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Tuesday, July 27, 2010

Solow vs. Prescott and the Real Business Cycle model. Who you got?

Ed Prescott deserved the Nobel prize for his work on the time inconsistency problem and central bank credibility. Lately he deserves a trip to the nut house as he continues to insist financial matters are "much ado about nothing" as I heard him say publically with my own ears. He says more nonsense of the same type here in point #3 (thanks Dr. Rothman).

Here, Nobel laureate Robert Solow says what he thinks Thanks to Arnold Kling, Greg Mankiw and Phil Rothman...

Thursday, July 22, 2010

Small business is the key to job growth.

I remember a quote I once read from a publication printed back in 1929. It said "uncertainty is worse than knowing the matter how bad."

Seems like uncertainty is the order of the day. So while we are at it, here is what he said yesterday....

Saturday, July 17, 2010

This is a cool view.

I once was in Costa Rica and saw an active volcano, Arenal, spew lava a kilometer in the air. I thought it so wonderful I stared at it for an hour. Enjoy the view. The icons in the bottom left let you spin the view 360 degrees. Thanks to Eric Butler for passing this along.

Thursday, July 15, 2010

What's wrong with deflation? Let me count the ways.

Someone recently emailed and asked "Why couldn't deflation be a good thing? Lower prices for consumers, greater investment, economic stimulation....."

Well, not quite. Here's my answer....

Dear (fill in name here): That's not how I think of these things. In my mind....

1. Deflation means much higher real interest rates that will kill investment when it is dead already. Remember the Fisher equation: real interest = nominal interest minus inflation. If we have deflation, then that minus sign becomes a plus sign. With nominal rates already at zero, the real rate becomes unbounded on the up side. See Great Depression 1929-33.
2. We had deflation in the housing industry and the financial industry, just two sectors of the economy. How's that working out for us?
3. Deflation puts consumption in a downward spin cycle of households playing chicken to see how low prices will go and thus never spending as deflation begets further expected deflation. See Japan 1989-2005.
4. Deflation would trash housing prices further and would convert toxic assets that are still on financial institutions' balance sheets into radioactive garbage.
5. Deflation would drop wages and incomes and raise unemployment. Quite the opposite of what you envision.
6. Deflation would trash firm cash flows, wreck already weak balance sheets of both households and firms as assets plummeted in value and would give us another round of financial institutions needing to re-capitalize since their capital would be vaporized with deflation. Credit to any but the most ultra safe investments would be unobtainable at any price. The European P.I.I.G.S. would go over the edge.
7. Deflation could potentially increase the real burden of debt so that people with falling incomes and falling wages could face higher real, price-adjusted debt servicing. That is called "debt deflation".
8. Once this started, public expectations would become even more depressed than they already are and would begin looking to worse times in the future, not better. That would definitely kick start the party of further and deeper economic misery.

Of course none of this would be a concern if changes to prices and wages were instantaneous and perfectly flexible in the downward direction. That of course is nonsense.

Deflation only has to happen if the central bank wants it to happen. And you can believe that more than anything. If Chairman Bernanke were to let that happen I will quit my job as an economist and go back to my old position as a Chippendale dancer.

Tuesday, July 13, 2010

Look at the graph from Jim Hamilton's blog...

Holy Toledo! I read the other day in the Wall Street Journal that it will take 250,000 new jobs a month for three years to lower the unemployment rate to 8%. That puts us at the middle of 2013. What are the odds? Look at how long it took to shake the recession of 2001 and a 2% increase in cyclical unemployment! I think we are in for a long hard sloggggggg.

I also include a piece that discusses if unemployment insurance increases the spell duration of unemployment.


Tuesday, July 6, 2010

Walmart finally goes into Chicago.

After a long battle Walmart finally is let into Chicago. They were kept out because they did not pay a "living wage", whatever that is supposed to mean. So Walmart took their jobs and tax base to the suburbs. Apparently the bad economy is bad enough to make the nay-sayers see the light. Senator Phil Gramm said it best...."the greatest social program in the world is a W2 form." Amen and good luck to those peeps looking to fill the 10,000 new jobs at Walmart.

Saturday, July 3, 2010

More fun at the Alumni Golf Tournament.

Three nice guys here: Francis Vaughn, Tee Davies and my nephew Ricky.
Victory at last!