Working Papers

2010 10

In Praise of Irrational Exuberance

Virginia Postrel on why an economy needs deluded optimists.

posted on 30 October 2010 by skirchner in Economics

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Australians Swoop on US Property

Australians show Americans how to make money on US residential property (note the apparent absence of capital xenophobia on the part of Americans in relation to residential property).

posted on 30 October 2010 by skirchner in Economics, House Prices

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Peter Costello Feels their Pain

If Peter Costello is to be believed, some former Liberal MPs are unemployable:

The point was whether he did the right thing by those MPs who would go on to lose their seats in the 2007 election. Some of them have never had a job since.

I have no idea which former MPs Costello might be referring to, but perhaps the fact that they are seemingly unemployable after three years had something to do with them losing their seat. Then there is this:

[Howard] had done nothing except politics all his adult life, and at his age there was little prospect of another career.

A little bit rich coming from someone who doesn’t have age as an excuse.

posted on 28 October 2010 by skirchner in Politics

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US T-Bills Versus Tuna

James Hamilton on the implications of negative real interest rates:

You’re better off storing a can of tuna for a year than messing with T-bills at the moment. But there’s only so much tuna you can use, and many expenditures you might want to save for can’t really be stored in your closet for the next year. It’s perfectly plausible from the point of view of more realistic economic models that we could see negative real interest rates, at least for a while.

Even so, within those models, there’s an incentive to buy and hold those goods that are storable. And in terms of the historical experience, episodes of negative real interest rates have usually been associated with rapidly rising commodity prices.


posted on 28 October 2010 by skirchner in Commodity Prices, Economics, Financial Markets, Monetary Policy

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The Behavioural Economics of the Public Sector

An important insight of the public choice literature is that relocating people from the private to the public sector does not miraculously transform them into promoters of the public interest. In my discussion of Doug Ginsburg and Joshua Wright’s paper ‘Behavioural Economics, Law and Liberty’ at the Mont Pelerin Society General Meeting in Sydney, I noted that relocating people from the private to the public sector does not make them any more rational either. This has mostly fatal implications for the attempt to hijack behavioural economics for the purposes of promoting increased government intervention discussed by Ginsburg and Wright. Matt Ridley references a paper by Slavisa Tasic which develops the point I was making in much greater detail.

posted on 27 October 2010 by skirchner in Economics

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The Right Policy Toward China

Send them flowers and chocolates argues John Cochrane:

They put a few trillion dollars worth of stuff on boats and sent it to us in exchange for U.S. government bonds. Those bonds lost a lot of value when the dollar fell relative to the euro and other currencies. Then they put more stuff on boats and took in ever more dubious debt in exchange. We’re in the process of devaluing again. The Chinese government’s accumulation of U.S. debt represents a tragic investment decision, not a currency-manipulation effort. The right policy is flowers and chocolates, or at least a polite thank-you note.

Yet Mr. Geithner thinks that the Chinese somehow hurt us. There is at work here a strange marriage of Keynesianism and mercantilism—the view that U.S. consumers supported the world economy by spending beyond our means, so that other people could have the pleasure of sending things in exchange for pieces of paper.

This is all as fuzzy as it seems. Markets and exchange rates are not always right. But it is a pipe dream that busybodies at the IMF can find “imbalances,” properly diagnose “overvalued” exchange rates, then “coordinate” structural, fiscal and exchange rate policies to “facilitate an orderly rebalancing of global demand,” especially using “medium-term targets” rather than concrete actions. The German economics minister, Rainer Brüderle, called this “planned economy thinking.” He was being generous. Planners have a clearer idea of what they are doing.


posted on 26 October 2010 by skirchner in Economics, Financial Markets

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The Rare Earths that are Neither Rare nor Earths

Tim Worstall on why we shouldn’t worry about China’s interest in rare earths:

But the non-rarity of the rare earths themselves means that China’s position isn’t sustainable. That California mine, for instance, could potentially supply 20 percent of world demand, currently around 130,000 tons a year. Another facility, Lynas Corp.‘s Mount Weld in Australia, has the capacity to produce a similar amount. In fact, there are enough rare earths in the millions of tons of sands we already process for titanium dioxide (used to make white paint) to fill the gap, while we throw away 30,000 tons a year or so in the wastes of the aluminum industry. There’s that much or more in what we don’t bother to collect from the mining of phosphates for fertilizers, and no one has even bothered to measure how much there is in the waste from burning coal.

If rare earths are so precious, why isn’t the United States working harder to collect them? The main reason is that, for these last 25 years, China has been supplying all we could eat at prices we were more than happy to pay. If Beijing wants to raise its prices and start using supplies as geopolitical bargaining chips, so what? The rest of the world will simply roll up its sleeves and ramp up production, and the monopoly will be broken.

posted on 25 October 2010 by skirchner in Commodity Prices, Economics

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Could the G20 Get Any Dumber?

Just when you thought the consenting adults view of current account balances was accepted by Australian policymakers, Wayne Swan signs-up for this:

The Obama administration on Friday urged the world’s biggest economies to set a numerical limit on their trade imbalances, in a major new effort to broker an international consensus on how to handle festering exchange-rate tensions. Officials from Britain, Canada and Australia quickly expressed support for the idea…

The Australian treasurer, Wayne Swan, called the Geithner proposal “a constructive one.”

Germany’s economy minister is not so sure:

Rainer Brüderle told reporters that the proposal could be viewed as a reversion to “planned economy thinking.”


posted on 23 October 2010 by skirchner in Economics, Financial Markets

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Sell the Gold Stock, Burn the Gold Bugs

Ed Truman makes the case for the US Treasury to follow the IMF and offload its gold stock:

the US Treasury holds 261.5 million fine troy ounces of gold. The government has been sitting on that gold since the Great Depression, receiving no return. At the current market price of $1,300 per ounce, the US gold stock is worth $340 billion. The Treasury secretary, with the approval of the president, has the power to sell (and buy) gold on terms that the secretary considers most beneficial to the public interest. Revenues from sales must be used to reduce the national debt.

If the United States were to sell its entire gold stock at the current market price, it would reduce the gross government debt by 2.25 percent of gross domestic product. Based on the average interest cost from 2005 to 2008, this reduction in debt would trim the budget deficit by $15 billion annually. Thus, the Obama administration would be doing something about the US fiscal debt and deficit without reducing near-term support for the ailing economy.

This would of course be incredibly lazy public policy, but should nonetheless give gold bugs pause. As I have noted previously, there is a certain irony in people who fear an over-supply of money taking refuge in an asset in which governments hold substantial stocks and for which the price is arguably in a stock rather than a flow equilibrium.


posted on 22 October 2010 by skirchner in Economics, Financial Markets, Fiscal Policy, Gold, Monetary Policy

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What Would Friedman Do? Support Ben Bernanke

David Beckworth and William Ruger argue that Friedman would support Ben Bernanke. I often point to this op-ed, in which Friedman argued in favour of quantitative easing for Japan in the late 1990s in circumstances not unlike those in the US today. While I doubt Friedman would see quantitative easing as a panacea (it certainly wasn’t for Japan from 2001-2006), he would surely argue that monetary policy should be as accommodating as possible.

In the classical liberal circles in which I travel, mindless criticism of quantitative easing is all too common, but this only highlights the lack of knowledge of the classical liberal tradition in monetary economics among many people who should know better.

posted on 22 October 2010 by skirchner in Economics, Monetary Policy

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Part-Time Work at the RBA Board

The so-called part-time members of the RBA Board were even more part-time than usual in October:

The minutes of the October board meeting, released yesterday, reveal that only three of the six independent board members attended the meeting, with the key voices on the health of retailing, manufacturing and the global economy absent. It was the lowest board meeting attendance in the four years that the Reserve Bank has been releasing its minutes.

The chairman of Bluescope Steel and Brambles, Graham Kraehe, former Woolworths chief executive Roger Corbett, who is also a director of US retailer Walmart and chairman of Fairfax, and the board’s resident academic economist, Warwick McKibbin, all had other commitments.

It only takes five of the nine members to form a quorum.

posted on 20 October 2010 by skirchner in Economics, Financial Markets, Monetary Policy

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‘American housing finance is the envy of the world’

Not anymore.

posted on 20 October 2010 by skirchner in Economics

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Matt Ridley on Econtalk

Russ Roberts interviews Matt Ridley about his book The Rational Optimist. Last time I looked, the book was still available for free on Amazon’s (US) Kindle. Here is Ridley on what might be called ‘peak wheat’:

In 1898, the centenary of Malthus’s pessimistic prognostication, the eminent British chemist Sir William Crookes gave a similar jeremiad in his presidential address to the British Association entitled ‘The Wheat Problem’. He argued that, given the growing population and the lack of suitable new acres to plough in the Americas, ‘all civilisations stand in deadly peril of not having enough to eat,’ and unless nitrogen could be chemically ‘fixed’ from the air by some scientific process, ‘the great Caucasian race will cease to be foremost in the world, and will be squeezed out of existence by races to whom wheaten bread is not the staff of life.’ Within fifteen years his challenge had been met. Fritz Haber and Carl Bosch invented a way of making large quantities of inorganic nitrogen fertiliser from steam, methane and air…

So thanks to tractors, fertilisers and new varieties, by 1931, the year in which Crookes had chosen to place his potential future famine, the supply of wheat had so far exceeded the demand that the price of wheat had plummeted and wheat land was being turned over to pasture all over Europe.

posted on 19 October 2010 by skirchner in Economics

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Economists as Gurus

Among many great papers at the Mont Pelerin Society General Meeting in Sydney was Geoff Brennan’s contribution on The Economist as Guru, which looked at the supply and demand for gurus. There was some debate as to whether the willingness of some economists to misappropriate their intellectual authority mattered given a free market in ideas.

Perhaps the most outrageous case of a guru in financial markets is Nouriel Roubini, but this article shows that the market in ideas has not completely failed in exposing Roubini:

A closer inspection of Roubini’s record shows that while he was predicting doom and gloom for the US in 2004, his initial call had nothing to do with a runaway housing bubble.

Rather he argued that the Bush Administration was racking up massive deficits to foreign investors, namely the Chinese, and that the Chinese would scale back on their purchases of US debt, causing interest rates to spike and the dollar to decline in value, resulting in “financial trainwrecks for the US economy in a matter of a couple of years.”

Sounds good, but the problem with the theory is that it didn’t happen.

posted on 17 October 2010 by skirchner in Economics, Financial Markets

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Behavioural Economics at the Mont Pelerin Society

Blogging will be even lighter than usual next week, as I will be attending the Mont Pelerin Society General Meeting in Sydney. I will be the lead discussant for a paper by Doug Ginsburg and Joshua Wright, ‘Behavioural Economics, Law and Liberty’. The paper should be topical, with the Nobel prize for economics announced next week and behaviouralists currently leading the field of potential winners at iPredict. While Richard Thaler would be a deserving recipient, it would be unfortunate if Robert Shiller were a co-recipient (indeed, it would be a tacit admission that Shiller should not win in his own right). Oddly enough, I was on the same Sydney-New York flight as Shiller when I went to the MPS special meeting in February last year, but did not spot him until after we had landed. Shiller can thank Qantas for not putting me next to him for 22 hours (that would have been an interesting conversation).

posted on 08 October 2010 by skirchner in Classical Liberalism, Economics

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The Perception that Will Not Die

The RBA wrong-footed the market and commentariat with Tuesday’s steady rates decision, although not quite as comprehensively as a similar decision back in February. The February decision provided a rather convenient backdrop for RBA Governor Glenn Stevens’ appearance before the House Economics Committee later that month, where he was questioned about RBA media backgrounding and said that ‘people do not leak the outcome’.

Despite the wrong-footing of the commentariat, most notably Terry McCrann, this has still not laid to rest financial market perceptions that the RBA engages in media backgrounding of selected journalists. Chris Joye quotes Kieran Davies:

note that the surprise decision today potentially signals a change in communication strategy by the Reserve Bank. In the past, the Bank has been fond of guiding the market via indirect signalling via the media. That hasn’t been the case this month, but it is not clear whether the Bank has permanently closed this channel.

Governor Stevens’ denial before the House Economics Committee and the wrong-footing of the commentariat has yet to convince those in financial markets. Having played favourites with the media for so long, it will be hard for the Bank to finally put this perception to rest.

For the record, here is what a former RBA official had to say in the AFR Magazine in 2001:

The Bank uses newspapers to manage expectations.  It’s a game the Bank manages very well.  Senior people talk to a small handful of the economics writers from the major papers on a strictly non-attributable basis.  I think it’s right to do this from the bank’s point of view, but not necessarily from a public policy view: accountability and a critical press are very important in this system.

posted on 06 October 2010 by skirchner in Economics, Financial Markets, Monetary Policy

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Peter Reith’s Triumph of Hope Over Experience

Robert Carling and I recently argued that a parliamentary budget office was the wrong model for an improved fiscal responsibility framework in Australia. Former federal minister Peter Reith has an op-ed in today’s Australian arguing for a PBO, but his review of overseas experience does not inspire confidence:

Hopefully, Australia’s PBO will not have the rocky start that the Canadians have had. Only recently, while I was in Canada, former deputy minister of finance Scott Clark wrote that the PBO had been an experiment in transparency and accessibility “that was doomed from the start”. Clark told me it was ironic that the Conservatives established the PBO in 2008, then undermined it from the start. The big problems have been a lack of independence, the failure to properly resource the PBO and the failure of government departments to provide necessary information. Clark says the PBO should be appointed and dismissed by parliament, not by the prime minister. It should be adequately resourced and have access to the same information as the auditor-general.

Carling and I have argued for an independent statutory Fiscal Commission, with Commissioners appointed in consultation with the states in much the same manner as the ACCC Commissioners. This was a theme I pursued at the recent Conference of Economist panel on Monetary and Fiscal Policy Interactions organised by Jan Libich from La Trobe University. The papers from the panel will appear in a future issue of Economic Papers.

posted on 05 October 2010 by skirchner in Economics, Fiscal Policy

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The CPI Pulse that Goes Dead Two Months in Three

HSBC chief economist for Australia and New Zealand, Paul Bloxham, makes the case for a monthly CPI. I made related arguments in this op-ed in The Canberra Times in March.

posted on 04 October 2010 by skirchner in Economics, Financial Markets, Monetary Policy

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We’re from the Nudge Unit…

...and we’re here to socially integrate you.

posted on 01 October 2010 by skirchner in Economics

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