Brad DeLong is "Pleased to See Martin Feldstein Wisely Calling for Large, Immediate Fiscal Stimulus to Boost Employment!":
I Am Pleased to See Martin Feldstein Wisely Calling for Large, Immediate Fiscal Stimulus to Boost Employment!, by Brad DeLong: But the rest of his column leaves me puzzled…
Martin Feldstein calls for the U.S. to fight deficient aggregate demand by spending an extra trillion dollars on infrastructure over the next five years–and then to keep that program from worsening the government debt-to-GDP ratio by also enacting tax increases and spending cuts that would bring the debt down to its baseline level between, say, years five and fifteen, by, say, 2028.
With idle labor and slack capacity at their current levels, the best bet is that such a program would boost total real GDP by at least $2 trillion over the next five years–and actually raise the government’s debt five years hence by at most $333 billion because of the federal, state, and local taxes that would be paid on the added income from higher real GDP.
But there is no need to also find the political will to reach agreement on longer-run tax increases and spending cuts in order to keep this program from worsening the long-run debt outlook..., an extra trillion dollars of infrastructure will boost U.S. national income in the long run by at least $40 billion a year–and the U.S. government will then collect $13.3 billion a year in extra taxes because of higher levels of income.
Thus Feldstein’s short-run program alone, without the hard-to-pass long-run component, would free up more than $7.8 billion a year of debt-amortization capacity: it would all by itself improve the long-run fiscal picture.
So why the focus on the need for a hard-to-pass long-run deal, and the unnecessary claim that it must be coupled to the short-run before what makes sense makes sense? It remains a mystery to me…
Also a mystery to me: just what is it that makes quantitative easing so risky? Keeping the U.S. economy in a situation of slack aggregate demand–yes, that is risky. But how is the Fed’s buying government bonds and holding them to maturity–even a lot of such bonds–risky? What is the risk? What might happen that would be bad, and couldn’t be neutralized? ...
He also points to Krugman's comments: My Favorite Martian.
Posted by Mark Thoma on Tuesday, December 10, 2013 at 09:14 AM in Economics, Fiscal Policy |
Posted by Mark Thoma on Tuesday, December 10, 2013 at 12:03 AM in Economics, Links |
Ramesh Ponnuru is paranoid about Republican paranoia:
Republican Inflation Paranoia Is Political Suicide, by Ramesh Ponnuru: In the years since the financial crisis, Republican politicians have increasingly embraced a “hard money” critique of the Federal Reserve.
They’ve warned that its policies are too loose and dangerously inflationary, even as inflation has stayed well below historical levels. Now some conservatives are arguing that criticizing loose money should be a more prominent part of their case to voters. It’s a winning issue, they say, and Republicans should make the most of it.
They’re wrong on both counts. ...
Republicans do need to rethink their approach to economics. Intensifying their already excessive focus on inflation isn’t the way to do it.
Posted by Mark Thoma on Monday, December 9, 2013 at 03:20 PM in Economics, Inflation, Monetary Policy, Politics |
Bullard Offers Up The Tiny Taper, by Tim Duy: The employment report put the December taper squarely on the table. But what about inflation? Does low inflation take the December taper off the table? That is the question I asked last week, and Gavyn Davies at the FT follows up on the theme. Davies draws attention to this line from the FOMC statement:
In judging when to moderate the pace of asset purchases, the Committee will, at its coming meetings, assess whether incoming information continues to support the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective.
As Davies notes, surely low inflation must create a headache for central bankers desperately seeking to taper. In the US, not only is inflation not trending back up to the Fed's objective, it is actually trending away from the objective. St. Louis Federal Reserve President James Bullard acknowledges the difficult position the Fed finds itself in:
While labor market outcomes have been considerably better than those predicted at the time of the September 2012 decision, Bullard noted that inflation has surprised to the downside. “There is no widely accepted reason why inflation is running as low as it is in the face of extraordinarily accommodative policy from the Fed,” he said.
They don't know why inflation is falling, only that it is. What should they do with respect to policy? Bullard offers a solution:
“A small taper might recognize labor market improvement while still providing the Committee the opportunity to carefully monitor inflation during the first half of 2014,” Bullard said. “Should inflation not return toward target, the Committee could pause tapering at subsequent meetings,” he added.
The tiny taper is back. What makes this extraordinary is that Bullard is an inflation hawk in the sense that he typically defends the inflation target from above or below. He is believed responsible for this addition to the FOMC statement:
The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance...
Seems like he is easing back on his low inflation concerns, perhaps thinking that inflation *must* turn upward soon considering the decline in the unemployment rate.
Note, though, that he offers up the tiny taper in the context of leaving the asset purchase progam data dependent. Other policymakers, however, want to shift the QE to a calendar dependent program. This I suspect Bullard would only be willing to accept if inflation was on a clear upward trajectory.
Bullard also discussed options for forward guidance:
He discussed three possible options for altering forward guidance, including lowering the unemployment threshold. However, Bullard cautioned, this “puts the credibility of the thresholds approach at risk.” He said another option would be to establish an inflation floor at 1.5 percent, which would be symmetric with the current forward guidance on inflation and which could be helpful if inflation continues to behave in an unusual manner. The third option would be to state verbally that the FOMC is unlikely to raise rates even after the 6.5 percent unemployment threshold is crossed, which Chairman Ben Bernanke has already done. This option is “less complicated and possibly just as effective,” Bullard said.
There seems to be a general resistance to changing the unemployment threshold, in part I suspect because there is lingering concern that the Phillip's Curve will rear its head before unemployment hits 5.5% or even 6%. And I would think that the erratic behavior of inflation is exactly why they would avoid tying their hands with an inflation floor. After all, arguably the "erratic" behavior of unemployment has already given them enough of a headache. I tend to think the FOMC will come around to the third option of verbally reinforcing the existing thresholds. It is indeed less complicated, as Bullard notes.
Bottom Line: The Federal Reserve wants to taper. Wants very badly to taper, in my opinion. The recent employment reports seem to be giving a green light, and I suspect they are coming around to the idea that the decline in the labor force participation rate is largely permanent at this point, which will only increase their angst about the asset purchase program. But inflation is a thorn in their sides. The Fed will need to do a 180-degree turn on its current inflation concerns. If they dismiss the inflation concern in their drive to taper, I suspect they will lean on the stable inflation expectations and Phillips Curves arguments to justify a forecast that has inflation quickly reversing course and trending to target. I still tend to believe the Fed will delay tapering until 2014. Whether December or January or later, policy is close to an inflection point with a shift from more to less accommodation in the works.
Posted by Mark Thoma on Monday, December 9, 2013 at 02:27 PM in Economics, Fed Watch, Monetary Policy |
Thought I'd highlight this piece from today's links:
What Obama Left Out of His Inequality Speech: Regulation, by Thomas McGarity, Commentary, NY Times: President Obama’s speech on inequality last Wednesday was important in several respects. He identified the threat to economic stability, social cohesion and democratic legitimacy posed by soaring inequality of income and wealth. He put to rest the myths that inequality is mostly a problem afflicting poor minorities, that expanding the economy and reducing inequality are conflicting goals, and that the government cannot do much about the matter.
Mr. Obama also outlined several principles to expand opportunity: strengthening economic productivity and competitiveness; improving education, from prekindergarten to college access to vocational training; empowering workers through collective bargaining and antidiscrimination laws and a higher minimum wage; targeting aid at the communities hardest hit by economic change and the Great Recession; and repairing the social safety net.
But there’s a crucial dimension the president left out: the revival, since the mid-1970s, of the laissez-faire ideology that prevailed in the Gilded Age, roughly the 1870s through the 1910s. It’s no coincidence that this laissez-faire revival — an all-out assault on government regulation — has unfolded over the very period in which inequality has soared to levels not seen since the Gilded Age. ...[continue]...
See here for more.
Posted by Mark Thoma on Monday, December 9, 2013 at 08:54 AM in Economics, Market Failure, Regulation |
Letting unemployment benefits expire is bad economics and shows "a complete lack of empathy for the unfortunate":
The Punishment Cure, by Paul Krugman, Commentary, NY Times: Six years have passed since the United States economy entered the Great Recession, four and a half since it officially began to recover, but long-term unemployment remains disastrously high.
And Republicans have a theory about why this is happening. ...: Unemployment insurance, which generally pays eligible workers between 40 and 50 percent of their previous pay, reduces the incentive to search for a new job. As a result, the story goes, workers stay unemployed longer. In particular, it’s claimed that the Emergency Unemployment Compensation program, which lets workers collect benefits beyond the usual limit of 26 weeks, explains why there are four million long-term unemployed workers in America today, up from just one million in 2007.
Correspondingly, the G.O.P. answer to the problem of long-term unemployment is to increase the pain of the long-term unemployed: Cut off their benefits, and they’ll go out and find jobs. How, exactly, will they find jobs when there are three times as many job-seekers as job vacancies? Details, details. ...
The view of most labor economists now is that unemployment benefits have only a modest negative effect on job search — and in today’s economy have no negative effect at all on overall employment. On the contrary, unemployment benefits help create jobs, and ... slashing unemployment benefits — which would have the side effect of reducing incomes and hence consumer spending — would just make the situation worse.
Still, don’t expect prominent Republicans to change their views, except maybe to come up with additional reasons to punish the unemployed. For example, Senator Rand Paul recently cited research suggesting that the long-term unemployed have a hard time re-entering the work force as a reason to, you guessed it, cut off long-term unemployment benefits. You see, those benefits are actually a “disservice” to the unemployed.
The good news, such as it is, is that the White House and Senate Democrats are trying to make an issue of expiring unemployment benefits. The bad news is that they don’t sound willing to make extending benefits a precondition for a budget deal, which means that they aren’t really willing to make a stand.
So the odds, I’m sorry to say, are that the long-term unemployed will be cut off, thanks to a perfect marriage of callousness — a complete lack of empathy for the unfortunate — with bad economics. But then, hasn’t that been the story of just about everything lately?
Posted by Mark Thoma on Monday, December 9, 2013 at 12:24 AM in Economics, Social Insurance, Unemployment |
Posted by Mark Thoma on Monday, December 9, 2013 at 12:03 AM in Economics, Links |
Posted by Mark Thoma on Sunday, December 8, 2013 at 10:14 AM in Economics, Video |
Posted by Mark Thoma on Sunday, December 8, 2013 at 12:03 AM in Economics, Links |
A quick one before heading out:
By George, Britain’s Austerity Experiment Didn’t Work!, by John Cassidy: George Osborne, the patron saint of austerity enthusiasts on both sides of the Atlantic, was in the House of Commons on Thursday, reveling in the fact that the U.K.’s economy is finally growing again, and claiming that “Britain’s economic plan is working.” Delivering his annual Autumn Statement—he was a bit late—the Chancellor of the Exchequer pointed to forecasts from the quasi-independent Office for Budget Responsibility, which point to G.D.P. growth of 1.4 per cent this year and 2.8 per cent in 2014.
For Britons who have been laboring through more than five years of recession, or near recession, that is welcome news. By some measures, the U.K. has been through a worse slump than the one it experienced during the Great Depression, and now, at last, it appears to be over. Recent figures from the Office for National Statistics show that the economy has expanded for three quarters in a row, with manufacturing, services, and construction all sharing in the growth. Small wonder that Osborne was smiling.
It’s a clever political line, and it appears to be having an impact. The rebound in the economy, which caught by surprise most forecasters, including those at the Office for Budget Responsibility, has transformed the political situation at Westminster and given the Conservative-Liberal coalition, which has been lagging badly in the opinion polls, new hope of winning reëlection in May 2015.
But from an economic perspective, Osborne’s argument is hogwash. ...
Posted by Mark Thoma on Saturday, December 7, 2013 at 10:28 AM in Economics, Fiscal Policy |
I tweeted this link, and it's getting far, far more retweets than I would have expected, so I thought I'd note it here:
Econometrics and "Big Data", by Dave Giles: In this age of "big data" there's a whole new language that econometricians need to learn. ... What do you know about such things as:
- Decision trees
- Support vector machines
- Neural nets
- Deep learning
- Classification and regression trees
- Random forests
- Penalized regression (e.g., the lasso, lars, and elastic nets)
- Spike and slab regression?
Probably not enough!
If you want some motivation to rectify things, a recent paper by Hal Varian ... titled, "Big Data: New Tricks for Econometrics" ... provides an extremely readable introduction to several of these topics.
He also offers a valuable piece of advice:
"I believe that these methods have a lot to offer and should be more widely known and used by economists. In fact, my standard advice to graduate students these days is 'go to the computer science department and take a class in machine learning'."
Posted by Mark Thoma on Saturday, December 7, 2013 at 10:15 AM in Econometrics, Economics, Methodology |
From today's links, Paul Krugman:
Pathetic Centrists: So progressive Democrats have seized on an op-ed by the group Third Way — an op-ed attacking Elizabeth Warren and Bill de Blasio for their terrible, horrible economic populism — as a way to start reclaiming the party from the “centrists”. And it’s working: the centrists are very much on the run.
Why? Part of the answer is that the Democratic party has become more progressive. But I would argue that the centrists are also suffering from their own intellectual bankruptcy.
I mean, going after Warren and de Blasio for not being willing to cut Social Security and their “staunch refusal to address the coming Medicare crisis” ??? Even aside from the question of exactly what the mayor of New York has to do with Medicare, this sounds as if they have been living in a cave for years, maybe reading an occasional screed from the Pete Peterson complex.
On Social Security, they’re still in the camp insisting that because the system might possibly have to pay lower benefits in the future, we must move now to cut future benefits. Oh, kay.
But anyway, they declare that Medicare is the bigger issue. So what’s this about “staunch refusal” to address Medicare? The Affordable Care Act contains lots of measures to limit Medicare costs and health care more generally — it’s Republicans, not progressive Democrats, who have been screaming against cost-saving measures (death panels!). And health cost growth has slowed dramatically, feeding into much better Medicare projections. ...
It’s just so tired and tiring. If being a “centrist” means fact-free denunciations of progressives for not being willing to cut entitlements, who needs these guys?
Some centrists, are, I think, motivated by the fear that the Democratic Party will lose the middle to Republicans if the "extremists" become the voice of the Party. So they adopt positions that are based upon what they think these at risk centrists Democrats and independents in the general voting population want to hear.
Posted by Mark Thoma on Saturday, December 7, 2013 at 10:02 AM in Economics, Politics |
Posted by Mark Thoma on Saturday, December 7, 2013 at 12:03 AM in Economics, Links |
Stronger and Sustainable, but..., by Tim Duy: The employment report produced a modest upside surprise with a gain of 203k jobs in November, remarkably close to my estimate of 211k from yesterday, which I might as well enjoy because it will never happen again. In addition, the unemployment rate fell to 7% while the labor force participation rates ticked up 0.2 percentage points. Smells like a tapering report. And with that in mind the market reaction to the news should please Fed official, as bond markets were flat while stocks gained. That too should be something of a green light to taper. I can't help but think, however, that today was something of a goldilocks days for markets, because while the labor report was solid, both headline and core inflation are still headed south. How will the Fed react to the inflation numbers? That seems to be the real question.
In my opinion, the employment report confirms what I said yesterday: The trend of improvement in labor markets remains intact. Indeed, on a twelve-month basis nfp growth is very, very steady:
In the context of the Yellen charts, the steady nfp growth is contributing to a similarly steady decline in the unemployment rate, while the the hiring and quit rates are barely edging higher:
The drop in the unemployment rate reveals the challenges with the Fed's forward guidance. As Victoria McGrane at the WSJ notes, Federal Reserve Chairman Ben Bernanke gave a clear signal earlier this year that the Fed expected its bond buying plan to be wound down by the time the unemployment rate hit 7%. We haven't even started the taper yet. I tend to think the 7% marker was the single biggest communications failure on the part of the Fed, and contributed greatly to the bond market volatility earlier this year. Of course, it is an error the Fed will never admit to.
The steady recent gains in job growth coupled with the decline in the unemployment rate certainly put tapering on the table at the next FOMC meeting. But a policy move at that point seems premature. The issue of tapering is currently wrapped up with a host of issues as noted by Jon Hilsenrath at the WSJ:
Fed officials are likely to debate at their December 17-18 meeting whether to go ahead and pull back on the bond-buying program then or wait until the January 28-29 meeting, Ben Bernanke’s last as Fed chairman, or even later. Waiting until January will give them a little more time to confirm their increasing optimism about the economy and more time to finalize their exit strategy from the bond program and prepare markets for how they’ll proceed. They still have lots of questions to answer about the overall thrust of their policies and how they communicate their plans. Some officials want to put a cap on the overall amount of bonds they plan to buy, rather than leave it open-ended. They’ve also been debating for several months whether to once again alter their guidance to the public about when they’ll raise short-term interest rates.
I tend to believe that they will want to firm up their communications stance prior to tapering, so I have tended to push my tapering expectations into next year. Moreover, the Personal Income and Outlays report leave me cautious about a December taper. The data don't suggest an acceleration of household spending activity:
More worrisome is that inflation continues to fall:
And some of the improvement we saw earlier this year has faded:
It seems premature to expect tapering while inflation is still trending down. Indeed, Chicago Federal Reserve President Charles Evans expressed some caution today:
The official, a voting member of the monetary policy setting Federal Open Market Committee, also said he was “nervous about inflation developments” describing the data as being “substantially” short of the Fed’s 2% target.
He said the Fed had to be prepared to defend the target from above and below.
I suspect Minneapolis Federal Reserve President Narayana Kocherlakota and St. Louis Federal Reserve President James Bullard with have similar concerns. If ultimately everything hinges on price stability over the long-run, the inflation decline should be very disconcerting to the entire FOMC.
Altogether, we have the makings of a very contentious FOMC meeting. Consider the issues at hand:
- The Fed will update their forecasts, which will have an impact on their policy stance.
- Do they focus on "stronger and sustainable," "progress toward goals," "dual-mandate", or "cost vs. efficacy" when assessing the large scale asset purchase program?
- Taper or not? When they taper, do they switch from data-dependent policy to a calendar-dependent policy?
- How do they balance the labor market improvement versus the inflation rate deterioration?
- Leave the current thresholds in place? If so, do they enhance forward guidance? Do they put in place an inflation floor?
- Cut the interest rate paid on reserves?
I don't sense broad agreement among FOMC participants on any of these issues. And all of these issues appear to be tied together in the context of an overall strategy for monetary policy, which means agreement and action on just one item leaves open the door for future conflict and communication failures. It seems too much to expect the December meeting to produce sufficient agreement to justify changing policy; instead, it seems like the best we should expect is that they lay the groundwork to next year's policy path.
Bottom Line: The employment report raises the odds of a December taper. But does the inflation report lower the odds by the same amount? Seems like that is a recipe for bond market stability. Overall, I tend to believe the range of contentious issues yet to be decided on leaves the odds of tapering below 50%. You kind of have to throw-out half the dual mandate, or make an argument that tapering is about labor markets only, to pull the trigger on tapering with inflation still trending down. That seems like it should be a problem for the FOMC.
Posted by Mark Thoma on Friday, December 6, 2013 at 11:20 AM in Economics, Fed Watch, Monetary Policy |
Obama's speech on inequality and mobility was important:
Obama Gets Real, by Paul Krugman, Commentary, NY Times: Much of the media commentary on President Obama’s big inequality speech was cynical. You know the drill: it’s yet another “reboot” that will go nowhere..., and so on. But ... the speech may matter a lot more than the cynics imagine.
First..., Mr. Obama laid out a disturbing — and, unfortunately, all too accurate — vision of an America losing touch with its own ideals, an erstwhile land of opportunity becoming a class-ridden society. ... And he linked rising inequality with falling mobility, asserting that Horatio Alger stories are becoming rare precisely because the rich and the rest are now so far apart. ...
What struck me about this speech, however, was what he had to say about the sources of rising inequality. Much of our political and pundit class remains devoted to the notion that rising inequality, to the extent that it’s an issue at all, is all about workers lacking the right skills and education. But the president now seems to accept progressive arguments that education is at best one of a number of concerns, that America’s growing class inequality largely reflects political choices, like the failure to raise the minimum wage along with inflation and productivity.
And because the president was willing to assign much of the blame for rising inequality to bad policy, he was also more forthcoming than in the past about ways to change the nation’s trajectory, including a rise in the minimum wage, restoring labor’s bargaining power, and strengthening, not weakening, the safety net.
And there was this: “When it comes to our budget, we should not be stuck in a stale debate from two years ago or three years ago. A relentlessly growing deficit of opportunity is a bigger threat to our future than our rapidly shrinking fiscal deficit.” Finally! Our political class has spent years obsessed with a fake problem — worrying about debt and deficits that never posed any threat to the nation’s future — while showing no interest in unemployment and stagnating wages. Mr. Obama, I’m sorry to say, bought into that diversion. Now, however,... we have the president of the United States breaking ranks, finally sounding like the progressive many of his supporters thought they were backing in 2008. This is going to change the discourse — and, eventually, I believe, actual policy.
So don’t believe the cynics. This was an important speech by a president who can still make a very big difference.
Posted by Mark Thoma on Friday, December 6, 2013 at 12:24 AM in Economics, Income Distribution, Politics |
...austerity, as much as the data has disproven the claim that it would be through reduction in government spending and increased confidence that advanced economies will return to healthy growth rates, it does not seem to lose its appeal... As an example, here is a CNBC article that provides a long list of arguments of why austerity is winning the war. The arguments: the UK is finally growing, Spain's GDP is not falling anymore and even in Greece we now start seeing the possibility of positive growth. And where is this coming from? From the austerity that these wise governments have implemented over the last year. This is, of course, a misleading analysis of the data. It is still the case that countries where austerity was the strongest have seen the lowest growth rates (and the largest increase in debt). The only reason why these three countries are either returning to growth or not collapsing anymore is that after such a deep crisis, growth must return at some point. Yes, even without any policy actions to support growth, economies recover. But they do so slowly and they will never return to where they should have been. And just to get the facts straight, in these three countries, governments have stopped being a large drag in the economy. When you reduce government spending growth suffers. Once government has stabilized at a low level it does not become a drag on growth.
The last five years have provided an incredible macroeconomic experiments to learn about the effects of monetary and fiscal policy to stabilize cycles. But it seems that this crisis will be wasted, not so much in terms of implementing reforms but in terms of our ability to use data to improve our understanding of macroeconomics.
Posted by Mark Thoma on Friday, December 6, 2013 at 12:15 AM in Economics |
Posted by Mark Thoma on Friday, December 6, 2013 at 12:03 AM in Economics, Links |
Ahead of the Employment Report, by Tim Duy: Another first Friday, another employment report. Although the general expectation is that the Fed holds its currently policy in place, there is speculation that the monetary policymakers could pull the trigger on tapering this month if we see another employment report that could be deemed sufficient to declare the labor recovery "stronger and sustainable." After all, it is not unreasonable to expect that, after tomorrow, three of the four most recent readings on the labor market revealed job growth in excess of 200k per month.
That said, caution would be warranted before taking an overly optimistic position based on these data. The gains may not be sustainable if US growth slows in the final quarter of the year as expected (indeed, the third quarter spurt is less than meets the eye). Moreover, Fed officials must be somewhat wary of reading too much into the data given the pattern of fall/winter strength seen in recent years. With these considerations in mind, it seems that sufficient certainty to justify tapering would not be evident until late in the first quarter of next year. This assumes, of course, the Fed doesn't pull a different rabbit out of its hat - progress toward goals or cost/benefit analysis - to justify tapering sooner than anticipated.
Forecasting the employment report is a notoriously hazardous activity. One quick and dirty method is a regression based on the ADP report, the ISM nonmanufacturing employment Index, and initial unemployment claims:
The one-step ahead forecasts since 2004 closely match the actual data:
The model predicts payroll growth of 211k for November, somewhat higher than consensus of 180k. But of course there are still occasions of particularly large errors. And this type of analysis is conditioned on the revised data. Tomorrow we get the preliminary report - the market moving report. It seems that no one cares much if you correctly anticipate the revised data; by the time that is released, the focus is on the next preliminary numbers. Overall, my takeaway is that is that this kind of model tells us that we should expect job growth consistent with that seen in past months. I don't read much into the specific forecast.
The Fed might be sensitive to the most recent report, which is why fears of imminent tapering will arise if the number surprises strongly to the upside. Still, one number should not make a policy decision. Indeed San Francisco Federal Reserve President John WIlliams seemed to have a relatively high bar for tapering in an interview with Reuter's Ann Saphir:
As for the Fed's massive asset-purchase program, Williams said the Fed should only reduce it once it is "completely confident that the economy is on the right track."
I have difficulty imagining that one number could leave the Federal Reserve "completely confident" about the pace of activity. The Beige Book, for example, gives no hints that the pace of activity has changed much at all. Like October, the economy was described as "modest to moderate" with no inflation to be seen despite continuing concerns about the supply of "qualified workers":
Hiring showed a modest increase or was unchanged across Districts. Difficulty with finding qualified workers, especially for high-skilled positions, was frequently reported. Upward pressure on wages and overall price inflation were contained. Contacts in many Districts voiced concern about future cost increases attributable to the Affordable Care Act and other types of federal regulation.
I still find talk of tapering frustrating in the context of the FOMC forecast. Inflation is well below target and there is no imminent threat of it accelerating to the 2.5% threshold. Unemployment remains unacceptably high. And their forecasts are likely to show that a return to potential output remains years away. One reason they seem to be focused on tapering is the expectation that the fiscal drag will ease in 2014, thus eliminating the need for QE. But that would seem to be a missed opportunity to give the economy a turbo boost to more quickly meet the Fed's policy objectives. What exactly is the pressing need to end the asset purchase program?
The need, I still suspect, could be found in the Fed's double-secret analysis of the costs/efficacy of QE. I would appreciate an entire speech on this topic, complete with a list of specific, quantified costs and benefits so that we can track understand the calculus underlying the Fed decision making.
Until we see that calculus, we need to fall back on the data dependent nature of all the Fed's programs. And if that data didn't support tapering in September, I am hard-pressed to say that enough stronger data has arrived to change that decision. I really hope I don't have to eat those words tomorrow!
In any event, the Fed would like us to shift our attention from tapering to interest rates. Indeed, it very well might be the case that the big tapering market move is behind us, and the Fed can now taper with little implication for financial markets. Thus would set the stage for the sort-of-normalization of policy. Williams was pushing in this direction:
"My view would be that we would not be raising the funds rate even if the unemployment rate was below 6.5 percent as long as inflation continued to be low, for some time," Williams said. "We need to be communicating more about the post-6.5-percent world now, because it could be with us much sooner than we expect, and I don't want market participants to be surprised."
The interview does not indicate that Williams is pushing to change the unemployment threshold. This seems more consistent with my view that the FOMC is more interested in strengthening the "threshold not trigger" language in the statement. What happen's after the unemployment rate hits 6.5% is going to be interesting; at that point, if they don't want to change the thresholds, I expect they have to get rid of the thresholds altogether. The unemployment threshold itself would be nonsensical at a 6.4% unemployment rate.
If there are any substantive policy changes in the FOMC, I expect they will be in the nature of the forward guidance. I think they want to confirm they have a firm hold on the short end of the yield before they taper. There is the possibility that they drop the rate of interest on reserves. Williams again:
Williams said he also supported cutting the interest paid to banks on the excess reserves they keep at the central bank as a way to signal the Fed's commitment to low rates. "I think it would make sense," he said, although he acknowledged that policymakers have considered, and rejected, the idea several times over the years.
As Williams notes, this idea comes in and out of fashion at the Fed. Policymakers apparently don't view it as having the potential for a huge boost, but they seem to be viewing it as less risky than previously thought.
Finally, one other thing of note from the William's interview:
...once the Fed decides the economy is strong enough for the Fed to reduce its $85 billion in monthly bond purchases, it should announce an end date and a purchase total for the program, Williams said.
This follows in the thinking of hawk Philadelphia Fed President Charles Plosser, who argued that the Fed cap the size of the program to enhance it's credibility (not sure how this works; ultimately credibility is built on meeting the Fed's objectives, which are not currently in danger, and least in the direction Plosser seems to believe). If this kind of proposal does gain favor, note that it represents a shift from a data dependent policy to another time dependent policy. Once some threshold is reached, the program shifts into automatic. Didn't the Fed just spend the summer convincing us that policy was not time dependent? Why change now? If they do change, why should we believe the same change will not occur with rate policy? Just food for thought.
Bottom Line: Another month, another employment report. With the fiscal shutdown in the rear-view mirror, Fed officials are turning their attention back to policy normalization. They want to taper, but remain wary of pulling the trigger on tapering too quickly. I tend to believe that, on balance, the FOMC needs to see a few more months of data given the uncertainty about the path of GDP before they were completely comfortable tapering. That said, one can make a reasonably solid argument for tapering if the November employment report adds to the recent string of 200k+ payroll gains. My expectation is that even a positive report will not trigger a taper with month; instead, the statement is most likely to evolve to reflect a new emphasis on forward guidance. But I can't rule out a tapering surprise.
Posted by Mark Thoma on Thursday, December 5, 2013 at 09:48 AM in Economics, Fed Watch, Monetary Policy |
Gloomy European Economist is, well, gloomy:
What is Wrong with the EU?: Eurostat just released the 2012 figures for poverty and social exclusion in the EU. The numbers are terrifying. Let me quote the press release:
“In 2012, 124.5 million people, or 24.8% of the population, in the EU were at risk of poverty or social exclusion, compared with 24.3% in 2011 and 23.7% in 2008. ...
One may be tempted to shrug. After all, 1% in four years, is not that much. Let me put actual people behind the numbers: The number of people at risk of poverty increased of 5.5 millions between 2008 and 2012. Strikingly, always looking at Eurostat data, the number of jobs lost in the EU28 over the same period is almost exactly the same (-5.4 millions).
This is plain unacceptable. And teaches us two lessons
- Our welfare system is not capable anymore to shield workers from the hardship of business cycles. We progressively dismantled welfare, becoming “more like the United States”. But we stubbornly refuse to accept the consequence of this, i.e. that fiscal and monetary policy need (like in the US) to be proactive and flexible, so as to dampen the cycle. Constraints to macroeconomic policy, coupled with a diminished protection from the welfare state, spell disaster, social exclusion, and the destruction of the social fabric.
- The second lesson is that these numbers are there to stay. The economy may recover, but the loss of confidence, of capacity, of social status of those who we pushed into hardship, will stay with us for years to come. We are destroying human capital at amazing speed.
What is enraging is that none of this was inevitable. The crisis could have been shielded by less ideological leadership in European institutions and in some most European capitals. Frontloading of austerity in the periphery was a terrible mistake. Not accompanying it with fiscal expansion in the core was a crime, showing of how little solidarity counts, facing the protestant urge to “punish the sinners”.
The result is that one of the most affluent economic areas of the world barely notices that one quarter of its population lives at risk of poverty. What is wrong with us?
Posted by Mark Thoma on Thursday, December 5, 2013 at 08:53 AM
Posted by Mark Thoma on Thursday, December 5, 2013 at 12:03 AM in Economics, Links |
Remarks by the President on Economic Mobility, THEARC, Washington, D.C.: Thank you. (Applause.) Thank you, everybody. Thank you so much. Please, please have a seat. Thank you so much. Well, thank you, Neera, for the wonderful introduction and sharing a story that resonated with me. There were a lot of parallels in my life and probably resonated with some of you.
Over the past 10 years, the Center for American Progress has done incredible work to shape the debate over expanding opportunity for all Americans. And I could not be more grateful to CAP not only for giving me a lot of good policy ideas, but also giving me a lot of staff. (Laughter.) My friend, John Podesta, ran my transition; my Chief of Staff, Denis McDonough, did a stint at CAP. So you guys are obviously doing a good job training folks.
I also want to thank all the members of Congress and my administration who are here today for the wonderful work that they do. I want to thank Mayor Gray and everyone here at THEARC for having me. This center, which I’ve been to quite a bit, have had a chance to see some of the great work that’s done here. And all the nonprofits that call THEARC home offer access to everything from education, to health care, to a safe shelter from the streets, which means that you’re harnessing the power of community to expand opportunity for folks here in D.C. And your work reflects a tradition that runs through our history -- a belief that we’re greater together than we are on our own. And that’s what I’ve come here to talk about today.
Over the last two months, Washington has been dominated by some pretty contentious debates -- I think that’s fair to say. And between a reckless shutdown by congressional Republicans in an effort to repeal the Affordable Care Act, and admittedly poor execution on my administration’s part in implementing the latest stage of the new law, nobody has acquitted themselves very well these past few months. So it’s not surprising that the American people’s frustrations with Washington are at an all-time high.
But we know that people’s frustrations run deeper than these most recent political battles. Their frustration is rooted in their own daily battles -- to make ends meet, to pay for college, buy a home, save for retirement. It’s rooted in the nagging sense that no matter how hard they work, the deck is stacked against them. And it’s rooted in the fear that their kids won’t be better off than they were. They may not follow the constant back-and-forth in Washington or all the policy details, but they experience in a very personal way the relentless, decades-long trend that I want to spend some time talking about today. And that is a dangerous and growing inequality and lack of upward mobility that has jeopardized middle-class America’s basic bargain -- that if you work hard, you have a chance to get ahead.
I believe this is the defining challenge of our time: Making sure our economy works for every working American. It’s why I ran for President. It was at the center of last year’s campaign. It drives everything I do in this office. And I know I’ve raised this issue before, and some will ask why I raise the issue again right now. I do it because the outcomes of the debates we’re having right now -- whether it’s health care, or the budget, or reforming our housing and financial systems -- all these things will have real, practical implications for every American. And I am convinced that the decisions we make on these issues over the next few years will determine whether or not our children will grow up in an America where opportunity is real.
Now, the premise that we’re all created equal is the opening line in the American story. And while we don’t promise equal outcomes, we have strived to deliver equal opportunity -- the idea that success doesn’t depend on being born into wealth or privilege, it depends on effort and merit. And with every chapter we’ve added to that story, we’ve worked hard to put those words into practice.
It was Abraham Lincoln, a self-described “poor man’s son,” who started a system of land grant colleges all over this country so that any poor man’s son could go learn something new.
When farms gave way to factories, a rich man’s son named Teddy Roosevelt fought for an eight-hour workday, protections for workers, and busted monopolies that kept prices high and wages low.
When millions lived in poverty, FDR fought for Social Security, and insurance for the unemployed, and a minimum wage.
When millions died without health insurance, LBJ fought for Medicare and Medicaid.
Together, we forged a New Deal, declared a War on Poverty in a great society. We built a ladder of opportunity to climb, and stretched out a safety net beneath so that if we fell, it wouldn’t be too far, and we could bounce back. And as a result, America built the largest middle class the world has ever known. And for the three decades after World War II, it was the engine of our prosperity.
Now, we can’t look at the past through rose-colored glasses. The economy didn’t always work for everyone. Racial discrimination locked millions out of poverty -- or out of opportunity. Women were too often confined to a handful of often poorly paid professions. And it was only through painstaking struggle that more women, and minorities, and Americans with disabilities began to win the right to more fairly and fully participate in the economy.
Nevertheless, during the post-World War II years, the economic ground felt stable and secure for most Americans, and the future looked brighter than the past. And for some, that meant following in your old man’s footsteps at the local plant, and you knew that a blue-collar job would let you buy a home, and a car, maybe a vacation once in a while, health care, a reliable pension. For others, it meant going to college -- in some cases, maybe the first in your family to go to college. And it meant graduating without taking on loads of debt, and being able to count on advancement through a vibrant job market.
Now, it’s true that those at the top, even in those years, claimed a much larger share of income than the rest: The top 10 percent consistently took home about one-third of our national income. But that kind of inequality took place in a dynamic market economy where everyone’s wages and incomes were growing. And because of upward mobility, the guy on the factory floor could picture his kid running the company some day.
But starting in the late ‘70s, this social compact began to unravel. Technology made it easier for companies to do more with less, eliminating certain job occupations. A more competitive world lets companies ship jobs anywhere. And as good manufacturing jobs automated or headed offshore, workers lost their leverage, jobs paid less and offered fewer benefits.
As values of community broke down, and competitive pressure increased, businesses lobbied Washington to weaken unions and the value of the minimum wage. As a trickle-down ideology became more prominent, taxes were slashed for the wealthiest, while investments in things that make us all richer, like schools and infrastructure, were allowed to wither. And for a certain period of time, we could ignore this weakening economic foundation, in part because more families were relying on two earners as women entered the workforce. We took on more debt financed by a juiced-up housing market. But when the music stopped, and the crisis hit, millions of families were stripped of whatever cushion they had left.
And the result is an economy that’s become profoundly unequal, and families that are more insecure. I’ll just give you a few statistics. Since 1979, when I graduated from high school, our productivity is up by more than 90 percent, but the income of the typical family has increased by less than eight percent. Since 1979, our economy has more than doubled in size, but most of that growth has flowed to a fortunate few.
» Continue reading "Remarks by the President on Economic Mobility"
Posted by Mark Thoma on Wednesday, December 4, 2013 at 03:06 PM in Economics, Politics |
Benjamin H. Harris and Melissa S. Kearney at Brookings:
A Dozen Facts about America’s Struggling Lower-Middle-Class, by Benjamin H. Harris and Melissa S. Kearney: This Hamilton Project policy paper provides a dozen facts on struggling lower-middle-class families focusing on two key challenges: food insecurity, and the low return to work for struggling lower-middle-class families who lose tax and transfer benefits as their earnings increase. These facts highlight the critical role of federal tax and transfer programs in providing income support to families struggling to remain out of poverty. ...
Here are the facts they discuss:
- More than half of families in the United States earn $60,000 or less per year.
- Nearly half of families in the United States live below 250 percent of the federal poverty level.
- Struggling lower-middle-class families are almost equally headed by single parents and married couples.
- Nearly one out of two families in the struggling lower-middle class is headed by an adult who has attended college.
- Nearly one-third of struggling lower-middle-class families rely on income support from a government program.
- Roughly 40 percent of children in the struggling lower-middle class experience food insecurity or obesity, or both.
- More than one in five children faces food insecurity in thirty-seven states and the District of Columbia.
- Nearly 90 percent of Supplemental Nutritional Assistance Program (SNAP) recipients live in a household with at least one child, one disabled individual, or one elderly individual.
- America’s tax and transfer system expands the middle class.
- Struggling lower-middle-class families depend on an array of tax and transfer benefits.
- A low-income, single parent can face a marginal tax rate as high as 95 percent.
- The highest marginal tax rates tend to fall on the struggling lower-middle class.
Posted by Mark Thoma on Wednesday, December 4, 2013 at 10:05 AM in Economics, Income Distribution, Social Insurance |
'Microfoundations': I Do Not Think That Word Means What You Think It Means
Brad DeLong responds to my column on macroeconomic models:
“Microfoundations”: I Do Not Think That Word Means What You Think It Means
The basic point is this:
...New Keynesian models with more or less arbitrary micro foundations are useful for rebutting claims that all is for the best macro economically in this best of all possible macroeconomic worlds. But models with micro foundations are not of use in understanding the real economy unless you have the micro foundations right. And if you have the micro foundations wrong, all you have done is impose restrictions on yourself that prevent you from accurately fitting reality.
Thus your standard New Keynesian model will use Calvo pricing and model the current inflation rate as tightly coupled to the present value of expected future output gaps. Is this a requirement anyone really wants to put on the model intended to help us understand the world that actually exists out there? ...
After all, Ptolemy had microfoundations: Mercury moved more rapidly than Saturn because the Angel of Mercury left his wings more rapidly than the Angel of Saturn and because Mercury was lighter than Saturn…
Posted by Mark Thoma on Wednesday, December 4, 2013 at 08:53 AM in Economics, Macroeconomics, Methodology |
Posted by Mark Thoma on Wednesday, December 4, 2013 at 12:03 AM in Economics, Links |
David Warsh on the "nature of what happened in September five years ago":
...George W. Bush was one of the heroes of the crisis. Despite the cavalier behavior of the first six years of his presidency, his last two years in office were pretty good – especially the appointment of Bernanke and Treasury Secretary Henry Paulson. Bush clearly shares credit with Obama for a splendid instance of cooperation in the autumn of 2008. (Bush, Obama and John McCain met in the White House on September 25, at the insistence of Sen. McCain, in the interval before the House of Representatives relented and agreed to pass the TARP bill. Obama dominated the conversation, Bush was impressed, and, by most accounts, McCain made a fool of himself.) ...
Much more here.
Posted by Mark Thoma on Tuesday, December 3, 2013 at 09:40 AM in Economics, Financial System |
Is There One Model to Rule Them All?: The recent shake-up at the research department of the Federal Reserve Bank of Minneapolis has rekindled a discussion about the best macroeconomic model to use as a guide for policymakers. Should we use modern New Keynesian models that performed so poorly prior to and during the Great Recession? Should we return to a modernized version of the IS-LM model that was built to explain the Great Depression and answer the questions we are confronting today? Or do we need a brand new class of models altogether?The recent shake-up at the research department of the Federal Reserve Bank of Minneapolis has rekindled a discussion about the best macroeconomic model to use as a guide for policymakers. Should we use modern New Keynesian models that performed so poorly prior to and during the Great Recession? Should we return to a modernized version of the IS-LM model that was built to explain the Great Depression and answer the questions we are confronting today? Or do we need a brand new class of models altogether? ...
The recent shake-up
at the research department of the Federal Reserve Bank of Minneapolis has rekindled a discussion about the best macroeconomic model to use as a guide for policymakers. Should we use modern New Keynesian models that performed so poorly prior to and during the Great Recession? Should we return to a modernized version of the IS-LM model that was built to explain the Great Depression and answer the questions we are confronting today? Or do we need a brand new class of models altogether? - See more at: http://www.thefiscaltimes.com/Columns/2013/12/03/There-One-Economic-Model-Rule-Them-All#sthash.WPTndtm4.dpuf
Posted by Mark Thoma on Tuesday, December 3, 2013 at 07:29 AM in Economics, Macroeconomics, Methodology |
Posted by Mark Thoma on Tuesday, December 3, 2013 at 12:03 AM in Economics, Links |
Israel Malkin and Daniel J. Wilson in the latest FRBSF Economic Letter:
Taxes, Transfers, and State Economic Differences, by Israel Malkin and Daniel J. Wilson, FRBSF Economic Letter: U.S. states collect their own taxes and determine their public spending. But they also pay taxes to and receive transfer payments and public services from the federal government. Many commentators have argued that this system of federal taxes and transfers provides not only considerable redistribution among regions, but also stabilization (see, for example, Krugman 2012). These commentators suggest that if the European Union (EU) had developed a similar system among member states, it might have avoided its recent fiscal and economic crises. In fact, as the EU was formed in the early 1990s, many economists doubted its viability because it lacked a stabilization system similar to that in the United States (see, for example, Sala-i-Martin and Sachs 1991).
Still, the size and mode of action of redistribution and stabilization in the U.S. system are not well understood. Stabilization implies that even a very high-income state whose economy temporarily worsens would receive some short-term relief through transfer payments or lower tax payments to the federal government, a kind of insurance offsetting temporary negative shocks. A system that provides redistribution from richer states to poorer states does not automatically provide stabilization. In other words, stabilization is separate from redistribution, in which over the long term the federal government collects more taxes from higher-income states and provides less support through transfers or public goods, regardless of temporary state-level economic problems. Thus, the extent of stabilization provided by a given tax-and-transfer system can’t be measured using simple cross-state correlations between average state income and taxes paid or transfers received by a state.
In looking at the U.S. system as a guide for how the EU or other cross-country economic unions might achieve stabilization, it is important to know how much stabilization in the United States results from taxation and how much from transfers, and what kinds of transfers best promote stabilization.
This Economic Letter looks at how much total redistribution and stabilization the U.S. system provides and how much is due to taxes and how much to transfers. We find substantial redistribution and stabilization, both driven entirely by the tax system. Surprisingly, federal government transfers to states—either to governments or to individuals or businesses—provide virtually no redistribution nor stabilization. This holds true whether we measure transfers broadly, including for example salaries of federal workers living in a given state and federal contracts with businesses in the state, or narrowly, including only grants to state and local governments and direct federal transfer payments to individuals, businesses, and nonprofits. One exception is federal emergency unemployment compensation, which rises when a state’s income falls and its unemployment rate increases. Rather, we find that the tax system has the most impact in stabilizing states in the short run, consistent with other research (see Asdrubali, Sorenson, and Yosha 1996, Sala-i-Martin and Sachs 1991, and Feyrer and Sacerdote 2013). ...
Implications for Europe
The key implication of our findings is that the U.S. tax-and-transfer system provides considerable interregional redistribution and economic stabilization. But what might these findings imply for the European Union? The EU lacks a comparable system of redistribution and stabilization among member countries, and that is often cited to explain why differences in economic performance among EU countries in the aftermath of the global recession have been so much greater than differences among U.S. states. A simple back-of-the-envelope calculation based on our results suggests that if the European Union had a system similar to that of the United States, Greek nominal disposable income per capita would have fallen 6.9% from 2008 to 2011 instead of the actual 11.2%. Income in Germany would have risen 3.7% instead of 5.9%.
This analysis is limited to quantifying the degree of stabilization that could be achieved in Europe if it had a U.S.-style tax-and-transfer system. How much stabilization among countries would be optimal is a separate and much more difficult question. Among other things, it depends on the costs and benefits of centralizing the allocation of resources and any moral hazard due to insuring countries against negative economic consequences resulting from poor policy decisions. Nonetheless, understanding the role of taxes and transfers in the United States could help guide European Union discussions about policy reforms.
[I omitted the sections with the supporting evidence, graphs, etc. showing the stabilization, tax, and transfer results for each state.]
Posted by Mark Thoma on Monday, December 2, 2013 at 10:58 AM in Economics, Fiscal Policy |
An increase in the minimum wage has "overwhelming public support":
Better Pay Now, by Paul Krugman, Commentary, NY Times: ... The last few decades have been tough for many American workers, but especially hard on those employed in retail trade — a category that includes both the sales clerks at your local Walmart and the staff at your local McDonald’s. ...
So can anything be done to help these workers, many of whom depend on food stamps — if they can get them — to feed their families, and who depend on Medicaid — again, if they can get it — to provide essential health care? Yes. We can preserve and expand food stamps, not slash the program the way Republicans want. We can make health reform work, despite right-wing efforts to undermine the program.
And we can raise the minimum wage..., we have a lot of evidence on what happens when you raise the minimum wage. And the evidence is overwhelmingly positive: hiking the minimum wage has little or no adverse effect on employment, while significantly increasing workers’ earnings.
It’s important to understand how good this evidence is..., a minimum-wage increase would help low-paid workers, with few adverse side effects. And we’re talking about a lot of people. Early this year the Economic Policy Institute estimated that an increase in the national minimum wage to $10.10 from its current $7.25 would benefit 30 million workers. ...
Now, many economists have a visceral dislike of anything that sounds like price-fixing, even if the evidence strongly indicates that it would have positive effects. Some of these skeptics oppose doing anything to help low-wage workers. Others argue that we should subsidize, not regulate — in particular, that we should expand the Earned Income Tax Credit (E.I.T.C.), an existing program that does indeed provide significant aid to low-income working families. And for the record, I’m all for an expanded E.I.T.C.
But there are, it turns out, good technical reasons to regard the minimum wage and the E.I.T.C. as complements — mutually supportive policies, not substitutes. Both should be increased. Unfortunately, given the political realities, there is no chance whatsoever that a bill increasing aid to the working poor would pass Congress.
An increase in the minimum wage, on the other hand, just might happen, thanks to overwhelming public support. This support doesn’t come just from Democrats or even independents; strong majorities of Republicans (57 percent) and self-identified conservatives (59 percent) favor an increase.
In short, raising the minimum wage would help many Americans, and might actually be politically possible. Let’s give it a try.
Posted by Mark Thoma on Monday, December 2, 2013 at 12:24 AM in Economics, Income Distribution |
Posted by Mark Thoma on Monday, December 2, 2013 at 12:03 AM in Economics, Links |
Simon Wren-Lewis documents the austerity insanity:
Here we go again:
1) Government embarks on austerity, to try and maintain the confidence of the bond markets. We must preserve the AAA rating for our government’s debt, says the finance minister.
2) Austerity reduces demand, helping create flat or negative growth.
3) As a result, deficit targets keep being missed. Additional austerity is imposed, and growth declines again.
3) Country loses its AAA rating, and the credit rating agency gives concerns about poor growth as an important factor for the downgrade.
4) This confirms our fears, says the finance minister. We must redouble our efforts to reduce our debt.
This will sound familiar to UK ears, but it is also what has just happened in the Netherlands.
I do not like using decisions by the credit rating agencies as an excuse to write posts, because when it comes to the major economies they have no particular expertise. (Typically markets show no reaction to the ‘news’ that a country like the Netherlands has been downgraded.) This useful post by Bas Jacobs (HT MT) argues that the S&P analysis for the Netherlands does not deserve any serious attention. On credit rating agencies generally, see Jonathan Portes. The media report what these agencies say because downgrades are convenient hooks to hang existing stories on, and it is a shame and a continuing source of puzzlement that officials and politicians bother with them.
So why am I writing this post? Because it seems important to record the progress of another country beside my own that is going down a depressingly predictable path. ...[continue]...
Posted by Mark Thoma on Sunday, December 1, 2013 at 10:41 AM in Economics, Fiscal Policy |
Paul Krugman notes work by my colleague George Evans relating to the recent debate over the stability of GE models:
God Didn’t Make Little Green Arrows: Actually, they’re little blue arrows here. In any case George Evans reminds me of paper (pdf) he and co-authors published in 2008 about stability and the liquidity trap, which he later used to explain what was wrong with the Kocherlakota notion (now discarded, but still apparently defended by Williamson) that low rates cause deflation.
The issue is the stability of the deflation steady state ("on the importance of little arrows"). This is precisely the issue George studied in his 2008 European Economic Review paper with E. Guse and S. Honkapohja. The following figure from that paper has the relevant little arrows:
This is the 2-dimensional figure (click on it for a larger version) showing the phase diagram for inflation and consumption expectations under adaptive learning (in the New Keynesian model both consumption or output expectations and inflation expectations are central). The intended steady state (marked by a star) is locally stable under learning but the deflation steady state (given by the other intersection of black curves) is not locally stable and there are nearby divergent paths with falling inflation and falling output. There is also a two page summary in George's 2009 Annual Review of Economics paper.
The relevant policy issue came up in 2010 in connection with Kocherlakota's comments about interest rates, and I got George to make a video in Sept. 2010 that makes the implied monetary policy point.
I think it would be a step forward if the EER paper helped Williamson and others who have not understood the disequilibrium stability point. The full EER reference is Evans, George; Guse, Eran and Honkapohja, Seppo, "Liquidity Traps, Learning and Stagnation" European Economic Review, Vol. 52, 2008, 1438 – 1463.
Posted by Mark Thoma on Sunday, December 1, 2013 at 08:52 AM in Academic Papers, Economics, Macroeconomics, Methodology |
Posted by Mark Thoma on Sunday, December 1, 2013 at 12:03 AM in Economics, Links |
Dean Baker is unhappy:
Subprime MBS With a Government Guarantee: [Creative Commons]: Way back in the last decade we had a huge housing bubble which was propelled in large part by junk loans that were packaged into mortgage backed securities (MBS) by Wall Street investment banks and sold all around the world. Unfortunately few people in policy positions are old enough to remember back to the this era, which is why they are now in the process of altering rules so that investment banks will be able to put almost any loan into a MBS without retaining a stake.
As Floyd Norris explains in his column this morning, the Dodd-Frank financial reform has a provision requiring investment banks to retain a 5 percent stake in less secure mortgages placed in the MBS they issue. This gives them an incentive to ensure that the mortgages they put into an MBS are good mortgages. However the definition of a secure mortgage has been gradually weakened over time. Originally many considered the cutoff to be a 20 percent down payment, which is the traditional standard for a prime mortgage. This was lowered to 10 percent and then 5 percent, even though mortgages with just 5 percent down default at four times the rate of mortgages with 20 percent down.
Norris tells us that the latest proposed rules would allow mortgages with zero down payment to be placed into pools with no requirement that banks maintain a stake. This change would mean that banks would have the same incentive as in the housing bubble years to put junk mortgages in MBS. If this rule is coupled with the Corker-Warner proposal for having a government guarantee for MBS, it will mean that banks will likely find it far easier to pass on junk and fraudulent mortgages going forward than they did in the years of the housing bubble.
Further facilitating this process is the gutting of the Franken amendment. This amendment (which passed the Senate with 65 votes) would have required investment banks to call the Securities and Exchange Commission (SEC) to pick a bond rating agency for a new MBS. This removed the conflict of interest where bond rating agencies would have an incentive to give a positive rating in order to get more business. In the conference committee, the amendment was replaced by a requirement that the SEC study the issue. After two and a half years the SEC issued its study and essentially concluded that picking bond rating agencies exceeded its competence. This left the conflict of interest in place.
If Congress wants to set up the conditions for another housing bubble fueled by fraudulent mortgages it is doing a very good job.
Posted by Mark Thoma on Saturday, November 30, 2013 at 08:58 AM
Posted by Mark Thoma on Saturday, November 30, 2013 at 12:03 AM in Economics, Links |
Speaking of the Dallas Fed, here are two figures from a report documenting how slow this recovery has been relative to the recovery from past recessions:
Posted by Mark Thoma on Friday, November 29, 2013 at 09:32 AM in Economics |
Gillian Tett of the FT summarizes research from the Dallas Fed:
...when it comes to immigration – of the legal and illegal kind – the Lone Star Fed is not sitting with the Tea Party core. On the contrary, it has just published a paper – under the provocative title “Gone to Texas” – arguing that immigration is good for the local economy. And it rebuffs the idea that immigrants are stealing jobs from native-born Americans. On the contrary, it insists, they tend to boost growth in a win-win way.
Now, if this conclusion had emerged in a state with few immigrants and plenty of unfilled jobs (think North Dakota), that might be unsurprising. But the picture that Fed researchers paint of Texas is eye-popping. Since 1990, the number of foreign-born people living there has jumped from 1.5 million to 4.3 million...”, and that “among large states, none has experienced a surge like Texas has, with immigrants rising from 9 per cent of the population in 1990 to 16.4 per cent in 2012”.
Some immigrants are highly skilled... But most are not: two-thirds do not have a high-school diploma, two-thirds come from Mexico, and almost half – or 1.8 million people – are illegal...
Here's a link to the report.
Posted by Mark Thoma on Friday, November 29, 2013 at 09:12 AM in Economics, Immigration, Unemployment |
Bending the cost curve:
Obamacare’s Secret Success, by Paul Krugman, Commentary, NY Times: The law establishing Obamacare was officially titled the Patient Protection and Affordable Care Act. And the “affordable” bit wasn’t just about subsidizing premiums. It was also supposed to be about “bending the curve” — slowing the seemingly inexorable rise in health costs. ...
So, how’s it going? ... Has the curve been bent?
The answer, amazingly, is yes. In fact, the slowdown in health costs has been dramatic .... Since 2010, when the act was passed, real health spending per capita ... has risen less than a third as rapidly as its long-term average. Real spending per Medicare recipient hasn’t risen at all; real spending per Medicaid beneficiary has actually fallen slightly.
What could account for this good news? One obvious answer is the still-depressed economy, which might be causing people to forgo expensive medical care. But this explanation turns out to be problematic in multiple ways. ...
A better story focuses on what appears to be a decline in ... expensive new blockbuster drugs, even as existing drugs go off-patent and can be replaced with cheaper generic brands. ... But since drugs are only about 10 percent of health spending, it can only explain so much.
So what aspects of Obamacare might be causing health costs to slow? One clear answer is the act’s reduction in Medicare “overpayments”... A less certain but likely source of savings involves changes in the way Medicare pays for services. The program now penalizes hospitals if many of their patients end up being readmitted soon after being released — an indicator of poor care — and readmission rates have, in fact, fallen substantially. Medicare is also encouraging ... “accountable care,” in which health organizations get rewarded for overall success in improving care while controlling costs.
Furthermore, there’s evidence that Medicare savings “spill over” to the rest of the health care system...
And the biggest savings may be yet to come. The Independent Payment Advisory Board, a panel with the power to impose cost-saving measures (subject to Congressional overrides) if Medicare spending grows above target, hasn’t yet been established, in part because of the near-certainty that any appointments to the board would be filibustered by Republicans yelling about “death panels.” Now that the filibuster has been reformed, the board can come into being.
The news on health costs is, in short, remarkably good..., health reform is starting to look like a bigger success than even its most ardent advocates expected.
Posted by Mark Thoma on Friday, November 29, 2013 at 12:24 AM in Economics, Health Care |
Posted by Mark Thoma on Friday, November 29, 2013 at 12:03 AM in Economics, Links |
Luck: Rick's lovely account of how computers enabled him to write should remind us of a more general point - that luck determines pretty much all of our economic fate.
The standard Mincer equations express individual earnings as a function of schooling and exprience - and, in more sophisticated versions, of personality or cognitive skills as well. Even these leave a huge chunk of earnings' varation across individuals' unexplained - suggesting that luck plays a big role...
However, these equations under-estimate the role of luck, because luck helps determine how much human capital we acquire in the first place. I'm thinking of several mechanisms here...[list/discussion of mechanisms]...
I suspect that pretty much all the differences between our incomes are due to luck; a capacity for hard work is also a matter for luck. We do not "deserve" our economic fate, and only the most witlessly narcissistic libertoon could claim otherwise. ...
What it does mean is that the rich and successful should be more humble.
Posted by Mark Thoma on Thursday, November 28, 2013 at 07:35 PM in Economics, Income Distribution |
Posted by Mark Thoma on Thursday, November 28, 2013 at 09:11 AM in Economics |
Posted by Mark Thoma on Thursday, November 28, 2013 at 12:03 AM in Economics, Links |
Sending people to food kitchens is not cool, especially with the labor market so far from full recovery and there aren't enough jobs for the unemployed:
Breadlines Return, by Teresa Tritch, NY Times: ...The Times’s Patrick McGeehan described a line snaking down Fulton Street in Brooklyn last week, with people waiting to enter a food pantry run by the Bed-Stuy Campaign Against Hunger. The line was not an anomaly. Demand at all of New York City’s food pantries and soup kitchens has spiked since federal food stamps were cut on Nov. 1. ...
The Great Recession was the worst downturn since the Great Depression. And yet,... food stamp cuts are occurring even though need is still high and opportunity low. ...
And there are more food-stamp cuts to come. House Republicans have proposed to cut the program by $40 billion over 10 years...; the Senate has proposed a $4 billion reduction. ...
If the current downturn has not mirrored the Great Depression, that’s thanks to safety net programs... Breadlines have, by and large, been replaced by food stamp... Now is not the time to cut back. Now is the time to provide.
Posted by Mark Thoma on Wednesday, November 27, 2013 at 12:33 AM in Economics, Social Insurance, Unemployment |
Who made economics?, by Daniel Little: The discipline of economics has a high level of intellectual status, even hegemony, in today’s social sciences — especially in universities in the United States. It also has a very specific set of defining models and theories that distinguish between “good” and “bad” economics. This situation suggests two topics for research: how did political economy and its successors ascend to this position of prestige in the social sciences? And how did this particular mix of techniques, problems, mathematical methods, and exemplar theoretical papers come to define the mainstream discipline? How did this governing disciplinary matrix develop and win the field?
One of the most interesting people taking on questions like these is Marion Fourcade. Her Economists and Societies: Discipline and Profession in the United States, Britain, and France, 1890s to 1990s was discussed in an earlier post (link). An early place where she expressed her views on these topics is in her 2001 article, “Politics, Institutional Structures, and the Rise of Economics: A Comparative Study” (link). There she describes the evolution of economics in these terms:
Since the middle of the nineteenth century, the study of the economy has evolved from a loose discursive "field," with no clear and identifiable boundaries, into a fully "professionalized" enterprise, relying on both a coherent and formalized framework, and extensive practical claims in administrative, business, and mass media institutions. (397)
And she argues that this process was contingent, path-dependent, and only loosely guided by a compass of “better” science:
Overall,contrary to the frequent assumption that economics is a universal and universally shared science, there seems to be considerable cross-national variation in (1) the and nature of the institutionalization of an economic knowledge field, (2) the forms of professional action of economists, and (3) intellectual traditions in the of economics. (398)
Fourcade approaches this subject as a sociologist; so she wants to understand the institutional and structural factors that led to the shaping and stabilization of this field of knowledge.
Understanding the relationship between the institutional and intellectual aspects of knowledge production requires, first and foremost, a historical analysis of the conditions under which a coherent domain of discourse and practice was established in the first place. (398)
A key question in this article (and in Economists and Societies) is how the differences that exist between the disciplines of economics in France, Germany, Great Britain, and the US came to be. The core of the answer that she gives rests on her analysis of the relationships that existed between practitioners and the state: "A comparison of the four cases under investigation suggests that the entrenchment of the economics profession was profoundly shaped by the relationship of its practitioners to the larger political institutions and culture of their country" (432). So differences between economics in, say, France and the United States, are to be traced back to the different ways in which academic practitioners of economic analysis and policy recommendations were situated with regard to the institutions of the state.
It is possible to treat the history of ideas internally ("systems of ideas are driven by rational discussion of their implications") and externally ("systems of ideas are driven by the social needs and institutional arrangements of a certain time"). The best sociology of knowledge avoids this dichotomy, allowing for both the idea that a field of thought advances in part through the scientific and conceptual debates that occur within it and the idea that historically specific structures and institutions have important effects on the shape and direction of the development of a field. Fourcade avoids the dichotomy by treating seriously the economic reasoning that took place at a time and place, while also searching out the institutional and structural factors that favored this approach or that in a particular national setting.
This is sociology of knowledge done at a high level of resolution. Fourcade wants to identify the mechanisms through which "societal institutions" influence the production of knowledge in the four country contexts that she studies (Germany, Great Britain, France, and the US). She does not suggest that economics lacks scientific content or that economic debates do not have a rational structure of argument. But she does argue that the configuration of the field itself was not the product of rational scientific advance and discovery, but instead was shaped by the institutions of the university and the exigencies of the societies within which it developed.
Fourcade's own work suggests a different kind of puzzle -- this time in the development of the field of the sociology of knowledge. Fourcade's topic seems to be one that is tailor-made for treatment within the terms of Bourdieu's theory of a field. And in fact some of Fourcade's analysis of the institutional factors that influenced the success or failure of academic economists in Britain, Germany, or the US fits Bourdieu's theory very well. Bourdieu's book Homo Academicus appeared in 1984 in French and 1988 in English. But Fourcade does not make use of Bourdieu's ideas at all in the 2001 article -- some 17 years after Bourdieu's ideas were published. Reference to elements of Bourdieu's approach appears only in the 2009 book. There she writes:
Bourdieu found that the social sciences occupy a very peculiar position among all scientific fields in that external factors play an especially important part in determining these fields' internal stratification and structure of authority.... Within each disciplinary field, the subjective (i.e., agentic) and objective (i.e., structural) positions of individuals are "homologous": in other words, the polar opposition between "economic" and "cultural" capital is replicated at the field's level, and mirrors the orthodoxy/heterodoxy divide. (23)
So why was Bourdieu not considered in the 2001 article? This shift in orientation may be simply a feature of the author's own intellectual development. But it may also be diagnostic of the rise of Bourdieu's influence on the sociology of knowledge in the 90's and 00's. It would be interesting to see a graph of the frequency of references to the book since 1984.
(Gabriel Abend's treatment of the differences that exist between the paradigms of sociology in the United States and Mexico is of interest here as well; link.)
Posted by Mark Thoma on Wednesday, November 27, 2013 at 12:24 AM in Economics, Methodology |
Posted by Mark Thoma on Wednesday, November 27, 2013 at 12:03 AM in Economics, Links |
I agree with this:
Janet Yellen Is Now a Litmus Test for Right-Wing Sanity, by Kevin Drum: Steve Benen notes that the increasingly shrill and hyperbolic Heritage Foundation has decided to make opposition to Janet Yellen a "key vote." That is, they'll count it on their end-of-the-year scorecard that tells everyone just how conservative you are:
Thanks to the “nuclear option” there’s very little chance Yellen’s nomination will fail — Joe Manchin appears to be her only Democratic opponent — but it now seems likely that most Senate Republicans will oppose the most qualified Fed nominee since the institution was founded.
That's true, which means this has become sort of a litmus test for wingnuttery. There's simply no serious reason to oppose Yellen...
Posted by Mark Thoma on Tuesday, November 26, 2013 at 01:22 PM in Economics, Monetary Policy |
Conservative Leads Effort to Raise Minimum Wage in California, by Jennifer Medina, NY Times: Ron Unz, a Silicon Valley millionaire, rose to fame by promoting a ballot initiative that essentially eliminated bilingual education in California. He went on to become publisher of The American Conservative, a libertarian-leaning magazine.
But after decades in the conservative movement, Mr. Unz is pursuing a goal that has stymied liberals: raising the minimum wage. He plans to pour his own money into a ballot measure to increase the minimum wage in California to $10 an hour in 2015 and $12 in 2016, which would make it by far the highest in the nation. Currently, it is $8 — 75 cents higher than the federal minimum.
Using what he sees as conservative principles to advocate a policy long championed by the left, Mr. Unz argues that significantly raising the minimum wage would help curb government spending on social services, strengthen the economy and make more jobs attractive to American-born workers.
“There are so many very low-wage workers, and we pay for huge social welfare programs for them,” he said in an interview. “This would save something on the order of tens of billions of dollars. Doesn’t it make more sense for employers to pay their workers than the government?” ...
Posted by Mark Thoma on Tuesday, November 26, 2013 at 12:24 PM in Economics |
My theory about what is happening at Minneapolis is that it is mostly about poor communication and insufficient leadership over a very strong willed group. That led to frictions between Narayana Kocherlakota and the research department. These issues came before his ideological conversion, have nothing to do with saltwater-freshwater, or pronouncements on low interest rates and deflation.
Posted by Mark Thoma on Tuesday, November 26, 2013 at 11:59 AM in Economics, Monetary Policy |
This is from Fernando Duarte and Carlo Rosa of the NY Fed:
A Way With Words: The Economics of the Fed’s Press Conference, by Fernando Duarte and Carlo Rosa, FRB NY: When central bankers speak, traders, journalists, and politicians listen with bated breath. The marked asset price reaction to Chairman Bernanke’s June press conference confirms the importance of his comments in the marketplace.
The chart below shows the dynamics of U.S. asset prices in five-minute intervals (the ten-year Treasury rate, S&P 500, and euro/dollar exchange rate) during the announcement day. The strong market reaction was spurred not only by the release of the Federal Open Market Committee (FOMC) statement at 2 p.m., but also by the question-and-answer part of the press conference at 2:30 p.m., when journalists questioned the Chairman to better understand the Fed’s views. In this case, markets thought Chairman Bernanke revealed new, important information, and asset prices moved. But was this an exception? Do all press conferences provide new information, or is the FOMC statement the more market-moving Fed communication tool?
To answer this question, we exploit the timing in the release of information. We restrict our attention to 2012, when the FOMC met eight times to discuss monetary policy. At the end of each meeting for which there was a press conference (on January 25, April 25, June 20, September 13, and December 12), the FOMC released a statement at 12:30 p.m. providing an overview of its policy stance. Then, at 2 p.m., the FOMC released the “Summary of Economic Projections” (SEP), which provides individual Committee members’ forecasts for output growth, the unemployment rate, inflation, and the federal funds rate. Finally, at 2:15 p.m., the Chairman started the press conference, which usually concluded around 3:15 p.m. Press conferences were only held in conjunction with five of the eight yearly FOMC meetings. In 2013, the timing changed a bit and the SEP started to be released concurrently with the FOMC statement at 2 p.m.; to avoid confounding the effect of the FOMC statement with that of the SEP, our post only looks at 2012.
The next chart displays the five-minute volatility of the S&P 500. The blue line shows the average volatility on 2012 FOMC meeting days that featured a press conference, while the black line shows the average volatility on nonannouncement days. We can clearly see that stocks are much more volatile on FOMC meeting days, and that the high volatility is concentrated around 12:30 p.m., 2 p.m., and the 2:15-2:30 p.m. period, when announcements are made. The effect is also quite large: If stocks on a daily basis were as volatile as they were at 12:30 p.m. on an announcement day, then the annualized volatility would be 35 percent instead of the normal 8 percent (note that these are five-minute volatilities that were then annualized, not annual volatilities). A red circle appears on top of the blue line whenever the difference in volatility between announcement and nonannouncement days is unlikely to be due to chance. (For our beloved wonks: The red dot means that the difference is statistically significant at the 10 percent level.
We’re now ready to answer the original question. By looking at the chart, it’s apparent that the June FOMC meeting wasn’t an exception, but rather the rule. The stock market moves the most around the release of the FOMC statement, but also moves more than usual around the time of the press conference. Because we’re looking at very narrow windows of time in which no other relevant economic events or announcements took place, we’re confident that we can ascribe the extra volatility to FOMC-related activities.
The “announcement effect” we uncovered isn’t unique to equities. The next two charts show the reaction of government bonds and exchange rates. The average five-minute change in the ten-year Treasury yield is two basis points after announcements – eight times higher than at the same time on nonannouncement days. For the euro/dollar exchange rate, we see a similar pattern. A notable finding is that, unlike equities, bonds tend to react more to the SEP release than to the press conference.
One of us has also found that these effects are also present in Europe, supporting the idea that there are several important communication tools at the disposal of central bankers throughout the world. This is particularly relevant in today’s environment of unconventional monetary policy, in which there are multiple dimensions of decision making that need to be conveyed to the public.
[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 Mark Thoma on Tuesday, November 26, 2013 at 10:00 AM in Economics, Monetary Policy |