econoblog.info

A roundup of economic news from around the Web.

Paradox of Thrift: On his blog, Paul Krugman looks at the paradox of thrift. “Sure enough, the sharp increase in personal saving has been accompanied by a decline in overall national saving — partly via reduced corporate savings, largely via increased public deficits. One caveat: some of the decline in investment, and hence in saving, is due to disruption in the credit markets. Still, my sense is that the big reason for declining business investment, at least, is simply the fact that consumer demand has fallen — which is paradox of thrift in action. One key implication of the fact that we’re living in a paradox of thrift world is the folly of demands that we reduce budget deficits in the near term. Slashing spending or raising taxes right now wouldn’t just deepen the slump — it would actually make us poorer in the future, too, because it would lead to lower overall saving and investment.”
Jobless Recovery: The Economist’s Free Exchange blog takes a look at the concept of the jobless recovery. “it’s worth wondering why only recently extended joblessness after a downturn has become the norm. Perhaps the pace of structural change has increased, or maybe change in demand and supply for low-skilled workers has reached a critical inflection point. If growth in demand for low-skilled workers has slowed considerably while supply growth has increased, then workers may stay in unemployment for longer and longer periods. This will lead to skill erosion, making workers harder to hire, and downward pressure on wages, reducing the benefits of joining the labor force in the first place. Each time through the business cycle, the labor market at the bottom end of the skill spectrum will worsen. Not a pretty picture. But with output variables moderating while employment variables continue to sink, there is every indication that recovery from this recession, when it arrives, will do little for many of the unemployed for years to come. Time to start thinking about why this is the case, and what can be done about it.”
Fed and Bubbles: Simon Johnson is wary of the Fed attempting to pop bubbles. “if the Fed can’t get better at spotting bubbles, the implication is that no one can. Which means that “macroprudential regulator” is just a slogan – a nice piece of what Lenin liked to call “agitprop”. And if macroprudentially regulating is an illusion, what does that imply? There will be bubbles and there will be busts. Next time, however, will there be financial institutions (banks, insurance companies, asset managers, you name it) who are – or are perceived to be – “too big to fail”? You cannot stop the tide and you cannot prevent financial crises. But you can limit the cost of those crises if your biggest players are small enough to fail.”
Housing Hindsight: On the Economix blog, Ed Glaeser says even hindsight isn’t 20-20 when it comes to housing. “At this point, not only is our foresight limited but our hindsight isn’t exactly 20-20 either. The housing price volatility of the last six years has been so extreme that it confounds conventional economic explanations. Over a four-year period — from February 2002 to February 2006 — the Case-Shiller index increased 68 percent in nominal terms or about 50 percent in constant dollars. Certainly, those price increases cannot be explained by increases in average income. Income growth was quite modest from 2002 to 2006. Nor can the boom be explained by a dearth of new housing supply. Construction rose dramatically during the boom, and we built hundreds of thousands of additional homes. Our current low levels of construction will continue until we work through all of this extra housing stock. “