•Really unemployed – The Economist

Q&A with Minneapolis Fed’s Kocherlakota – Minneapolis Fed President Narayana Kocherlakota sat down with the Wall Street Journal’s Jon Hilsenrath in his Minneapolis office on Jan. 6. Below are extended excerpts of the interview, which resulted in the following profile. The interview lasted more than an hour:

Fed Chief Gets a Likely Backer –  Narayana Kocherlakota gets his first crack at voting at Federal Reserve policy meetings later this month, and the wonky former academic said he is likely to support the Fed’s controversial $600 billion bond-buying program. Mr. Kocherlakota, who became president of the Federal Reserve Bank of Minneapolis just over a year ago, acknowledged he was hesitant about launching the program and is reluctant to expand it. "The bar for dissent from the committee is going to be pretty high for me," Mr. Kocherlakota, 47 years old, said in an extensive interview last week, his first with the national media.

Reducing the Budget Deficit – CBO Director’s Blog–  I participated this morning in a panel discussion about budget deficits at the annual meeting of the American Economic Association. The panelists were asked to talk about what should, or will, or might, happen regarding the fiscal imbalance and the likely economic impact. Of course, CBO doesn’t make policy recommendations, so I couldn’t talk about what should happen. We also don’t make political forecasts—finding economic and budget projections quite difficult enough—so I couldn’t talk about what will happen. What CBO does is to examine for the Congress the effect of alternative policies, so it’s natural for me to talk about what might happen, and that’s what I did.

More Bank Reforms Needed, Economists Say – In recent months, regulators around the world have taken steps toward ensuring banks are able to weather tough times. New international rules will require big global banks to hold more equity to protect their depositors and other creditors. In the U.S., lawmakers have adopted measures intended to rein in risk at big banks and keep closer tabs on potential threats throughout the financial system. Over the past few days, though, economists here offered a litany of reasons why the reforms fall short. Among their concerns: The new capital requirements aren’t tough or simple enough, there is too much uncertainty about how governments will deal with distress at the biggest lenders, and little has been done to prevent the kind of crisis that could occur if trouble broke out at many smaller institutions, such as hedge funds.

Will bigger paychecks bring a better economy? – As a key piece of President Obama’s signature tax-cut package begins boosting paychecks this month, American workers will confront a critical question that could determine the pace of country’s economic recovery: Spend or save?  One of the most visible components of the $858 billion plan passed by Congress is a 2-percentage-point reduction in the federal payroll tax for all workers that will last through the year. The administration hopes the increase in take-home pay – about $1,000 for an average family, according to White House estimates – will boost consumer spending, which in turn drives the nation’s economy.  But how much of that money will actually be spent rather than saved or used to pay down debt remains a hotly debated topic among economists. Many consumers will not even notice the increase because it is spread over the course of a year, rather than distributed as a lump sum. Critics also note that the payroll tax cut will leave the lowest-income workers with a smaller paycheck than last year, even though they are the most likely group to spend the money.

Brazil Warns Trade War Looming– Brazil has warned that the world is on course for a full-blown “trade war” as it stepped up its rhetoric against exchange rate manipulation. Guido Mantega, finance minister, told the Financial Times that Brazil was preparing new measures to prevent further appreciation of its currency, the real, and would raise the issue of exchange-rate manipulation at the World Trade Organisation and other global bodies. He said the US and China were among the worst offenders. “This is a currency war that is turning into a trade war,” Mr Mantega said in his first exclusive interview since Dilma Rousseff, Brazil’s new president, took office on January 1. His comments follow interventions in currency markets by Brazil, Chile and Peru last week and recent sharp rises in the Australian dollar, the Swiss franc and other currencies amid an exodus of investment from the sluggish economies of the US and Europe.

Tensions rise in currency wars. – If the world’s shell-shocked investors thought that 2011 might see an outbreak of peace in the currency wars, they were sadly mistaken. Not only did Brazil last week take more action to stem the rise in the real but Chile, one of the most free-market of emerging economies, has also unveiled a campaign of intervention against its currency. With a sense that the battles against destabilising capital inflows are here to stay has come a determination to set new rules of engagement on controlling them. But given the uncertainty and political explosiveness around the issue, any such venture faces a tough future. The International Monetary Fund last week revealed an attempt to put itself at the centre of the debate, releasing a study arguing for global rules to constrain governments’ use of capital controls. But observers doubt that it will broker a deal soon. “The IMF has made a pre-emptive grab for power without a clear idea of what it is asking for,” The case for global rules is that one country’s actions can spill over to others. Last year’s rash of direct currency market intervention to slow speculative capital inflows, for example, proved self-perpetuating as country after country rushed to stop its own exchange rate being the only one to rise.

China’s December Trade Rises, but Growth Weakens – China’s December exports rose by double digits, possibly fueling tension with Washington ahead of Chinese President Hu Jintao’s U.S. visit next week. Exports rose 17.9 percent, producing a $13.1 billion trade surplus, though growth was down from November’s 34.9 percent surge, customs data showed Monday. Imports gained 25.6 percent over a year earlier, down from the previous month’s 37.7 percent growth but reflecting China’s relatively strong economic growth. December exports of $154.1 billion might be the highest monthly level ever for China, which overtook Germany in 2009 as the world’s biggest exporter, according to Cohen. Imports were $141 billion. The trade surplus was the third-lowest monthly level in 2010 and down sharply from November’s $22.9 billion.

 China Reports Smaller Trade Surplus Before Obama Meeting – China reported a less-than-forecast $13.1 billion trade surplus for December, bolstering the nation’s bargaining position ahead of a Jan. 19 meeting where U.S. President Barack Obama may press for more gains in the yuan. The gap compared with the $20.8 billion median estimate of 20 economists surveyed by Bloomberg News and November’s $22.9 billion. Exports rose 17.9 percent to $154.2 billion from a year earlier and imports climbed 25.6 percent to $141.1 billion, the customs bureau said on its website today. Today’s figures support China’s case that the nation is moving towards balanced trade and contributing to global economic rebalancing by ramping up domestic consumption. The full-year gap narrowed 6 percent to $183.1 billion even as trade bounced back from the financial crisis with both exports and imports rising to records in December.

The Tax Rate that Maximizes Economic Growth, Part 3 – Today I will build a model that explains over three quarters of the annual movement in real GDP between 1929 and the present. The model depends on marginal tax rates, government spending, the Fed, and demographic trends. This post isn’t light reading and will demand a bit of attention, but I’m going to try to make it worth your while. Let’s just say there’s a lot here that contradicts what you’ll read in your standard economics textbook.This post continues the “Kimel curve” theme I’ve been following for the past few weeks, namely that there is a top that maximizes the growth of real GDP. That is relatively easy to find: run a regression with growth in real GDP as the dependent variable, and the top marginal income tax rate and the top marginal income tax rate squared as explanatory variables. (If you haven’t seen any posts in this series, or aren’t familiar with regression analysis, you might want to take a look the first post in the series .) Official and relatively reliable data for GDP is available going back to 1929. The growth maximizing top marginal tax rate according to that simple model is in the neighborhood of 65%.

Really unemployed – The Economist – To a great extent, the panel focused on its members’ attempts to understand the protracted nature of the bad conditions in labour markets. Robert Hall, an outstanding economist and an entertaining speaker, began by directing attention to a few key measures of lending conditions for small businesses and consumers. He pointed out that at the onset of crisis these measures deteriorated significantly and they have yet to improve all that much. It seemed to him that this had to be connected to the continued high level of unemployment. Mr Hall constructed a model, some of which he presented in the session and some of which came out later in his presidential lecture, in which the crisis gives rise to "financial frictions". Lenders must then be induced to provide additional credit through reductions in the real interest rate. But, he pointed out, interest rates are constrained by the zero lower bound. In his model, it might take a real interest rate of something like -2.5% to clear the economy. But obviously the Fed is constrained once nominal rates hit zero, and so the economy returns to its trend growth rate but never recovers the ground lost during the financial shock. Keep this in mind; we’ll return to it in a moment.

Zombie Economics and Just Deserts: Why the Right Is Winning the Economic Debate – Economist Paul Krugman recently decried "zombie economics," policies advocated by "free-market fundamentalists [who] have been wrong about everything yet now dominate the political scene more thoroughly than ever." I share his chagrin, but suggest that the problem is that Krugman was wrong to also assert that "economics is not a morality play." In fact, I believe that defeating the zombie-like resilience of laissez faire capitalism will require directly refuting the moral belief in the inherent fairness of free market outcomes.  Consider a recent suggestion by Harvard economist Greg Mankiw that tax policy should be based on a "Just Deserts Theory" under which "people should get what they deserve." This principle, a restatement of Equity Theory, has long played a central role in tax debates, and is one that I, like many liberals, heartily endorse. Indeed, I think that widespread support for free markets is based more on belief in their inherent morality than on belief that they promote economic growth, potentially explaining the religious fervor of free-market fundamentalists defending their faith despite the considerable counter-evidence provided by recent events.

Portugal’s Test of Debt Market Looms This Week – The euro zone’s debt crisis is entering a new phase after a brief Christmas lull as Portugal struggles to persuade investors to buy its bonds and other European governments step up pressure on the country to seek an international bailout. Portugal hopes to raise new funds in a bond auction on Wednesday … European Union governments including Germany and France have for weeks been urging Portugal to apply for rescue loans from the joint EU-International Monetary Fund bailout facility … the EU’s deliberations over Portugal haven’t reached the intensity seen ahead of the Greek and Irish rescues … That could change quickly, however, should Portugal’s borrowing costs continue to rise. Euro-zone finance ministers are set to meet Jan. 17, by which time the market’s appetite for Portuguese debt should be clear.

Fed Watch: Are Oil Prices About to Undermine the Recovery? – Calculated Risk directs us to an LA Times story identifying the possibility that rising gasoline prices will undermine the recovery. He also reminds us that James Hamilton recently wrote on the subject as well, concluding: I could certainly imagine that an abrupt move up in gasoline prices from here could hurt the struggling recovery of the domestic auto sector and dampen overall consumer spending. I do not think it would be enough to give us a second economic downturn, but it could easily be a factor reducing the growth rate. I would add that the current price appears inline with the general upward trend since the beginning of last decade. Here I extrapolated on the 2000-2006 trend: From this point on, I tend to think the issue is less of will oil continue to rise, but at what speed will it rise. The trend over the last decade appears to make a lie of recent claims that we have entered into a period of plentiful energy (see also James Hamilton), and while higher oil prices will tend to crimp growth, a gradual price increase should allow for non-disruptive adaptation on the part of economic agents.
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