Veronique de Rugy on France

The Rule of Law -- Not!

Via the WSJ, here is the view from a "secured (sic) creditor" of Chrysler:

"Like many others I made the mistake of buying what I believed was 'value,'" Mr. Gwin says, adding that investors who bought at the time believed the loans were worth more than their market price. "We did not contemplate having our first liens invalidated by a sitting president," he adds.

As the President intervenes in more and more industries, a key question is how he does it and what he is trying to achieve. Is he trying to reorganize insolvent firms while, as much as possible, preserving the rights of stakeholders as established under existing contracts? Or is he trying to achieve a "fair" outcome as he judges it, regardless of preexisting rules and agreements? I fear it may be the latter, in which case politics may start to trump the rule of law.

Chairman John

John Campbell is the new chairman of the Harvard economics department. Congratulations, John, and my condolences as well.

I have long thought that my biggest contribution to Harvard was being part of the team that recruited John to the university. As a coauthor of John early in his career, I knew a few years before the rest of the profession that he is both a great economist and a great human being. I am delighted that the leadership of our department will be in such capable hands over the next few years.

Miron on the Financial Crisis

A talk from Harvard's Jeff Miron.

Reis on Macro

Russ Roberts interviews Ricardo Reis.

Goolsbee versus Obama

The President:

Invoking the Sputnik Era, Obama Vows Record Outlays for Research

The President's adviser:

Does Government R&D Policy Mainly Benefit Scientists and Engineers?

by Austan Goolsbee

Conventional wisdom holds that the social rate of return to R&D significantly exceeds the private rate of return and, therefore, R&D should be subsidized. In the U.S., the government has directly funded a large fraction of total R&D spending. This paper shows that there is a serious problem with such government efforts to increase inventive activity. The majority of R&D spending is actually just salary payments for R&D workers. Their labor supply, however, is quite inelastic so when the government funds R&D, a significant fraction of the increased spending goes directly into higher wages. Using CPS data on wages of scientific personnel, this paper shows that government R&D spending raises wages significantly, particularly for scientists related to defense such as physicists and aeronautical engineers. Because of the higher wages, conventional estimates of the effectiveness of R&D policy may be 30 to 50% too high. The results also imply that by altering the wages of scientists and engineers even for firms not receiving federal support, government funding directly crowds out private inventive activity.

Fed staff goes negative

The FT reports:

Fed study puts ideal interest rate at -5%

The ideal interest rate for the US economy in current conditions would be minus 5 per cent, according to internal analysis prepared for the Federal Reserve's last policy meeting.

The analysis was based on a so-called Taylor-rule approach that estimates an appropriate interest rate based on unemployment and inflation.

A central bank cannot cut interest rates below zero. However, the staff research suggests the Fed should maintain unconventional policies that provide stimulus roughly equivalent to an interest rate of minus 5 per cent.