Author: The Economist | WASHINGTON

TODAY’S recommended economics writing:

• “Where you getting all this economic freedom all the sudden Canada? Just happen to find it laying around in the snow somewhere? Well it turns out we’ve recently misplaced a good deal of it around here. A little suspicious if you ask me.” (Modeled Behavior)

• Do Americans have a “deep vestigial sense of proportion”? (Economix)

• Power corrupts, but it only corrupts those who think they deserve it. (The Economist)

• The Dow is off 5.2% over the last three days. Bad economic news and bank policy announcements are partially to blame, but I suspect markets are getting increasingly nervous about this talk of abandoning Ben Bernanke. (Wall Street Journal)

• If American metropolitan economies were national economies… (Streetsblog Capitol Hill)

NOT long ago, I linked to an Economist piece from 2003 which warned that housing prices were unsustainably high and likely to fall, as evidence of the fact that the Economist had been warning for much of the last decade that house prices were unsustainably high and likely to fall. Scott Sumner seized on the opening bit as evidence that the Economist is actually horrible at identifying bubbles. Here’s that opening bit:

A survey in The Economist in May predicted that house prices would fall by 10% in America over the next four years, and by 20-30% in Australia, Britain, Ireland, the Netherlands and Spain. Prices have since continued to rise, so have we changed our mind?…

“A ha!” Mr Sumner has more or less written. In fact, home prices did not fall by that much during that time! As a result we can conclude, he says, that The Economist cannot reliably identify bubbles and that following The Economist‘s advice would be a bad idea. Today he elaborates on the point, using an interactive home price chart we put up not long ago.

So The Economist’s predictions of 10% to 30% price declines over 4 years were spectacularly off base.  Even over a 6 1/2 year time frame, only the US (the country they thought was the least overvalued) experienced a significant decline in house prices.  And then only in real terms.  So in all 6 countries their predictions were wildly inaccurate for the 4 year time window they specified.  And even under the most generous assumptions, using real housing prices and a 6 1/2 year time frame, The Economist’s predictions were still highly inaccurate in 5 of 6 countries.  What an awful record of forecasting housing prices through the use of ”fundamentals.”  This shows just how difficult it is to identify bubbles in real time.

My immediate response to this is that it is ludicrous to declare that bubbles can’t be identified in real time, based on the experience above, as the story The Economist was telling about what was happening was fundamentally correct, prices did begin falling within four years, prices for all of the above mentioned countries (except Australia) fell significantly from their peaks.

But wait, is the common criticism, the timing was all off—prices didn’t start falling in 2003 but in 2006! And if you can’t predict the timing, then you probably shouldn’t encourage people to make decisions based on your forecasts, right?

Hardly. Mr Sumner seems to think that it’s a big gotcha point that in nominal terms, American home prices at the beginning of 2009 were roughly where they were at the beginning of 2003. They didn’t fall from the beginning of 2003, and so it was wrong to warn of falling prices. But those who bought at the beginning of 2004 did experience falling prices through 2009, and they might easily be underwater at this moment. Those who bought in 2005 saw their homes lose a quarter of their value through early 2009.

In other words, if you read The Economist‘s warning in 2003 and decided to buy immediately, then you might not be underwater at this moment (unless you later refinanced). If you bought even 6 months later, you suffered some losses. If you bought 18 months later, you’re probably in an uncomfortable position. I feel very confident that if you gathered up all the people who, in early 2003, were considering getting into the housing market, and you asked all of them—those who did get in and those that didn’t—whether they felt The Economist was giving good advice, they’d overwhelmingly agree that we were.

Not least, it’s worth noting, since even those who didn’t actually lose money on their house have suffered through a three-year period of significant illiquidity in housing markets, which is annoying at best and extremely costly at worst.

So while it was possible to buy a home at the time of the warning and sell it at a substantial profit two years later, the warning nonetheless strikes me as both prescient and highly (I don’t much like this term) actionable.

IT HAS widely been assumed that Ben Bernanke’s reappointment would more or less sail through the Congress—that there might be hard questions and lots of finger wagging, but with the final vote never in doubt. In the suddenly fluid political environment, that’s no longer so clear:

The confirmation of Ben S. Bernanke to a second four-year term as chairman of the Federal Reserve ran into further trouble on Friday, as two more Democratic senators said they would vote against him.

The White House came to Mr. Bernanke’s defense Friday, but the Senate majority leader, Harry Reid, is believed to be struggling to come up with the 60 votes necessary to confirm Mr. Bernanke before his term as chairman expires on Jan. 31.

In a statement Friday morning, Senator Barbara Boxer, Democrat of California, came out against Mr. Bernanke, who was named to his post during the Bush administration. She said she had “a lot of respect” for him and praised him for preventing the economic crisis from getting even worse. “However, it is time for a change,” she said. “It is time for Main Street to have a champion at the Fed.”

“Our next Federal Reserve chairman must represent a clean break from the failed policies of the past,” Ms. Boxer said.

Another Democratic senator, Russell D. Feingold of Wisconsin, also announced Friday that he would vote against Mr. Bernanke.

This is a tricky situation. Mr Bernanke is generally respected and well-liked in Congress, but legislators, and Democrats in particular, are increasingly aware of the public’s frustrations with all things bail-out oriented, and that includes the Federal Reserve and its head. The Democratic leadership, including the president, have never wavered in their commitment to Mr Bernanke’s reappointment, and they would no doubt prefer to avoid the potential market backlash that would come with an unexpected change at the Fed. But many senators now seem to see an opportunity to cast a vote they can take home to their unhappy constituents.

Most Republicans would probably be happy to see Mr Bernanke reappointed as well, but it appears that they sense an opportunity to stick Democrats with a bad hand. If they manage to withhold their votes, they can force Democrats to own Mr Bernanke’s reappointment entirely. Sensing that possibility, the Dems are likely to grow more reluctant still.

The most likely outcome is still a vote to reconfirm, but Intrade contracts on confirmation have fallen from trading at 95 early this week into the 70s, indicating that traders are far less confident about a successful reappointment than before.

What would a failure to reconfirm mean? Markets would likely be unhappy, perhaps interpreting the failure as a rejection of the assistance the financial sector has received over the past year. Of course, any conceivable replacement would almost certainly have taken many or all of the extraordinary measures that were used to prop up markets, so that isn’t in danger. And yet, indexes are falling.

It seems unlikely that any successor would be more focused on inflation than Mr Bernanke (unless, paradoxically, the need to assert independence led them further down this road) and so monetary policy should end up the same to marginally easier, which would be good for the economy. But with public confidence and uncertainty over financial markets and monetary policy at issue, it’s hard to know how this scenario would play out.

Which is, I suspect, why President Obama was so quick and sure in his reappointment of Mr Bernanke in the first place. But Congress is its own chaotic animal these days (always?), and it may not be able to deliver what the president had in mind.

ONE day after the announcement of two new administration strategies to safeguard the banking system, a number of storylines are developing. One is the extent to which the decision to announce proposals for limiting the size and scope of large banks was political in nature; was this all about stepping on the post-Massachusetts elections furore? Probably not. The timing may well have been influenced by the media cycle, but the substance of the proposals was almost certainly there before the election. Obviously, the administration has been weighing its options for some time.

Another plotline focuses on the implications of the announcement for internal administration politics. Has the Tim Geithner-Larry Summers axis lost ground to more reform minded actors like Paul Volcker and Austan Goolsbee? Perhaps; it certainly seems clear that a battle is taking place. Mr Geithner played the good soldier in an interview with PBS on the plans, but someone close to Mr Geithner has been feeding reporters word of the Treasury secretary’s secret scepticism. There are few things Barack Obama detests more than public infighting, so it will be very interesting indeed to see how this situation resolves itself.

The most important issue, however, is what the plan might mean for policy and how it might (or might not) work in practice. You can go here for a nice Economist assessment of the proposals, which more or less echoes my own feelings that the devil is in the yet-to-emerge details.

One widely noted concern is that the task of separating market making from propietary trading is more difficult than Mr Obama makes it out to be. Buttonwood hints at this here. I don’t know that this is necessarily the case. John Hempton says that banks will have enough room to fudge classifications of prop trading (which “is like pornography.  I know it when I see it”) that the plan wouldn’t work. Economics of Contempt, on the other hand, writes:

Some people will claim that it’s impossible to distinguish between market-making trades and propietary trades, but that argument is completely baseless. The banks themselves already distinguish between their market-making trades and their proprietary trades, as there’s a whole different set of rules for proprietary versus market-making trades. So don’t be fooled by that argument.

So whether a policy will work or not will likely depend on what the rules end up being, and on what resources are given to regulators to oversee them.

A related point is whether separating these activities is important at all. Buttonwood suggests that proprietary trading or links with hedge funds weren’t really what got the banks in trouble (really?). But I do think it’s right that these activities weren’t really among the fundamental causes of the crisis. On the other hand, it is argued that one of the primary benefits of Glass-Steagall was simply its effect on institutional size. It made for more and smaller financial institutions, it kept investment banks away from low-cost, government-insured depositor funding that might have allowed them to swell in size, and it also reduced (somewhat) the political influence that grows with bank size (though not by enough to eventually bring about the end of Glass-Steagall, it should be noted).

Perhaps, then, the aim is to use the split in activities to reduce bank size? Well, maybe. The only thing is that the Obama administration is quite adamant that the plan is not about breaking up existing banks. Moreover, there are more effective and efficient ways to shrink banks—like a size or leverage tax.

As I said yesterday, it’s very important to address the enormous moral hazard problems looming in the system. As yet, there isn’t enough information about the president’s proposals to know exactly what they’re trying to accomplish and whether they can in fact accomplish those things. This lack of detail is largely being interpreted as suggesting that the whole announcement is political in nature, but I think it’s also a recognition of the fact that the incentive for the administration to announce details is small as the Congressional sausage factory awaits.

I do believe that the need to turn in a populist direction might well be harnessed toward healthy ends, including financial reform. But we’re a long way from knowing whether that will be the end result, rather than a combination of window-dressing and a more destructive vein of populism.

THIS week’s paper has a look at the divergent recovery taking place around the world. Where developed nations are slowly returning to growth or facing a return to contraction, the emerging market world is (for the most part) roaring back to strong performance. Developing world strength is better news than many may realise at first glance. Japan’s economy has stagnated for over a decade now, and yet it remains a rich country, full of rich, long-lived people. Elsewhere in the world growth, or the lack thereof, has life and death consequences for millions of people.

So it’s important to remember the good news:

That is from a Vox write-up of new research by Maxim Pinkovskiy and Xavier Sala-i-Martin. They also note that the world income distribution used to be bi-modal—the haves and the have-nots. Now it approximates a normal distribution. And it is unlikely that the world will ever have 1 billion people in poverty.

This won’t really be a comfort to unemployment Americans and Europeans, but it should be. It was inevitable that a move from 1 billion wealthy earthlings to something more like 3 billion would involve some serious dislocations. But ultimately, broader wealth will be a very good thing for developed nation residents.

THE latest issue of The Economist features a cover Briefing on the return of the over-involved state. It plays off a number of recent developments—the rise of “state capitalist” economic regimes in China and elsewhere, the growth of the security state since 2001, and the government reaction to the financial crisis and recession, which includes the immediate responses as well as the push to bolster social safety nets and reregulate.

Some of the piece is both obvious and dead-on. The growth of the security state, alongside the seeming viability of autocratic capitalism, has worrying implications for human freedom. I must confess to disagreeing with other parts of the piece; I think social safety nets can definitely boost personal freedom rather than detract from it, and the problem seems not to be large social insurance programmes, but rather large social insurance programmes unsupported by tax revenues.

But I think the Briefing gets at something important that has been coalescing as a threat in the minds of people across the ideological spectrum—the nexus between big business and government. This connection has driven the increasing rage among liberals angry at Wall Street control of government and among conservative Tea Partiers furious about perceived corruption. The anger is understandable; the business-government link makes people feel that markets are rigged and governments are unresponsive. More specifically, it makes voters feel helpless.

Interestingly, the anger produced by this feeling of helplessness isn’t always politically coherent. Various groups on the left and the right have succeeded in harnessing that anger, at times, behind one message or another—against deficits, against bail-outs, against health care—but it’s not clear that those are the specific topics about which people are angry. Rather, they’re frustrated at the sense that everything has gone wrong, that corporate control of government helped make everything go wrong, and that the government would prefer to strike deal after deal with corporate interests rather than fix the problems.

And it’s difficult to see the political endgame. New Massachusetts Senator Scott Brown benefitted from this populist anger in achieving his special election victory on Tuesday, and it’s not impossible that Republicans might ride that rage back into power. But then what? The GOP, as an institution, is every bit as beholden to corporate interests as the Democrats. Just today, a Supreme Court packed full of Republican justices ruled that corporations have the right to spend as much as they want on political messaging during elections.

Meanwhile, the Democratic base is all but ready to abandon the party over its gifts to insurance companies while crafting the health reform bill, and the significant largesse handed to industries as part of the effort to construct an energy and climate bill. At every step of the way, government appears to represent business interests first and foremost.

It’s not clear where this leads. It’s not impossible to imagine a compelling third-party challenge in 2012, although the identity politics games that have shored up party identification in recent years may make it very hard to find a true crossover candidate.

But I don’t imagine that this social energy will soon dissipate. Too many people from both the left and the right are angry, and far too little is being done to satisfy them. Until both the economy and the government appear to be working for voters rather than business, the frustration will grow, awaiting some release.

OUT of work? Has Holiday Inn got the job for you.

International hotel chain Holiday Inn is offering a trial human bed-warming service at three hotels in Britain this month.

If requested, a willing staff-member at two of the chain’s London hotels and one in the northern English city of Manchester will dress in an all-in-one fleece sleeper suit before slipping between the sheets.

The bed-warmer is equipped with a thermometer to measure the bed’s required temperature of 20 degrees Celsius (68 Fahrenheit).

And because someone is sure to ask:

Holiday Inn said the warmer would be fully dressed and leave the bed before the guest occupied it. They could not confirm if the warmer would shower first, but said hair would be covered.

Also:

Holiday Inn are promoting the service with the help of sleep-expert Chris Idzikowski, director of the Edinburgh Sleep Center, who said the idea could help people sleep.

Indeed, nothing is more comforting to me when I’m trying to sleep than the idea that only minutes earlier a complete stranger was lying in my bed.

CHINA’S economy was 10.7% larger in the fourth quarter of 2009 than it was a year earlier, a rate of growth that beat estimates. In December, industrial production grew 18.5% and retail sales increased 17.5%. Based in part on China’s performance, that World Bank revised up its expectations for global growth in 2010, from 2% to 2.7%. And if Chinese growth maintains this pace, China’s economy may surpass Japan’s to become the world’s second largest.

Of course, the government economic supports that helped produce this recovery haven’t come without some side effects:

Banks lent out US$14.58 billion in new mortgages in Shanghai in 2009, a 1,600% increase from the previous year, the South China Morning Post reported. Of the total, US$5.7 billion went to buyers of new properties and US$8.88 billion to those buying second-hand properties, according to the People’s Bank of China. Average prices of Shanghai homes rose 68% from 2008.

The government is aware of the potential problems here, and is beginning to take measures to rein in credit growth. Ultimately, the renminbi will almost certainly rise:

[T]he overwhelming consensus among analysts is that China is likely to abandon the renminbi’s de facto peg to the dollar as the world emerges from the financial crisis.

Indeed, over the last month, the futures market has moved from expecting a 1.7 per cent appreciation in the renminbi against the dollar over the next year to forecasting a rise of more than 3 per cent.

While China’s expansion has clearly boosted world growth and has likely helped developed nation economies on net, the use of RMB appreciation to rein in an overheating economy could potentially be quite beneficial for America. Consider this chart, posted by Menzie Chinn:

Compare the difference in America’s current account balance given depressed growth with a flat dollar and with stronger foreign growth. That difference represents higher output thanks to better net export performance—essentially, it means that improved exports have picked up the slack from weak consumption. So Americans shouldn’t look at current, rapid Chinese growth as a threat. It’s likely to mean a key source of support for the American economy over the next year, which will be crucial given the impending end of fiscal (and perhaps monetary) stimulus.

YESTERDAY, Buttonwood mused on the problems facing the Greek economy:

It is rare for a government’s bond yields to rise almost a percentage point in the course of a single day. But that has happened in Greece, where two-year yields have jumped 88 basis points to 4.6%, according to Bloomberg; almost four times the yield paid by the German government to borrow for the same period.

It was my case, at the start of the year, that we would see currency crises associated with government debts and it seems to be coming true quite rapidly. Most commenators think Greece will not leave the euro and I think they are probably right; the main reason to leave the euro would be to devalue. But since Greek debt is denominated in euros, that would make it harder to repay. One suspects the Greek government will try to muddle through by a)implementing some deficit reduction measures and b)making the domestic banks buy more of the debt. 

But a lesson of the Reinhart/Rogoff book (This Time is Different) is that debt crises can occur at levels well below 60% of GDP. The Greeks owe 89% and not everyone trusts their figures. The problem is that, as has been seen today, the markets drive up the costs of servicing the debt which makes it even more difficult to get their finances in order. And as Martin Wolf points out in today’s FT, austerity measures tend to slow the economy so that even a determined government can find deficit reduction is a case of two steps forward, one step back.

Greece is in a pickle, in other words. But I think that there is probably only one way this can end (assuming Greece fails in its muddle through approach)—the rest of the eurozone will bail them out. They have to. Perhaps some action will be taken to guarantee Greek debt and reduce funding costs. But one thing is nearly certain: Greece won’t be leaving the eurozone.

Barry Eichengreen explains:

In 1998, the founding members of the euro-area agreed to lock their exchange rates at the then-prevailing levels. This effectively ruled out depressing national currencies in order to steal a competitive advantage in the interval prior to the move to full monetary union in 1999. In contrast, if a participating member state now decided to leave the euro area, no such precommitment would be possible. The very motivation for leaving would be to change the parity. And pressure from other member states would be ineffective by definition.

Market participants would be aware of this fact. Households and firms anticipating that domestic deposits would be redenominated into the lira, which would then lose value against the euro, would shift their deposits to other euro-area banks. A system-wide bank run would follow. Investors anticipating that their claims on the Italian government would be redenominated into lira would shift into claims on other euro-area governments, leading to a bond-market crisis. If the precipitating factor was parliamentary debate over abandoning the lira, it would be unlikely that the ECB would provide extensive lender-of-last-resort support. And if the government was already in a weak fiscal position, it would not be able to borrow to bail out the banks and buy back its debt. This would be the mother of all financial crises.

That’s clearly something everyone involved would prefer to avoid. The bottom line is that states locked in a currency union have each other over a barrel, to a certain extent. A situation in which monetary policies are coordinated while fiscal policies are not is not sustainable. The European Union will intervene if it has to, and it may begin to realise that its institutions need to mature to address these problems, which will not have occurred for the last time.

I’M NOT a political analyst, but from where I sit one upside to the Democratic loss in the Massachusetts special Senate election is that it may have convinced the majority party to move forward on an issue that’s likely to prove politically popular—bank regulation. To wit:

President Obama on Thursday will publicly propose giving bank regulators the power to limit the size of the nation’s largest banks and the scope of their risk-taking activities, an administration official said late Wednesday.

The president, for the first time, will throw his weight behind an approach long championed by Paul A. Volcker, former chairman of the Federal Reserve and an adviser to the Obama administration. The proposal will put limits on bank size and prohibit commercial banks from trading for their own accounts — known as proprietary trading.

The news has been greeted with cautious optimism by many financial bloggers, though all will depend on the specifics of the policy to emerge. But it should be absolutely clear that banks which are too big to fail must be shrunk, and that using government-guaranteed consumer deposits to trade securities for profit is a terrible idea. It is a relief to see these holes in the regulatory structure get some attention.

BRAD DELONG posts this image:

And he quips, “I really am going to have to learn more about BLS seasonal adjustment procedures.” Indeed, it is mysterious and fascinating to see how noisy the unadjusted series is relative to the adjusted numbers. Of course, what you primarily see are two big spikes every year, one associated with the summer months and one with the end of the holiday season. But one suspects that employers aren’t behaving quite like they typically do, and so the seasonal adjustments are likely off a bit (though in which direction isn’t clear) during the seasonal spikes.

Now what you might also notice is the big tick upward at the end of the adjusted series. That is, in part, a product of the difficulty in making seasonal adjustments. But today’s numbers, for last week’s statistics, involve a decline to the unadjusted numbers of 154,000, and a large and unexpected increase in the adjusted numbers of 36,000. Last week, seasonally adjusted claims were at 482,000, which seems bad; not long ago they had fallen to 433,000.

But this, as it turns out, as nothing to do with the economy. Instead, the jump reflects an “administrative accumulation” at the Labour Department—essentially, a backlog of applications that built up over the holiday season. Budget cuts, you know. Even when the numbers are misleading, they’re informative.

THE Oracle of Omaha is not a fan of the proposed tax on large banks:

“I don’t see any reason why they should be paying a special tax,” said Buffett, the chairman and chief executive officer of Berkshire Hathaway Inc., in an interview on Bloomberg Television today. Supporters of the plan to tax the banks “are trying to punish people,” he said. “I don’t see the rationale for it.”

Mr Buffett’s argument is based on the idea that the tax is meant to cover the cost of TARP, which most of the large banks have already repaid. There are two problems with this. First, as Mr Buffett well knows, TARP was far from the only aid provided to large financial institutions during the crisis. Guarantees with potential values in the trillions were extended, along with easy emergency funding. That amounted to aid to banks and the assumption of bank risk by the federal government, a favour for which it stands to reason taxpayers should be compensated.

The second problem is that repayment of TARP isn’t really the best reason for the tax. The administration seems to know this; in advocating for the bank tax it acknowledged that a tax on leverage would counteract the negative externality posed by being too-big-to-fail and reduce careless risk-taking. But I don’t think that message plays as well politically as an effort to get Wall Street to pay back TARP.

But Mr Buffett should know better. It’s interesting that he says:

Look at the damage Fannie and Freddie caused, and they were run by the Congress…Should they have a special tax on congressmen because they let this thing happen to Freddie and Fannie? I don’t think so.

The reference to Fannie and Freddie is instructive. They weren’t actually run by Congress but operated as public companies. And yet, because they were government-sponsored entities, it was assumed that they enjoyed an implicit government guarantee. That government guarantee allowed them to borrow more cheaply than a purely private competitor, which enabled them to become too large and too risk-heavy. A tax on size or leverage would have counteracted the negative incentives generated by the implicit guarantee. And that’s the idea behind the bank tax, or at least it should be.

THE quote of the day comes from Tyler Cowen, on the question of disaster aid:

I still believe that foreign aid does not raise economic growth rates, on average.  But aid can alleviate human misery, such as when a visiting doctor gives vaccines or hands out medicine.  (In fact per capita income may fall, as a result, if some “weaklings” are kept alive.) 

I also believe that the U.S. military can make a huge difference in the immediate aftermath of catastrophes.

Imagine U.S. troops liberating Buchenwald.  Would any commentators say the following?  “Don’t give him that blanket, sell it to him!”  “Hey buddy, get a job!”  “Moral hazard: they’ll just go get captured again.”  etc.  I don’t think so.

I didn’t realise there was any kind of anti-planning backlash to government aid efforts in Haiti; I suppose I felt that was simply too cruel an outlook. Sometimes, incentives effects are simply not important. You help the people who need help.

OVER at Vox, Francesco Caselli and Guy Michaels describe a novel approach to the study of the resource curse and its effect on economic conditions. Rather than compare data across countries, they produced an analysis across municipalities within Brazil over the period after the country discovered large petroleum reserves. Their findings are interesting; for one thing, the multiplier from oil wealth is negligible—an additional real of oil income raises aggregate income by one real. There are some small compositional effects to economic activity; manufacturing decreases slightly while the service sector grows. But the interesting questions centre on what happens to growth and the distribution of oil money.

The authors note that oil-rich Brazilian municipalities tended to report large increases in spending on public goods like infrastructure and education. This would seem to be the route to a Norway-like experience, in which oil wealth translates into broader prosperity. And yet, services didn’t seem to improve. Why?

Our finding that oil windfalls translate into little improvement in the provision of public goods or the population’s living standards raises a key question – where are the oil revenues going? As a way of addressing this question, we put together a few pieces of tentative evidence:

• First, oil revenues increase the size of municipal workers’ houses (but not the size of other residents’ houses).
• Second, Brazil’s news agency is more likely to carry news items mentioning corruption and the mayor in municipalities with very high levels of oil output (on an absolute, though not per capita, basis).
• Third, federal police operations are more likely to occur in municipalities with very high levels of oil output (again in absolute terms).
• And finally, we document anecdotal evidence of scandals involving mayors in several of the largest oil-producing municipalities, some of which involve large sums of money.

As a partial explanation of why senior municipal workers may have thought that they could “get away” with large-scale alleged theft in a country where local elections are held regularly, we note that a survey in the largest oil-producing municipality found considerable ignorance among residents about the scale of the municipal oil windfall.

In general, these results confirm the general belief that resource discovery is likely to pose difficulties to poorer nations and those without well-developed oversight structures and a culture of transparency. But now we have a helpful metric. If you find yourself in a suddenly resource-rich emerging market and you’re interested in knowing whether revenues are being put to the proper uses, just go find the houses of the local government leaders.

THIS is much cooler than a diamond-encrusted skull:

A Tool to Deceive and Slaughter is an artwork by Caleb Larsen, currently for sale on eBay. If it hasn’t sold in the next couple of days — the minimum bid is $2,500 — it will go back on eBay. On the other hand, if it does sell, it will still go back on eBay. That’s what it does, as clearly explained in the legal contract accompanying the work:

Artist has created a work of art titled “A Tool to Deceive and Slaughter (2009)” (“the Artwork”) which consists of a black box that places itself for sale on the auction website “eBay” (the “Auction Venue”) every seven (7) days. The Artwork consists of the combination of the black box or cube, the electronics contained therein, and the concept that such a physical object “sells itself” every week.

…Many artists have tried to remove their art from the commercial aspects of the art world — by making it free, for instance, or by putting on performances, or creating public installations. This one does it by making an artwork which is so commercial that it can’t be collected. You could buy the piece today, and it might be worth $100,000 in a few years’ time. But you wouldn’t own it in a few years time, and you would have personally gained only a tiny fraction of the increase in the piece’s value, if anything at all.

There’s no way around the sell requirement. I was thinking that this could just be a super status piece, for which a determined buyer could bid highest each time, but the owner is not allowed to bid on the item. But perhaps a determined pair of conspirators could swap the item back and forth?

At any rate, a refreshing idea.

FOR a while, the trade-off between inflation and unemployment, captured in the Phillips Curve, was taken as one of the key facts of monetary economics. Stagflation in the 1970s posed a significant challenge to belief in the relationship, but modifications, including postulation of a natural rate of unemployment, gave rise to the idea of a short-term versus long-term Phillips Curve. Essentially, higher inflation could reduce unemployment in the short term, but attempts to hold unemployment below its natural rate would lead to increased joblessness and higher inflation over the longer term.

Continued empirical investigation into the phenomenon challanged even this notion, however, and there remains disagreement among central bankers over whether there is at any point a reliable relationship between levels of unemployment and rates of inflation.

According to San Francisco Fed economists Zheng Liu and Glenn Rudebusch, this connection does exist, but only under certain circumstances:

We argue that, in a deep economic downturn such as the current one, inflation and unemployment do tend to move together in a manner consistent with the Phillips curve. But, outside of such severe recessions, fluctuations in the inflation and unemployment rates do not line up particularly well. Inflation appears to be buffeted by many other factors. This explains why some studies find only a “loose empirical relationship” between economic slack and inflation. Thus, compared with the relatively tranquil period between the mid-1980s and the mid-2000s, evidence suggests that recent high unemployment rates are broadly consistent with the sizable decline in core inflation since the fourth quarter of 2007, a relationship that broadly fits the Phillips curve model.

They produce the following chart:

The authors spell out the obvious logic at work:

A simple economic rationale explains why changes in the unemployment rate help determine movements in inflation. The law of supply and demand suggests that excess supply of a good tends to push down its price, while excess demand tends to push up the price. The unemployment rate is a key indicator of the balance of supply and demand in the labor market. During periods of high unemployment, the abundance of jobless workers and the scarcity of job vacancies put downward pressure on wages. With labor costs well contained, businesses have less need to raise prices. And with weak demand for goods and services in such periods, businesses often can’t raise prices.

Indeed, labour costs continue to decline. Taking into account serious weakness in housing markets, it seems clear that core inflation will face some serious headwinds in the months to come (though that hasn’t prevented FOMC members from fretting about inflation all the same, and pushing for a speedier exit from monetary support strategies).

One potential hitch in the above logic is that prices for commodities are set on global markets, and with some parts of the globe experiencing rapid growth, those prices may rise despite slack in America. If those price increases push up headline inflation, central bankers may eventually feel compelled to raise interest rates.

But this doesn’t really make sense. For one thing, price rises based on increased global demand aren’t so much a monetary phenomenon as a reaction to fundamentals. For another, unless the Fed hammers the American economy enough to materially slow global growth, higher interest rates wouldn’t work anyway.

But central bankers react to rising prices like bulls to waving capes. High unemployment should prevent them from doing anything to rein in inflation anytime soon, but I suspect that it won’t.

A NEW Goldman Sachs report on the state of the real-estate market in America includes the nice graphic below, on America’s lacklustre labour market:

Employment used to recover a lot more quickly than it has in recent recessions, but even by the pitiful standard of those recent downturns the current recovery is a jobless one. The gist of the report on housing, by the way, is that the sector’s performance in 2010 is likely to be disappointing relative to the second half of 2009, thanks to the withdrawal of government supports, continued labour-market weakness, and foreclosure troubles.

Already the data appear ready to support the Goldman conclusion. Just today, the National Association of Home Builders released its report on builder confidence for January, and its index declined from December—the second consecutive monthly drop. As Calculated Risk notes, data on housing starts tend to follow builder confidence pretty closely, which suggests that the autumn rebound in home construction is likely to stall out. That will mean fewer new jobs in construction, and we’re back to the point about the jobless recovery. It will be a while until the American economy pulls itself out of this trap.

THERE has long been enthusiasm among the “nudge” behaviouralists for the posting of calorie content in restaurants. The availability of this information, it is assumed, will encourage diners to choose healthier options, thereby improving public health, without heavy-handed government limits on what can actually be sold and consumed. And so there was a great deal of disappointment when early results out of New York City, where mandated calorie count information was introduced in 2008, failed to show the expected decline in calories consumed:

The results were pretty dismal: only about half the respondents even noticed the calorie counts and only 15% said they influenced their choice. But the receipts told an even more dismal story: overall, people actually purchased more calories after the law went into effect. The results aren’t statistically significant, though, so basically all the researchers can really say is that the law (so far) hasn’t had any effect. The only glimmer of good news is that among people under 35, respondents who noticed the labeling did seem to cut back a bit. No other subgroup showed any effect.

But perhaps that initial analysis underestimated the effect of the programme. Here’s a new piece of research from NBER, by Bryan Bollinger, Phillip Leslie, and Alan Sorensen:

We study the impact of mandatory calorie posting on consumers’ purchase decisions, using detailed data from Starbucks. We find that average calories per transaction falls by 6%. The effect is almost entirely related to changes in consumers’ food choices—there is almost no change in purchases of beverage calories. There is no impact on Starbucks profit on average, and for the subset of stores located close to their competitor Dunkin Donuts, the effect of calorie posting is actually to increase Starbucks revenue. Survey evidence and analysis of commuters suggest the mechanism for the effect is a combination of learning and salience.

That is what we’d expect to see; after all, consumers seem to significantly underestimate the calorie content of junk food, occasionally by thousands of calories. What’s interesting is that Starbucks actually benefitted financially, relative to nearby competitors, from posting this information. That suggests that firms should be quick to adopt calorie posting in places where it’s not yet mandated. And, oddly enough, the government mandate seems to have turned up a few twenty dollar bills, just lying around on the sidewalk.

ONE point I’ve been making recently is that a return to full employment in America will be slow to arrive so long as household balance sheets remain troubled. Consumption is a large part of the American economy, and while Americans pay down the debts accumulated during the past few decades, consumption spending will lag.

In a new note (PDF) from IMF economists Jaewoo Lee, Pau Rabanal, and Damiano Sandri, the problem is assigned some numbers:

U.S. household consumption declined sharply in late 2008, against the backdrop of a deepening financial crisis. Personal consumption expenditure, which had peaked above 95 percent of disposable personal income in 2005, fell below 92 percent by the second quarter of 2009. This decline, if sustained, would break the trend of steady increase in the U.S. consumption rate since the 1980s…

Our analysis suggests that U.S. household consumption and saving rates will settle at 89½–91½ and 5–7 percent, respectively, over the next several years. Similar levels of consumption and saving rates were last seen in the early 1990s. Though not too far from the 2009 saving rate of nearly 5 percent, the forecast implies a significantly lower share of private sector demand in GDP by about 3 percentage points compared to the pre-crisis (2003–07) average. However, the forecast uncertainty is large: a 95-percent confidence interval has width of about 7 percentage points (3¾ percentage points on each side).

To put this in context, real GDP fell by about 3.8% from the second quarter of 2008 to the second quarter of 2009, a period during which payroll employment fell by nearly 6 million.

Now, some will argue that government is likely to make up for this shortfall in private demand. I don’t think that will be the case; the federal deficit is scheduled to decline from 2009 to 2010, and state budget tightening is likely to be significant over the course of this year. Ultimately, new demand will have to come from somewhere else: either from export demand, or a new wave of business investment (which will likely have to come in an emerging sector, given continued problems of excess capacity).

CHINA recently became the world’s largest emitter of carbon dioxide. A little over one-fifth of all the CO2 released into the atmosphere each year is produced in China (America is responsible for about 18% of global emissions, and Europe 14%). And yet, there’s this:

China’s major cities’ household carbon emissions are dramatically lower than in the US. Glaeser and Kahn (2010) report that in the cleanest cities of San Diego and San Francisco, a standardised household emits around 26 tons of CO2 per year – albeit with a much higher standard income of $62,500. Shanghai’s standardised household, meanwhile, produces 1.8 tons of carbon and Beijing’s standardised household produces 4.0 tons. Even in China’s brownest city, Daqing, a standardised household emits only one-fifth of the carbon produced by one in America’s greenest cities.

That’s from an interesting Vox piece by Matthew Kahn and Siqi Zheng, discussing new research they’ve produced on the emissions profiles of Chinese cities. It’s a nice read; the authors focus on how Chinese emissions patterns differ from those in developed nations and how Chinese regional policies are likely to influence the path of emissions growth.

But a key takeaway is the tricky position in which China finds itself. Its residents contribute far less to global warming than typical Americans or Europeans, but because there are 1.3 billion of them, they’ve already become the largest producer of greenhouse gases. As the authors note, if Chinese citizens emitted carbon at developed nation rates, global emissions would be 50% higher. And obviously, one of the main goals of the Chinese leadership is to achieve something like a developed nation standard of living for its residents.

China should just approach America with a deal: it will agree limit its per capita emissions to one half the current American level if America will agree to halve its per capita emissions. Seems fair, does it not?