Archive for the ‘Uncategorized’ Category



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Hmmm… BS.

“Chinese Premier Wen Jiabao on Sunday warned other countries that pressuring China on currency policy was equivalent to protectionism and insisted that the renminbi was not undervalued.

Mr Wen said China would continue to reform its currency system. But he pushed back strongly against international pressure on the level of the exchange rate, which is becoming a major flashpoint in relations with the US.”


It’s Mr. Wen’s own currency subsidy that constitutes a potent form of protectionism.  If the Chinese authorities are so confident that the renminbi is fairly valued – which they probably know full well is quite unlikely – then they have no reason to maintain a peg policy.

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Here’s Simon Johnson’s take:

“I’ve heard at least six distinct points.  None of them are convincing.

  1. Bernanke is a great academic.  True, but not relevant to the question at hand.
  2. Bernanke ran an inspired rescue operation for the US financial system from September 2008.  Also true, but this is not now the issue we face.  We’re looking for someone who can clean up and reform the system – not someone to bail it out further.
  3. Bernanke was not really responsible for the failures of the Fed under Alan Greenspan.  This is a stretch, as he was at the Fed 2002-05, then chair of the Council of Economic Advisers, June 2005-January 2006.  Bernanke took over as Fed chair in February 2006, when tightening (or even enforcing) regulation could still have made a difference.  He had plenty of time to leave a mark and, in a very real sense, he did.
  4. Bernanke understands the folly of the Fed’s old bubble-building ways and is determined to reform them.  This is wishful thinking.  There was nothing in his remarks this weekend (or at any time recently) to support such an assessment.
  5. Bernanke will be tough on banks when needed.  Again, there is not a shred of evidence that would support such a view – the markets like him because they see him as a soft touch and that’s great, except that it encourages further reckless risktaking by banks considered Too Big To Fail and leads to another financial meltdown.
  6. Dropping Bernanke would disrupt the process of economic recovery.  This is perhaps the strangest assertion – we’re in a global rebound phase, fueled by near zero US short-term interest rates.  Official forecasts will soon go through a set of upward revisions and calls for further worldwide stimulus will start to sound distinctly odd.  Now is the perfect time to change the chair of the Fed.”


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Healthcare Supply Cont.

Along the lines of some of my previous comments, the following is a clip from Mankiw today:

“Let’s review some basic principles of supply and demand: If a government policy increases the demand for a service, the price of that service tends to rise. If the government prevents prices from rising, shortages develop. The quantity provided is then determined by supply and not demand. In the presence of such excess demand, the result could be a two-tier market structure. Consumers who can somehow pay more than the government-mandated price will be able to purchase the service, while those paying the controlled price may be unable to find a willing supplier.”

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Soros calls this basic idea “reflexivity” but I think this is a much better articulation of the notion than anything that I’m aware he has written.  I like the “get back to the basics, forget the numbers” premise.  I think many economists often get bogged down in the details and lose sight of the very highest level realities.


…The problem is that, no matter how “scientifically” these new beliefs were formulated, they are still false. Capitalism is, among other things, a struggle between individual people over the control of scarce resources. Like boxing and poker, it is a soft, restrained, private form of warfare.

Military strategists have known for centuries that there is, and can be, no final science of war. In a real struggle over things that actually matter, we must assume that we are up against thinking opponents, who may understand some things about us that we don’t know about ourselves. For example, if profit can be made by understanding the model behind a policy, as is surely the case with the models used by the United States Federal Reserve, sooner or later so much capital will seek that profit that the tail will begin to wag the dog, as has been happening lately.

The truth is that such models are most useful when they are little known or not universally believed. They progressively lose their predictive value as we all accept and begin to bet on them. But there can be no real predictive science for a system that may change its behavior if we publish a model of it.

Markets might once have been fairly efficient, before we had the theory of efficient markets. If investing is simply a matter of allocating money to an index, however, liquidity becomes the sole determinant of prices, and valuations go haywire. When a substantial fraction of market participants are simply buying the index, the market’s role in ensuring good corporate governance also disappears.

The formation of large bubbles in recent decades was partly a consequence of the commonness and incorrigibility of the belief that no such thing could ever happen. Our collective belief that markets are efficient helped make them wildly inefficient.

If we cleave to the false security of a supposed science that isn’t working, and forget about the philosophy behind it, ideas like personal responsibility and the right to fail, our leaders will very scientifically give us no recovery at all.


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Conventional wisdom holds that the social rate of return to R&D significantly exceeds the private rate of return and, therefore, R&D should be subsidized. In the U.S., the government has directly funded a large fraction of total R&D spending. This paper shows that there is a serious problem with such government efforts to increase inventive activity. The majority of R&D spending is actually just salary payments for R&D workers. Their labor supply, however, is quite inelastic so when the government funds R&D, a significant fraction of the increased spending goes directly into higher wages. Using CPS data on wages of scientific personnel, this paper shows that government R&D spending raises wages significantly, particularly for scientists related to defense such as physicists and aeronautical engineers. Because of the higher wages, conventional estimates of the effectiveness of R&D policy may be 30 to 50% too high. The results also imply that by altering the wages of scientists and engineers even for firms not receiving federal support, government funding directly crowds out private inventive activity.


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This blog contains a wide array of thoughts and links related to various economic issues and ideas.

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