Wednesday, November 26, 2014

'Keynes Is Slowly Winning'

[Travel day, so no more until later.]

Paul Krugman:

Keynes Is Slowly Winning: Back in 2010, I had a revelation about just how bad economic policy was about to get; I read the OECD Economic Outlook, which called not just for fiscal austerity but for interest rate hikes — 350 basis points on the Fed funds rate by the end of 2011! — because, well, because.
Now, the OECD is calling for fiscal and monetary stimulus in Europe. ....
It has taken a while. ... But the hawks seem in retreat at the Fed; Mario Draghi ... sounds an awful lot like Janet Yellen; the whole way we’re discussing Japan is very much on Keynesian turf. Three and a half years ago Businessweek was declaring that expansionary austerian Alberto Alesina was the new Keynes; now it tells us that Keynes is the new Keynes. And we have people like Paul Singer complaining about the “Krugmanization” of the debate.
Why does the tide finally seem to be turning? Partly, I think, it’s just a matter of time; after six years it’s becoming hard not to notice that the anti-Keynesians have been wrong about everything. Europe’s slide toward deflation makes it even harder to deny the realities of liquidity-trap economics. And the refusal of almost everyone on the anti-Keynesian side to admit any kind of error has gradually made them look ridiculous.
All of this may be coming too little and too late to avoid policy disaster, especially in Europe. But it’s something to cheer, faintly.

    Posted by on Wednesday, November 26, 2014 at 08:59 AM in Economics, Fiscal Policy, Monetary Policy, Politics | Permalink  Comments (19)


    'Understanding George Osborne' or 'Osborne's Idiotic Idea'

    Simon Wren-Lewis:

    Understanding George Osborne: Yesterday I spoke at the Resolution Foundation’s launch of their analysis of the UK political parties’ fiscal plans post 2015. I believe this analysis shows two things very clearly. First, there is potentially a large gap between the amount of austerity planned by the two major parties. Second, George Osborne’s plans are scarcely credible. They represent a shrinking of the UK state that is unprecedented and which in my view virtually no one wants.  
    I would add one other charge - Osborne's plans are illiterate in macroeconomic terms. The UK economy desperately needs more growth. ...
    In this situation a Chancellor should not plan to reduce growth further. I have yet to come across a single macroeconomist who argues that Osborne’s plans for renewed austerity will not in themselves reduce aggregate demand. So doing this when the recovery could go much further but is still fragile is just plain dumb. It is even dumber if you have done this once before, in a very similar situation, and the risks I outlined above have indeed materialised.
    So why is the Chancellor proposing to make the same mistake twice? ...
    I cannot think of any way to rationalise what the Chancellor is planning in macroeconomic terms. But perhaps I’m looking for something that does not exist. Perhaps he does not have a coherent economic framework. Instead he has a clear political framework, which has so far been remarkably successful. The goal is to reduce the size of the state, and because (with his encouragement) mediamacro believes reducing the deficit is the number one priority, he is using deficit reduction as a means to that end. However another priority is to get re-elected, so deficit reduction has to take place at the start of any parliament, so its impact on growth has disappeared by the time of the next election. But this explanation would imply we have a Chancellor that quite cynically puts the welfare of the majority of the UK’s citizens at major risk for ideological and political ends, and I do not think I have ever experienced a UK Chancellor (with possibly one exception) who has done that. But as Sherlock Holmes famously said ...

    Chris Dillow:

    Osborne's idiotic idea: The FT reports that George Osborne wants to make unicorn farming compulsory:

    The new fiscal mandate is expected to enshrine in law one area of common ground between the Tories and Lib Dems: that the cyclically adjusted current deficit should be eliminated by 2017-18.

    This is imbecilic. ...

    Now, you might think that, in saying all this I'm merely being a Keynesian.

    Wrong. In fact, I'm writing in a Hayekian spirit. Hayek famously and correctly argued that economic knowledge was inherently fragmentary and dispersed and so central agencies could not possibly know very much. I'm echoing him. I'm saying that the OBR cannot know enough about the productive potential of millions of firms to know what the output gap is. And it hasn't got enough knowledge of the future to predict recessions.

    In presuming otherwise, Osborne is thus not only anti-Keynesian, but anti-Hayekian. I thus agree with Simon - that he is illiterate and plain dumb.

      Posted by on Wednesday, November 26, 2014 at 08:58 AM in Economics, Fiscal Policy, Politics | Permalink  Comments (6)


      Some Good News for the Unemployed

      At MoneyWatch:

      Some Good News for the Unemployed: There has been considerable discussion of the “hollowing out” of middle class jobs in recent years, a trend that started before the Great Recession. But where do those who have lost their jobs go? Do they end up with low paying service jobs, McJobs as they are sometimes called, or do they move up the ladder to higher paying jobs?
      Many people believe that most people who lose middle class jobs end up worse off than before, but recent research by Ellie Terry and John Robertson of the Atlanta Fed finds some surprising results. ...

        Posted by on Wednesday, November 26, 2014 at 08:58 AM in Economics, MoneyWatch, Unemployment | Permalink  Comments (1)


        Links for 11-26-14

          Posted by on Wednesday, November 26, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (78)


          Tuesday, November 25, 2014

          Economic Growth and the Information Age

          Brad DeLong:

          Over at Project Syndicate: Economic Growth and the Information Age: Daily Focus: ...America ... has become a vastly more unequal place since 1979... But the past generation has seen a third industrial revolution, a worthy information-age successor to the first of steam, iron, cotton, and machines and to the second of internal combustion, electricity, steel, and chemicals. Not everyone, but almost everyone in the North Atlantic and many and soon most in the world, can now if they wish have a smartphone–and so gain cheap access to the universe of human knowledge and entertainment to a degree that was far beyond the reach of all but the richest of a generation ago.
          How much does this matter? How much does this mean that conventional measures of real income and real standard of living understate how much we, even the relatively poor of we, have progressed toward utopia? ...
          Perhaps the right way to view the situation is that before the information age began our estimates of economic growth overstated true reality by perhaps 0.5%/year as the extra well-being we got from increased real wealth and income was offset by our noticing that the Jones’s next door had more, better, and newer than we did? Perhaps the right way to view the situation is that those parts of the information age that escape conventional growth-accounting calculations simply neutralize those forces of envy and spite that were never included in the calculations in the first place? That is my tentative judgment–or rather guess–today.

            Posted by on Tuesday, November 25, 2014 at 11:02 AM in Economics, Income Distribution | Permalink  Comments (29)


            'Is Uber Really in a Fight to the Death?'

            For those of you interested in Uber, this is from Joshua Gans:

            Is Uber really in a fight to the death?: In recent days, since their PR troubles, there has been much discussion as to why Uber seems to be so aggressive. Reasons ranged from being inept, to the challenges of fighting politics against taxi regulations to a claim that Uber’s market has a ‘winner take all’ nature. It is this last one that is of particular interest because it suggests that Uber has to fight hard against competitors like Lyft or it will lose. It also suggests that Uber’s $20 billion odd valuation is based on beliefs that it will win, and win big.
            I am not sure that this is really the case. Despite the name ‘Uber’ connoting, ‘one Uber to rule them all,’ the theory underlying the notion of winner take all is rather special and is far from being proven in cases like this. ...

              Posted by on Tuesday, November 25, 2014 at 10:28 AM in Economics, Technology | Permalink  Comments (5)


              ''How to Think about 'Think' Tanks''

              Miles Corak:

              Kady O'Malley Tweet on Think Tanks 1

              How to think about “think” tanks: It is sometimes said that think tanks are good for democracy; indeed the more of them, the better. If there are more ideas in the public arena battling it out for your approval, then it’s more likely that the best idea will win, and that we will all have better public policies. But intuitively many of us have trouble believing this, have trouble knowing who is being truthful, and don’t know who to trust.
              This battle of ideas, studies, and statistics has the potential to make many of us cynical about the whole process, and less trusting of all research and numbers. If a knowledgeable journalist like the Canadian Kady O’Malley expresses a certain exasperation that think-tank studies always back up “the think-tank’s existing position,” what hope is there for the rest of us? A flourishing of think tanks just let’s politicians off the hook, always allowing them to pluck an idea that suits their purposes, and making it easier to justify what they wanted to do anyways.
              Maybe we shouldn’t be so surprised that think tanks produce studies confirming their (sometimes hidden) biases. After all this is something we all do. We need to arm ourselves with this self-awareness. If we do, then we can also be more aware of the things in a think tank’s make-up that can help in judging its credibility, and also how public policy discussion should be structured to help promote a sincere exchange of facts and ideas. ...

              He goes on to explain in considerable detail.

                Posted by on Tuesday, November 25, 2014 at 10:05 AM in Economics, Politics | Permalink  Comments (12)


                'A Deeper Dive into the Weeds of the CBO Household Income Data'

                On Twitter, Jared Bernstein says he is "Correcting the record for those who claim that accounting for taxes & transfers changes the inequality story":

                A deeper dive into the weeds of the CBO household income data: ...between 1979 and 2011, inequality measured by the Gini coefficient rose 24% based solely on market outcomes and by 22% based on CBO’s comprehensive, post-tax and transfer income data.
                Here we show that changes in pre- and post-tax income shares* – the percentage of total U.S. income held by different income groups – reveals a similar trend:

                Change-in-CBO-Income-Shares

                The “low” category in this figure represents the lowest before-tax income quintile, the “middle” category represents households between the 40th and 60th income percentiles, and the “high” category represents the top quintile. As with the Gini, the change in pre- and post-tax income shares are similar. The share of total income held by the poorest households fell by 1 percentage point on a pre-tax basis, and by 1.2 points on a post-tax basis. The share of income held by middle-class households fell by almost two percentage points on a pretax basis and by 1.4 percentage points post-tax.
                Only within the top fifth of households do we see relative gains, and in fact, most of the increase in top quintile income shares has accrued to the richest subset of this group: the top 1%.
                A second motivation of our report was to document the stagnation of middle-class earnings to households with children and the increased importance of transfer income to these families. We note, for example, that the increase in earnings to middle-income households with children was actually less than the increase in the dollar value of transfers. ...
                To be clear, there’s nothing wrong and a lot right with transfers replacing lost earnings, especially in downturns. Tax cuts also helped offset middle quintile income losses. But this is not a reliable strategy by which to raise middle-class living standards for working families. For that, we must reconnect overall economic growth to paychecks... The CBO data highlight the nature of this problem and the urgency with which we must pursue the right solutions. ...

                  Posted by on Tuesday, November 25, 2014 at 09:04 AM in Economics, Income Distribution | Permalink  Comments (6)


                  Links for 11-25-14

                    Posted by on Tuesday, November 25, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (111)


                    Monday, November 24, 2014

                    'And the Winner Is...Full-Time Jobs!

                    This is from "Julie Hotchkiss, a research economist and senior policy adviser at the Atlanta Fed":

                    And the Winner Is...Full-Time Jobs!: Each month, the U.S. Bureau of Labor Statistics (BLS) surveys about 60,000 households and asks people over the age of 16 whether they are employed and, if so, if they are working full-time or part-time. The BLS defines full-time employment as working at least 35 hours per week. This survey, referred to as both the Current Population Survey and the Household Survey, is what produces the monthly unemployment rate, labor force participation rate, and other statistics related to activities and characteristics of the U.S. population.
                    For many months after the official end of the Great Recession in June 2009, the Household Survey produced less-than-happy news about the labor market. The unemployment rate didn't start to decline until October 2009, and nonfarm payroll job growth didn't emerge confidently from negative territory until October 2010. Now that the unemployment rate has fallen to 5.8 percent—much faster than most would have expected even a year ago—the attention has turned to the quality, rather than quantity, of jobs. This scrutiny is driven by a stubbornly high rate of people employed part-time "for economic reasons" (PTER). These are folks who are working part-time but would like a full-time job. Several of my colleagues here at the Atlanta Fed have looked at this phenomenon from many angles (here, here, here, here, and here).
                    The elevated share of PTER has left some to conclude that, yes, the economy is creating a significant number of jobs (an average of more than 228,000 nonfarm payroll jobs each month in 2014), but these are low-quality, part-time jobs. Several headlines have popped up over the past year or so claiming that "...most new jobs have been part-time since Obamacare became law," "Most 2013 job growth is in part-time work," "75 Percent Of Jobs Created This Year [2013] Were Part-Time," "Part-time jobs account for 97% of 2013 job growth," and as recently as July of this year, "...Jobs Report Is Great for Part-time Workers, Not So Much for Full-Time."
                    However, a more careful look at the postrecession data illustrates that since October 2010, with the exception of four months (November 2010 and May–July 2011), the growth in the number of people employed full-time has dominated growth in the number of people employed part-time. Of the additional 8.2 million people employed since October 2010, 7.8 million (95 percent) are employed full-time (see the charts). ...
                    During the Great Recession (until about October 2010), the growth in part-time employment clearly exceeded growth in full-time employment, which was deep in negative territory. The current high level of PTER employment is likely to reflect this extended period of time in which growth in part-time employment exceeded that of full-time employment. But in every month since August 2011, the increase in the number of full-time employed from the year before has far exceeded the increase in the number of part-time employed. This phenomenon includes all of the months of 2013, in spite of what some of the headlines above would have you believe.
                    So, in the post-Great Recession era, the growth in full-employment is, without a doubt, way out ahead.

                      Posted by on Monday, November 24, 2014 at 11:50 AM in Economics, Unemployment | Permalink  Comments (21)


                      Companies on Trial: Are They ‘Too Big to Jail’?

                      Lawrence Summers:

                      Companies on trial: are they ‘too big to jail’?: Disillusionment with government and large institutions is a salient feature of contemporary American life. An important cause is the widespread sense that big companies and those who run them are not held accountable for their crimes – that they are ... Too Big To Jail. The fact that no one has been imprisoned for the misdeeds that led to the financial crisis is seen as outrageous by many on Main Street. At the same time, the multibillion-dollar fines and enforcement actions against financial institutions that now seem to be a monthly event are a new phenomenon...
                      The current trend towards large fines ... seems to promote a somewhat unattractive combination of individual incentives. Managers do not find it personally costly to part with even billions of dollars of their shareholders’ money, especially when fines represent only a small fraction of total market value. Paying with shareholders’ money as the price of protecting themselves is a very attractive trade-off. Enforcement authorities like to either collect large fines or be seen as delivering compensation for those who have been victimized by corporate wrongdoing. So they are all too happy to go along.
                      In the process, punishment of individuals who do wrong or who fail in their managerial duty to monitor the behavior of their subordinates is short-changed. And deterrence is undermined. There is a broader cultural phenomenon here as well. Relative to other countries such as the UK or Japan, the principle that leaders should resign to take responsibility for failure on their watch even when they did not directly do wrong is less established in the US. This is probably an area where we have something to learn. ...

                        Posted by on Monday, November 24, 2014 at 11:05 AM Permalink  Comments (21)


                        Paul Krugman: Rock Bottom Economics

                        The era of "rock-bottom economics" is far from over:

                        Rock Bottom Economics, by Paul Krugman, Commentary, NY Times: Six years ago the Federal Reserve hit rock bottom. It had been cutting the federal funds rate ... more or less frantically in an unsuccessful attempt to get ahead of the recession and financial crisis. But it eventually reached the point where it could cut no more...
                        Everything changes when the economy is at rock bottom... But for the longest time, nobody with the power to shape policy would believe it.
                        What do I mean by saying that everything changes? As I wrote..., in a rock-bottom economy “the usual rules of economic policy no longer apply...” Government spending doesn’t compete with private investment — it actually promotes business spending. Central bankers, who normally cultivate an image as stern inflation-fighters, need to do the exact opposite, convincing markets ... that they will push inflation up. “Structural reform,” which usually means making it easier to cut wages, is more likely to destroy jobs than create them.
                        This may all sound wild and radical, but ... it’s what mainstream economic analysis says will happen once interest rates hit zero. And it’s also what history tells us. ...
                        But as I said, nobody would believe it. By and large, policymakers and Very Serious People ... went with gut feelings rather than careful economic analysis. ...
                        Thus we were told ... that budget deficits were our most pressing economic problem, that interest rates would soar ... unless we imposed harsh fiscal austerity... —... demands that we cut government spending now, now, now have cost millions of jobs and deeply damaged our infrastructure.
                        We were also told repeatedly that printing money ... would lead to “currency debasement and inflation.” The Fed ... stood up to this pressure, but other central banks didn’t. ...
                         But... Isn’t the era of rock-bottom economics just about over? Don’t count on it..., the counterintuitive realities of economic policy at the zero lower bound are likely to remain relevant for a long time..., which makes it crucial that influential people understand those realities. Unfortunately, too many still don’t; one of the most striking aspects of economic debate in recent years has been the extent to which those whose economic doctrines have failed the reality test refuse to admit error, let alone learn from it. ...
                        This bodes ill for the future. What people in power don’t know, or worse what they think they know but isn’t so, can very definitely hurt us.

                          Posted by on Monday, November 24, 2014 at 12:24 AM in Budget Deficit, Economics, Fiscal Policy, Monetary Policy, Politics | Permalink  Comments (170)


                          Links for 11-24-14

                            Posted by on Monday, November 24, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (69)


                            Sunday, November 23, 2014

                            'Is Economics Really a Dismal Science for Women?'

                            Since I posted an excerpt from Noah Smith's column, I should also post this response from Frances Woolley:

                            Is economics really a dismal science for women?: Donna Ginther and Shulamit Kahn have just published a paper that tracks thousands of American academics from the time they first get their PhDs through to their tenure and promotion decisions. ...
                            Noah Smith ... takes, Ginther and Kahn's cautious and nuanced results, and leaps to the conclusion that economics "seems to have a built-in bias that prevents women from advancing." 
                            Really?
                            I have never seen a woman denied tenure when a man with similar number and quality of publications was awarded it. I don't deny Ginther and Kahn's findings, but might there be a non-discriminatory explanation of the fact that a woman in economics with X number of publications is less likely to receive tenure than a man with X publications? ...

                            She goes on to give the "non-discriminatory explanation", and then says:

                            "Sexism" is not the result of some high level conspiracy. It is the product of millions of every day actions by thousands of ordinary people. ... If a man with 5 publications gets tenure while a woman with 5 publications does not, there must be a reason: either the man has higher quality publications, or higher impact publications, or more evidence of national or international reputation, or better letters of reference.
                            But a scholar's reputation and impact is determined by ... others: who they choose to acknowledge, who they choose to network with. Every single active academic can, through the citation and other decisions they make every day, influence other academics' reputations - and thus the probability that they will receive tenure or get promoted.  
                            Who do you cite? If you're like most people, you're more likely to cite the seminal work of some well-known male academic than the work of a female scholar. ...
                            Do you give women credit for their ideas? Just about every woman has had the experience of sitting in a committee, saying something, and having her contribution ignored. A man will then restate her point, and he is listened to, and receives credit for the idea. ...
                            How do you word your letters of reference? Do you use the same adjectives to describe women and men? Or are women delightful, pleasant, conscientious and hard-working while men are strong, original, insightful and persistent?
                            Who do you invite to present at conferences or departmental seminars? If a man, do you turn down invitations to participate in conferences with all-male line-ups...? Do you make it easy for female colleagues to come for a drink in the bar after a seminar by corralling them into the bar-going group? 
                            The economics profession is far from perfect. I personally don't find it any worse than the world of media (that the Globe and Mail paid Stephen Gordon more than me still burns), or the world of academic administration. But it could be better - and the power to change it lies within every one of us.

                              Posted by on Sunday, November 23, 2014 at 11:23 AM in Economics, Universities | Permalink  Comments (8)


                              'Lower Oil Prices and the U.S. Economy'

                              Jim Hamilton:

                              Lower oil prices and the U.S. economy: ... The current price of gasoline is 80 cents/gallon below what it has averaged over the last 3 years. Last year Americans consumed 135 billion gallons of gasoline. That means that if prices stay where they are, consumers will have an extra $108 billion each year to spend on other things. And if the historical pattern holds, spend it they will. ...
                              But another thing that’s changed is that much more of the oil we consume is now being produced right here at home. While lower prices are a boon for consumers, they pose a potential threat to producers, especially the higher-cost operators. ...
                              If there are employment cuts in places like Texas, Louisiana, and North Dakota, that would obviously offset some of the gains to consumers noted above, and ultimately undercut the major force keeping the price of crude low for the time being, that being the success of small U.S. oil producers.
                              Nevertheless, there should be no question that at this point this is a favorable development on-balance for the U.S. economy. We’re still importing 5 million more barrels each day of petroleum and products than we are exporting. Importing fewer barrels, and paying less for the barrels we do import, is a good thing.

                                Posted by on Sunday, November 23, 2014 at 10:43 AM in Economics, Oil | Permalink  Comments (25)


                                Links for 11-23-14

                                  Posted by on Sunday, November 23, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (119)


                                  Saturday, November 22, 2014

                                  'High Marginal Tax Rates on the Top 1%'

                                  Fabian Kindermann and Dirk Krueger:

                                  High marginal tax rates on the top 1%: Optimal tax rates for the rich are a perennial source of controversy. This column argues that high marginal tax rates on the top 1% of earners can make society as a whole better off. Not knowing whether they would ever make it into the top 1%, but understanding it is very unlikely, households especially at younger ages would happily accept a life that is somewhat better most of the time and significantly worse in the rare event they rise to the top 1%.
                                  Recently, public and scientific attention has been drawn to the increasing share of labour earnings, income, and wealth accruing to the so-called ‘top 1%’. Robert B. Reich in his 2009 book Aftershock opines that: “Concentration of income and wealth at the top continues to be the crux of America’s economic predicament”. The book Capital in the Twenty-First Century by Thomas Piketty (2014) has renewed the scientific debate about the sources and consequences of the high and increasing concentration of wealth in the US and around the world.
                                  But what is a proper public policy reaction to such a situation? Should the government address this inequality with its policy instruments at all, and if so, what are the consequences for the macroeconomy? The formidable literature on optimal taxation has provided important answers to the first question.1 Based on a static optimal tax analysis of labour income, Peter Diamond and Emmanuel Saez (2011) argue in favour of high marginal tax rates on the top 1% earners, aimed at maximising tax revenue from this group. Piketty (2014) advocates a wealth tax to reduce economy-wide wealth inequality....
                                  Conclusions and limitations Overall we find that increasing tax rates at the very top of the income distribution and thereby reducing tax burdens for the rest of the population is a suitable measure to increase social welfare. As a side effect, it reduces both income and wealth inequality within the US population.
                                  Admittedly, our results apply with certain qualifications. First, taxing the top 1% more heavily will most certainly not work if these people can engage in heavy tax avoidance, make use of extensive tax loopholes, or just leave the country in response to a tax increase at the top. Second, and probably as importantly, our results rely on a certain notion of how the top 1% became such high earners. In our model, earnings ‘superstars’ are made from luck coupled with labour effort. However, if high income tax rates at the top would lead individuals not to pursue high-earning careers at all, then our results might change.7 Last but not least, our analysis focuses solely on the taxation of large labour earnings rather than capital income at the top 1%.
                                  Despite these limitations, which might affect the exact number for the optimal marginal tax rate on the top 1%, many sensitivity analyses in our research suggest one very robust result – current top marginal tax rates in the US are lower than would be optimal, and pursuing a policy aimed at increasing them is likely to be beneficial for society as a whole.

                                    Posted by on Saturday, November 22, 2014 at 12:37 PM in Economics, Income Distribution, Taxes | Permalink  Comments (49)


                                    'The Risks to the Inflation Outlook'

                                    Remember all those predictions from those with other agendas about runaway inflation (e.g. see Paul Krugman today on The Wisdom of Peter Schiff)?:

                                    The Risks to the Inflation Outlook, by Vasco Cúrdia, FRBSF Economic Letter: The Federal Reserve responded to the recent financial crisis and the Great Recession by aggressively cutting the target for its benchmark short-term interest rate, known as the federal funds rate, to near zero. The Fed also began providing information about the probable future path of the short-term interest rate. Known as forward guidance, this policy is intended to lead to lower long-term yields and therefore stimulate economic activity. Additionally, the Fed has purchased long-term Treasury securities and mortgage-backed securities, leading to a balance sheet that is substantially larger than before the financial crisis. Taylor (2014), among others, argues that these policies are likely to lead to substantially higher inflation. Nevertheless, the inflation rate remains below 2%, the target set by the Federal Open Market Committee (FOMC).
                                    This Economic Letter describes results from a model that explicitly accounts for the different dimensions of monetary policy to quantify the risks to the inflation forecast. This analysis suggests that inflation is expected to remain low through the end of 2016, and the uncertainty around the forecast is tilted to the downside, that is, the risk of lower inflation. In particular, the probability of low inflation by the end of 2016 is twice as high as the probability of high inflation—the opposite of historical projections. The analysis also suggests that the risk of high inflation collapsed in 2008 and has remained well below normal since. Importantly, according to the model, there is little evidence that monetary policy constitutes a major source of inflation risk. ...

                                    Of course, the lack of inflation can't be explained with modern macroeconomic models:

                                    Inflation Dynamics During the Financial Crisis, by Simon Gilchrist, Raphael Schoenle, W. Sim, and Egon Zakrajsek,  September 18, 2013,  Preliminary & Incomplete: Abstract Using confidential product-level price data underlying the U.S. Producer Price Index (PPI), this paper analyzes the effect of changes in firms’ financial conditions on their price-setting behavior during the “Great Recession.” The evidence indicates that during the height of the crisis in late 2008, firms with “weak” balance sheets increased prices significantly, whereas firms with “strong” balance sheets lowered prices, a response consistent with an adverse demand shock. These stark differences in price-setting behavior are consistent with the notion that financial frictions may significantly influence the response of aggregate inflation to macroeconomic shocks. We explore the implications of these empirical findings within the New Keynesian general equilibrium framework that allows for customer markets and departures from the frictionless financial markets. In the model, firms have an incentive to set a low price to invest in market share, though when financial distortions are severe, firms forgo these investment opportunities and maintain high prices in an effort to preserve their balance-sheet capacity. Consistent with our empirical findings, the model with financial distortions—relative to the baseline model without such distortions—implies a substantial attenuation of price dynamics in response to contractionary demand shocks.

                                    I know, some of you hate old Keynesian models (which can also explain this), and you don't believe in New Keynesian models (ad hoc price stickiness -- reject! -- even if, for some, it is only a cover to reject the notion of government involvement in the economy...). But your model predicted inflation that never came. Or some other such nonsense.

                                    One final note. When I objected to this in 2010, I was called "Grumpy Thoma":

                                    ... I think it is quite possible that we will look back on QE2 as a severe error. In spite of the talk from some quarters about the intervention being too small, this is a very large-scale asset purchase for the Fed, on top of a previous very large purchase of mortgage-backed securities and agency securities. One possibility is that economic growth picks up, of its own accord, reserves become less attractive for the banks, and inflation builds up a head of steam. The Fed may find this difficult to control, or may be unwilling to do so. Even worse is the case where growth remains sluggish, but inflation well in excess of 2% starts to rear its ugly head anyway. Bernanke is telling us that he "has the tools to unwind these policies," but if the inflation rate is at 6% and the unemployment rate is still close to 10%, he will not have the stomach to fight the inflation. My concern here is that, given the specifics of the QE2 policy that was announced, the FOMC will be reluctant to cut back or stop the asset purchases, even if things start looking bad on the inflation front. Once inflation gets going, we know it is painful to stop it, and we don't need another problem to deal with.

                                    More than four years later...we now have the same group using neo-Fisherism to explain why the Fed is causing low inflation with low nominal interest rates. With QE2 (and QE of any sort), it was the Fed's fault that we faced so much inflation risk, now it's the Fed's fault that we don't.

                                      Posted by on Saturday, November 22, 2014 at 12:02 PM in Economics, Inflation | Permalink  Comments (33)


                                      Links for 11-22-14

                                        Posted by on Saturday, November 22, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (64)


                                        Friday, November 21, 2014

                                        Women in Economics

                                        Noah Smith:

                                        ... Why is it that the sciences look like a feminist nirvana compared with the economics profession, which seems to have a built-in bias that prevents women from advancing? ...

                                        More here.

                                          Posted by on Friday, November 21, 2014 at 01:46 PM in Economics | Permalink  Comments (20)


                                          'People Who Wanted Market-Driven Health Care Now Have It'

                                          Alice Rivlin:

                                          People Who Wanted Market-Driven Health Care Now Have it in the Affordable Care Act, by Alice M. Rivlin, Brookings: ... The United States ... relied primarily on employer-based health insurance, generously favored by tax laws. ... But there was a huge hole: Millions of people were left out of employer-based coverage and were not old enough or poor enough to qualify for the public programs. For 50 years, we have been arguing over how to fill that hole. ...
                                          In general, Republicans argued that relying on market forces would give people what they wanted while also putting pressure on the health system to offer more effective care for less money. ...
                                          In general, Democrats ... pointed out that markets didn't work well in health care because consumers didn't know enough to choose what was best for them, putting them at the mercy of providers and insurers. They pointed out that competition in health insurance drove insurers to compete for healthy patients, dumping people who got sick or cost too much and refusing coverage to those with preexisting conditions.
                                          The compromise was to combine markets with regulation, sometimes called "managed competition," now called "the Affordable Care Act." ... The proponents of the Affordable Care Act don't claim the law is perfect. The act's markets are in their infancy. ... The rules will have to be adjusted as experience accumulates.
                                          But millions of people do have health coverage who didn't have it two years ago. The markets are working pretty well... Should believers in market forces try to gut the Affordable Care Act? Heavens, no. They should seize this huge opportunity to prove their case by helping to make the law's markets work effectively.

                                            Posted by on Friday, November 21, 2014 at 10:51 AM Permalink  Comments (42)


                                            Paul Krugman: Suffer Little Children

                                            It's the decent thing to do:

                                            Suffer Little Children, by Paul Krugman, Commentary, NY Times: The Tenement Museum, on the Lower East Side, is one of my favorite places in New York City. It’s a Civil War-vintage building that housed successive waves of immigrants, and a number of apartments have been restored to look exactly as they did in various eras, from the 1860s to the 1930s... When you tour the museum, you come away with a powerful sense of immigration as a human experience, which — despite plenty of bad times,... was overwhelmingly positive.
                                            I get especially choked up about the Baldizzi apartment from 1934. When I described its layout to my parents, both declared, “I grew up in that apartment!” And today’s immigrants are the same, in aspiration and behavior, as my grandparents were — people seeking a better life, and by and large finding it.
                                            That’s why I enthusiastically support President Obama’s new immigration initiative. It’s a simple matter of human decency.
                                            That’s not to say that I, or most progressives, support open borders. ...
                                            But ... the proposition that we should offer decent treatment to children who are already here — and are already Americans in every sense..., that’s what Mr. Obama’s initiative is about.
                                            Who are we talking about? First, there are more than a million young people ... who came — yes, illegally — as children and have lived here ever since. Second, there are large numbers of children who were born here — which makes them U.S. citizens, with all the same rights you and I have — but whose parents came illegally, and are legally subject to being deported.
                                            What should we do about these people...? ... The truth is that sheer self-interest says that we should do the humane thing. Today’s immigrant children are tomorrow’s workers, taxpayers and neighbors. Condemning them to life in the shadows means that they will have less stable home lives than they should, be denied the opportunity to acquire skills and education, contribute less to the economy, and play a less positive role in society. Failure to act is just self-destructive.
                                            But... What really matters ... is the humanity. My parents were able to have the lives they did because America, despite all the prejudices of the time, was willing to treat them as people. Offering the same kind of treatment to today’s immigrant children is the practical course of action, but it’s also, crucially, the right thing to do. So let’s applaud the president for doing it.

                                              Posted by on Friday, November 21, 2014 at 12:24 AM in Economics, Immigration, Politics | Permalink  Comments (92)


                                              Links for 11-21-14

                                                Posted by on Friday, November 21, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (121)


                                                Thursday, November 20, 2014

                                                'Encouraging Work: Tax Incentives or Social Support?'

                                                Tim Taylor:

                                                Encouraging Work: Tax Incentives or Social Support?: Consider two approaches to encouraging those with low skills to be fully engaged in the workplace. The American approach focuses on keeping tax rates low and thus providing a greater financial incentive for people to take jobs. The Scandinavian approach focuses on providing a broad range of day care, education, and other services to support working families, but then imposes high tax rates to pay for it all. In the most recent issue of the Journal of Economic Perspectives, Henrik Jacobsen Kleven contrasts these two models in "How Can Scandinavians Tax So Much?" (28:4, 77-98). Kleven is from Denmark, so perhaps his conclusion is predictable. But the analysis along the way is intriguing.
                                                As a starting point, consider what Kleven calls the "participation tax rate." When an average worker in a country takes a job, how much will the money they earn increase their standard of living? The answer will depend on two factors: any taxes imposed on what they earn, including, income, payroll, and sales taxes; and also the loss of any government benefits for which they become less eligible or ineligible because they are working. In the Scandinavian countries of Denmark, Norway, and Sweden, this "participation tax rate" is about double what it is in the United States. ...
                                                A standard American-style prediction would be that countries where gains from working are so low should see a lower level of participation in the workforce. That prediction does not hold true in cross-country data among high-income countries. ...
                                                What explains this pattern? Kleven argues that just looking at the tax rate isn't enough, because it also matters what the tax revenue is spent on. For example, the Scandinavian countries spend a lot of money on universal programs for preschool, child care, and elderly care. Kleven calls these "participation subsidies," because they make it easier for people to work--especially for people who otherwise would need to find a way to cover or pay for child care or elder care. The programs are universal, which means that their value expressed as a share of income earned means much more to a low- or middle-income family than to a high-income family. ...
                                                Any direct comparisons between the United States (population of 316 million) and the Scandinavian countries of Denmark (6 million), Norway,  (5 million) and Sweden (10 million) is of course fraught with peril. Their history, politics, economies, and institutions differ in so many ways. You can't just pick up can't just pick up long-standing policies or institutions in one country, plunk them down in another country, and expect them to work the same way.
                                                That said, Kleven basic conceptual point seems sound. Provision of good-quality preschool, child care and elder care does make it easier for all families, but especially low-income  families with children, to participate in the labor market.   In these three Scandinavian countries, the power of these programs to encourage labor force participation seems to overcome the work disincentives that arise in financing and operating them. This argument has nothing to do with whether preschool and child care programs might help some children to perform better in school--although if they do work in that way, it would strengthen the case for taking this approach.
                                                So here is a hard but intriguing hypothetical question: The U.S. government spends something like $60 billion per year on the Earned Income Tax Credit, which is a refundable tax credit providing income mainly to low-income families with children, and almost as much on the refundable child tax credit. Would low-income families with children be better off, and more attached to the workforce, if a sizeable portion of the 100 billion-plus spent for these tax credits--and aimed at providing financial incentives to work--was instead directed toward universal programs of preschool, child care, and elder care?

                                                Or we could raise taxes on the wealthy, cut defense spending, etc., etc. and then ask which if the two programs it would be better to enhance (or in what proportions), the EITC and other tax credits or the "universal programs of preschool, child care, and elder care." If the programs are complementary and insufficient, as I believe they are, then neither should be cut to enhance the other (though I would choose the Scandinavian model if I had to pick on of the two to augment).

                                                  Posted by on Thursday, November 20, 2014 at 10:27 AM in Economics, Social Insurance, Taxes, Unemployment | Permalink  Comments (43)


                                                  Macroblog: For Middle-Skill Occupations, Where Have All the Workers Gone?

                                                  Ellie Terry and John Robertson of the Atlanta Fed:

                                                  For Middle-Skill Occupations, Where Have All the Workers Gone?: Considerable discussion in recent years has concerned the “hollowing out of the middle class.” Part of that story revolves around the loss of the types of jobs that traditionally have been the core of the U.S. economy: so-called middle-skill jobs.
                                                  These jobs, based on the methodology of David Autor, consist of office and administrative occupations; sales jobs; operators, fabricators, and laborers; and production, craft, and repair personnel (many of whom work in the manufacturing industry). In this post, we don't examine why the decline in middle-skill jobs has occurred, just how those workers have weathered the most recent recession. But our Atlanta Fed colleague Federico Mandelman offers an explanation of why this has occurred.
                                                  So how have workers in middle-skill occupations fared during the last recession and recovery? Let's examine a few facts from the Current Population Survey from the U.S. Bureau of Labor Statistics.
                                                  Only employment in middle-skill occupations remains below prerecession levels ...
                                                  Those in middle-skilled occupations were most likely to become unemployed...
                                                  Underemployment has improved only slowly at all skill levels...
                                                  Ready for some good news?
                                                  Those who held middle-skill jobs are more likely to obtain high-skill jobs than before the recession
                                                  Currently, of those in middle-skill occupations who remain in a full-time job, about 83 percent are still working in a middle-skill job one year later (see chart 4). What types of jobs are the other 17 percent getting? Mostly high-skill jobs; and that transition rate has been rising. The percent going from a middle-skill job to a high-skill job is close to 13 percent: up about 1 percent relative to before the recession. The percent transitioning into low-skill positions is lower: about 3.4 percent, up about 0.3 percentage point compared to before the recession. This transition to a high-skill occupation tends to translate to an average wage increase of about 27 percent (compared to those who stayed in middle-skill jobs). In contrast, those who transition into lower-skill occupations earned an average of around 24 percent less. ...
                                                  In summary, the number of middle-skill jobs declined substantially during the last recession, and that decline has been persistent—especially for full-time workers. Many of the workers leaving full-time, middle-skill jobs became unemployed, and some of that decline is the result of an increase in part-time employment. But others gained full-time work in other types of occupations. In particular, they are more likely than in the past to transition to higher-skill occupations. Further, the transition rate to high-skill occupations has gradually risen and doesn't appear directly tied to the last recession.

                                                    Posted by on Thursday, November 20, 2014 at 09:06 AM in Economics, Unemployment | Permalink  Comments (15)


                                                    Links for 11-20-14

                                                      Posted by on Thursday, November 20, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (68)


                                                      Wednesday, November 19, 2014

                                                      'On Mark Thoma: Marginalism, Marx etc'

                                                      Branko Milanovic has a very nice follow-up to my column yesterday:

                                                      On Mark Thoma: marginalism, Marx etc: Mark Thoma has written a very nice blog on how Piketty’s work is transforming economics by bringing it closer too it political economy roots. I found the post excellent, and wanted just to point out one thing which I think is very pertinently argued by Thoma and another where he somewhat simplifies the matter. ...[continue]...

                                                        Posted by on Wednesday, November 19, 2014 at 12:21 PM in Economics, History of Thought | Permalink  Comments (45)


                                                        'Fiscal Responsibility Claims Another Victim'

                                                        Paul Krugman:

                                                        Fiscal Responsibility Claims Another Victim: A few more thoughts on Japan.
                                                        The bad growth news shows, pretty clearly, that the consumption tax hike was a big mistake. It also shows, by the way, how weak the market monetarist argument — which is that fiscal policy doesn’t matter, because central banks can always achieve the nominal GDP they want — really is; do you seriously want to contend that Kuroda likes what he sees, that he isn’t trying as hard as he can to boost Japan out of deflation?
                                                        Beyond that, the Japanese story is another example of the damage wrought by the rhetoric of fiscal responsibility in a depressed economy.
                                                        Leave on one side the expansionary austerity nonsense. Even among relatively sensible people, you often encounter calls for a strategy that couples loose fiscal policy, maybe even stimulus, in the short run with measures to address long-run sustainability. ... But ... the urgency of the stimulus part gets lost, and in fact the practical result is generally austerity even in depression.
                                                        So it was with Japan... — the country that has offered many useful lessons to the West, none of which our policymakers have been willing to learn.

                                                          Posted by on Wednesday, November 19, 2014 at 11:43 AM in Economics, Fiscal Policy | Permalink  Comments (13)


                                                          'The Effect of Oil Price Declines on Consumer Prices'

                                                          From Ben Craig and Sara Millington of the Cleveland Fed:

                                                          The Effect of Oil Price Declines on Consumer Prices, by Ben Craig and Sara Millington: Oil prices have declined significantly in recent weeks, reaching levels not seen in several years. At the same time, the year-over-year percent change in the most widely known measure of inflation, the Consumer Price Index (CPI), came in at 1.7 percent for September, which is below policymakers’ targeted levels. Given these circumstances, there is some concern that low oil prices, which have continued to remain below $90 a barrel through October, will keep inflation persistently below or even push it further from targeted levels. A look at historical relationships between oil prices and various price measures can help gauge the potential pass-through of the recent oil-price declines to other domestic prices. ...
                                                          Oil price changes can potentially play a large role in the US economy. With respect to inflation, the two most likely channels through which they could do so are retail gasoline prices and producer prices. However, as consumers use savings from lower energy prices for other goods and services, these prices are likely to rise in response, offsetting the initial disinflationary impact of lower oil prices. Accordingly, as the FOMC observed in its Statement on Longer-Run Goals and Monetary Policy Strategy, “the inflation rate over the longer run is primarily determined by monetary policy,” rather than by movements in individual price components.

                                                          I'm not as sure as they are that other prices will rise as demand shifts from oil to other goods and services. In an economy like this one where demand is deficient and firms are operating below capacity (and therefore presumably below the minimum point on their average total cost curves assuming they were at or near the minimum before the recession, or at least on the flat part of the curve if the minimum extends over a range of output), shouldn't there be some room for demand to expand without putting upward pressure on prices (e.g. wages shouldn't rise until there are shortages in the labor market, but as noted here there is excess labor supply across the board)? The statement from the FOMC is about the long-run, and an economy operating near capacity, but we aren't there yet and won't be for some time at the present rate of recovery.

                                                            Posted by on Wednesday, November 19, 2014 at 10:30 AM Permalink  Comments (28)


                                                            The Long-Term and Short-Term Unemployed are Remarkably Similar

                                                            At MoneyWatch:

                                                            The Long-Term and Short-Term Unemployed are Remarkably Similar

                                                            Or, as I said here, we shouldn't ignore the long-term unemployed.

                                                              Posted by on Wednesday, November 19, 2014 at 08:44 AM in Economics, MoneyWatch, Unemployment | Permalink  Comments (11)


                                                              Links for 11-19-14

                                                                Posted by on Wednesday, November 19, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (127)


                                                                Tuesday, November 18, 2014

                                                                'The Structure of Obamacare'

                                                                Paul Krugman says pundits need to do their homework:

                                                                The Structure of Obamacare: The big revelation of this week has been how many political pundits have spent six years of the Obama administration opining furiously about the administration’s signature policy without making the slightest effort to understand how it works. They’re amazed and in denial at the suggestion that it has the same structure as Romneycare, which has been obvious and explicit all along...
                                                                So, why was Obamacare set up this way? It’s mainly about politics, but nothing that should shock you. Partly it was about getting buy-in from the insurance industry; a switch to single payer would have destroyed a powerful industry, and realistically that wasn’t going to happen. Partly it was about leaving most people unaffected: employment-based coverage, which was the great bulk of private insurance, remained pretty much as it was. ... And yes, avoiding a huge increase in on-budget spending was a consideration, but not central.
                                                                The main point was to make the plan incremental, supplementing the existing structure rather than creating massive changes. And all of this was completely upfront; I know I wrote about it many times.
                                                                Look, I understand why the hired guns of the right have to act ignorant and profess outrage. But I really am shocked at centrists who apparently thought they could opine on the politics of health reform, year after year, without taking a hour or two to learn how the darn thing was supposed to work.

                                                                It seems to me this takes some degree of willful ignorance.

                                                                  Posted by on Tuesday, November 18, 2014 at 05:21 PM in Economics, Health Care, Politics | Permalink  Comments (9)


                                                                  'How the Great Wage Slowdown Hurts Democrats'

                                                                  David Leonhardt argues "It’s the economy, stupid." Do you agree? Or is it mostly about turnout? (These may not be independent factors):

                                                                  How the Great Wage Slowdown Hurts Democrats: It’s a simple rule: A weak economy makes for an unpopular president. President Obama is on course to become the fourth president of the last six to leave office with an approval rating well below 50 percent. Each of the previous three — both Bushes and Jimmy Carter — also had something else in common: Median family income fell during their presidencies.
                                                                  The other two recent presidents, of course, were Bill Clinton and Ronald Reagan. Incomes rose while they were in the White House, and they left office with more Americans approving of their performance than not.
                                                                  The most famous expression of this rule is still the one made famous by the 1992 Clinton campaign: It’s the economy, stupid. ...
                                                                  Ezra Klein ... wrote he was skeptical that slow wage growth was “driving elections in a very clear way.” He instead suggested that structural political forces played a bigger role.
                                                                  We live in a time of partisan polarization, with most voters loyal to their side. The Republicans have an advantage in midterm elections ... because their older, whiter coalition turns out... The Democrats have an edge in presidential elections ... because their coalition is larger, even if large parts of it vote only in presidential years. Mr. Klein was suggesting that these structural forces affect politics more than the state of the economy. ...

                                                                  See also "Americans recognize slow economic recovery."

                                                                    Posted by on Tuesday, November 18, 2014 at 11:16 AM in Economics, Politics | Permalink  Comments (41)


                                                                    How Piketty Has Changed Economics

                                                                    I have a new column:

                                                                    How Piketty Has Changed Economics: Thomas Piketty’s Capital in the Twenty-First Century is beginning to receive book of the year awards, but has it changed anything within economics? There are two ways in which is has...

                                                                    I'm not sure everyone will agree that the changes will persist. [This is a long-run view that begins with Adam Smith and looks for similarities between the past and today.]

                                                                    Update: Let me add that although many people believe that the most important questions in the future will be about production (as it was in Smith's time), secular stagnation, robots, etc., I believe we will have enough "stuff", the big questions will be about distribution (as it was when Ricardo, Marx, etc. were writing).

                                                                      Posted by on Tuesday, November 18, 2014 at 08:28 AM in Economics, Methodology | Permalink  Comments (70)


                                                                      The Permanent Effects of the Great Recession

                                                                      At Moneywatch:

                                                                      The Permanent Effects of the Great Recession

                                                                      It was edited quite a bit, e.g. here is my opening for comparison:

                                                                      Economists have long believed that shocks to aggregate demand are temporary. It might take time to return to the previous trend rate of output growth, years in some cases, but given enough time the economy will return to the pre-recession path. This graph from Nobel Prize winning economist Robert Lucas, for example, illustrates this point of view. The red line is trend economic growth, and the blue line shows how aggregate demand shocks cause the economy to deviate from the trend, and then return.
                                                                      [Graph]
                                                                      However, the experience of the great recession along with recent work such as “Potential Output and Recessions: Are We Fooling Ourselves?” from economists Robert F. Martin, Teyanna Munyan, and Beth Anne Wilson at the Federal Reserve call this into question. ...

                                                                        Posted by on Tuesday, November 18, 2014 at 08:19 AM in Economics, MoneyWatch | Permalink  Comments (22)


                                                                        Links for 11-18-14

                                                                          Posted by on Tuesday, November 18, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (110)


                                                                          Monday, November 17, 2014

                                                                          'Measuring Labor Market Slack: Are the Long-Term Unemployed Different?'

                                                                          We shouldn't ignore the long-term unemployed:

                                                                          Measuring Labor Market Slack: Are the Long-Term Unemployed Different?, by Rob Dent, Samuel Kapon, Fatih Karahan, Benjamin W. Pugsley, and Ayşegül Sahin, Liberty Street Economics: [First in a three-part series] There has been some debate in the Liberty Street Economics blog and in other outlets, such as Krueger, Cramer, and Cho (2014) and Gordon (2013), about whether the short-term unemployment rate is a better measure of slack than the overall unemployment rate. As the chart below shows, the two measures are sending different signals, with the short-term unemployment rate back to its pre-recession level while the overall rate is still elevated because of a high long-term unemployment rate. One can argue that the unemployment rate is exaggerating the extent of underutilization in the labor market, based on the premise that the long-term unemployed are, in practice, out of the labor force and likely to exert little pressure on earnings. If this is indeed the case, inflationary pressures might start building up sooner than suggested by the overall unemployment rate. In a three-part series, we study the available evidence on the long-term unemployed and argue against this premise. The long-term unemployed should not be excluded from measures of labor market slack.
                                                                          In today’s post, we consider several important characteristics of long-term unemployed workers and compare them to the characteristics of three other groups of potential workers: the short-term unemployed, nonparticipants who report that they want a job, and nonparticipants who do not want a job (whom we refer to as “other nonparticipants”). ...
                                                                          Finally, we consider the occupation and industry composition of short- and long-term unemployed workers, classified by their former jobs..., they are remarkably similar.
                                                                          On the basis of these observable characteristics, we find that long-term unemployed workers are not less attached to the labor market than short-term unemployed workers. If anything, the long-term unemployed group has the largest share of prime-age workers, the age group likely to have the strongest labor force attachment. We also see that long-term unemployment is an economy-wide phenomenon, spread across industries and occupations. While there may be unobservable characteristics of long-term unemployed workers that make them less attached to the labor force, when looking at their observable characteristics, it’s hard to argue that they should not be considered as part of labor market slack. ...
                                                                          [Disclaimer: The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.]

                                                                            Posted by on Monday, November 17, 2014 at 08:47 AM in Economics, Unemployment | Permalink  Comments (30)


                                                                            'It's the Leverage, Stupid!'

                                                                            Cecchetti & Schoenholtz

                                                                            It's the leverage, stupid!: In the 30 months following the 2000 stock market peak, the S&P 500 fell by about 45%. Yet the U.S. recession that followed was brief and shallow. In the 21 months following the 2007 stock market peak, the equity market fell by a comparable 52%. This time was different: the recession that began in December 2007 was the deepest and longest since the 1930s.
                                                                            The contrast between these two episodes of bursting asset price bubbles ought to make you wonder. When should we really worry about asset price bubbles? In fact, the biggest concern is not bubbles per se; it is leverage. And, surprisingly, there remain serious holes in our knowledge about who is leveraged and who is not. ...

                                                                            All of this leads us to draw two simple conclusions. First, investors and regulators need to be on the lookout for leverage; that’s the biggest villain. In the United States and many other countries, mortgage borrowing has been at the heart of financial instability, and it may be so again in the future. But we should not be lulled into a sense of security just because banks’ real estate exposure has declined. If leverage starts rising in real estate or elsewhere – on or off balance sheet – then we should be paying attention.

                                                                              Posted by on Monday, November 17, 2014 at 08:30 AM in Economics, Financial System, Regulation | Permalink  Comments (32)


                                                                              Paul Krugman: When Government Succeeds

                                                                              Sometimes, government is the best solution:

                                                                              When Government Succeeds, by Paul Krugman, Commentary, NY Times: The great American Ebola freakout of 2014 seems to be over. ...
                                                                              When the freakout was at its peak, Ebola wasn’t just a disease — it was a political metaphor. It was, specifically, held up by America’s right wing as a symbol of government failure. ... Leading Republicans suggested ignoring everything we know about disease control and resorting to extreme measures like travel bans, while mocking claims that health officials knew what they were doing.
                                                                              Guess what: Those officials actually did know what they were doing. The real lesson of the Ebola story is that sometimes public policy is succeeding even while partisans are screaming about failure. And it’s not the only recent story along those lines.
                                                                              Here’s another: Remember Solyndra? It was a renewable-energy firm that borrowed money using Department of Energy guarantees, then went bust, costing the Treasury $528 million. And conservatives have pounded on that loss relentlessly... Last week the department revealed that the program that included Solyndra is, in fact, on track to return profits of $5 billion or more.
                                                                              Then there’s health reform. As usual, much of the national dialogue over the Affordable Care Act is being dominated by fake scandals drummed up by the enemies of reform. But if you look at the actual results so far, they’re remarkably good. ...
                                                                              One last item: Remember all the mockery of Obama administration assertions that budget deficits, which soared during the financial crisis, would come down as the economy recovered? ... Well,... the deficit has indeed come down rapidly...
                                                                              The moral of these stories is ... that ... government-hating politicians can sometimes turn their predictions of failure into self-fulfilling prophecies, but when leaders want to make government work, they can.
                                                                              And let’s be clear: The government policies we’re talking about here are hugely important. We need serious public health policy, not fear-mongering, to contain infectious disease. We need government action to promote renewable energy and fight climate change. Government programs are the only realistic answer for tens of millions of Americans who would otherwise be denied essential health care.
                                                                              Conservatives want you to believe that while the goals of public programs on health, energy and more may be laudable, experience shows that such programs are doomed to failure. Don’t believe them. Yes, sometimes government officials, being human, get things wrong. But we’re actually surrounded by examples of government success, which they don’t want you to notice.

                                                                                Posted by on Monday, November 17, 2014 at 12:06 AM in Economics, Market Failure | Permalink  Comments (79)


                                                                                Links for 11-17 -14

                                                                                  Posted by on Monday, November 17, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (45)


                                                                                  Sunday, November 16, 2014

                                                                                  'The Real Scientific Study of the Distribution of Wealth Has, We Must Confess, Scarcely Begun as Yet'

                                                                                  This is a small part of Irving Fisher's presidential address to the American Economic Association in 1919 (it is worth reading in its entirety, via Piketty's book and online notes):

                                                                                  Economists in Public Service: Annual Address of the President: ... The real scientific study of the distribution of wealth has, we must confess, scarcely begun as yet. The conventional academic study of the so-called theory of distribution into rent, interest, wages, and profits is only remotely related to the subject. This subject, the causes and cures for the actual distribution of capital and income among real persons, is one of the many now in need of our best efforts as scientific students of society. I shall here merely throw into the discussion a few tentative thoughts which seem to me to be now either completely overlooked or only dimly appreciated.
                                                                                  There are, I believe, two master keys to the distribution of wealth: the Inheritance system and the Profit system.
                                                                                  The practices which happen to be followed by men of great wealth in making wills is certainly the chief determinant of the distribution of their wealth after their death. Mr. Albert G. Coyle, one of my former students, has estimated that four-fifths of the one hundred and fifty or more fortunes in the United States having incomes of over $1,000,000 a year have been accumulating for two generations or more. It is interesting to observe that, although the formulae expressing distribution by Pareto's logarithmic law are similar for the United States and England, the number of wealthy men at the top is two and a quarter times as great, in proportion to population, in England as in the United States, presumably because the number of generations through which fortunes have been inherited are much greater there than here.
                                                                                  Yet the man who wills property does so without regard to its effect on the social distribution of wealth. In fact even from the private point of view careful thought is seldom bestowed on the solemn responsibility of bequeathing property. The ordinary millionaire capitalist about to leave this world forever cares less about what becomes of the fortune he leaves behind than we have been accustomed to assume. Contrary to a common opinion, he did not lay it up, at least not beyond a certain point, because of any wish to leave it to others. His accumulating motives were rather those of power, of self-expression, of hunting big game.
                                                                                  I believe that it is very bad public policy for the living to allow the dead so large and unregulated an influence over us. Even in the eye of the law there is no natural right, as is ordinarily falsely assumed, to will property. "The right of inheritance," says Chief Justice Coleridge of England, "a purely artificial right, has been at different times and in different countries very variously dealt with. The institution of private property rests only upon the general advantage." And again, Justice McKenna of the United States Supreme Court says: "The right to take property by devise or descent is the creature of the law and not a natural right-a privilege, and therefore the authority which confers it may impose conditions on it."
                                                                                  The disposal of property by will is thus simply a custom, one handed down to us from Ancient Rome. ...

                                                                                    Posted by on Sunday, November 16, 2014 at 09:45 AM in Economics, Income Distribution | Permalink  Comments (43)


                                                                                    Links for 11-16 -14

                                                                                      Posted by on Sunday, November 16, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (188)


                                                                                      Saturday, November 15, 2014

                                                                                      'The Unwisdom of Crowding Out'

                                                                                      Here's Paul Krugman's response to the Vox EU piece by Peter Temin and David Vines that I posted yesterday:

                                                                                      The Unwisdom of Crowding Out (Wonkish): I am, to my own surprise, not too happy with the defense of Keynes by Peter Temin and David Vines in VoxEU. Peter and David are of course right that Keynes has a lot to teach us, and are also right that the anti-Keynesians aren’t just making really bad arguments; they’re making the very same really bad arguments Keynes refuted 80 years ago.
                                                                                      But the Temin-Vines piece seems to conflate several different bad arguments under the heading of “Ricardian equivalence”, and in so doing understates the badness.
                                                                                      The anti-Keynesian proposition is that government spending to boost a depressed economy will fail, because it will lead to an equal or greater fall in private spending — it will crowd out investment and maybe consumption, and therefore accomplish nothing except a shift in who spends. But why do the AKs claim this will happen? I actually see five arguments out there — two (including the actual Ricardian equivalence argument) completely and embarrassingly wrong on logical grounds, three more that aren’t logical nonsense but fly in the face of the evidence.
                                                                                      Here they are...[explains all five]...

                                                                                      He ends with:

                                                                                      My point is that you do a disservice to the debate by calling all of these things Ricardian equivalence; and the nature of that disservice is that you end up making the really, really bad arguments sound more respectable than they are. We do not want to lose sight of the fact that many influential people, including economists with impressive CVs, responded to macroeconomic crisis with crude logical fallacies that reflected not just sloppy thinking but ignorance of history.

                                                                                        Posted by on Saturday, November 15, 2014 at 11:40 AM in Economics, Macroeconomics | Permalink  Comments (27)


                                                                                        'The Quantity of Labor Demanded is Not Always Equal to the Quantity Supplied'

                                                                                        Roger Farmer:

                                                                                        Repeat After Me: The Quantity of Labor Demanded is Not Always Equal to the Quantity Supplied: I've been teaching a class on intermediate macroeconomics this quarter. Increasingly, over the past twenty years or more, intermediate macro classes at UCLA (and in many other top schools), have focused almost exclusively on economic growth. That reflected a bias in the profession, initiated by Fynn Kydland and Ed Prescott, who persuaded macroeconomists to use the Ramsey growth model as a paradigm for business cycle theory. According to this Real Business Cycle view of the world, we should think about consumption, investment and employment 'as if' they were the optimal choices of a single representative agent with super human perception of the probabilities of future events. 
                                                                                        Although there were benefits to thinking more rigorously about inter-temporal choice, the RBC program as a whole led several generations of the brightest minds in the profession to stop thinking about the problem of economic fluctuations and to focus instead on economic growth. Kydland and Prescott assumed that labor is a commodity like any other and that any worker can quickly find a job at the market wage. In my view, the introduction of the shared belief that the labor market clears in every period, was a huge misstep for the science of macroeconomics that will take a long time to correct. ...
                                                                                        Ever since Robert Lucas introduced the idea of continuous labor market clearing, the idea that it may be useful to talk of something called 'involuntary unemployment' has been scoffed at by the academic chattering classes. It's time to fight back. The concept of 'involuntary unemployment' does not describe a loose notion that characterizes the sloppy work of heterodox economists from the dark side. It is a useful category that describes a group of workers who have difficulty finding jobs at existing market prices. ...
                                                                                        Repeat after me: the quantity of labor demanded is not always equal to the quantity supplied.

                                                                                        [There is quite a bit more detail and explanation in the full post.]

                                                                                          Posted by on Saturday, November 15, 2014 at 08:42 AM in Economics, Unemployment | Permalink  Comments (93)


                                                                                          Links for 11-15 -14

                                                                                            Posted by on Saturday, November 15, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (120)


                                                                                            Friday, November 14, 2014

                                                                                            Paul Krugman: China, Coal, Climate

                                                                                            Are we finally getting somewhere in the battle against climate change?:

                                                                                            China, Coal, Climate, by Paul Krugman, Commentary, NY Times: It’s easy to be cynical about summit meetings. Often they’re just photo ops, and the photos from the latest Asia-Pacific Economic Cooperation meeting, which had world leaders looking remarkably like the cast of “Star Trek,” were especially cringe-worthy. At best — almost always — they’re just occasions to formally announce agreements already worked out by lower-level officials.
                                                                                            Once in a while, however, something really important emerges. And this is one of those times: The agreement between China and the United States on carbon emissions is, in fact, a big deal.
                                                                                            To understand why, you first have to understand the defense in depth that fossil-fuel interests and their loyal servants — nowadays including the entire Republican Party — have erected against any action to save the planet.
                                                                                            The first line of defense is denial: there is no climate change; it’s a hoax concocted by a cabal including thousands of scientists around the world. ... Indeed, some elected officials have done all they can to pursue witch hunts against climate scientists.
                                                                                            Still, as a political matter, attacking scientists has limited effectiveness. It ... sounds like a crazy conspiracy theory, because it is.
                                                                                            The second line of defense involves economic scare tactics: any attempt to limit emissions will destroy jobs and end growth. ... Like claims of a vast conspiracy of scientists, however, the economic disaster argument has limited traction beyond the right-wing base. ...
                                                                                            Which brings us to the last line of defense, claims that America can’t do anything about global warming, because other countries, China in particular, will just keep on spewing out greenhouse gases. ... But ... China has declared its intention to limit carbon emissions. ...
                                                                                            But consider the situation. America is not exactly the most reliable negotiating partner on these issues, with climate denialists controlling Congress ...
                                                                                            But the principle that has just been established is a very important one. Until now, those of us who argued that China could be induced to join an international climate agreement were speculating. Now we have the Chinese saying that they are, indeed, willing to deal — and the opponents of action have to claim that they don’t mean what they say.
                                                                                            Needless to say, I don’t expect the usual suspects to concede that a major part of the anti-environmentalist argument has just collapsed. But it has. This was a good week for the planet.

                                                                                              Posted by on Friday, November 14, 2014 at 12:24 AM in Economics, Environment, Market Failure | Permalink  Comments (67)


                                                                                              Links for 11-14 -14

                                                                                                Posted by on Friday, November 14, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (191)


                                                                                                'Why Keynes is Important Today'

                                                                                                Peter Temin and David Vines:

                                                                                                Why Keynes is important today, Vox EU: The current debate on the efficacy of Keynesian stimulus mirrors the resistance Keynes met with when initially advocating his theory. This column explains the original controversy and casts today’s policy debate in that context. Now that concepts of Ricardian equivalence and the fiscal multiplier are  formally defined, we are better able to frame the arguments. The authors argue that a simple model of the short-run economy can substantiate the argument for stimulus.
                                                                                                Macroeconomists have largely failed in explaining and recommending policies since the Global Financial Crisis of 2008.  Today when thinking about fiscal policy they cite Ricardian Equivalence to deny the efficacy of Keynesian analysis (which was abandoned in the turbulent 1970s that signaled the end of rapid growth).  They seem unaware that they have revived the views of Montagu Norman, Governor of the Bank of England, in 1930.
                                                                                                Ricardian Equivalence is a theory that concludes that any expansion of public spending will be offset by an equal and opposite decline in private spending.  The theory is based on a few important assumptions. It assumes forward-looking consumers who adjust their current spending in anticipation of future taxes to pay for the spending.  Under these conditions, any increase in current spending leads consumers to anticipate a rise in future taxes and decrease their current spending to save for this.
                                                                                                This theory dominates current macroeconomic discussion.  It fits into the form of current macroeconomics that assumes not just forward-looking consumers, but flexible prices as well. And if a Keynesian suggests fiscal policy in current conditions, a modern economist is likely to invoke Ricardian Equivalence.
                                                                                                Remembering the past
                                                                                                Keynes faced exactly this opposition in 1930.  He was a member of the Macmillan Committee convened by the British government to analyze the worsening economic conditions of that time.  His recommendation for increased government spending – what we now call expansive fiscal policy – was opposed by Norman and other representatives from the Bank of England.  They did not invoke Ricardian Equivalence because it had not yet been formulated; instead they simply denied that increased government spending would have any beneficial effect.
                                                                                                Keynes opposed this view, but he did not have an alternate theory with which to refute it.  The result was confusion in which Keynes was unable to convince a single other member of the Macmillan Committee to support his conclusions.  It took five years for Keynes to formulate what we now call Keynesian economics and publish it in what he called The General Theory.
                                                                                                He based his new theory on several assumptions, two of which are relevant here.  He assumed that consumers are only forward-looking part of the time, being restrained by a lack of income at other times, and that many prices are not flexible in the short run wages in particular are ‘sticky’.  These assumptions give rise to involuntary (Keynesian) unemployment which expansive fiscal policy can decrease.
                                                                                                Which theory is relevant today?  We know that wages are sticky – countries in Southern Europe have found it impossible to implement requests from their creditors that they reduce wages swiftly.  And we know that not all private actors in the economy are forward-looking.  Before the crisis, borrowing and spending increased in ways that could not be sustained;  now consumers are not spending and business firms are not investing even though interest rates are close to zero. 
                                                                                                Those are the conditions described by Keynes in which expansive fiscal policy works well.  They also are the conditions in which monetary policy does not, even though modern macroeconomic policymakers came to rely entirely on monetary policy for stabilization.  There is a disconnect between the needs of current economies and theories of current macroeconomists.
                                                                                                Doomed to repeat it?
                                                                                                What to do?  In many applied disciplines, like medicine, practitioners go back to basics when the facts change.  If their current practice fails to produce the desired result, they search their armamentarium for others.  If their assumptions prove wrong, they look for more appropriate ones.  But not modern macroeconomists – they say we must simply endure what they call secular stagnation. 
                                                                                                This is an unhappy prediction.  Monetary policy does not work today; instead, this is the perfect time for fiscal policy.  There are immediate needs to repair roads and bridges, rebuild energy grids, and modernize other means of travel.  Expansive Keynesian fiscal policy will benefit the economy in both the short and long run.
                                                                                                We argue in our new book, Keynes, Useful Economics for the World Economy, that these recommendations can be seen as inferences from a simple and effective model of the short-run economy.  We show how hard it was for Keynes to break away from previous theories that work well for individual people and companies – and even for the economy as a whole in the long run – to define the short run in which we all live.  We also stress Keynes’ interest in the world economy, not just in isolated economies.  After all, the IMF is perhaps the most enduring remnant of Keynesian thought left today.
                                                                                                Authors' note: Peter Temin is Elisha Gray II Professor Emeritus of Economics at MIT and the author of "Lessons from the Great Depression" (MIT Press) and other books.  David Vines is Professor of Economics and Fellow of Balliol College at the University of Oxford, and joint editor of a number of books on global economic governance.
                                                                                                Editor's note: Temin and Vines are coauthors of "The Leaderless Economy: Why the World Economic System Fell Apart and How to Fix It".
                                                                                                References
                                                                                                Lucas, R (2009), “Why a Second Look Matters”, Council on Foreign Relations, March 30.
                                                                                                Krugman, P (2011), “A Note on the Ricardian Equivalence Argument Against the Stimulus (Slightly Wonkish)”, Krugman blog, The New York Times, December 26.
                                                                                                Barro, R (1974), “Are Government Bonds Net Wealth?”, Journal of Political Economy.
                                                                                                Barro, R “On the Determinants of the Public Debt”, Journal of Political Economy.
                                                                                                Poterba, J M and L H Summers (1987), “Finite Lifetimes and the Effects of Budget Deficits on National Savings”, Journal of Monetary Economics.
                                                                                                Carroll C and L H Summers (1987), “Why Have the Private Savings Rates in the United States and Canada Diverged?”, Journal of Monetary Economics.

                                                                                                  Posted by on Friday, November 14, 2014 at 12:06 AM in Economics, History of Thought | Permalink  Comments (33)


                                                                                                  Thursday, November 13, 2014

                                                                                                  Fed Watch: Dudley, Plosser, JOLTS, Potential Output

                                                                                                  Tim Duy:

                                                                                                  Dudley, Plosser, JOLTS, Potential Output, by Tim Duy: Not enough time to do any of these topics justice, but some quick takeaways for the last two days.
                                                                                                  First, read today's speech by Federal Reserve President William Dudley in which he discusses the global implications of US monetary policy. Some keys points:
                                                                                                  1. Still dismissing the recent drop in inflation expectations. Dudley says:
                                                                                                  In assessing inflation expectations, I currently put more weight on survey-based measures of inflation expectations as opposed to market-based measures. Survey-based measures have been generally stable, consistent with inflation expectations remaining well-anchored. However, market-based measures, such as those based on breakeven inflation derived from the difference between yields on nominal versus Treasury Inflation-Protected Securities (TIPS), have registered declines over the past few months, even on a 5-years forward basis. Research done by my staff suggests that much of this decline in market-based measures of inflation compensation reflects a fall in the inflation risk premium—that is, what investors are willing to pay to protect themselves against inflation risk. Adjusting for the fall in the inflation risk premium, inflation expectations appear to have declined much less than implied by TIPS inflation breakeven measures.
                                                                                                  The Fed is not taking the market-based measured of inflation expectations at face value, especially now that the Fed is closer to its employment objectives and they are increasingly confident that the recovery is more likely than not to strengthen further.
                                                                                                  2. Cautious about prematurely raising rates. Dudley on the implications of his outlook for monetary policy:
                                                                                                  In considering the appropriate timing of lift-off, there are three important reasons to be patient. First, the Committee is still undershooting both its employment and inflation objectives...Second, when interest rates are at the zero lower bound, the risks of tightening a bit too early seem considerably greater than the risks of tightening a bit too late. A premature tightening might lead to financial conditions that are too tight, resulting in a weaker economy and an aborted lift-off...Finally, given the still high level of long-term unemployment, there could be a significant benefit to allowing the economy to run “slightly hot” for a while in order to get these people employed again. If they are not employed relatively soon, their job skills will erode further, reducing their long-term prospects for employment and, therefore, the productive capacity of the U.S. economy.
                                                                                                  Hence, no need for a rate hike now. But...
                                                                                                  3. Rate hikes are coming. Dudley continues:
                                                                                                  All that said, I hope the economic outlook evolves so that it will be appropriate to begin to raise interest rates sometime next year. While raising interest rates is often portrayed as a difficult task for central bankers, in fact, given the events since the onset of the financial crisis, it would be a development to be truly excited about. Raising interest rates would signal that the U.S. economy is finally getting healthier, and that the Fed is getting closer to achieving its dual mandate objectives of maximum employment and price stability. That would be very good news, even if it were to cause a bump or two in financial markets.
                                                                                                  The economy is improving, hence normalization is coming. And note he does not specify any time frame other than next year. Based on previous comments we might reasonably conclude that he thinks mid-year, but it is a data-dependent decision. I think his is "patient" in the sense that it is not going to happen this year (which really isn't a question to begin with). But I doubt he has ruled out the end of the first quarter of next year. And again, don't expect the Fed to change course on the basis of some market turbulence. They expect it as part of the policy transition.
                                                                                                  Outgoing Philadelphia Federal Reserve President Charles Plosser, in contrast, is looking for action sooner than later. While Dudley sees the risks of premature tightening, Plosser thinks the risk of wanting too long before normalization are higher:
                                                                                                  First, we do not know how to confidently determine whether the labor market is fully healed or when we have reached full employment...Second, if we wait until we are certain that the labor market has fully recovered before beginning to raise rates, policy will be far behind the curve. One risk of waiting is that the Committee may be forced to raise rates very quickly to prevent an increase in inflation...This would represent a return of the so-called "go-stop" policies of the past...A third risk to waiting is that the zero interest rate policy has generated a very aggressive reach for yield as investors take on either credit or duration risk to earn higher returns...For these reasons, I would prefer that we start to raise rates sooner rather than later. This may allow us to increase rates more gradually as the data improve rather than face the prospect of a more abrupt increase in rates to catch up with market forces, which could be the outcome of a prolonged delay in our willingness to act. Of course, financial markets are not always patient, so some volatility will be unavoidable.
                                                                                                  Still a minority position on the FOMC, but eventually hawks (or those that remain, see below) and doves will converge. I still think that convergence will happen in the middle of next year with the risks weighted more on the second than the third quarter. Indeed, the JOLTS report for September suggests the labor market improvement is accelerating as we head into the final months of the year. Notably, the quits rates spiked:

                                                                                                  JOLTS111314

                                                                                                  I suspect that a faster quit rate will force employers to step up the pace of higher out of necessity. Moreover, unemployment below 6% and heading south and quit rates heading north to pre-recession levels suggests that wage growth is coming. And that wage growth will push FOMC moderates toward the "hike sooner than later" side of the debate. Call me an optimist on the near-term outlook.
                                                                                                  Finally, via Mark Thoma, researchers at the Federal Reserve are questioning the ability of the economy to regain anything like what we thought was potential output prior to the recession:
                                                                                                  The economic collapse in the wake of the global financial crises (GFC) and the weaker-than-expected recovery in many countries have led to questions about the impact of severe downturns on economic potential. Indeed, for several major economies, the level of output is nowhere near returning to pre-crisis trend (figure 1). Such developments have resulted in repeated downward revisions to estimates of potential output by private- and public-sector forecasters. In addition, this disappointment in post-recession growth has contributed to concerns that the U.S. economy, among others, is entering an era of secular stagnation. However, the historical experience of advanced economies around recessions indicates that the current experience is less unusual than one might think. First, output typically does not return to pre-crisis trend following recessions, especially deep ones. Second, in response, forecasters repeatedly revise down measures of trend...
                                                                                                  ...Although these calculations are simple, they raise deeper questions about the impact of recessions on trend output. The finding that recessions tend to depress the long-run level of output may imply that demand shocks have permanent effects. The sustained deviation of the level of output from pre-crisis trend points to flaws in the way the economics profession models the recovery of output to economic shocks and raises further doubts about the reliance on measures of output gaps to determine economic slack. For policymakers, the results also point to the cost of recessions, especially deep and long ones, and provide a rationale for strong and rapid policy responses to economic downturns.
                                                                                                  Those of us concerned by the risk that the lengthy cyclical downturn would yield structural damage would not be surprised by this conclusion. Note that the more the Fed believes output is close to potential, the less patient they will be in holding rates low. And note that the have already pretty much given up on the CBO potential output numbers:

                                                                                                  POT111314

                                                                                                  If he don't get back to that estimate of potential output by 2017, that estimate just isn't going to hold. Call me a pessimist on this point. I think it more likely than not that the CBO estimate of potential is revised downward again. I suspect the Fed has already done so.
                                                                                                  And in a late-breaking development, Dallas Federal Reserve President Richard Fisher announced his retirement today, effective March 19, 2015. Another hawk down.
                                                                                                  Bottom Line: Watch the data. In my opinion, the pessimistic focus from both the left and the right risks underestimating the degree of economic improvement. The Fed's patience will wane in the face of further improvement in the pace of activity.

                                                                                                    Posted by on Thursday, November 13, 2014 at 11:19 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (31)


                                                                                                    'The Number of Unemployed Exceeds the Number of Available Jobs Across All Sectors'

                                                                                                    About that skills mismatch story:

                                                                                                    The Number of Unemployed Exceeds the Number of Available Jobs Across All Sectors, by Elise Gould, EPI: The figure below shows the number of unemployed workers and the number of job openings in September, by industry. This figure is useful for diagnosing what’s behind our sustained high unemployment. If today’s labor market woes were the result of skills shortages or mismatches, we would expect to see some sectors where there are more unemployed workers than job openings, and others where there are more job openings than unemployed workers. What we find, however, is that unemployed workers exceed jobs openings across the board. ...
                                                                                                    This demonstrates that the main problem in the labor market is a broad-based lack of demand for workers—not, as is often claimed, available workers lacking the skills needed for the sectors with job openings. ...

                                                                                                      Posted by on Thursday, November 13, 2014 at 10:29 AM in Economics, Unemployment | Permalink  Comments (20)