Fed Watch: And Then There is Bernanke
Tim Duy: And Then There is Bernanke, by Tim Duy: Lots of Fed chatter in the last week. For openers, some background from Reuters: It decided on May 1 to keep buying at an $85 billion monthly pace, and many…
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‘The Climate Skeptics Have Already Won’
Humanity has decided to yawn and let the real and present dangers of climate change mount. ... Judged by the world’s inaction, climate skeptics have won..., however rational it may be to seek to lower the risk of catastrophic outcomes, this is not what is happening now or seems likely to happen in the foreseeable future. ...
The attempt to shift our choices away from the ones now driving ever-rising emissions has failed. It will, for now, continue to fail. The reasons for this failure are deep-seated. Only the threat of more imminent disaster is likely to change this and, by then, it may well be too late. This is a depressing truth. It may also prove a damning failure.
As he says, it's not too late, "Unless the most apocalyptic scenario happens, humanity may be able to curb emissions and buy itself time," but the clock is running and it's hard to see how meaningful change will come about without substantial changes in the political environment. Gridlock favors the skeptics.
Department of "Huh?!": Apple Computer Valuation Edition
If I have the right numbers in my head (which I may not), Apple currently makes $40 billion a year in profits, has $150 billion in free cash, and has a market value of $500 billion. That's a (price-cash)/earnings ratio of 7.75.
In what way is that divorced from fundamentals? Sounds like the market thinks that Apple has a very good franchise with a half-life of seven years, which seems about right to me. But if you told me the franchise was twelve years, I would not be surprised. And if you told me Apple was going to pull a Microsoft or a GM and burn all of its cash and its future earnings in a vain attempt to preserve a franchise beyond its natural life, I would not be surprised either. Apple's fundamentals are uncertain, but it does not seem to me that its market price is or was disconnected from them…
Muhammed El-Erian writes:
We should listen to what gold is really telling us: Like Apple, valuation has become divorced from fundamentals….
The consensus gold narrative is a familiar one… investors rushed into gold as a means to hedge against identifiable risks (inflation), as well as to counter nervousness about big uncertainties (including previously unthinkable disruptions to economic systems). Rising prices generated even higher prices, significantly disconnecting valuation from underlying fundamentals of physical demand and supply – that is until an otherwise insignificant bit of news pulled the rug from under the operating paradigm… the real catalyst for the dramatic price drop was a rumour that Cyprus could be forced to sell its holdings by its European partners. This involved a tiny amount of gold (valued at less than $1bn at the time), but it made investors suddenly pay attention to the possibility of significant supply hitting the markets from other European economies (particularly Italy with holdings of some $130bn)….
In corporate terms, think of the underlying dynamic as one of a powerful brand where valuation has become completely divorced from the intrinsic attributes of the product – thus rendering it vulnerable to any change in conventional wisdom…. Over the past year, a similar dynamic has played out in Apple and Facebook shares…. After a steady increase to just over $700, Apple’s share price hit a dramatic air pocket. Its price collapsed to less than $400. Today, it trades at around $440. Why? Basically because, as powerful as it is, the brand’s “enchantment” (to use a term coined by author and former Apple employee Guy Kawasaki) ended up inducing investors (inadvertently) to disconnect valuation from the reality of the furious catch-up on the part of Apple’s competitors. In the case of Facebook, it was widespread familiarity with the name, and the associated hype, that persuaded investors to oversubscribe to an IPO that valued the company at $38…. Today it is trading around $26….
[C]entral banks, pursuing higher growth and greater job creation, have inserted a sizeable wedge between financial markets and economic fundamentals. Firm and repeated central-bank commitment to asset purchases has done more than push a growing number of investors to add portfolio risk at ever more elevated prices. It has also repressed market volatility, lowered correlations and given the illusion of stability…. [M]arkets have outpaced fundamentals on the expectation that western central banks, together with a more functional political system, will deliver higher growth. If this fails to materialise, investors will worry about a lot more than the intrinsic value of gold.
Energy and Economic Growth
I did an interview with James Stafford of OilPrice.com:
It covers a few other topics as well.
Links for 05-21-2013
- Where Are The Deficit Celebrations? - Paul Krugman
- Fed Paper Urges Trading Revamp - WSJ
- Senior poverty is much worse than you think - Dylan Mathews
- Jeffrey Frankel on Alesina - Brad DeLong
- Fears of Widespread “Rate Shock” Unfounded - CBPP
- Macroeconomic Machismo - Paul Krugman
- Projected Medicare/Medicaid Spending Has Fallen by $900 Billion - CBPP
- Integrating monetary policy and macroprudential regulation - Vox EU
- Global Urbanization and the Governance Challenge - Tim Taylor
- German Wages and Portuguese Competitiveness - Paul Krugman
- The Oral Tradition of the IH metaphor - Gavin Kennedy
- Peggy Noonan's Broken Soul - Kevin Drum
- Economic Outlook: Moving in the Right Direction - FRBSF
- Climate change: After activism - The Interpreter
- Tumblr and Yahoo’s portal strategy - Digitopoly
- Do Big Cities Help College Graduates Find Better Jobs? - Liberty Street
- What's the best way to pass a climate bill? - Brad Plumer
- Regulating pot - The Register-Guard
- The Theory of Interstellar Finance - Paul Krugman
Martha L. Olney and Aaron Pacitti: More Services Means Longer Recoveries
Martha L. Olney and Aaron Pacitti:
More services means longer recoveries: The four longest recoveries in recent history, as measured by the number of months it took until the economy recovered all of the jobs lost during the recession, also have been the four most recent recoveries—those that followed the recessions of 1981, 1990, 2001, and 2007…. The shift from being a goods-producing, manufacturing-based economy to a service economy… is causing the pace of economic recoveries to slow…. Because services can’t be inventoried nor, for the most part, exported, services are only produced when domestic demand exists.
Goods-producing businesses… can produce in anticipation of increasing demand or in response to increased external demand. Either way, domestic demand need not increase before goods production increases. Service producers are not so lucky. A restaurant won’t produce a meal before you are in the booth. And your dentist can’t produce and inventory a teeth cleaning. You have to be in the dentist’s chair. So service producers must wait…. The greater the share of services in the economy, the greater the share of businesses that must wait for domestic demand to actually pick up…
Ezra Klein: Medicaid in Oregon
Is the future of American health care in Oregon?: Two weeks ago, the group reported… that Medicaid coverage increased the amount of health care people used, offered almost total protection against catastrophic health expenses and reduced depression by 30 percent, but it didn’t show a statistically significant effect on blood pressure, cholesterol or blood sugar…. The sample of sick people was too small to show statistically significant improvements in those measures…. It’s a critique that Katherine Baicker, a Harvard health economist who was one of the principle authors of the study, partially accepts:
Our power to detect changes in health was limited by the relatively small numbers of patients with these conditions. Indeed, the only condition in which we detected improvements was depression, which was by far the most prevalent of the four conditions examined.
She also noted that the diabetes results were consistent with the improvements one would expect from the clinical literature but the number of people with diabetes was too small to establish significance. However, she said the sample size was large enough to rule out large improvements in blood pressure and cholesterol, at least over the first two years.
All this might make for an interesting academic panel on Medicaid. But the results were quickly conscripted into the war over President k Obama’s health-care reforms. “Today, the nation’s top health economists released a study that throws a huge ‘STOP’ sign in front of ObamaCare’s Medicaid expansion,” wrote Michael Cannon, director of health policy studies at the libertarian Cato Institute. Perhaps the law’s supporters oversold what is really just “a $1 trillion program to treat mild depression,” wrote the Daily Beast’s Megan McArdle. I would be more favorably inclined toward such commentary if the authors followed their analysis to its logical conclusion and turned in their own health-insurance cards. “My daughter needs private coverage,” says Ezekiel Emanuel, an oncologist and chairman of the Department of Medical Ethics and Health Policy at the University of Pennsylvania who worked on the Affordable Care Act. “Do I say to her the health-care system in the U.S. won’t necessarily do a great job managing your blood pressure so don’t get health insurance? No way in hell! And if that wouldn’t be my response for my daughter it shouldn’t be my response for poor people.”
The study’s bottom line is that Medicaid worked. It performed the core functions of health insurance. It got people access to health care and protected them from catastrophic expenses. “We can reject the ‘Medicaid does nothing’ hypothesis,” Finkelstein said. “Medicaid had impact. It increases their use of preventive care. It increases their outpatient visits. It increases their health-care utilization.
What the study called into question is the next step in the health chain: How much healthier, really, does the care we’re buying make us? And I use the term “us” advisedly. “Medicaid is a financing tool,” Kitzhaber said. “Once people get on Medicaid they are bought into the same hyperinflationary, inefficient, backloaded medical system as everyone else.” That’s the system Kitzhaber wants to change….
The fundamental problem with our health-care system is the growing discrepancy between the cost of care, the resources available to pay for it and the tenuous connection between that expenditure and actual health. What we’re doing is instead of putting our budget into the ER and paying for congestive heart failure after congestive heart failure, we’re putting it into care coordination and community health workers. We’re investing in health. It’s just a paradigm shift.
At the core of this shift are Oregon’s 15 “coordinated care organizations.”…
Obamacare gives almost every American health insurance. That’s a necessary but not sufficient condition for making them healthier. Oregon’s experiment may or may not work, but it’s the right next step. “Medicaid can be improved,” Carroll said. “But we need to differentiate between the way we deliver care and the way we design insurance. Giving people insurance just gives them the access to the care itself. Denying them Medicaid deprives them of simply accessing the system. But if we want to improve quality, we have to change how we deliver care.” In Oregon, at least they’re trying.
Jeffrey Frankel: "[It Is] Alberto Alesina [Who] Has Not Been Receiving His ‘Fair Share of Abuse’”
On Whose Research is the Case for Austerity Mistakenly Based?: Several of my colleagues on the Harvard faculty have recently been casualties in the cross-fire between fiscal austerians and stimulators…. Carmen Reinhart and Ken Rogoff… the statistical relationship between debt and growth…. Niall Ferguson… “suggested that Keynes was perhaps indifferent to the long run because he had no children, and that he had no children because he was gay.”
But what does it all have to do with the debate between austerians and stimulators? Not much. But the battle lines of the austerians have been wavering lately under the continuing onslaught of facts (most notably the recessions in Europe and Japan’s recent conversion to stimulus), and the stimulators find the missteps of Reinhart-Rogoff and Ferguson to be convenient stones to…. Sorry: they are throwing the wrong stones.
The Reinhart-Rogoff controversy is not in fact relevant to the question whether governments should expand or contract at a given point in time. The basic finding in their papers continues to hold up…
Ahem! There is nothing special about 90%. That is also true for 80%, and 70%, and 60%, and 100%. As I am going to say, again, today, for the ninety-fifth time:
The Ferguson controversy is even less relevant, because the phrase “in the long run we are all dead” was neither about fiscal policy when Keynes wrote it nor an argument against deferred gratification…
Ahem! An awful lot of people--including Niall--claim, along with Hayek and Schumpeter, that Keynes had a view that cared only about the short-run--and claim "in the long run we are all dead" is about deferred gratification.
[It is] Alberto Alesina has not been receiving his “fair share of abuse.” His influential papers with Roberto Perotti (1995, 1997) and Silvia Ardagna (1998, 2010) found that cutting government spending is not contractionary and that it may even be expansionary…. The Alesina papers themselves are much more measured in their conclusions than one would think from the claims of some conservative politicians that academic research finds fiscal austerity to be expansionary in general. Nevertheless, the conclusions are clear: “Even major successful adjustments do not seem to have recessionary consequences, on average” (1997)…. Alesina’s recent policy advice is that the US should cut spending “right away.”…
A new attack on Professor Alesina’s econometric findings comes from an unlikely source: Perotti, the co-author of the first two of the five articles, has now recanted (2013a, b). He points out… the same year can count as a consolidation year, a pre-consolidation year, and a post-consolidation year… some of what have been treated as large spending-based consolidations… were in fact never implemented. Currency devaluation, reduced labor costs, and export stimulus played an important part…. His conclusions: “the notion of ‘expansionary fiscal austerity’ in the short run is probably an illusion: a trade-off does seem to exist between fiscal austerity and short-run growth” and so “the fiscal consolidations implemented by several European countries could well aggravate the recession” (2013b, p.10)…
Inequality and Economic Growth: Paul Krugman and Tony Atkinson
Note: The video starts around the 43 minute mark
‘Liberty for Whom?’
Liberty for Whom?, by James Kwak: ...Corey Robin's fascinating article on nineteenth-century European culture, Nietzsche, and the economic philosophy of Friedrich Hayek..., in very simplified form, goes like this. For Nietzsche, and for other cultural elitists of late-nineteenth-century Europe, both the rise of the bourgeoisie and the specter of the working class were bad things—the former for its mindless materialism, the latter for its egalitarian ideals, which threatened to drown the exceptional man among the masses. One set of Nietzsche’s descendants..., which Robin focuses on in this article, is the “Austrian” school of economics led by Friedrich Hayek.
People often like to think of the Austrians as advocates of liberty, both for its Economics 101 properties (free choice in free markets, under certain assumptions, maximizes societal welfare) and its moral properties. Robin ties Hayek’s conception of liberty, however, back to Nietzche’s. Hayek cared about liberty for ultimately elitist reasons: liberty is not an end in itself, but a condition that enables the select few to make the world a better place... And those select few are likely to be the rich, for only they have the requisite time and freedom from material concerns...
This idea is obviously echoed in Ayn Rand’s novels... It has also trickled into the contemporary conservative worship of the ultra-rich. The phrase today is “job creators” (whatever that means), but it has the same moralistic overtones as in Nietzsche and Hayek—a class of people who are better than the rest of us, on whom we depend for our salvation and prosperity, and whom we should not presume to question or constrain through, say, safety regulation or higher taxes (“penalizing success,” in the jargon).
I used to say that most Americans voted against their class interests because they thought they would one day be in the upper class... But today, five years after the financial crisis, with median income below where it was fifteen years ago and social mobility at developing-world levels, I can’t imagine many people really believe that vast riches are in their future. An alternative explanation is that many Americans just think the rich are better than they are and that it’s wrong to question your betters. ...
I think we sometimes forget that voting is multidimensional -- it depends upon more than economic interests (e.g. it's partly about choosing an identity and the other non-economic factors can dominate). In any case, not sure I buy that people "just think the rich are better than they are" argument. It didn't, for example, propel Romney to the presidency.