Inventory investment

Today's first look at 2009:Q4 GDP attributed 3.4 percentage points of the 5.7% annualized growth to changes in inventories. This is a good sign; inventory investment is one of the more volatile components of GDP that typically accounts for a large share of its decline during recessions.

It feels strange to conceptualize a reduction in a negative number, namely the net change in inventories, as a source of growth. But that still represents a net increase in investment goods sold to customers rather than either produced and stored by sellers or not produced at all.

David Brooks on populism

For a nice dose of his usual sweeping historical view of U.S. history, read David Brooks's column on populism, elitism, and what he calls the "anti-populism" of Hamilton and Lincoln.

Opinions on Bernanke

Ed Glaeser defends, while Paul Krugman weakly supports. Glaeser's point is that monetary policy is a very blunt instrument for redistributing wealth or gains and losses from risk taking, which is one way to characterize populist or anti-banker sentiments. It seems like Krugman's legitimate beef revolves around the Fed's opposition to consumer protection; it isn't the case at all that the Fed isn't doing what it can to lower unemployment, which is another of his gripes.

Update: Greg Mankiw posted a link to a derivative that allows bets on Bernanke's confirmation. Odds seem to have shifted rapidly against him last week, and more recently in his favor.

Update: On the day Alan Blinder defended him in the Times, Bernanke was confirmed by a final vote of 70-30, with the most no votes in history, ahead of Volcker's previous record of 16 in 1983.

Politics, populism, and central bankers

The Wall St. Journal reports on recent turmoil surrounding Argentina's central bank, which apparently has to do with the Argentine President's plan to use currency reserves to repay debt rather than defend the peso, which was devalued in 2002. Meanwhile, in this country, Ben Bernanke faces opposition to his reappointment as chair, and the Journal article refers to similar issues in Korea and Japan.

Plenty of academic research suggests that central bank independence is associated with lower inflation and better economic performance. But there's less information about the optimal shape of bank bailouts, and there is no practical way to run a real experiment with different central bankers, which might be more convincing to laypeople.

Solow reviews Cassidy's book

Nobelist Robert Solow reviews John Cassidy's new book on "utopian economics" versus "real-world economics," sort of an overview of efficient markets theory and market failures for nonspecialists, with an application to the recent financial panic. A few weeks back, I wrote on Cassidy's piece in the New Yorker on the Chicago school, which I thought was a little too "light-versus-dark," to use some of Solow's terminology.

Solow points out on the last page of his review that some of the very interesting questions raised by recent events go unasked and unanswered. These include why it is that the "real-world" argument seems to have lost out to the "utopian" view even though it's almost by definition more true. "Are we for some reason more receptive to simple answers than to complex ones? Is it that, in the nature of the case, there is more money backing one side than the other? Perhaps the long postwar prosperity provided good growing conditions for conservative political and economic ideology." All interesting food for thought.

Feldstein assesses economic policies

It's hard not to agree uniformly with Martin Feldstein's views on Obama administration economic policies, but there's one thing I think he left out. An attractive element of the health insurance reform bill from an economist's perspective is or was the so-called excise tax on employer-paid plan contributions, a better description of which is a reduction or elimination of the tax preference for health insurance premia over wages. Unless we feel health insurance is under-utilized for those with employer-provider coverage, and I don't think we do, there's no reason to tilt the tax code toward premia and away from wages, as the current system is.

Feldstein also argues that permanent tax cuts are better than temporary tax cuts, and that incentives to replace aging equipment (investment goods) would have brought more bang for the buck. Even a lengthy temporary tax cut on capital goods would probably result in much stimulus. What is somewhat less clear is whether temporary tax cuts on wages or income have much impact on consumption spending.

A bank tax as a retroactive insurance fee

Douglas Diamond and Anil Kashyap make a forceful case for a tax on banks to recoup TARP losses. They propose a tax that is proportional to the size of each bank's bailout, a retroactive fee for insurance that should have been assessed prior to the crisis. A notable difference is that the fee is based on ex post realizations of risk rather than ex ante assessments, like insurance usually is, so it reduces the implicit risk sharing across banks that FDIC insurance would impart, for example.