Does the crisis protect us from creating another bubble?

bubblesLast month, President Obama warned that “[w]hen wealth concentrates at the very top, it can inflate unstable bubbles that threaten the economy.” On August 10, he further cautioned that even in a slow-growth environment, we have to avoid the creation of “artificial bubbles.”

These warnings come after a prolonged period of historically low interest rates and the Federal Reserve’s unprecedented Quantitative Easing (QE) program. Although recent talk of tapering has sent bond yields up, the program has seen the central bank increase its balance sheet from $900 billion before the collapse of Lehman Brothers to $3.6 trillion. The S&P 500 index is chasing new highs and is up over 240% since its lowest point during the crisis, despite slow growth in the economy. Even Ben Bernanke hinted that low interest rates may incentivize risk-taking by financial institutions.

In this environment, fears about new bubbles are widespread. Some claim that—following an unhealthy pattern of artificial recoveries since the tech-bubble of the 1990s—the driving forces of the current recovery are again real estate and automobile sales. As these are mostly debt-financed, the argument goes, the recovery is fuelled by cheap credit and far from being structural. It is true that house prices have seen an impressive recovery, rising 15% year-on-year in June. Similarly, one can find a very high correlation between car sales and economy-wide growth figures. However, correlation does not imply causation. After 5 years of deleveraging, job uncertainty, and a significant reduction in net household wealth, it seems likely that buyers would postpone important investment decisions. The recovery in housing and automobile markets is therefore also a consequence of increased consumer confidence that results from an improved economic outlook, something that can be seen as a positive sign.

Others see bubbles in gold, investment in China, in emerging markets generally (though this risk might have been reduced after important capital outflows following the Fed’s announcement of tapering), treasuries, college tuition, and exchange-traded funds (ETFs). Another interesting example is the so-called “carbon bubble,” according to which oil-exploring firms do not factor in the possibility of government action on climate change, which could see two-thirds of fossil fuel reserves remain buried. Most convincing, along with Ben Bernanke’s concerns, is the argument that looks at the structural impact of central bank policy on the economy: while large corporations have access to cheap credit that boosts their profits and sends their share prices up; small firms cannot obtain loans at all, and sorely needed investment is postponed.

But does the current rise in stock prices really indicate a growing bubble? After the 2008 crisis, everyone can tell the tale: it all started with the housing bubble that turned into the subprime-mortgage crisis as loans turned sour. Because the financial sector was then forced to curtail lending, the global economy was pushed into a recession, which turned into a sovereign debt crisis in Europe as tax revenues declined and exposed structural imbalances that had been hidden by the bubble.

In hindsight, this is an easy story to tell, but people know little about what creates bubbles in the first place, and—more importantly—what drives investors to make such seemingly irrational decisions when, ex post, it is so easy to identify a “bubble”. As Harold L. Vogel writes, financial asset bubbles are broadly seen as inflations of price beyond what would be expected based on fundamental economic features alone. However, it is very difficult to identify what prices these fundamental features give rise to.

Economic research has produced many theories about the emergence of bubbles but so far, no model has been found to describe—or even predict—patterns of financial bubbles. Among the most debated issues are the assumptions of efficient markets and the rationality of actors. Although it might be rational for single investors to participate in bubbles when they expect others to remain in the market, Vogel rightly points out that the very idea of a bubble requires that there is a wave of irrationality that carries a majority of investment decisions in the excitement of the moment.

Several explanations for this irrationality have been investigated, and behavioral economics will have much to contribute to the debate over the coming decades. At the heart of the creation of a bubble seems to lay a tendency of humans to linearly extrapolate from past performance. Neurological research suggests that investors even override more cautious instincts to sell at times when they fear markets might crash. Furthermore, dynamic prospect theory posits that people change their very attitude to risks over time. The more they have already gained, the less risk-averse they become—implying a strong departure from rationality.

Overall, academic research suggests that a (limited) departure from the investor rationality and efficient markets hypothesis is warranted. Under conventional assumptions, statistical theory would suggest that daily market return amplitudes of 4% would only be observed once every 63 years (but it has been observed on several days in 2008). Clearly, markets do not always behave rationally.

The question that naturally follows is whether this is necessarily bad. Some claim that bubbles might actually spur much-needed technological investment that can drive future growth. Furthermore, bubbles might just be part of the economic cycle of boom and bust. After all, household wealth took a $5 trillion hit with the implosion of stocks in the 1990s, without causing anything like the current crisis.

But this does not square with the common narrative of the post-2008 financial crisis. Paul Krugman has argued that what makes this time different is the concentration of risk in the financial sector. The reason the burst of the bubble caused so much damage to the economy was that banks had to repair their balance sheets and therefore curtailed lending, which caused the economy to contract and the governments to bail out banks in order to prevent further damage. More worryingly, these bail-outs came with few strings attached, so that banks have no incentives to avoid similar behavior in the future.

Is this what we are witnessing right now? By historical standards, price-to-earnings ratios are normal, but some analysts claim that these are unsustainable because profits are held artificially high by low borrowing costs. While the profit-to-GDP ratio has historically been at 6%, it is currently at 10%, and Smithers & Company, a London-based market-research firm estimates stocks are overvalued by forty to fifty per cent compared to historic values. Counterarguments cite lower taxes, globalization (profit-to-GDP ratios are inadequate as companies make much of their profit abroad), and high unemployment (that allows companies to cut payrolls) as reasons for the relative surge in profits.

It comes in the nature of a bubble that it is quite difficult to realize when one is in it. Prolonged periods of low interest rates and QE certainly bear the danger of providing excess liquidity to financial speculators. With sluggish growth, investors are sitting on large piles of cash and seek returns, which can prepare an irrational environment prone to the development of bubbles. Although the stock markets are high, the money supply remains low, and there does not seem to be the same sense of euphoria that we have seen during earlier bubbles. Furthermore, one has to remember that central bank policies often follow a Taylor rule of monetary policy, which is highly dependent on economic performance—low interest rates therefore indicate, above all, bad economic performance. For the moment, the danger of a financial bubble does not seem to be imminent, but both the President and the Chairman of the Federal Reserve are right to keep an eye on financial markets as the economy gathers pace.

Posted by: Marvin Gouraud

Sources: Harold L. Vogel (2010) “Financial Market Bubbles and Crashes”, Bloomberg, U.S. Census, Financial Times, Forbes, Wired, Huffington Post, The New York Times, The Guardian, The New Yorker, NBC News, Leir Center for Bubble Research, The Telegraph, CNN Money, The Economist, IMF, Federal Reserve, NewsDay.com

Photo credit courtesy of Maricel Cruz (edited)

MOOCs: Classrooms of the Future

MOOCsMassive Open Online Courses (MOOCs), a form of online education, have emerged as an innovative method of teaching at an unprecedented pace. Founded in fall of 2011, Coursera, a leading MOOC, has reached enrollment of 3.1 million students worldwide as of April 2013. Coursera recently divulged plans to continue its rapid growth by partnering with 10 public universities and university flagships in the United States. Other online education companies have also been expanding. For example, in May, Georgia Tech announced its plans to partner with Udacity, another MOOC provider, to offer the first online master’s degree in computer science. Coursera’s cofounder, Andrew Ng explains that Coursera’s growth is part of a larger global movement towards online education. He recently stated, “Colleges are experimenting with different models state-by-state, but one thing is clear — the world is moving toward blended learning.” It is evident that online education is particularly beneficial to students in areas of the world who lack other education options, such as Eastern Europe, Africa, and the Middle East. Coursera has demonstrated a global strategic push by translating many of its courses into eight foreign languages, which will be available to students in September 2013.

However, despite their advantages, MOOCs as alternative forms of education have been subject to criticism. Opponents argue that the lecture format of teaching employed by MOOCs inhibits possibilities for one-on-one communication between instructors and students. Course enrollment sizes (up to 50,000 students can be enrolled in a single course simultaneously) also limit constructive interactions between students and their instructors, as well as among the students themselves. In addition, although online courses experience incredibly high enrollment rates, completion numbers pale in comparison. Only about 10% of students initially enrolled in MOOCs actually end up finishing them. As a result, MOOC providers continue to investigate ways in which these deficient rates can be remedied. Fortunately, online courses also provide novel opportunities to evaluate teaching methods. Ng states, “We see every mouse click and keystroke. We know if a user clicks one answer and then selects another, or fast-forwards through part of a video.”

Reform of the U.S. education system is both imperative and inevitable. Overdue student loans are at an all-time high and only about half of recent college graduates are working in jobs in which their degrees are necessary. As MOOCs become more widespread and continue to develop, perhaps online courses can contribute to resolving these issues.

Posted by: Marjorie Baker

Sources: Washington Post, Wall Street Journal, Venturebeat, New York Times, MIT Technology Review, Huffington Post, Forbes, Brookings

Photo credit: Library2010_028 courtesy of flickr user UTC Library

A Manufacturing Renaissance?

manufacturing2On May 29th, 2013, Motorola announced the opening of a manufacturing plant in Fort Worth, Texas to produce its new product, the Moto X. Motorola estimates that the plant will generate roughly 2,000 American jobs. Texas Governor Rick Perry supports Motorola’s initiative, stating, “Motorola Mobility’s decision to manufacture its new smartphone and create thousands of new jobs in Texas is great news for our growing state.”

Motorola’s decision is especially significant in the modern age of dominant overseas outsourcing. Moto X will be the first smartphone manufactured entirely in the United States. Will Moss, a spokesman for Motorola Mobility, explains that producing the Moto X in the United States will engender “much leaner, more efficient operations” by moving Motorola’s manufacturing operations “much closer to our key customers and partners as well as our end users.” Other technology firms have been following this same trend. For example, in December, Apple CEO Tim Cook announced plans to move the manufacturing of an existing line of Mac computers to the United States within the coming year.

Although some experts believe that these companies’ efforts are primarily politically motivated, other reasoning may exist to explain recent attempts to bring manufacturing opportunities back to the United States. A recent Gallup poll determined that 64% of Americans are willing to pay more for a product produced in the U.S. as opposed to overseas. Additionally, wage increases have led to rising production costs for companies located in East Asia. Economist Dan North predicts that the difference in labor costs between China and the United States could decrease to only $7 per hour by 2015 (as opposed to the $17 difference reported in 2006), as the Chinese economy strengthens and Chinese workers push for higher salaries.

It is still unclear if the “Manufacturing Renaissance” will generate enduring consequences for the U.S. economy—an increase in U.S. industrial production has yet to occur. According to the Federal Reserve, industrial production fell by 0.5 percent in April. Furthermore, although the total number of manufacturing jobs in the United States has increased by 520,000 since January 2010, only 50,000 of those jobs are due to re-shoring. It is therefore disputable as to whether efforts to bring manufacturing back to the U.S. will contribute to profound and lasting benefits for the U.S. economy, or if companies’ current efforts in this capacity will merely amount to a short-lived phase.

Posted by: Marjorie Baker

Sources: The Washington Post, CBS News, Businessweek, the Federal Reserve, Gallup, Huffington Post

Photo Credit: Big Industry of America courtesy of flickr user Canon in 2D

Event Summary: The Next Generation of Earth System Education

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On Earth Day 2013, Monday, April 22nd, a panel of Geo-science, technology, engineering and mathematics Master Teachers convened at the Wilson Center to discuss several innovative endeavors to engage teachers and students in Earth science studies using state-of-the art technologies and education resources.  The event was co-hosted by the Program on America and the Global Economy (PAGE) and the Global Sustainability and Resilience Program.  The event was moderated by Kent Hughes, Director of PAGE.

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John Moore, Director of Geo-science STEM Education at Palmyra Cove Nature Park and Environmental Discovery Center in New Jersey, former Albert Einstein Distinguished Education Fellow, and Executive Director for the American Council of STEM Teachers opened the panel discussion by pointing out two very important and influential opportunities for reform in STEM education: the PCAST Report to the President on plans for improvements in K-12 STEM education released on September 15, 2010 and the recently released Next Generation Science Standards (NGSS) report which outlines the new voluntary, rigorous, and internationally benchmarked standards for K-12 science education.  Moore emphasized the importance of, “developing the teachers’ voice,” providing several examples of projects for leadership and professional development of teachers such as the DataStreme Project, a distance learning course designed by the American Meteorological Society,  and Global Learning and Observation to Benefit the Environment (GLOBE), a worldwide network for sharing resources for primary and secondary earth science education.

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Marcia Barton spoke next about the opportunities and challenges for STEM educators.  She agreed that the NGSS report provided an opportunity to transform science in the United States by integrating the sciences instead of using current standards of teaching the sciences separately.  The NGSS report also elevated earth and space science, including them more in the proposed curriculum.  The challenges for geo-science, according to Barton, were taking advantage of this increased focus and engaging the students in this material, and training the next generation of teachers.  She proposed starting an academy for innovation and sustainability to engage students in geo-science and engineering, especially with the increase in job opportunities for geoscientists.  Based on President Obama’s initiative to prepare 100,000 new STEM teachers in the next decade, Barton suggested making 30,000 of those earth and space system science teachers.

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Vicky Gorman discussed efforts to promote geo-science education in her community with the Citizen Science Education Program (CSEP).  CSEP was designed by middle school students and tailored for their own community.  The program seeks to increase scientific literacy within the community and is part of the Weather Ready Nation network, a NOAA initiative.  Gorman stressed the importance of communication and leadership skills within students to prepare them for the workforce, with development of those skills starting in middle school.  She stated, “Unless students are marketable, all their education goes to waste.”  Gorman emphasized the importance of geo-science education as it encompasses chemistry, physics, and biology and applies to real-life situations and the global economy and where our workforce needs to be.

Peter Dorofy commented on the technology challenges of teaching earth science.  Traditionally, earth science is a non-lab course but with increasing technological advances such as GPS, GIS, remote sensing, and real-time data, that is changing.  He spoke of the challenges at his technical college in New Jersey, such as budget cuts and shifting programs, and how to make earth science relevant to students who have already chosen a career.  Dorofy stated it was key to identify real-life situations in which earth science can be applied and to take advantage of all the technology in the field to excite students.

John Moore recapped the first part of the panel and reiterated that teachers have a unique opportunity to push earth science.   The problem is in implementation.  Moore stated that in many schools the 1996 NGS Standards are barely implemented today, therefore, the responsibility will lie with the next generation of teachers to ensure that these new standards are realized.

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Kevin Simmons and Jin Kang explained new technology in the geoSTEM field: cubesats, microsatellites, which are powerful, interactive tools that can be used by schools to provide data from space.  Cubesats introduce children to systems engineering and allow them to put the engineering method, which Simmons distinguished from the scientific method, into practice.  Kang emphasized the two essential factors of effective education: motivation and hands-on education which are key to encouraging creativity and innovation.

The panel responded to audience questions about the integrity of the geoSTEM programs, differences between the U.S. and Korean education systems, and the new common core standards and standardized testing.

Drafted by Elizabeth White

Click here to view the video recording of this event.

You are invited: The Next Generation of Earth System Education

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The Program on America and the Global Economy and the Global Sustainability and Resilience Program Present:

The Next Generation of Earth System Education

Monday, April 22, 2013

3:00 – 5:00 p.m.

5th Floor Conference Room, Woodrow Wilson Center


Panelists: 

John D. Moore, Albert Einstein Distinguished Education Fellow Emeritus, Director for Geoscience STEM Education, Palmyra Cove Nature Park and Environmental Discovery Center

Marcia Barton, Albert Einstein Distinguished Educator Fellow, NSF, Directorate for Geosciences

Peter Dorofy, NESTA Eastern Regional Director, American Meteorological Society K-12 Distinguished Educator

Vicky Gorman, AMS DataStreme Atmosphere Resource Teacher, GLOBE Program

Kevin Simmons, Albert Einstein Distinguished Education Fellow Emeritus, Senior Policy Analyst, EDJ Associates Inc., Industrial Innovation and Partnerships Division Engineering Directorate, NSF

Jin Kang, Assistant Professor, Aerospace Engineering, U.S. Naval Academy

Moderator: 

Kent Hughes, Director, Program on America and the Global Economy


Celebrate Earth Day as a select panel of GeoSTEM Master Teachers discuss how teacher-leaders have come together to put policy into practice.  GeoSTEM is an ongoing educational endeavor to engage teachers and students in an innovative study of Planet Earth using state-of-the-art technologies and educational resources. Through programs such as the American Meteorological Society’s DataStreme Project, the GLOBE Program, and others, teachers are enhancing content knowledge, developing projects, and collaborating in projects that utilize real time and remote sensing data, promote 21st Century Workforce Development Skills, involve the local community and contribute to building the next generation of geoscientists.


Visit The Program on America and the Global Economy website for more information and to RSVP or send an email (acceptances only) to page@wilsoncenter.org

The Wilson Center is located in the Ronald Reagan Building at 1300 Pennsylvania Ave., NW. (Federal Triangle Metro stop on the Blue/ Orange Line) For a map and directions see: http://www.wilsoncenter.org/directions.  Please bring a photo ID and arrive 15 minutes ahead to allow time for the security checkpoint. 

Guest Contributor William Krist with Dani Litovsky: LNG – to export or not to export, that is the question

oil drilling at sunset
The United States is rapidly moving from being dependent on imported fossil fuels to becoming a major world producer.  We’re sitting on vast supplies of natural gas, and recent technological innovations have made it possible to tap previously unattainable resources.  So what should we do with these new-found riches?  Producers of natural gas, by and large, want to be able to sell where they can get the best price, and often that will mean selling overseas.  But consumers oppose exporting our natural gas, arguing that keeping these supplies to ourselves will keep the price here in the U.S. lower than the world price, and that this will give them a competitive advantage.  They believe this will add more value to the economy and trade account than exporting LNG.  And some environmentalists oppose exports because they believe this would raise the price of natural gas and thereby encourage more production.

From an economic perspective, allowing exports would lead to some increase in domestic prices, but the price of natural gas in the U.S. is far lower than in many other markets, for example, $2.66 per thousand cubic feet on average in the U.S. in 2012 compared to some $10 in the U.K. Somewhat higher prices in the U.S. because of exports would encourage greater U.S. production, but prices in the U.S. would still be lower than in most markets because of transportation costs, and this would continue to give manufacturers that use natural gas a cost advantage.  From an environmental perspective, natural gas is less polluting than other fossil fuels.  Until renewable energy such as wind and solar can meet the world’s energy needs – a prospect that is likely to be at least a decade away – encouraging the use of natural gas probably has a positive environmental impact.

From a trade policy perspective, restricting exports would likely run afoul of World Trade Organization (WTO) rules, and it would weaken our complaints about other countries’ export of vital minerals, which many believe is an attempt by China to gain a competitive advantage at its trade partners’ expense.

The economic impact of allowing natural gas exports is likely to be small, as is the environmental impact.  So perhaps this debate is more like “much ado about nothing.”

(Click here for a paper that sets out these issues in more detail.)

William K. Krist is a Senior Policy Scholar at the Woodrow Wilson Center.  He is a former Senior Vice President of the American Electronics Association.  He has written extensively on trade, development, and the environment.

Innovation Is What Drives Us: The Impact of Technology on Employment

driverless_carThe inexorable march of progress continues as Google carries on with its plan to bring driverless cars to a highway near you. This form of transportation—previously found only in the annals of science fiction—could prove a boon to the auto-industry and has many other profound implications for both business and society at large.

Among other things, Google’s self-driving car has reignited the larger debate over the role of technology in our lives, especially in the jobs market—a sector that is quite important to millions of working class Americans worried about employment prospects. This concern lies in the prevalent view that advanced technology is usurping jobs that would have otherwise gone to humans. An Associated Press analysis of employment data from 20 countries found that millions of mid-skill, mid-pay jobs already have disappeared over the past five years. With this data in mind, coupled with slow economic recovery, should the American people be worried? Not as much as you might think. It is helpful to realize that this sort of technological innovation has happened throughout history and, while jobs were indeed replaced, new ones arose that more than compensated for the original loss. For example, the combustion engine decimated makers of horse-drawn carriages, saddles, buggy whips and other occupations that depended on the horse trade. But it also resulted in huge auto plants that employed hundreds of thousands of workers, who were paid enough to help create a prosperous middle class. As Nobel Prize-winning economist Joseph Stiglitz states, “What has always been true is that technology has destroyed jobs but also always created jobs.” The invention of the iPhone, for instance, has put more than 290,000 people to work on related iPhone apps since 2007, according to Apple. This suggests that innovative technology continues to create new types of jobs that require higher skills and creativity.

Like an employment phoenix rising from the ashes of a bygone industry, the American worker will undoubtedly be able to take advantage of new opportunities. For its part, the United States must continue to invest in the educational system so its students are able to take on the challenge of these new and exciting industries.

Posted by: Matthew Goldberg

Sources: Washington Post, Forbes, Associated Press, New York Times

Photo Credit: Google self-driving car in Mountain View courtesy of flickr user MarkDoliner