Party like there's no tomorrow

The Queen of the United Kingdom and the other Commonwealth realms famously asked a bunch of eminent academics at the London School of Economics why nobody noticed the Great Recession before it arrived.

A simple question that all of us regular people have.  Of course, all the economists do was hem and haw and look the other way.  After all, as the joke goes, economists have correctly predicted 7 of the past 4 recessions!

Predicting the next recession is not easy.  It is impossible.  But, hey, I am not an economist; so, it is not like my reputation is on the line or anything ;)  But, I wonder if we are getting closer and closer to the next one.

Four years after the Queen asked that question, she got an answer:

Sujit Kapadia from the Bank's financial services committee gave the Queen three reasons why the crisis happened - one of which was that it was rare event which made it difficult to predict.
He added: "People thought markets were efficient, people thought regulation wasn't necessary. Because the economy was stable there was this growing complacency,"
"Thirdly, people didn't realise just how interconnected the system had become."
The Queen replied: "I suppose, in money terms, it is very difficult to foresee. But people had got a bit lax. Have they?"

The system is even more interconnected compared to a decade ago.  We have in power at the Oval Office, in the Senate, and in the House, maniacs who believe that regulation is unnecessary.  And, we the people have become a tad too complacent. They don't add up well, do they?

Rapid technological advances are propelling the U.S. economy into a new paradigm, unemployment is the lowest in decades, corporate debt is rising, inflation is dormant and the expansion is one of the longest on record, even if growth isn’t that hot.
Much of that growth is being driven by consumer spending fueled not by rising income, but by borrowing more and running down savings, which have slumped to historically low levels.
Sound like the U.S. economy today? Yes, it does. It’s also the U.S. economy of July 2000

Yep, American consumers are at it again. Spending the money that we don't have, confident that the boom times will continue forever.

So, for how long can consumers can carry on spending, while saving practically nothing at all?

“The toxic mix of rising interest rates, falling savings, low or falling incomes and high levels of corporate debt is a train crash waiting to happen,” said Ann Pettifor, director at Policy Research in Macroeconomics in London. 

Any other perspectives?

The historically low household savings rate has caught the eye of Bernstein, which is now at least partially reconsidering its positive economic outlook for 2018.
 "A big financial shock — which is a plausible scenario for 2018 — not only would damage the consumption forecast but could end the expansion itself," Philipp Carlsson-Szlezak, an economist at Bernstein, wrote in a client note. "For 2018 it remains a core cyclical recession scenario in our coverage."

Always keep in mind that the day before the stock market crash of 1929, an eminent economist of the day, Irving Fisher, made the worst prediction ever:

Source

Can we have more butter, please?

For a long time, in blog-years, I have been worried that the Great Recession and the anemic recovery are not any temporary issues but that they could be reflective of serious transformations in the economic structure.  Nothing in the American economy, nor in the global economy, has given me reasons to think otherwise.  The only good news is that students do not come asking for career and employment advice--because, if they do, then I would end up sharing my gloomy assessment, which will not do them any good.

But then, thankfully, I am only a nobody harboring such worries.  It is not like such assessments are in the New York Times, in analyses authored by respected economists who are not of the "loony left."

Oh, wait, here is Tyler Cowen writing in the New York Times

the recession was a learning experience that we haven’t fully absorbed. From this perspective, the radical and sudden changes of the financial crisis were early indicators of deep fragility and dysfunctionality.

In case you are not aware of Cowen, he is is an economics professor at George Mason University.  Cowen and his folks at George Mason are far from the "loony left."  Check out the blog that Cowen and his buddies run in order to understand their approach to public choice policies.

Anyway, back to Cowen's NY Times piece.  The title of that says it all:

Don’t Be So Sure the Economy Will Return to Normal

Welcome to the "new" normal!

Slowly but surely, we may be responding to these difficult revelations by scaling back our ambitions for the economy — reinforcing negative trends that were already underway. In this troubling view, we have finally begun to discover some unpleasant truths. Borrowing a phrase from the University of Toronto economist Richard Florida, it’s possible that we are experiencing a “Great Reset.”

So, what do we do then?  How can we reset this Great Reset?

If a reset is underway, we might have to accept that public policy cannot reverse it easily. Once unsustainable economic structures begin to fail, it takes a significant improvement to make them viable again. Yet because of the difficulty of making major changes under our current political alignment, most new government policies today are no more than changes at the margin. Perhaps the most basic problem is that it is difficult to be sure when a reset is underway, and it is harder yet to raise public alarm about changes that seem to be gradual and slow.
Most of all, it is not always wise to fight a reset.

Ouch!

Perhaps the most crucial issue is whether economies will return to normal conditions of steady growth, or whether we are witnessing a fundamental transformation, unveiled in bits and pieces. Nominations for the nature of that transformation include a “robot economy,” a new political economy where elites have too much power or, perhaps, a new global economy where the United States no longer holds such a dominant position, to the detriment of American firms and workers.
No one knows whether or how much of a reset may be underway.

It is rare for economists to openly admit that "no one knows."  Which means only one thing: things are not looking good.  They are looking real bad.

BTW, here's one more worry, which is more like a corollary.  When the American economy falters, staggers, guess what the bipartisan approach is to revving up the economy?  Think.  Think some more.  Yep, war.

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If it is Thursday, it must be science for lunch?

My science craving was a bit too uncontrollable today.  I had no choice but to feed that damn thing.  And, my, what awesome science food I had today!

A regular feature at the Scientific American, of answering science questions, had three awesome questions with wonderful explanations.  It was difficult for me to pick one from the three; if I am really, really, forced to, I would choose this question:

Let's say I'm an alien on a ship 65 million or more light-years away. Using a telescope, I look at Earth and I see dinosaurs living their daily lives. If my ship started travelling towards earth near the speed of light. Would I see the dinosaurs moving faster--fast-forwarded?

Of course, such a question wouldn't matter to those crazy creationists in any religion, who believe that there is nothing called 65 million years ago.  But, for the rest of us, this is one fascinating question.  Yes, an old one--a variation of the old one that Einstein talked about and the one that we were introduced to in high school.  But, I never get tired with any of the variations.  I am always, always, impressed that old man Einstein was so awesome!

So, what is the answer?  Don't be lazy; check it out :)

And then there was another.

It was not a topic I would have guessed would be at the Scientific American.

It was about the great financial collapse. About those complex derivatives and subprime loans and other mumbo-jumbos.

With a catchy title: The Real, and Simple, Equation That Killed Wall Street

What the ... what?  A simple equation that contributed to the Great Recession?

Really?  This equation?

The equation, though simple, reveals one dangerous truth that investors love to exploit.

Really? How?

It is the equation for a leveraged return, L:

Y is the return of the asset, R is the cost to borrow money, and N is the “haircut,” or the percentage of money the investor must put down to secure the loan (the down payment).
A simple example. An investor wants to buy a bond returning 7% using borrowed money. The bank requires them to pay 20% in cash with the remaining 80% lent at a rate of 5%. What is the leveraged return?

So after borrowing, a 7% return is turned into 15%.  Kaboom!

Kaboom, indeed!

Of course, there is a lot more to it; read it and weep!

Science matters, folks. Science!

I care about salaries of college coaches, not of presidents

I am quite happy about the NBA lockout.  Ten guys dripping with sweat and chasing a ball, all to figure out who can slide one through a hoop, for which they get paid a gazillion dollars!  A colossal waste of time and money.

Will the NBA lockout affect local economies?

"There is no way the NBA lockout will have any significant economic consequences," says the University of Alberta’s Brad Humphreys, an economist who has studied the effects of sports work stoppages.

Even worse is all the commercial aspect of college sports.

I am glad that salary raises for administrators at the University of Oregon made the news.  Thanks to all the brouhaha, we were reminded, early on in the football season, that there is a real university campus with buildings and students, associated with a local team called the Ducks.

While college sports grew out of a laudable and valid conviction that a sound mind needs a sound body too, we need to keep in perspective that football and most other college sports have veered far away from that original notion, and have morphed into yet another branch of a sprawling entertainment industry.

The question, especially during these trying times of high unemployment and stalled economic growth, is whether such entertainment delivers long term economic benefits.

This is where I begin to worry about our misplaced loud protests over a few thousand additional dollars spent on academic salaries versus the millions that we so enthusiastically invest in the college sports industry.

To begin with, all entertainment activities are not created equal.  When Hollywood produces movies and television shows, those are products consumed all over the world and not merely in California or the US.  In 2010, for example, films alone earned slightly more than $10.5 billion in the US, but earned almost 32 billion dollars at the global box offices.

These billions are significant exports, and help us tap into the niche in the global marketplace.  The niche that is often bombastically referred to in the academic jargon of “comparative advantage.” 

The corresponding employment generation that results from such a multi-billion dollar export industry is also why it feels like every other waiter in Los Angeles is a Hollywood wannabe. 

However, sports and sporting events are not in this category.  Most economic analysis routinely conclude that the stadiums, arenas and sporting events do not have consistent and long-term economic benefits and multipliers, and could even have unfavorable benefit-cost ratios. Even their local economic significance is in suspect.

College sports, in particular, serve a highly geographically restricted market even within the United States.  Professional sports are slightly better in their global appeal.  For instance, even my mostly sedentary brother is one of those many who follow this sport, even though he lives far away in Australia and has barely visited the US for a week.

Thus, as much as various college sports provide entertainment throughout the academic year, they do not generate employment and incomes with the kind of economic multipliers that, for instance, an Intel has had, and will continue to have, in the Portland metropolitan area and throughout Oregon as well.

The economic success of businesses like Intel, and entertainment activities like movie-making, are highly dependent on the other reason why college sports teams exist in the first place--the academic aspect of the universities.

Research universities push the edges of scientific and technological understanding, and it is no surprise then that a cluster of such institutions in the San Francisco area gave birth to, and continues to nurture, the huge information industry there.  It is, similarly, a symbiotic relationship between Hollywood and the universities in Southern California.  Further, we need to keep in mind that movies are not merely about lights, camera, and action anymore.  One only needs to recall the high tech wizardry of "Avatar" or any of the Pixar releases to be reminded of how technologically advanced and sophisticated this entertainment industry is.

Against such a background, I care not about the half a million dollar compensation for a university president, nor about the million dollar salary of an Intel executive, nor about the ten million dollar payday for a Hollywood actor—though, I would prefer a shuffling of that listing.  However, I am highly concerned about the phenomenal investment in college sports, including the multi-year and multiple-million dollar contracts that have become all too common for coaches in major college sports.

Successful sports teams could certainly help us forget, at least for a few hours, our individual and collective economic insecurities, but they are not going to help us build a secure and prosperous future in a rapidly changing world.

The second dip cometh? A Republican Recession?

So, the stock market sank faster than I can in water (yes, despite numerous attempts to learn, I can't even float, leave alone swim!)

The stock market plunged by more than 4 percent yesterday in its worst day in more than two years and investors flooded safe-haven investment alternatives, driven by escalating fears the wobbly global economy may stumble into a new recession.

While one swallow doesn't make a summer, the high probability of an economic catastrophe has always been talked and written about, even in this blog. And I am not even an economist or a banker!  So, it is not as if we are merely looking at this one day stock market event.

First, a recap of the nightmarish situation:

A Month of Awful News
June was a very weak month for the U.S. economy, and our data from July so far isn't looking good. Some quick highlights:

• Hiring was nearly stagnant in May and June.
• Real consumer spending fell from April through June.
• Small business optimism has been falling four months running. 
• Home sales continue to struggle. 
• The manufacturing sector is flirting with contraction.
• U.S. growth was less than 1% in the first half.

These would all be very bad signs in a healthy economy. In a weak recovery -- a time when business activity should be above average -- they're even worse. Although we appeared to climbing out of the abyss in early 2011, it no longer looks like we're even treading water. In fact, we may be drowning again.

Robert Reich is furious, and he is darn right:

Republicans repeatedly assured the nation that once the debt-limit deal was done – capping spending, cutting the budget deficit, and getting “90 percent” of what they wanted — the economy would bounce back.
 Just the opposite seems to be happening.
Call it the Republican’s double-dip recession.
Wall Street investors aren’t ideologues. They don’t obsess about budget deficits ten years from now, or the size of the government. One day doesn’t make a trend, but a giant sell-off like this is motivated by hard, cold realities.

Dr. Doom is on a spree of what essentially is "I told you so" ... like this one:

QE3 started in Japan & Switzerland via fx action &/or monetary easing. Fed will eventually get to QE3 but it will be too little too late

Oh, how I wish I had no interest in public policy issues at all; life will be so much without worries!

The Great Recession continues. Here comes the second dip

It is not because of all the brouhaha over the debt ceiling though.

My day started with this BBC news that Apple has a lot more cash than what Uncle Sam has in the treasuries.  It is a staggering billions of dollars that Apple has.  It is yet another statistic on the jobless recovery we have experienced the last two years--corporate profits not translating to job creation.

Commentators like Robert Reich have worried enough about this for all of us.  As Alan Blinder put it forcefully, we have a national job emergency. 

The situation is getting uglier, not because of the US default possibilities but:

Whatever fear global investors may have about a potential U.S. debt default, it's being trumped for the moment by another fear: that the economy could be headed back into recession.
Money is pouring into Treasury notes and bonds Friday, driving yields down sharply, after the government said the economy grew at a dismally weak annualized rate of 1.3% last quarter -- below even the lousy 1.8% consensus estimate of economists.

Be really, really worried :(

John Cassidy in the New Yorker dares to say it:

I think it is fair to say that the dreaded “double dip” recession is at hand.

And Cassidy is not even "Dr. Doom" ... Cassidy writes:

what we are going through looks suspiciously like the beginnings of another recession. Payrolls, after growing at a monthly rate of more than two hundred thousand jobs earlier in the year, have essentially been flat since the end of April, and the unemployment rate has crept up from 8.8 per cent to 9.2 per cent. The sharp falloff in job growth was a development that very few economists predicted. 

The Economist summarizes it all:

Time to crawl into a cave and hibernate until the end of the elections in 2012.

The Great Recession, Part II. The second dip cometh?

Yakking blogging about Ecuador, it turns out, was a wonderful distraction from depressing stuff, like Joseph Stiglitz's column, in which he writes that instead of putting "America back to work by stimulating the economy; end the mindless wars; rein in military and drug costs; and raise taxes, at least on the very rich" the fanatical free market ideology of the right is instead:

pushing for even more tax cuts for corporations and the wealthy, together with expenditure cuts in investments and social protection that put the future of the U.S. economy in peril and that shred what remains of the social contract. Meanwhile, the U.S. financial sector has been lobbying hard to free itself of regulations, so that it can return to its previous, disastrously carefree, ways.

When Stiglitz writes thus, it is time to worry. To really, really, worry.

So, what are the Democrats and President Obama doing to counter this ideological offensive from the right?  Mark Thoma is utterly disappointed:

We can do better than this, but it takes leadership and a willingness to fight rather than acquiesce, traits that are far too short in supply in the current administration.

 Hmmm ... so, does this mean that Europe, which doesn't suffer from the ideological right, but is cursed by the ideological left, any better?  Yes, Professor Stiglitz?

But matters are little better in Europe. As Greece and other countries face crises, the medicine du jour is simply timeworn austerity packages and privatization, which will merely leave the countries that embrace them poorer and more vulnerable. This medicine failed in East Asia, Latin America, and elsewhere, and it will fail in Europe, too. Indeed, it has already failed in Ireland, Latvia, and Greece.

Oh, come on.  "Can't anybody here play this game?"

 Stigltiz says there is a way out, but that path is blocked by the ideologues from the right:

an economic-growth strategy supported by the European Union and the International Monetary Fund. Growth would restore confidence that Greece could repay its debts, causing interest rates to fall and leaving more fiscal room for further growth-enhancing investments. Growth itself increases tax revenues and reduces the need for social expenditures, such as unemployment benefits. And the confidence that this engenders leads to still further growth.Regrettably, the financial markets and right-wing economists have gotten the problem exactly backward: They believe that austerity produces confidence, and that confidence will produce growth. But austerity undermines growth, worsening the government's fiscal position, or at least yielding less improvement than austerity's advocates promise. On both counts, confidence is undermined, and a downward spiral is set in motion

I was positive Paul Krugman would have a succinct bottom-line, and he didn't fail:

what we now have is a political drive that will, in effect, undo all those institutional changes that prevented the Great Recession into turning into another Great Depression.

It is a good thing I do not have to worry about stuffing my money into the mattress--have nothing to spare after paying the bills!  Not complaining though--at least I have money to pay those damned bills ...

Why is US economy in a mess? Built On Ancient Indian Burial Grounds!

As always, the best analysis and insight is from America's Finest News Source:


Report: Economy Failing Because U.S. Built On Ancient Indian Burial Grounds

College graduates and unemployment.Not a pretty scenario.

The idea of Occam's Razor tells us that the simplest explanation is also most likely the best and correct one.  A related idea is that if something walks like a duck, and quacks like a duck, it is damn well a duck.

All set?  I premise this posting with those observations because everywhere we turn, there is an ever increasing body of evidence that we are overselling higher education.  Even this blog has enough of those.  With all that evidence, one would think that that simple explanation fits.  But, it is so difficult to get people to acknowledge that.

In one of his recent columns, Paul Krugman came close to concluding about the oversell, but then veered off into a discussion of the economic stagnation of middle class.  And, yet, he himself provides additional evidence of the wasteful allocation of resources for higher education, when he writes:

Mark Thoma leads us to new research from the San Francisco Fed showing that recent college graduates have experienced a large rise in unemployment and sharp fall in full-time employment, coupled with a decline in wages. Why is this significant?
The answer is that it’s one more nail in the coffin of the notion that employment is depressed because we have the wrong kind of workers, or maybe workers in the wrong place.

Wrong kind of workers, and workers in the wrong place ... while college grads are unemployed or underemployed.  Add these and what do you get?  This is not the time to push more high school graduates into higher education, and yet that is precisely what we continue to do.

Krugman prefers to console himself with an explanation that this is demand side slump, which means that he probably thinks that stimulating the economy will somehow miraculously provide those millions of productive jobs for college grads.  I think not.  Though, in saying this, I fully recognize the futility of going against a recipient of the Swedish Central Bank Prize.  (editor: why don't you simply say a Nobel Prize recipient?  Because, it is not a Nobel Prize.)

Where are we in job losses since peak employment?  Check this out:

This is one serious slump we are in strictly in terms of employment.  By continuing to emphasize the overall growth in GDP, economists and politicians are misleading us about the depth of the problem.

Now, of course there is an element of the demand slump, and there is evidence for that--such as:

the corporate saving glut - no I didn't mean the 'global saving glut'. Furthermore, the corporate saving glut is manifesting itself into the labor market, creating high and persistent unemployment. ... unemployment is not structurally higher, it's that when firms do not reinvest corporate profits, the lack of income flow manifests itself into the unemployment rate.

Even if one wholly subscribes to this explanation, how does pushing more young adults to college help?

Crisis in economy, environment, health? Nah! Just watch TV and enjoy!

Not that different from politicians creating their own reality--we get the government we deserve!  Hey, Ray Bradbury, you were so right with your predictions of wall-to-wall television screens making people happy while ...

Why economists failed to foresee the Great Recession?

Raghuram Rajan, whose comments I have blogged about earlier only with appreciation, and who is fast becoming one of my favorite commentators on economic matters (the Indian connection is a bonus!) continues to think about why economists failed to anticipate the Great Recession--the question that bugged everybody from the Queen of England to my mother, who asked me the same question as the crisis started unfolding:

three factors largely explain our collective failure: specialization, the difficulty of forecasting, and the disengagement of much of the profession from the real world

Hey Professor Rajan, can you condense these into a crystal clear bottom-line that in very simple words will offer the explanation to my mother and the Queen of England?

many simply were not paying attention!

There.  That is one hell of a blunt, honest assessment!  Thanks.

ps: of course, the topic of how economists screwed up (and continue to do so) is not a new topic; this is an example

Eric Hobsbawm's comments on liberal democracy. Wait, he is alive?

It was in the early part of my graduate student life that I went across town to UCLA to listen to a bunch of visiting academics, including Eric Hobsbawm.  He was old even then, and I had assumed that he would have been gone by now.

Turns out that not only is he alive and well at 93, he has even published a book:

Eric himself has changed. He suffered a nasty fall over Christmas and can no longer escape the physical constraints of his 93 years. But the humour and the hospitality of himself and his wife, Marlene, as well as the intellect, political incisiveness and breadth of vision, remain wonderfully undimmed. With a well-thumbed copy of the Financial Times on the coffee table, Eric moved seamlessly from the outgoing President Lula of Brazil's poll ratings to the ideological difficulties faced by the Communist party in West Bengal to the convulsions in Indonesia following the 1857 global crash. The global sensibility and lack of parochialism, always such a strength of his work, continue to shape his politics and history.

I wish I were this alive even now, while I am only half his age!

Even though I have always disagreed with his ideological framework, I am always humbled by how much he knows (and by contrast, how little I do!)  But, there is no disagreement with the following point he makes:

What I'm saying now is that the basic problems of the 21st century would require solutions that neither the pure market, nor pure liberal democracy can adequately deal with. And to that extent, a different combination, a different mix of public and private, of state action and control and freedom would have to be worked out.
What you will call that, I don't know. But it may well no longer be capitalism, certainly not in the sense in which we have known it in this country and the United States.

I wish that in the US we would get rid of the rigid political/ideological bottom-line that the partisans spout, and begin to explore a 21st century approach.  Which is why I hope the LibCons would be daring enough ...

Doing the right thing

No, not the Spike Lee movie!
But, a TED talk:

In an intimate talk, Barry Schwartz dives into the question "How do we do the right thing?" With help from collaborator Kenneth Sharpe, he shares stories that illustrate the difference between following the rules and truly choosing wisely. 

Worrisome chart of the day: unemployment

Calculated Risk, the source for the chart as well, notes:

this recession is by far the worst recession since WWII in percentage terms, and 2nd worst in terms of the unemployment rate (only the early '80s recession with a peak of 10.8 percent was worse)

Is economics a science? Do we need to ask? :)

Economics aspires to be a science. But in this it does not succeed. Neither does finance. This despite the fact that there is an annual, optimistically named Nobel Prize in “Economic Sciences.”
Financial crises keep happening—the list is long. Could they be avoided if economics and finance were science?

Thus begins Alex Pollock's essay, which, I hope, will trigger responses from academic economists so that people like me can have fun watching the fireworks :)

Ever since the onset of the Great Recession, the "scientific" nature of economics has been seriously doubted, and for all the good reasons, as even noted in this ill-informed blog.  So, more the discussions on this, the better for our own understanding.

Pollock writes:

To forecast and, moreover, control the financial future correctly is literally impossible. This is because of the exceptionally complex and very rapid recursiveness of financial markets and the resultant Uncertainty. This “Uncertainty,” with a capital “U,” means, remembering the classic definition of economist Frank Knight, that you not only do not know the odds of events, but you cannot know the odds.

In case you thought it was some left-wing publication where this essay appeared, NOT!  Pollock is with the American Enterprise Institute.

What is common to the economy and my head? :)

The Great Recession and the youth

Every once in a while, when highlighting the rapid economic transformations across the world, I remark to students that it is not longer their grandfathers' world. Not even their mothers' world. And that they ought to be smart about their economic futures. And sometimes I take this to the next step and tell them, "you are screwed!"  And then, of course, give them what I think are the strategies to avoid getting screwed.

I suspect that most of them probably laugh this off because, after all, I too say all these with a big smile. But, a few students get the seriousness that lies underneath the veneer of humor.  To them, I now have one more piece of evidence: the chart below:

This is from Brookings' "The Hamilton Project" whose "most striking finding is that America’s youngest workers have been hit hardest by the Great Recession."

So, why this disproportionate impact?  The explanation makes sense to me:
"During the current recession both job openings and the number of people quitting their job (“quits”) plunged to extremely low levels. Very few older workers have left their jobs and are instead working longer and retiring later—perhaps in response to the recession’s effect on retirement savings and wealth. For younger Americans, such as new high school and college graduates, this has meant fewer opportunities to find work."

And even when openings come up, the experienced-but-now-jobless older person beats out the young.  So, is this temporary?  Now that the NBER has declared that the Great Recession ended last June, will conditions become better for the youth?  Not so fast:

According to one study (Kahn 2010), young people graduating from college during today’s severe recession will earn approximately 17.5 percent less per year than comparable peers graduating in better labor markets. This lower wage effect is highly persistent, fading away only after 17 years of work.

What does this mean in terms of lost income? For the average college graduate this year, this translates into approximately $70,000 (in today’s dollars) in lost earnings over the next decade. For the 2008, 2009, and 2010 classes combined that amounts to over $330 billion in lost earnings over 10 years. The projected losses are even larger for graduates who cannot find a job upon graduation.

There is a huge job-gap that might take a very long time to get filled (or maybe this is the new economic structural reality?)

And thus begins a new academic year :(

Maybe Bobby McFerrin was right with his "Don't worry, be happy"

Krugman v. Rajan: I root for the Indian-American :)

I clearly remember when I first heard about Raghuram Rajan, who is an economics professor at the University of Chicago.  It was from reports that he had taken on the then unassailable Fed guru, Alan Greeenspan, and warned about potential disasters.  Rajan did that with a whole lot of formal economic language, most of which I was/am incapable of understanding. And Nouriel Roubini warned about the disaster in theatrical ways, which I could easily understand :)

It was interesting to me that both these had offbeat ethnic names.  Placing the origin of Rajan's name was easy for me--both the first and last names are dead giveaways.  Naturally, I have then been on the alert whenever his name popped up in serious discussions in the publications that I follow (no, not the academic ones!!!)

The latest is a fascinating context.  Rajan and Paul Krugman are duking it out.  It is the wild, wild, west on the worldwide web.  (yet another evidence for how scholarly discussions are rapidly happening in real time and in open channels, as opposed to the time-delayed journal routes.  I love this.)

Rajan is clearly pissed off with Krugman's review of his book. Again, this is awfully close to a live debate: Krugman's review essay is in the latest issue of the NY Review of Books.  I read that on Sunday, when, as is my Sunday routine, I checked in with the NYRB site.  Perhaps it was there even earlier, and perhaps Rajan had access to that review in advance.  It is just awesome that Rajan's response--this essay--is dated September 19th.  How much more of a live debate can I take? :)

Anyway, Rajan writes:

Paul Krugman and Robin Wells caricature my recent book Fault Lines in an article in the New York Review of Books. The article, and their criticism, however, do have a lot to say about Krugman’s policy views (for simplicity, I will say “Krugman” and “he” instead of “Krugman and Wells” and “they”), which I have disagreed with in the past. Rather than focus on the innuendo about my motives and beliefs in the review, let me focus on differences of substance.

And that was the opening shot.  Rajan then goes through his arguments systematically.  As a non-economist, and more so when it comes to finance and monetary issues, I have a tough time then figuring out why Rajan is wrong.  As I have noted even earlier in a few posts, Krugman might have been ideological and a tad too shrill.  Rajan himself notes how there is a lack of consensus, in this case on the role of the fed in the crisis:

I admit that there is much less consensus on whether the Fed helped create the housing bubble and the banking crisis than on whether Fannie and Freddie were involved. Federal Reserve Chairman Ben Bernanke, a monetary economist of the highest caliber, denies it, while John Taylor, an equally respected monetary economist, insists on it. Some Fed studies accept responsibility while others deny it. 

As one on the sidelines, I am like many who have a tough time figuring out which expert is correct in the interpretation of apparently the same data that everybody is sifting through.

At the end of the day, I suspect that Krugman is becoming a lot more ideological and sarcastic when he doesn't need to.  Rajan makes this point as well:

Perhaps Krugman believes that by labeling other economists as politically extreme, he can undercut their credibility. In criticizing my argument that politicians pushed easy housing credit in the years leading up to the crisis, he writes, “Although Rajan is careful not to name names and attributes the blame to generic “politicians,” it is clear that Democrats are largely to blame in his worldview.” Yet if he read the book carefully, he would have seen that I do name names, arguing that both President Clinton with his “Affordable Housing Mandate” (see Fault Lines, page 35) as well as President Bush with his attempt to foster an “Ownership Society” (see Fault Lines, page 37) pushed very hard to expand housing credit to the less well-off. Indeed, I do not fault the intent of that policy, only the unintended consequences of its execution. My criticism is bipartisan throughout the book, including on the fiscal policies followed by successive administrations. Errors of this kind by an economist of Krugman’s stature are disappointing.

I am cheering Raghuram Rajan in this fight because his essay is a lot more convincing to me than is Paul Krugman's.  The fact that Rajan is an Indian-American also helps :)  It is also bloody humbling to realize that I am the same age as Rajan is, and what a non-entity I am, and how much the guy has accomplished.  Awesome.

Update: I notice the comment(s) ... but, first, here is more from Rajan--over at FP ... but, the contents look nearly identical to the earlier one.  This FP is dated Sep 20th, but it doesn't refer to the AEI essay ... hmmm....

Higher education's expansion frenzy and ponzi schemes

A few years ago, when I had at least a little bit of voice within the academic walls, I proposed to my departmental colleagues that we merge the four-person geography department with the three-person anthropology department, or at least seriously consider closer collaboration.  My idea was that we could then minimize duplication in the intellectual areas where we overlap, which will then free up resources to offer a lot more variety in both the disciplines.  It was a sure win-win, as far as I could see.

But, this proposal went nowhere.  (editor: did any of your proposals in the university ever go anywhere?) (Yes, you know-nothing-editor, I did achieve quite a few. Shut up already!)

Many academic terms have gone by since then.

A couple of weeks ago, in the annual report, the Chair of the Division notes as challenges ahead:

"With one member of our three-person department on sabbatical, the stress on other professors has been significant" and that "Small, three faculty departments in Anthropology and Sociology makes teaching and advising excessively demanding.  This is aggravated by sabbaticals and course releases."

To which I can only think, "duh!"

It does not take that metaphorical doctorate in rocket science to imagine the logistical issues that could arise out of offering programs through three-person departments. 

But, and worryingly so, this is not any unique academic story.  It is repeated across colleges and universities many times over.  Even this Great Recession apparently is incapable of arresting this trend, which is what Mark Taylor writes about in his NY Times op-ed.  He cites his own Columbia on a competitive expansionary race against NYU, even though this means both universities take on more and more debt.  Taylor writes:

Last year Columbia reported $1.4 billion in outstanding debt against a $5.89 billion endowment. N.Y.U. had a staggering $2.22 billion debt with a relatively modest $2.2 billion endowment — one that had shrunk by more than 11 percent over the previous fiscal year. For universities, as for banks, the question is not only the value of current and projected assets but also the availability of liquidity so they can pay off interim debt obligations during a time of financial instability.

Taylor, who has written many essays sharply critical of some of the practices in higher education, gives a tangible example that is not dissimilar from my own geography/anthropology example:

The competition between Columbia and N.Y.U. is an example of what educational institutions should not be doing. Universities should be looking for new ways to provide high-quality education to more students at a lower price. In today’s world, it no longer makes sense for every school to cover every subject.
For example, it is absurd for Columbia and N.Y.U. to be have competing philosophy departments at a time when there are few jobs for philosophy academics. Instead, they could cooperate by forming a joint graduate and undergraduate program, which would reduce costs by requiring fewer faculty members and a more modest physical presence, while at the same time increasing course choices for students. And in our wired world, universities on opposite sides of the globe could find similar ways to collaborate.

With every passing day, I am even more amazed than before that the public hasn't caught on and discovered that higher education has morphed into one huge ponzi scheme.

More worries about unemployment

Say, this chart on the percentage decline in employment during recessions (from Paul Krugman) ought to cheer you up!

(editor: this is no place for sarcasm.  Get to the point.)

Ok, as Krugman notes, this certainly seems to be the worst of times.  Just awful.

Robert Reich, who has consistently and loudly worried about the jobless recovery, writes:

GM now sells more cars in China than it does in the US, but makes most of them there. The company now employs 32,000 hourly workers in China. But only 52,000 GM hourly workers remain in the United States – down from 468,000 in 1970.

GM isn’t just hiring low-tech assembly workers in China. Last week the firm broke ground there on a $250 million advanced technology center to develop batteries and other alternative energy sources.

You and I and other American taxpayers still own over 60 percent of GM. We bought GM to save GM jobs, remember?

Well, worry no more, Professors Krugman and Reich.
It turns out that the high unemployment is "primarily the result of millions of Americans just completely blowing their job interviews," according to the finest news source in the country, which adds:

The Labor Department confirmed their statistics don't take into account the estimated 20 million citizens who were unable to get interiews in the first place because of formatting errors in their resumés, or cover letters that slightly exceeded one page.

Crap!  Can we do something about this?  I mean, isn't this why we pay taxes?  Fortunately, the president and his administration do have a plan:

"My administration remains fully committed to putting citizens back to work by making sure they show up at least 15 minutes early to their interview and never badmouth a previous boss," said Obama, flanked by unemployed Americans during an address from the White House Rose Garden. "Our new 'Nail the Interview, Score the Job' initiative will help regular Americans like Paul and Tracy here remember that they should prep ahead of time by learning a few things about the company they want to work for."

"And that little things," he continued, "like making sure your socks match, matter."