Where are the acronyms of the corona crisis?
During the Global Financial Crisis, we learned about CDO, CDS, Fannie Mae, Freddie Mac, MBS, NINJA…
Today? Nothing.
Why? Because the crisis didn’t originate in the financial system, but in the sudden shutdown of whole industries.
If you like acronyms to describe what’s going on, I want to coin NICO: no income, cash out.
This paper by Guerrieri, Lorenzoni, Straub and Werning (GLSW) looks at the macroeconomic effects of Covid-19.
The authors argue that
My summary of the GLSW model (their paper is 37 pages long, so obviously I’m oversimplifying and probably missing important things!):
Continue reading “Comments on ‘Macroeconomic implications of Covid-19: can negative supply shocks cause demand shortages?’”This post highlights the financial problems caused by (the reaction to) the coronavirus. I look at the balance sheets and cash flows of five sectors. The five sectors are (1) businesses that continue operations, (2) businesses that are closed due to the coronavirus, (3) households, (4) the government and (5) banks.
The coronavirus pandemic once again demonstrates that a lot of prominent economic commentors are dangerous. Their recommendations will amplify the economic shock caused by the virus.
People who claim that
are spreading falsehoods.
Here is a selection of people who do grasp the importance of acting now in order to prevent an economic meltdown later.
Scott Sumner and David Beckworth: How central banks should respond to the coronavirus threat (podcast)
John Cochrane: Corona virus monetary policy
Skanda Amarnath:
In case you’re not familiar with teen culture, VSCO girl is a fashion trend.
Surely, the Very Serious People who think about central banks are not susceptible to such fads, right?
I regret to inform you that the Very Serious economists and central bankers are just as prone to trends as teens on TikTok.
Continue reading “Larry Summers is a VSCO girl. On central banks, fiscal stimulus, and why you should read Eric Lonergan”
Money flows shed light on the entanglement of economic and political power. So following the money can reveal a lot about how the world works.
That’s why Follow the money is the name of Brad Setser’s blog and a Dutch research journalism website.
Here’s a great example of where following the money can take you. Economists at the World Bank have looked at aid granted to poor countries. By comparing disbursement dates with statistics from the BIS, they found that part of the aid money ends up in offshore havens.
Banks do not create money out of thin air. That’s the title and argument of an article by Pontus Rendahl and Lukas Freund in VOX.
Unsurprisingly, people on Twitter took issue with the authors’ claim:
I find this polemic boring and unproductive.
Boring, because I explained the misconceptions surrounding “money from thin air” in Bankers are people, too. (If you have a copy of the book, see page 38).
It’s also unproductive, because a slogan is not an insight. VOX claims to provide ‘Research-based policy analysis and commentary from leading economists’. It’s a sad state of affairs if leading economists produce more heat than light by using slogans.
Scientists don’t argue about slogans. Insight follows from identifing the relevant mechanisms or from looking at empirical findings, not from these endless ‘debates’.
That’s why Bankers are people, too contains so many drawings of simple balance sheets and discussions of behavior and incentives. I wanted to be crystal clear, not become yet another vague economics guru.
Do better, economics community…
How big is the economy? It’s a crucial question in economics. It’s also the title of a chapter in Bankers are people, too (pages 119-122).
Gross domestic product (GDP) is a measure for economic output based on market prices. This means that unpaid (e.g. domestic) work is not included in GDP, although we find it valuable.
As consumers, we also benefit from free digital services (email, messaging apps, maps, search engines…) that didn’t exist 40 years ago.
But how much do people value these digital services?
In How should we measure the digital economy, Erik Brynjolfsson and Avinash Collis try to measure just that. They introduce ‘GDP-B’, a metric which ‘augments’ GDP with the consumer wellbeing from free stuff. The whole article is worth a read.
For example, they argue that “Facebook alone has created more than $225 billion worth of uncounted value for consumers since 2004” and that “including the consumer surplus value of just one digital good—Facebook—in GDP would have added an average of 0.11 percentage points a year to U.S. GDP growth from 2004 through 2017.”
For more on the difficulties of GDP, read Economics is hard.
Productivity isn’t everything, but in the long run it is almost everything.
Paul Krugman
International datasets on productivity:
EU KLEMS (‘measures of economic growth, productivity, employment, capital formation, and technological change at the industry level for all European Union member states, Japan, and the US’)
CompNet (‘micro-based competitiveness dataset for European countries, unprecedented in terms of coverage and cross-country comparability’)