Sunday, February 20, 2011

Gareth Evans on the Labor Party

Kevin Rudd on the Labor Party

Monday, February 14, 2011

Inequality, leverage and crises

Nice article over here at voxeu.

"This paper has presented stylized facts and a theoretical framework that explore the nexus between increases in the income advantage enjoyed by high income households, higher debt leverage among poor and middle income households, and vulnerability to financial crises. This nexus was prominent prior to both the Great Depression and the recent crisis. In our model it arises as a result of increases in the bargaining power of high income households. The key mechanism, reflected in a rapid growth in the size of the financial sector, is the recycling of part of the additional income gained by high income households back to the rest of the population by way of loans, thereby allowing the latter to sustain consumption levels, at least for a while. But without the prospect of a recovery in the incomes of poor and middle income households over a reasonable time horizon, the inevitable result is that loans keep growing, and therefore so does leverage and the probability of a major crisis that, in the real world, typically also has severe implications for the real economy. More importantly, unless loan defaults in a crisis are extremely large by historical standards, and unless the accompanying real contraction is very small, the effect on leverage and therefore on the probability of a further crisis is quite limited. By contrast, restoration of poor and middle income households’ bargaining power can be very effective, leading to the prospect of a sustained reduction in leverage that should reduce the probability of a further crisis."

Sunday, February 06, 2011

Some cool books about behavioural economics.

I have read and half-read a few of these- hopefully one day I can plow through a few others. "Nudge" really is great reading, I wasn't a massive fan of "Animal Spirits" though. "The Bounds of Reason" by Herbert Gintis is excellent but remains half digested. As for the blog - "what the smartest people on the net read"- plz!

Friday, February 04, 2011

Tunisian Leasons for Australian States

From Joe Stiglitz:

"Nor is it enough to follow the dictates of international financial markets – that may get good bond ratings and please international investors, but it does not mean that jobs are being created or that standards of living are being increased for most citizens. Indeed, the fallibility of the bond markets and rating agencies was evident in the run up to the 2008 crisis. That they now looked with disfavor at Tunisia’s move from authoritarianism to democracy does not redound to their credit – and should never be forgotten."

AAA credit ratings do not guarantee that peoples' standards of living are improving- or that governments will be re-elected. People are happy when they have jobs and the trains run on time- forget this at your own peril.

Tuesday, February 01, 2011

Inflation: Fixed and flexible prices

Krugman picks up a point that I have also recently followed in a Robert Gordon paper, namely:

"there’s an important distinction between the prices of wheat, oil, rubber, etc. that may rise or fall by double-digit amounts over the course of a year, then quickly reverse that rise or fall, and the prices of many services and manufactured goods — and most wages — which are set for periods of months or years. The latter are slow to develop inflation, but also slow to give it up, which is why policy should focus on whether those prices have started to rise too fast (or too slowly).

The question, however, is whether changes in the flexible-price goods feed into persistent inflation in the core. Phelps thought not: he believed that wages were set mainly in reference to other wages, implying that swings in oil or wheat prices were largely irrelevant to the story. I’d agree: if we think of wages as the ultimate core price, I don’t see any mechanism in today’s America whereby rising commodity prices translate into higher wage contracts."

Some prices are highly flexible- especially those that are set in auction type markets. Others are sticky owing to contractual relations- most notably concerning labor. What this says is that policy makers should pay attention to core inflation in setting monetary policy, and ignore seasonal fluctuations in auction markets. Especially now that unions have lost clout, and COLA contracts are less common.

This is at odds with some Economists who claim that the key measure to watch is the headline inflation number. Of course, a sub-issue here is how the core or trimmed inflation figure is put together. When is core-inflation really core-inflation versus a mere statistical squib? If we are simply knocking off the top and bottom 15% of price movements in a given period is this really portraying "core" inflation accurately?