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What We Read Today 20 February 2016

Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries (and sometimes longer ones) of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.

This feature is published every day late afternoon New York time. For early morning review of headlines see "The Early Bird" published every day in the early am at GEI News (membership not required for access to "The Early Bird".).

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Every day most of this column ("What We Read Today") is available only to GEI members.

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Other Scientific, Health, Political, Economics and Business Items of Note plus Miscellanea

Topics today include:

  • Clinton Edges Sanders in Nevada

  • What's Dangerous about the Apple Encryption Case

  • What's the Fuss about Bernie's Economics Plan?

  • Poverty of Neoclassical Economic Analysis

  • A New Employment Depression

  • Opportunity to Reform Economics

  • Should Economics be a Deductive Logic Discipline?

  • What Economists Think about Negative Interest Rates

  • Watch the Ted Spread

  • Emerging Markets Meltdown

  • 5,00 ISIS Militants in Europe (and They are NOT Refugees)

  • And More

Articles about events, conflicts and disease around the world

Global

  • Here's What Economists Think About Negative Policy Rates (Bloomberg)  Bloomberg surveyed 63 economists covering central banks in the euro area, Switzerland, Denmark, Sweden and now Japan where have been implemented. We found that rates below zero are thought to work better in smaller, open economies dealing with foreign exchange challenges rather than in larger economies hoping to boost growth or tackle falling prices.

neg.interest.rates.global

  • Ted Spread Shows Increased Credit and Default Risk (Financial Sense)  The price difference between three-month futures contracts for U.S. Treasuries and three-month contracts for Eurodollars having identical expiration months. The Ted spread can be used as an indicator of credit risk. This is because U.S. T-bills are considered risk free while the rate associated with the Eurodollar futures is thought to reflect the credit ratings of corporate borrowers.  The Ted spread has been continually rising for 3 years and has been spiking  recently.

Click for larger image at Financial Sense.

Click for larger image.
em.pain.schematic.600px

U.S.

"... results have two potential implications for bond markets. First, with output and employment already close to potential in the US and the UK, inflation there is likely to rise more than bond markets currently discount. Second, assuming that the hit to potential is truly one-off, potential growth should pick up modestly in coming years, and thus challenge the market’s view that we have entered an era of secular stagnation and permanently depressed real interest rates."

EU

Germany

  • German police justify handling of migrant bus incident (BBC News)  German police have defended their response to an incident involving a bus full of migrants which was surrounded by chanting protesters.  A video posted online shows some 100 hostile demonstrators surrounding the bus as it pulls up to deliver migrants to accommodation in eastern Germany.  Another appears to show police roughly dragging a young boy off the vehicle.  Police said they needed to get the migrants into the hostel quickly as the situation was tense.  The incident took place on Thursday night in the eastern village of Clausnitz, south of Dresden.

Russia

  • When it comes to Russia, it’s Munich all over again – again (Reuters)  It appears as if the world is right back where it was a year ago, when the West was in a similar position, trapped between its fear of a greater war and inability to confront a ruthless adversary. Last February, German Chancellor Angela Merkel went face-to-face in Munich with Russian President Vladimir Putin to negotiate a lasting ceasefire in Ukraine. 

Taiwan

  • Profitability of Taiwan's banks could weaken in 2016: Taiwan Ratings (Focus Taiwan)  In an environment where interest rates have been trending lower, Taiwan's banking sector is expected to face more challenges and see its profitability weaken in 2016, according to Taiwan Ratings, a local partner of U.S.-based Standard & Poor's.  To boost the local economy, the central bank cut its key interest rates twice late last year, which is expected to exacerbate pressure on the banking sector's interest spreads this year and hurt its bottom line, the ratings agency said.
     

Other Scientific, Health, Political, Economics and Business Items of Note plus Miscellanea

  • The Dangerous All Writs Act Precedent in the Apple Encryption Case (The New Yorker)  What happens when the government goes to court to demand that you give it something that you do not have? No one has it, in fact, because it doesn’t exist. What if the government then proceeds to order you to construct, design, invent, or somehow conjure up the thing it wants? Must you?

  • The Pious Attacks on Bernie Sanders’s “Fuzzy” Economics (New Republic)  David Dayen points out the terrible record of those who criticize the study by economist Gerald Friedman of the University of Massachusetts-Amherst which has a more favorable outlook for Bernie Sanders' economic proposals than others.  In that regard, see the next articles.  Dayen says:

Let’s not allow one subset of Democratic economists to take the high road of “evidence-based” mathematics when they’re all throwing darts at a board.

  • The Poverty of Neoclassical Economic Analysis (Ron Baiman, Chicago Political Economy Group, D&S Blog)  Good summary of those who have criticized the "liberal economists" who have criticized the Friedman analysis cited in the previous article.  Included is a graph which clearly shows the employment depression of the 21st century.  See also next article.

employment.depressions

Top Democratic economists don't think much of Bernienomics. He doesn’t care. (Mathew Iglesias, Vox)  A key factor in the Prof. Friedman analysis of Bernie Sanders' economic plan bears on the assumptions about employment over the next 10 years.  Sanders' plan has the objective of increasing the employment to adult-population ratio systematically back to the peak level of 2001.  The CBO analysis assumes the current ratio will decline even lower reached in 2010.

employment.rate.sanders.cbo

  • Letter to Krueger, Goolsbee, Romer and Tyson (James K. Galbraith)  JKG has contributed to GEI.  Prof. Galbraith criticizes the four economists for not supplying any analysis.  He then supports the methodology of Prof. Friedman as being "standard" and the results are "quite ordinary".  JKG also points out that Prof. Friedman is an on-record supporter of Hillary Clinton so inference of biased work to support the Sanders candidacy seems misplaced.  JKG says that Sanders is the only candidate who seems to have learned the lesson taught by Ronald Reagan:

What the Friedman paper shows, is that under conventional assumptions, the projected impact of Senator Sanders' proposals stems from their scale and ambition. When you dare to do big things, big results should be expected. The Sanders program is big, and when you run it through a standard model, you get a big result.

  • The economic crisis presents an opportunity to reform economics (Mint)  Economists Ha-Joon Chang and Robert Skidelsky suggest that the current disarray in the economics profession offers "an opportunity to step back and ask what has gone wrong with economics, and if there are changes that can bring the discipline closer to reality and allow its practitioners to find more effective answers to economic problems".  The focus of their review is economics has suffered from (1) a failure to mathematical modeling combined with (2) an inattention to history.  They quote Robert Solow:

    If the proper choice of a model depends on the institutional context—and it should—then economic history performs the nice function of widening the range of observation available to the theorist.  Economic theory can only gain from being taught something about the range of possibilities in human societies. Few things should be more interesting to a civilised economic theorist than the opportunity to observe the interplay between social institutions and economic behavior over time and place.

    The authors explicitly criticize:

    • Orthodoxy of "market fundamentalism";

    • Assumption of "extremely rational agents who processed information perfectly";

    • Insularity of economists among all social scientists;

    • Pursuit of becoming "the physics of the social sciences";

    • Homogenization of training of economists;

    • Control of professional publication by a few top editors;

    • Need to include "insights of psychology, sociology and anthropology while making alternative models";

    • Need to accept that "social context ... shapes [individuals]";

    • Need to recognize that "unlike the natural sciences, there are no universal laws of economics".

    Econintersect:  Something we would suggest could be important would be the use of mathematics to exclude simple relationships that economists have often sought to prove in the past.  Instead of establishing simplifying assumptions in an attempt to prove a relationship, just the opposite endeavor should be pursued:  evaluate models to demonstrate what they  do not prove.  In other words, change the emphasis of economic modeling from inductive reasoning (which has not worked very well at all) to deductive reasoning.  Use empirical observations to start eliminating things that are not proved.  Note:  This is not to say that relationships can be disproved - only that empirical evidence does not support them.  Progress along such a path will be incremental and results today are continually open to refinement by additional analysis tomorrow.  The path of economic science could become an expanding domain of contexts rather than confined domains of economic laws. 


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