Trichet vilseleder om EMU och USA
Rolf Englund blog 14 juni 2011

The tragedy of the Euromess is that the creation of the euro was supposed to be the finest moment in a grand and noble undertaking: the generations-long effort to bring peace, democracy and shared prosperity to a once and frequently war-torn continent.
But the architects of the euro, caught up in their project’s sweep and romance, chose to ignore the mundane difficulties a shared currency would predictably encounter
Instead, they engaged in magical thinking, acting as if the nobility of their mission transcended such concerns.
Paul Krugman, New York Times, January 12, 2011
En lysande artikel

On Sept. 24, 1996, Fed Governor Lawrence Lindsey suggested the U.S. central bank might consider trying to rein in stocks "while the bubble still resembles surface froth."
The previous day, the Standard & Poor's 500 Index had closed at 687 points for a gain of 18 percent in 12 months.
Mark Gilbert, 1/6 2006(Bloomberg)

Lawrence Lindsey, the most influential member of President George W. Bush's economic team
Reginald Dale, International Herald Tribune, July 20, 2001

When world leaders gather Friday for the Group of Eight summit meeting in Genoa, the most influential member of President George W. Bush's economic team will be missing.

Lawrence Lindsey, Mr. Bush's chief economic adviser and mastermind of his $1.35 billion tax cut, will be staying home to keep a close eye on the rickety U.S. economy and world financial markets.

Mr. Lindsey has already briefed Mr. Bush on what to say in Genoa, where he hopes that the closest U.S. allies will endorse pro-growth, free-trade policies to help out the ailing world economy. As for the United States, the chances of a recession in the coming months are small, he says.

nejtillemu.com

Bush's economic team
Financial Times 2000-12-20

Having assembled most of his top foreign policy aides earlier this week, President-elect George W. Bush has begun to turn his focus on another critical element of his new administration: his economic team.

But whoever is appointed to these high-profile economic posts will have to deal with a group of advisers who have spent more than a year with Mr Bush during his election campaign.

The group, headed by Lawrence Lindsey, former Federal Reserve governor, has not only had Mr Bush’s ear, but is also likely to have wide influence on the new president’s first budget, which must be presented to Congress only weeks after assuming office.

It is a situation similar to that faced by Bill Clinton eight years ago when he was forced hurriedly to turn campaign rhetoric into legislative proposals.

Mr Lindsey’s influence over Mr Bush’s economic thinking - which was not as developed as Mr Clinton’s when he first sought the presidency - is substantial.

Indeed, Mr Bush’s continued insistence on pushing his across-the-board tax cut is at least in part attributable to Mr Lindsey, a strong advocate for over a decade of reducing marginal tax rates.

Although conservatives in Congress continue to grumble about the names floated as Mr Bush’s potential pick for Treasury - most recently Paul O’Neill, politically centrist chairman of Alcoa - the team assembled by Mr Lindsey comes from the anti-regulatory, tax-cutting wing of the Republican party.

Mr Lindsey himself, described by one economist as a ”recovering supply-sider”, first made a name for himself in Washington as a defender of President Ronald Reagan’s tax cuts, most prominently in his 1990 book, The Growth Experiment.

He is a stark contrast to the top economic adviser to former President George Bush, Richard Darman, director of the Office of Management and Budget (OMB), who is widely reviled by conservatives for convincing Mr Bush senior to raise taxes in order to shrink federal budget deficits.

In addition, many on Mr Lindsey’s team come from Stanford University’s Hoover Institution, a think-tank known as a gathering place for former Reagan officials, including George Shultz, Mr Reagan’s secretary of state, and Edwin Meese, attorney general.

Three of the most prominent Hoover scholars in Mr Lindsey’s circle during the campaign - Michael Boskin, John Cogan and John Taylor - have all been mentioned for top spots in the administration, perhaps OMB director, and all have strong conservative credentials.

Mr Boskin is the most prominent of the three, having chaired the president’s Council of Economic Advisers under Mr Bush senior, where he raised the profile of the panel considerably.

Despite his association with the moderates and a reputation as a strong technical economist, Mr Boskin is also a strong advocate of tax cuts.

”He’s ideologically technical,” said Stan Collender, head of the federal budget consulting group at Fleishman-Hillard. ”Yes, he is a technical economist, but clearly he comes from the conservative wing of the Republican party.”

Mr Taylor is one of the architects of Mr Bush’s $1,300bn tax cut proposal and is also firmly in the tax-cutting wing of the party, having convinced former Republican Senator Bob Dole to adopt a similar plan during his 1996 bid for the White House.

Another veteran of the economic team of former President Bush, Mr Taylor is also a highly regarded economist specialising in monetary policy, where he has pushed for objective standards for interest rate shifts by the Fed.

Mr Cogan is said to be Mr Bush’s top choice for OMB director - and, as a veteran of Mr Reagan’s OMB, a strong conservative - but he has reportedly withdrawn his name, vowing to stay in California with his large family.

Among the non-Hoover aides, the most prominent is Timothy Muris, a George Mason University law professor who has risen quickly through the Bush ranks and is now a top official in the transition team.

Although an expert in antitrust law and a potential Justice Department appointee, Mr Muris has been mentioned for the OMB position and is seen as a strong opponent of government interference in the economy.

FT, July 15, 1999 This time he is the chief economic policy adviser and co-ordinator to George W. Bush, governor of Texas and runaway favourite for the Republican nomination for next year's presidential election.

The cheerful and erudite Mr Lindsey is the man picked by the governor to put solid economic flesh on the bones of Mr Bush's "compassionate conservatism" - the moderate brand of inclusive Republicanism that many in the party fervently hope will take them back to the White House.

Mr Lindsey's so far short, but distinguished, career as a professional economist, White House adviser to George Bush senior and member of the board of governors of the Federal Reserve suggests he is firmly in the mainstream of conservative economic thinking. Though he is emphatic that his views do not necessarily prefigure Mr Bush's economic platform, the outlines of a Bush budget plan are visible.

He favours large tax cuts, and attacks President Bill Clinton's proposals to use vast budget surpluses in the next decade to "save" Social Security, the public pension scheme, and Medicare, the health insurance system for the elderly. "Mr Clinton announced a trillion-dollar surplus and then said he was giving $55bn back to the American people," he says. "Very generous."

He wrote a book defending the tax cuts of the Reagan presidency, and he supports at least a partial privatisation of social security.

Mr Lindsey pours scorn on the notion that Mr Clinton's Democrats should receive any credit for the surging economy. He argues the structural changes made to the US economy in the 1980s should take the credit.

In any case, as he argued in his most recent book, Economic Puppetmasters, an overview of global economic leadership, he believes the US economy looks increasingly as though it is riding high on an over-inflated asset bubble.

But if the US is in the throes of an inflationary conflagration, would not a big tax cut merely add fuel to the flames?

Mr Lindsey argues that over-emphasis on fiscal restraint puts greater pressure on the Federal Reserve to keep the economy moving. In any case a tax cut may prove to be necessary if the bubble bursts and recession follows.

On international economics, he is clearly not a great admirer of the International Monetary Fund and suggests more reform of its structure and policies may be necessary. And he says he would be more attuned to the problem of "moral hazard" in international bailouts than Mr Clinton's Treasury team seems to have been.

U.S.'s Fiscal Union Is Lesson for Europe
If Illinois goes bust, it is likely Illinois will go bust alone, says Mr. Ang.
If Greece goes bust, it's likely Greece will go bust along with other European countries.
David Wessel, The Wall Street Journal's economics editor, December 15, 2011

The U.S. has a fiscal union. Through Washington, money moves from taxpayers in Connecticut to the unemployed in California with less uproar than money goes from Germany to Greece. Workers move freely among the 50 U.S. states. Differences in inflation rates among states don't persist as they do among European countries. Nearly all U.S. states already are required, often by their constitutions, to balance budgets annually (though that doesn't stop them from making unfunded pension promises).

But as in Europe, the states share a currency. Each borrows on its own without explicit federal backing. And borrow they do: The U.S. municipal-bond market totals $2.9 trillion.

Mr. Ang offers two competing hypotheses. (Sigh.)

No matter how bad California's debt mess, perhaps no one fears the dollar-union will disintegrate.

Or maybe investors are certain Washington would ride to the rescue of a failing state; not sure Germany would do the same.

Full text

News

EMU, an American view

Financial Times 1996-11-28

Being an American, I cannot appreciate the historical and political motivations which seem to be the main thrust behind European monetary union.

I also firmly believe this is an issue for the people and parliaments of Europe to decide, and thus one on which Americans and American political institutions should avoid taking policy positions.

But as a US central banker responsible for the world's largest currency union, I can provide an informed perspective on some of the economic challenges in managing a continent-wide currency union.

In any dynamic modern economy the size of the US or the European Union there are bound to be significant regional differences in economic performance.

Economic policy tries to assuage such differences and set up automatic stabilising mechanisms by which they become self-correcting.

Movements in exchange rates can act as such an automatic stabiliser.

The exchange rate varies cyclically as real interest rates depress the attractiveness of financial assets in a slumping economy and boost those in an overheating one.

The deterioration in the real exchange rate provides an injection to the weak economy in the form of export demand while the appreciation in the currency of the fully expanding economy helps reduce excess demand.

Under a single currency, the stabilising process must find an alternative mechanism.

In a depressed economy, one such mechanism is a boost in the attractiveness of fixed investment through a deterioration in the prices of real assets.

In an economy where monetary policy is pursuing long-term price stability, this would require a decline in nominal asset prices.

Such price declines are quite disruptive economically and tend to damage financial services businesses by reducing the value of collateral underpinning their lending.

The US experienced such difficulties in the 1980s and l990s. Examples include the fall in asset prices in Texas and Oklahoma after the oil- price collapse of the mid-1980s, the end of the so-called Massachusetts miracle in the late 1980s and the decline in Californian property prices in the early 1990s.

Where there are many different currencies, much of the decline in relativeasset prices would lead to exchange rate adjustments rather than nominal price falls.

So, if there had been such a thing as a "California dollar", the nominal decline in Californian property prices in the early 1990s might have been as great in terms of US dollars, but substantially less in the local California currency.

In the absence of exchange rate variations between US regions, the automatic stabilisation of regional economic differences relies on two other mechanisms: labour mobility and fiscal transfers.

The US is characterised by an extremely mobile workforce.

The US Census Bureau estimates that roughly 17 per cent of all Americans move in a typical year and 3 per cent of the national population, some 7.7m people, change their state of residence.

This provides a major part of the interregional adjustment in the US economy.

For example, during California's recent economic difficulties between 1990 and 1994, for example, nearly 1.2m people left the state.

This led to a rapidly expanding labour force for booming areas of the west.

For example, Utah added 200,000 jobs, a 24 per cent increase in the same period, and Colorado added 300,000 jobs.

Not only are regional differences mitigated by this kind of mobility, but the beneficial effects show through in a relatively high level of output and low level of unemployment.

In Europe, cross-national migrations simply do not approach this magnitude.

The EU has taken dramatic steps towards ending the formal barriers which existed for citizens of the member states, but significant informal barriers remain.

Linguistic and cultural differences no doubt are major impediments to widescale migration between EU member states.

Over time, one might expect these differences to diminish. But in the short run Europe simply cannot rely on labour force mobility to stabilise regional economies to the same extent as the US.

The second major source of inter-regional economic stability in the US comes from automatic changes in fiscal transfers between the regions and central government.

The progressive tax system provides most of this adjustment: because the tax take is closely related to income levels, regions in recession find that their net fiscal positions change rapidly through the cycle.

For example, when the California economy was booming during the period 1987-91, the state provided nearly 17 per cent of marginal federal tax revenues, while driving its share of tax receipts up from 12 per cent to 13.4 per cent. From 1991 to 1994, the state's share of marginal federal revenue fell to just 8 per cent and its share of the national tax burden declined to 12.5 per cent.

These differences are quite significant. Had the 1991 tax share of California stayed constant, Californians would have paid $11bn more in taxes in 1994 - or $350 per capita.

In the New England recession of the late 1980s, the automatic fiscal stabilising effect was even greater, amounting to $550 per capita.

These payments can amount to 1½ to 2 per cent of personal income. One might equate this to an automatic tax cut in the UK of between £10bn and £12bn. (110-130 miljarder kronor)

It is important to stress these changes are automatic and stem from existing fiscal institutions.

Discretionary fiscal policy can augment these effects.

But the efficacy of such discretionary policies often suffers from a variety of lags in perception, decision-making and disbursement.

Just as the stabilising properties of exchange-rate variations are automatic, the stabilising alternatives to these variations should also occur without requiring action by decision-makers.

In comparison with the US Europe has no such automatic fiscal transfer mechanism.

European expenditure programmes do involve some transfers of resources. But they are not deliberately countercyclical in their effects or even in their intent.

Under the proposed stability pact to stop members of the single currency running large deficits, discretionary policy cannot be used to mitigate regional economic variations.

In sum, a review of the methods for carrying out the stabilisation function in a currency zone indicates that the US has developed institutions to substitute for the lack of exchange-rate variations between its regions.

Europe does not have such alternatives.

But to say that this is true now does not mean that this will always be the case, as economic convergence and institution-building continues apace.

Se även Nils Lundgrens särskilda yttrande

March 8, 1999 Arranged Marriage

By Lawrence B. Lindsey | Forbes Global Business & Finance Monday, March 8, 1999

After the briefest of honeymoons, the euro soon began sinking against the U.S. dollar in world currency markets. Many skeptics of the marriage of the 11 Euroland currencies thought the groom (the rock-hard German mark) and the bride (la belle franc Française) were incompatible, especially since the bride brought her weak sisters (lira and peseta) into the marriage. Even though the whole family worked to make them fiscally fit and attractive by the wedding date, just one month after the wedding the Italians were put on notice that their fiscal health was slipping. Behind these problems lies a tension common to most currencies: a conflict between central bankers and politicians.

Full text article

Trichet vilseleder om EMU och USA
Rolf Englund blog 14 juni 2011

The tragedy of the Euromess is that the creation of the euro was supposed to be the finest moment in a grand and noble undertaking: the generations-long effort to bring peace, democracy and shared prosperity to a once and frequently war-torn continent.
But the architects of the euro, caught up in their project’s sweep and romance, chose to ignore the mundane difficulties a shared currency would predictably encounter
Instead, they engaged in magical thinking, acting as if the nobility of their mission transcended such concerns.
Paul Krugman, New York Times, January 12, 2011
En lysande artikel

More about EMU

Home