New CB's role

A note by WB chief economist. I see the new trend that the central bank's role is changing from a traditional lender of last resort to a more proactive financial agency to enhance growth and address unemployment, which was traditionally realm of government's structural reform. I am a little bit concerned on this trend, because it will surely buy time for the government to do its homework in advanced economies - structural reform in labor market, establishment of social security system etc.  

Austerity measures raises the concern over inter-temporal equity

Simon Johnson's excellent article on inter-temporal equity over fiscal austerity. Standard economic model that assumes indefinite time horizon may not be useful here. His quote...very true.

"Today’s children did not play a role in any of these policy mistakes. The preschoolers who are about to lose access to Head Start weren’t even born when they were made."

Cyprus bail-out and debt sustainability

The Economist's article on the signed Cyprus bailout program. It says "...The creditors were helped by the IMF’s view that too big a loan would simply make Cyprus’s debt unsustainable." I would interpret this statement as: high reliance on official loans limits the window for market access, posing a challenge on future debt financing and thus debt sustainability. Now that we live in a period of debt crisis,  you may feel it is an easy task to pinpoint the obvious link between DSA and debt management strategy, while this linkage has been often omitted with over-simplified financing assumptions in a standard DSA. In the post-crisis era in particular, capital market factors are playing a key role here, if not constitute a condition for sustainable debt. 

China’s Hidden Debt Risk by Ms. Monan

Zhang Monan alarmed the Chinese public debt problem in the PS. While technical details may need to be revisited (for instance, she argues that revenues account for 6 percent of the sovereign asset; theoretically speaking, this should be the present value of future revenues), I agree with her key message.

Ms. Monan argues that simply comparing the aggregate levels of assets and liabilities do not deliver a right message about  the Chinese sovereign debt risk: if the assets are not liquid enough,  liquidity shortage (she writes "short-term solvency" but it should be interpreted as "liquidity") could be a real possibility. This statement is relevant, given too many economists look at either net or gross debt level in terms of GDP only, which is misleading. The maturity, investor base, and instruments matter. We all know that.

I wish she applied this perspective to corporate debt story as well. Although the high leverage of the non financial corporate sector is already worrisome,  it would be interesting should there be more granular discussion on the asset and liability structures (e.g., instruments and maturity structure, among others.), which could aggravate the problem.

Euro Area's unpleasant truth

The Economist argues that given weak competitiveness and growth prospect, France needs to cut its welfare and public sector wages/benefits. Seems like tax increase would be difficult economically, politically, and legally. This is a difficult game, because as Moscovici rightly suggests, front-loaded fiscal austerity kills the economy, while loss of market access could be a reality if confidence in public finance is lost. Now that the tail risk is gone after the announcement of OMT last year, euro area countries need to run this narrow path.

Just one small minor comment on the following chart. To have a balanced argument, would not it be possible to have a 3-4 year projection, together with real growth projection. The current picture masks an important link between real and fiscal sectors.

                             Source: The Economist

Christina Romer on minimum age.

From a NY times article. Mankiw also cited here.

Prof. Romer discusses why minimum wage policy may not achieve its intended goal.

First,  basic economics tells us that minimum wage harms competition and reduces the employment. You may want to counter-argue that empirically the minimum wage does not necessarily lower the employment.  Then she took a step further to say that even if employment is manitaned (as opposed to micro  101), still the minimum wage may not be a good policy, as employment is maintained:

1. Because of high turnover. Good thing.
2. Because a higher wage attracts more efficient works and raise productivity. Partly good, but this could harm the disadvantaged.
3. Because the increased wage is passed on to consumers, including the very poor.

Quite convincing. At least, we should stop naively taking an empirical relationship between the minimum wage and the employment rate in a reduced-form regression formula. We have to understand mechanics.

Austerity would not work...

Joe Stiglitz's appraisal of the Italian general election here.

The article argues that austerity is misguided and would not work, in particular if not accompanied by a growth strategy. This is not news. An interesting element is the statement that internal valuation would not work because it would increase the debt burden of household and companies and distort the allocation of wealth in more general.