Spreading Euro Crisis

Poor Europe. No matter what it does, the crisis is spreading. The German news magazine Spiegal has been covering the crisis and has another good graphic of the countries in trouble. Here it is:

Serious Macromodel with explanation

Most models used in intro classes are basic and do not really convey the sophistication of economic modeling. In today's Wall Street Journal, there was a good article on agent based modeling that had the following image that showed a macro-model and provided a good explanation - which even a intro student could understand. I will be using this as a prop for showing students higher level modeling.

Mapping America

The American Human Development Project has a great web page called "Mapping the Measure of America". It is a huge database of social science statistice built into an interactive map of the United States for comparisions across the country. Check it out...

Brad DeLong on the failure of macro

Brad DeLong has published a very readable essay called "Battered and Beaten" on the current crisis and the failure of policy to address the crisis. Another good DeLong post is "The Four Horsement of the Teapocalypse". Krugman has built on to this with his own thoughts on the intellectual and poltical failures of policy in a post called "The Instability of Moderation".

Deflation, Fed Policy and Exchange Rates

The big story has been Ben Bernanke going to bat for Fed policy against both domestic and international critics over QE2. Domestically, the big fear is inflation. But the new inflation numbers (core CPI) show that inflation is at historic lows and going lower. The fear is that the United States is following Japan in into its own lost decade. The chart below from the New York Times shows this clearly.




























China has made it clear that it opposes QE2 because it will lower the value of the dollar, which will make it harder for China to maintain its huge trade surplus. In response to QE2, the Chinese Central Bank has raised its reserve requirements by half a percent (the Chinese Central Bank uses the reserves to buy dollars) which will negate the affect of QE2 plan. This is described in a good article in the New York Times. Here is an example of banking policy affecting exchange rates.

Krugman with the Snow

Paul Krugman has a post where he makes a good use of the Swan diagram to explain how the trade issues between the United States and China affect both economies, and how they could solve each others problems (if China would let them). Here is the diagram. It is a good teaching tool - I wonder why more textbooks do not use it. here is the Wikipedia link with more about the Swan diagram.

Irish Crisis - Good Graphs

The German on-line magazine Spiegel has a series of good charts showing the problems in Ireland and comparing the Irish situation to the rest of the euro-zone. Here is the interesting part - clearly Ireland is in trouble with high unemployment and a very high deficit (30% of GDP), but its overall debt to GDP is low (lower than Germany's). So, why is this a sudden crisis? Why is there a sudden jump in Irish interest rates?
Look at the charts:

The New Age of Austerity

The New Age of Austerity is the phrase in today's article in The New York Times, by David Leonhardt, on the difficulty the United States will have in reducing the long-term debt problems it is facing. The root question is how much of tax increases and spending cuts can be done while keeping the economy growing and not having an adverse decline in government services. Basically, there are no painless choices, but there are less painful choices. And while everyone has to feel some of the pain, who should feel more and who should feel less is a hard political choice.

The times also has a great interactive budget puzzle, where the reader gets a change to put their own budget priorities to the test. Good luck.

American Debt and Deleveraging

The amount of household debt, and the process of deleveraging, is an important part of the economic recovery. The fact that American households are trying to repair their balance sheets from the combined problem of running up large debts during the 2000's and suffering from the large negative wealth effect as a result of the housing crisis and declines in the stock market, is a major factor. So, how have American households been doing in this recession and how much more debt deleveraging still needs to happen, are the big questions. The chart below, originally from the New York Fed, but reposted on the Economist's Free Exchange Blog, shows the rise in household debt and how it is slowing be cut down - still a long way to go.

Ireland's growing deficit - and crisis

Last spring Ireland was held up as the model of what countries should be doing - engaging in an austerity package in the face of a deep recession. They were doing this to stay within the bounds of the euro-zone treaties that limit deficits and debt. It was clear that the budget cuts and tax increases would be painful. Still, it was seen as the responsible thing to do. During the Greek crisis last spring, the Greeks were constantly reminded that the Irish were doing the noble thing. Even more oddly, given the current state of things, some people said that austerity would cause economic growth.

Now, it looks like Ireland will be the next point of the euro-crisis. The Irish deficit has been sky-rocketing and this has been compounded by rising interest rates. Clearly, Ireland is in trouble. Two charts from the Wall Street Journal get to the crisis. The first shows the history of the banking crisis in Ireland - it may be, as Simon Johnson has said, that Ireland's banks are "too big to save" (as opposed to the American banks which are said to be "too big to fail". The second chart shows Irish deficit compared to the rest of the euro-zone average.


This is about to get ugly.

Rewards of Austerity

Fiscal austerity is the big focus now. The basic idea is that the cost of rising national debts are too much and that nations, in the heart of a global recession, need to cut government spending. The big examples of this have been in Europe - namely the PIIGS (Portugal, Italy, Ireland, Greece and Spain). Last spring, when the focus was Greece, Ireland was held up as a model of fiscal austerity and prudence since it had cut its government spending in the face of recession. Of course the result of such a choice is to further weaken the economy - which is the case with Ireland. However, the reward for such behavior has been higher (not lower) interest rates. Check out the chart below from the German magazine Spiegel. Clearly, the bond markets don't care about austerity. They care about the ability to repay debt - which increases as an economy gets stronger.

Intelligence and Economics

The Freakonomics blog has a post on the relationship between intelligence and economics. The basic point is that more intelligent people tend to think like economists. It is not just that more educated people think like economists, it is that education is a "proxy" for intelligence.

Time Span to Close the Unemployment Gap

The new unemployment numbers are in - and the overall picture has not changed much. Unemployment is still at 9.6% and underemployment is at 17%. While the economy added jobs, it did not do enough to close the gap between its current state and full employment. For that we need more growth, and more jobs. The hard part, beyond the current numbers, is how long it will take the economy to get back to full employment. The Brookings Institution has a good report on the effects of long-term unemployment, which contained this graph showing how long it would take the economy to return to full employment based on the number of jobs created every month. For reference, only 151,000 Jobs were created in October (its not even on the chart!).

Timeline of Fed Policy

With the news of today's FOMC meeting and the decision to engage in a $600 billion Quantitative Easing program, it seems like the Fed is reaching deep into its bag of tricks to get the economy moving. However, despite the size of the action, it is really unknown (and unclear) if this will have much effect. But, it seems on balance to be better than doing nothing (which is what fiscal policy is doing).

The New York Times has posted a graphic timeline of Fed policy in this crisis. It is a good teaching tool.