The Nation’s Future Depends on Its Cities, Not on Washington - Michael Hirsh - NationalJournal.com
Krugman parses Larry Summers recent IMF talk, and finds at the core the hard paradoxes of the postnormal: Secular Stagnation, where the liquidity trap inverts the order of the economic universe.
If you take a secular stagnation view seriously, it has some radical implications – and Larry goes there.
Currently, even policymakers who are willing to concede that the liquidity trap makes nonsense of conventional notions of policy prudence are busy preparing for the time when normality returns. This means that they are preoccupied with the idea that they must act now to head off future crises. Yet this crisis isn’t over – and as Larry says, “Most of what would be done under the aegis of preventing a future crisis would be counterproductive.”
He goes on to say that the officially respectable policy agenda involves “doing less with monetary policy than was done before and doing less with fiscal policy than was done before,” even though the economy remains deeply depressed. And he says, a bit fuzzily but bravely all the same, that even improved financial regulation is not necessarily a good thing – that it may discourage irresponsible lending and borrowing at a time when more spending of any kind is good for the economy.
Amazing stuff – and if we really are looking at secular stagnation, he’s right.
Of course, the underlying problem in all of this is simply that real interest rates are too high. But, you say, they’re negative – zero nominal rates minus at least some expected inflation. To which the answer is, so? If the market wants a strongly negative real interest rate, we’ll have persistent problems until we find a way to deliver such a rate.
One way to get there would be to reconstruct our whole monetary system – say, eliminate paper money and pay negative interest rates on deposits. Another way would be to take advantage of the next boom – whether it’s a bubble or driven by expansionary fiscal policy – to push inflation substantially higher, and keep it there. Or maybe, possibly, we could go theKrugman 1998/Abe 2013 route of pushing up inflation through the sheer power of self-fulfilling expectations.
Any such suggestions are, of course, met with outrage. How dare anyone suggest that virtuous individuals, people who are prudent and save for the future, face expropriation? How can you suggest steadily eroding their savings either through inflation or through negative interest rates? It’s tyranny!
But in a liquidity trap saving may be a personal virtue, but it’s a social vice. And in an economy facing secular stagnation, this isn’t just a temporary state of affairs, it’s the norm. Assuring people that they can get a positive rate of return on safe assets means promising them something the market doesn’t want to deliver – it’s like farm price supports, except for rentiers.
Oh, and one last point. If we’re going to have persistently negative real interest rates along with at least somewhat positive overall economic growth, the panic over public debt looks even more foolish than people like me have been saying: servicing the debt in the sense of stabilizing the ratio of debt to GDP has no cost, in fact negative cost.
I could go on, but by now I hope you’ve gotten the point. What Larry did at the IMF wasn’t just give an interesting speech. He laid down what amounts to a very radical manifesto. And I very much fear that he may be right.
Daniel Kahneman, Nobel Laureate in Economics, on Idea Lab
In this interview he also states that the key trait of entrepreneurs is ‘delusional optimism’.
Realists are forced out by the organizational immune system, especially when confronting senior leadership about the cognitive biases inherent in most policy setting. At the most obvious, pointing out that some initiative is based on optimistic projections will lead to the realist being sidelined as a trouble-maker intent on demotivating people.
There is no really good intervention possible to counter irrational exuberance once an elite group in an entrepreneurial organization have collectively decided to move forward. The fact that one in ten or one in a hundred turns out to create a billion dollar business justifies the waste and pain of the failed nine or ninety-nine efforts, at least in the mind of the entrepreneur.
The fast-and-loose business has room for realists, because the core foundation is about being engaged in your work, and connecting to others through a deep culture based on constant learning and adaptation. It is not about mobilizing people into collective delusional mindsets or quests. Laissez-faire management starts with an appreciation of the cognitive biases underlying group dynamics and decision making, while entrepreneurialism is based upon glorifying bias and applauds the 1% who win the gamble as triumphant geniuses, instead of just dumb luck.
Eduardo Porter, Perils in Philosophy for Austerity in the U.S.
A lot of folks were predicting a big surge in corporate mergers and acquisitions, but the rate has actually fallen by 3.4% since last year. Why?
Andrew Ross Sorkin, Frenzy of Deals, Once Expected, Seems to Fizzle - NYTimes.com
[…] deal-making may not be coming back anytime soon.
“It’s pretty grim, even with Verizon-Vodafone padding the numbers,” said Scott A. Barshay, the head of the corporate department at the law firm Cravath, Swaine & Moore, referring to Verizon’s recent $130 billion deal to buy out Vodafone’s share of the joint venture in Verizon Wireless. If you exclude that deal from the count measured by total dollars, we’ve returned to 2009.
“There has not been confidence in the strength of the recovery since the financial crisis, which makes C.E.O.’s and boards reticent to pursue major transactions,” he said.
Some blame the debt ceiling fights in Washington, the government shutdown or the introduction of Obamacare for creating uncertainty in the economy and thus the slowdown in deal-making.
“It reflects the broad-based loss of confidence in the business community and their inability to make significant capital investment, be it M.&A. or capital spending, in large measure because of the uncertainty of tax and regulatory policy from Washington, D.C.,” said Doug Kass, founder of Seabreeze Partners Management. “Until Washington, D.C., grows more proactive, less inert in policy, this is likely to continue.”
But that may only be part of it.
What if the slowdown in merger activity isn’t cyclical, but secular? What if corporations have learned the lessons of so many companies before them that the odds of a successful merger are no better than 50-50 and probably less? Is it possible that the biggest deals have already been done?
What if these two views — uncertainty about tax policies and the uncertainty about whether 1 + 1 is really going to be more than 2 — are just two aspects of a more general increase in uncertainty and ambiguity? In an economy that has grown to be so complex and where markets are so volatile predictions of risks and rewards are growing to be increasingly difficult.
In the background, we have the paradox where slowing growth rates — caused by governments and corporations cutting back on expenditures — cannot be countered by lowering interest rates because central bank interest rates are at zero already. This leads to even slower or negative growth, which increases uncertainty, lowers investments and dealmaking, lowers tax collection, and which leads to growth slowing even more.
We lack the political will in Washington and other capitals to spend more money to get things rolling, and corporations are unwilling to invest because they don’t know if it will lead to a productive return. So all those corporate profits are mounting, and not being used for new investments. Instead, investors are calling for stock buybacks, to transfer the cash from corporations to investors. But neither know what to do with the money, and neither do our political leaders.
The postnormal economy is likely to be here for a long while.
Robert Shiller shared the Nobel Prize in Economics this week for his contributions to understanding market price fluctuations. Here, he makes the case that the boom/bust cycle of markets is a sort of mass psychosis, or hysteria, like Beatlemania or the Salem witch trials.
The foundation of neoliberal thought — the rational market — is no more real than the mass belief in angels, which 8 of 10 Americans swear by.
Jared Bernstein, Charting A Path To Shared Prosperity
As the chart reveals, once the recoveries of the 1980s, and even more so in the 1990s, took hold, real household incomes grew at both the middle and the bottom. They grew faster at the top, as the forces of inequality increased in these years. And since all of the last three recoveries began as “jobless” and “wageless” (i.e., though gross domestic product was growing, jobs and real wages lagged), it took a while for the expansions to lift those in the middle and below. But eventually, they did.
In the 2000s, however, the recovery hardly reached the middle or poor households at all. Including this year’s stable 15 percent rate, poverty has gotten worse or stayed the same for 11 of the last 12 years.
This is a remarkable and persistent disconnection between growth and living standards. For well over a decade, households that would have gotten ahead in previous periods of our economic history have failed to do so. Even when the top was outpacing the rest, as in the 1980s and 1990s, middle and low-income households made up some ground. Poverty rates declined at least somewhat in the 1980s expansion, and fell considerably more in the full-employment economy of the latter 1990s.
If there’s one picture I could show to policy makers to wake them up to the profound costs to broad swaths of Americans of gridlock, austerity, immobility and just the general ignoring of the central economic problem — the disconnect between overall growth and shared prosperity — it would be this.
Paul Krugman, Moment of Truthiness
S&P Since 1900 via Ritholtz
Welcome to the postnormal, that plateau at the top.
In 2004, [Rep. Earl] Blumenauer [D-Oregon] did push through a major overhaul of the insurance program, including incentives to raise or buy out houses that had been damaged multiple times. But it took hurricanes Rita and Katrina, and a more deficit-minded Congress, to pass another flood insurance reform bill last year that finally limited subsidies for second homes and for properties that were damaged repeatedly.
Under that 2012 reform, such homes will see premiums rise dramatically over the next five years, eventually bringing 400,000 of the most heavily subsidized properties up to market rates. The new law also lets FEMA buy homes that are considered “severe repetitive losses” at their full pre-disaster price, rather than the 75 percent it offered before.
But perhaps the most significant change in the reform involved maps—specifically, FEMA’s floodplain maps, which determine who must buy flood insurance. Those maps can now for the first time include “future changes in sea levels, precipitation, and intensity of hurricanes.” But there’s a catch: Those changes don’t affect the new flood maps FEMA is currently releasing, the first in 30 years. Floodplain maps issued for New York City and coastal New Jersey in late 2012 and early 2013, for example, don’t account for sea level rise. Maps for the rest of the country are rolling out slowly, and it’s unclear when they will start including sea level projections.
Back during the Bush administration, in 2007, FEMA began a major assessment of how climate change would affect the flood insurance program, with a projected completion date of 2010. When FEMA finally released the report in June 2013, it included a number of alarming findings. Rising seas and severe weather are expected to increase the area of the United States at risk of floods by up to 45 percent by 2100, doubling the number of people insured by an already insolvent program.
It will take another cluster of major storms before the US moves people off the coasts (see this on tail risk).