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 Mark Thoma on Friday, November 21, 2014 at 10:51 AM
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 Mark Thoma on Friday, November 21, 2014 at 12:24 AM in Economics, Immigration, Politics |
Posted by Mark Thoma on Friday, November 21, 2014 at 12:06 AM in Economics, Links |
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 Mark Thoma on Thursday, November 20, 2014 at 10:27 AM in Economics, Social Insurance, Taxes, Unemployment |
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 Mark Thoma on Thursday, November 20, 2014 at 09:06 AM in Economics, Unemployment |
Posted by Mark Thoma on Thursday, November 20, 2014 at 12:06 AM in Economics, Links |
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 Mark Thoma on Wednesday, November 19, 2014 at 12:21 PM in Economics, History of Thought |
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 Mark Thoma on Wednesday, November 19, 2014 at 11:43 AM in Economics, Fiscal Policy |
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 Mark Thoma on Wednesday, November 19, 2014 at 10:30 AM
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 Mark Thoma on Wednesday, November 19, 2014 at 08:44 AM in Economics, MoneyWatch, Unemployment |
Posted by Mark Thoma on Wednesday, November 19, 2014 at 12:06 AM in Economics, Links |
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 Mark Thoma on Tuesday, November 18, 2014 at 05:21 PM in Economics, Health Care, Politics |
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 Mark Thoma on Tuesday, November 18, 2014 at 11:16 AM in Economics, Politics |
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 Mark Thoma on Tuesday, November 18, 2014 at 08:28 AM in Economics, Methodology |
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.
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 Mark Thoma on Tuesday, November 18, 2014 at 08:19 AM in Economics, MoneyWatch |
Posted by Mark Thoma on Tuesday, November 18, 2014 at 12:06 AM in Economics, Links |
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 Mark Thoma on Monday, November 17, 2014 at 08:47 AM in Economics, Unemployment |
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 Mark Thoma on Monday, November 17, 2014 at 08:30 AM in Economics, Financial System, Regulation |
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 Mark Thoma on Monday, November 17, 2014 at 12:06 AM in Economics, Market Failure |
Posted by Mark Thoma on Monday, November 17, 2014 at 12:06 AM in Economics, Links |
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 Mark Thoma on Sunday, November 16, 2014 at 09:45 AM in Economics, Income Distribution |
Posted by Mark Thoma on Sunday, November 16, 2014 at 12:06 AM in Economics, Links |
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 Mark Thoma on Saturday, November 15, 2014 at 11:40 AM in Economics, Macroeconomics |
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 Mark Thoma on Saturday, November 15, 2014 at 08:42 AM in Economics, Unemployment |
Posted by Mark Thoma on Saturday, November 15, 2014 at 12:06 AM in Economics, Links |
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 Mark Thoma on Friday, November 14, 2014 at 12:24 AM in Economics, Environment, Market Failure |
Posted by Mark Thoma on Friday, November 14, 2014 at 12:06 AM in Economics, Links |
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".
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 Mark Thoma on Friday, November 14, 2014 at 12:06 AM in Economics, History of Thought |
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:
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:
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 Mark Thoma on Thursday, November 13, 2014 at 11:19 AM in Economics, Fed Watch, Monetary Policy |
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 Mark Thoma on Thursday, November 13, 2014 at 10:29 AM in Economics, Unemployment |
Dear Fed hawks. Please listen:
The Mysterious Fed, by Paul Krugman: As usual, my inbox is full of speculations about when the Fed will raise interest rates. June 2015? Earlier? Has it already waited too long?
And as usual, I wonder why anyone is talking about this at all. Yes, unemployment has fallen. But there is huge ambiguity about what level of unemployment is sustainable given changing demography, the uncertain degree to which people might return to the work force given better job availability, and so on. There’s also a huge asymmetry in risks between raising rates too soon — which can leave us stuck in a low inflation or deflation trap for a very long time — and raising rates a bit too late, which at worst means temporarily overshooting an inflation target that’s arguably too low anyway.
Meanwhile, both the Fed’s preferred measure of inflation and wages are showing no hint of an overheating economy...
So what the heck is going on? Maybe it’s just pluralistic ignorance?
Dallas Fed president Richard Fisher said recently that the failure to raise interest rates soon enough could cause the economy to go into a recession. Because inflation. He wants interest rates to go up sooner rather than later, which I think would be a mistake.
[See also Dan Alpert: Why the Fed is Flummoxed by the U.S. Labor Market.]
Update: "Federal Reserve Bank of Dallas President and CEO Richard W. Fisher today announced that he will retire from his position on March 19, 2015."
Posted by Mark Thoma on Thursday, November 13, 2014 at 09:39 AM in Economics, Monetary Policy |
Do you agree with Robert Reich?:
The Choice of the Century: The President blames himself for the Democrat’s big losses Election Day. “We have not been successful in going out there and letting people know what it is that we’re trying to do and why this is the right direction,” he said Sunday.
In other words, he didn’t sufficiently tout the Administration’s accomplishments.
I respectfully disagree.
If you want a single reason for why Democrats lost big on Election Day 2014 it’s this: Median household income continues to drop. This is the first “recovery” in memory when this has happened. ...
It's hard for me to believe that people think Republican economic policies are the solution to this problem. As Paul Krugman says, "So if Republicans are gaining from public frustration here, it is ironic. After all, the GOP is systematically opposed to anything that would increase workers’ bargaining power, and bitterly opposed to any suggestion that inequality is an issue — what we need, they say, is growth, which will raise all incomes (even though it hasn’t)." I'm all for growth, but the increase in income needs to be distributed equitably, and in recent years (decades actually) it hasn't been. It's hard to see how Republican policies will change that rather than make the problem worse.
Posted by Mark Thoma on Thursday, November 13, 2014 at 09:19 AM in Economics, Politics |
Posted by Mark Thoma on Thursday, November 13, 2014 at 12:06 AM in Economics, Links |
Why are the Conservatives so incompetent at running the economy?: If that question seems odd to you, you are one of the majority in the UK who think the Conservatives are better at managing the economy than Labour. Why do people think this? My guess is that it is very simple. The financial crisis happened while Labour was in power. This led to the largest recession since the Great Depression.
But surely everyone knows that the financial crisis was a global phenomenon that started in the US? Surely everyone knows that if the Conservatives had been in power there would have been just as little financial regulation, so the impact of the crisis on UK banks would have been much the same?
The problem is that most people do not know this. What they hear is the Conservatives repeating relentlessly that it was all Labour’s fault. ... It is hardly ever challenged by reporters in the BBC or other TV media. It has become so pervasive, that even some of my non-macro colleagues repeat elements of it back to me.  ...
Of course there is mucha more to say about all this, but the point I want to make here is fairly simple. Once we recognise that the financial crisis was a global event, then the three remaining major departures from trend growth happened under Conservative led administrations. In all three cases they can be associated with poor policy decisions taken by those administrations: money supply targets under Thatcher, ERM entry under Major, and austerity under Osborne.
So the idea that the Conservatives are more competent at macroeconomic management is a myth, and if anything the opposite appears to be true. ...
He also notes in closing that:
... In mediamacro, the deficit is all important, but the decline in average living standards not so much. And people wonder why many potential voters are disaffected from mainstream politics.
In a recent post, the US economist Robert Reich berates the Democrats for failing to campaign on falling median wages and the growing inequality that lies behind it. The reason he gives is simple: money buys votes in the US system, which Jeffrey Sachs calls a plutocracy. In the UK Labour has tried to raise the link between inequality and falling real wages, as my example above shows, but the UK media does not appear to want that discussion to take place. I would really like someone who knows the UK media from the inside to explain why.
Posted by Mark Thoma on Wednesday, November 12, 2014 at 10:58 AM in Economics, Politics |
The profession appears to be changing it's mind about the permanence of large shocks to aggregate demand:
Potential Output and Recessions: Are We Fooling Ourselves?, by Robert F. Martin, Teyanna Munyan, and Beth Anne Wilson, Federal Reserve: 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.
... Economic models usually assume that recession-induced gaps will close over time, typically via a period of above trend growth. In our results, growth is not faster after the recession than before, implying that the recession-induced gap is closed primarily by revising estimates of trend output growth lower. Interestingly, much of the downward revision to estimates of trend output happens well into the recovery. In particular, as economies recover and the lower level of actual output persists, potential output is gradually revised down toward actual GDP. ...
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. ...
Disclaimer: IFDP Notes are articles in which Board economists offer their own views and present analysis on a range of topics in economics and finance. These articles are shorter and less technically oriented than IFDP Working Papers.
[There is quite a bit more detail -- tables, graphs, etc. -- in the full article describing how they arrive at this conclusion.]
One note: I want to emphasize that "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." An important question is how much of the permanent effect can be avoided with a correct and timely policy response -- something we surely did not get with fiscal policy in the most recent episode.
Posted by Mark Thoma on Wednesday, November 12, 2014 at 09:34 AM in Economics |
Jeff Sachs seems to be pleased:
The climate breakthrough in Beijing gives the world a fighting chance: Today’s US-China joint announcement on climate change and energy is the most important advance on the climate change agenda in many years. ... What they’ve said gives the world a fighting chance – and no doubt the last one – for climate safety. ...
An announcement is just an announcement, of course. .. The US and China have yet to put their cards on the table on how they intend to achieve deep decarbonization. ...
Not surprisingly, the incoming Republican Senate majority leader Mitch McConnell piped up immediately that he and his colleagues would oppose the deal. No doubt they will try. Yet my guess is that Mr McConnell and his buddies are soon going to learn a lesson in real democracy.
While the fossil fuel lobby may have helped finance the Republican victories last week, the US public cares about its own survival and the world that their children will soon inherit. ... The Koch brothers may have bought some 44,000 paid ads this fall to help put favoured coal and oil candidates over the top, but they did not buy the souls of the American people, who by a large majority will be gratified today by the announcements from Beijing. ...
I'm not so sure that Republican opposition can be overcome so easily.
Posted by Mark Thoma on Wednesday, November 12, 2014 at 09:15 AM in Economics, Environment, Market Failure, Politics |
Posted by Mark Thoma on Wednesday, November 12, 2014 at 12:06 AM in Economics, Links |
Busy day today, so let me ask you a question. If you had the power, what policies would you enact to raise middle/working class income?:
The Great Wage Slowdown, Looming Over Politics, by David Leonhardt: A quiz: How does the Democratic Party plan to lift stagnant middle-class incomes?
I realize that liberal-leaning economists can give a long, substantive answer to this question, touching on health care costs, education and infrastructure. But most Americans would not be able to give a clear answer — which helps explain why the party took such a drubbing last week.
The Democratic Party’s short-term plan to help the middle class just isn’t very clear. Some of the policies that Democrats favor, such as broader access to good education, take years to pay off. Others, like reducing medical costs or building new roads, have an indirect, unnoticed effect on middle-class incomes. ...
Dean Baker's idea is here. (For me, it is a matter of distribution. The income is there -- the typical worker has earned more than he or she receives -- but the flow is distorted upward...)
Posted by Mark Thoma on Tuesday, November 11, 2014 at 09:15 AM in Economics, Income Distribution |
Posted by Mark Thoma on Tuesday, November 11, 2014 at 12:06 AM in Economics, Links |
Sylvain Leduc and Glenn Rudebusch of the Federal Reserve Bank of San Francisco.
The aging of the labor force, weak productivity growth, and possible long-run supply-side damage from the Great Recession have all suggested recently that the potential growth rate of the U.S. economy may be lower in the years ahead. According to standard economic theory, such slower growth would push down the level of the natural rate of interest. This natural rate, also called the neutral or equilibrium real interest rate, is the risk-free short-term interest rate adjusted for inflation that would prevail in normal times with full employment (Williams 2003).
Moreover, a decline in the natural rate of interest would tend to lower every other real and nominal interest rate in the economy. Therefore, understanding the linkage between economic growth and the natural rate is crucial for forecasting all types of interest rates. Indeed, this linkage has been at the center of recent fiscal and monetary policy forecasts. The Congressional Budget Office (CBO 2014) noted that its lower projections of U.S. Treasury yields and the federal government’s future debt servicing costs partly reflected reductions in its forecast for potential output. In addition, earlier this year, some Federal Open Market Committee (FOMC) participants appeared to reduce their estimates of the natural rate of interest because of an expectation of slower growth ahead for potential output.
This Economic Letter examines the linkage between growth and interest rates as embodied in recent projections by FOMC participants, the CBO, and private-sector forecasters. Although forecasts of potential growth or the natural rate are rarely reported, we can construct reasonable proxies from long-run forecasts of GDP growth, the short-term interest rate, and inflation. In essence, the long-run nature of these forecasts strips out cyclical variation and reveals the fundamental secular trends that underlie the concepts of potential growth and the natural rate of interest.
Although in the CBO and FOMC policy projections long-run forecasts of growth and the real interest rate have fallen together, private-sector forecasters do not anticipate a similar dual drop. In particular, the recent downward revisions in private-sector expectations for long-run growth have been associated with no change in their long-run projections of the real short-term interest rate. If the private-sector forecasters are correct, this would raise a concern that the CBO and FOMC may have overestimated the effects of slower potential growth toward reducing interest rates, which may introduce some upside risk to CBO and FOMC interest rate projections. ...
Skipping to the conclusions:
In this Letter, we document a range of views about the link between potential growth and the natural interest rate. In particular, while the CBO and many FOMC participants expect weaker long-run growth to translate into lower interest rates, private-sector forecasts do not seem to share this view. Thus, future downward pressure on interest rates may be more muted than indicated by current monetary and fiscal policy projections, which would translate into an upside risk to these longer-term interest rate forecasts.
Posted by Mark Thoma on Monday, November 10, 2014 at 10:00 AM in Economics |
Stephen Ziliak emails:
I thought you and readers of Economist's View would like to know about an essay, "Honest Abe Was a Co-op Dude: How the G.O.P. Can Save Us from Despotism", hot off the press. Here is the abstract:
Abstract: Abraham Lincoln was a co-op dude. He had a hip neck beard, sure. Everyone knows that. But few have bothered to notice that the first Republican President of the United States was an economic democrat who put labor above capital. Labor is prior to and independent of capital, Lincoln believed, and “deserves much the higher consideration”, he told Congress in his first annual address of 1861. Capital despotism is on the rise again, threatening the stability of the economy and union. The biggest problem of democracy now is not the failure to fully extend political rights, however important. The bigger problem is economic in nature. The threat today is from a lack of economic democracy—a lack of ownership, of self-reliance, of autonomy, and of justice in the distribution of rewards and punishments at work. From the appropriation of company revenue to lack of protection against pension raids, capital despotism is rife. “The road to serfdom” has many paths to choose from, Hayek warned in his important book of 1944. But too many Americans—including economists and policymakers—are neglecting the economic path, the road to serfdom caused by a lack of economic democracy. Cooperative banks and firms can help.
And here are a few excerpts:
“Labor is prior to and independent of capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration.”
"Economists in the know have acknowledged that the worker owned cooperative firm is the most perfect model of economic democracy and rational business organization dreamed up so far. That is true around the world, from Springfield all the way back to Shelbyville, economists who’ve examined such co-ops agree. Co-ops are more productive. And every worker is an owner."
"From the Dutch blossoming of commerce in the 1600s to the Asian Spring of the 2000s, socialists and capitalists alike have not produced, it seems, a better, more efficient and democratic form of economic production and distribution. Co-ops win. Not everyone is convinced."
"If co-ops are so great, why don’t they dominate the economy? Negligence and ignorance, more than any other possible cause, it would seem.
For example, the infamous “socialist calculation debate” in economics dragged on for two decades before a single word was said by either side, from Lange and Lerner to von Mises and Hayek, about the nature of the firm. Nary a peep from economists about how or even why firms choose to organize into production units of a certain scale, large or small. Ronald Coase’s article on “The Nature of the Firm” (1937) was good enough to fetch him a Nobel Prize. But Coase did not bring as much clarity to the debate as most economists believe.
Coase was vague and conventional to point of embarrassment. He made straw man assumptions about the firm being a hierarchical-capitalistic entity. Coase’s firm, though more “tractable” and “realistic” than previous notions, is assumed to be run by a “master” or masters, by capitalists who seek to maximize profit by bossing around “servants”—that is, wage earners possessing little autonomy, little or no ownership, and no voting rights on capital, their sole purpose being assumed to serve the “masters” of capital.
Said Coase, “If a workman moves from department Y to department X, he does not go because of a change in relative prices, but because he is ordered to do so.” But if Coase (himself a lovely man in person) would have taken a closer look at the real world, he could have found cooperative firms succeeding in stark contrast to the anti-democratic firms of his imagination."
Stephen T. Ziliak
Posted by Mark Thoma on Monday, November 10, 2014 at 09:50 AM in Academic Papers, Economics |
Do these people not understand, or care, how history will view them?
Death by Typo, by Paul Krugman, Commentary, NY Times: My parents used to own a small house with a large backyard, in which my mother cultivated a beautiful garden. At some point, however — I don’t remember why — my father looked at the official deed defining their property, and received a shock. According to the text, the Krugman lot wasn’t a rough rectangle; it was a triangle more than a hundred feet long but only around a yard wide at the base.
On examination, it was clear what had happened: Whoever wrote down the lot’s description had somehow skipped a clause. And of course the town clerk fixed the language. After all, it would have been ludicrous and cruel to take away most of my parents’ property on the basis of sloppy drafting, when the drafters’ intention was perfectly clear.
But it now appears possible that the Supreme Court may be willing to deprive millions of Americans of health care on the basis of an equally obvious typo. And if you think this possibility has anything to do with serious legal reasoning, as opposed to rabid partisanship, I have a long, skinny, unbuildable piece of land you might want to buy.
Last week the court shocked many observers by saying that it was willing to hear a case claiming that the wording of one clause in the Affordable Care Act sets drastic limits on subsidies to Americans who buy health insurance. It’s a ridiculous claim... But the fact that the suit is ridiculous is no guarantee that it won’t succeed — not in an environment in which all too many Republican judges have made it clear that partisan loyalty trumps respect for the rule of law. ...
Now, states could avoid this death spiral by establishing exchanges — which might involve nothing more than setting up links to the federal exchange. But how did we get to this point?
Once upon a time, this lawsuit would have been literally laughed out of court. Instead, however, it has actually been upheld in some lower courts, on straight party-line votes — and the willingness of the Supremes to hear it is a bad omen.
So let’s be clear about what’s happening here. Judges who support this cruel absurdity aren’t stupid; they know what they’re doing. What they are, instead, is corrupt, willing to pervert the law to serve political masters. And what we’ll find out in the months ahead is how deep the corruption goes.
Posted by Mark Thoma on Monday, November 10, 2014 at 12:24 AM in Economics, Health Care, Politics |
Posted by Mark Thoma on Monday, November 10, 2014 at 12:06 AM in Economics, Links |
Posted by Mark Thoma on Sunday, November 9, 2014 at 12:06 AM in Economics, Links |
How severe has the zero lower bound constraint been?: Summary In December 2008, the Fed lowered the federal funds rate to essentially zero and has kept it there since then. This column argues that, contrary to traditional macroeconomic thinking, monetary policy has not been severely constrained by the zero bound until mid-2011. The results imply that the Fed could have done more to ease monetary policy between 2009 and 2011. These findings could also help explain why the fiscal stimulus package adopted in 2009 did not bring the expected success.
Posted by Mark Thoma on Saturday, November 8, 2014 at 08:45 AM in Environment, Fiscal Policy, Monetary Policy |
I am at the Social Science History Association meetings in Toronto, and later today I'll be on a panel discussing Piketty's book (the theme of the conference is "Inequalities: Politics, Policy, and the Past"). So this was timely:
Inequality, migration and economists, by Chris Bertram: Tim Harford has a column in the Financial Times claiming that citizenship matters more than class for inequality. In many ways it isn’t a bad piece. I give him points for criticizing Piketty’s default assumption that the nation-state is the right unit for analysis. The trouble with the piece though is the immediate inference from two sets of inequality stats to a narrative about what matters most, as if the two things Harford is talking about are wholly independent variables. This is a vice to which economists are rather prone. ...
Well ... as Joseph Carens noticed long ago, and Harford would presumably endorse, nationality can function rather like feudal privilege of history. People are indeed sorted into categories, as they were in a feudal or class society, that confine them to particular life paths, limit their access to resources and so forth. But there’s a rather obvious point to make which rather cuts across the “X matters more than Y” narrative, which is that citizenship isn’t a barrier for the rich, or for those with valuable skills. It is the poor who are excluded, who are denied the right to better themselves in the wealthy economies, who drown in the Mediterranean, or who can’t live in the same country as the love of their life. Citizenship, nationality, borders are ways of controlling the mobility of the poor whilst the rich pass effortlessly through. It isn’t simply an alternative or competitor to class, it is also a way in which states enforce class-based inequality.
Posted by Mark Thoma on Saturday, November 8, 2014 at 08:05 AM in Economics, Income Distribution |
Lei Fang and Pedro Silos of the Atlanta Fed:
Wage Growth of Part-Time versus Full-Time Workers: Evidence from the SIPP: Debates about the sluggish recovery in output, the low growth in labor productivity, and the actual level of slack in the U.S. economy are common within policy circles (see, for example, this speech by Fed Chair Janet Yellen and previous macroblog posts—here and here). One of the defining features of the recovery from the Great Recession has been the rise in the number of people employed part-time. As reported by the U.S. Bureau of Labor Statistics, roughly 10 percent more people are working part-time in September 2014 than before the recession. Part-time workers generally earn less per hour than full-time workers, so lower hours and lower per-hour earnings both contribute to their lower incomes. Despite those differences in wage levels, less is known about wage growth of part-time relative to full-time workers. Has wage growth been different? Has wage inequality increased across the two groups of workers? ...
Chart 1 shows the median wage growth rate of individuals over time. During the recovery, the median growth rate of full-time workers has been higher than that of part-time workers. In particular, wage declines were more common among part-time workers.
To further analyze the wage growth pattern of full-time and part-time workers, we subdivide the sample by education. Chart 2 plots the median wage growth rates for those with at least a bachelor's degree and those with some college or less. The median wage growth rates for full-time workers are larger than for part-time workers within each education group and highest for college graduates working full-time. Also apparent is that the weak wage growth of part-time workers is significantly influenced by the sluggish wage growth among those with less than a bachelor's degree.
Overall, we find that part-time workers as a group appear to experiencing a lower average wage growth rate than full-time workers during the recovery from the Great Recession. Education matters for wage growth, but the pattern of lower wage growth for part-time workers persists for people with broadly similar educational attainment.
Posted by Mark Thoma on Saturday, November 8, 2014 at 08:01 AM
Posted by Mark Thoma on Saturday, November 8, 2014 at 12:06 AM in Economics, Links |
Employment Report, Yellen Speech, by Tim Duy: The October employment report was another solid albeit not spectacular read on the labor market. Job growth remained above the 200k mark, extending the ever-so-slight acceleration over the past year:
Upward revisions to the previous two months added another 31k jobs. The acceleration is a bit more evident in the year-over-year picture, albeit still modest:
The unemployment rate fell to 5.8% while the labor force participation rate ticked up. The labor market picture in the context of indicators previously cited by Federal Reserve Chair Janet Yellen looks like this:
Looks like steady, ongoing progress to meeting the Federal Reserve's goals that remains fairly consistent with expectations for a mid-year rate hike. Wage growth remains anemic, but as regular readers know I believe we are just entering the zone where we might expect upward pressure on wage growth:
I am wondering what the Fed will do if the unemployment rate touches 5% and wage growth and inflation remain anemic? Not my baseline scenario, but I am wondering how patient they will be before moving further along the normalization process. I suppose this is what Chicago Federal Reserve President Charles Evans wonders about as well. Via Reuters:
The Federal Reserve should be "extraordinarily patient" when it comes to raising interest rates, because doing so too soon could choke off recovery and force the U.S. central bank to cut rates back to zero again, a top Fed official said on Friday...
...But the biggest risk, he said, is raising rates prematurely, which could consign the United States to the kind of stagnation that affected it in the 1930s and that dogs Japan today.
Speaking of policy normalization, Yellen made some interesting remarks this morning:
As employment, economic activity, and inflation rates return to normal, monetary policy will eventually need to normalize too, although the speed and timing of this normalization will likely differ across countries based on differences in the pace of recovery in domestic conditions. This normalization could lead to some heightened financial volatility. But as I have noted on other occasions, for our part, the Federal Reserve will strive to clearly and transparently communicate its monetary policy strategy in order to minimize the likelihood of surprises that could disrupt financial markets, both at home and around the world. More importantly, the normalization of monetary policy will be an important sign that economic conditions more generally are finally emerging from the shadow of the Great Recession.
Take note of the specific emphasis on financial volatility. The message is that market participants should not expect the Fed to react to every twist and turn in equity markets. More to the point, they expect volatility as they progress toward policy normalization. Consequently, while they will keep an eye on the financial markets, they are primarily concerned with watching overall economic indicators as they consider the timing and pace of their next steps. In short, they are signalling that market participants misread the likely path of the Federal Reserve when 2 year yields collapsed last month:
That said, I am fairly concerned that the Fed is not taking the flattening of the yield curve seriously enough. I see that as a signal that they have less room for normalization than they might think they have.
Bottom Line: Steady as she goes.
Posted by Mark Thoma on Friday, November 7, 2014 at 10:54 AM in Economics, Fed Watch, Monetary Policy |