- Report: Trump team ordered government economists to cook up forecasts - Vox
- Saint Janet Yellen: The Best Fed Chair Ever? - EconoSpeak
- Lobbyists helped bankroll Trump’s transition - Center for Public Integrity
- Why Trump’s 2-for-1 Rule on Regulations Is No Quick Fix - Robert Shiller
- Why Did China’s 2016 Current Account Surplus Fall? - Brad Setser
- A Close Look at the Decline of Homeownership - Liberty Street Economics
- International science collaboration growing at astonishing rate - EurekAlert
- Macro Musings Podcast: Sebastian Mallaby - David Beckworth
- ECB monetary policy and its positive impact on inflation - Banque de France
- Beware of Consultants Bearing Rosy News About Mergers - Noah Smith
- Declining US Investment, Gross and Net - Tim Taylor
Saturday, February 18, 2017
Friday, February 17, 2017
Report: Trump transition ordered government economists to cook up rosy growth forecasts: As the White House staff tries to put together a budget for President Donald Trump, they face a fundamental problem. Trump has promised to cut taxes, increase spending on the military and infrastructure, and avoid cuts to Social Security and Medicare. The only way to do that without producing an exploding budget deficit is to assume a big increase in economic growth.
And Nick Timiraos at the Wall Street Journal reports that Trump is planning to do just that — by making things up.
Deep into his story about Trump budget hijinks, Timiraos reveals that “what’s unusual about the administration’s forecasts isn’t just their relative optimism but also the process by which they were derived.” Specifically, what’s unusual about them is that they weren’t derived by any process at all. Instead of letting economists build a forecast, Trump’s budget was put together with “transition officials telling the CEA staff the growth targets that their budget would produce and asking them to backfill other estimates off those figures.” ...
NAIRU bashing: The NAIRU is the level of unemployment at which inflation is stable. Ever since economists invented the concept people have poked fun at how difficult to measure and elusive the NAIRU appears to be, and these articles often end with the proclamation that it is time we ditched the concept. Even good journalists can do it. But few of these attempts to trash the NAIRU answer a very simple and obvious question - how else do we link the real economy to inflation? ...
The NAIRU is one of those economic concepts which is essential to understand the economy but is extremely difficult to measure. ...
While we should not be obsessed by the 1970s, we should not wipe it from our minds either. Then policy makers did in effect ditch the NAIRU, and we got uncomfortably high inflation. In 1980 in the US and UK policy changed and increased unemployment, and inflation fell. There is a relationship between inflation and unemployment, but it is just very difficult to pin down. For most macroeconomists, the concept of the NAIRU really just stands for that basic macroeconomic truth. ...
The truth is out there:
The Silence of the Hacks, by Paul Krugman, NY Times: The story so far: A foreign dictator intervened on behalf of a U.S. presidential candidate — and that candidate won. Close associates of the new president were in contact with the dictator’s espionage officials during the campaign, and his national security adviser was forced out over improper calls to that country’s ambassador...
Meanwhile, the president seems oddly solicitous of the dictator’s interests, and rumors swirl about his personal financial connections to the country in question. ...
Maybe ... it’s all perfectly innocent. But if it’s not innocent, it’s very bad indeed. So what do Republicans in Congress, who have the power to investigate the situation, believe should be done?
Paul Ryan ... says that Michael Flynn’s conversations with the Russian ambassador were “entirely appropriate.”
Devin Nunes, the chairman of the House Intelligence Committee, angrily dismissed calls for a select committee to investigate contacts during the campaign: “There is absolutely not going to be one.”
Jason Chaffetz, the chairman of the House oversight committee — who hounded Hillary Clinton endlessly over Benghazi — declared that the “situation has taken care of itself.”
Just the other day Republicans were hot in pursuit of potential scandal, and posed as ultrapatriots. Now they’re indifferent to actual subversion and the real possibility that we are being governed by people who take their cues from Moscow. ...
The point is that you can’t understand the mess we’re in without appreciating not just the potential corruption of the president, but the unmistakable corruption of his party — a party so intent on cutting taxes for the wealthy, deregulating banks and polluters and dismantling social programs that accepting foreign subversion is, apparently, a small price to pay. ...
So how does this crisis end? It’s not a constitutional crisis — yet. But Donald Trump is facing a clear crisis of legitimacy. ... And nothing he has done since the inauguration allays fears that he is in effect a Putin puppet.
How can a leader under such a cloud send American soldiers to die? How can he be granted the right to shape the Supreme Court for a generation? ...
The thing is, this nightmare could be ended by a handful of Republican legislators willing to make common cause with Democrats to demand the truth. And maybe there are enough people of conscience left in the G.O.P.
But there probably aren’t. And that’s a problem that’s even scarier than the Trump-Putin axis.
- Industrial Revolution Comparisons Aren't Comforting - Tyler Cowen
- Trump’s Push to Meddle With the Fed Is Part of a Global Trend - NYTimes
- Economic Experts Still Rule -- at Least for Dutch - Justin Fox
- The Economic Vision for Precocious, Cleavaged India - Tim Taylor
- Healing Labour's class divide - Stumbling and Mumbling
- Total Household Debt Nears 2008 Peak but Looks Much Different - Liberty
- Market Failure Looks Like the Culprit in Rising Costs - Noah Smith
- Never Use a Supply and Demand Diagram for Labor Markets - EconoSpeak
Thursday, February 16, 2017
Gene Kindberg-Hanlon at Bank Underground:
Low real interest rates: depression economics, not secular trends: Real interest rates have fallen by around 5 percentage points since the 1980s. Many economists attribute this to “secular” trends such as a structural slowdown in global growth, changing demographics and a fall in the relative price of capital goods which will hold equilibrium rates low for a decade or more (Eggertsson et al., Summers, Rachel and Smith, and IMF). In this blog post, I argue this explanation is wrong because it’s at odds with pre-1980s experience. The 1980s were the anomaly (chart A). The decline in real rates over the 1990s and early 2000s simply reflected a return to historical norms from an unusually high starting point. Further falls since 2008 are far more plausibly related to the financial crisis than secular trends.
Source: Robert Shiller and author’s calculations
Note: Simple estimate of real rates using 1-year US treasury bill converted to a real yield using the year-ahead CPI outturn. Model-based estimates of short and long-term real interest rates show similar trends to the above chart (for example, see IMF).
Do secular trends affecting real interest rates fit the data before the 1980s?
Studies proposing a secular fall in real interest rates have generally taken the 1980s as their starting point. However, the 1980s appear to be an anomaly, as real interest rates were well above rates observed earlier in the 20th century. The secular trends proposed to be causing declining real rates since the 1980s do not fit the data beforehand. ...
... It would not be the first time that economists had fallen into the trap of assuming growth and interest rates would remain permanently lower for longer as a result of secular trends following a large financial crisis. In the late 1930s, Alvin Hansen developed the term “secular stagnation” to describe his concerns that structural factors such as stagnant technological development and weaker population growth prospects would weigh on growth permanently. We know now that these concerns over secular trends proved misplaced, and played little role in weaker growth. But there is large uncertainty over the length and depth of the slowdown in growth following a broad-based financial crisis of the severity seen in 2008. The Great Depression was only ended by rearmament and war, but other financial crises have seen recoveries at or before the 10-year mark. Are we now at a point in which the effects of the 2008 crisis on interest rates may begin to wear off?
- Make Big Banks Put 20% Down—Just Like Home Buyers Do - WSJ
- This (by Judy Shelton) Makes No Sense - Econbrowser
- Tutorial for Judy Shelton on Currency Manipulation - Uneasy Money
- Brexit and Trump: a failure of the political right - mainly macro
- Monopolies Are Worse Than We Thought - Noah Smith
- Houses as ATMs No Longer - Liberty Street Economics
- For a democratic Euro-zone government -Thomas Piketty
- Japan must form a bulwark to protect globalisation - VoxEU
- A case for keeping the Fed's balance sheet large - MacroMania
- Why the Middle East Fell Behind - Jared Rubin
- Update on the Social Cost of Carbon - Tim Taylor
- Low job mobility - Stumbling and Mumbling
- Scoring DBCFT - EconoSpeak
Wednesday, February 15, 2017
Jeb Hensarling's Alternative Facts: House Financial Services Committee Chairman Jeb Hensarling (R-Texas 5th) has an alternative fact problem. In a Wall Street Journal op-ed Hensarling alleged that "Since the CFPB’s advent, the number of banks offering free checking has drastically declined, while many bank fees have increased. Mortgage originations and auto loans have become more expensive for many Americans.”
The problem with these claims? They are verifiably false. Free checking has become more common, bank fees have plateaued after decades of steep increases, and both mortgage rates and auto loan rates have fallen. One can question how much any of these things are causally related to the CFPB, but using Hensarling's logic, the CFPB should be commended for expanding free checking and bringing down mortgage and auto loan rates. Hmmm.
Below the break I go through each of Chairman Hensarling's claims and demonstrate that each one is not only unsupported, but in fact outright contradicted by the best evidence available, general FDIC and Federal Reserve Board data. ...
...Bottom line: Jeb Hensarling's claims about the CFPB are based on a set of utterly concocted alternative facts. This is not the way we should be making policy.
My latest at MoneyWatch:
The problem with Puzder as Labor Secretary: Donald Trump’s pick for secretary of labor, Andrew Puzder, is scheduled to undergo confirmation hearings Thursday before the Senate Health, Education, Labor and Pensions Committee. Prior to his nomination, Puzder was the CEO of CKE Restaurants, the parent company of fast-food chains Hardee’s and Carl’s Jr.
Democrats and other critics of Puzder’s nomination have raised concerns about Puzder’s employment of an undocumented housekeeper (a transgression that has disqualified nominees of previous administrations). But for me, the biggest issue is the extent to which he can fulfill the Labor Department’s own stated mission, to be an advocate for labor...
It ends with:
...that’s a portrait of a “Secretary of Business Owners” rather than a “Secretary of Labor.” In this time of rising inequality, stagnant wages and increasing economic insecurity due to globalization and technological change, workers need someone to protect their interests, someone willing to work endlessly to improve all aspects of their working lives.
President Trump promised workers that he would stand up for them and bring decent jobs to regions of the country that have struggled in recent years. In my eyes, the nomination of Puzder for labor secretary betrays that promise, and to me, that’s reason enough that he should not be confirmed.
- Does Growing Mismeasurement Explain Disappointing Growth? - FRBSF
- CBO: There’s more slack in the labor market than thought - Jared Bernstein
- Does the Border-Adjustment Tax Threaten Financial Stability? - Brad Setser
- Semiannual Monetary Policy Report to the Congress - Janet Yellen
- House prices as leaky bucket - Stumbling and Mumbling
- China: The Economic Story of Our Time - Tim Taylor
- High-Skilled Immigrant Visas - IGM Forum
- Economics Gets a Presidential Demotion - Noah Smith
- The Long Economic and Political Shadow of History - VoxEU
- Can Immigration Hurt the Economy? An Old Prejudice Returns - NYTimes
- The Evolution of Home Equity Ownership - Liberty Street Economics
- Capital Inflows: The Good, the Bad and the Bubbly - Bank Underground
Tuesday, February 14, 2017
Me, at MoneyWatch:
Not just any kind of tax cut can boost economic growth: President Donald Trump promised last week he would unveil a “phenomenal” tax reform package in the next few weeks. Although no details were offered, Mr. Trump’s past statements suggest that his proposal will adhere to fairly standard supply-side principles.
The idea behind supply-side policy is to encourage more investment, more labor effort and technological innovation through changes in the tax code and regulatory structure.
Have these policies been successful in the past? Are some types of policies better than others at spurring economic growth? To answer those questions, it’s useful to put supply-side policies into broad categories...
On inequality in China: With Trump and Brexit, the Western-type democratic model is under fire. The Chinese media are having a field day. In column after column, the Global Times (official daily newspaper) condemns the explosive cocktail of nationalism, xenophobia, separatism, TV-reality, vulgarity and ‘money reigns supreme’, the outcome of the so-called free elections and the wonderful political institutions which the West would like to impose on the world. No more lessons!
Recently the Chinese authorities organised an international colloquium on ‘The Role of Political Parties in Global Economic Governance’. The message sent to the colloquium by the Chinese Communist Party (CCP) was perfectly clear. Reliance on solid intermediary institutions such as the CCP (which includes 90 million members, or roughly 10% of the adult population, almost as many as the number of voters in the American or French primaries) enables the organisation of discussions and decision-making and the design of a model for stable, harmonious and duly considered development in which identity conflicts can be overcome.
By so doing, the Chinese regime may well be over-confident. The limits of the model are well known, beginning with the total lack of transparency and the ferocious repression suffered by all those who condemn the opacity of the regime. ...
- It's Way Too Early for the Fed... - Tim Duy
- The Role of Narratives in Economics - ProMarket
- The Future of the Euro - Cecchetti & Schoenholtz
- The Dangerous Myth That China “Needs” $2.7 Trillion in Reserves - Brad Setser
- Fixed Effects, Random Effects, and (Lack of) External Validity Marc Bellemare
- Does a High-Pressure Labor Market Bring Long-Term Benefits? - macroblog
- The Monetary Superpower: As Strong As Ever- David Beckworth
- The current economy and the outlook - FRBSF
- A rationale for the Tobin tax - VoxEU
- Balance Sheet Blues - Stephen Williamson
- Persuade - interfluidity
- Economies in reverse - John Cochrane
- The trouble with experts - Stumbling and Mumbling
- The Distributional Consequences of the Carbon Tax - EconoSpeak
- How Resilient Is the U.S. Housing Market Now? - Liberty Street Economics
- The Future of Police Reform Under the Trump Administration - RegBlog
Monday, February 13, 2017
Takeaways From Fischer Speech, by Tim Duy: Federal Reserve Governor Stanley Fischer gave a very nice speech this weekend that shed light on the current monetary policymaking process. I found three points particularly notable. First:
One important but underappreciated aspect of the SEP is that its projections are based on each individual's assessment of appropriate monetary policy. Each FOMC participant writes down what he or she regards as the appropriate path for policy. They do not write down what they expect the Committee to do. Yet the public often misinterprets the interest rate paths we write down as a projection of the Committee's policy path or a commitment to a particular path.
The interest rate projections in the SEP do not represent the Committee’s forecast because there is no such forecast. And they certainly do not represent a policy commitment. It is often easy, however, to use the shorthand of referring to the median of the SEP projections as the Fed’s forecast, which is why we fall in the habit of doing so. It is important to realize, however, that this is not an official forecast, and even if it were, it can change over the year so it is not a promise.
My preference is to view the median SEP projection as a baseline to assess policy shifts throughout the year. For instance, I do not believe that incoming data suggests that the Fed will raise its projection relative to the baseline at the upcoming March FOMC meeting. In other words, the median projection is not likely to shift from three to four hikes. This further suggests that given the Fed’s predilection to delay rate hikes in favor of further labor market gains, there is no pressing reason for the Fed to hike in March. They still have plenty of time to raise rates three times this year if necessary and the data do not suggest they need to move early to act on the possibility of needing four rate hikes this year. So no rate hike is likely in March.
A second point from Fischer:
Figure 2 reproduces panels from the April 2011 Tealbook that show the staff's baseline forecast--the solid black line--as well as prescriptions from three simple policy rules that were generated using the FRB/US model. The panel on the left shows the paths for the federal funds rate, while the panels on the right show the implications of those policy prescriptions for the unemployment rate and core PCE (personal consumption expenditures) price inflation, respectively…… How does the FOMC choose its interest rate decision? Fundamentally, it uses charts like those shown in figure 2 as an important input into the discussion. And in their discussion, members of the FOMC explain their policy choices, and try to persuade other members of the FOMC of their viewpoints.
An important takeaway here is that the Fed makes monetary policy decisions on the basis of a medium term forecast. In other words, they tailor policy to meet their objectives over the medium term. This stands in contrast with criticism that the Fed either only sees the short-term outcomes of their actions or that they base policy only on the last piece of data. In reality, they are incorporating that most recent data into the medium term forecast and adjusting policy appropriately.
This process, however, is challenging for the public to understand. Moreover, I do not think the Fed has spent sufficient time explaining their actions in terms of the forecast. I suspect that the Fed may not be doing itself any favors with the opening paragraph of the FOMC statement, which is backwards-looking in nature and portrays the impression that the most recent data is the basis of policymaking. I thus appreciate that Fischer is using charts like these to explain policy choices and hope to see more of it in the future.
A final point from Fischer:
As the August 2011 meeting illustrates, the eureka moment I thought I had 50-plus years ago was a chimera. Why is that? First, the economy is very complex, and models that attempt to approximate that complexity can sometimes let us down. A particular difficulty is that expectations of the future play a critical role in determining how the economy reacts to a policy change. Moreover, the economy changes over time--this means that policymakers need to be able to adapt their models promptly and accurately in real time. And, finally, no one model or policy rule can capture the varied experiences and views brought to policymaking by a committee. All of these factors and more recommend against accepting the prescriptions of any one model or policy rule at face value.
The Fed relies on models, but not only models. Moreover, those models, or the underlying components of those models, such as the natural rate of interest, change over time. This is not a weakness of policymaking, it is a strength. The Fed responds to a ;changing economy. It is not possible to place the Fed in the straightjacket of a simplistic Taylor Rule and expect good outcomes for the economy. Clearly this is intended to push back at ongoing efforts to limit the Fed’s independence.
Bottom Line: Read Fischer’s speech for a greater understanding of the interplay between models, forecasts, data and judgment that governs the Fed’s policy choices.
I have a new column:
If Trump Stacks Its Board, He Politicizes the Fed and Demeans Its Independence: Daniel Tarullo announced on Friday that he is resigning from the Federal Reserve Board of Governors in early April, nearly five years before his term expires on January 31, 2022. Governor Tarullo, who was appointed by President Obama in 2009, led the effort to plug the holes in financial regulation that allowed the housing bubble and financial panic to occur. So his resignation comes at an inopportune time for those of us worried about Trump’s plans for wholesale deregulation of the financial sector and the vulnerability to another financial crisis that comes with it.
Trump could also have a large impact on how the Fed conducts monetary policy..., the Fed could be permanently damaged...
There's a reason Republicans don't like experts:
Ignorance Is Strength. by Paul Krugman, NY Times: When I travel to Asia, I’m fairly often met at the airport by someone holding a sign reading “Mr. Paul.” Why? In much of Asia, names are given family first, personal second — at home, the prime minister of Japan is referred to as Abe Shinzo. And the mistake is completely forgivable when it’s made by a taxi driver picking up a professor.
It’s not so forgivable, however, if the president ... makes the same mistake when welcoming the leader of one of our most important economic and security partners. But there it was: Donald Trump referring to Mr. Abe as, yes, Prime Minister Shinzo.
Mr. Abe did not, as far as we know, respond by calling his host President Donald.
Trivial? Well, it would be if it were an isolated instance. But it isn’t. What we’ve seen instead over the past three weeks is an awesome display of raw ignorance on every front. Worse, there’s no hint that either the White House or its allies in Congress see this as a problem. They appear to believe that expertise, or even basic familiarity with a subject, is for wimps; ignorance is strength. ...
And that is, of course, the point. Competent lawyers might tell you that your Muslim ban is unconstitutional; competent scientists that climate change is real; competent economists that tax cuts don’t pay for themselves; competent voting experts that there weren’t millions of illegal ballots; competent diplomats that the Iran deal makes sense, and Putin is not your friend. So competence must be excluded.
At this point, someone is bound to say, “If they’re so dumb, how come they won?” Part of the answer is that disdain for experts — sorry, “so-called” experts — resonates with an important part of the electorate. Bigotry wasn’t the only dark force at work in the election; so was anti-intellectualism, hostility toward “elites” who claim that opinions should be based on careful study and thought. ...
In some ways this cluelessness may be a good thing: malevolence may ... be tempered by incompetence. It’s not just the court defeat over immigration; Republican ignorance has turned what was supposed to be a blitzkrieg against Obamacare into a quagmire, to the great benefit of millions. And Mr. Trump’s imploding job approval might help slow the march to autocracy.
But meanwhile, who’s in charge? Crises happen, and we have an intellectual vacuum at the top. Be afraid, be very afraid.
Is our basic income really universal?: After our call « For a credible and bold basic income » launched by a group of ten researchers (Antoine Bozio, Thomas Breda, Julia Cagé, Lucas Chancel, Elise Huillery, Camille Landais, Dominique Méda, Emmanuel Saez, Tancrède Voituriez), we received considerable support and also, of course, questions and requests for clarification. The first question was: Given that the system of a basic income which we propose does not defend the idea of an identical monthly allowance paid to each individual, is it really universal? The question is legitimate and I would like to reply here as clearly as possible. ...
Background (from the link in the excerpt):
...The goals of the candidates standing in the presidential primary elections launched by the left must be judged on the relevance of their proposals, their impact on the recovery of economic activity and employment in France, and their effect on social cohesion in the country.
The economic and fiscal policy adopted during François Hollande’s five-year term of office has prevented France from engaging in the dynamics of strong and sustainable economic recovery. The choice made in 2012 to forcibly impose an increase in taxes and reduce deficits in a period of recession killed any hope of growth. The numerous warnings launched in this respect remained unanswered. Those who bear the responsibility for this disastrous policy and who claim to have had no part in it must be held to account today.
In the ongoing debates in the primaries, discussions are crystallizing around a new issue: a basic income (in French sometime referred to as a « revenu universel » or « revenu de base »). Benoît Hamon is faced with the accusation that he is incompetent to govern because he introduced this proposal. According to his critics, the introduction of a basic income would mean bankruptcy for France. The accusation is easily made but over-hasty. Economically and socially, a basic income can be both relevant and innovative. It could be quite the reverse of the fiscal and budgetary choices made in 2012 and in particular the incredibly complex and inefficient tax credit for competitivity and employment, not to mention the exoneration of overtime which even the right wing has abandoned and Manuel Valls would like to bring back today. Properly designed and defined, the basic income can be a structuring element in a new foundation for our social model. ...
- "I'd Rather Have Bob Solow Than an Econometric Model, But..." - Stan Fischer
- Why shocks to large banks cause big GDP swings - VoxEU
- Global Trade: Drivers Behind the Slowdown - VoxEU
- President Le Pen – small risk, big shock - Gavyn Davies
- Macro Musings Podcast: Eswar Prasad - David Beckworth
- The Death of Dodd-Frank? - EconoSpeak
- Surely we're behind some curve - CFE
Saturday, February 11, 2017
- Is Corporate Short-Termism a Problem? - Larry Summers
- No link between immigration and increased crime - EurekAlert
- Effects of the backhaul problem on global trade - VoxEU
- The Middle Income Trap and Governance Issues - Tim Taylor
- Still Seeking Growth From Tax Cuts and Union Busting - Noah Smith
- Fed Official’s Departure to Leave 3 Vacant Seats on Board - NYTimes
- We Are Arrogant - We hold On to Our Old Beliefs on Trade”- ProMarket
- Historical Echoes: The Legacy of Freedman’s Savings and Trust - Liberty Street
- Economic benefits of transportation infrastructure - Microeconomic Insights
- Barriers to the spread of prosperity - VoxEU
Friday, February 10, 2017
Fed's Bullard Knows His Treasury Yield Curve: Having tipped their toes in the water with two interest-rate hikes -- and more expected to come -- the Federal Reserve officials have begun the discussion about reducing the size of the central bank’s $4.45 trillion balance sheet. To date, they have tended to look at interest rate-policy as separate from balance-sheet policy. Once the former is heading toward normalization, then they can begin the latter... Continued at Bloomberg Prophets ...
Who will stop him?:
When the Fire Comes, by Paul Krugman, NY Times: ...there’s a pretty good chance that sometime over the next few years something nasty will happen — a terrorist attack on a public place, an exchange of fire in the South China Sea, something. Then what?
After 9/11, the overwhelming public response was to rally around the commander in chief. Doubts about the legitimacy of a president who lost the popular vote and was installed by a bare majority on the Supreme Court were swept aside. Unquestioning support for the man in the White House was, many Americans believed, what patriotism demanded. ...
Unfortunately, the suspension of critical thinking ended ... badly. The Bush administration exploited the post-9/11 rush of patriotism to take America into an unrelated war, then used the initial illusion of success in that war to ram through huge tax cuts for the wealthy.
Bad as that was, however, the consequences if Donald Trump finds himself similarly empowered will be incomparably worse. ...
Mr. Trump’s attack on Judge James Robart, who put a stay on his immigration ban, was ... unprecedented. ... The really striking thing about Mr. Trump’s Twitter tirade, however, was his palpable eagerness to see an attack on America, which would show everyone the folly of constraining his power... What we see here is the most powerful man in the world blatantly telegraphing his intention to use national misfortune to grab even more power. And the question becomes, who will stop him?
Don’t talk about institutions, and the checks and balances they create. Institutions are only as good as the people who serve them. Authoritarianism, American-style, can be averted only if people have the courage to stand against it. So who are these people?
It certainly won’t be Mr. Trump’s inner circle. It won’t be Jeff Sessions, his new attorney general... It might be the courts — but Mr. Trump is doing all he can to delegitimize judicial oversight in advance.
What about Congress? Well..., maybe, just maybe, there are enough Republican senators who really do care about America’s fundamental values to cross party lines in their defense. But given what we’ve seen so far, that’s just hopeful speculation.
In the end, I fear, it’s going to rest on the people — on whether enough Americans are willing to take a public stand. We can’t handle another post-9/11-style suspension of doubt about the man in charge; if that happens, America as we know it will soon be gone.
- Why Trump Can’t Bully China - Kenneth Rogoff
- (Rodrik and) the Balance of Trade - Bob Kuttner
- Firms Take the Lead in Global Saving - Tim Taylor
- "Incentives" as bigotry - Stumbling and Mumbling
- Trump’s Anachronistic Trade Strategy - Richard Baldwin
- Trump’s Defense of Ivanka Could Hurt the Economy - Justin Wolfers
- How Brexit advocates intend to smear economics - mainly macro
- People Actually Use Food Stamps to Buy More Food - Noah Smith
Thursday, February 09, 2017
Three reasons we’re not yet at full employment: It is often asserted that the U.S. labor market, where unemployment has been at or below 5 percent since late 2015, has reached full employment. But I’ve got three reasons we’re not yet quite there yet:
— the underemployment employment rate is still too high;
— employment rates are still too low;
— wage pressures are still too mild.
I’ll explain each in turn...
Jay Fitzgerald at the NBER Digest:
Housing Crisis Boxed in Some Job Seekers: The housing crash of 2007-08 devastated many homeowners who suddenly found themselves facing an array of woes, from owning homes no longer worth the purchase prices to keeping up with mortgage payments amidst one of the worst recessions in generations. In Locked in by Leverage: Job Search During the Housing Crisis (NBER Working Paper No. 22929), Jennifer Brown and David A. Matsa find that being underwater on a mortgage in a distressed housing market impeded the job searches of these homeowners by reducing their mobility. By constraining job search, this reduced mobility likely damaged their long-term compensation and career prospects.
Housing-market downturns can devastate homeowners' overall wealth, and lower housing values can actually "lock in" owners who can't sell their homes with negative equity, forcing them to remain in their homes and limiting their mobility to buy homes and find work elsewhere. But little is known about how a housing bust specifically affects labor supply, largely because it's difficult to separate effects on labor supply and on labor demand.
These researchers studied the crash's effect on job searches. With data from a large online job search platform, they analyzed more than four million applications to 60,000 online job postings in the financial services sector between May 2008 and December 2009. The data encompassed a rich array of jobs, including posts for bank tellers, administrative assistants, software engineers, account executives, and financial advisers. The postings were spread across all 50 states, 12,157 ZIP codes and more than 700 commuting zones.
The researchers matched information from the job search platform to housing market data. Monthly estimates of home values and borrowing were drawn from Zillow and CoreLogic's Loan-Level Market Analytics, while labor market data came from the U.S. Bureau of Labor Statistics and the Bureau of the Census.
Home value declines and the presence of negative equity led job seekers in depressed housing markets to apply for fewer jobs that required relocation; a 30 percent decline in home values led to a 15 percent decline in applications for jobs outside of the job seeker's commuting zone.
When job searchers were constrained geographically due to the "lock in" effect of lower home values, they were more likely to apply for lower-level and lower-paying positions within their commuting zone.
This constrained search pattern was particularly pronounced in distressed housing markets with recourse mortgages, which allow lenders to go after a defaulting homeowner's other assets. The researchers found clear job-search differences in border areas in which one state allowed recourse mortgages and the other did not.
From the standpoint of firms, the constrained search of some prospective workers had two effects. Firms had reduced access to a national labor market if millions of Americans couldn't or wouldn't relocate due to housing value concerns. At the same time, firms within distressed housing markets faced less competition for labor and benefited by being able to hire well qualified workers at lower salaries than they might otherwise have had to offer.
The researchers conclude that the housing market has important effects on the labor market, as "workers who accept positions below their skill or experience levels forego opportunities to build their human capital." They note that those forced to seek lower-level jobs than they would typically consider could also crowd out other workers, who in turn suffer, creating a far-reaching labor market ripple effect "even if housing market constraints are short-lived."
- Who are you calling Malthusian? - Dietrich Vollrath
- Does Korea Operate A De Facto Target Zone? - Brad Setser
- Theory of the Firm Interview Series: John Van Reenen - ProMarket
- Popularity vs. Legitimacy and Why It Matters - Jared Rubin
- R&D Investment: An International Snapshot - Tim Taylor
- Adapting to the New Globalization - Tyson and Lund
- Dodd-Frank Under Fire - Twenty-Cent Paradigms
Wednesday, February 08, 2017
Steve Maas at the NBER Digest:
Competition from China Reduced Domestic Innovation: While much attention has been paid to the impact of Chinese imports on U.S. factory employment, relatively little has been focused on other affected areas, such as innovation by American manufacturers.
In Foreign Competition and Domestic Innovation: Evidence from U.S. Patents (NBER Working Paper No. 22879), David Autor, David Dorn, Gordon H. Hanson, Gary Pisano, and Pian Shu compare firm-level data on patents obtained in the period 1975 to 1991—before the surge in Chinese imports—with data for the period 1991 to 2007. They find that while patent output and exposure to trade were not significantly correlated in the earlier period, they were in the latter.
China's exports made up nearly 19 percent of the world's total in 2013, up from just 2.3 percent in 1991. The study finds that corporations in U.S. industries where the Chinese made their greatest inroads experienced the most pronounced decline in innovation.
The researchers use patents as their main proxy for innovation, but the study's conclusions are corroborated by corresponding trends in research and development spending. Corporations tightened their belts across the board as imports eroded revenues. There was no association between rising imports and patents generated among entities relatively immune to international market forces, such as universities, hospitals, and nonprofit research institutions.
In conducting their study, the researchers controlled for other factors that could influence the rate of patent generation, such as the post-2001 dot-com bust, a trend toward greater scrutiny of patent applications, and pre-existing trends in the rate of patenting in key industries.
The study's long-term perspective, using data from 1975 to 2007, reveals a growth trend in patenting in the computer and electronics industries and a trend of stagnation of patenting in chemicals and pharmaceuticals, which are two of the most important sectors for innovation. Both of these trends predate the surge in Chinese import competition of the 1990s and 2000s, which was much stronger in the computer and electronics industries than in industries that create new chemical patents.
Given the countervailing trends in these two large, patent-intensive sectors, simple correlations would suggest — misleadingly, it turns out—that industries with larger increases in trade exposure during the sample period of 1991 to 2007 did not exhibit significant falls in patenting. Once the researchers account for preexisting trends in just these two sectors—computers and chemicals—the adverse impact of trade exposure on industry patenting becomes strongly apparent and can be precisely estimated.
While manufacturing employs less than a tenth of U.S. private nonfarm workers, it accounts for two-thirds of the country's research and development spending and corporate patents. "The relationship between competition in the global marketplace and the creation of new products and production processes is thus one of immense importance for the U.S. economy," they write.
The researchers ask why corporations do not spend more on innovation in the face of mounting Chinese imports. One possibility is that firms assume increased competition will lead to a permanent decline in the profitability of their market sectors, giving them little incentive to invest. Another is that American consumers, accustomed to low-cost Chinese goods, have become less inclined to pay more for innovative alternatives. A third possibility is that as American companies shifted their factories to lower-cost countries while keeping R&D at home, the geographic separation impeded the coordination that helps fertilize innovation.
"Each explanation has important implications for both policy and our understanding of the impact of trade on economic performance," the researchers conclude.
Nick Buffie at the CEPR:
The U.S. Tax Code Actually Doesn’t “Soak the Rich” : In 2012, Republican presidential candidate Mitt Romney famously commented that 47 percent of Americans were “dependent on government” because they didn’t pay any federal income taxes. He went on to explain that his job was “not to worry about those people.”
Journalists and other public figures often claim that only the rich pay taxes, supporting this with the argument that the rich pay the vast majority of federal income taxes. However, federal income taxes are just one part of the broader tax code. When we consider other types of federal taxes as well as state and local taxes, it becomes clear that the overall tax code isn’t extremely progressive – in other words, it doesn’t “soak the rich,” and it certainly doesn’t let the poor off the hook. ...
Feldstein, Halstead, and Mankiw :
A Conservative Case for Climate Action: Crazy as it may sound, this is the perfect time to enact a sensible policy to address the dangerous threat of climate change. Before you call us nuts, hear us out.
During his eight years in office, President Obama regularly warned of the very real dangers of global warming, but he did not sign any meaningful domestic legislation to address the problem, largely because he and Congress did not see eye to eye. Instead, Mr. Obama left us with a grab bag of regulations aimed at reducing carbon emissions, often established by executive order. ... As Democrats are learning the hard way, it is all too easy for a new administration to reverse the executive orders of its predecessors.
On-again-off-again regulation is a poor way to protect the environment. ...
Our own analysis finds that a carbon dividends program starting at $40 per ton would achieve nearly twice the emissions reductions of all Obama-era climate regulations combined. ...
The idea of using taxes to correct a problem like pollution is an old one with wide support among economists. ...
Republicans are in charge of both Congress and the White House. If they do nothing other than reverse regulations from the Obama administration, they will squander the opportunity to show the full power of the conservative canon, and its core principles of free markets, limited government and stewardship. ...
One suggested edit to the last paragraph: If the Republicans do more than reverse regulations from the Obama administration and impose a carbon tax, they will squander the opportunity to show the full power of the conservative canon, and its core principle of rewarding wealthy supporters in the business community.
- Is There A Trump Bubble? - Paul Krugman
- Unequal opportunities, unequal growth - VoxEU
- Immigrants Do Not Increase Crime, Research Shows - Scientific American
- Restricting Immigration Would Make America Smaller, Not Greater - NYTimes
- When Authors Forget What their Own Abbreviations Stand For - Tim Taylor
- Treasury Pick’s Oversight of “Robo-Signing” Heats Up Nomination - RegBlog
- How lies work - Stumbling and Mumbling
- Path-dependence of measuring real GDP? - Nick Rowe
- Misallocation in Europe during the Global Crisis - VoxEU
- Net Exports Continue to Bedevil GDPNow - macroblog
Tuesday, February 07, 2017
Philip Bunn, Jeanne Le Roux, Kate Reinold and Paolo Surico at Bank Underground:
Do consumers respond in the same way to good and bad income surprises?: If you unexpectedly received £1000 of extra income this year, how much of it would you spend? All? Half? None? Now, by how much would you cut your spending if it had been an unexpected fall in income? Standard economic theory (for example the ‘permanent income hypothesis’) suggests that your answers should be symmetric. But there are good reasons to think that they might not be, for example in the face of limits on borrowing or uncertainty about future income. That is backed up by new survey evidence, which finds that an unanticipated fall in income leads to consumption changes which are significantly larger than the consumption changes associated with an income rise of the same size ...
The asymmetry that we document could have important implications for the way that households respond to changes in their income that are brought about by monetary and fiscal policies. For example, changes in monetary policy redistribute income between borrowers and savers (Cloyne, Ferreira & Surico (2016)). Borrowers reported higher MPCs than savers out of both positive and negative income shocks, as is typically assumed, but the asymmetry in MPCs was clearly present for both groups. Such an asymmetry in MPCs implies that, at least in the short term, a given interest rate rise would have a larger contractionary effect on spending than the expansionary effect from an equivalent fall in rates, although households may respond differently to small changes in rates than they do to large changes in income.
Larry Christiano on why the Great Recession happened, why it lasted so long, why it wasn't foreseen, and how it’s changing macroeconomic theory (the excerpt below is about the last of these, how it's changing theory):
The Great Recession: A Macroeconomic Earthquake, Federal Reserve Bank of Minneapolis: ...Impact on macroeconomics The Great Recession is having an enormous impact on macroeconomics as a discipline, in two ways. First, it is leading economists to reconsider two theories that had largely been discredited or neglected. Second, it has led the profession to find ways to incorporate the financial sector into macroeconomic theory.
At its heart, the narrative described above characterizes the Great Recession as the response of the economy to a negative shock to the demand for goods all across the board. This is very much in the spirit of the traditional macroeconomic paradigm captured by the famous IS-LM (or Hicks-Hansen) model,9 which places demand shocks like this at the heart of its theory of business cycle fluctuations. Similarly, the paradox-of-thrift argument10 is also expressed naturally in the IS-LM model.
The IS-LM paradigm, together with the paradox of thrift and the notion that a decision by a group of people11 could give rise to a welfare-reducing drop in output, had been largely discredited among professional macroeconomists since the 1980s. But the Great Recession seems impossible to understand without invoking paradox-of-thrift logic and appealing to shocks in aggregate demand. As a consequence, the modern equivalent of the IS-LM model— the New Keynesian model—has returned to center stage.12 (To be fair, the return of the IS-LM model began in the late 1990s, but the Great Recession dramatically accelerated the process.)
The return of the dynamic version of the IS-LM model is revolutionary because that model is closely allied with the view that the economic system can sometimes become dysfunctional, necessitating some form of government intervention. This is a big shift from the dominant view in the macroeconomics profession in the wake of the costly high inflation of the 1970s. Because that inflation was viewed as a failure of policy, many economists in the 1980s were comfortable with models that imply markets work well by themselves and government intervention is typically unproductive.
Accounting for the financial sector
The Great Recession has had a second important effect on the practice of macroeconomics. Before the Great Recession, there was a consensus among professional macroeconomists that dysfunction in the financial sector could safely be ignored by macroeconomic theory. The idea was that what happens on Wall Street stays on Wall Street—that is, it has as little impact on the economy as what happens in Las Vegas casinos. This idea received support from the U.S. experiences in 1987 and the early 2000s, when the economy seemed unfazed by substantial stock market volatility. But the idea that financial markets could be ignored in macroeconomics died with the Great Recession.
Now macroeconomists are actively thinking about the financial system, how it interacts with the broader economy and how it should be regulated. This has necessitated the construction of new models that incorporate finance, and the models that are empirically successful have generally integrated financial factors into a version of the New Keynesian model, for the reasons discussed above. (See, for example, Christiano, Motto and Rostagno 2014.)
Economists have made much progress in this direction, too much to summarize in this brief essay. One particularly notable set of advances is seen in recent research by Mark Gertler, Nobuhiro Kiyotaki and Andrea Prestipino. (See Gertler and Kiyotaki 2015 and Gertler, Kiyotaki and Prestipino 2016.) In their models, banks finance long-term assets with short- term liabilities. This liquidity mismatch between assets and liabilities captures the essential reason that real world financial institutions are vulnerable to runs. As such, the model enables economists to think precisely about the narrative described above (and advocated by Bernanke 2010 and others) about what launched the Great Recession in 2007. Refining models of this kind is essential for understanding the root causes of severe economic downturns and for designing regulatory and other policies that can prevent a recurrence of disasters like the Great Recession.
- Dude, Where's My Policy? - Paul Krugman
- Offshore Profits and U.S. Exports - Brad Setser
- Changes in Labor Force Participation - macroblog
- 'People Have Had Enough of Experts' - Sheila Dow
- China's Wind Power: Some Cautionary Facts - Tim Taylor
- The Economic Growth That Experts Can’t Count - New York Times
- An Open Letter to Congressman Patrick McHenry - Cecchetti & Schoenholtz
- Immigration Restrictions as Active Labor Market Policy - NBER
- Is the US Violating WTO Rules with Respect to Pharma R&D - EconoSpeak
- ‘Metrics Monday: Dealing with Duration Data - Marc Bellemare
- Dodd-Frank Reform: less regulation for much more capital - John Cochrane
- The surprise in monetary surprises: a tale of two shocks - Bank Underground
Monday, February 06, 2017
Olivier Blanchard (PIIE), Guido Lorenzoni (Northwestern University,) and Jean Paul L'Huillier (Einaudi Institute for Economics and Finance):
Short-Run Effects of Lower Productivity Growth: A Twist on the Secular Stagnation Hypothesis: Despite interest rates being very close to zero, US GDP growth has been anemic in the last four years largely due to lower optimism about the future, more specifically to downward revisions in growth forecasts, rather than legacies of the past. Put simply, demand is temporarily weak because people are adjusting to a less bright future. The authors suggest that downward revisions of productivity growth may have decreased demand by 0.5 to 1.0 percent a year since 2012. This explanation, if correct, has important implications for policy and forecasts. It may weaken the case for secular stagnation, as it suggests that the need for very low interest rates to sustain demand may be partly temporary. It also implies that, to the extent that investors in ﬁnancial markets have not fully taken this undershooting into account, the current yield curve may underestimate the strength of future demand and the need for higher interest rates in the future. The authors’ hypothesis is not an alternative to the secular stagnation hypothesis but a twist on it. They do not question that interest rates will probably be lower in the future than they were in the past but argue that, for a while, they may be undershooting their long-run value. [paper]
ProMarket interviews Daniel Carpenter "ahead of the upcoming conference on the theory of the firm, in which he will be taking part, Carpenter shared some of thoughts on the role of corporations and government interference in the market:
How Incomplete is the Theory of the Firm? Q&A with Daniel Carpenter: ...Q: The neoclassical theory of the firm does not consider political engagement by corporations. How big an omission do you think this is?
I think it’s an immense omission. For one, we can’t even talk about the historical origins of many firms without talking about corporate charters, limited liability arrangements, zoning, public contracts and grants, and so on. To view these processes as legal and not political is a significant mistake. I’m currently writing a lot on the history of petitioning in Europe and North America, and in areas ranging from railroads, to technology-heavy industries, to extractive industries, to banking, firms (or their investors) had to bring a case before the legislature, or an agency of government, or both. They usually used petitions to do so.
Beyond the past and into the present, there are a range of firm activities that we can’t understand without looking at politics. ...
And in the future, the profitability and survival prospects of many firms in the coming years will depend heavily, in a polarized environment, on the political skills of managers. ...
Q: Some people describe Donald Trump’s economic policies as “corporatism.” Are you more worried by Trump’s interference in the market economy or by companies’ ability to subvert markets’ rules?
I don’t see those as binary opposites but as complements. If regulation is constitutive of marketplaces (fraud standards, disclosure and labeling requirements, evidentiary requirements), then companies’ ability to subvert market rules will in fact interfere in the proper functioning of a market economy.
I think we’re likely to see both Trumpian interference and company subversion, in other words.
That said, I am concerned about Trump’s interference in markets, for example his bullying of companies and the idea of imposing border taxes. In the U.S. and elsewhere, we are going to see the need for legislative and judicial constraints upon this kind of executive action.
Financial regulation is under attack:
Springtime for Scammers, by Paul Krugman, NY Times: ...Donald Trump ... and his allies in Congress are making it a priority to unravel financial reform — and specifically the parts of financial reform that protect consumers against predators.
Last week Mr. Trump released a memorandum calling on the Department of Labor to reconsider its new “fiduciary rule,” which requires financial advisers to act in their clients’ best interests — as opposed to, say, steering them into investments on which the advisers get big commissions. He also issued an executive order designed to weaken the Dodd-Frank financial reform...
Why ...was the fiduciary rule created? The main issue here is retirement savings..., “conflicted investment advice” has been ... costing ordinary Americans around $17 billion each year. Where has that $17 billion been going? Largely into the pockets of various financial-industry players. And now we have a White House trying to ensure that this game goes on.
On Dodd-Frank: Republicans would like to repeal the whole law, but probably don’t have the votes. What they can do is try to cripple enforcement, especially by undermining the Consumer Financial Protection Bureau, whose goal is to protect ordinary families from financial scams. ...
Remember the Wells Fargo scandal...? This scandal only came to light thanks to the bureau.
So why are consumer protections in the Trump firing line?
Gary Cohn, the Goldman Sachs banker appointed to head Mr. Trump’s National Economic Council — populism! — says that the fiduciary rule is like “putting only healthy food on the menu” and denying people the right to eat unhealthy food if they want it. Of course, it doesn’t do anything like that. If you want a better analogy, it’s like preventing restaurants from claiming that their 1400-calorie portions are health food.
Mr. Trump offers a different explanation for his hostility to financial reform: It’s hurting credit availability. ... What we do know is that U.S. banks have generally shunned Mr. Trump’s own businesses ... perhaps because of his history of defaults.
Other would-be borrowers, however, don’t seem to be having problems. ... Overall bank lending ... has been quite robust since Dodd-Frank was enacted.
So what’s motivating the attack on financial regulation? Well, there’s a lot of money at stake — money that the financial industry has been extracting from unwitting, unprotected consumers. Financial reform was starting to roll back these abuses, but we clearly now have a political leadership determined to roll back the rollback. Make financial predation great again!
- Die hard: The once and future scholarly book - Peter Dougherty
- An improved approach to empirical modelling - Castle and Hendry
- Why is no one talking about the angry Remainers? - mainly macro
- Needed: An Order of Battle for the Newspaper War - Economic Principals
- Measuring the Obama Administration’s Historic Midnight Surge - RegBlog
- Global reflation without higher inflation in 2017 - Gavyn Davies
- The Wisdom and Madness of Crowds - Noah Smith
- Double diversification - VoxEU
Sunday, February 05, 2017
Revoking trade deals will not help American middle classes: ...The idea that renegotiating trade agreements will “make America great again” by substantially increasing job creation and economic growth swept Donald Trump into office.
More broadly, the idea that past trade agreements have damaged the American middle class and that the prospective Trans-Pacific Partnership would do further damage is now widely accepted in both major US political parties. ...
The reality is that the impact of trade and globalisation on wages is debatable and could be substantial. But the idea that the US trade agreements of the past generation have impoverished to any significant extent is absurd. ... My judgment is that these effects are considerably smaller than the impacts of technological progress.
A strategy of returning to the protectionism of the past and seeking to thwart the growth of other nations is untenable and would likely lead to a downward spiral in the global economy. The right approach is to maintain openness while finding ways to help workers at home who are displaced by technical progress, trade or other challenges.
Saturday, February 04, 2017
Trump Picks Wall Street Over Main Street: President Trump fired the first round in his war against financial regulations by signing two executive orders on Friday.
The first calls for the Treasury secretary to conduct a review over the next 120 days of regulations stemming from the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. The second calls for a review of the Department of Labor’s “fiduciary rule,” which requires investment professionals to act in the best interest of their clients, rather than seek the highest profits for themselves...
Though they don’t do too much by themselves to roll back these reforms, the directives do offer important details on how Mr. Trump will approach the financial industry in the next four years — and provide three reasons that people on Main Street should be scared about how Mr. Trump will help Wall Street.
The first is that President Trump, contrary to the hopes of many, has no intention of getting tough with finance. ...
Second, while Mr. Trump wants to repeal the fiduciary rule, he appears to have no interest in a replacement for it. ...
Third, rather than meet with regulators, small businesses or community banks, Mr. Trump met with the titans of Wall Street before announcing the directives. ...
It’s no wonder financial stocks have been soaring since Mr. Trump was elected. Voters who hoped he would “drain the swamp” and upset the elite are in for a big surprise. ...
- Reducing uncertainty around exchange rate forecasts - VoxEU
- The European origins of economic development - Easterly and Levine
- How Close is the EU to a Single Market in Goods? - Tim Taylor
- Trump Isn't the Only Older Worker Staying on the Job - Justin Fox
- Macro Musings Podcast: Jesus Fernandez-Villaverde - David Beckworth
- The Great Bacon Freak Out of 2017 - Jayson Lusk
- Trump And The Fed - EconoSpeak
- Stories MPs tell - mainly macro