July FOMC Preview on Bloomberg: How long can doves at the Federal Reserve stand their ground?
The fight within the U.S. central bank continues at this week's Federal Open Market Committee (FOMC) meeting as both hawks and doves jockey for dominant position. This battle will go to the doves; the Fed is not expected to raise its interest rate target just yet. Both the hawks and the doves know this. Both camps also know that this meeting is about laying down markers for the September meeting. And while the doves have the upper hand this month, the current flow of data will increasingly place them on the defensive as the second half of the year progresses.
Continued at Bloomberg....
Posted by Mark Thoma on Wednesday, July 27, 2016 at 12:15 AM in Economics, Monetary Policy |
Posted by Mark Thoma on Wednesday, July 27, 2016 at 12:06 AM in Economics, Links |
Economists Give Up on Milton Friedman's Biggest Idea: One of the core pieces of modern macroeconomic theory, handed down to us by the great Milton Friedman, probably missed the mark. ...
The idea is called the permanent income hypothesis (PIH). ... The PIH says that people’s consumption doesn’t depend on how much they earn today, but on how much they expect to earn over their lifetime. ...
That assumption about human behavior has huge implications for policy. If true, the PIH means that the effectiveness of a fiscal stimulus is likely to be a lot lower than economists thought in the 1960s. ...
It’s also important for finance. ... Friedman’s idea says that consumers want to smooth out their consumption... So in theory people will spend a lot for financial assets that pay off during recessions, allowing them to avoid tightening their belts.
PIH is so dominant that almost all modern macroeconomic theories are based on it. ... Unfortunately, there’s just one small problem -- it’s almost certainly wrong. Not completely wrong, mind you, just somewhat wrong. ...
The mounting evidence against the PIH -- the papers I cited are only a small sampling -- is causing economists to cast around for an alternative. ...Narayana Kocherlakota ...thinks macroeconomists should set aside their big, complex formal models of the economy, since these elaborate constructions are built on a foundation that probably doesn’t describe reality all that well. He recommends that economists go back to the drawing board, and look around for new, more accurate kernels of insight with which to build the theories of tomorrow.
In the meantime, we should all recognize that Milton Friedman’s ideas might have been too influential. His impact on economics was deep and lasting, but this theory, at least, hasn’t stood the test of time.
Posted by Mark Thoma on Tuesday, July 26, 2016 at 08:25 AM in Economics |
Jeff Frankel at Econbrowser:
Trump Jr.’s Pants-on-Fire Allegation of Manipulated Jobs Numbers: When interviewed about the unemployment numbers, which have fallen steadily since 2010, Donald Trump Jr., replied “These are artificial numbers. These are numbers that are massaged to make the existing economy look good, to make this administration look good when, in fact, it’s a total disaster.” PolitiFact asked a variety of experts about the quote. Their bottom line: the quote from the younger Trump was a “Pants on Fire” lie. The truth is that presidents don’t and can’t manipulate the jobs numbers. No White House has even tried — at least not since Richard Nixon made a heavy-handed attempt in 1971 to interfere with BLS staffing. After that, extra firewalls were put in place.
Here is my own full response to PolitiFact’s question regarding the Trump claim...
Posted by Mark Thoma on Tuesday, July 26, 2016 at 08:24 AM in Economics, Politics, Unemployment |
Pax Trumpiana: With everything else going on, it may be hard to stay with the evolving Trump/Putin story. But it’s really crucial. I don’t think Trump is literally an agent of the Kremlin; instead, he’s someone Putin is aiding because he knows Trump is close to, probably financially entangled with friendly oligarchs. And equally important, Putin knows that Trump’s combination of ignorance and greed would quickly undermine the Western alliance: already we have, incredibly, a presidential candidate essentially proposing that we turn NATO into a protection racket, in which countries get defended only if they pay up.
All of this is, as it turns out, dovetailing with my bedtime reading.
I’m a huge fan of Adrian Goldsworthy’s histories, and I have a galley of his new opus, Pax Romana. Great fun as usual, plus lots of detail. ...
America is, one hopes, not ancient Rome; we aspired to universal values from the beginning, and the Pax Americana, while far from being perfect or even free from some evil, has surely been the most benign great-power domination in history. Still, there is some parallel between how we’ve run much of the world and what the Romans learned to do.
But Trump doesn’t care about any of that — he basically wants America to behave like Rome at its worst, to become the predatory power of Lucullus and Sulla.
And all those ultra-patriotic Republicans are cheering him on.
Posted by Mark Thoma on Tuesday, July 26, 2016 at 08:01 AM in Economics, Politics |
I have a new column:
Economists, Blogs, and Donald Trump: The reason I have this column can be credited to, or blamed on, George Bush.
During the presidential campaigns before the 2004 election, I was very unhappy with the coverage of Bush’s economic proposals in the press. The reporting on the claim that tax cuts would cause so much growth they would pay for themselves, and the discussion of Social Security privatization were particularly irksome, but there was a more general sense that people writing about economic issues were too easily lulled into “bothsideism” and swayed by political spin. Readers were not being informed about what economic theory and evidence says about the policies the candidates were proposing.
In an attempt to do whatever I could to change that, I started writing letters to the local paper followed by three op-eds. Then, one day in March of 2005 I started ablog. That eventually led to this column.
I wasn’t the only one who began using blogs to try and improve communication about economics. The number of economists with blogs has grown substantially, and it has made a difference. The press coverage of economic issues is much better than it was during the campaigns for president in 2004. It’s not perfect, there are still occasions when I want to tear my hair out in frustration, but it’s far better than it was. ...
So it’s been frustrating to see how little difference it has made in the current presidential campaign. ...
Posted by Mark Thoma on Tuesday, July 26, 2016 at 07:38 AM in Economics, Politics, Weblogs |
Posted by Mark Thoma on Tuesday, July 26, 2016 at 12:06 AM in Economics, Links |
Brexit: a blow to the low-paid?: The CBI reported today that manufacturers’ business confidence has fallen at its fastest rate since early 2009, causing falls in investment and hiring plans. This corroborates surveys by Deloitte, Markit (pdf), the Institute of Directors and, to a lesser extent the Bank of England* all of which suggest that the Brexit vote will depress economic activity. ...
What worries me is that the pain of this will disproportionately hit the low-paid. A new paper (pdf) from the Minneapolis Fed says:
It is precisely the households at the bottom of the wealth distribution with low savings rates and high propensities to consume out of current income that suffer the largest welfare losses from a severe recession. Further, these losses are much more severe than those sustained by the "average" household.
This is because the low-paid have no financial assets to cushion themselves against job loss and so must suffer either big falls in living standards or resort to high-cost payday lenders whereas the rich have savings and/or access to cheaper credit**. Also, firms faced with uncertainty might well respond by hoarding skilled labour – which is harder to find when needed – and trimming unskilled workers.
Although the coming downturn will probably not be as severe as the 2009 one, I suspect that these mechanisms will still operate. ...
What’s more, for now we are only seeing the short-run effect of increased uncertainty. In the long-run, it’s possible that by depressing world trade growth, the losers from Brexit will be those in more skilled manufacturing and finance jobs.
For now, though, it might be the low-paid that suffer the most from Brexit. These, though, were more likely (pdf) to have voted Leave. We might ask them Johnny Rotten’s famous question: ““Ever get the feeling you’ve been cheated?”
Posted by Mark Thoma on Monday, July 25, 2016 at 12:13 PM in Economics |
Marilyne Tolle at the Bank of England's Bank Underground blog:
Central bank digital currency: the end of monetary policy as we know it?: Central banks (CBs) have long issued paper currency. The development of Bitcoin and other private digital currencies has provided them with the technological means to issue their own digital currency. But should they?
Addressing this question is part of the Bank’s Research Agenda. In this post I sketch out how a CB digital currency – call it CBcoin – might affect the monetary and banking systems – setting aside other important and complex systemic implications that range from prudential regulation and financial stability to technology, operational and financial conduct.
I argue that taken to its most extreme conclusion, CBcoin issuance could have far-reaching consequences for commercial and central banking – divorcing payments from private bank deposits and even putting an end to banks’ ability to create money. By redefining the architecture of payment systems, CBcoin could thus challenge fractional reserve banking and reshape the conduct of monetary policy. ...
Posted by Mark Thoma on Monday, July 25, 2016 at 09:35 AM in Economics, Monetary Policy |
The phrase "trumped up" comes to mind:
Delusions of Chaos, by Paul Krugman, NY Times: Last year there were 352 murders in New York City. This was a bit higher than the number in 2014, but far below the 2245 murders ... in 1990, the city’s worst year. In fact..., New York is now basically as safe as it has ever been, going all the way back to the 19th century.
National crime statistics, and numbers for all violent crimes, paint an only slightly less cheerful picture. And it’s not just a matter of numbers; our big cities look and feel far safer than they did a generation ago...
How, then, was it even possible for Donald Trump to give a speech accepting the Republican nomination whose central premise was that crime is running rampant, and that “I alone” can bring the chaos under control? ...
Yet there’s no question that many voters — including, almost surely, a majority of white men — will indeed buy into that vision. Why? ...
Well, I do have a hypothesis..., Trump supporters really do feel, with some reason, that the social order they knew is coming apart. It’s not just race, where the country has become both more diverse and less racist (even if it still has a long way to go). It’s also about gender roles — when Mr. Trump talks about making America great again, you can be sure that many of his supporters are imagining a return to the (partly imagined) days of male breadwinners and stay-at-home wives. ...
But what are the consequences of these changes in the social order? Back when crime was rising, conservatives insistently drew a connection to social change — that was what the whole early ’90s fuss over “family values” was about. ...
Then a funny thing happened: Crime plunged instead of continuing to rise. Other indicators also improved dramatically — for example, the teen birthrate has fallen 60 percent since 1991. Instead of societal collapse, we’ve seen what amounts to a mass outbreak of societal health. The truth is that we don’t know exactly why. ...
The point, however, is that in the minds of those disturbed by social change, chaos in the streets was supposed to follow, and they are all too willing to believe that it did, in the teeth of the evidence.
The question now is how many such people, people determined to live in a nightmare of their own imagining, there really are. I guess we’ll find out in November.
Posted by Mark Thoma on Monday, July 25, 2016 at 01:39 AM in Politics |
Posted by Mark Thoma on Monday, July 25, 2016 at 12:06 AM in Economics, Links |
Dani Rodrik and Mr. Trump: David Brooks, of The New York Times, wrote the single best piece I read last week on the Republican convention: “Death of the Party.” Like him, I was riveted by Donald Trump’s acceptance speech. The scene seemed straight out of one of those dystopian Batman movies of the 1980s, ’90s, and ’00s, an outlandish character, sailing under false colors, bullying and threatening, preying on fears, selling Gotham a bill of goods, preparing chaos.
By the time the nominee bellowed, “I am your voice” to the hall of delegates, he seemed simply the latest in a long line of improbable adversaries: the Joker, the Penguin, the Riddler, Mr. Freeze, Poison Ivy, Ra’s al Ghul, the Scarecrow, Bane, Mr. Trump.
But then Batman movies depend on the Caped Crusader, the Dark Knight, to answer the Bat signal, expose the fraud, counter the villains’ plans, and save the city.
Batman in this case is Dani Rodrik, 58, of Harvard University’s Kennedy School of Government. He is likely to be the next economist to enter the pantheon of those who went to school in the ’70s whom much of the public knows today” Jeffrey Sachs, Paul Krugman, Larry Summers, Ben Bernanke. ...
Rodrik isn’t exactly fighting with Trump, the way Batman fights with those villains. He is, by his own account, recasting the globalization narrative, replacing the familiar triumphalist version with a more nuanced account, including the ill-effects of integration that gave rise to the Trump and Bernie Sanders campaigns, and those of H. Ross Perot and Pat Buchanan before them. (Meanwhile, Rodrik is interpreting events in Turkey as well.)
The Trump campaign supports no intellectual edifice whatsoever. For all its flaws, it is up to the Clinton campaign to begin translating into political terms the deeper understanding globalization – its costs as well as its benefits – that Rodrik, Unger, and many others have been working out.
Holy Hoodwink, Batman! Let’s get to work!
Posted by Mark Thoma on Sunday, July 24, 2016 at 10:14 AM in Economics, International Trade, Politics |
Posted by Mark Thoma on Sunday, July 24, 2016 at 12:06 AM in Economics, Links |
Posted by Mark Thoma on Saturday, July 23, 2016 at 12:06 AM in Economics, Links |
In defense of equality (without welfare economics): When I taught recently at the Summer School at Groningen University, I began my lecture on the measurement of inequality by distinguishing between the Italian and English schools as they were defined in 1921 by Corrado Gini...
I put myself squarely in the camp of the “Italians”. Measurement of income inequality is like measurement of any natural or social phenomenon. We measure inequality as we measure temperature or height of people. The English (or welfarist) school believes that the measure of income inequality is only a proxy for a measure of a more fundamental phenomenon: inequality in welfare. The ultimate variable, according to them, that we want to estimate is welfare (or even happiness) and it is distributed. Income provides only an empirically feasible short-cut to it.
I would have been sympathetic to that approach if I knew how individual utility can be measured. There is, I believe, no way to compare utilities of different persons. ... The only way for the “welfaristas” to solve this conundrum is to assume that all individuals have the same utility function. This is such an unrealistically bold assumption that I think nobody would really care to defend it...
Now, the welfarst approach continues to be associated with pro-equality policies. Why? Because if all people have the same utility function, then the optimal distribution of income is such that everybody has the same income. ...
My students then asked how I can justify concern with inequality if I reject the welfarist view which is the main ideological vehicle through which equality of outcomes is being justified. (A non-utilitarian, contractarian alternative is provided by Rawls. Yet another alternative, based on equal capabilities—a close cousin to equality of opportunity (of which more below) is provided by Amartya Sen.)
My answer was that I justify concern with income inequality on three grounds.
The first ground is instrumental: the effect on economic growth. ...
The second is political effect. In societies where economic and political spheres are not separated by the Chinese wall (and all existing societies are such), inequality in economic power seeps and ultimately invades and conquers the political sphere. ...
The third ground is philosophical. As Rawls has argued, every departure from unequal distribution of resources has to be defended by an appeal to a higher principle. Because we are all equal individuals (whether as declared by the Universal Charter of Human Rights or by God), we should all have an approximately equal opportunity to develop our skills and to lead a “good (and pleasant) life”. Because inequality of income almost directly translates into inequality of opportunities, it also directly negates that fundamental equality of all humans. ...
I have to say here that in addition inequality of opportunity affects negatively economic growth...
My argument, if I need to reiterate it, is: you can reject welfarism, hold that inter-personal comparison of utility is impossible, and still feel very strongly that economic outcomes should be made more equal—that inequality should be limited so that it does not strongly affect opportunities, so that it does not slow growth and so that it does not undermine democracy. Isn’t that enough?
Posted by Mark Thoma on Friday, July 22, 2016 at 08:59 AM in Economics, Income Distribution |
Is it more than ignorance?:
Donald Trump, the Siberian Candidate, by Paul Krugman, NY Times: If elected, would Donald Trump be Vladimir Putin’s man in the White House? This should be a ludicrous, outrageous question. After all, he must be a patriot — he even wears hats promising to make America great again. ...
I’m not talking about merely admiring Mr. Putin’s performance — being impressed by the de facto dictator’s “strength,” and wanting to emulate his actions. I am, instead, talking about indications that Mr. Trump would ... actually follow a pro-Putin foreign policy, at the expense of America’s allies and her own self-interest.
That’s not to deny that Mr. Trump does, indeed, admire Mr. Putin. ... But admiration for Putinism isn’t unusual in Mr. Trump’s party. ...
All of this is, or should be, deeply disturbing..., what we’re now seeing ... goes beyond emulation, and is starting to look like subservience.
First, there was the Ukraine issue — one on which Republican leaders have consistently ... criticized Mr. Obama for insufficient action... And the G.O.P. platform was going to include a statement reaffirming this line, but it was watered down to blandness on the insistence of Trump representatives.
Then came Mr. Trump’s interview with The New York Times, in which ... he declared that even if Russia attacked members of NATO he would come to their aid only if those allies — which we are bound by treaty to defend — have “fulfilled their obligations to us.”
Now, some of this is Mr. Trump’s deep ignorance of policy... But is there more to the story? Is there some specific channel of influence?
We do know that Paul Manafort, Mr. Trump’s campaign manager, has worked as a consultant for various dictators, and was for years on the payroll of Viktor Yanukovych, the former Ukrainian president and a Putin ally.
And there are reasons to wonder about Mr. Trump’s own financial interests. Remember, we know nothing about the true state of his business empire, and he has refused to release his taxes... We do know that he has substantial if murky involvement with wealthy Russians and Russian businesses. ...
At some level, Mr. Trump’s motives shouldn’t matter. We should be horrified at the spectacle of a major-party candidate casually suggesting that he might abandon American allies — just as we should be horrified when that same candidate suggests that he might welsh on American financial obligations. But there’s something very strange and disturbing going on here, and it should not be ignored.
Posted by Mark Thoma on Friday, July 22, 2016 at 08:36 AM in Politics |
Posted by Mark Thoma on Friday, July 22, 2016 at 12:06 AM
Yellen Needs to Make More Speeches: What does the U.S. Federal Reserve think about the repercussions of Britain's vote to leave the European Union? Amazingly, we still don’t really know...
Fed officials give a lot of speeches, and many have addressed Brexit in recent weeks. But, as they always say, they don’t speak on behalf of the Federal Open Market Committee...
Only one official, Fed Chair Janet Yellen, has the authority to speak on the committee's behalf, and she does so rarely. ... In all, according to the Fed's website, she has discussed policy at six formal public appearances this year. Her next won’t come until the Kansas City Fed's Jackson Hole conference in late August and the committee meeting of Sept. 20 to 21. ...
The Fed hasn’t always been so taciturn. In 2004, at the beginning of the central bank's last tightening cycle, Chairman Alan Greenspan spoke or testified on 29 separate occasions... Granted, his language was famously hard to parse. But by speaking nearly three times a month, he left no confusion among the public or Fed watchers about who to follow if they wanted to know the future course of monetary policy.
Today, people are a lot more concerned about the state of the global economy than they were in 2004... So if anything, the Fed should be communicating more. That means having a press conference after every open-market committee meeting, and having Yellen make a lot more public speeches. ...
Posted by Mark Thoma on Thursday, July 21, 2016 at 10:45 AM in Economics, Monetary Policy |
Mike Konczal and Marshall Steinbaum:
New Paper: Demand-Side Business Dynamism, by Mike Konczal and Marshall Steinbaum: We—Marshall Steinbaum, who has recently joined the Roosevelt Institute as a visiting fellow, and Mike Konczal—have a new working paper out titled Declining Entrepreneurship, Labor Mobility, and Business Dynamism: A Demand-side Approach. We hope you check it out! We think it adds some important evidence on an unfolding debate. ...
A lot of people have recently been focusing on a worsening economic phenomenon commonly referred to as the decline in “business dynamism” or “labor market fluidity.” There are a lot of ways to measure that, but it’s generally defined as the declining rate at which new businesses are formed and grow, or a decline in overall labor market mobility, which includes job transitions, quitting a job, and geographic migration for work. ...
Most ... analyses stress supply-side factors such as excessive occupational licensing, restrictions on building new housing, and regulations more broadly. However, recent investigations haven’t found evidence for these supply-side factors as drivers of the decline. Measures of dynamism that don’t require geographic mobility are also falling, so it’s not driven by housing. ...
This paper provides an alternative explanation for the recent trends of declining entrepreneurship, falling labor mobility, and rising concentration of employment in old firms and large firms. Our explanation focuses on weakening demand, especially during the slow recovery from the last two recessions. That demand slowdown should, in turn, be investigated further, keeping in mind both secular stagnation and how power is shifting in favor of the owners and managers of incumbent firms alongside rising profits and inter-firm inequality. The key findings in this report are...
Jumping to the conclusion:
This paper argues that the decline in mobility, dynamism, and entrepreneurship is a result of declining labor demand since 2000. When it is hard to find another job, employed workers stay at the jobs they have, impairing their ascent up the job ladder and the accompanying wage growth over careers that historically led to the middle class. Declining entrepreneurship can also be explained by workers’ reluctance to leave large, stable incumbents to start their own firm or to work at a start-up when they cannot be assured that they will have a more stable job to return to. Thus, we find that the concentration of employment in old firms and in large firms mirrors the timing of declining labor mobility due to declining demand.
Regardless of what you make of the merits of policy debates over occupational licensing, housing restrictions, and regulation, these items are not the driver of the aggregate decline in labor market fluidity. Our alternative analysis suggests future research should investigate potential policy-related causes of those trends in demand and market structure—such as declining effective marginal tax rates on high earners and a permissive environment for inter-firm mergers—that deemphasize full employment and market competition and enable secular stagnation. ...
Posted by Mark Thoma on Thursday, July 21, 2016 at 08:48 AM in Economics |
Posted by Mark Thoma on Thursday, July 21, 2016 at 12:06 AM in Economics, Links |
Saleem Bahaj, Iren Levina, and Jumana Saleheen at the Bank of England's Bank Underground:
Is finance a powerful driver of growth?: Since the financial crisis the UK has experienced a period of weak productivity growth, weak investment coupled with a decline in credit to non-financial sectors of the economy. But there is debate about the direction of causality: did low growth and other structural factors mean firms and households wanted to borrow less – as argued by Martin Wolf? Or did the financial sector offer too few funds to the real economy in the wake of the crisis as banks tried to repair their balance sheets. Alternatively, the financial system may not be functioning properly in general, if much of the financial sector’s activity contributes little to the betterment of lives and efficiency of business – a point made by John Kay.
In this post, we analyse whether there has been enough finance to enable productive investment? This question was posed to the Bank of England by the Government last year, as part of its ‘productivity plan’. One concern is: Is the financial sector is holding back UK productivity? This post summarises our own insights on this topic, partly drawing on the recent Bank Discussion Paper. Importantly, our interpretation is blurred by the lack of data. But let’s start with the really interesting things we uncovered.
What we know
To measure the concept of finance for productive investment, we split our thinking into two questions:
(Q1) Are there unexploited productive investment opportunities in the UK? We found no conclusive evidence of investment deficiency....
(Q2) Is there enough finance to ensure productive investment takes place? Yes for the corporate sector as a whole, but not for all firms
The real question of interest here is if investment is low, is the blockage that is stopping investment taking place due to real economy factors – such as globalisation and secular stagnation – or financial factors – such as a lack of access to finance. ...
Large firms, with access to bond and stock markets, don’t appear to have problems financing themselves. Small firms that do have access to capital markets rely heavily on net equity issuance to finance their business... But the vast majority of small firms do not have access to market-based finance and are heavily dependent on bank funding or internal funds. Surveys show that small firms’ access to finance remains an issue, but it now affects a smaller proportion of firms than in recent years...
In an era of big data, we have discovered the presence of big data gaps. These data gaps may have blurred our bottom line: we have not found any conclusive evidence of investment deficiency in the UK; and the corporate sector as a whole appears to have an adequate supply of finance to fund their desired investment activities. ...
Posted by Mark Thoma on Wednesday, July 20, 2016 at 05:37 AM in Economics, Financial System |
Posted by Mark Thoma on Wednesday, July 20, 2016 at 12:06 AM in Economics, Links |
Simeon Djankov at PIIE:
European Red Tape Is a Bogus Justification for Brexit: Did the European Union’s ship of state run aground on misleading anecdotes? It would appear so. Red tape is frequently mentioned as one of the main reasons for Brexit. ...
But however much Brussels is reviled for burdensome regulations, especially in the conservative British press, it is primarily up to the national governments to regulate business and ensure that their regulation is competitive. In recent years, individual European countries have actually improved the environment for doing business. Half of the 25 countries in the world where it is easiest to do business are EU members, according to the 2016 World Bank’s Doing Business survey. These are Denmark (3), United Kingdom (6), Sweden (8), Finland (10), Germany (15), Estonia (16), Ireland (17), Lithuania (20), Austria (21), Latvia (22), Portugal (23), and Poland (25). Malta is the lowest-ranked EU country, at 80 (of 189 economies). ...
An examination of the EU’s record on regulations shows that in practice the EU governs few areas of business activity and that it has a lighter regulatory touch than many other parts of the world, including the United States. Yet the perception of bureaucratic Europe persists. ...
Posted by Mark Thoma on Tuesday, July 19, 2016 at 08:26 AM in Economics, Politics, Regulation |
Tim Duy at Bloomberg:
Why the Fed Can't and Shouldn't Raise Interest Rates: ... The flattening of the U.S. yield curve as investors see little chance of rates rising in the longer term should serve as a red flag that their focus on short-term interest rates may be doomed to failure.
One of the defining features of this tightening cycle is the same as the cycles that came before – the yield curve is flattening, and very quickly. The spread between 10-year and two-year U.S. Treasuries has collapsed to 88 basis points at a time when the federal funds target rate is 25-50bps. This suggests that the Fed actually has very little room to raise short-term rates. If additional rates hikes compress the yield curve further, the capacity for maturity transformation – effectively the process of borrowing on shorter time frames to lend on longer time frames – will soon be compromised. ...
... Bottom Line: The Fed needs to remember that how they got into this policy stance may offer a lesson for how to get out. Policy makers cut rates to zero and then instituted quantitative easing. Now they should consider selling assets before raising rates. Or, at a minimum, utilizing a mixed strategy of rate hikes and asset sales. The objective of meeting the Fed's mandate in the context of maintaining financial stability may be unattainable using the interest rate tool and associated forward guidance alone. Unfortunately, the Fed does not appear to be debating the policy mix — at least not in public. They remain focused on interest rates, delaying balance sheet policy to a later date. On the current trajectory, however, that later date may never come.
Posted by Mark Thoma on Tuesday, July 19, 2016 at 07:43 AM in Economics, Monetary Policy |
Don't Try This Crazy Trick on the Economy: Some economists argue that the Federal Reserve should take a highly unconventional approach to ending a long period of below-target inflation: Instead of keeping interest rates low to spur economic activity and push up prices, it should raise rates.
Labeled "Neo-Fisherism" ... (after the famous monetary economist Irving Fisher), it's an idea I once entertained. Allow me to explain why I now think it’s dangerous. ...
Posted by Mark Thoma on Tuesday, July 19, 2016 at 07:43 AM in Economics, Monetary Policy |
Posted by Mark Thoma on Tuesday, July 19, 2016 at 12:06 AM in Economics, Links |
Why has transparency been so damn confusing?: The theme of our recent series of posts on understanding FOMC actions and communications has been the well-disguised, steady predictability of FOMC policy. The basic story is that policy is driven by a consensus on the FOMC. The consensus tends to evolve slowly and predictably, and for some time now, the consensus has behaved consistently as if driven by two principles:
So long as steady job market gains persist, continue a gradual, pre-announced removal of accommodation.
So long as inflation remains below target, take a tactical pause if credible evidence arises that the job gains might soon falter.
The factual record, I argued, is unambiguous: over the last three years, we’ve gotten normalization at a preannounced pace as in to the first principle, punctuated only by brief (so far) tactical pauses as under the second.
But the fact that my low-drama story lines up with the facts doesn’t make it correct. And my story directly contradicts the popular narrative of a skittish, market-obsessed Fed flip-flopping at every opportunity. This is where the well-disguised part comes in.
Before continuing, however, I want to emphasize that I came to the views I’m describing during my years working on transparency and communications on behalf of the chairs Bernanke and Yellen—a job that ended about 2 years ago now. Yes, I did my small part in making the mess. But the FOMC members and Fed staffers like me also worked pretty hard to understand what was going wrong and attempting to improve the situation. This series of posts is essentially the lessons I took from these efforts. It would be inappropriate for me to say who among my former colleagues subscribes to these views, but I similarly don’t want to claim the ideas as my own. For now, I’ll be deliberately and appropriately vague in saying that all the points I’m making were in the air at the Fed while I was there. In this post, I’ll sketch the basics, leaving details and support for subsequent posts. ...
Posted by Mark Thoma on Monday, July 18, 2016 at 08:44 AM in Economics, Monetary Policy |
I have a new post at MoneyWatch:
The toughest question about global trade: This year's battle for the White House has put international trade in the spotlight. Donald Trump has led the charge against trade agreements, but Hillary Clinton's reversal of her support for President Obama's Trans-Pacific Partnership (TPP) also reflects the evolving view of the benefits of globalization.
The American public has long been suspicious of international trade, but economists have been much more supportive. However, new evidence in the economics literature has caused a rethinking of how to evaluate trade agreements.
This research documents that the negative effects of globalization on employment and wages are larger than many people realized. In addition, it recognizes that most of the benefits have accrued to those at the top of the income distribution while the costs -- lost jobs, lower wages and fewer attractive employment opportunities -- have fallen mainly on the working class.
One response from many advocates is to point out that international trade has lifted millions of people around the world out of poverty and that reducing the pace of globalization would slow the rate of global poverty reduction.
All of which brings up an important and rather difficult question: Just how should we value international trade? ...
Posted by Mark Thoma on Monday, July 18, 2016 at 08:37 AM in Economics, International Trade |
Balancing the unbalanced:
Both Sides Now?, by Paul Krugman, NY Times: When Donald Trump began his run for the White House, many people treated it as a joke. Nothing he has done or said since makes him look better. On the contrary, his policy ignorance has become even more striking, his positions more extreme, the flaws in his character more obvious, and he has repeatedly demonstrated a level of contempt for the truth that is unprecedented in American politics.
Yet while most polls suggest that he’s running behind in the general election..., there’s still a real chance that he might win. How is that possible? Part of the answer, I’d argue, is that voters don’t fully appreciate his awfulness. And the reason is that too much of the news media still can’t break with bothsidesism — the almost pathological determination to portray politicians and their programs as being equally good or equally bad, no matter how ludicrous that pretense becomes. ...
You might think that Donald Trump, who lies so much that fact-checkers have a hard time keeping up, who keeps repeating falsehoods even after they’ve been proved wrong, and who combines all of this with a general level of thuggishness aimed in part at the press, would be too much even for the balance cultists to excuse.
But you would be wrong. ...
And in the last few days we’ve seen a spectacular demonstration of bothsidesism...: an op-ed article from the incoming and outgoing heads of the White House Correspondents’ Association, with the headline “Trump, Clinton both threaten free press.” How so? Well, Mr. Trump has selectively banned news organizations he considers hostile; he has also, although the op-ed didn’t mention it, attacked both those organizations and individual reporters, and refused to condemn supporters who, for example, have harassed reporters with anti-Semitic insults.
Meanwhile, while Mrs. Clinton hasn’t done any of these things, and has a staff that readily responds to fact-checking questions, she doesn’t like to hold press conferences. Equivalence!
Stung by criticism, the authors ... issued a statement denying that they had engaged in “false equivalency” — I guess saying that the candidates are acting “similarly” doesn’t mean saying that they are acting similarly. And they once again refused to indicate which candidate was behaving worse.
As I said, bothsidesism isn’t new, and it has always been an evasion of responsibility. But taking the position that “both sides do it” now, in the face of this campaign and this candidate, is an act of mind-boggling irresponsibility.
Posted by Mark Thoma on Monday, July 18, 2016 at 08:02 AM in Economics, Politics, Press |
Posted by Mark Thoma on Monday, July 18, 2016 at 12:06 AM in Economics, Links |
Helicopter money: Despite aggressive actions by central banks, many of the world’s economies are still stagnating and facing new shocks, leading to renewed calls for helicopter money as a serious policy prescription for countries like Japan and the U.K.. And, if things go badly, maybe the United States? ...
After discussing helicopter money, he concludes with:
... If helicopter money is no more than a combination of fiscal expansion and LSAP, and if we think LSAP hasn’t been able to do that much, it’s clear that the fiscal expansion part is where the real action is coming from. On the other hand, if we think both components make a difference, there’s no inherent reason that the size of the fiscal operation has to be exactly the same as the size of the monetary operation.
Nevertheless, as has been true with LSAP, there might be some psychological impact, if nothing else, from announcing this as if it were a new policy. For example, I could imagine the Fed announcing that for the next n months, it will buy all the new debt that the Treasury issues. For maximal effect this would be coupled with a Treasury announcement of a new spending operation. Doubtless the announcement would bring out calls from certain quarters that the U.S. was going the route of Zimbabwe. And just as in the previous times we heard those warnings, those pundits would be proven wrong, as indeed the effects would not be that different from what we’re already getting from central bank expansions around the globe.
Helicopter money is no bazooka for stimulating the economy. Ben Bernanke offered this reasonable summary:
Money-financed fiscal programs (MFFPs), known colloquially as helicopter drops, are very unlikely to be needed in the United States in the foreseeable future. They also present a number of practical challenges of implementation, including integrating them into operational monetary frameworks and assuring appropriate governance and coordination between the legislature and the central bank. However, under certain extreme circumstances– sharply deficient aggregate demand, exhausted monetary policy, and unwillingness of the legislature to use debt-financed fiscal policies– such programs may be the best available alternative. It would be premature to rule them out.
Posted by Mark Thoma on Sunday, July 17, 2016 at 10:36 AM in Economics, Fiscal Policy, Monetary Policy |
Posted by Mark Thoma on Sunday, July 17, 2016 at 12:06 AM in Economics, Links |
Posted by Mark Thoma on Saturday, July 16, 2016 at 12:06 AM in Economics, Links |
Data dump, by Tim Duy: Interesting mix of data today that will give monetary policymakers plenty of food for thought. My guess is that it will probably drive a deeper division in the Fed between those who looking to secure two hikes this year rather and those good with just one or none at all.
Retail sales came in stronger than expected, although prior months were revised down. Various measures of sales excluding gas are perking up compared to last year:
While prior expansions churned out some better spending numbers, the consumer is clearly not in some kind of recessionary free-fall. Remember, 2% growth is the new 4%. These data will help reassure the Fed that the bulk of economic activity - that directed by consumers - remains solid.
Industrial production rose, albeit on the back of autos. Compared to a year ago, factory activity remains in negative territory. Still, softness in the sector does not exhibit the degree of dispersion typically experienced in recessions:
Still looks to me more like a mid-cycle slowdown like the mid-80s and 90s rather than a recession. Containing such a slowdown argues for keeping rates low for now.
Inflation as measured by the consumer price index continues to firm. Core CPI inflation came in at 0.2 percent m-o-m and 2.3 percent y-o-y. Of course, the Fed targets PCE inflation, and there the core number is weaker:
See Calculated Risk for more measures of inflation. The key point here is that the Fed's preferred measure is tracking lower than other measures. Watch for the hawks to press their case on those higher measures; the doves should keep a focus on PCE. The doves should win this battle. If they don't win, the Fed will be effectively targeting a different inflation rate than stated in their long-run policy objectives. That would then render those objectives and likely future similar missives essentially worthless.
The Atlanta Fed released its wage measures for June. These measures - which track persons steadily employed over the past twelve months - continue to exceed the average measures of the employment report:
The Atlanta Fed measure just about in the pre-recession territory; while the standard measures still have a ways to go. The Atlanta Fed measure tells the Fed that cyclical labor market dynamics are not terribly different than the past. When unemployment goes down, wage growth accelerates:
Demographic effects - the exit of higher earning Boomers from the labor force, replaced by lower earning Millennials - appear to be weighing on average wage growth. Which one is the better guide for monetary policy? Policymakers will again find themselves at odds along the obvious lines. The San Francisco Fed gives mixed guidance on the issue:
How to best gauge the impact of wage growth on overall inflation is less clear. As long as employers can keep their wage bills low by replacing or expanding staff with lower-paid workers, labor cost pressures for higher price inflation could remain muted for some time. If, however, these lower-wage workers are less productive, continued increases in unit labor costs could be hiding behind low readings on measures of aggregate wage growth.
On net, when the Fed faces a mixed message, they tend to move slower than faster. So given the low core-PCE environment, the doves will likely remain in control.
Separately, the Wall Street Journal has a story on which Fed speakers are most useful as policy guides. The article is behind the WSJPro paywall, but via Twitter came this graphic:
Granted, this type of list is always in flux. That said, I would definitely move Brainard, Powell, and Tarullo up with Yellen and Dudley. I find it very rare that you would learn less from a Board member than a regional president. This is especially true given the caliber of these three speakers. And remember that Tarullo doesn't talk a lot about monetary policy, but when he does you probably should listen. Brainard has been driving policy since last fall. Of the regionals, I would place Evans at the top. Williams has been too hawkish in his guidance the past couple of years; you really need to put a negative delta on any rate forecast you glean from him. Rosengren steered you wrong this year as he joined Williams in trying to set the stage for a June rate hike. I don't see where Lockhart should be in the top half of this list. And I don't know what to make of Fischer. He has leaned hawkish this cycle as well, to the point of being one who scolds markets for thinking differently. He appears to me to be an outlier on the Board at the moment, not one driving the policy debate.
Bottom Line: Generally solid data sufficient to keep the prospect of a rate hike or two alive for this year. But soft or mixed enough on key points to lean policy closer to the former than the latter.
Posted by Mark Thoma on Friday, July 15, 2016 at 11:13 AM in Economics, Fed Watch, Monetary Policy |
The Outsized Impact of the Fall in Commodity Prices on Global Trade: Global trade has not grown since the start of 2015.
Emerging market imports appear to be running somewhat below their 2014 levels.
Creeping protectionism? Perhaps.
But for now the underlying national data points to much more prosaic explanation.
The “turning” point in trade came just after oil prices fell. ...
Posted by Mark Thoma on Friday, July 15, 2016 at 10:51 AM in Economics, International Trade, Oil |
High stock prices are "not evidence of a healthy economy":
Bull Market Blues, by Paul Krugman, NY Times: Like most economists, I don’t usually have much to say about stocks. Stocks ... have a lot less to do with the state of the economy or its future prospects than many people believe. ...
Still, we shouldn’t completely ignore stock prices. The fact that the major averages have lately been hitting new highs ... is newsworthy and noteworthy. What are those Wall Street indexes telling us?
The answer, I’d suggest, isn’t entirely positive..., in some ways the stock market’s gains reflect economic weaknesses, not strengths. ...
We measure the economy’s success by the extent to which it generates rising incomes for the population. But stocks ... only reflect the part of income that shows up as profits.
This wouldn’t matter if the share of profits in overall income were stable; but it isn’t. The share of profits ... has been a lot higher in recent years than it was during the great stock surge of the late 1990s ... making the relationship between profits and prosperity weak at best. ...
When investors buy stocks, they’re buying a share of future profits. What that’s worth to them depends on what other options they have for converting money today into income tomorrow. And these days those options are pretty poor... So investors are willing to pay a lot for future income, hence high stock prices for any given level of profits. ...
This may seem, however, to present a paradox. If the private sector doesn’t see itself as having a lot of good investment opportunities, how can profits be so high? The answer, I’d suggest, is that these days profits often seem to bear little relationship to investment in new capacity. Instead, profits come from some kind of market power... And companies making profits from such power can simultaneously have high stock prices and little reason to spend.
Consider the fact that the three most valuable companies in America are Apple, Google and Microsoft. None of the three spends large sums on bricks and mortar. ...
In other words, while record stock prices do put the lie to claims that the Obama administration has been anti-business, they’re not evidence of a healthy economy. If anything, they’re a sign of an economy with too few opportunities for productive investment and too much monopoly power.
So when you read headlines about stock prices, remember: What’s good for the Dow isn’t necessarily good for America, or vice versa.
Posted by Mark Thoma on Friday, July 15, 2016 at 09:10 AM in Economics |
Posted by Mark Thoma on Friday, July 15, 2016 at 12:06 AM in Economics, Links |
On Arrest Filters and Empirical Inferences: I've been thinking a bit more about Roland Fryer's working paperce use of force, prompted by this thread by Europile and excellent posts by Michelle Phelps and Ezekeil Kweku.
The Europile thread contains a quick, precise, and insightful summary of the empirical exercise conducted by Fryer to look for racial bias in police shootings. There are two distinct pools of observations: an arrest pool and a shooting pool. The arrest pool is composed of "a random sample of police-civilian interactions from the Houston police department from arrests codes in which lethal force is more likely to be justified: attempted capital murder of a public safety officer, aggravated assault on a public safety officer, resisting arrest, evading arrest, and interfering in arrest." The shooting pool is a sample of interactions that resulted in the discharge of a firearm by an officer, also in Houston.
Importantly, the latter pool is not a subset of the former, or even a subset of the set of arrests from which the former pool is drawn. Put another way, had the interactions in the shooting pool been resolved without incident, many of them would never have made it into the arrest pool. Think of the Castile traffic stop: had this resulted in a traffic violation or a warning or nothing at all, it would not have been recorded in arrest data of this kind.
The analysis in the paper is based on a comparison between the two pools. The arrest pool is 58% black while the shooting pool is 52% black, which is the basis for Fryer's claim that blacks are less likely to be shot by whites in the raw data. He understands, of course, that there may be differences in behavioral and contextual factors that make the black subset of the arrest pool different from the white, and attempts to correct for this using regression analysis. He reports that doing so "does not significantly alter the raw racial differences."
This analysis is useful, as far as it goes. But does this really imply that the video evidence that has animated the black lives matter movement is highly selective and deeply misleading, as initial reports on the paper suggested?
Not at all. The protests are about the killing of innocents, not about the treatment of those whose actions would legitimately plant them in the serious arrest pool. What Fryer's paper suggests (if one takes the incident categorization by police at face value) is that at least in Houston, those who would assault or attempt to kill a public safety officer are treated in much the same way, regardless of race.
But think of the cases that animate the protest movement, for instance the list of eleven compiled here. Families of six of the eleven have already received large settlements (without admission of fault). Six led to civil rights investigations by the justice department. With one or two possible exceptions, it doesn't appear to me that these interactions would have made it past Fryer's arrest filter had they been handled more professionally.
The point is this: if there is little or no racial bias in the way police handle genuinely dangerous suspects, but there is bias that leads some mundane interactions to turn potentially deadly, then the kind of analysis conducted by Fryer would not be helpful in detecting it. Which in turn means that the breathless manner in which the paper was initially reported was really quite irresponsible.
For this the author bears some responsibility, having inserted the following into his discussion of the Houston findings:
Given the stream of video "evidence", which many take to be indicative of structural racism in police departments across America, the ensuing and understandable outrage in black communities across America, and the results from our previous analysis of non-lethal uses of force, the results displayed in Table 5 are startling... Blacks are 23.8 percent less likely to be shot by police, relative to whites.
His claim that this was "the most surprising result of my career" was an invitation to misunderstand and misreport the findings, which are important but clearly limited in relevance and scope.
Posted by Mark Thoma on Thursday, July 14, 2016 at 08:49 AM in Economics |
Austin Clemens at Equitable Growth:
New analysis shows it is more difficult for workers to move up the income ladder: Against a rising chorus of concern about increasing income inequality, some economists are pushing back, suggesting that it is not income inequality we should be concerned with but rather income mobility. Income mobility describes the ability of individuals to move up and down the income ladder over some period of time. As long as mobility is healthy, they argue, society can remain egalitarian in the face of inequality, because the poor can move up and the rich down. ...
Equitable Growth grantees Michael D. Carr and Emily E. Wiemers at the University of Massachusetts-Boston used a new dataset to revisit the measurement of earnings mobility, the part of income that comes from work. Their results suggest that lifetime earnings mobility has declined in recent years. ...
Posted by Mark Thoma on Thursday, July 14, 2016 at 08:43 AM in Economics, Income Distribution |
Posted by Mark Thoma on Thursday, July 14, 2016 at 12:06 AM in Economics, Links |
Cameron's failure: austerity: David Cameron’s premiership must be considered a failure. He wanted to keep the UK in the EU, but failed; he wanted to preserve the Union but Scotland might well leave as a result of Brexit; and he wanted to heal a “broken Britain” but leaves the country divided and with hate crime rising.
A big reason for these failures lies in economic policy. Unnecessary austerity contributed to Brexit in four ways:
- In contributing to stagnant incomes for many, it increased hostility to immigrants, which some Brexiteers exploited. When combined with high inequality – which Cameron did little to combat – it also contributed to increasing distrust of “elites”. ...
- In worsening public services, Cameron and Osborne allowed the false impression to grow that immigrants were responsible for pressure on the NHS. ...
- Austerity policies ran contrary to the established wisdom of most economic experts. Having shut out experts in one area, Cameron and Osborne were then less able to appeal to them on the merits of staying in the EU. They created a precedent for a rejection of mainstream economics.
- Supporting austerity at home meant that the Tories could not argue for expansionary policies in the euro zone – policies which would have both helped to reduce migration to the UK and which would have diminished the image of the EU as a failing institution. ...
In this sense, the costs of austerity have been far higher than estimated by conventional macroeconomic thinking. This perhaps reinforces an old piece of political wisdom – that if a government doesn’t get economic policy right, it’ll not get much else right either.
Posted by Mark Thoma on Wednesday, July 13, 2016 at 09:53 AM in Economics, Politics |
The Costs of Monopoly: A New View, The Region, FRB Minneapolis: Economists overwhelmingly agree that the actual costs of monopoly are small, even trivial. This consensus is based on a theory that assumes monopolies are well-run businesses that limit their output in order to drive up prices and maximize profit. And because empirical studies have found that monopolists do not restrict output or raise prices by very much, most economists have concluded that monopolies inflict relatively little harm on the economy.
In this essay, I review recent research that upends both the theoretical and empirical elements of this consensus view.2 This research shows that monopolies are not well-run businesses, but instead are deeply inefficient. Monopolies do drive up prices, as conventional theory suggests, but because they also reduce productivity, they often ultimately destroy most of an industry’s profits. These productivity losses are a dead-weight loss for the economy, and far from trivial.
The new research also shows that monopolists typically increase prices by using political machinery to limit the output of competing products—usually by blocking low-cost substitutes. By limiting supply of these competing products, the monopolist drives up demand for its own. Thus, in contrast to conventional theory, the monopolist actually produces more of its own product than it would in a competitive market, not less. But because production of the substitutes is restricted, total output falls.
The reduction in productivity exacts a toll on all of society. But the blocking of low-cost substitutes particularly harms the poor, who might not be able to afford the monopolist’s product. Thus, monopolies drive the poor out of many markets.
In this essay, I first review the standard theory of monopoly that contends it inflicts little harm, and then I introduce a new theory that refutes that view. In this new theory, groups within monopolies act as both adversaries that reduce productivity and allies that eliminate substitutes. The new theory thus demonstrates that monopolies in fact cause substantial economic harm, and that harm falls disproportionately on people with fewer financial resources.
I then provide several historical examples of monopolies from my own research and that of others. I’ll discuss monopoly subgroups in their role as adversaries in the sugar, cement and construction industries. I’ll discuss monopoly subgroups acting as allies in the dental and legal industries. But I want to emphasize that in all monopolies, subgroups engage in both roles. I’ll also take a fresh look at a familiar example of a monopoly, U.S. Steel, showing how subgroups acted as both adversaries and allies. These few examples are illustrative only and provide a narrow glimpse of a far broader economic phenomenon: Monopolies are prevalent in the U.S. (and international) economy. ...
Skipping forward to the summary and conclusion:
For decades, the theoretical understanding and empirical analysis of monopoly have themselves been monopolized by a dominant paradigm—that the costs of monopoly are trivial. This blindness to new theory and analysis has impeded economists’ understanding of the actual harm caused by monopoly. Rather than inflicting little actual damage, adversarial relationships within monopolies have significantly reduced productivity and economic welfare. And in many industries, subgroups within monopolies collaborate to eliminate competition from low-cost substitutes. This lack of competition in the marketplace has a disproportionate impact on poor citizens who might otherwise find low-cost services that would meet their needs.
I’ve described this as a “new” theory, but in truth its roots go back decades, to the ideas of Thurman Arnold. Arnold ran the Antitrust Division at the Department of Justice from 1938 to 1943, taking aim at a broad range of targets, from automakers to Hollywood movie producers to the American Medical Association.10 He argued that lack of competition reduced productivity and that monopolies crushed low-cost substitutes, hurting the poor. Arnold supported his arguments through intensive real-world research. He and his staff undertook detailed investigations of monopolies, examining the on-site operations of many industries and documenting the productivity losses and destruction of substitutes caused by monopoly.
Arnold began his work at a pivotal time—in the midst of the Great Depression, just after the United States had experimented with the cartelization of its economy. Faith in competitive markets had reached such a low that cartels and monopolies were thought to be, perhaps, better alternatives. His work and ideas played a big role in reinvigorating confidence in competitive markets. He mounted an aggressive campaign to protect society from monopoly. The campaign had two parts: forceful prosecution of monopoly through the courts, accompanied by an array of speeches and articles to educate the general public about its costs.
Economists gradually forgot Arnold and his ideas, convinced by Harberger’s empirical work and the introspection of economists, leading to, for example, the logic provided by Stigler and others. Scholars and regulators who studied monopolies focused on prices alone and found little to worry about.
But as shown by the research reviewed in this essay—and an expanding body of empirical work—the problems caused by monopoly are significant, and still pervasive. My hope is that this paper will open a new era of discussion about monopoly and its costs, and ultimately lead policymakers to encourage greater competition for the benefit of all.
Posted by Mark Thoma on Wednesday, July 13, 2016 at 12:24 AM in Economics, Market Failure |