Thursday, December 6, 2012

Bubbling Up...12/6/12

1) Europe’s Avoidable Collision Course by Tyler Cowen @ The New York Times (h/t Mark Thoma)
It is thus a mistake to overreact to most of the headline events about the euro zone crisis. The good news is never quite as good as it looks, and the bad news often brings beneficial responses. It seems that for dozens of months now, we’ve been hearing that the fate of the euro zone will be decided “shortly,” yet somehow the drama continues.
Unfortunately, longer-lasting solutions require coordinated agreement among many euro-zone nations and, possibly, the broader European Union. That would include significant debt write-offs (as the International Monetary Fund is suggesting), quick moves toward better-integrated European banking institutions, and a general agreement that the European Central Bank unconditionally support troubled debt securities without trying to manipulate home governments’ policies.
Could all of that happen? For comparison, the current fiscal standoff in the United States involves no more than a president and two houses of Congress. In Europe, however, the bargaining is much more precarious, as it must span numerous nations, many of which have coalition governments, separation of powers and, in the case of Spain and Belgium, significant ethnic and linguistic division. The European Union has even had trouble concluding routine budget negotiations, the disputed parts of which concern no more than 0.03 percent of the union’s gross domestic product.
Woj’s Thoughts - Though I hold some differing views about the feasibility of the European Union with a common currency, in this piece I think Tyler is right on the mark. It has been fascinating and frustrating to watch markets seemingly overreact to every bit of European news. The supposedly best efforts of politicians and economists have, to date, failed to change the direction of economic growth and unemployment in the region. As I’ve stated previously, the clear optimism that remains among markets and Europeans is a positive sign of how deep faith in an eventual resolution lies. The likelihood of that optimism being rewarded is unfortunately minute in the near future and remains unfavorable for the long-run.

2) Mandated Employer Health Insurance Is Biased Against Small Business (in the US) by Peter Dorman @ EconoSpeak
This morning’s story about the problems small business owners face in complying with the ACA doesn’t surprise me.  My first gig as an economist, way back in 1979, was a summer internship at the Small Business Administration, where, among other things, I prepared an analysis of the impact of health insurance mandates on small firms.  It was a pretty rudimentary piece of work: I was just a grad student and had not yet studied how to do applied micro analysis.  Still, I was able to see the main story line.
Actually, I got two out of the three pieces of the story.  First, I saw that there are economies of scale in group health insurance, and without some form of organization above the firm level, small employers will pay a higher unit cost.  Second, and quantitatively more important, small firms in the US are substantially more labor-intensive on average, so an increase in labor costs hits them harder.  The third piece, which I missed at the time, is that wages are lower in the small business sector, so a mandated benefit of given cost will constitute a larger share of the wage bill.
But the US suffers tremendously from duality*—the division in the economy between larger, better-capitalized, more productive, higher-paying operations and smaller, less productive sectors that offer crummy jobs.  (It isn’t entirely a division between firms because some large firms have established their own internal “secondary” sectors.)  ACA should be examined in this context, especially since the administration hasn’t proposed any measures at all to reverse the trend toward greater duality, which is one of the underlying factors behind the growth in inequality.
Woj’s Thoughts - The other day I offered thoughts on Furthering the Post-Keynesian View of Wealth and Income Concentration, which entailed some great discussion within the comments. A question that I posed regarding a Job Guarantee is, how will it interact with the current market structure? The above post suggests a similar approach should have been considered with the ACA. Yes it will increase access to health insurance, but what if it also leads to larger unemployment and inequality? There is no question that trying to quantify these effects is difficult and imprecise, at best. The end result may have even been the same. All I’m saying is that I would generally prefer to see these macro-policy decisions examined in a broader context.

3) Conflicting signals on dollar-yen by Walter Kurtz @ Sober Look
Clearly investors have some good reasons to continue shorting the yen, as fundamentals for the currency are terrible. The BOJ balance sheet as percentage of GDP is at a record.
Source: Merrill Lynch
Based on these fundamentals Merrill obviously predicts a weaker yen. As one would expect, monetary expansion is unlikely to improve credit, but it should impact the FX markets.
Woj’s Thoughts - Obviously many people have been trying, unsuccessfully, to short the Yen for a long time. The BOJ's efforts to create inflation have been equally unrewarded. I continue to think that until the government pledges and follows through on a massive fiscal stimulus (deficit increases), the economy will remain stagnant and the Yen will remain a strong safe-haven.

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