Procrastinators May Just Need to Temper Optimism

August 16, 2008, 10:14 pm

It probably isn’t news to anyone that people take longer to get things done than they think they will. Students, contractors and even some reporters show a tendency to dither up until the last minute, making hitting deadline into a real challenge that oftentimes doesn’t get met. But why?

If everybody was purely rational, deadline problems wouldn’t exist. Everyone would assess what they needed to do and carefully mete out their work in order to get it done on time. (Some such people do exist, of course, and the less said about them, the better.) Psychologists have dubbed this problem the “planning fallacy.”

Several economists have suggested that the problem has to do with preferences. Under that model, faced with a two day project, today my preference will be to do 30% of the work and do the remaining 70% tomorrow. Tomorrow, I will wish that I had done just the opposite — but it will be too late.

But research from economists Markus Brunnermeier of Princeton, Filippos Papakonstantinou of Imperial College London and Jonathan Parker of Northwestern University suggests that the real problem is an inherent optimism about how much work things take. It’s more pleasurable to think that a task will be easier to accomplish than it actually is, and so I let that pleasure guide me. Under the model, if people set intermediate deadlines for themselves, their optimism gets tempered and they perform better. But intermediate deadlines set by outsiders are more effective. Finally, the economists found that data from experiments and surveys on the planning fallacy fit their model.

Unfortunately, studying the planning fallacy didn’t prevent the economists from suffering from it themselves, says Mr. Brunnermeier. They expected to finish their paper long before they actually did. –Justin Lahart

Source: http://blogs.wsj.com/economics/2008/08/15/procrastinators-may-just-need-to-temper-optimism/

by Ronald in Economics Blog of The Wall Street Journal
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ECB and Fed: Worlds Apart?

July 3, 2008, 11:40 pm

The European Central Bank, as expected, raised interest rates a quarter point to 4.25% in a bid to attack inflation despite signs of weakening growth. The U.S. Federal Reserve, meanwhile, appears to be on hold for the coming months — despite rising inflation concerns — to give the economy more time to recover from the turmoil in housing, credit, labor and energy markets. Their divergence might be explained by the central banks’ mandates: the ECB is charged with maintaining price stability first, while the Fed aims to achieve low inflation and optimal growth at the same time.

Chart

But the difference in mandates or even economic circumstances between the U.S. and Europe don’t quite account for the divide, Deutsche Bank economists say in a research note this week titled “ECB is from Mars and Fed is from Venus.” As chief economist Peter Hooper explains, “The two central banks are reacting to relatively similar economic and financial circumstances as if they are from different planets, with the ECB’s approach akin to a frontal attack on inflation that the Roman god Mars would have approved of, while the Fed is being more cautious and patient, in a manner the goddess Venus would have endorsed.”

The Deutsche Bank economists say the divergence comes from the two regions’ different historical experiences in dealing with the shock from deflating asset prices and rising inflation.

In the United States: “The traumatic experience of the deflation and extreme levels of unemployment that occurred during the Great Depression in the 1930s – and the Fed’s mistakes during this period — play a prominent role in the discussion of monetary policy by both practitioners and academics. Accordingly, Fed policy makers have been very sensitive to the risk of asset price collapses and debt deflation (note, for example, the Fed’s reaction to the 1987 stock market crash, the [Long-Term Capital Management] crisis, and the burst of the dot-com bubble).”

In Europe: “Probably the most prominent economic trauma in Europe were Germany’s hyperinflation after World War I and currency reform after World War II. Throughout its existence the Bundesbank was extremely sensitive to inflation pressures, and willing to take significant risks with growth to keep inflation in check (note, for example, the Bundesbank’s reaction to the two oil shocks of the 1970s and its reluctance to follow the Fed in 1987). German sensitivity to inflation risks of course had a strong influence on the institutional design of the ECB and more recently on the implementation of the euro zone’s monetary policy.”

Of course, Fed officials in recent weeks have ratcheted up their talk about “vigilance” of inflation and inflation expectations. But most policy makers appear inclined to wait as long as they can to give their rate cuts of the last year a chance to work. And the ECB won’t necessarily be following today’s rate increase with more tightening. The Deutsche Bank economists say the the transatlantic policy divergence will diminish when weaker growth in Europe lowers fears at the ECB and even leads to rate cuts in 2009, while the Fed remains on hold. “What now looks like the beginning of a new transatlantic divergence of monetary policy,” they write, “will in our view eventually look like a blip in the time-tested relationship of the Fed leading and European central banks following.” - Sudeep Reddy

Source : http://blogs.wsj.com/economics/2008/07/03/ecb-and-fed-worlds-apart/

by Ronald in Economics Blog of The Wall Street Journal
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Is China Unfairly Blamed for Global Inflation?

February 20, 2008, 9:36 pm

With inflation on the march around the globe, the links between prices of goods in different countries are now getting lots of attention. Low-priced products from China have been given some of the credit for low global inflation in years past, but higher costs for labor and materials in China are also getting some of the blame for the current rise in prices.

But Tarhan Feyzioglu, of the IMF’s Beijing office, and Luke Willard, an economist for the OECD in Paris, doubt that changes in consumer prices in China have pushed prices up – or down – elsewhere in the world. They argue that China is not as big of a trading power as is sometimes thought, and that the countries consuming Chinese goods are not simply passive recipients of price pressures from abroad.

“Imports constitute around 15% of U.S. GDP and around 13% of that comes from China,” the authors write in an article in the latest issue of China & World Economy, an English-language journal published by the Chinese Academy for Social Sciences. On their back-of-the-envelope calculation, that means a 1 percentage point increase in China’s inflation rate should lead to an increase in U.S. inflation of 0.02 to 0.03 percentage points. Yet their comparison of historical price trends in China with those in both the U.S. and Japan found the actual effect was even smaller. This, they argue, shows the central banks were able to adjust interest rates to prevent a significant inflation shock from imported goods.

“It is estimated that something like half of total imports would need to come from China for a 1% Chinese price increase to translate into a very moderate 0.1% price increase in Japanese and U.S. prices,” the authors write. “For any noticeable effect on inflation, China would need to dominate international trade on a large scale.” –Andrew Batson

Source: http://blogs.wsj.com/economics/2008/02/20/is-china-unfairly-blamed-for-global-inflation/

by Ronald in Economics Blog of The Wall Street Journal
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Economists React: Fed Racing to Tie

January 31, 2008, 10:27 pm

Economists and others weigh in on the the Fed’s half-percentage-point reduction in interest rates.

We anticipate that Bernanke and his FOMC will continue with an aggressive course of rate cutting in order to boost economic growth. It’s looking less certain, however, that Fed action will be able to help the economy avert a recession. Think of the situation like this: the Fed is in a footrace with the economy, but their goal isn’t to win, it’s to tie. When the two racers are in step, the Fed can move and cut rates at a steady pace, so long as the decline in economic growth remains consistent with expectations. With recent volatility, however, the Fed has been forced to take aggressive action and, given the deterioration in economic conditions, further aggressive action seems likely. –Guy LeBas, Janney Montgomery Scott

A clear shift away from Greenspan era gradualism. Moreover, this sizable correction toward near-zero real (i.e., inflation adjusted) interest rates comes prior to conclusive evidence of the start of a recession… We expect to see a continuation of weak economic indicators in the remainder of the first quarter of 2008, leading to another cut in the Fed funds rate at the FOMC’s next scheduled meeting on March 18.–PNC

The hint here is that they think further easing will be much slower — markets permitting. –Ian Shepherdson, High Frequency Economics

This aggressive action suggests that, once inflation returns as a concern for this Committee, rate hikes could come more quickly than we have seen in the past. –Drew Matus, Lehman Brothers

Whether this more aggressive approach to monetary easing will prove sufficient to keep the economy out of recession is difficult to say, particularly given that monetary policy operates with long and variable lags and the credit crunch and the housing correction have yet to run their course. Much will depend on the health of the labor market and the ability of consumers to grow spending at a pace sufficient to offset weakness elsewhere in the economy. –Joshua Shapiro, MFR, Inc.

What happens next? This may not be the last move on the part of the Fed, but it will take additional very soft economic data to get more action. The key will be the jobs situation. The FOMC noted that there was “some softening in the labor markets”. We get the January employment report on Friday so we will see if that deterioration has continued. Before the next FOMC meeting on March 18th, we will also have seen the February jobs data as well as enough economic numbers to get a picture of first quarter growth. If those numbers are soft, look for another cut. However, I have consistently argued that we could skirt a recession and a 3.00% funds rate could be low enough to get the job done. –Naroff Economic Advisors

While the Fed certainly left the door open for further action, the policy assessment did seem to tilt toward reigning in expectations of significant additional action… We continue to look for the fed funds target to reach a trough of 2.50% during the first half of 2008. Moreover, the aggressiveness of the Fed’s response to date — together with pending fiscal stimulus, lower energy prices, and a likely surge in mortgage refinancing activity — reinforces our call for a rebound in economic activity during the second half of the year. –David Greenlaw, Morgan Stanley

The Fed can continue to cut rates with the expectation that domestic demand for goods and services will be modest and that core inflation should ease later this year. The risk to that assumption is that a decline in demand for services will be concomitantly with a fall in demand for commodities and energy. Thus, the risk that the committee is implicitly accepting is that inflation will cool along with global demand for basic inputs. Should this occur, the reflation gambit on the part of the Fed may succeed in stabilizing the economy. Should inflation not decline in an expected fashion or should output bounce back earlier than anticipated, then we may see the Fed begin to withdraw liquidity sooner than may be optimal for an economy recovering from both a financial and energy shock. Either way 2008 will be a very mean year for the FOMC. –Joseph Brusuelas, IDEAglobal

The FOMC may well cut the funds rate further, it’s more significant steps (and those of foreign central banks as well) will be directed towards keeping global credit markets functioning amidst the continuing fallout from the mortgage-backed mess that has yet to run its course. This is clearly a more daunting challenge and until confidence is restored along this front, lower interest rates are likely to be of limited effectiveness. –Richard F. Moody, Mission Residential

Compiled by Phil Izzo

Source: http://blogs.wsj.com/economics/2008/01/30/economists-react-fed-racing-to-tie/

by Ronald in Economics Blog of The Wall Street Journal
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Is GDP the Right Yardstick for Recessions?

January 12, 2008, 1:28 am

Source: http://blogs.wsj.com/economics/2008/01/10/is-gdp-the-right-yardstick-for-recessions/

Gross domestic product is the broadest measure of economic output but it’s not universally accepted as the right yardstick for how well the economy is doing. That was debated today on NPR’s On Point, where Robert Gordon of Northwestern University, a member of the academic panel that dates recessions, joined Allen Sinai of Decision Economics and Steve Liesman of CNBC to discuss the possibility of recession. The Wall Street Journal’s Greg Ip started off the discussion with a review of economic developments. (You can listen to the show here.)

Mr. Gordon later followed up in an email with his thoughts on why GDP is still an appropriate indicator for judging whether the economy is in recession, although the fact it was only available quarterly had, prior to 2001, been a barrier to its usefulness:

“It’s rare for me to disagree with Allen about anything, and you noticed that we converged during the hour — my modest degree of pessimism deepened in the direction of his.

“Our only remaining disagreement is his claim that real GDP is ‘obsolete’ as a business cycle indicator. He is correct that it doesn’t measure the pain that people feel, because of course it is just one aggregate number disguising that underneath, 20% of the population may be in great pain while another 60% may be doing moderately well and the other 20% may be doing very well. 20% of the American population can make a lot of noise and influence the media.

“Yes, real GDP does not measure the pain, but it is the right thing to look at to gauge whether the aggregate economy, 100% of the people, are experiencing a recession.

“Recall that real GDP began to recover in December 2001, and the NBER committee took two years after that to declare that the recession was over. A key disagreement within the committee was whether to look mainly at output measures (which were all recovering after late 2001), or to put weight on employment which continued to decline through mid-2003. [Stanford University’s] Bob Hall, the committee chairman, kept arguing that sizeable weight should be placed on employment, and I was the main voice for output, pointing out that an unusual surge in productivity growth (a good thing) explained the discrepancy between output and employment growth.

“Eventually I was able to persuade the committee after discovering that [Consultants] Macroadvisers was producing an index of monthly GDP that weighted together what was happening to the economy on a monthly basis in a much more sophisticated way than the four monthly indicators that the committee had traditionally used.”

by Ronald in Economics Blog of The Wall Street Journal
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