Yotta Point

Some Readings on Income and Wealth Inequality and Intergenerational Mobility

I have been trying to develop a deeper understanding on the topic of income and wealth inequality and wanted to bookmark for myself some pertinent research and posts.

Josh Barro [Business Insider]

• 95% Of Income Gains Since 2009 Went To The Top 1% — Here's What That Really Means
• David Brooks is Wrong About Inequality
• Sorry, Libertarians — Inequality Does Matter

Andrew Berg, Jonathan Ostry [IMF]

• Equality and Efficiency
• [with Tsangarides] Redistribution, Inequality, and Growth
• Inequality and Unsustainable Growth: Two Sides of the Same Coin?

Matthew O'Brien [The Atlantic]

• Why The 1% Don't Feel Rich

Miles Corak [University of Ottawa]

• Income Inequality, Equality of Opportunity, and Intergenerational Mobility; PDF
• How to Slide Down the ‘Great Gatsby Curve’: Inequality, Life Chances, and Public Policy in the United States

Kathleen Geier [Inequality Matters]

• Ten facts you should know about global economic inequality

Colin Gordon [Dissent]

• The Computer Did It? Technology and Inequality
• Who Pays? Taxes and American Inequality

David Howell [The New School]

Reads for June 24

It's been a while since my last round-up of interesting posts, so here is a reading list for this weekend (updated).

Economics & Finance

• Henry Blodget at Business Insider: Corporate Profits Just Hit An All-Time High, Wages Just Hit An All-Time Low
• Ben Cassel at Real Time Economics (WSJ): "Number of the Week: Corporations Not Hoarding Cash"
• Eric Platt at Business Insider: America's Debt Levels Are Falling To Pre-Crisis Levels - but also see David Cay Johnston at Reuters looking at income as well: "America's Long Slope Down" and Mish Shedlock's comments at Global Economic Analysis
• Tyler Durden at Zero Hedge: The Chart That Scares The "1%" The Most
• Joe Weisenthal at Business Insider: Yesterday's Philly Fed Report Implies A Horrendous Jobs Report
• Joe Weisenthal at Business Insider: The Difference Between Obama's First Term And Bush's First Term In One Devastating Chart
• New Deal Democrat at Business Insider: Inflation Is Under Control, And It's A Sign Of Bad Things
• Zarathustra at Also Sprach Analyst: Quantitative easing and the (lack of) responses in bond yields
• Paul Krugman at NYT: Interest Rates: Varieties of Error
• Scott Barber at Alpha Now/Thomson-Reuters: "Crude Oil Futures Bouncing Near Their Lows of 2012" - has interesting charts comparing historical and recent behavior of oil vs. economic indicators and stocks; also see Sober Look's related analysis: "Crude oil vs. US equities: dislocation continues"
• Sober Look: "Dr. Copper Says Watch Out Below" & "Summer of 2011 Redux"
• Mark Thomas at Economist's View: Did Income Inequality Contribute to the Great Recession?
• Jie Jenny Zou at Real Time Economics (WSJ): Inequality Has Increased in Income and Consumption, Economists Argue [via]; here's the link to the paper by Attanasio, Hurst and Pistaferri: "The Evolution of Income, Consumption, and Leisure Inequality in The US, 1980-2010" [and a related post on income inequality across recent Presidents here; links here and here worth a look as well]
• David Cay Johnston at Reuters: "The Fortunate 400"
• Econompicdata: "Valuation Matters: Equities vs Bonds Edition"; "Dividend vs. Treasury Yields"; "Stocks For The Long Run?"
• Jared Bernstein at On The Economy: "CBO’s Long-Term Budget Outlook: What It’s Telling Us"
• Zarathustra at Also Sprach Analyst: "Coal inventory in various Chinese ports hit record highs" [also see Sober Look's post on this]
• Zarathustra at Also Sprach Analyst: "Is China massaging macro data? (Ans: Yes)"
• Sober Look: "India's Currency Spirals Out of Control" [see this older post as well]

Energy & Environment, Climate Change

• Climate Central: The Heat is On: U.S. Temperature Trends
• National Research Council: Sea-Level Rise for the Coasts of California, Oregon, and Washington: Past, Present, and Future (2012)
• Climate Central has a neat interactive online tool that allows you to assess the impact of sea-level rise on your coastal town or city
• Stefan at Real Climate: "What makes sea-level rise?"
• Andrew Freedman at Climate Central: "Did Global Warming Set Stage for Duluth Flooding?"

Healthcare

• Lane Kenworthy at Consider the Evidence: "Is rising obesity a product of income inequality and economic insecurity?"; "Why the Surge in Obesity?"
• Duff Wilson and Janet Roberts at Reuters: "Special Report: How Washington went soft on childhood obesity"

Miscellaneous

• Elizabeth Flock at US News/Washington Whispers: "Five Charts That Show How Our Democracy Isn't Working"

That's it for today.

Do Surveys of Consumer Confidence Provide Insight Into Actual Economic Activity?

Sober Look has two good, worth reading posts - "The story of two risk indices" and "The jump in U Michigan sentiment index is driven by consumer expectations". I'll try to return to the first post later but I thought I'd comment on the second one - which is about indicators tied to what we generally refer to as 'consumer sentiment' or 'consumer confidence'. SL makes some good points about these indices but he does not mention a larger point that I want to call out here - which is that these indices very clearly are not at all good gauges of absolute economic activity.

1) Let's start with SL's first point that the Thomson Reuters/University of Michigan's survey of consumer sentiment registered a reading in August 2011 that was as low as the reading in November 2008 - which, as SL says is "...a bit surprising and not at all intuitive, with anecdotal evidence suggesting that 08 felt far worse than 2011".

He's completely right about the non-intuitive nature of index values - but it is also completely non-intuitive when you look at non-anecdotal evidence. For example:

• The change in real GDP in Q4 2008 was -8.9% whereas in Q3 2011, GDP changed by +1.8%
• Retail sales changed at an annual rate of  more than -10% in Q4 2008 compared to +6 to 8% in Q3 2011
• Industrial production and capacity utilization were much lower in Q4 2008 compared to Q3 2011
• The economy was losing jobs at the average rate of ~600,000 jobs/month in Q4 2008 as opposed to gaining on average ~150,000 jobs a month in Q3 2011

So, what exactly is the Thomson Reuters/University of Michigan Consumer Sentiment measuring?

2) Second, SL adds:

What drove the sentiment index to levels comparable to 2008? The index actually has two components: the Current Conditions Index and the Consumer Expectations Index. And it was the "expectations" component that pushed the whole index to this low point. In fact according to U Michigan, when it came to consumer expectations, the "end of the world" was coming in August of 2011 - a point on the index that was in fact lower than the expectations measure in 2008 (as shown in the chart below). This is puzzling. Were consumers reacting to all the market driven media frenzy in August that wasn't as prevalent in 2008? Were consumers not as focused on the state of the financial markets in the past as they are now?

On the other hand the "current conditions" component did not dive anywhere close to its 08 lows, which is more in line with other economic indicators.

So, basically, according to this measure of consumer sentiment, in August 2011 the Consumer Expectations index fell lower than the lowest value in 2008! Yet, all the above indicators measuring the real health of the economy (see above) were much worse in Q4 2008 than in Q3 2011 and Q4 2011. How is it that, not just the overall consumer sentiment index, but also its consumer expectations component, seems so out of whack with macroeconomic conditions (current and immediate future)?

3) Third, SL discusses another indicator on consumer confidence:

Reads for 1 Jan 2012

A very happy new year to everyone! Here are some readings to ring in the new year...

Economics & Finance

• Bill at Calculated Risk: Private Investment and the Business Cycle; Vehicle Miles Driven Decline: A possible contributing factor; Labor Force Participation: The Kids are Alright Part 2 [Bill also provides a helpful how-to link on "How do you put recession bars on graphs using Excel?"]
• Yves Smith at Naked Capitalism: Global Savings Glut or Global Banking Glut?
• Christina Romer in the NYT: A Financial Crisis Needn’t Be a Noose
• Richard Peach, Josiah Bethards and Joseph Song at Liberty Street Economics: Labor Force Exits Are Complicating Unemployment Rate Forecasts
• David Cay Johnston at Reuters: The corporations that occupy Congress; Where's the fraud, Mr. President?
• Menzie Chinn at Econbrowser: Regulatory Uncertainty, Macro Policy Uncertainty, and Demand
• Dave Altig at Macroblog: Uncertainty about uncertainty; Maybe this time was at least a little different? (regarding the failure of economic forecasting)
• Tara Sinclar at Econbrowser: Guest Contribution: US Federal Regulatory Budget and Macroeconomic Outcomes: What Do We Know?
• Cardiff Garcia at FT Alphaville: 'Tis the Seasonality, Hold the Jolly
• Barry Ritholtz at The Big Picture: Clouded Title - The Gross Illegality of MERS
• TaxProf Blog: CRS on Income Inequality (via)
• Mark Thoma at Economist's View: Peddling a False Narrative on the Financial Crisis
• Zsolt Darvas: A Tale of Three Countries: Recovery After Banking Crisis [focus on Iceland, Ireland and Latvia, via]
• Paul Krugman ay NYT: Debt and Growth in the G7
• David Romer: What Have We Learned about Fiscal Policy from the Crisis? (via)
• Bruce Bartlett in Economix at NYT: Cutting the Corporate Tax Rate Is No Economic Panacea
• Jake at Econompicdata: Consumers Don't Care About Savings Rates
• Louis Uchitelle in the NYT: Factory Jobs Gain, But Wages Retreat (via)
• Dean Baker in CEPR's Beat The Press: Robert Samuelson, Wrong Again
• Uneasy Money: Which Fed Policy is Boosting Stocks? (includes an interesting look at the link between inflation expectations and S&P 500 returns)
• Michael Panzner at Financial Armageddon: Buzzing Again (topic: "Heightened speculation about economic recovery...doesn't mean it will happen")
• Derek Thompson in The Atlantic: It's Beginning to Look a Lot Like 2009 in India (via)

Energy & Environment, Food Security, Climate Change

Reads for Dec 18

Economics & Finance

• Paul Krugman at NYT: Inflating Your Way to Prosperity; Slow Learners; Lake Wobegon, Europe; No, It's Not The Welfare State; Chronic Confusion
• Brad DeLong: "Expansionary" Austerity in Europe
• Economist: Are Persistent Trade Deficits a Bad Thing?
• Paul Bergin at the SF Federal Reserve: Asset Price Booms and Current Account Deficits
• Kash Mansori at The Street Light: House Prices and Current Account Deficits; More House Prices and Current Account Deficits
• Global Macro Monitor at The Big Picture: Italy Works 20% More Hours than Germany or France
• Uneasy Money: Deutsche Bank Gets It, Why Can’t Mrs. Merkel?
• Scott Sumer at The Money Illusion: Like deer caught in headlights (talking about the Fed)
• Washingtons Blog at The Big Picture: FBI Estimates 80% of Mortgage Fraud Involved Industry Insiders
• Calculated Risk: Research: New paper on the role of investors in the housing bubble
• Michael Olenick at Naked Capitalism: NAR’s Big Miss on Home Sales Underscores Lack of Transparency and Accuracy in Mortgage/Housing Data
• Tamara Keith at NPR's It's All Politics Blog: GOP Objects To 'Millionaires Surtax'; Millionaires We Found? Not So Much [via]
• Mark Thoma at Economist's View: Percentage Growth in Annual Wages and Salaries [also see]
• Alex Tabarrok at Marginal Revolution: Roman Empire More Equal than the United States
• Brad DeLong: Why Oh Why Can't We Have a Better Press Corps? No, High Unemployment Is Not Primarily The Result of "Generous" Unemployment Insurance Benefits
• Chad Stone at CBPP's Off The Charts Blog: It’s the Great Recession, Not the Great Vacation, That’s Responsible for High Unemployment
• Mike Konczal at Rortybomb: What is the Real Unemployment Rate and How Could We Tell?
• Macromania: Beveridge Curves for 36 U.S. Cities (Updated)
• Ben Walsh at Business Insider: A Bunch Of Academics Think They've Figured Out How To Tell If A Hedge Fund Will Outperform The Market
• Barry Ritholtz at The Big Picture: Interest Rates: 1831-2011; US Housing Prices Mirror Japan's Experience; Beware The Retail Hype; Retail Sales Disappoint on False Black Friday Reports
• Cardiff Garcia at FT Alphaville: The Decline of "Safe" Assets

To wrap up this section, here's an interesting comment by William Cohan in this FDL Book Salon on his book "Money and Power: How Goldman Sachs Came to Rule the World":

Goldman actually almost went out of business many times in its history; it is very good at getting into trouble — and also very good at getting out of trouble

...and he also notes:

actually i go through chapter and verse of the many frauds that Goldman has committed or participated in over the years

Should make for some interesting reading.

Energy & Environment, Food Security, Climate Change

Eurozone Government Debt and Current Account Deficits

Background

In my previous post - The Stormy Petrel of Eurozone Budget Deficits: Current Account Deficits - I examined this question:

Do pre-crisis current account balances, as opposed to pre-crisis fiscal balances, better predict crisis-period fiscal balances (quantitatively) for countries that are part of the European currency union (EMU)?

I showed that the answer was yes and discussed the implications in the context of the recently concluded EU summit. The analysis in the post focused on current account (CA) and fiscal balances in the 7 years preceding the start of the Great Recession (pre-crisis) and fiscal balances in the 2008-2010 (crisis) time period. Countries that joined the Euro currency union in 2007 or beyond were excluded from the analysis since they were not on the Euro long enough in advance of the financial crisis. The key finding was that the average CA balance/GDP by country for 2000-2007 is a much better quantitative predictor of the average fiscal balance/GDP for the same country in 2008-2010, than is the average fiscal balance/GDP of the country in 2000-2007. The EU "fiscal union" was largely a fiscal austerity pact, with inordinate emphasis on minimizing fiscal deficits and sovereign debt levels as a % of GDP, with little or no focus on the current account. However, as I discussed in the above post, pre-crisis fiscal balances are less effective in predicting future fiscal balances than are pre-crisis CA balances. Hence, I argued that a "fiscal union" that demands fiscal austerity as a way to ensure low fiscal deficits in the future, with no attention paid to CA balances, is unlikely to consistently prevent large future fiscal deficits.

In this post, I turn my attention to government debt - the other element of the EU pact. The question I ask here is:

Do pre-crisis current account balances/GDP, as opposed to pre-crisis government debt/GDP, better predict crisis-period debt/GDP or changes in debt/GDP (quantitatively) for countries that are part of the European currency union (EMU)?

The answer is mixed as I will explain below.

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Summary

In this post, I summarize the results of a simple analysis of the average current account (CA) and government debt, as a percentage of GDP, for nearly a dozen European countries that use the Euro as their currency [Section 1]. With the usual caveat that correlation does not always imply causation, the key findings can be summarized as follows:

1. The average debt/GDP change from 2000-2007 to 2008-2010 was ~12.2 percentage points, with a standard deviation of ~11.9 percentage points. If Ireland and Luxembourg are excluded as outliers, the average is 10.0 and standard deviation is 9.8 [Section 1].

2. The % change in average debt/GDP between 2000-2007 and 2008-2010 was ~ 35.2%, with a standard deviation of 47.3%. If Ireland and Luxembourg are excluded as outliers, the average is 14.9% and the standard deviation is 13.9% [Section 1].

3. Pre-crisis average debt/GDP was a fairly good predictor of the absolute value of post-crisis average debt/GDP (slightly greater than 1X) but was poor in predicting the % change to pre-crisis average debt/GDP due to the crisis [Section 2]. The reason for this behavior is unclear.

4. Pre-crisis average current account balance/GDP is a low to moderate predictor of the absolute value of post-crisis average debt/GDP as well as the % change to pre-crisis average debt/GDP due to the crisis [Section 3].

Hence, if we were interested in knowing the likely % change to average debt/GDP [pre- to post-crisis], the pre-crisis average CA balance/GDP was more likely to give us some insight on this than the pre-crisis average debt/GDP. If, on the other hand, we were interested in knowing the likely absolute average debt/GDP [post-crisis], the pre-crisis average debt/GDP hits the mark much more effectively on this than than the pre-crisis average CA balance/GDP. In the context of the recently concluded EU "fiscal union" summit, a focus purely on nominal debt/GDP levels will likely provide less insight on the mechanisms that might allow for net debt reduction. A focus on CA balances/GDP is more likely to be useful in understanding how to shape the % change in debt/GDP in the desired direction.

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1. Eurozone Countries - Assumptions & Data

The Stormy Petrel of Eurozone Budget Deficits: Current Account Deficits

[NOTE: The second part of this analysis is posted in the next post: Eurozone Government Debt and Current Account Deficits]

Background

In my previous post discussing the recent EU "fiscal union" summit, I said:

You'll notice that Spain and Ireland were running fiscal surpluses with acceptable debt/GDP in the years immediately preceding the financial crisis - yet these countries are amongst the worst affected by the meltdown and and in the crosshairs of the ECB and austerity hawks. Slovenia had run modest deficits ahead of the financial crisis and its debt to GDP ratio was low and declining ahead of the crisis - yet, Slovenia's bond yields have been in crisis territory recently and its debt situation is worsening as the economy teeters into recession. Undoubtedly, countries like Greece made their problems much worse with very high levels of deficits and debt prior to the crisis. That said, even Germany ran significant deficits and had high debt levels prior to the crisis - yet, Germany remains relatively unscathed because it has run massive current account surpluses thanks in part to the Eurozone periphery that ran massive trade deficits that benefited countries like Germany.

This is a point that has been made by many people before: rather than fiscal profligacy, the main root cause of the current European financial crisis can be traced back to large current account deficits run by many EU members following the establishment of the Euro as a common currency, culminating in a sudden stop (in the vicinity of the Great Recession) that pummeled the economic and fiscal health of those countries. A useful chart is available from Kash Mansori at The Street Light - along with his follow-up observations...

In their book "This Time is Different: Eight Centuries of Financial Folly", Carmen Reinhart and Kenneth Rogoff point out:

An even stronger regularity found in the literature on modern financial crises is that countries experiencing sudden large capital inflows are at high risk of experiencing a debt crisis [15]. The preliminary evidence here suggests that the same is true over a much broader sweep of history, with surges in capital inflows often preceding external debt crises at the country, regional, and global levels since 1800, if not before.

[I've discussed some of these issues in more detail in a couple of other prior posts: Capital Flow Bonanzas and Their Aftermath and Q&A with President Bill Clinton at the 2011 Clinton Global Initiative, Part 2 - The Financial Crisis in Europe]

Given the known impact of large net capital inflows and current account deficits on fiscal stability, here's a natural question that came to mind in the context of the Eurozone:

Do pre-crisis current account balances, as opposed to pre-crisis fiscal balances, better predict crisis-period fiscal balances (quantitatively) for countries that are part of the European currency union (EMU)?

This post focuses on that question. The answer, as it turns out, is yes and the implications of this are obviously significant in the context of the recently concluded EU summit.

---

Summary

In this post, I summarize the results of a simple analysis of the average current account (CA) and fiscal balances, as a percentage of GDP, for nearly a dozen European countries that use the Euro as their currency [Section 1]. The analysis focused on CA and fiscal balances in the 7 years preceding the start of the Great Recession (pre-crisis) and fiscal balances in the 2008-2010 (crisis) time period. Countries that joined the Euro currency union in 2007 or beyond were excluded from the analysis since they were not on the Euro long enough in advance of the financial crisis. The key finding from this analysis is that the average CA balance/GDP by country for 2000-2007 [Section 3a, 3b] is a much better quantitative predictor of the average fiscal balance/GDP for the same country in 2008-2010, than is the average fiscal balance/GDP of the country in 2000-2007 [Section 2a, 2b].

The analysis was completed with and without Ireland in the mix. Ireland is a massive outlier in the data when it comes to fiscal deficits - likely due to the fact that the main issue in Ireland was large-scale private debt rather than sovereign debt, and sovereign debt ballooned only later because of the Irish government's huge borrowing to bail out private banks during the crisis. With the exclusion of Ireland, the positive correlation between average pre-crisis CA balance/GDP to crisis-era fiscal balance/GDP is very high and even more stark [Section 3c, 3d]. It is significantly higher than the correlation between average pre-crisis fiscal balance/GDP to crisis-era fiscal balance/GDP [Section 2c, 2d]. 

The findings here raise more questions about the effectiveness of the recently touted EU "fiscal union" which was largely a fiscal austerity pact, with inordinate emphasis on fiscal balances as opposed to CA balances. Specifically, the data shown here indicate that pre-crisis fiscal balances do not effectively predict fiscal balances during downturns/crises - they are less effective in doing so than pre-crisis CA balances. Hence, a "fiscal union" that demands fiscal austerity as a way to ensure low fiscal deficits in the future, with no attention paid to CA balances, is unlikely to consistently prevent large future fiscal deficits. Further, given the limited direct correlation between CA and fiscal balances over the same period of time [see "Baseline Charts" in Section 3], it is quite possible that countries might run fiscal surpluses along with large current account deficits over the same time period, and yet have little or no protection against future fiscal deficits during downturns [as shown in Section 3a-3d]. Finally, a misguided focus on short-term fiscal deficits and debt (as opposed to longer-term fiscal health) is more likely to drive deflationary results as well in the current environment - which could be another negative consequence of the recently announced EU "fiscal union".

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1. The Eurozone Countries

The EU Brand of Hopium

It's abundantly unclear how the EU summit on Friday actually solved the foundational problems behind the financial crisis in Europe - if anything the implications for the future might be worse. Here are a few posts that get to the gist of the problem with the touted "fiscal union".

Let's start with this NPR piece by Chana Joffe-Walt which helpfully summarizes the recent historical data on Eurozone deficits and debt as a percentage of GDP. First, EU countries' deficits as a percentage of GDP compared to the threshold limit set by the pact on Friday, December 9.

Second, EU countries' debt as a percentage of GDP compared to the threshold limit set by the same pact.

Reads for Dec 4/5

Economics & Finance

• Catherine Rampell at Economix: Rating the Credit Raters
• Rebecca Wilder at News N Economics: Malicious ECB Rate Hikes [also see her post from September: The European debt crisis in charts]
• Michael Darda of MKM Partners: Memo to the ECB - Money's Too Tight
• James Kirkup at The Telegraph (UK): Euro doomed from start, says Jacques Delors [Delors was a key architect of the Euro] (via Credit Writedowns)
• Kash Mansori at The Street Light: Italy and Japan
• Joe Weisenthal at Business Insider: Guess Which Country Has Debt Of Nearly 1000% Of GDP...; The Entire Sovereign Debt Crisis Can Be Understood By Looking At Sweden Vs. Finland
• David Cay Johnston at Reuters: The Taxpayers Burden and Closing Wall Street's Casino [absolutely fascinating chart showing bank failures, de-regulation & income inequality in the US since 1910 and another on fewer Federal financial prosecutions in 2000+ era]
• Hannah Shaw at CBPP's Off The Charts Blog: Exploring Income Inequality, Part 5: The Concentration of Income and Wealth
• Mish's Global Economic Trend Analysis: Banks Make $13 Billion on $7.7 Trillion in Secret Fed Loans; SEC Stands by Does Nothing
• Mike Konczal at Rortybomb: Comparing the Federal Reserve's Reaction to the Financial Crisis Versus the Unemployment Crisis [Wow!]
  • Konczal says: "To recap: Lehman Brothers goes worse than the Federal Reserve’s projection and the Fed goes to the most extreme lengths it can find to extend emergency lending. Every single unemployment number turns out to be worse than all of the Federal Reserve’s projections, and the Federal Reserve finds every excuse to look the other way. Only Charles Evans has the courage to say that we should let inflation go to 3% while unemployment is over 7% to catch up to trend growth. Amazing."
• Historinhas: The "hole theory of unemployment" (via)
• Bill McBride at Calculated Risk: Employment Summary, Part Time Workers, and Unemployed Over 26 Weeks
• Menzie Chinn at Econbrowser: The November Employment Situation
• Mark Thoma at Economist's View: Unemployment Falls, But Is It Good News?
• Brad DeLong: The Household Survey: A Note on the December 2, 2011 Report
• Barry Ritholtz at the Washington Post: Did Black Friday save the season? Beware the retail hype.
• Kenneth Rogoff: Is Modern Capitalism Sustainable? (via)
• Paul Krugman at NYT: British Debt History; Bleeding Britain; Explaining Business Investment; The Summer of Confidence; Memories of VSPs Past; Oh? ECD;  There is Something Not Rotten (in the State of Denmark);
• Noahpinion: Harrison & Kreps 1978: The power of irrational expectations (via)
• Vivek Wadhwa in the Washington Post: China opens doors of state-run companies to world's top talent
• Vivek Wadhwa in the Washington Post: Why silicon valley should fear India

On that last article....I agree with much of Wadhwa's observations about India based on my experience - in particular, these passages:

India’s information technology sector may have started by running call centers and maintaining old computer code for American companies. But, today, instead of starting more I.T. services companies, a new breed of Indian entrepreneurs are developing high-value technology products based on intellectual property.

[...]

But something is missing in India: The angel investors, venture capitalists, and, most critically, experienced mentors. This problem will fix itself as more companies achieve success and seasoned entrepreneurs decide to give back to the next generation. When that happens, Silicon Valley better watch out. It is in for some very real competition.

Energy & Environment, Food Security, Climate Change

Required and Excess Reserves of US Banks - Is It Time for a Policy Change by the Federal Reserve?

In his recently released book - "Back to Work: Why We Need Smart Government for a Strong Economy" - President Bill Clinton has evidently proposed a slew of ideas to boost job growth and the US economy. Although I've not read the book yet, he has been discussing many interesting ideas through this year, including at the 2011 Clinton Global Initiative (my discussions on the Q&A with President Bill Clinton at CGI 2011 are available here: Part 1, Part 2, Part 2A, Part 2B, Part 3). One of his ideas apparently ties to the reserve policy set by the US Federal Reserve according to Dave Johnson's review of the book in Alternet [the use of bold text is my emphasis throughout this post]:

...Clinton offers a three-part economic and jobs growth strategy:

(1) put as much of the $4 trillion now held in banks and corporate treasuries back into the economy as fast as we can; (2) concentrate on the areas most likely to produce good jobs that have a positive ripple effect, jobs in modern infrastructure building, high-end manufacturing, green technologies, and exported goods and services; and (3) do literally dozens of other things that, when combined, can make a real impact now and also increase our long-term economic growth.

The list is full of smaller policy ideas, like #3, the Federal Reserve has to give banks an incentive to lend. The Fed should charge banks for parking money, maybe .25% and/or require banks to pay their customers a minimum 1% interest on deposits...

Dave's fairly detailed review is worth reading in full but I'm inclined to disagree with his characterization of the latter idea as a "smaller policy idea". I'll use this post to explain why an idea like this could have a substantial impact on increasing lending and thereby boosting nominal GDP (NGDP). In fact, arguably pioneered by economist Scott Sumner who blogs at The Money Illusion, numerous economists across the political spectrum are advocating the need for NGDP targeting by the Fed (rather than prices or inflation), as a response to the large and persistent nominal and real output gap in the US economy. This becomes even more important given recent indications from historically reliable leading indicators that the U.S. could be headed into another recession.

Excess v. Required Reserves

To explore this topic more broadly, it's worth starting with the post "Cash Is Not The Problem" by Paul Krugman back in July 2011. Krugman discussed the massive cash balances that corporations have accumulated and briefly discussed the large amount of excess reserves held by depository institutions (banks), well above the level of required reserves:

Second, banks are also sitting on large amounts of cash that they aren’t lending...

At face value, Krugman has a point - banks are holding well over $1 Trillion in excess reserves. Given that we have a serious NGDP gap with anemic employment growth, it would seem appropriate for the Fed to drive banks to reduce their excess reserves via increased lending in order to stimulate faster economic growth, especially in a political environment where stimulative fiscal policy seems out of reach. However, the fact that banks have large and growing excess reserves does not automatically mean that loan growth is not occurring. To understand this better, we need to look at both excess reserves and required reserves.

I've included below a reserves chart from the St. Louis Federal Reserve Economic Database (FRED). Note that the scales for required reserves (left) and excess reserves (right) are completely different - by over an order of magnitude - meaning that excess reserves have been growing more than order of magnitude faster than required reserves since the start of the Great Recession. Excess reserves have grown from zero prior to the Great Recession to almost $1.5 T now, with the most rapid growth beginning in Fall 2008 when the Fed started aggressively intervening to prevent another Great Depression - via liquidity facilities, loans, asset purchases, etc. (QE1 and QE2 are good examples). The Fed also modified its policy on reserves starting in October 2008 and started paying 0.25% interest on reserve balances - the first time in its history.