Hartar Blog

Robert Shiller warns us in the New York Times about the potential risks of high stock market valuations in the US. According to Shiller "the United States stock market looks very expensive right now". Brad DeLong and Dean Baker disagree with Shiller and argue that stock prices might look higher than historical averages but this could be ok given other changes in the economic environment. Here is a restatement of their debate (and I will be repeating arguments I have made before ): Shiller's concern comes from the fact that price-to-earning (PE) ratios in the US are high by historical standards. Using his own measure, they stand at above 25 which is much higher than the 15 level that was common before the massive 2000 bubble that took that ratio all the way to 44. There is no disagreement about this fact. Where Brad DeLong and Dean Baker disagree is in how relevant history is an indicator of what constitutes the right level for the PE ratio. The easiest way to think abou...

Here is a thought experiment: what if the US economy entered a recession next month? Would it be too early for a recessions? How would it compare to previous recessions? And what stories we would tell to explain why the recession happened? Let's start counting months using the two phases of the business cycle as defined by the NBER business cycle dating committee. How long is the current expansion? The current expansion started in June 2009, which makes it already 62 months. Compared to all the previous post-WWII expansions it is already above average (60.5 months). Another way to look at it is to realize that we are only one year away from reaching the length of the previous expansion (73 months). It is true that we are still far from reaching the 92 or 120 months of the previous two, but these were two of the largest expansion the US has ever seen. So for those who like to think about expansions and recessions in terms of length and they have the idea that crisis happen with a ...

In today's Financial Times, Matteo Renzi, Italy's primer minister defends the pace of Italian reforms. In doing so he responds to comments by Mario Draghi last week that the pace of structural reform in Italy was responsible for the low GDP growth figures. From the FT interview : I agree with Draghi when he says that Italy needs to make reforms but how we are going to do them. So no disagreement between Draghi and Renzi on the need for structural reforms in Italy. The fact that improvements in regulation, labor markets, competition can increase growth rates in Europe is undisputed. The real debate is about the right timing and speed of those reforms. Here Renzi disagrees with Draghi. I will decide, not the Troika, not the ECB, not the European Commission,” he said. “I will do the reforms myself because Italy does not need someone else to explain what to do.” But beyond the question of who decides on what are the appropriate reforms and at what pace they should be done, I find t...

Simon Wren-Lewis in one of his latests posts dismisses the idea that the pre-recession UK economy was in an unsustainable debt-fueled boom. The argument, which I have made before in earlier posts , is that focusing only on the path of debt can give a misleading picture of the sustainability of growth or spending. Wren-Lewis presents data for the UK showing that the large increase in debt in the UK prior to 2007 was matched by an increase in the value of the assets that UK households held so that net wealth was indeed increasing (despite the increase in borrowing). The role of housing prices is key to understand these developments. Wren-Lewis argues that in the case of the UK, because of a combination of lower interest rates and limited supply, housing prices are trending upwards. The simplest way to understand the argument is to think about two alternative scenarios when it comes to the purchase of housing services: renting versus borrowing to buy the house (no rent is paid in the fut...