Economic debates for 2010 and beyond

By Nick Li

The 2008 economic collapse will be studied for years to come by economists of all stripes. While some economists were able to look back and say "I told you so" many will be forced to rethink conventional wisdom. Alan Greenspan, who at one point was being canonized by everyone, now looks very foolish because of statements like:

Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants. Such developments are representative of the market responses that have driven the financial services industry throughout the history of our country … With these advances in technology, lenders have taken advantage of credit scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. … Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending; indeed, today subprime mortgages account for roughly 10 percent of the number of all mortgages outstanding, up from just 1 or 2 percent in the early 1990s.

Similarly, many economists who had predicted that the next great crisis would be a collapse of the US dollar due to the accumulation of "global imbalances" (the massive US current account deficit and government debt held by foreign investors, especially sovereign wealth funds and central banks) turned out to be wrong (so far) – the financial distress that originated in the US housing sector resulted in a flight to safety to US assets and US treasuries have never been perceived as safer. Even the usually brilliant Nobel Laureate Paul Krugman, who correctly predicted the housing bubble, missed the recent speculative oil bubble. Well, I shouldn’t presume to know that Krugman is wrong – perhaps he has some as yet unpublished analysis of how fundamentals drove the large and rapid increase and decrease in oil prices since 2007 – but the fear of $200 a barrel oil that some analysts were predicting certainly seems far off.

Prognostication is always a dangerous game in economics – anyone batting above .500 would be immensely wealthy if they ever put their money where their mouth is – but we are very good at hindsight. Or so I thought until I saw the level of the debate today. Apparently our profession has yet to reach a consensus about how the US got out of the Great Depression – see the recent work by Robert Barro or Lee Ohanian. While the level of disagreement over fundamental issues can be disheartening, it is also exciting for young researchers in the field seeking to make a name for themselves. Apparently there are many more open questions than anyone thought. The debates that will be played out in Academia and in policy circles in 2010 and beyond include:

  •  Monetary policy – objectives beyond low and stable inflation?
  •  Regulating finance
  •  How to get out of recessions?

In the next few weeks I will try to lay out the lines of debate and their main proponents. Continue reading

Monetary Policy: Debates for 2010 and beyond

By Nick Li  

Whither monetary policy?

Back in 2006 it seems like the industrialized world had achieved a consensus on monetary policy. There was an independent central bank whose primary objective was to maintain price stability, either through direct inflation-targetting (say, keeping the prime rate between 1% and 3%) or through a general objective of "price stability" sometimes counterbalanced by maintaining the economy near full employment. And despite tremendous criticism from some quarters in the aftermath of the 2007-201? financial crisis and recession, Alan Greenspan and Ben Bernanke (after 2006) did exactly that, as did the European Central Bank (with the important caveat that unemployment varies tremendously across European countries and the ECB tends to be more oriented towards the biggest economies of the Euro area, especially Germany). Unemployment was around 5% in the US and inflation (as measured by the Consumer Price Index) was low and stable.

Yet in the aftermath of the crisis, there has been a lot of debate about whether the Central Banks did enough to avert the crisis and whether their role might extend beyond simply setting interest rates to maintain stable inflation, especially since with interest rates near zero, conventional monetary policy has little power to affect the economy and boost employment in the current global recession. In this article I will briefly review some of the current proposals and debates.

Continue reading

Martin Luther King Day and Inauguration Day

 By Nick Li

At 12pm EST on Tuesday, January 20th 2009 Barack Obama will be sworn in as the 44th President of the United States. Americans and the rest of the world have high hopes for this man – nothing less than ending a global financial crisis and economic downturn, fighting the scourges of disease and poverty, promoting reconciliation and peace between the West and the Muslim world, and restoring America’s global moral authority (though we can debate whether or not it has possessed such a moral authority in decades). Continue reading

Understanding the Global Financial Meltdown

By Nick Li

I confess to not being an expert on financial economics or monetary policy, so I have no original thoughts about the current financial crisis gripping the world. However, I have been trying to inform myself about what is going on. In this post I would like to suggest a few resources for non-experts to get acquainted with the origins and solutions to the current crisis, and I will attempt to describe in layman’s terms a few of the options. Continue reading

The World Electoral College according to the Economist

By Nick Li

The Economist magazine has an interesting map that shows what the US election would look like if everyone in the world could vote. Each country is like a US state, in that it gets 3 automatic electoral college votes and then additional votes proportional to population. The 50%+1 majority gets all the electoral college votes for that country. The choice of each country is based on a survey of Economist readers, so obviously this is a highly biased sample. Nevertheless the results are interesting – an overhwhelming Obama landslide 8202 to 8. Continue reading

Some thoughts on the first US Presidential Debate

By Nick Li

After all the drama of the last few days, Barack Obama and John McCain finally got down to business today. US Presidential Debates are a very strange format for disseminating information about the candidates and their policies. The participants have very short periods in which to communicate their points, and tend to get judged as much on style as substance. Did Al Gore sigh? Did George HW Bush glance at his watch? Did Kennedy look better than Nixon? To make matters worse, in the US the debate is immediately followed by non-stop spin by the spokepeople for both camps, and any opportunity to take words out of context or dwell exclusively on minor gaffes tends to dominate discussion of the actual issues or the veracity of the speakers’ claims. Don’t expect the media to call out John McCain if he claims that Barack Obama wants to raise your taxes (which is a true statement only for the richest 5% of viewers), as the US newsmedia no longer feels its role is to be the arbiter of truth. Impartiality demands that lies not be called lies. Continue reading

Manipulating and measuring the political spectrum part 2: Political Rankings and Compasses

political_compass.png By Nick Li

In my last post I argued that Barack Obama’s so-called move to the center is largely a fiction. This perception appears to be partly driven by a misunderstanding of his previous positions, for example on capital punishment. Some of it also appears to be the result of taking statements made in a speech out of context or putting a rather radical spin on them and then calling the subsequeht clarification and nuance a flip-flop(whether on timetables for withdrawal from Iraq, delaying tax increases if the economy is in recession, or meeting without preconditions with leaders of hostile regimes). But a large part of it must be due to the perception that Obama is a very liberal politician at heart. This perception is largely driven by the often repeated claim that Obama is the most liberal (or left-wing for our international readers) senator in the US senate, which according to McCain now means he is left of a self-described socialist, Senator Bernie Sanders of Vermont. The source for the claim is a study by the National Journal, a magazine for Washington insiders. In this post I will discuss the methodology behind the study and some other methodologies used to gauge, based on voting records, where to located a politician on the political spectrum. Continue reading

Manipulating and measuring the political spectrum part 1: Obama and the flip flops

By Nick Li

flip flops.jpg The conventional political wisdom in the last few weeks is that Democratic Presidential Candidate Barack Obama has been moving to the center to win the votes of moderates. In doing this he is just following the time honored tradition of running towards the political extremes during the primary contests and then moving back to the center in time for the general election. Purveyors of this narrative include McClatchy,Time Magazine, the Chicago Tribune,the Hill, the Huffington Post,and Salon.com. Among the issues at stake are retroactive immunity for telecommunications companies, recent supreme court decisions to overturn the Washington D.C. handgun ban and disallow the death penalty for child rape cases, unilateral withdrawal from NAFTA, whether Jerusalem must remain united and under Israeli control, the rate of troop withdrawal from Iraq, tax policy and support for "faith-based initiatives" (i.e. church-based social service provision). I find all the talk about moving to the center surprising because I never thought that Barack Obama was a political radical far to the left of the American mainstream or even the Democratic party. Part of the problem is that a major talking point of the right-wing, often repeated in the echo chamber of the US mainstream media, is that Obama is too liberal for mainstream America, and is in fact "the most liberal senator in the US." This is a devastating charge in a country where "liberal" is seen as a dirty word by many, and where self-identified conservatives still outnumber liberals. It seems like many Americans are buying into this rhetoric without more carefully scrutinizing Senator Obama’s own voting record. They have perhaps been misled by Obama’s associations with more radical leftist figures like his former Reverend, Jeremiah Wright, or neighbor, former Weather underground terrorist Bill Ayers. In this post I want to briefly provide my own analysis of whether Obama has in fact moved to the center on various issues. In my next post I will look in greater detail at how one can actually measure the political spectrum – what is the center in US politics and how are these things measured by the likes of the National Journal, which did rank Obama as the most liberal Senator in 2007. Continue reading

California and the inexorable march of same-sex marriage

ba_gaywed_01_lm.jpg

On Monday, June 16th of 2008 same-sex marriage became legal in the state of California due to a ruling by the Supreme Court of California. Since this site is crawling with human rights lawyers and such I will not embarrass myself by attempting detailed legal analysis of the 172 page ruling but I think the decision is worthy of comment. While the state of Massachusetts had already legalized same-sex marriages back in 2004, and Connecticut, Vermont, New Jersey, and New Hampshire all had civil union laws with equal benefits, this case was particularly significant for several reasons. California is the largest state in the nation and also possesses the highest population of same-sex couples (over 92,000 according to the 2000 census), the largest gay population at over 1.3 million, and the most famous “Gay village” in the world, San Francisco, which has a gay population as high as 15%.
Continue reading

It’s all over for Clinton: Obama versus McCain this November

obama.champion.jpgBy Nick Li

With all apologies to the residents of West Virginia, Kentucky and Puerto Rico, the outcome of the Democratic Primary process is no longer in doubt. Hillary Clinton put on a brave face and a valiant (if someone negative) fight. While it would be nice of her to concede soon, the most important thing is that she work hard to get her many supporters to line up behind Obama – although exit polls claiming that "40% of Hillary voters would not vote for Barack in the General Election" should not be trusted, Obama cannot take for granted that all the Democratic Primary voters will vote for him in the fall. Barack Hussein Obama will be the Democratic Nominee this fall and will face Republican John Sidney McCain. Yes, I said their middle names. I find it unbelievable that it is considered a smear in the US to imply that someone is a muslim (or worse, a secret muslim) but I get the feeling we haven’t even seen a fraction of the dirty, racist, fear-mongering tactics that are coming our way this fall. Continue reading