business-outlook-survey/]]
!Currencies
#[[USDCNY|https://tradingeconomics.com/china/currency]]
!Commodities
#[[Brent Crude Oil|https://tradingeconomics.com/commodity/brent-crude-oil]]
#[[Copper Cash Market|https://www.marketscreener.com/LME-COPPER-CASH-16161/charts-historical/]]
#[[Gold|https://tradingeconomics.com/commodity/gold]]
Each group consists 7 persons. For a critical analysis, you should:
#Select a study/report/paper by a well-known economist or a well-known institution.
#Summarize the main arguments and conclusions.
#Criticize the questionable part of the study/report/paper.
#Make your own argument and establish your own conclusions.
#The criticism could be theoretical and/or empirical.
#You should make use of knowledge learned in this course.
#The Group Critical Analysis Report is in English (12pt fonts, main text 2 to 4 pages, additional pages for charts/tables are allowed) and is due 9:00 am on April 7, 2019.
How did Paul Krugman get it so Wrong?
John H. Cochrane[1]
@@Many friends and colleagues have asked me what I think of Paul Krugman’s New York Times Magazine article, “How did Economists get it so wrong?”
Most of all, it’s sad. Imagine this weren’t economics for a moment. Imagine this were a respected scientist turned popular writer, who says, most basically, that everything everyone has done in his field since the mid 1960s is a complete waste of time. Everything that fills its academic journals, is taught in its ~PhD programs, presented at its conferences, summarized in its graduate textbooks, and rewarded with the accolades a profession can bestow, including multiple Nobel prizes, is totally wrong. Instead, he calls for a return to the eternal verities of a rather convoluted book written in the 1930s, as taught to our author in his undergraduate introductory courses.@@ If a scientist, he might be a global-warming skeptic, an ~AIDS-HIV disbeliever, a stalwart that maybe continents don’t move after all, or that smoking isn’t that bad for you really.
It gets worse. Krugman hints at dark conspiracies, claiming “dissenters are marginalized.” Most of the article is just a calumnious personal attack on an ever-growing enemies list, which now includes “new Keyenesians” such as Olivier Blanchard and Greg Mankiw. Rather than source professional writing, he plays gotcha with out-of-context second-hand quotes from media interviews. He makes stuff up, boldly putting words in people’s mouths that run contrary to their written opinions. Even this isn’t enough: he adds cartoons to try to make his “enemies” look silly, and puts them in false and embarrassing situations. He accuses us literally of adopting ideas for pay, selling out for “sabbaticals at the Hoover institution” and fat “Wall street paychecks.” It sounds a bit paranoid.
It’s annoying to the victims, but we’re big boys and girls. It’s a disservice to New York Times readers. They depend on Krugman to read real academic literature and digest it, and they get this schlock instead. And it’s ineffective. Any astute reader knows that personal attacks and innuendo mean the author has run out of ideas.
And that’s the biggest and saddest news of this piece: Paul Krugman has no interesting ideas whatsoever about what caused our current financial and economic problems, what policies might have prevented it, or what might help us in the future, and he has no contact with people who do. “Irrationality” and “spend like a drunken sailor” are pretty superficial compared to all the fascinating things economists are writing about it these days.
What do I think? How sad.
That’s what I think, but I don’t expect you the reader to be convinced by my opinion or my reference to professional consensus. Maybe he is right. Occasionally sciences, especially social sciences, do take a wrong turn for a decade or two. I thought Keynesian economics was such a wrong turn. So let’s take a quick look at the ideas.
Krugman’s attack has two goals. First, he thinks financial markets are “inefficient,” fundamentally due to “irrational” investors, and thus prey to excessive volatility which needs government control. Second, he likes the huge “fiscal stimulus” provided by multi-trillion dollar deficits.
Efficiency.
It’s fun to say we didn’t see the crisis coming, but the central empirical prediction of the efficient markets hypothesis is precisely that nobody can tell where markets are going – neither benevolent government bureaucrats, nor crafty hedge-fund managers, nor ivory-tower academics. This is probably the best-tested proposition in all the social sciences. Krugman knows this, so all he can do is huff and puff about his dislike for a theory whose central prediction is that nobody can be a reliable soothsayer.
@@Krugman writes as if the volatility of stock prices alone disproves market efficiency, and efficient marketers just ignored it all these years. This is a canard that Paul knows better than to pass on, no matter how rhetorically convenient. (I can overlook his mixing up the CAPM and ~Black-Scholes model, but not this.) There is nothing about “efficiency” that promises “stability.” “Stable” growth would in fact be a major violation of efficiency. Efficient markets did not need to wait for “the memory of 1929 … gradually receding,” nor did we fail to read the newspapers in 1987. Data from the great depression has been included in practically all the tests. In fact, the great “equity premium puzzle” is that if efficient, stock markets don’t seem risky enough to deter more people from investing! Gene Fama’s ~PhD thesis was on “fat tails” in stock returns.@@
It is true and very well documented that asset prices move more than reasonable expectations of future cashflows. This might be because people are prey to bursts of irrational optimism and pessimism. It might also be because people’s willingness to take on risk varies over time, and is sharply lower in bad economic times. As Gene Fama pointed out in 1972, these are observationally equivalent explanations at the superficial level of staring at prices and writing magazine articles and opeds. Unless you are willing to elaborate your theory to the point that it can quantitatively describe how much and when risk premiums, or waves of “optimism” and “pessimism,” can vary, you know nothing. No theory is particularly good at that right now. Crying “bubble” is no good unless you have an operational procedure for identifying bubbles, distinguishing them from rationally low risk premiums, and not crying wolf too many years in a row.
But this difficulty is really no surprise. It’s also the central prediction of free-market economics, as crystallized by Hayek, that no academic, bureaucrat or regulator will ever be able to fully explain market price movements. Nobody knows what “fundamental” or “hold to maturity value” is. If anyone could tell what the price of tomatoes should be, let alone the price of Microsoft stock, communism would have worked.
More deeply, the economist’s job is not to “explain” market fluctuations after the fact, to give a pleasant story on the evening news about why markets went up or down. Markets up? “A wave of positive sentiment.” Markets went down? “Irrational pessimism.” (And “the risk premium must have increased” is just as empty.) Our ancestors could do that. Really, is that an improvement on “Zeus had a fight with Apollo?” Good serious behavioral economists know this, and they are circumspect in their explanatory claims so far.
But this argument takes us away from the main point. The case for free markets never was that markets are perfect. The case for free markets is that government control of markets, especially asset markets, has always been much worse. Free markets are the worst system ever devised – except for all of the others.
@@Krugman at bottom is arguing that the government should massively intervene in financial markets, and take charge of the allocation of capital. He can’t quite come out and say this, but he does say “Keynes considered it a very bad idea to let such markets…dictate important business decisions,” and “finance economists believed that we should put the capital development of the nation in the hands of what Keynes had called a `casino.’” Well, if markets can’t be trusted to allocate capital, we don’t have to connect too many dots to imagine who Paul has in mind.
To reach this conclusion, you need theory, evidence, experience, or any realistic hope that the alternative will be better. Remember, the SEC couldn’t even find Bernie Madoff when he was handed to them on a silver platter. Think of the great job Fannie, Freddie, and Congress did in the mortgage market. Is this system going to regulate Citigroup, guide financial markets to the right price, replace the stock market, and tell our society which new products are worth investment? As David Wessel’s excellent In Fed We Trust makes perfectly clear, government regulators failed just as abysmally as private investors and economists to see the storm coming. And not from any lack of smarts.@@
In fact, the behavioral view gives us a new and stronger argument against regulation and control. Regulators are just as human and irrational as market participants. If bankers are, in Krugman’s words, “idiots,” then so must be the typical treasury secretary, fed chairman, and regulatory staff. They act alone or in committees, where behavioral biases are much better documented than in market settings. They are still easily captured by industries, and face horrendously distorted incentives.
Careful behavioralists know this, and do not quickly run from “the market got it wrong” to “the government can put it all right.” Even my most behavioral colleagues Richard Thaler and Cass Sunstein in their book “Nudge” go only so far as a light libertarian paternalism, suggesting good default options on our 401(k) accounts. (And even here they’re not very clear on how the Federal Nudging Agency is going to steer clear of industry capture.) They don’t even think of jumping from irrational markets, which they believe in deeply, to Federal control of stock and house prices and allocation of capital.
Stimulus
Most of all, Krugman likes fiscal stimulus. In this quest, he accuses us and the rest of the economics profession of “mistaking beauty for truth.” He’s not that clear on what the “beauty” is that we all fell in love with, and why one should shun it. And for good reason. The first siren of beauty is simple logical consistency. Paul’s Keynesian economics requires that people make plans to consume more, invest more, and pay more taxes with the same income. The second siren is even vaguely plausible assumptions about how people behave. Keynesian economics requires that the government is able to systematically fool people again and again. It presumes that people don’t think about the future in making decisions today. Logical consistency and vaguely plausible foundations are indeed “beautiful” but to me they are also basic preconditions for “truth.”
In economics, stimulus spending ran aground on Robert Barro’s Ricardian equivalence theorem. This theorem says that debt-financed spending can’t have any effect because people, seeing the higher future taxes that must pay off the debt, will simply save more. They will buy the new government debt and leave all spending decisions unaltered. Is this theorem true? It’s a logical connection from a set of “if” to a set of “therefore.” Not even Paul can object to the connection.
Therefore, we have to examine the “ifs.” And those ifs are, as usual, obviously not true. For example, the theorem presumes lump-sum taxes, not proportional income taxes. Alas, when you take this into account we are all made poorer by deficit spending, so the multiplier is most likely negative. The theorem (like most Keynesian economics) ignores the composition of output; but surely spending money on roads rather than cars can affect the overall level.
Economists have spent a generation tossing and turning the Ricardian equivalence theorem, and assessing the likely effects of fiscal stimulus in its light, generalizing the “ifs” and figuring out the likely “therefores.” This is exactly the right way to do things. The impact of Ricardian equivalence is not that this simple abstract benchmark is literally true. The impact is that in its wake, if you want to understand the effects of government spending, you have to specify why it is false. Doing so does not lead you anywhere near old-fashioned Keynesian economics. It leads you to consider distorting taxes, estate taxes, how much people care about their children, how many people would like to borrow more to finance today’s consumption and so on. And when you find “market failures” that might justify a multiplier, that analysis quickly suggests direct fixes for the market failures, not their exploitation along the lines Keynes suggested. Most “New Keynesian” analysis that add frictions don’t produce big multipliers.
This is how real thinking about stimulus actually proceeds. Nobody ever “asserted that an increase in government spending cannot, under any circumstances, increase employment.” This is unsupportable by any serious review of professional writings, and Krugman knows it. (My own are perfectly clear on lots of possibilities for an answer that is not zero.) But thinking through this sort of thing and explaining it is so much harder than just tarring your enemies with out-of-context quotes, ethical innuendo, or silly cartoons.
In fact, I propose that Krugman himself doesn’t really believe the Keynesian logic for that stimulus. I doubt he would follow that logic to its inevitable conclusions. Stimulus must have some other attraction to him.
If you believe the Keynesian argument for stimulus, you should think Bernie Madoff is a hero. Seriously. He took money from people who were saving it, and gave it to people who most assuredly were going to spend it. Each dollar so transferred, in Krugman’s world, generates an additional dollar and a half of national income. The analogy is even closer. Madoff didn’t just take money from his savers, he really borrowed it from them, giving them phony accounts with promises of great profits to come. This looks a lot like government debt.
If you believe the Keynesian argument for stimulus, you don’t care how the money is spent. All this puffery about “infrastructure,” monitoring, wise investment, jobs “created” and so on is pointless. Keynes thought the government should pay people to dig ditches and fill them up.
If believe in Keynesian stimulus, you don’t even care if the government spending money is stolen. Actually, that would be better. Thieves have notoriously high propensities to consume.
The crash.
Krugman’s article is supposedly about how the crash and recession changed our thinking, and what economics has to say about it. The most amazing piece of news in the whole article is that Paul Krugman has absolutely no idea about what caused the crash, what policies might have prevented it, and what policies we should adopt going forward. Furthermore, he seems completely unaware of the large body of work by economists who actually do know something about the banking and financial system, and have been thinking about it productively for a generation.
Here’s all he has to say: “Irrationality” caused markets to go up and then down. “Spending” then declined, for unclear reasons, possibly “irrational” as well. The sum total of his policy recommendations is for the Federal Government to spend like a drunken sailor after the fact.
Paul, there was a financial crisis, a classic near-run on banks. The centerpiece of our crash was not the relatively free stock or real estate markets, it was the highly regulated commercial banks. A generation of economists has thought really hard about these kinds of events. Look up Diamond, Rajan, Gorton, Kashyap, Stein, and so on. They’ve thought about why there is so much short term debt, why banks run, how deposit insurance and credit guarantees help, but how they give incentives for excessive risk taking.
If we want to think about events and policies, this seems like more than a minor detail. The hard and central policy debate over the last year was how to manage this financial crisis. Now it is how to set up the incentives of banks and other financial institutions so this mess doesn’t happen again. There’s lots of good and subtle economics here that New York Times readers might like to know about. What does Krugman have to say? Zero.
Krugman doesn’t even have anything to say about the Fed. Ben Bernanke did a lot more last year than set the funds rate to zero and then go off on vacation and wait for fiscal policy to do its magic. Leaving aside the string of bailouts, the Fed started term lending to securities dealers. Then, rather than buy treasuries in exchange for reserves, it essentially sold treasuries in exchange for private debt. Though the funds rate was near zero, the Fed noticed huge commercial paper and securitized debt spreads, and intervened in those markets. There is no “the” interest rate anymore, the Fed is managing them all. Recently the Fed has started buying massive quantities of mortgage-backed securities and long-term treasury debt.
Monetary policy now has little to do with “money” vs. “bonds” with all the latter lumped together. Monetary policy has become financial policy. Does any of this work? What are the dangers? Can the Fed stay independent in this new role? These are the questions of our time. What does Krugman have to say? Nothing.
Or perhaps Krugman’s point is that a cabal of obvious crackpots bedazzled all of macroeconomics with the beauty of their mathematics, to the point of inducing policy paralysis. Alas, that won’t stick. The sad fact is that few in Washington pay the slightest attention to neo-classical or intertemporal ideas. Paul’s simple Keynesianism has dominated policy analysis for decades and continues to do so. From the CEA to the Fed to the OMB and CBO, everyone just adds up consumer, investment and government “demand” to forecast output and uses simple Phillips curves to think about inflation. If a failure of ideas caused bad policy, it’s Keynes’ ideas that failed.
The future of economics.
How should economics change? Krugman argues for three incompatible changes.
@@First, Krugman argues for a future of economics that “recognizes flaws and frictions,” and incorporates alternative assumptions about behavior, especially towards risk-taking. To which I say, “Hello, Paul, where have you been for the last 30 years?” Macroeconomists have not spent 30 years admiring the eternal verities of Kydland and Prescott’s 1982 paper. Pretty much all we have been doing for 30 years is introducing flaws, frictions and new behaviors, especially new models of attitudes to risk, and comparing the resulting models, quantitatively, to data. The long literature on financial crises and banking which Krugman does not mention has been doing exactly this bidding for the same time.@@
Second, Krugman argues that “a more or less Keynesian view is the only plausible game in town,” and “Keynesian economics remains the best framework we have for making sense of recessions and depressions.” One thing is pretty clear by now, that when economics incorporates flaws and frictions, the result will not be to rehabilitate an 80-year-old book. As Paul bemoans, the “new Keynesians” who did just what he asks, putting Keynes inspired price-stickiness into logically coherent models, ended up with something that looked a lot more like monetarism. (Actually, though this is the consensus, my own work finds that new-Keynesian economics ended up with something much different and more radical than monetarism.) A science that moves forward almost never ends up back where it started. Einstein revises Newton, but does not send you back to Aristotle. At best you can play the fun game of hunting for inspirational quotes, but that doesn’t mean much.
Third, and most surprising, is Krugman’s Luddite attack on mathematics; “economists as a group, mistook beauty, clad in impressive-looking mathematics, for truth.” Models are “gussied up with fancy equations.” I’m old enough to remember when Krugman was young, working out the interactions of game theory and increasing returns in international trade, and the old guard tut-tutted “nice recreational mathematics, but not real-world at all.” How quickly time passes.
Again, what is the alternative? Does Krugman really think we can make progress on his – and my – agenda for economic and financial research — understanding frictions, imperfect markets, complex human behavior, institutional rigidities – by reverting to a literary style of exposition, and abandoning the attempt to compare theories quantitatively against data? Against the worldwide tide of quantification in all fields of human endeavor (read “Moneyball”) is there any real hope that this will work in economics?
No, the problem is that we don’t have enough math. Math in economics serves to keep the logic straight, to make sure that the “then” really does follow the “if,” which it so frequently does not if you just write prose. The challenge is how hard it is to write down explicit artificial economies with these ingredients, actually solve them, in order to see what makes them tick. Frictions are just bloody hard with the mathematical tools we have now.
The insults.
The level of personal attack in this article, and fudging of the facts to achieve it, is simply amazing.
As one little example (ok, I’m a bit sensitive), take my quotation about carpenters in Nevada. I didn’t write this. It’s a quote, taken out of context, from a bloomberg.com article written by a rather dense reporter who I spent about 10 hours with patiently trying to explain some basics. (It’s the last time I’ll do that!) I was trying to explain how sectoral shifts contribute to unemployment. Krugman follows it by a lie — I never asserted that “it take mass unemployment across the whole nation to get carpenters to move out of Nevada.” You can’t even dredge up a quote for that monstrosity.
What’s the point? I don’t think Paul disagrees that sectoral shifts result in some unemployment, so the quote actually makes sense as economics. The only point is to make me, personally, seem heartless — a pure, personal, calumnious attack, having nothing to do with economics.
Bob Lucas has written extensively on Keynesian and monetarist economics, sensibly and even-handedly. Krugman chooses to quote a joke, made back in 1980 at a lunch talk to some business school alumni. Really, this is on the level of the picture of Barack Obama with Bill Ayres that Sean Hannity likes to show on Fox News.
It goes on. Krugman asserts that I and others “believe” “that an increase in government spending cannot, under any circumstances, increase employment,” or that we “argued that price fluctuations and shocks to demand actually had nothing to do with the business cycle.” These are just gross distortions, unsupported by any documentation, let alone professional writing. And Krugman knows better. All economic models are simplified to exhibit one point; we all understand the real world is more complicated; and his job is supposed to be to explain that to lay readers. It would be no different than if we were to look up Paul’s early work which assumed away transport costs and claim “Paul Krugman believes ocean shipping is free, how stupid” in the Wall Street Journal.
Of course the idea that any of us do what we do because we’re paid off by fancy Wall Street salaries or cushy sabbaticals at Hoover is just ridiculous. (If Krugman knew anything about hedge funds he’d know that believing in efficient markets disqualifies you for employment. Nobody wants a guy who thinks you can’t make any money trading!) And given Krugman’s speaking fees and how much the looney right likes him, it’s a surprising first stone for him to cast.
Apparently, salacious prose, ethical innuendo, calumny, and selective quotation from media aren’t enough: Krugman added cartoons to try to make opponents look silly. The Lucas-Blanchard-Bernanke conspiratorial cocktail party celebrating the end of recessions is a fiction. So is their despondent gloom on reading “recession” in the paper. Nobody at a conference looks like Dr. Pangloss with wild hair and a suit from the 1800s. (OK, Randy Wright has the hair, but not the suit.) Keynes did not reappear at the NBER to be booed as an “outsider.” Why are you allowed to make things up in pictures that wouldn’t pass even the Times’ weak fact-checking in words?
Well, perhaps we got off easy. This all was mild compared to Krugman’s vicious obituary of Milton Friedman in the New York Review of Books. But most of all, Paul isn’t doing his job. He’s supposed to read, explain, and criticize things economists write, and preferably real professional writing, not interviews, opeds and blog posts. At a minimum, this leads to the unavoidable conclusion that Krugman simply isn’t reading real economics anymore. Well, the equations are hard. But most of all, who cares about Paul’s character assassination attempts of us boring and politically unimportant academics?
How did Krugman get it so wrong?
So what is Krugman up to? Why become a denier, a skeptic, an apologist for 70 year old ideas, replete with well-known logical fallacies, a pariah? Why publish an essentially personal attack on an ever-growing enemies list that now includes practically every professional economist? Why publish an incoherent vision for the future of economics?
The only explanation that makes sense to me is that Krugman isn’t trying to be an economist, he is trying to be a partisan, political opinion writer. This is not an insult. I read George Will, Charles Krauthnammer and Frank Rich with equal pleasure even when I disagree with them. Krugman wants to be Rush Limbaugh of the Left. I still want to be Milton Friedman, but each is a worthy calling.
Alas, to Krugman, as to far too many ex-economists in partisan debates, economics is not a quest for understanding. It is a set of debating points to argue for policies that one has adopted for partisan political purposes. “Stimulus” is just marketing with which to sell voters on a package of government spending priorities that you want for political reasons. It’s not a proposition to be explained, understood, taken seriously to its logical limits, or reflective of market failures that should be addressed directly. To my mind, Krugman left the world of economics when, in the California electricity crisis, he argued that supply curves slope down; that a price cap, desired by his political constituency, would increase electricity supplies. That position served the political goal no matter how tortured the economics. This is more of the same.
Why argue for a nonsensical future for economics? Well, again, if you don’t regard economics as a science, a discipline that ought to result in quantitative matches to data, a discipline that requires crystal-clear logical connections between the “if” and the “then,” if the point of economics is merely to provide marketing and propaganda for politically-motivated policy, then it all does make sense. It makes sense to appeal to some future economics – not yet worked out, even verbally –disdain quantification and comparison to data, and to appeal to the authority of ancient books as interpreted you, their lone remaining apostle.
Most of all, this is the only reason I can come up with to understand why Krugman wants to write personal attacks on those who disagree with him. I like it when people disagree with me, and take time to read my work and criticize it. At worst I learn how to position it better. At best, I discover I was wrong and learn something. I send a polite thank you note.
Krugman wants people to swallow his arguments whole from his authority, without demanding logic, or evidence. Those who disagree with him, alas, are pretty smart and have pretty good arguments if you bother to read them. So, he tries to discredit them with personal attacks.
This is the political sphere, not the intellectual one. Don’t argue with them, swift-boat them. Find some embarrassing quote from an old interview. Well, good luck, Paul. Let’s just not pretend this has anything to do with economics, or actual truth about how the world works or could be made a better place.
[1] University of Chicago Booth School of Business. Many colleagues and friends helped, but I don’t want to name them for obvious reasons. Please don’t bother emailing me to tell me what a jerk I am.
September 6, 2009
How Did Economists Get It So Wrong?
By PAUL KRUGMAN
I. MISTAKING BEAUTY FOR TRUTH
@@It’s hard to believe now, but not long ago economists were congratulating themselves over the success of their field. Those successes — or so they believed — were both theoretical and practical, leading to a golden era for the profession. On the theoretical side, they thought that they had resolved their internal disputes. Thus, in a 2008 paper titled “The State of Macro” (that is, macroeconomics, the study of big-picture issues like recessions), Olivier Blanchard of M.I.T., now the chief economist at the International Monetary Fund, declared that “the state of macro is good.” The battles of yesteryear, he said, were over, and there had been a “broad convergence of vision.” And in the real world, economists believed they had things under control: the “central problem of depression-prevention has been solved,” declared Robert Lucas of the University of Chicago in his 2003 presidential address to the American Economic Association. In 2004, Ben Bernanke, a former Princeton professor who is now the chairman of the Federal Reserve Board, celebrated the Great Moderation in economic performance over the previous two decades, which he attributed in part to improved economic policy making.
Last year, everything came apart.
Few economists saw our current crisis coming, but this predictive failure was the least of the field’s problems. More important was the profession’s blindness to the very possibility of catastrophic failures in a market economy.@@ During the golden years, financial economists came to believe that markets were inherently stable — indeed, that stocks and other assets were always priced just right. There was nothing in the prevailing models suggesting the possibility of the kind of collapse that happened last year. Meanwhile, macroeconomists were divided in their views. But the main division was between those who insisted that free-market economies never go astray and those who believed that economies may stray now and then but that any major deviations from the path of prosperity could and would be corrected by the all-powerful Fed. Neither side was prepared to cope with an economy that went off the rails despite the Fed’s best efforts.
@@And in the wake of the crisis, the fault lines in the economics profession have yawned wider than ever. Lucas says the Obama administration’s stimulus plans are “schlock economics,” and his Chicago colleague John Cochrane says they’re based on discredited “fairy tales.” In response, Brad DeLong of the University of California, Berkeley, writes of the “intellectual collapse” of the Chicago School, and I myself have written that comments from Chicago economists are the product of a Dark Age of macroeconomics in which hard-won knowledge has been forgotten.@@
What happened to the economics profession? And where does it go from here?
@@As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth.@@ Until the Great Depression, most economists clung to a vision of capitalism as a perfect or nearly perfect system. That vision wasn’t sustainable in the face of mass unemployment, but as memories of the Depression faded, economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations. The renewed romance with the idealized market was, to be sure, partly a response to shifting political winds, partly a response to financial incentives. But while sabbaticals at the Hoover Institution and job opportunities on Wall Street are nothing to sneeze at, the central cause of the profession’s failure was the desire for an all-encompassing, intellectually elegant approach that also gave economists a chance to show off their mathematical prowess.
Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets — especially financial markets — that can cause the economy’s operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don’t believe in regulation.
It’s much harder to say where the economics profession goes from here. But what’s almost certain is that economists will have to learn to live with messiness. That is, they will have to acknowledge the importance of irrational and often unpredictable behavior, face up to the often idiosyncratic imperfections of markets and accept that an elegant economic “theory of everything” is a long way off. In practical terms, this will translate into more cautious policy advice — and a reduced willingness to dismantle economic safeguards in the faith that markets will solve all problems.
@@II. FROM SMITH TO KEYNES AND BACK
The birth of economics as a discipline is usually credited to Adam Smith, who published “The Wealth of Nations” in 1776. Over the next 160 years an extensive body of economic theory was developed, whose central message was: Trust the market. Yes, economists admitted that there were cases in which markets might fail, of which the most important was the case of “externalities” — costs that people impose on others without paying the price, like traffic congestion or pollution. But the basic presumption of “neoclassical” economics (named after the late-19th-century theorists who elaborated on the concepts of their “classical” predecessors) was that we should have faith in the market system.
This faith was, however, shattered by the Great Depression. @@Actually, even in the face of total collapse some economists insisted that whatever happens in a market economy must be right: “Depressions are not simply evils,” declared Joseph Schumpeter in 1934 — 1934! They are, he added, “forms of something which has to be done.” But many, and eventually most, economists turned to the insights of John Maynard Keynes for both an explanation of what had happened and a solution to future depressions.
@@Keynes@@ did not, despite what you may have heard, want the government to run the economy. He described his analysis in his 1936 masterwork, “The General Theory of Employment, Interest and Money,” as “moderately conservative in its implications.” He @@wanted to fix capitalism, not replace it. But he did challenge the notion that free-market economies can function without a minder, expressing particular contempt for financial markets, which he viewed as being dominated by short-term speculation with little regard for fundamentals. And he called for active government intervention — printing more money and, if necessary, spending heavily on public works — to fight unemployment during slumps.@@
It’s important to understand that Keynes did much more than make bold assertions. “The General Theory” is a work of profound, deep analysis — analysis that persuaded the best young economists of the day. Yet the story of economics over the past half century is, to a large degree, the story of a retreat from Keynesianism and a return to neoclassicism. The neoclassical revival was initially led by Milton Friedman of the University of Chicago, who asserted as early as 1953 that neoclassical economics works well enough as a description of the way the economy actually functions to be “both extremely fruitful and deserving of much confidence.” But what about depressions?
@@Friedman’s counterattack against Keynes began with the doctrine known as monetarism.@@ Monetarists didn’t disagree in principle with the idea that a market economy needs deliberate stabilization. “We are all Keynesians now,” Friedman once said, although he later claimed he was quoted out of context. @@Monetarists asserted, however, that a very limited, circumscribed form of government intervention — namely, instructing central banks to keep the nation’s money supply, the sum of cash in circulation and bank deposits, growing on a steady path — is all that’s required to prevent depressions. Famously, Friedman and his collaborator, Anna Schwartz, argued that if the Federal Reserve had done its job properly, the Great Depression would not have happened. Later, Friedman made a compelling case against any deliberate effort by government to push unemployment below its “natural” level (currently thought to be about 4.8 percent in the United States): excessively expansionary policies, he predicted, would lead to a combination of inflation and high unemployment — a prediction that was borne out by the stagflation of the 1970s, which greatly advanced the credibility of the anti-Keynesian movement.@@
@@Eventually, however, the anti-Keynesian counterrevolution went far beyond Friedman’s position, which came to seem relatively moderate compared with what his successors were saying. Among financial economists, Keynes’s disparaging vision of financial markets as a “casino” was replaced by “efficient market” theory, which asserted that financial markets always get asset prices right given the available information. Meanwhile, many macroeconomists completely rejected Keynes’s framework for understanding economic slumps. Some returned to the view of Schumpeter and other apologists for the Great Depression, viewing recessions as a good thing, part of the economy’s adjustment to change. And even those not willing to go that far argued that any attempt to fight an economic slump would do more harm than good.@@
Not all macroeconomists were willing to go down this road: many became self-described @@New Keynesians, who continued to believe in an active role for the government.@@ Yet even they mostly accepted the notion that investors and consumers are rational and that markets generally get it right.
Of course, there were exceptions to these trends: a few economists challenged the assumption of rational behavior, questioned the belief that financial markets can be trusted and pointed to the long history of financial crises that had devastating economic consequences. But they were swimming against the tide, unable to make much headway against a pervasive and, in retrospect, foolish complacency.
III. PANGLOSSIAN FINANCE
In the 1930s, financial markets, for obvious reasons, didn’t get much respect. Keynes compared them to “those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those that he thinks likeliest to catch the fancy of the other competitors.”
And Keynes considered it a very bad idea to let such markets, in which speculators spent their time chasing one another’s tails, dictate important business decisions: “When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”
@@By 1970 or so, however, the study of financial markets seemed to have been taken over by Voltaire’s Dr. Pangloss, who insisted that we live in the best of all possible worlds. Discussion of investor irrationality, of bubbles, of destructive speculation had virtually disappeared from academic discourse. The field was dominated by the “efficient-market hypothesis,” promulgated by Eugene Fama of the University of Chicago, which claims that financial markets price assets precisely at their intrinsic worth given all publicly available information. (The price of a company’s stock, for example, always accurately reflects the company’s value given the information available on the company’s earnings, its business prospects and so on.) And by the 1980s, finance economists, notably Michael Jensen of the Harvard Business School, were arguing that because financial markets always get prices right, the best thing corporate chieftains can do, not just for themselves but for the sake of the economy, is to maximize their stock prices. In other words, finance economists believed that we should put the capital development of the nation in the hands of what Keynes had called a “casino.”@@
It’s hard to argue that this transformation in the profession was driven by events. True, the memory of 1929 was gradually receding, but there continued to be bull markets, with widespread tales of speculative excess, followed by bear markets. In 1973-4, for example, stocks lost 48 percent of their value. And the 1987 stock crash, in which the Dow plunged nearly 23 percent in a day for no clear reason, should have raised at least a few doubts about market rationality.
These events, however, which Keynes would have considered evidence of the unreliability of markets, did little to blunt the force of a beautiful idea. @@The theoretical model that finance economists developed by assuming that every investor rationally balances risk against reward — the so-called Capital Asset Pricing Model, or CAPM (pronounced cap-em) — is wonderfully elegant. And if you accept its premises it’s also extremely useful. CAPM not only tells you how to choose your portfolio — even more important from the financial industry’s point of view, it tells you how to put a price on financial derivatives, claims on claims.@@ The elegance and apparent usefulness of the new theory led to a string of Nobel prizes for its creators, and many of the theory’s adepts also received more mundane rewards: @@Armed with their new models and formidable math skills — the more arcane uses of CAPM require physicist-level computations — mild-mannered business-school professors could and did become Wall Street rocket scientists, earning Wall Street paychecks.@@
To be fair, finance theorists didn’t accept the efficient-market hypothesis merely because it was elegant, convenient and lucrative. They also produced a great deal of statistical evidence, which at first seemed strongly supportive. But this evidence was of an oddly limited form. Finance economists rarely asked the seemingly obvious (though not easily answered) question of whether asset prices made sense given real-world fundamentals like earnings. Instead, they asked only whether asset prices made sense given other asset prices. Larry Summers, now the top economic adviser in the Obama administration, once mocked finance professors with a parable about “ketchup economists” who “have shown that two-quart bottles of ketchup invariably sell for exactly twice as much as one-quart bottles of ketchup,” and conclude from this that the ketchup market is perfectly efficient.
But neither this mockery nor more polite critiques from economists like Robert Shiller of Yale had much effect. Finance theorists continued to believe that their models were essentially right, and so did many people making real-world decisions. Not least among these was Alan Greenspan, who was then the Fed chairman and a long-time supporter of financial deregulation whose rejection of calls to rein in subprime lending or address the ever-inflating housing bubble rested in large part on the belief that modern financial economics had everything under control. There was a telling moment in 2005, at a conference held to honor Greenspan’s tenure at the Fed. One brave attendee, Raghuram Rajan (of the University of Chicago, surprisingly), presented a paper warning that the financial system was taking on potentially dangerous levels of risk. He was mocked by almost all present — including, by the way, Larry Summers, who dismissed his warnings as “misguided.”
By October of last year, however, Greenspan was admitting that he was in a state of “shocked disbelief,” because “the whole intellectual edifice” had “collapsed.” Since this collapse of the intellectual edifice was also a collapse of real-world markets, the result was a severe recession — the worst, by many measures, since the Great Depression. What should policy makers do? Unfortunately, macroeconomics, which should have been providing clear guidance about how to address the slumping economy, was in its own state of disarray.
IV. THE TROUBLE WITH MACRO
“We have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand. The result is that our possibilities of wealth may run to waste for a time — perhaps for a long time.” So wrote John Maynard Keynes in an essay titled “The Great Slump of 1930,” in which he tried to explain the catastrophe then overtaking the world. And the world’s possibilities of wealth did indeed run to waste for a long time; it took World War II to bring the Great Depression to a definitive end.
Why was Keynes’s diagnosis of the Great Depression as a “colossal muddle” so compelling at first? And why did economics, circa 1975, divide into opposing camps over the value of Keynes’s views?
I like to explain the essence of Keynesian economics with a true story that also serves as a parable, a small-scale version of the messes that can afflict entire economies. Consider the travails of the Capitol Hill Baby-Sitting Co-op.
This co-op, whose problems were recounted in a 1977 article in The Journal of Money, Credit and Banking, was an association of about 150 young couples who agreed to help one another by baby-sitting for one another’s children when parents wanted a night out. To ensure that every couple did its fair share of baby-sitting, the co-op introduced a form of scrip: coupons made out of heavy pieces of paper, each entitling the bearer to one half-hour of sitting time. Initially, members received 20 coupons on joining and were required to return the same amount on departing the group.
Unfortunately, it turned out that the co-op’s members, on average, wanted to hold a reserve of more than 20 coupons, perhaps, in case they should want to go out several times in a row. As a result, relatively few people wanted to spend their scrip and go out, while many wanted to baby-sit so they could add to their hoard. But since baby-sitting opportunities arise only when someone goes out for the night, this meant that baby-sitting jobs were hard to find, which made members of the co-op even more reluctant to go out, making baby-sitting jobs even scarcer. . . .
In short, the co-op fell into a recession.
O.K., what do you think of this story? Don’t dismiss it as silly and trivial: economists have used small-scale examples to shed light on big questions ever since Adam Smith saw the roots of economic progress in a pin factory, and they’re right to do so. The question is whether this particular example, in which a recession is a problem of inadequate demand — there isn’t enough demand for baby-sitting to provide jobs for everyone who wants one — gets at the essence of what happens in a recession.
Forty years ago most economists would have agreed with this interpretation. But since then macroeconomics has divided into two great factions: “saltwater” economists (mainly in coastal U.S. universities), who have a more or less Keynesian vision of what recessions are all about; and “freshwater” economists (mainly at inland schools), who consider that vision nonsense.
Freshwater economists are, essentially, neoclassical purists. They believe that all worthwhile economic analysis starts from the premise that people are rational and markets work, a premise violated by the story of the baby-sitting co-op. As they see it, a general lack of sufficient demand isn’t possible, because prices always move to match supply with demand. If people want more baby-sitting coupons, the value of those coupons will rise, so that they’re worth, say, 40 minutes of baby-sitting rather than half an hour — or, equivalently, the cost of an hours’ baby-sitting would fall from 2 coupons to 1.5. And that would solve the problem: the purchasing power of the coupons in circulation would have risen, so that people would feel no need to hoard more, and there would be no recession.
But don’t recessions look like periods in which there just isn’t enough demand to employ everyone willing to work? Appearances can be deceiving, say the freshwater theorists. Sound economics, in their view, says that overall failures of demand can’t happen — and that means that they don’t. Keynesian economics has been “proved false,” Cochrane, of the University of Chicago, says.
@@Yet recessions do happen. Why? In the 1970s the leading freshwater macroeconomist, the Nobel laureate Robert Lucas, argued that recessions were caused by temporary confusion: workers and companies had trouble distinguishing overall changes in the level of prices because of inflation or deflation from changes in their own particular business situation. And Lucas warned that any attempt to fight the business cycle would be counterproductive: activist policies, he argued, would just add to the confusion.
By the 1980s, however, even this severely limited acceptance of the idea that recessions are bad things had been rejected by many freshwater economists. Instead, the new leaders of the movement, especially Edward Prescott, who was then at the University of Minnesota (you can see where the freshwater moniker comes from), argued that price fluctuations and changes in demand actually had nothing to do with the business cycle. Rather, the business cycle reflects fluctuations in the rate of technological progress, which are amplified by the rational response of workers, who voluntarily work more when the environment is favorable and less when it’s unfavorable. Unemployment is a deliberate decision by workers to take time off.@@
Put baldly like that, this theory sounds foolish — @@was the Great Depression really the Great Vacation? And to be honest, I think it really is silly.@@ But the basic premise of Prescott’s “real business cycle” theory was embedded in ingeniously constructed mathematical models, which were mapped onto real data using sophisticated statistical techniques, and the theory came to dominate the teaching of macroeconomics in many university departments. In 2004, reflecting the theory’s influence, Prescott shared a Nobel with Finn Kydland of Carnegie Mellon University.
@@Meanwhile, saltwater economists balked. Where the freshwater economists were purists, saltwater economists were pragmatists. While economists like N. Gregory Mankiw at Harvard, Olivier Blanchard at M.I.T. and David Romer at the University of California, Berkeley, acknowledged that it was hard to reconcile a Keynesian demand-side view of recessions with neoclassical theory, they found the evidence that recessions are, in fact, demand-driven too compelling to reject. So they were willing to deviate from the assumption of perfect markets or perfect rationality, or both, adding enough imperfections to accommodate a more or less Keynesian view of recessions. And in the saltwater view, active policy to fight recessions remained desirable.@@
But the self-described New Keynesian economists weren’t immune to the charms of rational individuals and perfect markets. They tried to keep their deviations from neoclassical orthodoxy as limited as possible. This meant that there was no room in the prevailing models for such things as bubbles and banking-system collapse. The fact that such things continued to happen in the real world — there was a terrible financial and macroeconomic crisis in much of Asia in 1997-8 and a depression-level slump in Argentina in 2002 — wasn’t reflected in the mainstream of New Keynesian thinking.
Even so, you might have thought that the differing worldviews of freshwater and saltwater economists would have put them constantly at loggerheads over economic policy. Somewhat surprisingly, however, between around 1985 and 2007 the disputes between freshwater and saltwater economists were mainly about theory, not action. The reason, I believe, is that New Keynesians, unlike the original Keynesians, didn’t think fiscal policy — changes in government spending or taxes — was needed to fight recessions. They believed that monetary policy, administered by the technocrats at the Fed, could provide whatever remedies the economy needed. At a 90th birthday celebration for Milton Friedman, Ben Bernanke, formerly a more or less New Keynesian professor at Princeton, and by then a member of the Fed’s governing board, declared of the Great Depression: “You’re right. We did it. We’re very sorry. But thanks to you, it won’t happen again.” The clear message was that all you need to avoid depressions is a smarter Fed.
And as long as macroeconomic policy was left in the hands of the maestro Greenspan, without Keynesian-type stimulus programs, freshwater economists found little to complain about. (They didn’t believe that monetary policy did any good, but they didn’t believe it did any harm, either.)
It would take a crisis to reveal both how little common ground there was and how Panglossian even New Keynesian economics had become.
V. NOBODY COULD HAVE PREDICTED . . .
In recent, rueful economics discussions, an all-purpose punch line has become “nobody could have predicted. . . .” It’s what you say with regard to disasters that could have been predicted, should have been predicted and actually were predicted by a few economists who were scoffed at for their pains.
Take, for example, the precipitous rise and fall of housing prices. Some economists, notably Robert Shiller, did identify the bubble and warn of painful consequences if it were to burst. Yet key policy makers failed to see the obvious. In 2004, Alan Greenspan dismissed talk of a housing bubble: “a national severe price distortion,” he declared, was “most unlikely.” Home-price increases, Ben Bernanke said in 2005, “largely reflect strong economic fundamentals.”
How did they miss the bubble? To be fair, interest rates were unusually low, possibly explaining part of the price rise. It may be that Greenspan and Bernanke also wanted to celebrate the Fed’s success in pulling the economy out of the 2001 recession; conceding that much of that success rested on the creation of a monstrous bubble would have placed a damper on the festivities.
@@But there was something else going on: a general belief that bubbles just don’t happen. What’s striking, when you reread Greenspan’s assurances, is that they weren’t based on evidence — they were based on the a priori assertion that there simply can’t be a bubble in housing. And the finance theorists were even more adamant on this point. In a 2007 interview, Eugene Fama, the father of the efficient-market hypothesis, declared that “the word ‘bubble’ drives me nuts,” and went on to explain why we can trust the housing market: “Housing markets are less liquid, but people are very careful when they buy houses. It’s typically the biggest investment they’re going to make, so they look around very carefully and they compare prices. The bidding process is very detailed.”@@
Indeed, home buyers generally do carefully compare prices — that is, they compare the price of their potential purchase with the prices of other houses. But this says nothing about whether the overall price of houses is justified. It’s ketchup economics, again: because a two-quart bottle of ketchup costs twice as much as a one-quart bottle, finance theorists declare that the price of ketchup must be right.
In short, the belief in efficient financial markets blinded many if not most economists to the emergence of the biggest financial bubble in history. And efficient-market theory also played a significant role in inflating that bubble in the first place.
Now that the undiagnosed bubble has burst, the true riskiness of supposedly safe assets has been revealed and the financial system has demonstrated its fragility. U.S. households have seen $13 trillion in wealth evaporate. More than six million jobs have been lost, and the unemployment rate appears headed for its highest level since 1940. So what guidance does modern economics have to offer in our current predicament? And should we trust it?
VI. THE STIMULUS SQUABBLE
Between 1985 and 2007 a false peace settled over the field of macroeconomics. There hadn’t been any real convergence of views between the saltwater and freshwater factions. But these were the years of the Great Moderation — an extended period during which inflation was subdued and recessions were relatively mild. Saltwater economists believed that the Federal Reserve had everything under control. Fresh­water economists didn’t think the Fed’s actions were actually beneficial, but they were willing to let matters lie.
But the crisis ended the phony peace. Suddenly the narrow, technocratic policies both sides were willing to accept were no longer sufficient — and the need for a broader policy response brought the old conflicts out into the open, fiercer than ever.
Why weren’t those narrow, technocratic policies sufficient? The answer, in a word, is zero.
During a normal recession, the Fed responds by buying Treasury bills — short-term government debt — from banks. This drives interest rates on government debt down; investors seeking a higher rate of return move into other assets, driving other interest rates down as well; and normally these lower interest rates eventually lead to an economic bounceback. The Fed dealt with the recession that began in 1990 by driving short-term interest rates from 9 percent down to 3 percent. It dealt with the recession that began in 2001 by driving rates from 6.5 percent to 1 percent. And it tried to deal with the current recession by driving rates down from 5.25 percent to zero.
But zero, it turned out, isn’t low enough to end this recession. And the Fed can’t push rates below zero, since at near-zero rates investors simply hoard cash rather than lending it out. So by late 2008, with interest rates basically at what macroeconomists call the “zero lower bound” even as the recession continued to deepen, conventional monetary policy had lost all traction.
Now what? This is the second time America has been up against the zero lower bound, the previous occasion being the Great Depression. And it was precisely the observation that there’s a lower bound to interest rates that led Keynes to advocate higher government spending: when monetary policy is ineffective and the private sector can’t be persuaded to spend more, the public sector must take its place in supporting the economy. Fiscal stimulus is the Keynesian answer to the kind of depression-type economic situation we’re currently in.
Such Keynesian thinking underlies the Obama administration’s economic policies — and the freshwater economists are furious. For 25 or so years they tolerated the Fed’s efforts to manage the economy, but a full-blown Keynesian resurgence was something entirely different. Back in 1980, Lucas, of the University of Chicago, wrote that Keynesian economics was so ludicrous that “at research seminars, people don’t take Keynesian theorizing seriously anymore; the audience starts to whisper and giggle to one another.” Admitting that Keynes was largely right, after all, would be too humiliating a comedown.
@@And so Chicago’s Cochrane, outraged at the idea that government spending could mitigate the latest recession, declared: “It’s not part of what anybody has taught graduate students since the 1960s. They [Keynesian ideas] are fairy tales that have been proved false. It is very comforting in times of stress to go back to the fairy tales we heard as children, but it doesn’t make them less false.”@@ (It’s a mark of how deep the division between saltwater and freshwater runs that Cochrane doesn’t believe that “anybody” teaches ideas that are, in fact, taught in places like Princeton, M.I.T. and Harvard.)
Meanwhile, saltwater economists, who had comforted themselves with the belief that the great divide in macroeconomics was narrowing, were shocked to realize that freshwater economists hadn’t been listening at all. Freshwater economists who inveighed against the stimulus didn’t sound like scholars who had weighed Keynesian arguments and found them wanting. Rather, they sounded like people who had no idea what Keynesian economics was about, who were resurrecting pre-1930 fallacies in the belief that they were saying something new and profound.
And it wasn’t just Keynes whose ideas seemed to have been forgotten. As Brad DeLong of the University of California, Berkeley, has pointed out in his laments about the Chicago school’s “intellectual collapse,” the school’s current stance amounts to a wholesale rejection of Milton Friedman’s ideas, as well. Friedman believed that Fed policy rather than changes in government spending should be used to stabilize the economy, but he never asserted that an increase in government spending cannot, under any circumstances, increase employment. In fact, rereading Friedman’s 1970 summary of his ideas, “A Theoretical Framework for Monetary Analysis,” what’s striking is how Keynesian it seems.
And Friedman certainly never bought into the idea that mass unemployment represents a voluntary reduction in work effort or the idea that recessions are actually good for the economy. Yet the current generation of freshwater economists has been making both arguments. Thus Chicago’s Casey Mulligan suggests that unemployment is so high because many workers are choosing not to take jobs: “Employees face financial incentives that encourage them not to work . . . decreased employment is explained more by reductions in the supply of labor (the willingness of people to work) and less by the demand for labor (the number of workers that employers need to hire).” Mulligan has suggested, in particular, that workers are choosing to remain unemployed because that improves their odds of receiving mortgage relief. And Cochrane declares that high unemployment is actually good: “We should have a recession. People who spend their lives pounding nails in Nevada need something else to do.”
Personally, I think this is crazy. Why should it take mass unemployment across the whole nation to get carpenters to move out of Nevada? Can anyone seriously claim that we’ve lost 6.7 million jobs because fewer Americans want to work? But it was inevitable that freshwater economists would find themselves trapped in this cul-de-sac: if you start from the assumption that people are perfectly rational and markets are perfectly efficient, you have to conclude that unemployment is voluntary and recessions are desirable.
Yet if the crisis has pushed freshwater economists into absurdity, it has also created a lot of soul-searching among saltwater economists. Their framework, unlike that of the Chicago School, both allows for the possibility of involuntary unemployment and considers it a bad thing. But the New Keynesian models that have come to dominate teaching and research assume that people are perfectly rational and financial markets are perfectly efficient. To get anything like the current slump into their models, New Keynesians are forced to introduce some kind of fudge factor that for reasons unspecified temporarily depresses private spending. (I’ve done exactly that in some of my own work.) And if the analysis of where we are now rests on this fudge factor, how much confidence can we have in the models’ predictions about where we are going?
The state of macro, in short, is not good. So where does the profession go from here?
VII. FLAWS AND FRICTIONS
Economics, as a field, got in trouble because economists were seduced by the vision of a perfect, frictionless market system. If the profession is to redeem itself, it will have to reconcile itself to a less alluring vision — that of a market economy that has many virtues but that is also shot through with flaws and frictions. The good news is that we don’t have to start from scratch. Even during the heyday of perfect-market economics, there was a lot of work done on the ways in which the real economy deviated from the theoretical ideal. What’s probably going to happen now — in fact, it’s already happening — is that flaws-and-frictions economics will move from the periphery of economic analysis to its center.
There’s already a fairly well developed example of the kind of economics I have in mind: the school of thought known as behavioral finance. Practitioners of this approach emphasize two things. First, many real-world investors bear little resemblance to the cool calculators of efficient-market theory: they’re all too subject to herd behavior, to bouts of irrational exuberance and unwarranted panic. Second, even those who try to base their decisions on cool calculation often find that they can’t, that problems of trust, credibility and limited collateral force them to run with the herd.
On the first point: even during the heyday of the efficient-market hypothesis, it seemed obvious that many real-world investors aren’t as rational as the prevailing models assumed. Larry Summers once began a paper on finance by declaring: “THERE ARE IDIOTS. Look around.” But what kind of idiots (the preferred term in the academic literature, actually, is “noise traders”) are we talking about? Behavioral finance, drawing on the broader movement known as behavioral economics, tries to answer that question by relating the apparent irrationality of investors to known biases in human cognition, like the tendency to care more about small losses than small gains or the tendency to extrapolate too readily from small samples (e.g., assuming that because home prices rose in the past few years, they’ll keep on rising).
Until the crisis, efficient-market advocates like Eugene Fama dismissed the evidence produced on behalf of behavioral finance as a collection of “curiosity items” of no real importance. That’s a much harder position to maintain now that the collapse of a vast bubble — a bubble correctly diagnosed by behavioral economists like Robert Shiller of Yale, who related it to past episodes of “irrational exuberance” — has brought the world economy to its knees.
On the second point: suppose that there are, indeed, idiots. How much do they matter? Not much, argued Milton Friedman in an influential 1953 paper: smart investors will make money by buying when the idiots sell and selling when they buy and will stabilize markets in the process. But the second strand of behavioral finance says that Friedman was wrong, that financial markets are sometimes highly unstable, and right now that view seems hard to reject.
Probably the most influential paper in this vein was a 1997 publication by Andrei Shleifer of Harvard and Robert Vishny of Chicago, which amounted to a formalization of the old line that “the market can stay irrational longer than you can stay solvent.” As they pointed out, arbitrageurs — the people who are supposed to buy low and sell high — need capital to do their jobs. And a severe plunge in asset prices, even if it makes no sense in terms of fundamentals, tends to deplete that capital. As a result, the smart money is forced out of the market, and prices may go into a downward spiral.
The spread of the current financial crisis seemed almost like an object lesson in the perils of financial instability. And the general ideas underlying models of financial instability have proved highly relevant to economic policy: a focus on the depleted capital of financial institutions helped guide policy actions taken after the fall of Lehman, and it looks (cross your fingers) as if these actions successfully headed off an even bigger financial collapse.
Meanwhile, what about macroeconomics? Recent events have pretty decisively refuted the idea that recessions are an optimal response to fluctuations in the rate of technological progress; a more or less Keynesian view is the only plausible game in town. Yet standard New Keynesian models left no room for a crisis like the one we’re having, because those models generally accepted the efficient-market view of the financial sector.
There were some exceptions. One line of work, pioneered by none other than Ben Bernanke working with Mark Gertler of New York University, emphasized the way the lack of sufficient collateral can hinder the ability of businesses to raise funds and pursue investment opportunities. A related line of work, largely established by my Princeton colleague Nobuhiro Kiyotaki and John Moore of the London School of Economics, argued that prices of assets such as real estate can suffer self-reinforcing plunges that in turn depress the economy as a whole. But until now the impact of dysfunctional finance hasn’t been at the core even of Keynesian economics. Clearly, that has to change.
@@VIII. ~RE-EMBRACING KEYNES
So here’s what I think economists have to do. First, they have to face up to the inconvenient reality that financial markets fall far short of perfection, that they are subject to extraordinary delusions and the madness of crowds. Second, they have to admit — and this will be very hard for the people who giggled and whispered over Keynes — that Keynesian economics remains the best framework we have for making sense of recessions and depressions. Third, they’ll have to do their best to incorporate the realities of finance into macroeconomics.@@
Many economists will find these changes deeply disturbing. It will be a long time, if ever, before the new, more realistic approaches to finance and macroeconomics offer the same kind of clarity, completeness and sheer beauty that characterizes the full neoclassical approach. To some economists that will be a reason to cling to neoclassicism, despite its utter failure to make sense of the greatest economic crisis in three generations. This seems, however, like a good time to recall the words of H. L. Mencken: “There is always an easy solution to every human problem — neat, plausible and wrong.”
When it comes to the all-too-human problem of recessions and depressions, economists need to abandon the neat but wrong solution of assuming that everyone is rational and markets work perfectly. The vision that emerges as the profession rethinks its foundations may not be all that clear; it certainly won’t be neat; but we can hope that it will have the virtue of being at least partly right.
Paul Krugman is a Times Op-Ed columnist and winner of the 2008 Nobel Memorial Prize in Economic Science. His latest book is “The Return of Depression Economics and the Crisis of 2008.”
This article has been revised to reflect the following correction:
Correction: September 6, 2009
Because of an editing error, an article on Page 36 this weekend about the failure of economists to anticipate the latest recession misquotes the economist John Maynard Keynes, who compared the financial markets of the 1930s to newspaper beauty contests in which readers tried to correctly pick all six eventual winners. Keynes noted that a competitor did not have to pick “those faces which he himself finds prettiest, but those that he thinks likeliest to catch the fancy of the other competitors.” He did not say, “nor even those that he thinks likeliest to catch the fancy of other competitors.”
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[[Syllabus]]
[[About Danyang Xie|http://danyang.xie.tiddlyspot.com]]
Kenneth Rogoff
DEC 14, 2015
Oil Prices and Global Growth
CAMBRIDGE – One of the biggest economic surprises of 2015 is that the stunning drop in global oil prices did not deliver a bigger boost to global growth. Despite the collapse in prices, from over $115 per barrel in June 2014 to $45 at the end of November 2015, most macroeconomic models suggest that the impact on global growth has been less than expected – perhaps 0.5% of global GDP.
The good news is that this welcome but modest effect on growth probably will not die out in 2016. The bad news is that low prices will place even greater strains on the main oil-exporting countries.
The recent decline in oil prices is on par with the supply-driven drop in 1985-1986, when OPEC members (read: Saudi Arabia) decided to reverse supply cuts to regain market share. It is also comparable to the demand-driven collapse in 2008-2009, following the global financial crisis. To the extent that demand factors drive an oil-price drop, one would not expect a major positive impact; the oil price is more of an automatic stabilizer than an exogenous force driving the global economy. Supply shocks, on the other hand, ought to have a significant positive impact.
Although parsing the 2014-2015 oil-price shock is not as straightforward as in the two previous episodes, the driving forces seem to be roughly evenly split between demand and supply factors. Certainly, a slowing China that is rebalancing toward domestic consumption has put a damper on all global commodity prices, with metal indices also falling sharply in 2015. (Gold prices, for example, at $1,050 per ounce at the end of November, are far off their peak of nearly $1,890 in September 2011, and copper prices have fallen almost as much since 2011.)
New sources of oil supply, however, have been at least as important. Thanks to the shale-energy revolution, American oil production has risen from five million barrels per day in 2008 to 9.3 million barrels in 2015, a supply boom that has so far persisted, despite the price collapse. Anticipation of post-sanctions Iranian oil production has also affected markets.
A decline in oil prices is to some extent a zero-sum game, with producers losing and consumers gaining. The usual thinking is that lower prices stimulate global demand, because consumers are likely to spend most of the windfall, whereas producers typically adjust by cutting back savings.
In 2015, though, this behavioral difference has been less pronounced than usual. One reason is that emerging-market energy importers have a much larger global economic footprint than they did in the 1980s, and their approach to oil markets is much more interventionist than in the advanced countries.
Countries such as India and China stabilize retail energy markets through government-financed subsidies to keep price down for consumers. The costs of these subsidies had become quite massive as oil prices peaked, and many countries were already looking hard for ways to cut back. Thus, as oil prices have fallen, emerging-market governments have taken advantage of the opportunity to reduce the fiscal subsidies.
At the same time, many oil exporters are being forced to scale back expenditure plans in the face of sharply falling revenues. Even Saudi Arabia, despite its vast oil and financial reserves, has come under strain, owing to a rapidly rising population and higher military spending associated with conflicts in the Middle East.
The muted effect of oil prices on global growth should not have come as a complete surprise. Academic research has been pointing in this direction for a long time. Oil is now thought to be less of an independent driver of business cycles than was previously believed. Also restraining growth is a sharp decline in energy-related investment. After years of rapid growth, global investment in oil production and exploration has fallen by $150 billion dollars in 2015. Eventually, this will feed back into prices, but only slowly and gradually: Futures markets have oil prices rising to $60 per barrel only by 2020.
The good news for 2016 is that most macroeconomic models suggest that the impact of lower oil prices on growth tends to stretch out for a couple years. Thus, low prices should continue to support growth, even if emerging-market importers continue to use the savings to cut subsidies.
For oil producers, though, the risks are rising. Only a couple – notably governance-challenged Venezuela – are in outright collapse; but many are teetering on the brink of recession. Countries with floating exchange rates, including Colombia, Mexico, and Russia, have managed to adjust so far, despite facing significantly tighter fiscal constraints (though Russia’s situation remains especially vulnerable if low oil prices endure). By contrast, countries with rigid exchange-rate regimes are being tested more severely. Saudi Arabia’s long-standing peg to the dollar, once apparently invulnerable, has come under enormous pressure in recent weeks.
In short, oil prices were not quite as consequential for global growth in 2015 as seemed likely at the beginning of the year. And strong reserve positions and relatively conservative macroeconomic policies have enabled most major producers to weather enormous fiscal stress so far, without falling into crisis. But next year could be different, and not in a good way – especially for producers.
https://www.project-syndicate.org/commentary/oil-prices-global-growth-by-kenneth-rogoff-2015-12
Read more at https://www.project-syndicate.org/commentary/oil-prices-global-growth-by-kenneth-rogoff-2015-12#tPtcd1Kr7EkQb4cH.99
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|''Date:''|Apr 19, 2007|
|''Source:''|http://tiddlywiki.bidix.info/#PasswordOptionPlugin|
|''Author:''|BidiX (BidiX (at) bidix (dot) info)|
|''License:''|[[BSD open source license|http://tiddlywiki.bidix.info/#%5B%5BBSD%20open%20source%20license%5D%5D ]]|
|''~CoreVersion:''|2.2.0 (Beta 5)|
***/
//{{{
version.extensions.PasswordOptionPlugin = {
major: 1, minor: 0, revision: 2,
date: new Date("Apr 19, 2007"),
source: 'http://tiddlywiki.bidix.info/#PasswordOptionPlugin',
author: 'BidiX (BidiX (at) bidix (dot) info',
license: '[[BSD open source license|http://tiddlywiki.bidix.info/#%5B%5BBSD%20open%20source%20license%5D%5D]]',
coreVersion: '2.2.0 (Beta 5)'
};
config.macros.option.passwordCheckboxLabel = "Save this password on this computer";
config.macros.option.passwordInputType = "password"; // password | text
setStylesheet(".pasOptionInput {width: 11em;}\n","passwordInputTypeStyle");
merge(config.macros.option.types, {
'pas': {
elementType: "input",
valueField: "value",
eventName: "onkeyup",
className: "pasOptionInput",
typeValue: config.macros.option.passwordInputType,
create: function(place,type,opt,className,desc) {
// password field
config.macros.option.genericCreate(place,'pas',opt,className,desc);
// checkbox linked with this password "save this password on this computer"
config.macros.option.genericCreate(place,'chk','chk'+opt,className,desc);
// text savePasswordCheckboxLabel
place.appendChild(document.createTextNode(config.macros.option.passwordCheckboxLabel));
},
onChange: config.macros.option.genericOnChange
}
});
merge(config.optionHandlers['chk'], {
get: function(name) {
// is there an option linked with this chk ?
var opt = name.substr(3);
if (config.options[opt])
saveOptionCookie(opt);
return config.options[name] ? "true" : "false";
}
});
merge(config.optionHandlers, {
'pas': {
get: function(name) {
if (config.options["chk"+name]) {
return encodeCookie(config.options[name].toString());
} else {
return "";
}
},
set: function(name,value) {config.options[name] = decodeCookie(value);}
}
});
// need to reload options to load passwordOptions
loadOptionsCookie();
/*
if (!config.options['pasPassword'])
config.options['pasPassword'] = '';
merge(config.optionsDesc,{
pasPassword: "Test password"
});
*/
//}}}
for ~Bi-Weekly MBA, HKUST
''Global Macroeconomics
Course Website: http://globalmacro.tiddlyspot.com/
Instructor: Danyang Xie, danyang.xie@gmail.com
!Objectives
This course provides an understanding of macroeconomic concepts and models, develops your ability to anticipate macroeconomic adjustment. You will have a good grasp of macroeconomic topics including the determinants of growth, business cycles, fiscal and monetary policy. Special attention would be devoted to open-economy macro issues such as current account imbalance, capital flows, exchange rate regimes, and financial crises. Frequent cross-country comparisons will enable you to acquire an international perspective.
!Textbook
Macroeconomics, Olivier Blanchard, Updated Edition, Seventh Edition
For those students who have no background on Macroeconomics, please consult the [[Brief Note on Basic Macro Concepts]]. Everyone should work through the [[CAMEL]] to check the understanding of the course material and the progress of learning.
!Grading
Class Discussion: 20%. [[Group Critical Analysis Report]] due 9:00 am on April 7, 2019: 20%. Final Exam (closed-book except one A4-size page double-sided notes; no need to put down the concepts since the [[Brief Note on Basic Macro Concepts]] will be attached to the Final Exam Paper): 60%.
@@Warning: Electronic device is prohibited during class time.@@
!An Overview
An overview of this course
Readings:
*[[Learning from China by Erik Berglöf, LSE, December 2018|https://www.project-syndicate.org/commentary/impediments-to-exporting-china-development-model-by-erik-berglof-2018-12]]
*[[China's Malign Secrecy by Ricardo Hausmann, Harvard Kenndy School, January 2019|https://www.project-syndicate.org/commentary/china-development-finance-secrecy-by-ricardo-hausmann-2019-01]]
*[[Why American Firms and Households need China by Shang-Jin Wei, Columbia University, January 2019|https://www.project-syndicate.org/commentary/apple-revenues-china-trade-war-employment-by-shang-jin-wei-2019-01]]
*[[A Resurgent East Asia, World Bank, 2018|https://openknowledge.worldbank.org/bitstream/handle/10986/30858/211333ov.pdf?sequence=2&isAllowed=y]]
!Concepts and Models: ~IS-LM Model and its Extensions
*[[2018 IMF Article IV Consultation: China|http://ihome.ust.hk/~dxie/Econ5200/IMF Article IV China July 2018.pdf]]
*Blanchard: Chapter 5-9
! Open Economy Issues
*Blanchard: Chapter 18-21
!Global Imbalance
Key concepts: current account, capital account, savings glut
Readings
*[[US needs to get its own economic house in order]] (Xie, Danyang, China Daily, March 28, 2006).
!Monetary Policy in Action
Key concepts: Direct and Indirect monetary policy instruments, Central Bank independence
Readings:
*[[Monetary Policy Report of ~PBoC. Q3, 2018. English Version|http://ihome.ust.hk/~dxie/Econ5200/Monetary Policy Report Q3 2018.docx]]
!Fiscal Account Analysis and Fiscal Policy
Key concepts: Ponzi game, fiscal sustainability, automatic stabilizer.
[[Historical Changes of Public Spending to GDP|https://ourworldindata.org/grapher/historical-gov-spending-gdp?tab=map&year=2011]]
Readings:
*[[China Fiscal Revenue: Historical |http://data.stats.gov.cn/easyquery.htm?cn=C01]]
*[[China Fiscal Revenue 2017|http://www.stats.gov.cn/tjsj/ndsj/2018/html/EN0702.jpg]]
*[[China Fiscal Expenditure 2017|http://www.stats.gov.cn/tjsj/ndsj/2018/html/EN0703.jpg]]
!Macroeconomic Adjustment
!Macroeconomic Adjustment
Key concepts: Impossible Trinity, Capital flows and Sterilization, Yield Curve.
Readings:
*[[The Impossible Trinity|http://www.voxeu.org/index.php?q=node/7340]], Stephen Grenville, November 2011. Based on an ADB Working Paper.
*[[China: Two Distinct Diagnoses of the Current Macroeconomic Situation|http://ihome.ust.hk/~dxie/Econ5120/Two%20Views.pdf]], Bank of America, September 2006.
!Determinants of Economic Growth
Key concepts: Human capital, Growth Accounting, Total Factor Productivity.
Readings:
*[[Does openness generate growth? Reconciling the experiences of Mexico and China|http://voxeu.org/index.php?q=node/7301]], Timothy Kehoe and Kim Ruhl, November 2011
*[[Xavier ~Sala-i-Martin, “I just Ran 4 Million Regressions”|http://ihome.ust.hk/~dxie/Econ5120/Sala-i-Martin%204%20million%20regressions.pdf]], 1997.
!International Trade and Capital Flows.
Key concepts: Comparative Advantage, Harberger Triangle, FDI and portfolio investment, Tobin Tax, WTO accession.
Readings:
*[[The Capital Flow Conundrum|http://voxeu.org/index.php?q=node/6718]], Uri Dadush and Bennett Stancil, July 2011
!Country Analysis and Business Strategies in Riding the Waves
*[[Country Profiles|http://pan.baidu.com/s/1kT2JlPH]]
*[[Data Sources|http://www.tradingeconomics.com/germany/current-account-to-gdp]]
!Current Topics
*[[Project Syndicate|https://www.project-syndicate.org/]]
!Final Exam'': March 31 9:00-12:00. Bring your calculator (@@mobile phone is not allowed@@).
Mohamed ~El-Erian
DEC 2, 2015
The Great Policy Divergence
WASHINGTON, DC – Over the next few weeks, the US Federal Reserve and the European Central Bank are likely to put in place notably different policies. The Fed is set to raise interest rates for the first time in almost ten years. Meanwhile, the ECB is expected to introduce additional unconventional measures to drive rates in the opposite direction, even if that means putting further downward pressure on some government bonds that are already trading at negative nominal yields.
In implementing these policies, both central banks are pursuing domestic objectives mandated by their governing legislation. The problem is that there may be few, if any, orderly mechanisms to manage the international repercussions of this growing divergence.
The Fed is responding to continued indications of robust job creation in the United States and other signs that the country’s economy is recovering, albeit moderately so. Also conscious of the risk to financial stability if interest rates remain at artificially low levels, the Fed is expected to increase them when its policy-setting Federal Open Market Committee meets on December 15-16. The move marks a turning point in the Fed’s approach to the economy. In deciding to raise interest rates, it will be doing more than simply lifting its foot from the financial-stimulus accelerator; it will also be taking a notable step toward the multiyear normalization of its overall policy stance.
In the meantime, the ECB is facing a very different set of economic conditions, including generally sluggish growth, the risk of deflation, and worries about the impact of the terrorist attacks in Paris on business and consumer confidence. As a result, the bank’s decision-makers are giving serious consideration to pushing the discount rate further into negative territory and extending its large-scale asset-purchase program (otherwise known as quantitative easing). In other words, the ECB is likely to expand and extend experimental measures that will press even harder on the financial-stimulus accelerator.
In a perfect world, policymakers would have assessed the potential for international spillovers from these divergent policies (including possible spillbacks on both sides of the Atlantic) and put in place a range of instruments to ensure a better alignment of domestic and global objectives. Unfortunately, political polarization and general policy dysfunction in both the US and the European Union continue to inhibit such an effort. As a result, lacking a more comprehensive policy response, the harmonization of their central banks’ divergent policies will be left to the markets – in particular, those for fixed-income assets and currencies.
Already, the interest-rate differential between “risk-free” bonds on both sides of the Atlantic – say, US Treasuries and German Bunds – has widened notably. And, at the same time, the dollar has strengthened not only against the euro, but also against most other currencies. Left unchecked, these trends are likely to persist.
If history is any guide, there are three major issues that warrant careful monitoring in the coming months. First, the US is unlikely to stand by for long if its currency appreciates significantly and its international competitiveness deteriorates substantially. Companies are already reporting earning pressures due to the rising dollar, and some are even asking their governments to play a more forceful role in countering a stealth “currency war.”
Second, because the dollar is used as a reserve currency, a rapid rise in its value could put pressure on those who have used it imprudently. At particular risk are emerging-country companies that, having borrowed overwhelmingly in dollars but generating only limited dollar earnings, might have large currency mismatches in their assets and liabilities or their incomes and expenditures.
And, finally, sharp movements in interest rates and exchange rates can cause volatility in other markets, most notably for equities. Because regulatory controls and market constraints have made brokers less able to play a countercyclical role by accumulating inventory on their balance sheets, the resulting price instability is likely to be large. There is a risk that some portfolios will be forced into disordered unwinding. Furthermore, the central banks’ policy of curtailing so-called “volatile volatility” is likely to be challenged.
Of course, none of these outcomes is preordained. Politicians on both sides of the Atlantic have the ability to lower the risk of instability by implementing structural reforms, ensuring more balanced aggregate demand, removing pockets of excessive indebtedness, and smoothing out the mechanisms of multilateral and regional governance.
The three possible outcomes of all this include a relatively stable multi-speed world, notable disruptions that undermine the US’s economic recovery, and a European revival that benefits from US growth. The good news is that the impact of the divergence will depend on how policymakers manage its pressures. The bad news is that they have yet to find the political will to act decisively to minimize the risks.
As the Fed normalizes its monetary policy and the ECB doubles down on extraordinary measures, we certainly should hope for the best. But we should also be planning for a substantial rise in financial and economic uncertainty.
https://www.project-syndicate.org/commentary/federal-reserve-ecb-policy-divergence-by-mohamed-a--el-erian-2015-12
Read more at https://www.project-syndicate.org/commentary/federal-reserve-ecb-policy-divergence-by-mohamed-a--el-erian-2015-12#9Fz4wq5QG3xmmBT5.99
Jeffrey Frankel
NOV 24, 2015
The Trouble with International Policy Coordination
BOLOGNA – After a 30-year hiatus, international coordination of macroeconomic policy seems to be back on policymakers’ agendas. The reason is understandable: growth remains anemic in most countries, and many fear the US Federal Reserve’s impending interest-rate hike. Unfortunately, the reasons why coordination fell into abeyance are still with us.
The heyday of international policy coordination, from 1978 to 1987, began with a G-7 summit in Bonn in 1978 and included the 1985 Plaza Accord. But doubts about the benefits of such cooperation persisted. The Germans, for example, regretted having agreed to joint fiscal expansion at the Bonn summit, because reflation turned out to be the wrong objective in the inflation-plagued late 1970s. Similarly, the Japanese came to regret the appreciated yen after the Plaza Accord succeeded in bringing down an overvalued dollar.
Moreover, emerging-market countries’ representation in global governance did not keep pace with the increasingly significant role of their economies and currencies. These countries’ very success thus became an obstacle to policy coordination.
The effort to revive international coordination began in response to the 2008 global financial crisis. The larger emerging-market countries acquired more representation when the G-20 succeeded the G-7 as the preeminent global economic grouping. G-20 leaders agreed on coordinated expansionary policies at their London summit in April 2009. Then they agreed in Seoul in 2010 to give emerging-market countries quota shares in the International Monetary Fund that would be more commensurate with their economic weight. (The US Congress, to its shame, has yet to pass the necessary legislation.)
Since then, many calls for coordination have lamented the outbreak of “currency wars,” otherwise known as competitive depreciation – an old phenomenon that recalls the tit-for-tat devaluations of the 1930s. Now, as then, the fear is that if all countries try to depreciate their currency to gain export competitiveness and boost their economies, all will fail.
This concern has been reflected, for example, in complaints about intervention by China and other emerging markets to prevent currency appreciation. Likewise, successive rounds of quantitative easing by the US Federal Reserve in 2009-2014, the Bank of Japan since 2013, and the European Central Bank since earlier this year, resulted in depreciations of the dollar, yen, and euro, respectively.
The most recent set of calls for coordination arise from fears – articulated, for example, by Raghuram Rajan, Governor of the Reserve Bank of India – that the Fed will not adequately take into account the adverse impact on emerging-market economies when it raises interest rates.
The US has led some international attempts to address competitive depreciation, including an agreement among G-7 ministers in February 2013 to refrain from foreign-exchange intervention and a November 2015 side agreement to the Trans-Pacific Partnership to address currency manipulation. But critics are agitating for a stronger agreement backed up by the threat of trade sanctions.
Attempting to use game theory to interpret the various calls for coordination is revealing, though not in the way that game theorists assume. The players often do not think they are playing the same game. For example, when the US urges German fiscal stimulus – as at it did in Bonn in 1978, in London in 2009, and at the G-20’s Brisbane summit in 2014 – it has in mind the “locomotive game,” in which fiscal stimulus has positive “spillover effects” on its trading partners. The global economy will do better if the major countries – each afraid to undertake fiscal expansion on its own, for fear of worsening its trade balance – agree to act together to pull it out of recession and up to speed.
Germans, by contrast, think they are playing a “discipline game.” They view budget deficits as creating negative spillover effects for neighbors, owing, for example, to the moral hazard of bailouts. Their idea of a cooperative equilibrium is the European Union’s 2013 “fiscal compact,” under which euro members agreed yet again to rules for limiting their budget deficits.
The most recent example of this “dialogue of the deaf” occurred in Europe, from January to July 2015. Month after month, the Greek government and its eurozone partners sat at the board, one side thinking the game was checkers and the other thinking it was chess.
Interpretations vary no less when it comes to monetary policy. Some believe that monetary expansion in one country shifts the trade balance against its partners, owing to the exchange-rate effect; others believe that any adverse effect on trade balances is offset by higher spending. Some argue that the problem is competitive depreciation or too-low interest rates; others maintain that the real problem is overvalued currencies or too-high interest rates.
Some believe that the way to overcome competitive depreciation for good is to fix exchange rates, as the architects of the Bretton Woods arrangements did in 1944; others, including some US politicians today, advocate the opposite approach: an agreement against seeking to influence exchange rates at all.
Yes, regular meetings of officials can be useful. Consultation can minimize surprises. Exchanges of views might help narrow differences in perceptions. But some calls for international coordination are less useful, particularly when the aim is to blame foreigners in order to distract attention from domestic constraints and disagreements.
Consider the Brazilian officials who coined the phrase “currency wars” in 2010. Their country’s budget deficit was too large, causing its economy to overheat. Private demand was going to be crowded out one way or another, if not via currency appreciation, then via higher interest rates. Yet officials blamed the US and others for the strong real. Likewise, US politicians’ ongoing efforts to ban currency manipulation in trade agreements may be an effort to scapegoat Asians for US workers’ stagnant real incomes.
Officials would often be better advised to improve their own policies, before they tell others what to do. Otherwise, calls for international cooperation may do more harm than good.
https://www.project-syndicate.org/commentary/international-policy-coordination-constraints-by-jeffrey-frankel-2015-11
Read more at https://www.project-syndicate.org/commentary/international-policy-coordination-constraints-by-jeffrey-frankel-2015-11#cu3IWcSBzGZvT5F6.99
DEC 26, 2016
Trump’s Gathering Trade War
@@Stephen S. Roach, former Chairman of Morgan Stanley Asia and the firm's chief economist, is a senior fellow at Yale University's Jackson Institute of Global Affairs and a senior lecturer at Yale's School of Management. He is the author of Unbalanced: The Codependency of America and China.@@
NEW HAVEN – During his campaign, US President-elect Donald Trump used foreign trade as a lightning rod in his supposed defense of the beleaguered American middle class. This is not an uncommon tactic for candidates at either end of the political spectrum. What is unusual is that Trump has not moderated his anti-trade tone since winning. Instead, he has upped the ante and fired a series of early warning shots in what could turn into a full-blown global trade war, with disastrous consequences for the United States and the rest of the world.
Consider Trump’s key personnel decisions. Industrialist Wilbur Ross, the Commerce Secretary-designate, has been vocal in his desire to abrogate America’s “dumb” trade deals. Peter Navarro, an economics professor at the University of California at Irvine, will be the director of the National Trade Council – a new White House policy shop to be set up on a par with the National Security Council and the National Economic Council. Navarro is one of America’s most extreme China hawks. The titles of his two most recent books – Death by China (2011) and Crouching Tiger: What China’s Militarism Means for the World (2015) – speak volumes about his tabloid-level biases.
Ross and Navarro were also co-authors of an economic-policy position paper published on the Trump campaign website that stretched any semblance of credibility. Now they will get the opportunity to put their ideas into practice. And, in fact, the process has already begun.
Trump has made it clear that he will immediately withdraw the US from the Trans-Pacific Partnership (TPP) – in keeping with Ross’s criticism of America’s trade deals. And his brazen willingness to challenge the 40-year-old “One China” policy by speaking directly with Taiwanese President Tsai Ing-wen – to say nothing of his subsequent anti-China tweets – leaves little doubt that his administration will follow Navarro’s prescription and take dead aim at America’s largest and most powerful trading partner.
Of course, Trump, a self-proclaimed master dealmaker, may simply be talking tough, in order to put China and the world on notice that the US is now prepared to operate from a position of strength in the foreign-trade arena. A bold opening gambit, the argument goes, softens the adversary for a more palatable endgame.
But, while such tough talk undoubtedly played well with voters, it fails a key reality check: America’s large trade deficit – a visible manifestation of its low saving – calls into question the very notion of economic strength. A significant domestic saving deficit, such as that which afflicts the US, accounts for America’s insatiable appetite for surplus saving from abroad, which in turn spawns its chronic current-account deficit and a massive trade deficit.
Dealmakers who try to address this macroeconomic problem one country at a time cannot possibly succeed: the US ran trade deficits with 101 countries in 2015. There can be no bilateral fix for a multilateral problem. It’s like the proverbial Dutch boy sticking his finger in a leaky dike. Unless the source of the problem – a saving shortfall that is likely to worsen in the face of Trump’s inevitable widening of federal budget deficits –is addressed, America’s current-account and trade deficits will only widen. Squeezing China would merely shift the trade imbalance to other countries – most likely to higher-cost producers, which would effectively raise the prices of foreign goods sold to hard-pressed American families.
But the story doesn’t end there. The Trump administration is playing with live ammunition, implying profound, global repercussions. Nowhere is this more evident than in the likely Chinese response to America’s new muscle-flexing. The Trump team is dismissive of China’s reaction to its threats – believing that the US has nothing to lose and everything to gain.
Alas, that may not be the case. Like it or not, America and China are locked in a codependent economic relationship. Yes, China depends on US demand for its exports, but the US also depends on China: the Chinese own over $1.5 trillion in US Treasury securities and other US dollar-based assets. Moreover, China is America’s third-largest export market (after Canada and Mexico) and the one that is expanding most rapidly – hardly inconsequential for a growth-starved US economy. It is foolish to think that America holds all the cards in this bilateral economic relationship.
Codependency is a very reactive connection. If one partner changes the terms of engagement, the other is likely to respond in kind. If the US goes after China – as Trump, Navarro, and Ross have long advocated and now seem to be doing – it must also face the consequences. On the economic front, that spells the possibility of reciprocal tariffs on US exports to China, as well as potential ramifications for Chinese purchases of Treasuries. And other countries – tightly linked to China through global supply chains – may well impose countervailing tariffs of their own.
Global trade wars are rare. But, like military conflicts, they often start with accidental skirmishes or misunderstandings. More than 85 years ago, US Senator Reed Smoot and Representative Willis Hawley fired the first shot in sponsoring the Tariff Act of 1930. That led to a catastrophic global trade war, which many believe turned a serious recession into the Great Depression.
It is the height of folly to ignore the lessons of history. For today’s saving-short, deficit-prone US economy, it will take far more than China-bashing to make America great again. Turning trade into a weapon of mass economic destruction could be a policy blunder of epic proportions.
http://prosyn.org/iRD7kuj
/***
Description: Contains the stuff you need to use Tiddlyspot
Note, you also need UploadPlugin, PasswordOptionPlugin and LoadRemoteFileThroughProxy
from http://tiddlywiki.bidix.info for a complete working Tiddlyspot site.
***/
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SideBarOptions = SideBarOptions.replace(/(<<saveChanges>>)/,"$1<<tiddler TspotSidebar>>");
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DefaultTiddlers = DefaultTiddlers.replace(/^/,"[[WelcomeToTiddlyspot]] ");
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"See also GettingStarted.",
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[[Online Article by Danyang Xie, March 2006|http://www.china-embassy.org/eng/zmgx/1/t242849.htm]]
Despite the noises continuously made by the US congressmen, the Chinese RMB will not be up there on international investors' worry list of global risks. The main risks lie in the United States, the risks that the former Fed chairman, Alan Greenspan, repeatedly warned the public about: the property market bubble and the unsustainable current account deficit.
The property market bubble in the United States began at about the same time as the "New Economy" and grew with the Internet bubble. Housing prices continue to climb upward in the aftermath of the stock market crash in 2001, thanks to the Fed's aggressive interest rate cuts in an effort to keep American consumers spending and to boost the US economy. The subsequent hikes of the Federal Funds rate since June 2004, to Mr Greenspan's dismay, have failed to push the long-term interest rates up. If anything, the 30-year bond rate has been getting lower in this round of monetary tightening, to the effect that the yield curve turned inverted towards the end of 2005. With the average 30-year mortgage rate staying below 6.5 per cent, the property market simply marches on.
According to the US Census Bureau press release on February 14, housing construction reached a seasonally adjusted annual pace of 2.28 million homes in January, the highest rate in 33 years. Despite the signs of slowdown in sales volume of existing homes, the price could resume its upward movement when mortgage interest rate stays low.
As to the unsustainability of the US current account deficit, we should remember that in June 1977, Treasury Secretary W. Michael Blumenthal made comments on the issue when it was only 1 per cent of GDP, thereby establishing his reputation for "talking down" the dollar. Nowadays, the US current account deficit is more than 6 per cent of GDP and the US net investment position is negative with a magnitude over 20 per cent of GDP. Could international investors turn a blind eye to the obvious imbalance, or should they seriously worry about the ultimate crash of the US dollar and the resulting global meltdown as the investors unload their dollar assets?
A solution to resolving these two issues is needed. And no finger should point at the RMB exchange rate policy. After all, 10 years after the 1985 Plaza Accord and with 100 per cent appreciation of the yen from 200 yen/Dollar to 100 yen/Dollar as well as 72 per cent appreciation of the Deutsche Mark from 2.46 DM/Dollar to 1.43 DM/Dollar, the US current account deficit to GDP barely improved by 1 percentage point. How can anyone think that RMB appreciation would magically shrink the US current account deficit?
In fact, if substantial RMB appreciation forces bankruptcy in low-profit-margin Chinese firms that have been absorbing the layoffs by State-owned enterprises over the years, the resulting social unrest could destabilize China, which will lead to lower demand for US exports and greater US current account deficit. By improving the flexibility of RMB exchange rate system in a gradual manner and thereby maintaining China's social stability, China contributes the most to global economic stability. This is exactly how an important country such as China should behave as a responsible member of the global economic community.
The solution is with the United States and not, as pointed out by Governor Ben Bernanke in March 2005, with global savers. The problem is not the global savings glut, it is the lack of savings in the United States on the part of the government no doubt, but also on the part of the individual households. Believe it or not, the extremely low household savings in the United States can be partly attributed to the rising housing price. Think about it: Who needs to save if his house is gaining value astronomically? By the time of retirement, all he needs to do is to cash in on the house or get an annuity through reverse mortgage to pay for all the bills for the rest of his life (increase in rental cost consistently falls short of the increases in housing price). Saving little is indeed rational if the housing price continues to rise at its current pace indefinitely, if down payment and mortgage cost remains low, and if the dollar does not collapse in the foreign exchange market. Unfortunately, these are big "ifs."
International investors would like to see more responsible behaviour and better targeted policies from the United States. They do not mind that the US property market cools off, as long as it does not melt down. They can cope with the US dollar easing off, but not crashing.
Yes, the Fed is pushing up the short-term interest rate in order to control the speculative favour in the property market. Yes, Greenspan repeatedly issued public warnings of the property market bubble and the unsustainability of current account deficit. Yes, the US Treasury has abandoned the gibberish that a strong dollar is in line with the US national interest. But when conventional medicines do not work, one needs to look for alternatives.
"Something unusual is clearly at play here," as Greenspan said. The long rate had stayed stubbornly low and failed to respond to the hikes of the Federal Funds rate. The reason, alas, is that the long rate stayed low precisely because the Fed has been doing such a terrific job so that the long-term inflation expectation is low. The hawks in the Fed have had the upper hand for too long. It is time to welcome the Fed doves. If Bernanke, the new Fed chairman, has his heart where his mind was when he was an academic, we may have some hope. We will see his true colour in the upcoming FOMC meetings. Remember, unusual circumstances require unusual thinking.
What the Fed should do is to follow "inflation targeting," a framework that Bernanke favoured before he took the helm at the Fed. Furthermore, the medium- to long-term core CPI inflation target could be in the range between 2.25 and 3.25 per cent, namely with an upper bound higher than the average core CPI inflation rate during the past 10 years but nevertheless at a level that will not cause much concern for business planning.
Bernanke could announce his intention by putting on hold the rise of the Federal Funds rate. This will surprise the Wall Street, but no matter. The expectation of long-term inflation will be revised up and the yield curve will be tilted upward. Given the slightly higher long-term inflation, the dollar will gradually weaken, which in turn feeds back to the international investors demand for higher long-term yield in US government bonds.
We need the Fed doves to help remove the lid on the long rates and break the wishful thinking that cheap financing is always around for property purchase, for fiscal budget deficit, and for current account deficit. The property market will cool off. With well-targeted CPI inflation rate eating into the value of the house and with dollar depreciating against all major currencies, the property market bubble will shrink over time. The US households will finally begin to realize that they need to save for their retirement nest egg, or else, be prepared to face the reality that the equity they build into and the capital gains on their house won't be enough to keep them happy for the rest of their retirement life.
The risk of allowing for inflation to resurface is that it may go out of control. But we trust that the Fed has had more experience in putting the inflation rate within the desired range. Will the moderate increase in long-term inflation rate have a negative impact on long-term health of the economy? There is no evidence suggesting this will be the case. A core CPI inflation rate between 2.25 and 3.25 per cent will not put a dent in long-term productivity growth.
The author is a professor of economics and Senior Wei Lun Fellow at Hong Kong University of Science and Technology.
| !date | !user | !location | !storeUrl | !uploadDir | !toFilename | !backupdir | !origin |
| 24/01/2019 11:09:00 | Danyang Xie | [[/|http://globalmacro.tiddlyspot.com/]] | [[store.cgi|http://globalmacro.tiddlyspot.com/store.cgi]] | . | [[index.html | http://globalmacro.tiddlyspot.com/index.html]] | . |
| 24/01/2019 11:12:54 | Danyang Xie | [[/|http://globalmacro.tiddlyspot.com/]] | [[store.cgi|http://globalmacro.tiddlyspot.com/store.cgi]] | . | [[index.html | http://globalmacro.tiddlyspot.com/index.html]] | . |
| 08/02/2019 17:03:46 | Danyang Xie | [[/|http://globalmacro.tiddlyspot.com/]] | [[store.cgi|http://globalmacro.tiddlyspot.com/store.cgi]] | . | [[index.html | http://globalmacro.tiddlyspot.com/index.html]] | . |
| 13/02/2019 16:40:42 | Danyang Xie | [[/|http://globalmacro.tiddlyspot.com/]] | [[store.cgi|http://globalmacro.tiddlyspot.com/store.cgi]] | . | [[index.html | http://globalmacro.tiddlyspot.com/index.html]] | . |
| 02/03/2019 18:34:38 | Danyang Xie | [[/|http://globalmacro.tiddlyspot.com/]] | [[store.cgi|http://globalmacro.tiddlyspot.com/store.cgi]] | . | [[index.html | http://globalmacro.tiddlyspot.com/index.html]] | . |
| 25/03/2019 09:02:02 | YourName | [[/|http://globalmacro.tiddlyspot.com/]] | [[store.cgi|http://globalmacro.tiddlyspot.com/store.cgi]] | . | [[index.html | http://globalmacro.tiddlyspot.com/index.html]] | . |
| 25/03/2019 09:19:29 | YourName | [[/|http://globalmacro.tiddlyspot.com/]] | [[store.cgi|http://globalmacro.tiddlyspot.com/store.cgi]] | . | [[index.html | http://globalmacro.tiddlyspot.com/index.html]] | . |
| 31/03/2019 08:31:13 | YourName | [[/|http://globalmacro.tiddlyspot.com/]] | [[store.cgi|http://globalmacro.tiddlyspot.com/store.cgi]] | . | [[index.html | http://globalmacro.tiddlyspot.com/index.html]] | . |
| 16/04/2019 12:47:00 | YourName | [[/|http://globalmacro.tiddlyspot.com/]] | [[store.cgi|http://globalmacro.tiddlyspot.com/store.cgi]] | . | [[index.html | http://globalmacro.tiddlyspot.com/index.html]] | . |
| 24/09/2019 16:45:12 | Danyang Xie | [[/|http://globalmacro.tiddlyspot.com/]] | [[store.cgi|http://globalmacro.tiddlyspot.com/store.cgi]] | . | [[index.html | http://globalmacro.tiddlyspot.com/index.html]] | . |
/***
|''Name:''|UploadPlugin|
|''Description:''|Save to web a TiddlyWiki|
|''Version:''|4.1.3|
|''Date:''|Feb 24, 2008|
|''Source:''|http://tiddlywiki.bidix.info/#UploadPlugin|
|''Documentation:''|http://tiddlywiki.bidix.info/#UploadPluginDoc|
|''Author:''|BidiX (BidiX (at) bidix (dot) info)|
|''License:''|[[BSD open source license|http://tiddlywiki.bidix.info/#%5B%5BBSD%20open%20source%20license%5D%5D ]]|
|''~CoreVersion:''|2.2.0|
|''Requires:''|PasswordOptionPlugin|
***/
//{{{
version.extensions.UploadPlugin = {
major: 4, minor: 1, revision: 3,
date: new Date("Feb 24, 2008"),
source: 'http://tiddlywiki.bidix.info/#UploadPlugin',
author: 'BidiX (BidiX (at) bidix (dot) info',
coreVersion: '2.2.0'
};
//
// Environment
//
if (!window.bidix) window.bidix = {}; // bidix namespace
bidix.debugMode = false; // true to activate both in Plugin and UploadService
//
// Upload Macro
//
config.macros.upload = {
// default values
defaultBackupDir: '', //no backup
defaultStoreScript: "store.php",
defaultToFilename: "index.html",
defaultUploadDir: ".",
authenticateUser: true // UploadService Authenticate User
};
config.macros.upload.label = {
promptOption: "Save and Upload this TiddlyWiki with UploadOptions",
promptParamMacro: "Save and Upload this TiddlyWiki in %0",
saveLabel: "save to web",
saveToDisk: "save to disk",
uploadLabel: "upload"
};
config.macros.upload.messages = {
noStoreUrl: "No store URL in parmeters or options",
usernameOrPasswordMissing: "Username or password missing"
};
config.macros.upload.handler = function(place,macroName,params) {
if (readOnly)
return;
var label;
if (document.location.toString().substr(0,4) == "http")
label = this.label.saveLabel;
else
label = this.label.uploadLabel;
var prompt;
if (params[0]) {
prompt = this.label.promptParamMacro.toString().format([this.destFile(params[0],
(params[1] ? params[1]:bidix.basename(window.location.toString())), params[3])]);
} else {
prompt = this.label.promptOption;
}
createTiddlyButton(place, label, prompt, function() {config.macros.upload.action(params);}, null, null, this.accessKey);
};
config.macros.upload.action = function(params)
{
// for missing macro parameter set value from options
if (!params) params = {};
var storeUrl = params[0] ? params[0] : config.options.txtUploadStoreUrl;
var toFilename = params[1] ? params[1] : config.options.txtUploadFilename;
var backupDir = params[2] ? params[2] : config.options.txtUploadBackupDir;
var uploadDir = params[3] ? params[3] : config.options.txtUploadDir;
var username = params[4] ? params[4] : config.options.txtUploadUserName;
var password = config.options.pasUploadPassword; // for security reason no password as macro parameter
// for still missing parameter set default value
if ((!storeUrl) && (document.location.toString().substr(0,4) == "http"))
storeUrl = bidix.dirname(document.location.toString())+'/'+config.macros.upload.defaultStoreScript;
if (storeUrl.substr(0,4) != "http")
storeUrl = bidix.dirname(document.location.toString()) +'/'+ storeUrl;
if (!toFilename)
toFilename = bidix.basename(window.location.toString());
if (!toFilename)
toFilename = config.macros.upload.defaultToFilename;
if (!uploadDir)
uploadDir = config.macros.upload.defaultUploadDir;
if (!backupDir)
backupDir = config.macros.upload.defaultBackupDir;
// report error if still missing
if (!storeUrl) {
alert(config.macros.upload.messages.noStoreUrl);
clearMessage();
return false;
}
if (config.macros.upload.authenticateUser && (!username || !password)) {
alert(config.macros.upload.messages.usernameOrPasswordMissing);
clearMessage();
return false;
}
bidix.upload.uploadChanges(false,null,storeUrl, toFilename, uploadDir, backupDir, username, password);
return false;
};
config.macros.upload.destFile = function(storeUrl, toFilename, uploadDir)
{
if (!storeUrl)
return null;
var dest = bidix.dirname(storeUrl);
if (uploadDir && uploadDir != '.')
dest = dest + '/' + uploadDir;
dest = dest + '/' + toFilename;
return dest;
};
//
// uploadOptions Macro
//
config.macros.uploadOptions = {
handler: function(place,macroName,params) {
var wizard = new Wizard();
wizard.createWizard(place,this.wizardTitle);
wizard.addStep(this.step1Title,this.step1Html);
var markList = wizard.getElement("markList");
var listWrapper = document.createElement("div");
markList.parentNode.insertBefore(listWrapper,markList);
wizard.setValue("listWrapper",listWrapper);
this.refreshOptions(listWrapper,false);
var uploadCaption;
if (document.location.toString().substr(0,4) == "http")
uploadCaption = config.macros.upload.label.saveLabel;
else
uploadCaption = config.macros.upload.label.uploadLabel;
wizard.setButtons([
{caption: uploadCaption, tooltip: config.macros.upload.label.promptOption,
onClick: config.macros.upload.action},
{caption: this.cancelButton, tooltip: this.cancelButtonPrompt, onClick: this.onCancel}
]);
},
options: [
"txtUploadUserName",
"pasUploadPassword",
"txtUploadStoreUrl",
"txtUploadDir",
"txtUploadFilename",
"txtUploadBackupDir",
"chkUploadLog",
"txtUploadLogMaxLine"
],
refreshOptions: function(listWrapper) {
var opts = [];
for(i=0; i<this.options.length; i++) {
var opt = {};
opts.push();
opt.option = "";
n = this.options[i];
opt.name = n;
opt.lowlight = !config.optionsDesc[n];
opt.description = opt.lowlight ? this.unknownDescription : config.optionsDesc[n];
opts.push(opt);
}
var listview = ListView.create(listWrapper,opts,this.listViewTemplate);
for(n=0; n<opts.length; n++) {
var type = opts[n].name.substr(0,3);
var h = config.macros.option.types[type];
if (h && h.create) {
h.create(opts[n].colElements['option'],type,opts[n].name,opts[n].name,"no");
}
}
},
onCancel: function(e)
{
backstage.switchTab(null);
return false;
},
wizardTitle: "Upload with options",
step1Title: "These options are saved in cookies in your browser",
step1Html: "<input type='hidden' name='markList'></input><br>",
cancelButton: "Cancel",
cancelButtonPrompt: "Cancel prompt",
listViewTemplate: {
columns: [
{name: 'Description', field: 'description', title: "Description", type: 'WikiText'},
{name: 'Option', field: 'option', title: "Option", type: 'String'},
{name: 'Name', field: 'name', title: "Name", type: 'String'}
],
rowClasses: [
{className: 'lowlight', field: 'lowlight'}
]}
};
//
// upload functions
//
if (!bidix.upload) bidix.upload = {};
if (!bidix.upload.messages) bidix.upload.messages = {
//from saving
invalidFileError: "The original file '%0' does not appear to be a valid TiddlyWiki",
backupSaved: "Backup saved",
backupFailed: "Failed to upload backup file",
rssSaved: "RSS feed uploaded",
rssFailed: "Failed to upload RSS feed file",
emptySaved: "Empty template uploaded",
emptyFailed: "Failed to upload empty template file",
mainSaved: "Main TiddlyWiki file uploaded",
mainFailed: "Failed to upload main TiddlyWiki file. Your changes have not been saved",
//specific upload
loadOriginalHttpPostError: "Can't get original file",
aboutToSaveOnHttpPost: 'About to upload on %0 ...',
storePhpNotFound: "The store script '%0' was not found."
};
bidix.upload.uploadChanges = function(onlyIfDirty,tiddlers,storeUrl,toFilename,uploadDir,backupDir,username,password)
{
var callback = function(status,uploadParams,original,url,xhr) {
if (!status) {
displayMessage(bidix.upload.messages.loadOriginalHttpPostError);
return;
}
if (bidix.debugMode)
alert(original.substr(0,500)+"\n...");
// Locate the storeArea div's
var posDiv = locateStoreArea(original);
if((posDiv[0] == -1) || (posDiv[1] == -1)) {
alert(config.messages.invalidFileError.format([localPath]));
return;
}
bidix.upload.uploadRss(uploadParams,original,posDiv);
};
if(onlyIfDirty && !store.isDirty())
return;
clearMessage();
// save on localdisk ?
if (document.location.toString().substr(0,4) == "file") {
var path = document.location.toString();
var localPath = getLocalPath(path);
saveChanges();
}
// get original
var uploadParams = new Array(storeUrl,toFilename,uploadDir,backupDir,username,password);
var originalPath = document.location.toString();
// If url is a directory : add index.html
if (originalPath.charAt(originalPath.length-1) == "/")
originalPath = originalPath + "index.html";
var dest = config.macros.upload.destFile(storeUrl,toFilename,uploadDir);
var log = new bidix.UploadLog();
log.startUpload(storeUrl, dest, uploadDir, backupDir);
displayMessage(bidix.upload.messages.aboutToSaveOnHttpPost.format([dest]));
if (bidix.debugMode)
alert("about to execute Http - GET on "+originalPath);
var r = doHttp("GET",originalPath,null,null,username,password,callback,uploadParams,null);
if (typeof r == "string")
displayMessage(r);
return r;
};
bidix.upload.uploadRss = function(uploadParams,original,posDiv)
{
var callback = function(status,params,responseText,url,xhr) {
if(status) {
var destfile = responseText.substring(responseText.indexOf("destfile:")+9,responseText.indexOf("\n", responseText.indexOf("destfile:")));
displayMessage(bidix.upload.messages.rssSaved,bidix.dirname(url)+'/'+destfile);
bidix.upload.uploadMain(params[0],params[1],params[2]);
} else {
displayMessage(bidix.upload.messages.rssFailed);
}
};
// do uploadRss
if(config.options.chkGenerateAnRssFeed) {
var rssPath = uploadParams[1].substr(0,uploadParams[1].lastIndexOf(".")) + ".xml";
var rssUploadParams = new Array(uploadParams[0],rssPath,uploadParams[2],'',uploadParams[4],uploadParams[5]);
var rssString = generateRss();
// no UnicodeToUTF8 conversion needed when location is "file" !!!
if (document.location.toString().substr(0,4) != "file")
rssString = convertUnicodeToUTF8(rssString);
bidix.upload.httpUpload(rssUploadParams,rssString,callback,Array(uploadParams,original,posDiv));
} else {
bidix.upload.uploadMain(uploadParams,original,posDiv);
}
};
bidix.upload.uploadMain = function(uploadParams,original,posDiv)
{
var callback = function(status,params,responseText,url,xhr) {
var log = new bidix.UploadLog();
if(status) {
// if backupDir specified
if ((params[3]) && (responseText.indexOf("backupfile:") > -1)) {
var backupfile = responseText.substring(responseText.indexOf("backupfile:")+11,responseText.indexOf("\n", responseText.indexOf("backupfile:")));
displayMessage(bidix.upload.messages.backupSaved,bidix.dirname(url)+'/'+backupfile);
}
var destfile = responseText.substring(responseText.indexOf("destfile:")+9,responseText.indexOf("\n", responseText.indexOf("destfile:")));
displayMessage(bidix.upload.messages.mainSaved,bidix.dirname(url)+'/'+destfile);
store.setDirty(false);
log.endUpload("ok");
} else {
alert(bidix.upload.messages.mainFailed);
displayMessage(bidix.upload.messages.mainFailed);
log.endUpload("failed");
}
};
// do uploadMain
var revised = bidix.upload.updateOriginal(original,posDiv);
bidix.upload.httpUpload(uploadParams,revised,callback,uploadParams);
};
bidix.upload.httpUpload = function(uploadParams,data,callback,params)
{
var localCallback = function(status,params,responseText,url,xhr) {
url = (url.indexOf("nocache=") < 0 ? url : url.substring(0,url.indexOf("nocache=")-1));
if (xhr.status == 404)
alert(bidix.upload.messages.storePhpNotFound.format([url]));
if ((bidix.debugMode) || (responseText.indexOf("Debug mode") >= 0 )) {
alert(responseText);
if (responseText.indexOf("Debug mode") >= 0 )
responseText = responseText.substring(responseText.indexOf("\n\n")+2);
} else if (responseText.charAt(0) != '0')
alert(responseText);
if (responseText.charAt(0) != '0')
status = null;
callback(status,params,responseText,url,xhr);
};
// do httpUpload
var boundary = "---------------------------"+"AaB03x";
var uploadFormName = "UploadPlugin";
// compose headers data
var sheader = "";
sheader += "--" + boundary + "\r\nContent-disposition: form-data; name=\"";
sheader += uploadFormName +"\"\r\n\r\n";
sheader += "backupDir="+uploadParams[3] +
";user=" + uploadParams[4] +
";password=" + uploadParams[5] +
";uploaddir=" + uploadParams[2];
if (bidix.debugMode)
sheader += ";debug=1";
sheader += ";;\r\n";
sheader += "\r\n" + "--" + boundary + "\r\n";
sheader += "Content-disposition: form-data; name=\"userfile\"; filename=\""+uploadParams[1]+"\"\r\n";
sheader += "Content-Type: text/html;charset=UTF-8" + "\r\n";
sheader += "Content-Length: " + data.length + "\r\n\r\n";
// compose trailer data
var strailer = new String();
strailer = "\r\n--" + boundary + "--\r\n";
data = sheader + data + strailer;
if (bidix.debugMode) alert("about to execute Http - POST on "+uploadParams[0]+"\n with \n"+data.substr(0,500)+ " ... ");
var r = doHttp("POST",uploadParams[0],data,"multipart/form-data; ;charset=UTF-8; boundary="+boundary,uploadParams[4],uploadParams[5],localCallback,params,null);
if (typeof r == "string")
displayMessage(r);
return r;
};
// same as Saving's updateOriginal but without convertUnicodeToUTF8 calls
bidix.upload.updateOriginal = function(original, posDiv)
{
if (!posDiv)
posDiv = locateStoreArea(original);
if((posDiv[0] == -1) || (posDiv[1] == -1)) {
alert(config.messages.invalidFileError.format([localPath]));
return;
}
var revised = original.substr(0,posDiv[0] + startSaveArea.length) + "\n" +
store.allTiddlersAsHtml() + "\n" +
original.substr(posDiv[1]);
var newSiteTitle = getPageTitle().htmlEncode();
revised = revised.replaceChunk("<title"+">","</title"+">"," " + newSiteTitle + " ");
revised = updateMarkupBlock(revised,"PRE-HEAD","MarkupPreHead");
revised = updateMarkupBlock(revised,"POST-HEAD","MarkupPostHead");
revised = updateMarkupBlock(revised,"PRE-BODY","MarkupPreBody");
revised = updateMarkupBlock(revised,"POST-SCRIPT","MarkupPostBody");
return revised;
};
//
// UploadLog
//
// config.options.chkUploadLog :
// false : no logging
// true : logging
// config.options.txtUploadLogMaxLine :
// -1 : no limit
// 0 : no Log lines but UploadLog is still in place
// n : the last n lines are only kept
// NaN : no limit (-1)
bidix.UploadLog = function() {
if (!config.options.chkUploadLog)
return; // this.tiddler = null
this.tiddler = store.getTiddler("UploadLog");
if (!this.tiddler) {
this.tiddler = new Tiddler();
this.tiddler.title = "UploadLog";
this.tiddler.text = "| !date | !user | !location | !storeUrl | !uploadDir | !toFilename | !backupdir | !origin |";
this.tiddler.created = new Date();
this.tiddler.modifier = config.options.txtUserName;
this.tiddler.modified = new Date();
store.addTiddler(this.tiddler);
}
return this;
};
bidix.UploadLog.prototype.addText = function(text) {
if (!this.tiddler)
return;
// retrieve maxLine when we need it
var maxLine = parseInt(config.options.txtUploadLogMaxLine,10);
if (isNaN(maxLine))
maxLine = -1;
// add text
if (maxLine != 0)
this.tiddler.text = this.tiddler.text + text;
// Trunck to maxLine
if (maxLine >= 0) {
var textArray = this.tiddler.text.split('\n');
if (textArray.length > maxLine + 1)
textArray.splice(1,textArray.length-1-maxLine);
this.tiddler.text = textArray.join('\n');
}
// update tiddler fields
this.tiddler.modifier = config.options.txtUserName;
this.tiddler.modified = new Date();
store.addTiddler(this.tiddler);
// refresh and notifiy for immediate update
story.refreshTiddler(this.tiddler.title);
store.notify(this.tiddler.title, true);
};
bidix.UploadLog.prototype.startUpload = function(storeUrl, toFilename, uploadDir, backupDir) {
if (!this.tiddler)
return;
var now = new Date();
var text = "\n| ";
var filename = bidix.basename(document.location.toString());
if (!filename) filename = '/';
text += now.formatString("0DD/0MM/YYYY 0hh:0mm:0ss") +" | ";
text += config.options.txtUserName + " | ";
text += "[["+filename+"|"+location + "]] |";
text += " [[" + bidix.basename(storeUrl) + "|" + storeUrl + "]] | ";
text += uploadDir + " | ";
text += "[[" + bidix.basename(toFilename) + " | " +toFilename + "]] | ";
text += backupDir + " |";
this.addText(text);
};
bidix.UploadLog.prototype.endUpload = function(status) {
if (!this.tiddler)
return;
this.addText(" "+status+" |");
};
//
// Utilities
//
bidix.checkPlugin = function(plugin, major, minor, revision) {
var ext = version.extensions[plugin];
if (!
(ext &&
((ext.major > major) ||
((ext.major == major) && (ext.minor > minor)) ||
((ext.major == major) && (ext.minor == minor) && (ext.revision >= revision))))) {
// write error in PluginManager
if (pluginInfo)
pluginInfo.log.push("Requires " + plugin + " " + major + "." + minor + "." + revision);
eval(plugin); // generate an error : "Error: ReferenceError: xxxx is not defined"
}
};
bidix.dirname = function(filePath) {
if (!filePath)
return;
var lastpos;
if ((lastpos = filePath.lastIndexOf("/")) != -1) {
return filePath.substring(0, lastpos);
} else {
return filePath.substring(0, filePath.lastIndexOf("\\"));
}
};
bidix.basename = function(filePath) {
if (!filePath)
return;
var lastpos;
if ((lastpos = filePath.lastIndexOf("#")) != -1)
filePath = filePath.substring(0, lastpos);
if ((lastpos = filePath.lastIndexOf("/")) != -1) {
return filePath.substring(lastpos + 1);
} else
return filePath.substring(filePath.lastIndexOf("\\")+1);
};
bidix.initOption = function(name,value) {
if (!config.options[name])
config.options[name] = value;
};
//
// Initializations
//
// require PasswordOptionPlugin 1.0.1 or better
bidix.checkPlugin("PasswordOptionPlugin", 1, 0, 1);
// styleSheet
setStylesheet('.txtUploadStoreUrl, .txtUploadBackupDir, .txtUploadDir {width: 22em;}',"uploadPluginStyles");
//optionsDesc
merge(config.optionsDesc,{
txtUploadStoreUrl: "Url of the UploadService script (default: store.php)",
txtUploadFilename: "Filename of the uploaded file (default: in index.html)",
txtUploadDir: "Relative Directory where to store the file (default: . (downloadService directory))",
txtUploadBackupDir: "Relative Directory where to backup the file. If empty no backup. (default: ''(empty))",
txtUploadUserName: "Upload Username",
pasUploadPassword: "Upload Password",
chkUploadLog: "do Logging in UploadLog (default: true)",
txtUploadLogMaxLine: "Maximum of lines in UploadLog (default: 10)"
});
// Options Initializations
bidix.initOption('txtUploadStoreUrl','');
bidix.initOption('txtUploadFilename','');
bidix.initOption('txtUploadDir','');
bidix.initOption('txtUploadBackupDir','');
bidix.initOption('txtUploadUserName','');
bidix.initOption('pasUploadPassword','');
bidix.initOption('chkUploadLog',true);
bidix.initOption('txtUploadLogMaxLine','10');
// Backstage
merge(config.tasks,{
uploadOptions: {text: "upload", tooltip: "Change UploadOptions and Upload", content: '<<uploadOptions>>'}
});
config.backstageTasks.push("uploadOptions");
//}}}
bidix.UploadLog.prototype.endUpload = function(status) {
if (this.tiddler) this.addText(" "+status+" |");
window.location.reload( false );
};