Reads for Nov 25

Economics & Finance

• Brad DeLong: Department of "Huh?!": John Taylor and Milton Friedman's Monetary Policy Edition
• Global Macro Monitor at Credit Writedowns: Chart of the day - China's Credit Bubble
• Adrian Peralta-Alva at The Big Picture: Real Estate Bubbles and Weak Recoveries
• CBO Report: Estimated Impact of the American Recovery and reinvestment Act on Employment and Economic Output from July 2011 through September 2011 [also see here]
• Ken Houghton at Angry Bear: How Keynesian Policy Led Economic Growth In the New Deal Era: Three Simple Graphs
• James Hamilton at Econbrowser: Taxing the 1%
• James Hornet at CBPP's Off The Charts blog: Why Doing Nothing Would Reduce Deficits by $7.1 Trillion
• Catherine Rampell at Economix (NYT): Deficit Deals Weren’t Always So Antitax
• Catherine Rampell at Economix (NYT): How Other Countries Do Deficit Reduction
• David Glasner at Uneasy Money: Watching the CPI Can Get You into Deep Trouble
• Hyun Song Shin: Global Banking Glut and Loan Risk Premium [also see Kevin Drum]
• Dan Crawford at Angry Bear: EA Balance of Payments: the Current Account [also see this Deutsche Bank Research paper]

Let's wrap this section with this excellent paper "Why stricter rules threaten the eurozone" by Simon Tilford and Philip Whyte of the Center for European Reform (CER), via Paul Krugman. Can't say there is a lot that is new here, but the authors do a good job of explaining in a simple way some of the issues behind the European crisis. Here are some excerpts from their paper:

The North European interpretation is by no means all wrong (no serious observer disputes that Greece grossly mismanaged its public finances). But it is damagingly partial and self-serving. It skates over the contribution played by the euro’s introduction to the rise of indebtedness in the periphery; it wrongly assigns all the blame for peripheral indebtedness to government profligacy; it makes no mention of the far from innocent role played by creditor countries in the run-up to the crisis; and it does not acknowledge how the absence of fiscal integration has exacerbated financial vulnerabilities and made the crisis harder to resolve.

How did the euro’s introduction contribute to the current crisis? The answer is that the removal of exchange rate risk inside the eurozone encouraged massive sums of capital to flow from thrifty countries in the ‘core’ to countries in the ‘periphery’ (where private investors thought the rates of return were higher). The influx of foreign capital cut borrowing costs in the periphery, encouraging households, firms and governments to spend more than they earned. The result was an explosion of current-account imbalances inside the eurozone. As a share of GDP, these imbalances were far bigger than those between, say, the US and China.

It is wrong, however, to blame government profligacy for the rise in peripheral indebtedness: Greece is the only country where this holds true. In Ireland and Spain, it was the private sector (particularly banks and households) that was to blame. Indeed, in
2007, the Spanish and Irish governments looked more virtuous than Germany’s: they had never broken the fiscal rules, had lower levels of public debt and ran budget surpluses.

Creditor countries cannot be absolved of all blame. Not only was export-led growth in countries like Germany and the Netherlands structurally reliant on rising indebtedness abroad. But creditor countries in the core harboured plenty of vice: the conduits for the
capital that flowed from core to periphery were banks, and these were more highly leveraged in countries like Germany, the Netherlands and Belgium than they were in the periphery (or the Anglo-Saxon world). The eurozone crisis is as much a tale of excess
bank leverage and poor risk management in the core as of excess consumption and wasteful investment in the periphery.

If the eurozone had been a fully-fledged fiscal union, it would not be in its current predicament. Its aggregate public debt and deficit ratios, after all, are no worse than the US’s. But it is not a fiscal union – which is why it faces an existential crisis, and the US  does not. The absence of a fiscal union explains why economic imbalances between Germany and Spain matter in a way that those between Delaware and New Jersey do not. And it explains why some eurozone members face sovereign debt crises, while states in the US do not (unlike them, members of the euro did not assume joint liability for rescuing banks).

[...]

The grand bargain (or Plan A) has failed. The reason is that its underlying philosophy – that of ‘collective responsibility’ – is flawed. There are three problems. First, the demands of collective responsibility have been asymmetric: self-defeating medicine has been prescribed to debtor countries, while problems in creditor countries have been allowed to fester. Second, too much virtue has become a collective vice, resulting in excessively tight macroeconomic policy for the region as a whole. Third, stricter rules are no substitute for common institutions: they have left solvent countries vulnerable to catastrophic death spirals.

Education

• Mike Konczal at Rortybomb: The Relationship Between Tuition Costs and Faculty

Miscellaneous

• Catherine Rampell at Economix (NYT): Fatalism and the American Dream
• Catherine Rampell at Economix (NYT): The Golden Age of Republican Deficit Hawks
• David Frum in New York Magazine: When did the GOP Lose Touch with Reality?
• Brad DeLong: Edward Luce Says the Czar Needs New Cossacks: What Is Barack Obama Thinking Department?
• Mish's Global Economic Trend Analysis: Ron Paul Smacks Bob Schieffer on Face The Nation [also see Glenn Greenwald on this topic]
• Yves Smith at Naked Capitalism: We Speak on PBS Newshour About Why No Bank Executives Have Gone to Jail