Demonetisation: Economy shaken, GDP hurt, trust in government undermined

[India]


The difficulty in making a cost-benefit analysis is that the move was not purely economic, given the fact that the currency issuer Reserve Bank of India (RBI) had no role in the decision, as testified by former Governor Raghuram Rajan.

Coming back to the beginning, this is what Nobel winning economist Amartya Sen had to say of demagnetization:

It is a despotic action that has struck at the root of the economy based on trust. It undermines notes, it undermines bank accounts, it undermines the entire economy of trust. That is the essence in which it is despotic.

Source: Demonetisation: Economy shaken, GDP hurt, trust in government undermined

Trump Is About to Own This Credit Cycle | Bloomberg Gadfly

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If Trump decides to renominate Yellen, he’ll incur the wrath of conservative Congress members who think she’s gone outside her monetary policy mandate.

Should Trump make a bigger change, say, by nominating Kevin Warsh, a former Fed governor, he’ll be viewed as somewhat responsible should the central bank raise rates too quickly, or make some policy error that craters the U.S. economy.

Stanford University economist John Taylor is also in the running, as is Trump adviser Gary Cohn.

Whoever he picks will have a tough job cut out for them.

Source: Trump Is About to Own This Credit Cycle – Bloomberg Gadfly

Unfinished Business review: The financial crash and its terrible cost, 10 years on


The section on how regulators allowed financial assets, backed by mortgage loans, to be classed in such a way as to allow their conversion into cash might require perseverance. But it is worth it, as it details the subtle but profoundly important interplay between regulation and banking behavior.

This spurred an alchemy that had deep consequences for the American housing market.

We are reminded that European currency crises had a long history before the arrival of the euro.

Attempts to co-ordinate major global currencies ended in 1970 with the collapse of the Bretton Woods agreement. Attempts to align European currencies culminated with the creation of the exchange-rate mechanism in 1979.

Ironically, the seeds for the eventual creation of the euro were laid in the infamy of Black Wednesday, in September 1992, when the financial markets lost faith in the credibility of these initiatives.

Source: Unfinished Business review: The financial crash and its terrible cost, 10 years on

Reforming the sovereign debt regime | OUPblog


What went wrong?

There are many valid answers to this question, but an important one has to do with the politics of sovereign debt restructuring. As countless experts have argued and the IMF now admits, Greece should have undergone a sizeable debt restructuring at the outset of its crisis.

And when the country did restructure its debt in the spring of 2012, it proved ‘too little, too late’ and was complicated by opportunistic ‘holdout creditors’. Moreover, Greece hasn’t been given any significant debt relief since 2012.

All of this speaks to the core problem in managing sovereign debt crises: the lack of an effective global framework or set of institutional arrangements for restructuring government debt obligations when they become unsustainable.

Source: Reforming the sovereign debt regime | OUPblog

The seven sins of economists | Livemint


The edifice built atop the rational expectations model also came crashing down then, and the policy response to the crisis reverted back to old-fashioned Keynesian demand-management policies (read fiscal stimulus packages), which the ‘superior’ and ‘rigorous’ rational expectation model had supposedly supplanted three decades back.

Why did the state-of-the-art rational expectations model fail? The answer lies in its deeply problematic assumptions. The model collapses all distinctions between firms, and homogenizes all individuals and commodities.

“If you homogenize all individuals and commodities in aggregate models, it is mathematically easy to build stability into the defining equations as a pure assumption,” wrote the Harvard Business School scholar Jonathan Schlefer in his 2012 book on the subject—The Assumptions Economists Make. “But it is a pure assumption. If you want, you can just as easily build instability into the model’s defining equations.”

Source: The seven sins of economists – Livemint

In-work poverty in the EU | Eurofound

The ‘working poor’ are a substantial group, the latest estimate putting 10% of European workers at risk of poverty, up from 8% in 2007. This report describes the development of in-work poverty in the EU since the crisis of 2008, picking up where an earlier Eurofound report on this subject, published in 2010, ended and looks at what countries have done to combat the problem since. This endeavor is complicated by the policy focus on employment as a route out of poverty, underplaying the considerable financial, social and personal difficulties experienced by the working poor.

The increase in non-standard forms of employment in many countries appears to have contributed to rising in-work poverty.

Source: In-work poverty in the EU | Eurofound

California should cut losses on high-speed rail | The Sacramento Bee


California’s high-speed rail project has broken more promises than ground. At every stage, the project has underestimated costs and overestimated benefits.

Travel times are up 40 percent. Ticket prices have risen 78 percent. Construction costs have nearly doubled – from initial estimates of $33 billion to $64 billion. So far, roughly 1,000 construction jobs have benefited the Central Valley – a far cry from the 160,000 construction-related jobs and 450,000 permanent tourism jobs originally promised.

California’s high-speed rail is a classic case of a sunk cost trap.

Source: California should cut losses on high-speed rail | The Sacramento Bee

Fed Study Shows Phillips Curve Is Useless: Admitting the Obvious

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The Phillips Curve, an economic model developed by A. W. Phillips purports that inflation and unemployment have a stable and inverse relationship.

This has been a fundamental guiding economic theory used by the Fed for decades to set interest rates.

A new Fed Study shows the Phillips Curve Doesn’t Work.

Source: Fed Study Shows Phillips Curve Is Useless: Admitting the Obvious

Taxes Won’t Eliminate Federal Deficits | Economics21


The primary purpose of Samuelson’s column is to argue that America cannot afford a large tax cut as part of tax reform.

With the national debt set to rise from $20 trillion to $30 trillion over the next decade, that is largely true.

Even though Americans are entering an era in which they will be significantly overtaxed by the standards of the past 50 years, a large tax cut is simply not affordable – and would likely poison the well for necessary entitlement reforms.

Source: Taxes Won’t Eliminate Federal Deficits | Economics21

How inequality became the big issue troubling the world’s top economists


Peter Diamond believes that the debate on inequality can help focus discussion on policy failures: from the lack of investment in education, research and infrastructure, to the failure to compensate those who bore the cost of glottalization through job losses in heavy industry.

He also argues that direct transfers, including introducing child benefit to everyone who has children and a UBI (universal basic income), would help tackle poverty.

While he does not think that the goal of policy should necessarily be focused on redistributing wealth, he believes that the economic challenges in the US require a higher level of government spending, and therefore higher taxation on the better off.

Source: How inequality became the big issue troubling the world’s top economists