Book review: The Age of Turbulence: Adventures in a New World by Alan Greenspan.
The first half of this book provides a decent history of the past 40 years, with a few special insights such as descriptions of how most presidents in that period worked (he’s one of the least partisan people to have worked with most of them). The second half is a discussion of economics of rather mixed quality (both in terms of wisdom and ability to put the reader to sleep).
He comes across as a rather ordinary person whose private thoughts are little more interesting that his congressional testimony.
One of the strangest sections describes the problems he worried would result from a projected paydown of all federal government debt. He does claim to have been careful not to forget the possibility those forecasts could be mistaken. But his failure to mention ways that forecasts of Social Security deficits could be way off suggests he hasn’t learned much from that mistake.
He mentions a “conundrum” of falling long-term interest rates in 2004-2005, when he had expected that rising short-term rates would push up long-term rates. I find his main explanation rather weak (it involves technology induced job insecurity leading to lower inflation expectations). But he then goes on to describe a better explanation (but is vague about whether he believes it explains the conundrum): the massive savings increase caused largely by rapid growth in China. I suspect this is a powerful enough force that Deng Xiaoping deserves more credit than Greenspan for the results that inspired the label Maestro.
The book is often more notable for what it evades than what it says. It says nothing about his inflationary policies in 2003-2004 or his favorable comments about ARMs and how they contributed to the housing bubble.
He gives a brief explanation of how Ayn Rand converted him to an Objectivist by pointing out a flaw in his existing worldview, but he is vague about his drift away from Objectivism. His description of the 1995 government “shutdown” as a crisis is fairly strong evidence of a non-Randian worldview, but mostly he tries to avoid controversies between libertarianism and the policies of politicians he likes.
He often praises markets’ abilities to signal valuable information, yet when claiming that the invasion of Iraq was “about oil”, he neglects to mention the relevant market prices. Those prices appear to discredit his position (see Leigh, Wolfers and Zitzewitz’ paper What do Financial Markets Think of War in Iraq?).
He argues against new hedge fund regulations on the grounds that hedge funds change their positions faster than regulators can react. He is right about the regulations that he imagines, but it’s unfortunate that he stops there. The biggest financial problems involve positions that can’t be liquidated in a few weeks. It seem like it ought to be possible for accounting standards to provide better ways for institutions to communicate to their investors how leveraged they are and how sensitive their equity is to changes in important economic variables.
He argues against using econometric models to set Fed policy, citing real problems with measuring things like NAIRU and GDP, but if he was really interested in scientifically optimizing Fed policy, why didn’t he try to create models based on more relevant and timelier data (such as from the ISM?) the way he did when he had a job that depended on providing business with useful measures? Maybe he couldn’t have become Fed chairman if he had that kind of desire.
I listened to the cd version of this book because I got it as a present and listening to it while driving had essentially no cost. I wouldn’t have bought it or read the dead tree version.
macroeconomics
All posts tagged macroeconomics
Early this week, the Federal Reserve Board lowered interest rates at an unexpected time by a surprisingly large amount.
I see three possible explanations, which I think are about equally likely.
- The Fed has evidence that the economy is slowing more than markets have realized.
- The Fed has evidence that some big financial institutions have troubles that are endangering the careers of some influential people, and is bailing out those institutions in hopes that those people will use their influence to enhance the job security of the people in charge of the Fed.
- Bernanke isn’t interested in the kind of publicity he can get by maximizing the total number of rate cuts. He realizes that a steady, predictable series of small rate cuts doesn’t stimulate the economy as well as cutting rates far enough that it isn’t easy to predict that more rate cuts will be needed (for one thing, making further rate cuts predictable creates incentives to postpone borrowing to when rates are lower). If that’s what’s happening, it’s not going to work as well as he would like this time, because the markets think the Fed is following the predictable rate cut strategy that gives them publicity for doing something at the time that the average person is most concerned about recession.
In related news, Singapore has a system which is designed to stabilize the economy rather than to provide politicians with opportunities to claim credit for doing something about the economy.
China is imposing widespread price controls and suffering power shortages which hinder production. If China were like the U.S., I’d say it’s trying to recreate the experience the U.S. had in the early 1970s. But the way Chinese politics work, the central government probably will allow local authorities to use a lot of discretion in enforcing the price controls, so the price controls will probably only produce shortages in a few industries that are dominated by large state-owned firms.
Up to two months ago, I was not too excited by the claims of a bubble in the Chinese stock market. Maybe the stocks that trade only in China were at bubble levels, but the ones that trade in the U.S. or Hong Kong still looked like mostly good investments.
Much has changed since then. On October 17, PetroChina rose 14.5%, more than doubling in about two months. That was a one day gain in market capitalization of almost $60 billion, and a two month gain of $247 billion (doubling the market capitalization). I’ve seen similar but less dramatic rises in smaller Chinese stocks that trade in the U.S., but less on the Hong Kong stock exchange.
By comparison, the largest rises in market capitalization that I’ve been able to find in the technology stock bubble of 1999-2000 were a $50 billion one day rise in Microsoft on December 15, 1999, and a $250 billion rise (doubling) in Cisco which took four months.
I’m not saying that Chinese stocks are clearly overvalued yet, and I’m still holding some stocks in smaller Chinese companies that I don’t feel much urgency about selling. But the unusually strong and long lasting Chinese economic expansion, combined with the unusually frothy action in the stock market, are what I’d expect to be causes and symptoms of a bubble.
Bubbles in the U.S. have peaked when real interest rates rise to higher than normal levels. The Chinese government is keeping real interest rates near zero, and seems to think it can keep nominal interest rates stable and reduce inflation. That would be an unusual accomplishment under most circumstances. When combined with a stock market bubble, I suspect it could only be accomplished with drastic restrictions on economic activity, which would involve instabilities that the Chinese government has been trying to avoid by stabilizing things such as interest rates.
Without a rise in interest rates or drastic restrictions of some sort, it’s hard to see what will stop the rise in Chinese stocks. So I’m guessing we’ll see a bigger bubble than the U.S. has experienced. It’s effects will likely extend well beyond China.
Richard Timberlake’s article in the June 2006 issue of Liberty makes some arguments about the causes of the Great Depression that are tempting to believe but at best only partly convincing.
Much of the article is about the Fed becoming dominated by followers of the real bill doctrine. While he presents evidence that leaders of the Fed liked the doctrine, and I can imagine that following that doctrine could explain much of the 1930-1932 contraction. But if the Fed was fully following that doctrine and that were the primary cause of the contraction, the narrow measures of the money supply (which are the ones most directly under the Fed’s control) would have contracted, when they actually expanded during 1930-1932. So I doubt that the Fed was as influenced by the doctrine as Timberlake suggests. But as a factor contributing to the Fed’s caution about expanding the money supply further, it’s fairly plausible, and causes me to be a bit more skeptical of the Fed’s competence than I was before.
The more interesting part of the article is the attempt to deny that the gold standard did anything to cause the contraction. Timberlake notes that the Fed’s gold reserves remained well above the legally required minimum, and claims that shows the Fed wasn’t constrained from expanding the money supply by risks to the gold standard. But that’s true only if the legally required reserves were either sufficient to cover all potential claims or to convince holders of paper dollars that all likely claims would be satisfied. I’m not aware of any clear reason to think this was the case, and it’s easy to imagine that the Fed knew more than Timberlake does about how eager holders of paper dollars would have been to demand gold if the Fed’s gold reserves had dropped further. So I’m still inclined to think that the Fed’s restraint in late 1931 and 1932 resulted from a somewhat plausible belief that it couldn’t do more without taking excessive risk that the gold standard would fail and that we would be stuck with the kind of inflation-prone system that we ended up with anyway.
Book Review: The Armchair Economist: Economics And Everyday Experience by Steven Landsburg
This short and eloquent book does a mostly excellent job of explaining to non-economists how economic reasoning works in a wide variety of mostly non-financial areas. But it’s frustrating how he can get so much right but still demonstrate many annoying oversimplifications that economists’ biases make them prone to.
For example, on page 145 he claims that a trash collection company could cheaply prohibit Styrofoam peanuts in the trash by checking everyone’s trash once a year and fining violators $100,000. But anyone who thinks about the economics of such fines will be able to imagine massive costs from people disputing who is responsible for peanuts in the trash. Maybe there are cultures in which such fines would ensure negligible violations, but there are probably as many cultures in which disputes over people putting peanuts in someone else’s trash cans would produce more waste than the peanuts do.
His suggestion of applying antitrust laws to politicians is almost right, but ignores the public choice problems of ensuring that laws marketed as antitrust laws do anything to prevent monopoly. The details of antitrust laws are complex and boring enough that few people other than special interests pay attention to them, so special interests are able to twist the details to turn the laws into forces that protect monopolies.
On page 183 he says “Flood the economy with money and the nominal interest rate goes up in lockstep with inflation”. Given a sufficiently long-term perspective, this is an arguably decent approximation. But he’s disputing the common sense of a typical reporter who is more interested in a short-term perspective under which those changes clearly do not happen in lockstep (on page 216 he provides hints at a theory of why there’s a delayed reaction).
He makes some good points about the similarities between environmentalism and religion, but it seems these points blind him to non-religious motives behind environmentalism. He says on page 227 about relocating polluting industries: “To most economists, this is a self-evident opportunity to make not just Americans but everybody better off.” Maybe if he included a payoff to the U.S. workers whose jobs went overseas, this conclusion would be plausible. But it’s hard enough to figure out how such a payoff should be determined that I suspect he simply ignored that problem.
Book Review: Nanofuture: What’s Next For Nanotechnology by J. Storrs Hall
This book provides some rather well informed insights into what molecular engineering will be able to do in a few decades. It isn’t as thoughtful as Drexler’s Engines of Creation, but it has many ideas that seem new to this reader who has been reading similar essays for many years, such as a solar energy collector that looks and feels like grass.
The book is somewhat eccentric in it’s choice of what to emphasize, devoting three pages to the history of the steam engine, but describing the efficiency of nanotech batteries in a footnote that is a bit too cryptic to be convincing.
The chapter on economics is better than I expected, but I’m still not satisfied. The prediction that interest rates will be much higher sounds correct for the period in which we transition to widespread use of general purpose assemblers, since investing capital in producing more machines will be very productive. But once the technology is widespread and mature, the value of additional manufacturing will decline rapidly to the point where it ceases to put upward pressure on interest rates.
The chapter on AI is disappointing, implying that the main risks of AI are to the human ego. For some better clues about the risks of AI, see Yudkowsky’s essay on Creating Friendly AI.
The 2004 Accelerating Change Conference focused much more on current changes than last year’s attempts at providing long-term visions led me to expect.
The one topic that excited me was a virtual world called Second Life. While it might sound superficially like just a virtual Burning Man, the designers are serious enough about their nationbuilding to encourage commerce, both within the system and via currency exchanges such as The Gaming Open Market with other worlds. Their VP of Product Development Cory Ondrejka described Hernando de Soto’s book The Mystery of Capital as "must reading". They have been careful to insure that people have few incentives to take disputes arising in the virtual world to meatspace courts. For instance, they once banned a vandal from the game who owned a fair amount of land; they auctioned off the land and sent him a check for most of the proceeds – $1600.
Some of their customers are doing well enough in the virtual world that the company that runs Second Life has trouble offering them a salary good enough to compete with what they’re making in virtual life.
They don’t seem as concerned about the highly deflationary effects of their monetary policy as I expect they ought to be. Why will people buy their land (the sale of which seems to be their main source of income) if they can earn a safe and sure return by just holding the local currency?
The responsiveness of the company to citizen complaints (e.g. simplifying and later abolishing taxes in response to tax revolts) is fairly strong evidence that a non-monopolistic dictator is better than a democracy with monopoly power.