Dim expectations for the QE2

Paul Krugman has been looking at Japan and its lost decade for guide as to what the next round of Fed Quantitative Easing might look like. In a recent blog post he looked at how much effect the Central Bank of Japan's policy of quantitative had on the Japanese money supply. The evidence says it has almost no effect. Here is the graph to support this:

Krugman's explanation for this was that when an economy is up against the zero bound, monetary policy ceases to have any effect. Sounds familiar?

Microscopic Microeconomics - Psych & Econ

The New York Times has a short piece called Microscopic Microeconomics on the brain science behind economic decision making - particularly in regard to investment decisions and speculative bubbles. While there are a lot of sources of this information out there, this is a nice short piece that goes into the brain science behind behavioral economics.

Long Term Unemployment on 60 Minutes

60 minutes had a good piece tonight on the effects of long term unemployment in Silicon Valley. The piece specifically looked at the troubles that educated older workers are facing in this recession. Here is the link.

The PBS program Need To Know had a piece a few weeks ago that looked at the same problem, except this time the focus was on people who were not professionals, but in much the same situation - only worse - called "The New Poor".

Retirement Ages - International Comparison

So, the French are protesting the plan by their government to push up the retirement age from age 60 to 62. This is part of a larger political battle about bringing European government budgets into compliance with the Euro zone rules. The chart below from the German magazine Speigel shows just how young the French retirement age is when compared to other major industrialized countries.

It is interesting to compare actually retirement ages to official statistics. Also, check out the gender differences in the official ages in every country except the United States.

Who might vote for QE2 and what to expect

The blog Calculated Risk has posted a chart showing which members of the FOMC it expects to vote for the second round of Quantitative Easing or QE2. According to the chart, it looks like it will happen. Paul Krugman has a description of QE2 that puts the policy action in perspective and is not too optimistic.

Growing Income Inequality

The issue of growing income inequality has been an issue in the United States for several decades now and there are many reasons for it ranging from structural changes in the economy to the reductions in many government programs. This is a good chart showing this change over time, from the Economist View blog.

Size and Scale of the Mortgage Mess

The current foreclosure nightmare is big and it is far from clear how it will be resolved. Many in the finance industry and government claim that the halt of foreclosures will be over soon and things will keep moving. It would be nice to believe this, but we have heard this type of talk before. The bigger issue is that the American economy is far from being out of the woods with this housing crisis. This graphic from the Wall Street Journal shows the current size and scope of the problem.

Brad DeLong's confused students

Surprisingly, one of the trickiest parts of teaching economics is to get students to understand how a market works and that the price adjusts forces of supply and demand to equilibrium. It seems easy enough, and most students learn how to demonstrate this mathematically and graphically. However, students often fail to grasp the real reason that economists like markets - that the price works as a signal that allows market participants to self organize a solution to unexpected changes in the economy. Somehow, students believe there is some magical third force guides the economy. Maybe this is a result of so many tellings of Adam Smith's "Invisible Hand".

If you feel like you do not do a good job conveying this idea to your students, you are not alone. Brad DeLong blogs that he has the same problem. Read his post and take heart.

Economic Recovery and Growth

The New York Times has a good graph (shown below) of how far the economy is below the baseline of potential GDP and how long it will take the economy to get back to potential GDP under different growth rates. Dismal science once again.

Nobel Prize Winners!!!

The announcement has come out for this year's Nobel Prize in economics. There were three winners, with Peter Diamond of MIT, at the forefront of the trio for his work on search theory and the workings of markets. Two good descriptions are the PBS News Hour video and Paul Krugman's connection to Diamond's work on Search Theory and the Beveridge Curve.

Foreclosure and Property Rights

The housing crisis and financial crisis has had a huge effect on my economics classes. Formerly obscure concepts, such as credit default swaps, and mundane points, such as the limits of Fed power, have come to the forefront as important issues that students need to know to fully understand the crisis.

The foreclosure problem is quickly turning into a new teachable moment on the importance of property rights. Quite simply, the announcements by major banks to suspend foreclosures across the country due to problems with the paperwork (due to missing and fraudulent documents) has the potential to cloud the property rights to foreclosed houses across the country. While the legal issues involved are interesting and maddening, from an economics point of view, the confusion over property rights will make it harder for the housing market to function and recover from the crisis. Simply put, who will buy a foreclosed house when the title to it is suspect (title insurance companies are pulling back from issuing new policies on foreclosed properties).

Any solution to this problem will create more problems. If people fighting foreclosure can win either monetary payments from banks not to fight or possibly win title, and lose the mortgage obligations in the in the process because the banks cannot show ownership, than the result is moral hazard to default and more people will challenge the banks. This will have the knock on effect of further weakening the financial positions (and stock values) of the banks. Ignoring the problems with these mortgages will make it easier to foreclose (which has been tried in some states such as Florida), will result in more abuses by banks, such as foreclosing on people who never had a mortgage with the banks. This new part of the crisis stems from attempts to speed up the process, which brought the issue of bank abuse to the light of day.

There is no good solution to this problem. However, there is a good teachable moment.

The core of the teachable moment is this: basic economics teaches that secure property rights are crucial to the functioning of any market. The failure of property rights will cause market failure - in this case, it will prevent the recovery of the housing market. Only governments can enforce property rights.

A good description of how this new part of the crisis has emerged is covered by Mike Konczal at the blog Rortybomb.

Great Graphic on the Output Gap

The Washington Post has a great interactive graphic on the output gap and what it would take to close it. This is why they call economics the "dismal science".

Great Graphic on Global Trade

The German on-line magazine Spiegel has a great graphic showing the imbalance of trade between China and the United States and Europe. Check it out:

Can you say "public good"

Market failure and the need for the government to provide public goods is a core lesson in economics. Simply put, the private market will not provide some things at a socially optimal level because of the free rider problem. Examples of this are military protection, police, and (yes) fire protection. If you ever needed an example of this, the state of Tennessee has provided a great example that clearly shows the reason. In a rural area of the state the fire protection is provided on a fee based system of $75 a year. In one case, the fire department let a family's house burn down because they did not pay the fee - even though they easily could have saved the house - also the family was willing to pay. Here is the link.

Bits and pieces

School has been busy lately and the economics news has been in rolling forward. There are a number of interesting pieces out there that could be really useful for teaching. For example, in today's New York Times, Robert Shiller has a column on the larger effect of unemployment on the employed called "Survival of the Safest", which has a lot of good insights about unemployment. One, that has real applications to teaching macroeconomics is an explanation of sticky wages (even though he does not use that term) in a recession.

The New York Times also has a great graphic showing the the TARP repayment. It shows that while some parts of the program have profited, most parts of the program have not (should that really be a surprise?). Gretchen Morganson follows that up with a column about why we should expect more TARP like programs in the future because the Dodd-Frank financial legislation set up more backstops for the financial industry and created more moral hazard opportunities by enlarging the potential firms that could be considered "too big to fail".

Paul Krugman has a good insight about how people view markets as morality good, and how that view is utterly wrong in this blog post called "Economics is not a Morality Play". This is an important point students need to understand. Economists do not like markets because markets are virtuous - any they are not. Economists like markets, when they work well, because they work to efficiently distribute resources to best meet needs. When markets do not work, economist think about how to use other tools to efficiently distribute resources to meet needs. That might mean changing markets with regulation or outright government action to deal with "market failure" through the provision of public goods.