Seven Lean Years for the US ?

Mark Thoma (University of Oregon and Economist’s View) calculates that, from the experience of previous US recessions, seven years could be necessary for the unemployment rate to return to five percent. The process could be accelerated, he believes, by adequate economic policies.

Note that the current unemployment rate is quite similar to the one reached during the 1981-82 recession (10.8 percent).

Read his paper here .

Two Real Estate Booms and Busts Compared

Eugene N. White compares the 1920s and the recent episode in an NBER working paper here . He concludes that the elements absent in the 1920s were federal deposit insurance, the “Too Big To Fail” doctrine, and federal policies to increase mortgages to higher risk homeowners. These factors combined induced risk-taking that was crucial to the eruption of the recent financial crisis.

Paul Volcker Joins the Classical Banking Club

The former U.S. Federal Reserve Chairman called in Bonn for separating the business of commercial banking from the riskier business of proprietary trading and hedge funds, offering a government safety net of deposit insurance and emergency lending only to the traditional banking business.

Read the Wall Street Journal article here .

The US and the Payroll Tax

The United States Treasury is going “European” on tax matters. Casey Mulligan reports in his blog today (“Approaching a Tax Milestone”, December 9) that the payroll tax has, for the first time in history, become the single largest federal tax, replacing in that role the federal income tax.

As a conclusion he wonders “Will it be Democrats who first harness the revenue-collection power of the payroll tax? Or will Republicans appreciate its favorable incentives?”

I disagree with the last sentence claim: the incentives provided by the payroll tax are not “favorable” but strongly detrimental to labor supply. And the transatlantic differences in its level go a long way to explaining differences in hours worked per capita, and consequently production per capita, on both sides of the Atlantic as Edward Prescott showed (see my paper "Comment gagner plus" on my homepage here ).

Read the Mulligan post here .

The Great Trade Collapse and Crisis Theory

According to Richard Baldwin in the introductory chapter of the new book he is editing for the world’s trade ministers WTO gathering in Geneva, Causes, Consequences and Prospects,

“World trade experienced a sudden, severe and synchronized collapse in the late 2008 – the sharpest in recorded history and deepest since WWII.”

After all, maybe the US Federal Reserve was not the main culprit …

Hat tip to Menzie Chinn (Econbrowser) for the report and for the link to the book here .

The Global Savings Glut Theory of the Great Recession

The Guardian journalist Robin Wells blames the crisis on cheap credit and excessive thrift by Germans and Chineses. And we haven’t seen the end of it. “Worse yet, the glut’s continued existence will feed a succession of asset bubbles until we confront it, head on, and find a way to soak up the excess” she writes.

I agree that once a huge amount of liquidity has been deluged on the world economy it can only be returned to a more reasonable level by several successive asset markets crashes that dissipate some wealth each time, absent a new innovation boom that would require a large amount of new real investment.

Read her paper here .

Macroeconomic Theory Did Not Fail, Sumner

Scott Sumner (The Money Illusion) claims that an (almost) standard “aggregate demand-aggregate supply” (AD-AS) model, just modified by Alex Tabarrok and Tyler Cowen in their new textbook in order to substitute the inflation rate for price levels, goes a long way in explaining the current great recession.

According to him the Federal Reserve did cause the contraction by its ultra-restrictive monetary policy in 2008. He however does not exclude that some real supply side difficulties also contributed to the crisis, but that too can be inserted into the AD-AS diagram.

Read the paper here .