•Ten Economic Questions for 2011 – Calculated Risk

When Zombies Win, by Paul Krugman – When historians look back at 2008-10, what will puzzle them most, I believe, is the strange triumph of failed ideas. Free-market fundamentalists have been wrong about everything — yet they now dominate the political scene more thoroughly than ever. For two years we’ve been warned that government borrowing would send interest rates sky-high; in fact, rates have fluctuated with optimism or pessimism about recovery, but stayed consistently low by historical standards. For two years we’ve been warned that inflation, even hyperinflation, was just around the corner; instead, disinflation has continued. The free-market fundamentalists have been as wrong about events abroad as they have about events in America.  But such failures don’t seem to matter. To borrow the title of a recent book by the Australian economist John Quiggin on doctrines that the crisis should have killed but didn’t, we’re still — perhaps more than ever — ruled by “zombie economics.” Why? Part of the answer, surely, is that people who should have been trying to slay zombie ideas have tried to compromise with them instead.
 
Blunt or blunter? Emerging markets (try to) return in kind  The one thing we can’t accuse central banks of these days is lack of creativity. The latest gem came from the Central Bank of Turkey (CBT) last week, when, on one hand, it cut its policy rate by 50bps to 6.50%, while at the same time increased the reserve requirement ratios (RRR) for short-term bank funding (deposits and repo) to help lengthen the maturity structure of banks’ liabilities. I don’t want to dwell exclusively on the Turkish example, which, in my view, is fraught with confusion about what exactly the authorities are trying to achieve. What I do want to do is examine under what conditions, if any, a hike in reserve requirements can be effective in tightening monetary conditions. This is particularly relevant at a time when many emerging markets think they can “get away” with avoiding raising interest rates by employing alternative tools, to avoid attracting further capital flows from abroad.

As Hiring Falters, More Workers Become Temporary –  Temporary workers are starting to look, well, not so temporary.  Despite a surge this year in short-term hiring, many American businesses are still skittish about making those jobs permanent, raising concerns among workers and some labor experts that temporary employees will become a larger, more entrenched part of the work force.  This is bad news for the nation’s workers, who are already facing one of the bleakest labor markets in recent history. Temporary employees generally receive fewer benefits or none at all, and have virtually no job security. It is harder for them to save. And it is much more difficult for them to develop a career arc while hopping from boss to boss.  “We’re in a period where uncertainty seems to be going on forever,”  “So this period of temporary employment seems to be going on forever.” This year, companies have hired temporary workers in significant numbers. In November, they accounted for 80 percent of the 50,000 jobs added by private sector employers, according to the Labor Department. Since the beginning of the year, employers have added a net 307,000 temporary workers, more than a quarter of the 1.17 million private sector jobs added in total.

What’s not to like about your big, fat bonus? –  Managers have long believed that the prospect of a bonus can motivate young workers to work harder and smarter, even in a year like this one, when bonuses are expected to fall. By making a huge amount of an employee’s compensation – possibly even twice his or her regular salary – dependent on the firm’s results and the individual’s performance, managers hope to align workers’ incentives with those of the larger company. Yet, in reviewing the roughly 800 essays our students handed in this year, we see a different story. Students increasingly distrust the bonus system and contend that annual bonuses are too large a part of the way they are managed, often serving as a substitute for thoughtful supervision or meaningful reviews

Currency tensions: What historical parallels teach us – While it is true that currency tensions often arise between countries with flexible exchange rates, the potential for conflict is sharper among economies that “manage” their currencies and, perhaps even more so, between these countries and those that let their currencies float (such as the US and Japan). Fixed exchange rates are common; about 50 countries peg (or quasi-peg) their currencies to the dollar and nearly 30 peg to the euro (IMF 2009). Germany, the world’s second largest exporter, shares a currency with about half of its export markets and benefits from major competitiveness divergences with them as well as with Eastern European countries that peg to the euro. Viewed through this prism, the turmoil that preceded the collapse of history’s two fixed-exchange rate regimes – the gold standard in 1936 and the fixed-dollar rate regime in 1973 – provides three useful lessons.

Reply to Thoma on NGDP targeting, by Scott Sumner: Mark Thoma recently asked the following question:So, for those of you who are advocates of nominal GDP targeting and have studied nominal GDP targeting in depth, (a) what important results concerning nominal GDP targeting have I left out or gotten wrong? (b) Why should I prefer one rule over the other? In particular, for proponents of nominal GDP targeting, what are the main arguments for this approach? Why is targeting nominal GDP better than a Taylor rule?.Thoma raises issues that I don’t feel qualified to discuss, such as learnability.  My intuition says that’s not a big problem, but no one should take my intuition seriously.  What people should take seriously is Bennett McCallum’s intuition (in my view the best in the business), and he also thinks it’s an overrated problem.  I think the main advantage of NGDP targeting over the Taylor rule is simplicity, which makes it more politically appealing.  I’m not sure Congress would go along with a complicated formula for monetary policy that looks like it was dreamed up by academics (i.e. the Taylor Rule.)  In practice, the two targets would be close, as Thoma suggested elsewhere in the post.

Monetary Freedom: Sumner and DeLong on Index Futures Convertibility Here DeLong begins to go wrong. He adds in 3 percent because he believes that is a proper target for the long run average nominal interest rate. His figure assumes a 3 percent average nominal interest rate between 2007 and 2011. Whether or not that would be desirable, it plays no role in determining what the Fed should be doing during either the 4th quarter of 2011 or the 4th quarter of 2010. He has effectively put NGDP on an 8 percent growth path. Neither $18.155 trillion nor its reciprocal should play any role in the system. Why does DeLong make this error? It is because he understands the proposal as automatically changing the quantity of money when futures are purchased and sold. In DeLong’s view, when the Fed buys these contracts, it is providing money now, in the fourth quarter of 2010 and will receives the money back in the fourth quarter of 2011. The Fed is making a type of loan when it buys contracts. It makes sense that the Fed would charge interest on these loans. If the Fed charges 3 percent interest on the loans per year, then it provides dollar deposits (makes a loan of a dollar now) in return for (1+.03) times 1/$17.455 trillion of 4th quarter NGDP to be paid in one year.

Nominal GDP Targeting Via Index Futures – Let me try to explain what we want to do…Right now, in December 2010, we want to give people an incentive to take actions that expand the money supply if they think that nominal GDP at the end of 2011 is likely to be lower than $17.5 trillion and to contract the money supply if they think that nominal GDP at the end of 2011 is likely to be higher than $17.5 trillion. So the Federal Reserve announces an open offer to buy and sell: $1 in cash now in exchange for… some fraction of nominal GDP at the end of 2011. It seemed to me when I wrote that the fraction of nominal GDP should not be 1/17,500,000,000,000 because that gives people an incentive to take action to expand the money supply if they expect nominal GDP in a year to be $17.5 trillion because then the Federal Reserve is lending them money at 0% nominal. So if you want people to borrow from the Fed and so increase the money stock if they expect nominal GDP to be less than $17.5 trillion and lend and so shrink the money stock if they expect nominal GDP to be greater than $17.5 trillion, you need a different number than $17.5 trillion in the denominator.

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