Author: S.D. | WASHINGTON

The lead note in the Finance & Economics section in this week’s issue looks at the shift in the balance of economic power from the West to Asia. Our correspondent crunches some numbers, and clarifies the ways in which this much-talked about shift is real, and the ways in which it is exaggerated. It turns out, for instance, that looking at GDP at market exchange rates, there hasn’t been that much of a shift at all:

Thanks partly to falling currencies, Asia’s total share of world GDP (in nominal terms at market exchange rates) has actually slipped, from 29% in 1995 to 27% last year (see chart 1). In 2009 Asia’s total GDP exceeded America’s but was still slightly smaller than western Europe’s (although it could overtake the latter this year). To put it another way, the output of the rich West is still almost twice as big as that of the East.

That Asian exports are somehow taking over the world is also not as true as some suppose:

As for the popular belief that Asian producers are grabbing an ever-larger slice of exports, the region’s 31% share of world exports last year was not much higher than in 1995 (28%) and remains smaller than western Europe’s. Indeed, the shift towards Asia appears to have slowed, not quickened.

Of course, converted at purchasing-power-parity, Asia’s GDP share looks more impressive. And although official statistics may say America’s share of private consumption dwarfs Asia, the piece points out that it may be bigger in reality than captured by official figures. But it’s Asia’s demand for capital goods that really stands out:

Many Western firms are more interested in Asia’s capital spending than its consumption, and here Asia is undoubtedly the giant. In 2009, 40% of global investment (at market exchange rates) took place in Asia, as much as in America and Europe combined.

Lots more interesting stuff in the piece itself, here.

THERE’S a fun little piece in this week’s print edition (well, I had fun writing it) that attempts to evaluate Christina Romer’s recent claim about the staff and members of the Council of Economic Advisers, which she made on the CEA’s blog last month, that

This past year, the Council has been blessed with staff of a caliber not seen since the glory days of the CEA in the 1960s, when future Nobel laureates Robert Solow and Kenneth Arrow were senior economists and James Tobin was a member.

Those who read Greg Mankiw’s blog will have noticed that he was sceptical of this claim, pointing out that the Martin Feldstein-headed CEA was full of very highly-cited academic economists (particularly when one includes all the senior staff, which included Larry Summers and Paul Krugman). Anyway, I decided to comb through past CEAs to rank their members by cite counts, much as Mr Mankiw suggested, (and along the lines of what another blogger, Tino Sanandaji did) but in fairness to Ms Romer, who was referring to the staff too, I also included the senior economists, who tend to be young faculty on leave from their normal jobs, or seconded government economists.

Anyway, the results, summarised in the piece, were interesting. The present CEA is exceptional on some counts – two senior economists, for example, are among the top 5% of academic economists by cites, and two of the three members are too. The former bit is particularly rare – I had to go back quite a few years to find another Senior Economist who was on the top 5% list.

But by cite-counts per head, this is by no means the most-cited since the 1960s (or even in the past decade). That Feldstein-Summers-Krugman year wins hands down, followed fairly closely by the time that Sitglitz and Blinder were on the CEA in 1994. But while looking at such old CEAs and using lifetime cite-counts does handicap the present lot (for instance, in twenty years Austan Goolsbee could well have jumped much higher up the citation rankings!), even the Greg Mankiw CEA in 2003 does a lot better than the present lot (and it’s not as clear that cite counts for the present members will have jumped enough by 2016 to have eliminated the gap). The present CEA does outshine most very recent ones, though the one headed by Bernanke in 2005 also does better (but not by as much as the Mankiw year).

I also tried to rank CEAs by the average rank of the PhD programme in economics, using the good old USNews rankings, at the school where they got their PhDs. Here, the race was tighter. The present CEA  is only beaten by one in the past 10 – by the group under Glenn Hubbard, headed by Douglas Holtz-Eakin. Again, PhD rankings do move up and down, but not a lot and not in a way as to stack the cards either for the present CEA or against it. The other recent CEA staff which came really, really close by this metric was the 2004 crew, where there were nearly enough Harvard-MIT-Princeton-Chicago geeks to outshine those two other CEAs.

A couple of other things stood out, and didn’t make the piece. For one, the dominance of Cambridge, MA- trained economists on the membership of the CEA surprised me. I had expected this to be the case under Democratic presidents, but it is true pretty much across the board since about 2000. In 1999, Robert Lawrence, who got his PhD at Yale, made for a slight change, and going a bit further back, Janet Yellen was another Yale alum. But other than these two, every single CEA member or chair since 1993 has been to graduate school at either Harvard or MIT. You have to go back to the 1980s for a similar dominance of another school – Chicago, of course (though Martin Feldstein’s PhD is actually from Oxford, but all others were Chicago PhDs between end-1982 and 1988).

And what about that amazing 1960s lineup? I suspect it’s going to be hard to beat. From the article:

Take 1961, for instance. James Tobin was a member, Robert Solow was a staff economist, and consultant economists included Kenneth Arrow and Paul Samuelson. All four went on to win Nobel prizes.

In fact, two others who were associated with the 1961 council, whom I didn’t mention for want of space, were Robert Triffin, who gave his name to the ‘Triffin dilemma’, and Arther Okun, after whom Okun’s Law is named. Stellar indeed.

OVER the past few days, several economists, both in America and Europe, have weighed in on Daniel Gros and Thomas Mayer’s proposal for a European Monetary Fund (EMF). They have raised questions both about the need for an EMF in principle, and about its feasibility and usefulness in the present context, i.e. Greece’s troubles. I think it’s fair to say that Messrs Gros and Mayer’s ideas came in for a good deal of criticism from our invited experts on all these counts.

The guest piece argued that:

The difficulties facing Greece and other European borrowers expose two big failures of discipline at the heart of the euro zone. The first is a failure to encourage member governments to maintain control of their finances. The second, and more overlooked, is a failure to allow for an orderly sovereign default.

Our commenters were by and large unconvinced that that there was a need for a new institution to do what existing institutions were already doing bits of. This applied particularly strongly to the idea of the EMF as a way to enforce fiscal discipline.

Desmond Lachman wrote:

“What is even less clear is why Gros and Mayer would want to reinvent the wheel by creating a European Monetary Fund, when one has the International Monetary Fund that already has the expertise to impose the appropriate conditionality on lending to wayward countries like Greece”

But maybe the EMF would do a better job than the IMF? Edwin Truman was sceptical, saying that “if the EMF were tougher than the IMF is on average in terms of its economic and financial conditions, then Euro area countries would prefer to go to the IMF for assistance”.

Tyler Cowen argued that the “underlying problems of European multilateral governance” are unlikely to “be solved by creating an entirely new and different institution”. He would rather the ECB were reformed by broadening its focus beyond price stability, than an EMF set up. Carmen Reinhart worried about the ECB and the EMF (if one were indeed to be set up) butting heads.

Our commenters were also not convinced an EMF would work. Roberto Perotti, for example, argued that:

(B)y the authors’ calculations this facility would today give Greece access to something like .65 percent of its GDP … plus any additional discretionary fund from the pool of all accumulated savings. However, .65 percent of GDP would make no difference to Greece today; and … the intervention needed would eat up the whole fund just for a small country like Greece. The key problem country, Spain, with a public debt just above the Maastricht level this year, would have made virtually no contribution to the EMF. In the end, effective intervention, especially when the risk of contagion is high, is likely to depend on the discretion of Germany and other non-problem countries, just as it does now.

Ms Reinhart, though, was a bit more supportive of the second bit of the proposal, relating to orderly sovereign defaults. She argues that a regional institution would indeed “be filling a gap in the existing financial architecture”. But she would like their proposal to go beyind sovereing debts to thinking about how to sort out” the messy blur that currently exists between public and private debts: the “quasi-sovereigns”” During crises, she points out, “private debts often become public ones”.

Then, of course, is the question of feasibility, given where we are now. Could such a fund even be set up? Several commenters pointed out that any negotiations to set up a new institution would be protracted and messy. Mr Lachman argues that

(I)t is fanciful to think that markets will patiently hold onto their Greek paper while the Europeans take their sweet time to set up as far-reaching an institutional change as Gros and Mayer are now proposing

Mr Cowen also argued that conditions are hardly ideal for the negotiations surrounding an EMF-type institution – winners and losers are too clearly known ex ante, whereas ideally such negotiations would be done behind a “veil of ignorance”. More generally, several experts argued that the problem is a political one, not a technical one: what needs to be done is known; how to do it is a matter of politics.

So what might be done? Mark Thoma suggested fiscal federalism as part of a solution to the euro-zone’s problems, but was realistically pessimistic about its prospects. But most would appear to agree with Jean Pisani-Ferry, who wrote:

The real choice at least in a first step is between IMF and EU assistance. As the EU in this respect has no legal basis, no mechanism, no financial instrument and no track record, a strong case can be made for calling in the IMF

DAVID ROODMAN, a fellow at the Centre for Global Development, blogs about microfinance here (he’s writing a book on it). I found this post (and a couple of follow-ups) very interesting indeed. Mr Roodman has crunched the numbers on late payments, delinquent borrowers, and such, using the data from the Grameen Bank, which (as he points out) very helpfully (and somewhat unusually for the industry) posts them on its website. Stellar repayment rates—the much-touted figure is 98%—are an important ingredient in making microfinance work. Mr Roodman shows that Grameen’s own data show several negative developments over the last year or so. For instance, the percentage of amounts actually repaid has fallen from being consistently around or above 98% to a little over 96.5%.

That’s still high, right? Yes, but…at what point, given microfinance’s wafer-thin margins, does delinquency become a genuine cause for worry? Mr Roodman poses exactly the right question, I think, when he writes:

I think about this graph in two ways. One is by focusing on the ending level of 96.54%. That seems high in absolute terms. But it is low by historical standards. And Rich Rosenberg, in his authoritative field guide to delinquency metrics (quoted by Pearl and Phillips) and in a recent post, explains that a 95% collection rate can spell disaster….

Another way to analyze the graph is by focusing on the recent change. Whether or not Grameen Bank is yet in the red zone, it seems likely that something bad is happening. In Rosenberg’s language, the on-time collection rate graphed above is an excellent  red flag indicator because it plummets as soon as borrowers start struggling. It is a leading indicator of trouble, a canary in the coal mine.

There’s plenty of other good stuff in there, including, of course, the graph referred to above (and several others). Well worth reading for anyone interested in microfinance, and looking to move beyond either the hype or the naysayers.

EDUARDO CAVALLO, Andrew Powell, and Oscar Becerra, three economists at the Inter-American Development Bank have a new paper that tries to quantify the damage caused by last month’s earthquake in Haiti.

Using worldwide data from about 2000 natural catastrophic events between 1970 and 2008 … we model the dollar amount of damage of each event as a function of the number of deaths or missing, the level of economic development (real GDP per capita), country size, regional dummies, and a linear trend. Using these regression results we make out-of-sample predictions regarding the estimated dollar amount of damages that can be expected for a country with Haiti’s economic and demographic characteristics in the aftermath of the catastrophic earthquake of January 12th. 

Their results suggest that reconstructing Haiti’s infrastructure after the quake will cost at least $7.2 billion (though their best guess, based on what is known about the death toll, is $8.1 billion). These are enormous numbers compared, for instance, with World Bank aid of $100m announced immediately after the quake. The paper’s results suggest that much more will be needed, and that co-ordination between agencies will be crucial.

OLIVIER BLANCHARD, the IMF’s chief economist, and a couple of other Fund economists ruminate in a new paper out today about how macro policy might be reoriented in the light of the crisis. It begins with a mea culpa of sorts. Mr Blanchard and his colleagues write that macroeconomists did not “resist the temptation…to take much of the credit for the steady decrease in fluctutions”, and that “the crisis clearly forces us to question our earlier assessment”. The contrast with Mr Blanchard’s most recent rumination on macroeconomics, from August 2008, (which, to be fair, was much more about academic macro as opposed to macro policy) is striking. The assessment of that paper was that, “The state of macro is good.” (Interestingly, the older paper is not among the list of references in the new one).

Blanchard and Co.’s list of the oversights and mistakes of “Great Moderation” macroeconomics and macro policy includes some now-familiar items: fiscal policy played second fiddle to monetary policy, monetary policy focused exclusively on inflation and used only one target—the policy rate, and financial regulation was in its own silo, outside the macro policy framework (and focused on the health of individual firms, without paying much attention to systemic issues).

The authors argue that policy was too focused on ensuring that inflation stayed stable AND low. The low bit, they think, may have been overkill; it gave policymakers too little wiggle room when hit by a big shock. Another way of putting it is that the dangers of inflation being too low were underestimated. Even the relationship between output and inflation, they argue, is understood “quite poorly, especially at low rates of inflation”. They think that correcting for some of the distortions in the economy that create negative inflation effects—tax brackets set in nominal terms, for instance—might allow for the optimal rate of inflation to be higher. They also make a plea for not thinking of the policy rate as the only tool of monetary policy, even in more normal times. They come down quite strongly on the side of situating both monetary policy and macroprudential regulation in central banks. They also argue, sensibly I think, for allowing automatic stabilisers—transfers and taxes—to vary countercyclically based on pre-specified triggers.

For all that they talk about the crisis having reinforced the importance of fiscal policy, they have relatively little to say about it, apart from admitting that:

[T]here is a lot we do not know about the effects of fiscal policy, about the optimal composition of fiscal packages, about the use of spending increaes versus tax decreases, and the factors that underlie the sustainability of public debts.

Part of the reason for the neglect of fiscal policy, as they themselves point out, were Ricardian equivalence arguments emanating from academia, where, as they say, its rejection as a countercyclical tool was “particularly strong”. All of which certainly makes it harder to see why, a month before Lehman Brothers collapsed, Mr Blanchard was saying that the state of academic macroeconomics was good.