Free exchange


  • Crash course

    How to interpret a market plunge

    by R.A. | WASHINGTON

    FOR much of the past two years, market watchers have had little to write about, apart from the passing of one stock-index milestone after another. The events of the past week, however, have shaken the financial world awake. A recent, upward zag in bond yields seemed to signal the arrival of a new theme in market movements. Stock prices confirmed it, and then some. Over the past week, American stocks have dropped about 7%, punctuated by a breathtaking, record-setting plunge on Monday. The Dow Jones stock index recorded its largest ever one-day drop, of more than 1,000 points. In percentage terms the decline, of more than 4%, was the biggest since 2011.

  • Dynamic do-over

    Republicans grouse about tax models they once supported

    by B.G. | WASHINGTON

    THEY have been at this a long time. In 1994 Republicans, newly in charge of Congress, held hearings on what would come to be called “dynamic scoring”. Bills, they said, should be evaluated using the predictive power of macroeconomic models. If the model predicts more GDP growth, then it could be inferred that the growth would produce more tax revenue. During the hearings, however, came an awkward moment. Alan Greenspan, then in charge of the Federal Reserve, told Congress that macroeconomic models were “deficient”. That is, their predictive power, though interesting, was not good enough to rely on.

  • Job-stealing robots

    Why scan-reading artificial intelligence is bad news for radiologists

    by R.A. | WASHINGTON

    THE better artificial intelligence gets, the greater the popular concern that smart machines will soon usher in a labour-market catastrophe. In Chandler, Arizona, Americans can at this moment hail a ride from a car without a human at the wheel. Web users can read high-quality, instant translations of foreign-language newspapers—no professional translation service needed. And developers of machine-learning technologies are moving rapidly to apply their tools across a vast array of medical tasks.

  • The Nobel prize in economic sciences

    Richard Thaler’s work demonstrates why economics is hard

    by R.A. | WASHINGTON

    RICHARD THALER has won the Nobel prize in economic sciences this year for his contributions to behavioural economics. It's a well-deserved prize and a clarifying one, as far as economics is concerned. For a very long time, economists hoped to treat individuals a bit like particles in physics, whose activity can be described by a few well-understood rules, which allow researchers to model and understand complex interactions between particles. The rules, they reckoned, were things like perfect information, forward-looking reasoning and rationality.

  • The 2017 Nobel prizes

    The Nobel in economics rewards a pioneer of “nudges”

    by K.K.

    NOT long ago, the starting assumption of any economic theory was that humans are rational actors who maximise their utility. Economists summarily dismissed anyone insisting otherwise. But over the past few decades, behavioural economists like Richard Thaler have progressively chipped away at this notion. They combine economics with insights from psychology to show how heavily economic decisions are influenced by cognitive biases. On October 9th Mr Thaler’s work was recognised at the highest level when the Nobel Committee awarded him this year’s prize in economics. Mr Thaler thus becomes one of very few behavioural economists to win the prize.

  • Not so novel

    Bitcoin is fiat money, too

    by B.G. | WASHINGTON

    FINANCIERS with PhDs like to remind each other to “read your Kindleberger". The rare academic who could speak fluently to bureaucrats and normal people, Charles Kindleberger designed the Marshall Plan and wrote vast economic histories worthy of Tolstoy. “Read your Kindleberger” is just a coded way of saying “don’t forget this has all happened before”. So to anyone invested in, mining or building applications for distributed ledger money such as bitcoin or ethereum: read your Kindleberger.

    Start with A Financial History of Western Europe, in which Kindleberger documents how many times merchants in different centuries figured out clever ways of doing the exact same thing.

  • Unwinding QE

    The case against shrinking the Fed’s balance-sheet

    by H.C. | WASHINGTON, DC

    AS EXPECTED, the Federal Reserve announced on September 20th that it will soon begin reversing the asset purchases it made during and after the financial crisis. From October, America’s central bank will stop reinvesting all of the money it receives when its assets start to mature. As a result, its $4.5trn balance-sheet will gradually shrink. However, the Fed did not give any clues as to what the endpoint for the balance-sheet should be. This is an important question. There are strong arguments for keeping the balance-sheet large. In fact, it might be better were the Fed not shedding any assets at all. 

  • America’s labour market

    Is there a wage growth puzzle in America?

    by H.C. | WASHINGTON, DC

    TODAY’S labour market report showed that the American economy created 156,000 net new jobs in August. That was a bit less than expected, but payrolls are still growing comfortably faster than the working-age population. Despite having created over 2m jobs in the last year, pushing unemployment below 4.5% for the last five months, wage growth remains muted, at around 2.5%, compared to more like 3.5% the last time unemployment was comparably low. In a recent article for the print edition, I analysed one potential explanation for weak wage growth: retirements of high-earnings baby-boomers.

    Scott Sumner has taken issue with the premise of my piece. He says there is no puzzle at all.

  • Budgetary crystal balls

    The hubris of ten-year budgets

    by B.G.| WASHINGTON, D.C.

    IN February of 2001, Alan Greenspan, then still the chairman of the Federal Reserve, and still called the “Maestro”, testified to the Senate Budget Committee. The committee wanted to get started on the tax cuts George W. Bush had promised during his campaign. Mr Greenspan gave them his qualified blessing, with an argument that now sounds incredible: he was worried that America would pay down its debt too soon. 

    That week the Clinton administration’s Office of Management and Budget had released its final ten-year budget projections. Firms had just completed several years of capital investments in desktop computers, and workers had become more productive.

  • Money talks

    Podcast: Goodbye, Benito


    Brazil’s rigid labour market regulations were transplanted wholesale from Benito Mussolini’s Italy back in 1943. Now President Michel Temer has approved an overhaul. Will it encourage job creation? Also, an exorcist in Paris fighting “bad spirits”. And why President Trump is playing hardball in renegotiating NAFTA. Hosted by Andrew Palmer.

  • Money talks

    Podcast: Vorsprung durch Angst


    Germany is admired for a stable economy and holding on to blue-collar jobs but derided for its persistent trade surpluses. Our economics editor John O’Sullivan examines what Chancellor Merkel’s government might do next. Also, how “total immersion” could drive the masses to virtual reality. And why banks are de-risking to avoid penalties. Hosted by Simon Long.


  • Money talks

    Podcast: The Italian bailout job


    Italy has been forced to bail out two banks at a cost of as much €17bn euros ($19 bn). Is that the end of the bleeding in Italy's financial sector? Also, as the iPhone turns ten, we look at how Apple is evolving. And Catherine Mann, Chief Economist at the OECD, tells us how to government can help workers made jobless by globalisation. Hosted by Simon Long.

  • Immigration economics

    A new paper rekindles a tiresome debate on immigration and wages

    by W.Z.

    WHAT effect do immigrants have on native wages? It’s perhaps one of the most important questions of labour economics. It's also one that is largely unanswerable. The problem is that it's almost impossible to separate cause and effect. If a country with high rates of immigration also sees strong wage growth, we can’t assume that immigrants are boosting wages—it may well be the case that the migrants are choosing to move to places with stronger economies.

    One approach to getting around this problem is to find a natural experiment in which either the supply of or demand for labour changes exogenously.

  • Money talks

    Podcast: Super Mario to the rescue

    by The Economist

    As the European Central Bank meets in Estonia this week, is it time for Mario Draghi to withdraw support from the Eurozone economy? Emerging Markets Editor Simon Cox on why the BRICs label is still relevant. And, how investors are taking care of the planet. Simon Long presents

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