We have a deal

Apparently the Europeans have reached an agreement on actions to stave off a collapse of their banking system. Banks accept a 50 percent writedown on Greek debt, the EFSF is enlarged by 1.3 trillion euros (though there's still no agreement on where that 1.3 trillion euros is coming from; in related news, I have decided to spend $5 million on a beach house in the Hamptons - source of funding to be determined later).

My sense is that what the Europeans are doing is saving the banking system but throwing the real economy to the wolves. Six months from now the wolves will be hungry again and the banking system will need to be saved again. Tim Duy has an excellent analysis explaining why we should be pessimistic about the European deal, the core of his argument being that the lack of participation by the European Central Bank dooms these efforts to failure.

The ECB (read: Germany) is reluctant to turn on its printing presses to solve this problem because of fears of inflation. As is well known, Germans still bear the scars from their bout with hyperinflation in the 1920s. But here's a message for the Germans: the 1920s hyperinflation was not the worst thing that happened to Germany in the first half of the 20th century.

Sweet spot

The BEA reports that according to its advance estimate, GDP rose by 2.5 percent in the third quarter. That is the sweet spot. Another sub two percent reading would keep alive the fears that the economy is slumping toward recession. Anything above 3 would have led policymakers to believe that recovery was firmly established and relieve them of some of the urgency of taking action. Two point five percent, however, tells us that the economy is stuck in neutral and needs to be unstuck. The president's interest in passing jobs legislation is undiminished. The Federal Reserve has no excuse not to support the strengthened HARP program by announcing a program to buy mortgage backed securities to drive down mortgage rates.

Dans ce meilleur des mondes possibles, tout est au mieux.

Refi Madness

We have two reports now on the likely effects of the Obama Administration's revised HARP program that will allow a large number of people who were previously ineligible to refinance their mortgages at today's mortgage rates.

Mark Zandi and Cristian Deritis say that at current mortgage rates we could expect 1.6 million more refinancings through 2013 than under the old program. Refinancing acts like a tax cut because it lowers people's interest payments. This could amount to several billion dollars in effective tax relief, adding a small but meaningful boost to the economy.

Joe Gagnon is more optimistic. He assumes, and he may very well be right, that the Federal Reserve will cooperate by buying massive amounts of mortgage backed securities and drive the mortgage rate down to as low as 3.5 percent. If so, Gagnon says that we could see a 2 percentage point boost to GDP and 4 million jobs. That would be a significant turnaround.

The key is that the Federal Reserve must support the Administration's program with a new round of quantitative easing focused on mortgage backed securities. And it must be big. If anyone in Washington knows what they're doing, this quid pro quo has already been agreed to implicitly at least. The FOMC meeting scheduled for Nov. 1-2 should be very interesting.

No hope for Europe

If at 8:00 this morning the European Central Bank were to announce it's commitment to buy unlimited quantities of Italian and Spanish debt at a price implied by German interest rates (or maybe just a smidge more), by 8:02 the European financial crisis would be over. It's that simple. The fact that Europe cannot agree on this very simple solution tells me that they will not be able to agree on any real solution. Best case scenario: Europe cobbles together a fund that keeps the banking system afloat for another few months but does not relieve Italy and Spain from having to pay panic-induced interest rates on their debt. Austerity measures are imposed on Italy that bring the government down, throw the Italian economy and Europe as a whole into recession but do not help reduce Italy's budget deficit. Europe survives until the next wave of panic next spring.

Menzie Chinn eviscerates the "Real American Jobs Act"

Here's his analysis. I will just add that it is remarkable that Republicans keep coming up with "jobs plans" that do not contain a single affirmative policy that would actually create jobs.

Distributional consequences of Herman Cain's 9-9-9 tax plan

What's more disturbing: that Herman Cain, now the frontrunner in the race for the Republican presidential nomination, never thought his plan through very carefully; or that he did and is fine with the distributional consequences?

Here's the Tax Policy Center's analysis via Brian Highsmith via Jared Bernstein:

I am plugged

David Beckworth chimes in on an issue that Brad DeLong has been writing about on his blog: the inadequacy of the IS-LM model we teach in intermediate macroeconomics courses and the need for an alternative framework to teach undergraduates. David writes:

An IS-LM Model That Almost Has It All

... Well Brad, there actually is such an undergraduate IS-LM model that fufills most of these criteria. It is developed by Charles L. Weise and Robert J. Barbera in this paper here. It incorporates the short-term policy rate, the natural interest rate, the long-term risky real interest rate, the term premium, the risk premium, and the term structure of interest rates. The model has an IS curve, an AS curve, and a TS or term structure curve. The model can also be easily drawn in (r, Y) space. The big drawback is that money and its importance for recessions--money is the one asset one every market and thus the one asset that can disrupt every market--is ignored. Still, the Weise-Barbera IS-LM model is still a vast improvement over the standard undergraduate IS-LM. Do take a look.

Thanks for the plug! Sometimes when I teach this model I substitute the TS component with a graph of the supply and demand for risky versus safe assets (the safest asset of course being money). DeLong used this graph in some blog posts awhile back. Maybe that's enough to get Beckworth to remove the "almost" qualifier from his headline?

Scene from Wednesday's Principles of Macroeconomics class:

Char: Good morning students. Let me ask you a question. Over the last week or so, has any of you experienced an intellectual epiphany, a moment in which you saw something, read something, heard something, thought of something, that was new, interesting, changed the way you looked at the world or at least some issue? Have you encountered a new idea, a different perspective on an issue that caused you to say "hmm, I never thought about that before"? Anyone?

Students: Silence.

Crickets outside the window: Chirp! Chirp!

Char: Anybody? Anything?

A student: The Giants don't suck as bad as I thought.

Char: Well, that's something, but I was thinking on a more elevated plane. Any intellectual idea you might have encountered by reading a newspaper, or one of those ... what do you call them ... "books"? Anyone? C'mon people, you're at one of the finest liberal arts colleges in the land, surrounded by intellectual ferment and people who have devoted their lives to the pursuit of knowledge. We live in an age where newspapers, magazines, blogs bring you ideas from great thinkers around the world at the touch of a screen. Anything?

Coyotes in the hills off campus: Awhooooo!

So I have given my students an extra credit assignment. On a 3x5 index card, write down one new intellectual thought you have had or idea you have encountered in the last week that has had an impact on you. No sports, and "I didn't realize my roommate was such an idiot" does not count.

I wonder what I will get...

Mitt Romney's economic plan

I've finally read Mitt Romney's economic plan. He is, after all, going to be the Republican nominee for president, and quite possibly our next president, so we might as well know what he has in store for the American economy. Some quick reactions:

- As a campaign document it is very good. It is a strong attack on Barack Obama's policies. If Barack Obama has done it, it is bad and Mitt Romney will reverse it. I fear its political impact.

- As an economic analysis it's plausible by the standards of Republican Party thinking (see Herman Cain's 9-9-9 plan) but woefully unsubstantiated. This is largely the work of Glenn Hubbard and, I think, Greg Mankiw, and they are smart economists. But they rarely back their claims up with even references to scholarly literature. They claim, for example, that Obama's environmental policies are retarding investment, but the only evidence they provide is an industry-provided inflated cost estimate of the ozone regulations that the Obama Administration overruled last month.

- For the most part the plan is to return the US to the status quo ante that prevailed under George W. Bush. Keep the current marginal tax rates, eliminate the "death tax," pull back on regulation - all of the things that created the wonderful economic environment that served us so well in 2008. So, no, that doesn't appeal to me much.

- Romney panders to Republican primary voters. Everything associated with Obama will be repealed: the ACA, Dodd-Frank, any "excessively costly" regulation, etc. If the theory is that uncertainty about health care, financial regulation and so on is preventing businesses from hiring, I can't see what benefit comes from re-opening these debates from square one. He seems to approve of many elements of Dodd-Frank like increased capital requirements - if he was honest with himself and with Republican primary voters he would argue for amending the act rather than repealing it outright.

- There are some whoppers in the plan. Currently when regulatory agencies propose new regulations they do a cost benefit analysis, adopting them if the benefits exceed the costs. Not so in Romney's first term. He would adopt a policy of no net increase in regulatory costs, period. So suppose the FDA finds that increasing the frequency of meat inspections would cost $1 billion but would generate $10 billion in benefits due to fewer deaths and illnesses due to contaminated food. Under Obama, we get the inspections. Under Romney, the $10 billion in benefits is irrelevant - if it costs $1 billion, it doesn't get done, unless the FDA finds another regulation that currently imposes costs equal to $1 billion and eliminates it. So if we want fewer deaths due to contaminated meat we have to accept more deaths due to, I don't know, poorly-labeled products containing peanuts.

- And Romney wants to start a trade war with China! Sober business-types and their likeminded allies in the press have been tut-tutting about the Democrats' effort to impose tariffs on China unless China revalues its currency. Romney wouldn't wait for Congress - he'll declare that China is unfairly manipulating its currency and impose compensatory duties right away. I'm waiting for the Very Serious People of the world to come down on Romney like a ton of bricks. I'm waiting...

- Overall, of course, the plan does almost nothing to address the main economic problem facing the US today: lack of effective demand. The plan hinges on the assumption that once regulations are removed, there's a plan to balance the budget, and corporate taxes are reformed, businesses will be overcome with confidence, open up their wallets, and start hiring and investing. Gosh it would be nice if that were to happen, but again there is no evidence whatsoever that the reason they aren't doing this now is because of too much regulation, too high taxes, etc. There is abundant evidence that corporations aren't hiring because people aren't buying their stuff. And Romney's plan doesn't give anyone the means to start buying stuff, so I don't see how it can do any good.

- And of course you can kiss goodbye any thought that this country will one day deal with our addiction to fossil fuels, try to address the problem of income inequality, or try to give workers a fighting chance to organize for higher wages and better working conditions. Those ideas will be off the table entirely. We can just rewind the clock to 2001, thank you very much.

So in summary: not a fan.

Count the errors

Here is Steve Forbes on Fareed Zakaria's show yesterday, sparring with Paul Krugman about the Federal Reserve and Obama Administration's economic policies:

FORBES: The whole notion that government, by that way, can jump start the economy is a false one. Where do they get that trillion dollars from? It does not come from heaven, what it comes from borrowing or printing money, which is a form of taxation, or taxation itself. So remove resources from the private sector--where it could be put into productive use—perpetuates a lot of things that should not be perpetuated. Again, if you let the private sector…

ZAKARIA: The private sector is saving right now because it has a cloud over it.

FORBES: Because of the weak dollar, sending private capital overseas, uncertainty about the tax code, massive new regulations coming on health care and the financial sector, those are real headwinds. If the government…if President Obama had done nothing when he took office, he’d be a genius today.

In that brief exchange I count three logical or factual falsehoods, two unsubstantiated (and unsubstantiatable) charges, and one bizarre conclusion.

Falsehood #1: The trillion dollars comes from mobilizing resources that are currently unemployed. Does Forbes believe that no economic benefit would arise if General Electric spent a billion dollars to build a new factory in upstate New York because that billion dollars was simply pulled away from some other productive private sector activity? Then he has no business saying that money that the government spends has no effect. This is basic macroeconomics. I just taught it to my Econ 104 students last week.

Falsehood #2: The dollar is not "weak". The trade-weighted exchange rate against major currencies is now precisely where it was when the recession began in early 2008. Today the dollar is precisely where it was against the euro in summer 2007, stronger than it was when the recession began in early 2008.

Falsehood #3: Capital has not been sent overseas. Every time there is an increase in uncertainty anywhere in the world capital floods US financial markets. This is why US interest rates are so low and why the dollar has not depreciated against major currencies.

Unsubstantiated charges #1 and #2: There is no evidence that uncertainty about health care regulations, financial regulations, taxes, and so on are a major "headwind" for the economy. None at all. Zip.

Bizarre conclusion: Can Steve Forbes really believe that doing nothing was a reasonable response to the financial crisis and recession from 2009 to the present? If so, why does anyone ever invite him on their tv show?

Goldman Sachs wants to go nuclear - this time in a good way

Goldman Sachs economist (and U-Wisconsin Ph.D one or two years behind me) Jan Hatzius wants the Federal Reserve to "go nuclear" - institute a massive new round of quantitative easing while announcing that it is targeting nominal GDP. The fundamental problem with this policy is credibility - if we're in a liquidity trap where monetary policy doesn't have the effects it usually has, then who would believe the Fed could be successful in trying to increase nominal GDP? So the policy has to be accompanied by something like a new round of fiscal stimulus, which does not seem likely to happen. So:

- Get whatever can be got out of the Jobs Act - if it's just tax cuts, so be it.

- Vow not to let up on Republicans until they vote for infrastructure spending and support for states

- Institute "Refi Madness" - anyone can refinance his/her Fannie Mae - Freddie Mac home mortgage regardless of the amount of equity they have in the house and waiving fees. This would be the equivalent of a massive tax cut and requires no Congressional action.

Sims and Sargent win the Nobel Prize in Economics

Christopher Sims and Thomas Sargent are this year's Nobel winners. Their contributions are described in detail here. The Nobel committee cited their contribution to empirical macroeconomics, which was indeed important. Sims' main contribution was creating the vector autoregression (VAR) technique to estimate dynamic simultaneous equations models. I torture my senior seminar students with this technique every year. Sargent's main contribution in the 1970s, which is the basis for his Nobel, was in applying the assumption of rational expectations to time series macroeconometric modeling. Hence Sargent was one of the rational expectations revolutionaries who attacked Keynesian economics along with people like Robert Lucas, who won the Nobel in 1995 (give or take a year). Yet I'm a big fan of Sargent, because his recent work has explored alternative types of expectations formation that fall in the broad category of "bounded rationality." Sims has been engaged in this kind of work as well. So rather than being satisfied simply with having destroyed the empirical foundations of Keynesian economics, these economists have been hard at work modifying the rational expectations paradigm that replaced Keynesianism. I think that their interest in pushing beyond rational expectations makes them a much more interesting and useful species of "fresh water" macroeconomists than people like Lucas who seem to be more interested in enshrining the rational expectations, market clearing approach to macroeconomics as a new religious orthodoxy.

Occupy DC poster

I spotted this one at the Occupy DC protest this weekend. One must admire the awareness of the intricacies of Dodd-Frank even while condemning the numerous spelling errors. This reminds me of the "16:1" signs that delegates were waving at the 1896 Democratic National Convention.

Apparently the threat of forcible implementation of the Volcker Rule was a major concern of DC security officials: the Federal Reserve buildings were surrounded by cops yesterday.

Occupy Wall Street poster

From Paul Krugman:

My guess is this person thought of this poster some time after 1990-92, when the Fed did pursue a strategy of opportunistic disinflation, and vowed that the next time we had a big recession he'd put the poster together and be famous. Then in 2001-03 he was too busy working on his dissertation to protest, but now that he's an underemployed economics Ph.D (perhaps driving a cab in Madison, Wisconsin or Berkeley, California) he's got a lot of time on his hands and his years in graduate school have not completely squashed his spirit. Not yet anyway.

Too many English professors on the APPC

That's the only explanation I can come up with for these instructions on the Proposal Form for New Courses.

1. COURSE DESCRIPTION

The maximum length should be 80 words, including the title. Please begin the first sentence with a noun, or one modified by an adjective; the first sentence should be a fragment. Keep to the present tense; avoid the future tense. Avoid first person pronouns as well. Do not include reading list.

Bon mots

Ken Rogoff via Brad DeLong on the importance of the European Central Bank's getting its head out of its ass:

Similarly, the fact the European Central Bank has not already cut interest rates to zero reflects far more the need to preserve a semblance of independence than a sober calculation of the balance of risks. If the eurozone ultimately becomes unglued, will anyone care that during euro’s brief life, inflation expectations remained firmly anchored about 2 per cent?

My question for the Faculty Finance Committee this Thursday

Dear members of the Faculty Finance Committee,

I always look forward to the annual report on compensation. I’ve been through about eleven of these now, however, and they’ve become fairly predictable. Though the college has always had the goal of offering compensation that is competitive with those at similar institutions, every year we learn that we are not meeting those goals. This year, if I am reading the Excel spreadsheet on Moodle correctly, I learn that I could be making almost $15,000 more per year if I worked at one of the Group 1 colleges (Bates, Bucknell, Colgate,…). The annual rate of salary increase for continuing faculty for the last five years has been almost a percentage point lower than the average of the other 18 colleges that we are comparing ourselves to, so we are falling further behind. In 2009-10 starting salaries for assistant professors with no experience were significantly lower than at colleges like Franklin and Marshall and Dickinson, with which we compete for talented new faculty. That’s a bunch of bad news. We’ll be reminded that the numbers don’t take into account the age distribution of the faculty and differences in cost of living, but we don’t know whether correcting for those problems would improve or worsen the comparison. The President or Provost will acknowledge the problem and let us know that they really want to rectify it (and I know they’re sincere when they say this), but budgets are tight so we can’t expect miracles.

Several years ago under our previous president, the faculty asked for a report on administrative expenses at Gettysburg relative to our own history and the colleges in our reference group. We were wondering whether perhaps one reason that money was not available to raise faculty salaries was that too much of the College’s scarce resources were being spent on administration. As I recall the administration responded to our question by giving us a couple of presentations breaking down the budget. What I remember from those presentations was that it is very difficult to distinguish between spending on “academics” versus “administration” (where does academic advising fit for example, or the library?) and therefore the numbers did not really speak strongly to the question.

In light of the bad news in the current salary report, I’d like to reframe the question and ask it again. I recently read an interesting book by Benjamin Ginsberg called The Fall of the Faculty: The Rise of the All-Administrative University and Why It Matters (Oxford University Press, 2011). The book is long on anecdote and short on data, but one piece of data that it does report is that at American colleges and universities between 1975 and 2005, while the number of students per full-time equivalent faculty was roughly stable (falling from 16 to 15 over that period), the number of students per FTE administrator fell from 84 to 68 and the number of students per FTE professional staff fell from 50 to 21. That’s a pretty big increase in administration relative to faculty. The book also notes that the size of college administrations varies a lot across institutions, singling out schools like Vanderbilt and Rochester for having very large administrations while others like Wisconsin have very efficient administrations.

So my question is, can we (the faculty) get some information about the number of professional staff and administrators (and/or “managers and staffers”) at Gettysburg, how this number has changed over the years and how we compare to colleges in our reference group? At the same time can we get a salary comparison for administrators across time and across institutions? I know this might sound confrontational but I don’t mean it in that way. We frequently have discussions about the faculty salary issue, but the faculty only has information about a portion of the College’s budget and I think that the discussions would be more informed if we had a more complete picture. If it turns out that the administration at Gettysburg is absorbing more resources than at the institutions that offer higher salaries than we do, then that points to a possible solution to the faculty salary problem. If it turns out that we have a leaner administration that is paid less than at comparable institutions (and I know that the administration has taken the lion’s share of budget cuts during this recession), then that might be a problem as well. At least that would give the faculty some consolation in knowing that their predicament is shared up and down the College.

Thanks for reading. I look forward to the presentation on Thursday.

Char

***

Oops, I inverted my fractions in the original. I made the corrections above. Thanks MRW.