A tribute to Ben Bernanke, sung to the tune of Rudolph the Red-Nosed Reindeer. University of Chicago professor Anil Kashyap unveiled this Friday at economists’ big annual conference.

The Great Snowy Owl Irruption

10626824625_5a69c27fb3_bPhoto Credit: FannyBanny1 via Compfight cc

Snowy owls are popping up all over the eastern United States and Canada. One even made it to Bermuda.

Biologists aren’t sure why. Perhaps a summer lemming boom fed many more snowy owlets than usual?

Whatever the reason, remarkable numbers of Hedwig’s kin have come south. If you’d like to see one in the wild, now is the time. Keep an eye out at airports, the beach, fields, and other open areas that remind owls of the tundra. But they could show up anywhere, like this one at a Maryland McDonald’s.

For more info, check out this e-Bird summary and a zoomable map of reported sightings.

P.S. I took a little break from blogging for an exciting personal project. Hope to do more in the new year.

Congressional negotiators are trying to craft a budget deal by mid-December. Fareed Zakaria’s Global Public Square asked twelve experts what they hoped that deal would include. My suggestion: it’s time to fix the budget process:

Odds are slim that the budget conference will deliver anything big on substance. No grand bargain, no sweeping tax reform, no big stimulus paired with long-term budget restraint. At best, conferees might replace the next round of sequester cuts with more selective spending reductions spread over the next decade.

Those dim substantive prospects create a perfect opportunity for conferees to pivot to process. In principle, Congress ought to make prudent, considered decisions about taxes and spending programs. In reality, we’ve lurched from the fiscal cliff to a government shutdown to threats of default. We make policy in the shadow of self-imposed crises without addressing our long-run budget imbalances or near-term economic challenges. Short-term spending bills keep the government open – usually –  but make it difficult for agencies to pursue multiyear goals and do little to distinguish among more and less worthy programs. And every few years, we openly discuss default as part of the political theater surrounding the debt limit.

The budget conferees should thus publicly affirm what everyone already knows: America’s budget process is broken. They should identify the myriad flaws and commit themselves to fixing them. Everything should be on the table, including repealing or replacing the debt limit, redesigning the structure of congressional committees, and rethinking the ban on earmarks.

Conferees won’t be able to resolve those issues by their December 13 deadline. But the first step to recovery is admitting you have a problem. The budget conferees should use their moment in the spotlight to do so.

P.S. Other suggestions include investing in basic research, reforming the tax system, and slashing farm programs. For all twelve, see here.

The Council of Economic Advisers just released an interesting paper examining the macroeconomic harm from the government shutdown and debt limit brinksmanship. To do so, they created a Weekly Economic Index from data that are released either daily or weekly (and weren’t delayed by the shutdown). These data include measures of consumer sentiment, unemployment claims, retail sales, steel production, and mortgage purchase applications.

The headline result: They estimate that the budget showdown cost about 120,000 jobs by October 12.

Looking ahead, I wonder whether this index might prove useful in identifying future shocks to the economy, whether positive or negative. As the authors note:

In normal times estimating weekly changes in the economy is likely to detract from the focus on the more meaningful longer term trends in the economy which are best measured over a monthly, quarterly, or even yearly basis. But when there is a sharp shift in the economic environment, analyzing high-frequency changes with only a very short lag since they occurred can be very valuable.

P.S. I am pleased to see CEA come down on the right side of the “brinksmanship” vs. “brinkmanship” debate.

Eugene Fama, Lars Peter Hansen, and Robert Shiller won the Nobel Prize in Economics this morning for their work studying asset prices. In one sense, they are a motley trio: Fama is famous for emphasizing efficient markets, Shiller for emphasizing investor psychology and inefficient markets, and Hansen for high-tech econometric techniques that are used well beyond finance. The unifying theme is their shared interest in understanding the predictability, if any, of asset prices.

The Royal Swedish Academy of Sciences posted an accessible summary of their work. Here’s the intro:

There is no way to predict whether the price of stocks and bonds will go up or down over the next few days or weeks. But it is quite possible to foresee the broad course of the prices of these assets over longer time periods, such as, the next three to five years. These findings, which may seem both surprising and contradictory, were made and analyzed by this year’s Laureates, Eugene Fama, Lars Peter Hansen and Robert Shiller.

Fama, Hansen, and Shiller have developed new methods for studying asset prices and used them in their investigations of detailed data on the prices of stocks, bonds and other assets. Their methods have become standard tools in academic research, and their insights provide guidance for the development of theory as well as for professional investment practice. Although we do not yet fully understand how asset prices are determined, the research of the Laureates has revealed a number of important regularities that are helping us to arrive at better explanations.

The predictability of asset prices is closely related to how markets function, and that’s why researchers are so interested in this question. If markets work well, prices should have very little predictability. This statement may seem paradoxical, but consider the following: suppose investors could predict that a certain stock would increase a lot in value over the next year. Then they would buy the stock immediately, driving up the price until it is so high that the stock is no longer attractive to buy. What remains is an unpredictable price pattern, with random movements that reflect the arrival of news. In technical jargon, prices then follow a “random walk.”

There are, however, reasons why prices may follow somewhat predictable patterns even in a well-functioning market. A key factor is risk. Risky assets are less attractive to investors, so on average, a risky asset will need to deliver a higher return. A higher return for the risky asset means that its price can be predicted to rise faster than for safe assets. To detect market malfunctioning, then, one would need to have an idea of what a reasonable compensation for risk ought to be. The issue of predictability and the issue of normal returns that compensate for risk are intertwined. The three Laureates have shown how to disentangle these issues and analyze them empirically.

You’ve probably heard that Treasury will hit the debt limit on October 17 and soon thereafter it won’t be able to pay all of America’s bills. That second part is true: Congress needs to act soon—preferably before the 17th—so Treasury doesn’t miss any payments. But the first part isn’t: Treasury actually hit the debt limit way back on May 19.

So how did Treasury keep paying our bills? Extraordinary measures.

When money gets tight, Treasury uses several accounting gimmicks and cash flow sleights of hand—the extraordinary measures—for extra financing. The easiest to explain involves the G-Fund, which is offered to federal employees through their equivalent of a 401(k) plan. As its name implies, that fund invests in government bonds. But the Treasury Secretary has a special power: he can replace those bonds with IOUs. I kid you not. One day the G-Fund has Treasury bonds, and the next it has IOUs. Those IOUs don’t count against the debt limit, but they will eventually be repaid with interest once the debt limit gets increased. Employees don’t lose anything, and Treasury gets some extra financing room.

Such budget gimmickry used to inspire outrage. In 1995, pundits accused Treasury Secretary Robert Rubin of violating his fiduciary duty and robbing federal employees when he did this. Today, the same action generates nary a peep; stuffing the G-fund with IOUs is standard operating protocol.

So it is with the other extraordinary measures (for a full list, see here). Once extraordinary, they are now merely ordinary. No one takes the debt limit seriously until the extraordinary measures are running on fumes, as they are today.

That’s what makes a new proposal from House Republicans intriguing. News reports indicate that they want to permanently eliminate some extraordinary measures as part of a debt limit deal.

At first glance, you might worry that killing off those measures would undermine the financing buffer Treasury relies on in times of fiscal discord. But here’s the thing: Our leaders already take that buffer for granted. They know the gas gauge is flashing empty, but they don’t pull into the next station. Instead, they ask the fuel engineers at Treasury how much further we can make it. When the engineers say 30 miles, we drive another 29 ½.

Eliminating the extraordinary measures wouldn’t change the unpleasant brinksmanship of the debt limit. It would merely shift the focus from the day extraordinary measures are exhausted to the day we first hit the debt limit. In return, it would increase the transparency of our goofy budget process and would rid us of the embarrassingly casual use of fiscal gimmicks.

That’s a trade worth considering. But the gains must be balanced against some caveats.

First, the extraordinary measures might be providing some fiscal buffer that remains unused, even now. For example, the Bipartisan Policy Center recently noted that an aggressive reading of the law might allow the Treasury Secretary to squeeze a bit more money out of one measure, known as the debt issuance suspension period. As BPC explains, that would be a dubious maneuver, but it would be better than default. So perhaps we could be giving up a bit of flexibility.

Second, eliminating the extraordinary measures would reduce the time the next debt limit increase will last. Early this year, Congress raised the debt limit through May 18, but the extraordinary measures got us well into October. Without those measures, a similar increase now, perhaps to November 22, would come with no extra buffer. That’s a plus for transparency, but a minus if you want to avoid the debt limit as long as possible.

Third, for the same reason, eliminating the extraordinary measures would make it easier for Congress to time when the debt limit comes to a head. That could be a plus or a minus depending on your view of congressional intentions.

Finally, our political system might need several months of a blinking “empty” light to get people ready to act. My sense is that most people are now inured to the flashing and don’t even realize we hit the debt limit months ago. But maybe the flashing still serves some purpose.

In short, the idea of eliminating the extraordinary measures is an interesting addition to the debt limit debate. Those measures provide much less flexibility than they used to. As with star ballplayers, there is some logic to retiring extraordinary measures once they’ve become merely ordinary. But the idea requires more tire-kicking to determine how any costs stack up against the benefits of a clearer, less gimmicky budget process.


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