Thursday, September 03, 2015

Latest from the GDPNow Forecasting Model

Interesting divergence between "Blue Chip" consensus and the GDPNow measure from the Atlanta Fed:

GDPNow: The growth rate of real gross domestic product (GDP) is a key indicator of economic activity, but the official estimate is released with a delay. Our new GDPNow forecasting model provides a "nowcast" of the official estimate prior to its release. Recent forecasts for the GDPNow model are available here. More extensive numerical details—including underlying source data, forecasts, and model parameters—are available as a separate spreadsheet.
Latest forecast — September 3, 2015
The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2015 is 1.5 percent on September 3, up from 1.3 percent on September 1. ...
... As more monthly source data becomes available, the GDPNow forecast for a particular quarter evolves and generally becomes more accurate. That said, the forecasting error can still be substantial just prior to the “advance” GDP estimate release. It is important to emphasize that the Atlanta Fed GDPNow forecast is a model projection not subject to judgmental adjustments. It is not an official forecast of the Federal Reserve Bank of Atlanta, its president, the Federal Reserve System, or the FOMC.

    Posted by on Thursday, September 3, 2015 at 10:47 AM in Economics | Permalink  Comments (5)


    Carlos Garriga, Finn Kydland, and Roman Sustek, say (based upon their work "The Costs of Interest Rate Liftoff for Homeowners":

    If the purpose of the liftoff is to “normalize” nominal interest rates without derailing the recovery, the Federal Reserve Bank and the Bank of England should wait until the economies show convincingly signs of inflation taking off.

      Posted by on Thursday, September 3, 2015 at 09:08 AM in Environment, Monetary Policy | Permalink  Comments (11)

      The Divergence Between Productivity and Pay

      From Larry Mishel and Josh Bivens at the EPI:

      Understanding the Historic Divergence Between Productivity and a Typical Worker’s Pay: Why It Matters and Why It’s Real, by Josh Bivens and Lawrence Mishel: Introduction and key findings Wage stagnation experienced by the vast majority of American workers has emerged as a central issue in economic policy debates, with candidates and leaders of both parties noting its importance. This is a welcome development because it means that economic inequality has become a focus of attention and that policymakers are seeing the connection between wage stagnation and inequality. Put simply, wage stagnation is how the rise in inequality has damaged the vast majority of American workers.

      The Economic Policy Institute’s earlier paper, Raising America’s Pay: Why It’s Our Central Economic Policy Challenge, presented a thorough analysis of income and wage trends, documented rising wage inequality, and provided strong evidence that wage stagnation is largely the result of policy choices that boosted the bargaining power of those with the most wealth and power (Bivens et al. 2014). As we argued, better policy choices, made with low- and moderate-wage earners in mind, can lead to more widespread wage growth and strengthen and expand the middle class.

      This paper updates and explains the implications of the central component of the wage stagnation story: the growing gap between overall productivity growth and the pay of the vast majority of workers since the 1970s. A careful analysis of this gap between pay and productivity provides several important insights for the ongoing debate about how to address wage stagnation and rising inequality. First, wages did not stagnate for the vast majority because growth in productivity (or income and wealth creation) collapsed. Yes, the policy shifts that led to rising inequality were also associated with a slowdown in productivity growth, but even with this slowdown, productivity still managed to rise substantially in recent decades. But essentially none of this productivity growth flowed into the paychecks of typical American workers. Second, pay failed to track productivity primarily due to two key dynamics representing rising inequality: the rising inequality of compensation (more wage and salary income accumulating at the very top of the pay scale) and the shift in the share of overall national income going to owners of capital and away from the pay of employees. Third, although boosting productivity growth is an important long-run goal, this will not lead to broad-based wage gains unless we pursue policies that reconnect productivity growth and the pay of the vast majority.

      Ever since EPI first drew attention to the decoupling of pay and productivity (Mishel and Bernstein 1994), our work has been widely cited in economic analyses and by policymakers. It has also attracted criticisms from those looking to deny the facts of inequality. Thus in this paper we not only provide an updated analysis of the productivity–pay disconnect and the factors behind it, we also explain why the measurement choices we have made are the correct ones. As we demonstrate, the data series and methods we use to construct our graph of the growing gap between productivity and typical worker pay best capture how income generated in an average hour of work in the U.S. economy has not trickled down to raise hourly pay for typical workers. ...

      Key findings from the paper include:

      • For decades following the end of World War II, inflation-adjusted hourly compensation (including employer-provided benefits as well as wages) for the vast majority of American workers rose in line with increases in economy-wide productivity. Thus hourly pay became the primary mechanism that transmitted economy-wide productivity growth into broad-based increases in living standards.
      • Since 1973, hourly compensation of the vast majority of American workers has not risen in line with economy-wide productivity. In fact, hourly compensation has almost stopped rising at all. Net productivity grew 72.2 percent between 1973 and 2014. Yet inflation-adjusted hourly compensation of the median worker rose just 8.7 percent, or 0.20 percent annually, over this same period, with essentially all of the growth occurring between 1995 and 2002. Another measure of the pay of the typical worker, real hourly compensation of production, nonsupervisory workers, who make up 80 percent of the workforce, also shows pay stagnation for most of the period since 1973, rising 9.2 percent between 1973 and 2014. Again, the lion’s share of this growth occurred between 1995 and 2002.
      • Net productivity grew 1.33 percent each year between 1973 and 2014, faster than the meager 0.20 percent annual rise in median hourly compensation. In essence, about 15 percent of productivity growth between 1973 and 2014 translated into higher hourly wages and benefits for the typical American worker. Since 2000, the gap between productivity and pay has risen even faster. The net productivity growth of 21.6 percent from 2000 to 2014 translated into just a 1.8 percent rise in inflation-adjusted compensation for the median worker (just 8 percent of net productivity growth).
      • Since 2000, more than 80 percent of the divergence between a typical (median) worker’s pay growth and overall net productivity growth has been driven by rising inequality (specifically, greater inequality of compensation and a falling share of income going to workers relative to capital owners). Over the entire 1973–2014 period, rising inequality explains over two-thirds of the productivity–pay divergence.
      • If the hourly pay of typical American workers had kept pace with productivity growth since the 1970s, then there would have been no rise in income inequality during that period. Instead, productivity growth that did not accrue to typical workers’ pay concentrated at the very top of the pay scale (in inflated CEO pay, for example) and boosted incomes accruing to owners of capital.
      • These trends indicate that while rising productivity in recent decades provided the potential for a substantial growth in the pay for the vast majority of workers, this potential was squandered due to rising inequality putting a wedge between potential and actual pay growth for these workers.
      • Policies to spur widespread wage growth, therefore, must not only encourage productivity growth (via full employment, education, innovation, and public investment) but also restore the link between growing productivity and the typical worker’s pay.
      • Finally, the economic evidence indicates that the rising gap between productivity and pay for the vast majority likely has nothing to do with any stagnation in the typical worker’s individual productivity. For example, even the lowest-paid American workers have made considerable gains in educational attainment and experience in recent decades, which should have raised their productivity.


        Posted by on Thursday, September 3, 2015 at 12:12 AM in Economics, Income Distribution | Permalink  Comments (57)

        Links for 09-03-15

          Posted by on Thursday, September 3, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (159)

          Wednesday, September 02, 2015

          'The Triumph of Backward-Looking Economics'

          In response to Paul Krugman's recent post, "The Triumph of Backward-Looking Economics" -- no surprise here -- there is  disagreement from Steve Williamson. So let me offer this from Blanchard and Johnson's intermediate macroeconomics text discussing this issue. But first, a brief review of the controversy. Krugman says:

          ... What did orthodox salt-water macroeconomists believe about disinflation on the eve of the Volcker contraction? As it happens, we have an excellent source document: James Tobin’s “Stabilization Policy Ten Years After,” presented at Brookings in early 1980. Among other things, Tobin laid out a hypothetical disinflation scenario based on the kind of Keynesian model people like him were using at the time (which was also the model laid out in the Dornbusch-Fischer and Gordon textbooks). These models included an expectations-augmented Phillips curve, with no long-run tradeoff between inflation and unemployment — but expectations were assumed to adjust gradually based on experience, rather than changing rapidly via forward-looking assessments of Fed policy.
          This was, of course, the kind of model the Chicago School dismissed scathingly as worthy of nothing but ridicule, and which was more or less driven out of the academic literature, even as it continued to be the basis of a lot of policy analysis. ...

          Krugman goes on to claim that the Chicago School was wrong. Williamson says:

          ... Tobin is using what he thinks is a conventional macroeconometric model. It's got adaptive expectations and a Phillips curve with what people then would have called a "high sacrifice ratio." You have to suffer a lot of unemployment to get a small reduction in inflation. Of course, Tobin's simulation looks nothing like what happened. ...

          He is focused on whether a particular set of assertions by Tobin are correct, and he claims they do not fully fit the evidence. But there is a larger issue here that goes far beyond the particulars of Tobin's paper (and a broad view of the evidence is supportive of Krugman's view of the Volcker disinflation). Blanchard and Johnson:

          ... Fighting inflation implied tightening monetary policy, decreasing output growth, and thus accepting higher unemployment for some time. The question arose of how much unemployment, and for how long, would likely be needed to achieve a lower level of inflation, say 4%-which is the rate Volcker wanted to achieve. Some economists argued that such a disinflation would likely be very costly. .....
          The natural conclusion was that it would make sense to go slowly, so as not to increase unemployment by too much in a given year. Some economists argued that disinflation might in fact be much less costly. In what has become known as the Lucas critique, Lucas pointed out that when trying to predict the effects of a major policy change-like the change considered by the Fed at the time-it could be very misleading to take as given the relations estimated from past data. In the case of the Phillips curve, taking equation (8.10) [note: this is the backward looking Phillips curve specified below] as given was equivalent to assuming that wage setters would keep expecting inflation in the future to be the same as it was in the past, that the way wage setters formed their expectations would not change in response to the change in policy. This was an unwarranted assumption, Lucas argued: Why shouldn't wage setters take policy changes directly into account? If wage setters believed that the Fed was committed to lower inflation, they might well expect inflation to be lower in the future than in the past. ...
          Lucas did not believe that disinflation could really take place without some increase in unemployment. But Thomas Sargent, looking at the historical evidence on the end of several very high inflations, concluded that the increase in unemployment could be small. The essential ingredient of successful disinflation, he argued, was credibility of monetary policy-the belief by wage setters that the central bank was truly committed to reducing inflation. Only credibility would cause wage setters to change the way they formed their expectations. Furthermore, he argued, a clear and quick disinflation program was more likely to be credible than a protracted one that offered plenty of opportunities for reversal and political infighting along the way.
          Who turned out to be right? In September 1979, Paul Volcker started increasing the interest rate so as to slow down the economy and reduce inflation. From 9% in 1979, the three-month Treasury bill rate was increased to 15% in August 1981. The effects on inflation, output growth, and unemployment are shown in Table 8-1. The table makes clear that there was no credibility miracle: Disinflation was associated with a sharp recession, with negative growth in both 1980 and 1982, and with a large and long-lasting increase in unemployment.
          Does this settle the issue of how much credibility matters? Not really. Those who argued before the fact that credibility would help argued after the fact that Volcker had not been fully credible. After increasing the interest rate from September 1979 to April 1980 and inducing a sharp decrease in growth, he appeared to have second thoughts, reversing course and sharply decreasing the interest rate from April to September, only to increase it again in 1981. This lack of consistency, some argued, reduced his credibility and increased the unemployment cost of the disinflation. A larger lesson still stands: The behavior of inflation depends very much on how people and firms form expectations. The Lucas critique still stands: The past relation between unemployment and inflation may be a poor guide to what happens when policy changes. ...

          They are saying that a Phillips curve of the form π = πe - α(U - Un), where πe  at time t equals πt-1 is a good model of the Volcker era (that is, expectations were backward looking), and that was reasonable at the time. However, as expectations formation changes with experience this may no longer hold true -- the tradeoff could change as expectations are more responsive to Fed announcements. Krugman is arguing that recent experience lends credence to the idea that a backward looking model (or a model with a linear combination of past and rationally expected inflation, i.e. a model with persistence in unemployment in response to policy changes) continues to hold.

            Posted by on Wednesday, September 2, 2015 at 12:07 PM Permalink  Comments (24)

            'The Evolution of Scale Economies in U.S. Banking'

            This is a question I have wanted to see an answer to for a long time. What is the minimum efficient scale for financial institutions? This is an important question with respect to breaking up large banks into smaller entities. Some have argued, based on very little compelling evidence as far as I can tell, that breaking up big banks would be costly because large banks are able to exploit economies of scale. Others disagree, but again evidence for either point of view is unclear. I don't mean there is no evidence at all, the existing research is described in the introduction to this paper, but the results do not point strongly in any particular direction. Hopefully, more work on the topic will shift the weight of the evidence in one direction or another:

            The Evolution of Scale Economies in U.S. Banking, by David C. Wheelock and Paul W. Wilson, August 2015: Abstract Continued consolidation of the U.S. banking industry and general increase in the size of banks has prompted some policymakers to consider policies to discourage banks from getting larger, including explicit caps on bank size. However, limits on the size of banks could entail economic costs if they prevent banks from achieving economies of scale. The extent of scale economies in banking remains unclear. This paper presents new estimates of returns to scale for U.S. commercial banks based on nonparametric, local-linear estimation of bank cost, revenue and pro t functions. We present estimates for both 2006 and 2012 to compare the extent of scale economies in banking some four years after the financial crisis and two years after enactment of the Dodd-Frank Act with scale economies prior to the crisis. We find that most banks faced increasing returns to scale in cost in both years, though results for the very largest banks in 2012 are somewhat sensitive to specification. Further, most banks faced decreasing returns in revenue in both years, though nearly all banks could still increase revenue and pro t by becoming larger.

            [As I've written many, many times, I do not think that breaking up big banks will do a lot to reduce our susceptibility to bank crises. After all, we had a financial crisis about every 20 years in the 1800s, and this continued through the Great Depression, and at that time banks were relatively small. Thus, it seems that crises have more to do with the diversity of activity and connectedness than bank size. I favor breaking up the biggest banks to reduce their political power, which I believe is excessive, and to reduce their economic power. If the above results had shown that the minimum efficient scale was much smaller than the typical large, systemically important bank, breaking them up would be an easy call. But that's not what the results imply. Thus, in this case, there is a tradeoff between the benefit or reducing political and economic power versus losing economies of scale (not sure how steep the cost function is at the existing size -- if it's relatively flat the loss of scale economies could be small). The other alternative is to treat them along the lines of a public utility. We allow them to be large to exploit scale economies, then regulate pricing and other behavior. However, this is where the political power of the large banks matters, and it's not clear that a policy of "large but with regulatory oversight" is the best option to pursue.]

              Posted by on Wednesday, September 2, 2015 at 09:30 AM in Economics, Financial System, Market Failure, Regulation | Permalink  Comments (21)

              'QE and Financial Interests'

              Simon Wren-Lewis says:

              Corbyn, QE and financial interests: ... I want to talk about Quantitative Easing (QE). The basic idea behind QE is that by buying long term assets at a time when their price is high (interest rates are low) to make their price even higher (interest rates even lower) in the short term, and selling them back later when asset prices are lower (and interest rates higher), you could stimulate additional demand. At first sight it seems not too dissimilar to a central bank’s normal activities in changing short rates. There are however two major differences....

              After discussing the differences, and some of the problems with QE, he continues with:

              That should mean that everyone is looking around for a better way of doing things when short rates hit their lower bound. Fiscal stimulus is the obvious candidate, but we know the political problems there. ...
              In the absence of an appropriate government fiscal policy, I find the logic for helicopter money compelling and the arguments against it pretty weak. But just as with fiscal policy, just because something makes good macroeconomic sense does not mean it will happen. I have always been reluctant to pay too much attention to the distributional impact of monetary policy, because it seemed like one of those occasions when even well meaning attention to distribution can mess up good policy. Yet in terms of the political economy of replacing QE, perhaps we should.
              It is more likely than not that QE will lead to central bank losses. ... After all, they are buying high, and selling low. That is integral to the policy. Who gains from these losses. Where does the money permanently created because of these losses go? To the financial sector, and the owners of financial assets (who are selling to the central bank high, and buying back low). In that sense, likely losses on QE will involve a transfer from the public to the financial sector.
              If QE was the only means of stabilizing the economy in a liquidity trap, because fiscal policy was out of bounds for political reasons, then so be it. The social benefits would far outweigh any distributional costs, even if the latter could not be undone elsewhere. But if QE is a highly ineffective instrument, and there are better instruments available, you have to ask in whose interest is it that we stick with QE?

                Posted by on Wednesday, September 2, 2015 at 08:57 AM in Economics, Financial System, Monetary Policy | Permalink  Comments (60)

                Links for 09-02-15

                  Posted by on Wednesday, September 2, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (191)

                  Tuesday, September 01, 2015

                  The U.S. Economy Has Become Less Interest Rate Sensitive

                  This is from "Has the U.S. Economy Become Less Interest Rate Sensitive?," by Jonathan L. Willis and Guangye Cao of the KC Fed:

                  ... IV. Conclusion Although monetary policy is an important tool for promoting price and economic stability, its efficacy can change over time. This article investigates the interest rate channel of monetary policy and, more specifically, the response of employment to changes in the federal funds rate. Analytical results suggest the interest sensitivity of employment has declined in recent decades for nearly all industries and for the overall economy. The article tests three possible explanations for the observed change in interest sensitivity. First, changes in the conduct of monetary policy do not appear to be responsible for the shift in interest sensitivity. Second, linkages between the short end and the long end of the yield curve along with linkages between financial markets and the overall economy have become protracted. Third, structural shifts have altered how employment changes at the industry level feed back to the aggregate economy. Overall, the findings suggest that the decline in the interest sensitivity of the economy is not due to changes in the conduct of monetary policy, but rather to structural changes in industries and financial markets. Future research should investigate whether and how monetary policy should adapt in response to these changes.

                    Posted by on Tuesday, September 1, 2015 at 11:53 AM in Economics, Monetary Policy, Unemployment | Permalink  Comments (90)

                    'Leveraged Bubbles'

                    The conclusion to "Leveraged bubbles," by Òscar Jordà, Moritz Schularick, and Alan Taylor:

                    ... In this column, we turned to economic history for the first comprehensive assessment of the economic risks of asset price bubbles. We provide evidence about which types of bubbles matter and how their economic costs differ. Our historical analysis shows that not all bubbles are created equal. When credit growth fuels asset price bubbles, the dangers for the financial sector and the real economy are much more substantial. The damage done to the economy by the bursting of credit boom bubbles is significant and long lasting.
                    In the past decades, central banks typically have taken a hands-off approach to asset price bubbles and credit booms. This way of thinking has been criticised by some institutions, such as the BIS, that took a less rosy view of the self-equilibrating tendencies of financial markets and warned of the potentially grave consequences of leveraged asset price bubbles. The findings presented here can inform ongoing efforts to devise better macro-financial theory and real-world applications at a time when policymakers are still searching for new approaches in the aftermath of the Great Recession.

                      Posted by on Tuesday, September 1, 2015 at 09:25 AM in Economics, Financial System | Permalink  Comments (11)

                      Syllabus for Monetary Theory and Policy

                      Everyone seems to be posting the syllabus for the graduate courses they are teaching this fall. Mine is simple. In my Monetary Theory and Policy course we are going to go through this book by Jordi Gali (don't tell anyone I actually know this stuff):

                      Front Cover

                      Blurb: This revised second edition of Monetary Policy, Inflation, and the Business Cycle provides a rigorous graduate-level introduction to the New Keynesian framework and its applications to monetary policy. The New Keynesian framework is the workhorse for the analysis of monetary policy and its implications for inflation, economic fluctuations, and welfare. A backbone of the new generation of medium-scale models under development at major central banks and international policy institutions, the framework provides the theoretical underpinnings for the price stability–oriented strategies adopted by most central banks in the industrialized world.

                      Using a canonical version of the New Keynesian model as a reference, Jordi Galí explores various issues pertaining to monetary policy’s design, including optimal monetary policy and the desirability of simple policy rules. He analyzes several extensions of the baseline model, allowing for cost-push shocks, nominal wage rigidities, and open economy factors. In each case, the effects on monetary policy are addressed, with emphasis on the desirability of inflation-targeting policies. New material includes the zero lower bound on nominal interest rates and an analysis of unemployment’s significance for monetary policy.

                      • The most up-to-date introduction to the New Keynesian framework available
                      • A single benchmark model used throughout
                      • New materials and exercises included
                      • An ideal resource for graduate students, researchers, and market analysts

                      I'm looking forward to it. The revised version has lots of new, up to date material, and I really like the fact that he uses variations on a core model throughout the text (it makes the math and intuition a bit easier since you don't have to redo everything with each new topic). I'm a bit torn to move away from Carl Walsh's book, both books have their advantages and I'll still draw quite from the Walsh text. But my focus this quarter is Gali.

                        Posted by on Tuesday, September 1, 2015 at 01:17 AM in Economics, Monetary Policy, University of Oregon | Permalink  Comments (30)

                        'The Clinical-Bench Science Distinction in Macro'

                        In response to this from Paul Romer:

                        The Clinical-Bench Science Distinction in Macro: I had hoped to find time to offer a more thoughtful response to Simon Wren Lewis’s most recent comments on the way forward in macroeconomics...
                        For now, I’ll go ahead with what I hope is a suggestion that could encourage some kind of consensus:
                        Perhaps the discussion about macro would benefit from a distinction like the one in biomedicine between bench science and clinical work.
                        In my interpretation, what Lucas and Sargent were trying to do in the 1970s was to develop the bench science side of macroeconomics. ...
                        Lucas (1972) got things off to a very promising start. It offered both a technical advance–a tractable way to introduce uncertainty and expectations–and an initial conjecture about the fundamental imperfection–incomplete information. It also boasted prematurely about new insights into policy. If at this time, we had already established the distinction between bench science and clinical practice, this might have been recognized as harmless obiter dicta.
                        Assuming the profession can get back to generally sensible bench science inquiry into the basic scientific questions of macroeconomics (and of course, there were economists who kept doing good bench science on macro questions far away from the RBC reality distortion field), we could copy the quid-pro-quo that prevails in biomedicine: Bench scientists get the freedom to explore any question they want. In return, when they get a result that they think might have implications for clinical practice, the bench-scientists can’t just try to pull rank and order the clinicians to change to some new clinical protocol.
                        The bench scientists have to persuade other bench scientists first. Then the bench scientists together have to persuade the clinicians, and this will not in general, be an easy task. For every important bench-science insight (e.g. that clinicians should wash their hands, or that you can treat ulcers with antibiotics) there are countless episodes in which the bench scientists persuaded each other that they were onto something really big that turned out to be a whimper or simply wrong. ...
                        So the clinicians are going to be appropriately skeptical. This will irritate the bench scientists, but so what. ...

                        I'll offer this old Reuters column of mine, A great divide holds back the relevance of economists, on the same topic (from 2011, with links to responses by Summers, Krugman, Hamilton, and Baker among others -- they don't all agree -- full list of responses here). My point, in part, was that causality shouldn't run only from "bench scientists" to practitioners (who then, according to the above, should be free to accept or reject the advice of theorists). The "bench research" should also be informed by the needs of practitioners. That increases the likelihood that theorists will address the most important questions faced by the practitioners, and hence that the research will be useful. That doesn't mean that theorists shouldn't entertain questions with no obvious application, some important discoveries are made in that way. But the theorists should at least consider the needs of the practitioners when deciding which questions are the most important, and most in need of answers.

                          Posted by on Tuesday, September 1, 2015 at 01:11 AM Permalink  Comments (7)

                          'Dynasties versus Development'

                          From Vox EU:

                          Dynasties and development, by Jan Frederick P. Cruz and Ronald U Mendoza: The possibility of a showdown between Hillary Clinton and Jeb Bush in the US Presidential polls may have some political pundits salivating, but perhaps many more Americans wondering. Is political power becoming too concentrated in the US? A Bush or a Clinton was President or Vice President in the US for almost 30 years between 1981 and 2009, a dynastic run that may yet be extended by the 2016 elections. ...
                          In the end, political dynasties in today’s modern and developing democracies are a reminder of how personalities still dominate the political landscape, be it in Washington, DC or in Bombay and Manila. Democracies do not necessarily reflect a level playing field, when certain political clans wield disproportionately large influence and control over public resources. And in the worst cases, all that political power is not wielded to advance development or reduce poverty. They appear, instead, to be linked to underdevelopment and rising inequality, particularly in countries and regions with relatively weaker democratic institutions.
                          Whoever said that during elections is the only time the vote of the richest citizen is equivalent to that of the poorest needs to start rethinking whether this still holds true...

                            Posted by on Tuesday, September 1, 2015 at 12:24 AM in Economics, Politics | Permalink  Comments (9)

                            Links for 09-01-15

                              Posted by on Tuesday, September 1, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (180)

                              Monday, August 31, 2015

                              Paul Krugman: A Heckuva Job

                              "Those predicting Mr. Trump’s imminent political demise are ignoring the lessons of recent history":

                              A Heckuva Job, by Paul Krugman, Commentary, NY Times: ...Katrina was special in political terms because it revealed such a huge gap between image and reality. Ever since 9/11, former President George W. Bush had been posing as a strong, effective leader keeping America safe. He wasn’t. But as long as he was talking tough about terrorists, it was hard for the public to see what a lousy job he was doing. It took a domestic disaster, which made his administration’s cronyism and incompetence obvious to anyone with a TV set, to burst his bubble.
                              What we should have learned from Katrina, in other words, was that political poseurs with nothing much to offer besides bluster can nonetheless fool many people into believing that they’re strong leaders. And that’s a lesson we’re learning all over again as the 2016 presidential race unfolds.
                              You probably think I’m talking about Donald Trump, and I am. But he’s not the only one.
                              Consider, if you will, the case of Chris Christie. Not that long ago he was regarded as a strong contender for the presidency... Now Mr. Christie looks pathetic — did you hear the one about his plan to track immigrants as if they were FedEx packages? But he hasn’t changed, he’s just come into focus.
                              Or consider Jeb Bush... What happened to Jeb the smart, effective leader? He never existed.
                              And there’s more. Remember when Scott Walker was the man to watch? Remember when Bobby Jindal was brilliant?
                              I know, now I’m supposed to be evenhanded, and point out equivalent figures on the Democratic side. But there really aren’t any; in modern America, cults of personality built around undeserving politicians seem to be a Republican thing. ...
                              Which brings us back to Mr. Trump.
                              Both the Republican establishment and the punditocracy have been shocked by Mr. Trump’s continuing appeal to the party’s base. He’s a ludicrous figure, they complain. His policy proposals, such as they are, are unworkable, and anyway, don’t people realize the difference between actual leadership and being a star on reality TV?
                              But ... those predicting Mr. Trump’s imminent political demise are ignoring the lessons of recent history, which tell us that poseurs with a knack for public relations can con the public for a very long time. Someday The Donald will have his Katrina moment, when voters see him for who he really is. But don’t count on it happening any time soon.

                                Posted by on Monday, August 31, 2015 at 08:55 AM in Economics, Politics | Permalink  Comments (47)

                                Fed Watch: Does 25bp Make A Difference?

                                Tim Duy:

                                Does 25bp Make A Difference?, by Tim Duy: I am often asked if 25bp really makes any difference? If not, why does it matter when the Fed makes its first move? The Fed would like you to believe that 25bp really isn't all that important. Indeed, they don't want us focused on the timing of the first move at all, reiterating that the path of rates is most important. Yet I have come to believe that the timing of the first rate hike is important for two reasons. First, it will help clarify the Fed's reaction function. Second, if the experience of Japan and others who have tried to hike rates in the current global macroeconomic environment is any example, the Fed will only get one shot at pulling the economy off the zero bound. They better get it right.
                                On the first point, consider that there is no widespread agreement on the timing of the Fed's first move. Odds for September have been bouncing around 50%, lower after a couple of weeks of market turmoil, but bolstered by the Fed's "stay the course" message from Jackson Hole. I think you can contribute the lack of consensus to the conflicting signals send by the Fed's dual mandate. On one hand, labor markets are improving unequivocally. The economy is adding jobs and measures of both unemployment and underemployment continue to improve. The Fed has said that only "some" further progress is necessary to meet the employment portion of the dual mandate. I would argue the Fed Vice-Chair Stanley Fischer even was kind enough to define "some" while in Jackson Hole:
                                In addition, the July announcement set a condition of requiring "some further improvement in the labor market." From May through July, non-farm payroll employment gains have averaged 235,000 per month. We now await the results of the August employment survey, which are due to be published on September 4.
                                Nonfarm payroll growth was the only labor market indicator he put a number to. He clearly intended to tie that number to the Fed statement. Basically, he said "some" further improvement is simply another month of the same pattern.
                                While the Fed is moving closer to the employment mandate, however, the price stability mandate is moving further from view:


                                On a year-over-year basis, core-CPI is at four year lows, and the collapse in the monthly change suggests that year-over-year trends will not soon turn in the Fed's favor. One can argue that the net effect on policy should be zero. After all, the Fed has long argued that inflation will revert to target, yet inflation has only drifted away from target. What kind of central bank tightens policy when they are moving farther from their inflation target?
                                Fischer, however is undeterred:
                                Can the Committee be "reasonably confident that inflation will move back to its 2 percent objective over the medium term"? As I have discussed, given the apparent stability of inflation expectations, there is good reason to believe that inflation will move higher as the forces holding down inflation dissipate further. While some effects of the rise in the dollar may be spread over time, some of the effects on inflation are likely already starting to fade. The same is true for last year's sharp fall in oil prices, though the further declines we have seen this summer have yet to fully show through to the consumer level. And slack in the labor market has continued to diminish, so the downward pressure on inflation from that channel should be diminishing as well.
                                So back to the question: What kind of central bank tightens policy when they are moving further from their inflation target? Answer: The Federal Reserve. Why? Faith in their estimate of the natural rate of unemployment. Inflation expectations hold the baseline steady, shocks cause deviations from that baseline. The shocks will all dissipate over time, including labor market shocks. The economy is approaching full employment, therefore the downward pressure from labor market slack will soon diminish and turn into upward pressure in the absence of tighter monetary policy.
                                Now note that, aside from the equilibrium real rate, of the four variables in a Taylor-type reaction function, only one of those variables is unobserved. The target inflation rate is defined, and unemployment and inflation are measured. The natural rate of unemployment is unobserved and needs to be estimated. How confident are policymaker's in their estimate (5.0-5.2 percent) of the natural rate of unemployment?
                                I would argue that the Fed will reveal a high degree of confidence in that estimate if they hike rates in the face of inflation drifting away from trend. That would be new information in defining their reaction function. I think it would be a signal that Federal Reserve Chair Janet Yellen has largely abandoned here concerns about underemployment, which remains unacceptably high.
                                The clarification of the Fed's reaction function by narrowing the confidence interval around the Fed's estimate of the natural rate of unemployment would, I think, be an important new piece of information. Moreover, I think it would be a fairly hawkish signal - remember that financial market participants, as well as the Federal Reserve staff, tend to have a more dovish outlook that FOMC participants. The sooner the Fed hikes rate, the more hawkish the signal relative to expectations.
                                That signal, I suspect, is more important than the actual 25bp. The latter might not mean much, but at the zero bound, the former probably means a lot.
                                The timing of the first hike is also important because the Fed will only get one bite at the apple. That at least is what we saw with the rush to tighten in Japan, Europe, and Sweden. The downside risks of tightening too early are thus enormous, amounting to essentially locking your economy into a subpar equilibrium. This was the Fed's staff's warning in the last set of minutes:
                                The risks to the forecast for real GDP and inflation were seen as tilted to the downside, reflecting the staff's assessment that neither monetary nor fiscal policy was well positioned to help the economy withstand substantial adverse shocks.
                                Again, Fischer seems to fear the opposite risk more. Via the New York Times:
                                And Mr. Fischer emphasized that Fed officials could not afford to wait until all of their questions were answered and all of their doubts resolved. “When the case is overwhelming,” he said, “if you wait that long, then you’ve waited too long.”
                                I am not looking for an overwhelming case, just inflation that is trending toward target instead of away. Yet even that is apparently too much for Fischer as unemployment bears down on their estimate of the full employment.
                                You can take the central banker out of the 1970's, but you can't take the 1970's out of the central banker.
                                Bottom Line: I am coming around to the belief that the timing of the first rate hike is more important than Fed officials would like us to believe. The lack of consensus regarding the timing of the first hike tells me that we don't fully understand the Fed's reaction function and, importantly, their confidence in their estimates of the natural rate of unemployment. The timing of the first hike will thus define that reaction function and thus send an important signal about the Fed's overall policy intentions.

                                  Posted by on Monday, August 31, 2015 at 08:55 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (89)

                                  'The Effect of Payday Lending Restrictions on Liquor Sales'

                                  This is a summary of new research from two of our former graduate students here at the University of Oregon, Harold Cuffe and Chris Gibbs (link to full paper):

                                  The effect of payday lending restrictions on liquor sales – Synopsis, by Harold Cuffe and Chris Gibbs: The practice of short-term consumer financing known as payday lending remains controversial because the theoretical gains in welfare from greater credit access stand in opposition to anecdotal evidence that many borrowers are made worse off. Advocates for the industry assert that the loans fill a gap in credit access for underserved individuals facing temporary financial hardship. Opponents, who include many state legislatures and the Obama administration, argue that lenders target financially vulnerable individuals with little ability to pay down their principal, who may end up paying many times the borrowed amount in interest and fees.
                                  Regulations restricting both payday loan and liquor access seek to minimize the potential for overuse. To justify intervention in the two markets, policy makers note a host of negative externalities associated with each product, and cite behavioral motivations underlying individuals' consumption decisions. In particular, researchers have shown that the same models of impulsivity and dynamically inconsistent decision making - hyperbolic preferences and the cue theory of consumption - used to describe the demand for alcohol, also describe patterns of payday loan usage. In these models, individuals can objectively benefit from a restricted choice set that limits their access to loans and liquor. The overlap in behavioral characteristics of over-users of both products suggests that liquor sales is a reasonable and interesting place to test the effectiveness of payday lending regulations.
                                  To identify the causal effect of lending restrictions on liquor sales, we exploit a change in payday lending laws in the State of Washington. Leveraging lender- and liquor store-level data, we estimate a difference-in-differences model comparing Washington to the neighboring State of Oregon, which did not experience a change in payday lending laws during this time. We find that the law change leads to a significant reduction in liquor sales, with the largest decreases occurring at liquor stores located very near to payday lenders at the time the law took effect. Our results provide compelling evidence on how credit constraints affect consumer spending, suggest a behavioral mechanism that may underlie some payday loan usage, and provide evidence that the Washington’s payday lending regulations reduced one form of loan misuse.
                                  Washington State enacted HB 1709 on January, 1st 2010, which introduced three new major restrictions to the payday loan industry. First the law limited the size of a payday loan to 30% of a person's monthly income or $700, whichever is less. Second the law created a state-wide database to track the issuance of payday loans in order to set a hard cap on the number of loans an individual could obtain in a twelve month period to eight, and eliminated multiple concurrent loans. This effectively prohibited the repayment of an existing loan with a new one. In the year prior to the law, the State of Washington estimated that roughly one third of all payday loan borrowers took out more than eight loans. Finally, the law mandated that borrowers were entitled to a 90 day instalment plan to pay back loans of $400 or less or 180 days for loans over $400.
                                  The effect of the law on the industry was severe. There were 603 payday loan locations active in Washington in 2009 that were responsible for 3.24 million loans worth $1.366 billion according to Washington Division of Financial Institutions. In the year following the law change, the number of payday lenders dropped to 424, and loan volume fell to 1.09 million loans worth only $434 million. The following year the number of locations fell again to 256 with a loan volume of roughly 900,000 worth $330 million. Today there are fewer than 200 lenders in Washington and the total loan volume and value has stabilized close to the 2011 values.
                                  A crucial feature of our estimation strategy involves accounting for potentially endogenous supply side factors that challenge efforts to separately identify changes in demand from the store response to the change. To do so, we focus on liquor control states, in which the state determines the number and location of liquor stores, the products offered, and harmonizes prices across stores to regulate and restrict liquor access. Oregon and Washington were both liquor control states until June of 2012 (Washington privatized liquor sales in June 2012).
                                  Main Results
                                  For this study, we use monthly store-level sales data provided by Oregon's and Washington's respective liquor control agencies from July 2008 through March 2012. Figure 4 plots estimated residuals from a regression of log liquor store sales on a set of store-by-month fixed effects, averaged over state and quarter. The graph possesses three notable features. First, prior to Washington's lending restrictions (indicated by the vertical dashed line), the states' log sales are trending in parallel, which confirming the plausibility of the ``common trends'' assumption of the DD model. Second, a persistent gap in the states' sales appears in the same quarter as the law change. This gap is the result of a relatively large downward movement in Washington's sales compared to Oregon's, consistent with a negative effect of the law on sales. Finally, the effect appears to be primarily a level shift as sales in both states maintain a common upward trend.


                                  Our regression estimates indicate that the introduction of payday lending restrictions reduced liquor store sales by approximately 3.6% (statistically significant at the 1% level). As average Washington liquor sales were approximately $163,000 in the months prior to the law change, this represents a $5,900 decline per store each month. At the state level, the point estimate implies a $23.5 million dollar annual decrease in liquor sales. As Washington State reported that the law decreased payday loans by $932 million from 2009 to 2010, this decline represents approximately 2.5% of the change in total value of loans issued.
                                  We see two primary explanations (not mutually exclusive) for the decline in Washington liquor sales in response to the law change. First, the effect may represent a wider permanent reduction in consumption as households lose their ability to cope with unforeseen negative income shocks. Alternatively, the drop in spending may indicate a more direct financing of liquor purchases by individuals with present-biased preferences. The first explanation implies that restrictions on payday lending negatively affect consumer welfare, while the second allows for a positive impact, since individuals with present-biased preferences may be made objectively better off with a restricted choice set.
                                  Zinman (2013) highlights Laibson (2001) theory of Pavlovian cues as a particularly intriguing explanation for payday loan usage. In these models, consumer ``impulsivity'' makes instant gratification a special case during dynamic utility maximization, where exposure to a cue can explain dynamically inconsistent behavior. Indeed, Laibson uses liquor as a prime example of a consumption good thought to be influenced by cues, and subsequent experimental research on liquor uncovers evidence consistent with this hypothesis (MacKillop et al (2010)). In situations where payday lenders locate very near to liquor stores, individuals may be exposed to a cue for alcohol, and then see the lender as a means to satisfy the urge to make an immediate purchase. A lender and liquor store separated by even a brief walk may be far enough apart to allow an individual to resist the urge to obtain both the loan and liquor. Of course, cue-theory of consumption makes lender-liquor store distance relevant even in circumstances where individuals experience a cue only after borrowing. Lenders locating near liquor stores increase the likelihood that an individual exposed to a cue is financially liquid, and able to act on an impulse.
                                  To investigate liquor store and lender proximity, we geocode the stores' and lenders' street addresses, and calculate walking distances for all liquor store-lender pairs within two kilometers of one another. We then repeatedly estimate our preferred specification with a full set of controls on an ever expanding window of liquor stores beginning with the stores that were located within a ten meter walking distance of a lender in the month prior to the law change, then within 100 meters, within 200 meters, etc., to two kilometres. These estimates are presented in Figure 5. The graph demonstrates a negative effect of 9.2% on those liquor stores that had a payday lender located within ten meters in the month before the law change (significant at the 1% levels), an effect almost three times as large as that overall.  The larger effect rapidly declines in distance suggesting that even a small degree of separation is significant. The degree of nonlinearity in the relationship between distance and liquor sales supports the behavioral explanation of demand.


                                  Our analysis provides the first empirical evidence of the connection between payday lending and spending on liquor. We uncover a clear reduction in liquor sales resulting from payday lending restrictions. In addition, we find that those liquor stores located very near to lenders at the time of the law change experience declines in sales almost three times as large as the overall average.
                                  This finding is significant because it highlights that a segment of borrowers may be willing to assume significant risk by borrowing in order to engage in alcohol consumption - an activity which carries significant personal risk of its own. The connection between payday lending restrictions and reduced liquor purchases, therefore, suggests that the benefits to payday lending restrictions extend beyond personal finance and may be large.
                                  Effective payday loan regulation should recognize the potential for greater credit access to help or harm consumers. As Carrell and Zinman (2014) highlight, heterogeneity likely exists within the pool of payday loan users, and external factors will influence the ratio of ``productive and counter-productive borrowers.'' Lending restrictions can seek to reduce the proportion of counterproductive borrowers through the prohibition of practices known to harm consumers, including those that rely upon leveraging behavioral responses such as addiction and impulsivity. The behavioral overlap identified in the literature between counterproductive payday loan borrowers and heavy alcohol users suggests that there exists a link between the two markets. The decline in liquor sales documented here provides evidence that these regulations may be effective in promoting productive borrowing.
                                  1. Carrell, Scott and Jonathan Zinman, “In harm's way? Payday loan access and military personnel performance," Review of Financial Studies, 2014, 27(9), 2805-2840.
                                  2. Laibson, David, “A cue-theory of consumption," Quarterly Journal of Economics, 2001, pp. 81-119.
                                  3. MacKillop, James, Sean O'Hagen, Stephen A Lisman, James G Murphy, Lara A Ray, Jennifer W Tidey, John E McGeary, and Peter M Monti, “Behavioral economic analysis of cue-elicited craving for alcohol," Addiction, 2010, 105 (9), 1599-1607.
                                  4. Zinman, Jonathan, “Consumer Credit: Too Much or Too Little (or Just Right)?," Working Paper 19682, National Bureau of Economic Research November 2013.

                                    Posted by on Monday, August 31, 2015 at 12:24 AM in Academic Papers, Economics | Permalink  Comments (17)

                                    Links for 08-31-15

                                      Posted by on Monday, August 31, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (147)

                                      Sunday, August 30, 2015

                                      'Is China's Devaluation a Game Changer'

                                      If you can't get enough on China, here's more from Cecchetti & Schoenholtz:

                                      Is China's devaluation a game changer?: Since 1978, China has engaged in an unprecedented and wildly successful experiment, moving gradually from a command economy to one based on markets; in small steps transforming a system where administrators controlled the goods that were produced to one where prices allocate resources. There were surely miscalculations along the way. But, even big blunders could largely be concealed. Until now!
                                      What has changed in recent months? The day has come for China to become more closely integrated into the global financial system, and this has a number of implications. The most important is that as prices and quantities of financial assets (rather than goods) are determined in markets, bureaucrats lose a great deal of control. But, as recent events very clearly demonstrate, Chinese authorities are reluctant to let go.
                                      Last August, we posted our most popular blog piece to date: China’s Capital Controls and the Exchange Rate Regime. In it, we explained how capital controls make it possible for China to maintain a fixed exchange rate while policymakers could adjust interest rates to stabilize their domestic economy. We also highlighted how these same capital controls are incompatible with the objectives of making Shanghai a global financial center and the renminbi (RMB) a leading international currency. Given the risks inherent in freeing cross-border capital flows, we concluded that the process of financial liberalization (both domestically and externally) would remain gradual. Yet, having seen China develop in unprecedented ways in the past, we have been watching to see if China could also alter conventional paradigms of finance and monetary policy. Could China do what no one else has done?
                                      Well, it turns out that the “impossible trinity” or “trilemma” – which compels policymakers to choose only two of three from among free capital flows, discretionary monetary policy, and a fixed exchange rate – may be more like a physical law than nearly any economic principle we know. And policymakers in China look to be quite unhappy about the constraints this is creating. (For more on the impossible trinity, see here and here.)
                                      Here’s what has happened. ...

                                      After a detailed discussion of the issue, they conclude with:

                                      ... For a country that wishes its currency to join the ranks of the reserve currencies, the reputational costs of a modest devaluation would seem to sharply exceed any possible economic benefits. Ultimately, a true reserve currency is one that is reliably available to provide liquidity insurance internationally even in tough times. As our friend and colleague William Silber notes in his book on the financial upheavals that accompanied World War I, this is one reason staying on the gold standard propelled the U.S. dollar to the reserve status it still maintains today. Imagine, instead, that American officials in 1914 had chosen to leave the gold standard in order to achieve a depreciation of 3%!
                                      The Chinese authorities’ newly demonstrated lack of confidence in financial markets – whether the RMB or equities – undermines their promise to increase reliance on market forces. So, while the IMF welcomed the RMB “regime shift,” no one anticipates a floating currency regime anytime soon. Similarly, the government’s clumsy equity market interventions have encouraged investors to push back the expected timing for including China’s domestic equities in key international benchmarks, and at least temporarily dampened hopes for Shanghai to become an international financial center. But, without a system in which foreign exchange and equity prices are market determined, global integration of China’s financial system as well as reserve status for its currency will remain beyond the country’s grasp.
                                      The bottom line: Today, China is the world’s largest economy on a purchasing-power parity basis. And it still has the second largest equity market (by trading volume and capitalization). If and when market forces clearly become the dominant factor in currency and equity price determination, the RMB and China’s financial assets will gain sharply in global importance, as will China’s domestic financial markets. Yet, by this standard, China’s 3% devaluation is no game changer. If anything, the recent actions by the government have delayed its achievement of these aims.

                                        Posted by on Sunday, August 30, 2015 at 09:41 AM Permalink  Comments (32)

                                        'The Case for Realism in the Social Realm'

                                        Daniel Little:

                                        The case for realism in the social realm, Understanding Society: The case for scientific realism in the case of physics, microbiology, and chemistry is a strong one. The theories of physics, biology, and chemistry postulate unobservable entities, forces, and properties. These hypotheses are specified in a fair degree of precision. They are not individually testable, because we cannot directly observe or measure the properties of the hypothetical entities. But the theories as wholes have a great deal of predictive and descriptive power, and they permit us to explain and predict a wide range of physical phenomena. And the best explanation of the success of these theories is that they are true: that the world consists of entities and forces approximately similar to those hypothesized in physical theory. So realism is an inference to the best explanation, based on the engineering and observational successes of physics, chemistry, and biology. (In the diagram above we might hypothesize that the foraging strategies of the albatross have evolved towards a combination of random walk and orderly search pattern through a process of natural selection; this hypothesis can be empirically investigated in a variety of ways.)
                                        If we lived in a more chaotic physical world, with a larger number of more variable forces at work, our physical theories would be greatly less successful at representing the behavior of observable physical systems, and we would have much less confidence in the idea that various snippets of our physical theories are "true" of the world. If space were more like a pudding with abrupt variations in curvature and gravitational force, and were in addition subject to a numerous other factors and forces, our confidence in the science of mechanics would be greatly undermined. We would never know even approximately where the fly ball will go.
                                        The situation in political science and sociology is quite different from astronomy, atomic theory, and mechanics. First, there are no theories in the social sciences that have the predictive and explanatory success of the physical sciences. Second, the social world is more like the fantastic and chaotic scenario just mentioned than it is an ice rink with frictionless surfaces and predictable mechanics. The social world embodies multiple heterogeneous causal and structural influences that aggregate in contingent and surprising ways. Third, sociologists and political scientists sometimes make hypotheses about unobservable or hypothetical social entities. But these hypotheses do not assume the logical role of that played by hypotheses in the natural sciences. Hypothetical social entities may be unobservable in a fairly ordinary sense -- no one can directly observe or measure a social class. But in fact, these concepts do not depend on holistic confirmation in the way that hypotheses in the natural sciences do. Rather, it is perfectly possible to further refine our ideas about "social class", "prisoners' dilemma", or "bipolar security field" and then investigate the manifold aspects of these concepts through direct social research. Sociology and political science do not consist of unified deductive systems whose empirical success depends upon a derivation of distant observational consequences; instead, it is possible to investigate essentially every sociological or political concept through various direct methods of research and inquiry. (This ability is not unique to the social sciences. The study of animal behavior likewise admits of a variety of hypotheses at various levels that can be independently studied.)
                                        In short, the social sciences do not possess the remarkable coherence and predictive accuracy of physics, so confidence in realism is not grounded in the high level of success of the enterprise. Sociology is not like physics.
                                        But equally, the concepts of the social sciences are not "hypothetical constructs" that depend upon their role in a developed theoretical system for application. It is therefore possible to be piecemeal realists. Again, sociology is not like physics.
                                        So it seems that two specific ideas follow. First, the inference to the best explanation argument for realism doesn't work at all in sociology or political science. We simply don't have the extraordinary predictive successes of a theoretical system that would constitute the ground of such an argument. Social science theories and models remain heuristic and suggestive, but rarely strongly indicative of the reality of the social factors they highlight.
                                        But second, there is a very different kind of argument for social realism that is not available in the natural sciences: the piecemeal investigation of claims and theories about social entities, properties, and forces. If we believe that class conflict is a key factor in explaining political outcomes, we can do sociological research to further articulate what we mean by class and class conflict, and we can investigate specific social and political processes to piece together the presence or absence of these kinds of factors.
                                        So it seems that we can justify being realists about class, field, habitus, market, coalition, ideology, organization, value system, ethnic identity, institution, and charisma, without relying at all on the hypothetico-deductive model of scientific knowledge upon which the "inference to the best explanation" argument depends. We can look at sociology and political science as loose ensembles of empirically informed theories and models of meso-level social processes and mechanisms, each of which is to a large degree independently verifiable. And this implies that social realism should be focused on mid-level social mechanisms and processes that can be identified in the domains of social phenomena that we have studied rather than sweeping concepts of social structures and entities.
                                        This perspective converges unexpectedly with some of the thinking that Peter Manicas put forward in his book on social-science realism, A Realist Philosophy of Social Science: Explanation and Understanding. What is realism, in the natural sciences, he asks? It is not a general claim to have discovered the universal laws of everything.
                                        Rather, more modestly, theory (at least in one of its clear senses) aims to provide an understanding of the processes which jointly produce the contingent outcomes of experience. We understand why the planets move in ellipses, why materials burn, and why salt dissolves in water (if and when it does) when we have a physical theory that provides a causal mechanism. By providing the principles detailing the nature of molecules, the atomic structure of salt and water, the principles of their action, and so on, we can understand combustion and solubility – and other chemical processes. (1)
                                        So what are the generative mechanisms in the social world? Manicas argues that these mechanisms proceed from the actions and relations of social agents:
                                        The foregoing has also argued that persons are the dominant causal agents in society – even while, of course, they work with materials at hand. It follows, accordingly, that in the social sciences, the generative mechanisms of social outcomes are the actions of persons and no further reduction is either plausible or demanded. (75)
                                        So his most general idea about the social world is "social mechanisms as agent-generated causal mechanisms" (2).
                                        If this is the approach we take, then our claims about what is "real" in the social realm will be more modest that some have thought. We will understand that there are real social processes, mechanisms, and powers; that they derive from the actions and agency of actors; and that these processes can be traced out through fairly direct sociological and historical research. And we will understand too that claims about the reality of "capitalism", the world financial system, or fascism are to be understood less weightily than they first appear. Capitalism exists in a time and place; but it is understood to be an ensemble of relations and actions by the people of the time. It is not a "thing" in the way that deoxyribonucleic acid is a thing.
                                        These thoughts should perhaps lead us to consider that the topic of realism is less important in sociology, political science, and economics than it might appear to be. Social scientists have every reason to be realist about the actions, relations, and interactions of individuals. They are justified in thinking that the practices of education and socialization that bring children to adulthood are "real" and can be empirically investigated. And they are justified in observing that there are higher-order configurations of action, power, and social relationship that are "real", insofar as they are present in the activities of the individuals who constitute them and they possess some stable characteristics over time. In other words, social scientists are justified in postulating the social reality of the social processes and institutions that they postulate and investigate. But this is a very weak and qualified conception of realism, and it suggests a fairly weak social ontology.
                                        It will be noted that this conclusion is somewhat in tension with the argument I offered in the prior post on "flat social ontology". That's the virtue and the challenge of open-source philosophy: conclusions and arguments shift over time.

                                          Posted by on Sunday, August 30, 2015 at 03:33 AM in Economics | Permalink  Comments (72)

                                          Links for 08-30-15

                                            Posted by on Sunday, August 30, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (183)

                                            Saturday, August 29, 2015

                                            'U.S. Inflation Developments'

                                            [A speech by Stanley Fischer at Jackson Hole turned into a pretend interview]

                                            Hello, and thank you for talking with us.

                                             Let me start by asking if you feel like it gives the Fed a bad image to have a conference in an elite place like Jackson Hole. Why not have the conference in, say, a disadvantaged area to send the signal that you care about these problems, to provide some stimulus to the area, etc.?

                                            I am delighted to be here in Jackson Hole in the company of such distinguished panelists and such a distinguished group of participants.

                                            Okay then. Let me start be asking about your view of the economy. How close are we to a full recovery?:

                                            Although the economy has continued to recover and the labor market is approaching our maximum employment objective, inflation has been persistently below 2 percent. That has been especially true recently, as the drop in oil prices over the past year, on the order of about 60 percent, has led directly to lower inflation as it feeds through to lower prices of gasoline and other energy items. As a result, 12-month changes in the overall personal consumption expenditure (PCE) price index have recently been only a little above zero (chart 1).

                                            Why are you telling us about headline inflation? What about core inflation? Isn't that what the Fed watches?

                                            ...measures of core inflation, which are intended to help us look through such transitory price movements, have also been relatively low (return to chart 1). The PCE index excluding food and energy is up 1.2 percent over the past year. The Dallas Fed's trimmed mean measure of the PCE price index is higher, at 1.6 percent, but still somewhat below our 2 percent objective. Moreover, these measures of core inflation have been persistently below 2 percent throughout the economic recovery. That said, as with total inflation, core inflation can be somewhat variable, especially at frequencies higher than 12-month changes. Moreover, note that core inflation does not entirely "exclude" food and energy, because changes in energy prices affect firms' costs and so can pass into prices of non-energy items.

                                            So are you saying you don't believe the numbers? Why bring up that core inflation is highly variable unless you are trying to de-emphasize this evidence? In any case, isn't there reason to believe these numbers are true, i.e. doesn't the slack in the labor market imply low inflation?

                                            Of course, ongoing economic slack is one reason core inflation has been low. Although the economy has made great progress, we started seven years ago from an unemployment rate of 10 percent, which guaranteed a lengthy period of high unemployment. Even so, with inflation expectations apparently stable, we would have expected the gradual reduction of slack to be associated with less downward price pressure. All else equal, we might therefore have expected both headline and core inflation to be moving up more noticeably toward our 2 percent objective. Yet, we have seen no clear evidence of core inflation moving higher over the past few years. This fact helps drive home an important point: While much evidence points to at least some ongoing role for slack in helping to explain movements in inflation, this influence is typically estimated to be modest in magnitude, and can easily be masked by other factors.

                                            If that's true, if the decline in the slack in the labor market does not translate into a notable change in inflation, why is the Fed so anxious to raise rates based upon the notion that the labor market has almost normalized? Is there more to it than just the labor market?

                                            ...core inflation can to some extent be influenced by oil prices. However, a larger effect comes from changes in the exchange value of the dollar, and the rise in the dollar over the past year is an important reason inflation has remained low (chart 4). A higher value of the dollar passes through to lower import prices, which hold down U.S. inflation both because imports make up part of final consumption, and because lower prices for imported components hold down business costs more generally. In addition, a rise in the dollar restrains the growth of aggregate demand and overall economic activity, and so has some effect on inflation through that more indirect channel.

                                            That argues against a rate increase, not for it. Anyway, I interrupted, please continue.

                                            Commodity prices other than oil are also of relevance for inflation in the United States. Prices of metals and other industrial commodities, and agricultural products, are affected to a considerable extent by developments outside the United States, and the softness we've seen in these commodity prices, has in part reflected a slowing of demand from China and elsewhere. These prices likely have also been a factor in holding down inflation in the United States.

                                            So you must believe that all of these forces holding down inflation (many of which are stripped out by core inflation measures, which are also low) that these factors are easing, and hence a spike in inflation is ahead?

                                            The dynamics with which all these factors affect inflation depend crucially on the behavior of inflation expectations. One striking feature of the economic environment is that longer-term inflation expectations in the United States appear to have remained generally stable since the late 1990s (chart 6). ... Expectations that are not stable, but instead follow actual inflation up or down, would allow inflation to drift persistently. In the recent period, movements in inflation have tended to be transitory.

                                            Let's see, lots of factors holding down inflation, longer-term inflation expectations have been stable throughout the recession and recovery, remarkably so, yet the Fed still thinks a rate raise ought to come fairly soon?

                                            We should however be cautious in our assessment that inflation expectations are remaining stable. One reason is that measures of inflation compensation in the market for Treasury securities have moved down somewhat since last summer (chart 7). But these movements can be hard to interpret, as at times they may reflect factors other than inflation expectations, such as changes in demand for the unparalleled liquidity of nominal Treasury securities.

                                            I have to be honest. That sounds like the Fed is really reaching to find a reason to justify worries about inflation and a rate increase. Let me ask this a different way. In the Press Release for the July meeting of the FOMC, the committee said it can be " reasonably confident that inflation will move back to its 2 percent objective over the medium term." Can you explain this please? Why are you "reasonably confident" in light of recent history?

                                            Can the Committee be "reasonably confident that inflation will move back to its 2 percent objective over the medium term"? As I have discussed, given the apparent stability of inflation expectations, there is good reason to believe that inflation will move higher as the forces holding down inflation dissipate further. While some effects of the rise in the dollar may be spread over time, some of the effects on inflation are likely already starting to fade. The same is true for last year's sharp fall in oil prices, though the further declines we have seen this summer have yet to fully show through to the consumer level. And slack in the labor market has continued to diminish, so the downward pressure on inflation from that channel should be diminishing as well.

                                            Yet when these forces were absent -- they weren't there throughout the crisis -- inflation was still stable. But this time will be different? I guess falling slack in the labor market will make all the difference? More on labor markets in a moment, but let me ask if you have more to say about inflation expectations first.

                                            ...with regard to expectations of inflation, it is possible to consult the results of the SEP, the Survey of Economic Projections, which FOMC participants complete shortly before the March, June, September, and December meetings. In the June SEP, the central tendency of FOMC participants' projections for core PCE inflation was 1.3 percent to 1.4 percent this year, 1.6 percent to 1.9 percent next year, and 1.9 percent to 2.0 percent in 2017. There will be a new SEP for the forthcoming September meeting of the FOMC.
                                            Reflecting all these factors, the Committee has indicated in its post-meeting statements that it expects inflation to return to 2 percent. With regard to our degree of confidence in this expectation, we will need to consider all the available information and assess its implications for the economic outlook before coming to a judgment.

                                            You will need to consider all the available information, I agree wholeheartedly with that. I just hope that information includes how poor forecasts like those just cited have been in the past, and the Fed's own eagerness to see "green shoots" again and again, far before it was time for such declarations.

                                            What might deter the Fed from it's intention to raise rates sooner rather than later?

                                            Of course, the FOMC's monetary policy decision is not a mechanical one, based purely on the set of numbers reported in the payroll survey and in our judgment on the degree of confidence members of the committee have about future inflation. We are interested also in aspects of the labor market beyond the simple U-3 measure of unemployment, including for example the rates of unemployment of older workers and of those working part-time for economic reasons; we are interested also in the participation rate. And in the case of the inflation rate we look beyond the rate of increase of PCE prices and define the concept of the core rate of inflation.

                                            I find these kinds of statement difficult to square with the statement that labor markets are almost back to normal. Anyway, what, in particular, will you look at?

                                            While thinking of different aspects of unemployment, we are concerned mainly with trying to find the right measure of the difficulties caused to current and potential participants in the labor force by their unemployment. In the case of the core rate of inflation, we are mainly looking for a good indicator of future inflation, and for better indicators than we have at present.

                                            How do recent events in China change the outlook for policy?

                                            In making our monetary policy decisions, we are interested more in where the U.S. economy is heading than in knowing whence it has come. That is why we need to consider the overall state of the U.S. economy as well as the influence of foreign economies on the U.S. economy as we reach our judgment on whether and how to change monetary policy. That is why we follow economic developments in the rest of the world as well as the United States in reaching our interest rate decisions. At this moment, we are following developments in the Chinese economy and their actual and potential effects on other economies even more closely than usual.

                                            I know you won't answer this directly, but let me try anyway. When will rates go up?

                                            The Fed has, appropriately, responded to the weak economy and low inflation in recent years by taking a highly accommodative policy stance. By committing to foster the movement of inflation toward our 2 percent objective, we are enhancing the credibility of monetary policy and supporting the continued stability of inflation expectations. To do what monetary policy can do towards meeting our goals of maximum employment and price stability, and to ensure that these goals will continue to be met as we move ahead, we will most likely need to proceed cautiously in normalizing the stance of monetary policy. For the purpose of meeting our goals, the entire path of interest rates matters more than the particular timing of the first increase.

                                            As expected, that was pretty boilerplate. When rates do go up, how fast will they rise?

                                            With inflation low, we can probably remove accommodation at a gradual pace. Yet, because monetary policy influences real activity with a substantial lag, we should not wait until inflation is back to 2 percent to begin tightening. Should we judge at some point in time that the economy is threatening to overheat, we will have to move appropriately rapidly to deal with that threat. The same is true should the economy unexpectedly weaken.

                                            The Fed has said again and again that it's 2 percent inflation target is symmetric with respect to errors, i.e. it will get no more worried or upset about, say, a .5 percent overshoot of the target than it will an undershoot of the same magnitude (2.5 percent versus 1.5 percent). However, many of us suspect that the 2 percent target is actually a ceiling, not a central tendency, or that at the very least the errors are not treated symmetrically, and statements such as this do nothing to change that view.

                                            I have quite a few more questions, and I wish we had time to hear your response to the charge that the 2 percent target is functionally a ceiling, but I know you are out of time and need to go, so let me just thank you for talking with us today. Thank you.

                                              Posted by on Saturday, August 29, 2015 at 10:39 AM in Economics, Fed Speeches, Monetary Policy | Permalink  Comments (113)

                                              Links for 08-29-15

                                                Posted by on Saturday, August 29, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (169)

                                                Friday, August 28, 2015

                                                Fed Watch: Hawkish Rumblings

                                                Tim Duy:

                                                Hawkish Rumblings, by Tim Duy: Fedspeak from the Jackson Hole conference suggests that the more hawkish FOMC participants are sticking to their guns. Cleveland Federal Reserve Bank President Loretta Mester, via the Wall Street Journal:
                                                “I want to take the time I have between now and the September meeting to evaluate all the economic information that’s come in, including recent volatility in markets and the reasons behind that,” Ms. Mester said. “But it hasn’t so far changed my basic outlook that the U.S. economy is solid and it could support an increase in interest rates.”
                                                Then there is St. Louis Federal Reserve President James Bullard, via Bloomberg:
                                                “The key question for the committee is -- how much would you want to change the outlook based on the volatility that we’ve seen over the last 10 days, and I think the answer to that is going to be: not very much,” Bullard told Bloomberg Television in an interview Friday at the Kansas City Fed’s annual conference in Jackson Hole, Wyoming.
                                                “You’ve really got the same trajectory that the committee will be looking at that we were looking at before, so why would we change strategy, which was basically to lift off at some point,” said Bullard, who votes on the FOMC next year...
                                                ...“The committee does not like to move when there’s volatility,” he said. “If we had the meeting this week, people would probably say let’s wait.”...
                                                ...He added, “but the meeting is not this week, it’s Sept. 16 and 17.”
                                                Bullard does not want financial market turmoil to derail his long-supported rate hike. He is hoping all this noise just fades away over the next few weeks. And he wants to open up the October option:
                                                Bullard also said he would support scheduling a press conference following the Oct. 27-28 FOMC meeting if the committee doesn’t raise rates next month. That would make it easier for the Fed to explain a liftoff in October.
                                                Bullard has repeatedly sought a press conference for every meeting, to no avail. I agree with him. The Fed has reinforced the view that major policy shifts are limited to only four of the eight meetings a year. Ridiculous and unnecessary. There should be a press conference at every meeting. That said, they can't now announce a press conference for October because it will be taken as a clear signal of a rate hike on that date. After they get the first hike out of the way, then they should switch to a press conference with every meeting.
                                                Here Bullard disappoints:
                                                “I actually think we’re OK on the inflation front,” Bullard said. “I’ve been arguing that we should get going, because interest rates -- it’s not that we’re a little bit below normal, we’re all the way down at zero, so you’ve got to think about: How is this going to play out over the next two to three years.”
                                                I can remember when Bullard had a reliable view on inflation. When inflation deviates from trend, you act. But the inflation picture is not friendly for hawks and even less so after this morning:


                                                Core-PCE inflation decelerated to a meager 0.87 percent annualized rate in July. The uptick in near-term inflation had provided strong support for a September rate hike as it was consistent with the view that last year's disinflation was temporary. That no longer looks to be the case, pulling apart the argument that the Fed can be confident that inflation will trend back to target. If anything, all the monthly data looks like noise as inflation slowly drifts further and further away from target.
                                                Moreover, I would have thought that Bullard would give more weight to market-based measures:
                                                BreakI believe Bullard is increasingly held by the siren-song of the Neo-Fisherians, thinking the only way to raise inflation is to hike rates. Good luck with that.
                                                I like this from Greg Robb at MarketWatch:
                                                Fischer just trying to show the Fed is as cool as the underside of your pillow
                                                — Greg Robb (@grobb2000) August 28, 2015
                                                Fischer went into this interview with the goal of leaving September open. Via CNBC:
                                                "I think it's early to tell: The change in the circumstances which began with the Chinese devaluation is relatively new and we're still watching how it unfolds, so I wouldn't want to go ahead and decide right now what the case is—more compelling, less compelling, etc.," he said.
                                                Fischer was trying not to tip his hat as much as New York Federal Reserve President William Dudley did on Tuesday. Or even arguably trying to pull back Dudley's comments as they had seemed to close off September. Perhaps more telling, when asked about the PCE numbers, Fischer reiterated his confidence that inflation will trend to target, citing the transitory nature of the oil shock. This is somewhat disappointing given the data and his dovish comments on inflation just two weeks ago. But then again, he couldn't take a dovish stance if his intent was to keep September on that table.
                                                Where does Fischer get his confidence on inflation? A basic Phillips curve story. It is the story that makes a September liftoff compelling. He believes the labor market is near full employment and that you need to move ahead of the inflation curve:
                                                Still, he added that he has not seen "much evidence" of increasing risks to staying at near-zero rates for longer, but he also said he didn't want to wait too long.
                                                "When the case is overwhelming, if you wait that long, you'll be waiting too long," he said. "There's always uncertainty."
                                                The Fed very much wants to ignore the inflation data and follow the labor markets. And even as inflation drifts further away from their target, they keep doubling down on their bets. It's what the Phillips curve is telling them they should do.
                                                Bottom Line: The Fed doesn't want to take September off the table. Many officials had what they believed was a solid case for hiking rates at the next meeting, and they don't want market turmoil to undermine that case. And that case is not complicated. It's the Phillip curve combined with an estimate of full employment (an estimate of full employment that remains sticky despite the persistent downtrend in inflation). If they move in September, that's the story they will run with. They don't have another paradigm.

                                                  Posted by on Friday, August 28, 2015 at 10:16 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (37)

                                                  Paul Krugman: Crash-Test Dummies as Republican Candidates for President

                                                  It's a good thing Republicans, at least in theory, take a hands off approach when it comes to the economy (they actually don't, but let's pretend) because they "haven't a clue":

                                                  Crash-Test Dummies as Republican Candidates for President, by Paul Krugman, Commentary, NY Times: Will China’s stock crash trigger another global financial crisis? Probably not. Still,... this is a test:  How would the men and women who would be president respond if crisis struck on their watch?
                                                  And the answer, on the Republican side at least, seems to be: with bluster and China-bashing. Nowhere is there a hint that any of the G.O.P. candidates understand the problem, or the steps that might be needed if the world economy hits another pothole.
                                                  Take, for example, Scott Walker... So what was his suggestion to President Obama? Why, cancel the planned visit to America by Xi Jinping, China’s leader. That would fix things!
                                                  Then there’s Donald Trump,... he simply declared that U.S. markets seem troubled because Mr. Obama has let China “dictate the agenda.” What does that mean? I haven’t a clue — but neither does he.
                                                   ...According to Mr. Christie, the reason U.S. markets were roiled ... was U.S. budget deficits, which he claims have put us in debt to the Chinese and hence made us vulnerable to their troubles. ... Did the U.S. market plunge because Chinese investors were cutting off credit? Well, no. ...
                                                  In fact, talking nonsense about economic crises is essentially a job requirement for anyone hoping to get the Republican presidential nomination.
                                                  To understand why, you need to go back to the politics of 2009, when the new Obama administration was trying to cope with the most terrifying crisis since the 1930s. ...Republicans, across the board, predicted disaster. ...
                                                  None of it happened. ... Instead, the party’s leading figures kept talking, year after year, as if the disasters they had predicted were actually happening.
                                                  Now we’ve had a reminder that something like that last crisis could happen again — which means that we might need a repeat of the policies that helped limit the damage last time. But no Republican dares suggest such a thing.
                                                  Instead, even the supposedly sensible candidates call for destructive policies. Thus John Kasich is being portrayed as a different kind of Republican because as governor he approved Medicaid expansion in Ohio, but his signature initiative is a call for a balanced-budget amendment, which would cripple policy in a crisis.
                                                  The point is that one side of the political aisle has been utterly determined to learn nothing from the economic experiences of recent years. If one of these candidates ends up in the hot seat the next time crisis strikes, we should be very, very afraid.

                                                    Posted by on Friday, August 28, 2015 at 09:02 AM in Economics, Financial System, Politics | Permalink  Comments (13)

                                                    How Rubio Would Deal With China

                                                    In the WSJ, Marco Rubio says Obama hasn't been tough enough with China on economic issues:

                                                    President Obama has continued to appease China’s leaders ...[with] his insufficient responses to economic ... concerns

                                                    What would he do?

                                                    For years, China has subsidized exports, devalued its currency, restricted imports and stolen technology on a massive scale. As president, I would respond not through aggressive retaliation, which would hurt the U.S. as much as China, but by greater commitment and firmer insistence on free markets and free trade. This means immediately moving forward with the Trans-Pacific Partnership and other trade agreements.

                                                    So, unlike Obama, who wants to move forward immediately with the TPP and other trade agreements, he'd move forward immediately with the TPP and other trade agreements.

                                                      Posted by on Friday, August 28, 2015 at 12:24 AM in China, Economics, International Trade, Politics | Permalink  Comments (42)

                                                      Fed Watch: The Right And Wrong Arguments For September

                                                      Tim Duy:

                                                      This September meeting is the gift that keeps on giving. Right now it is giving by the shear quantity of truly bad commentary arguing for a rate hike next month.
                                                      Let's back up a few weeks. Prior to the recent market rout, September looked like a pretty good bet. And the basic story that justified that view still holds. It isn't complicated. Just a straight forward Phillips curve story. The economy continues to improve, dragging the labor market along for the ride. Any questions about the meaning of a weak first quarter GDP report were wiped away by the second quarter. Neither is by itself meaningful; the average of 2.5 percent growth for the first half is just about the same as 2014 as a whole. As the labor market approaches full employment, policymakers expect that wage growth will accelerate and they must raise interest rates to prevent those wage gains from translating into above-target inflation. They feel they need to raise rates sooner than later to be ahead of the curve.
                                                      That story is not without holes, of course. The lack of widespread faster wage growth or inflationary pressures as the unemployment rate approached the Fed's estimate of full employment should be a red flag. Moreover, measures of labor underutilization remain elevated. Marked-based inflation expectations were low and falling, the dollar was rising, and commodities were tanking. And it seems that the risks of premature exit from ZIRP still outweigh the risk of holding on just a little too long. The Fed staff highlighted this risk in the July FOMC meeting. From the minutes:
                                                      The risks to the forecast for real GDP and inflation were seen as tilted to the downside, reflecting the staff's assessment that neither monetary nor fiscal policy was well positioned to help the economy withstand substantial adverse shocks.
                                                      Despite these questions, Fed policymakers were leaning toward a rate hike in September, at least in my opinion. Fundamentally, they want to start raising rates and had shifted toward looking for reasons to do exactly that. It was never, however, a done deal, at least according to the probabilities assigned by the Fed futures markets. I was fairly confident of a September rate hike, but arguments against were entirely reasonable. I still believe that the Phillips curve story justifies expecting a rate hike in September.
                                                      Then I go on a little vacation to visit an old friend, the market starts sliding, culminating is a white-knuckle thousand point drop on the Monday opening. I saw that and came to the same conclusion as fed futures markets. A rate hike probably wasn't happening. That kind of volatility cannot be ignored, and it put the exclamation point on signs that US financial conditions tightened with the end of QE3. We have been around this block before. We know how the story ends.
                                                      As a long time Septemberist (Junist, back in the day), I was not pleased. 
                                                      Many others are not pleased as well, and the commentariat is bringing forth a host of bad reasons to push the Fed into hiking rates in September. One of my favorites comes from Jon Hilsenrath of the Wall Street Journal, reporting from Jackson Hole:
                                                      Raising rates would signal that the Fed is confident about the U.S. economy, Bank of Japan Governor Haruhiko Kuroda said Wednesday in New York, ahead of the Fed gathering. “That is not only good for the U.S. economy, but also for the world economy, including the Japanese economy,” he said.
                                                      Really, the Fed needs to be taking advice from the Bank of Japan? I think you should listen to their advice and do exactly the opposite. Rushing to hike rates never did them any favors. Foreign central banks have anything but the Fed's best interest in mind. Hilsenrath knows this:
                                                      When interest rates rise in one country but not another, the currency tends to strengthen in the country where rates go up, because the higher rates offer greater returns on bank deposits and fixed-income investments.
                                                      Looser conditions abroad require looser conditions in the US, all else equal, to hold the US economy steady. Foreign central bankers, however, are looking to boost growth off of weaker currencies, and hope the Fed thinks they should just eat the consequences for the US economy. Not. Gonna. Happen.
                                                      Another anecdote from Hilsenrath:
                                                      “If you delay something that you were planning to do, then you leave the impression that your compass is different than what you led markets to believe,” Jacob Frenkel, chairman of J.P. Morgan Chase International and former head of the Bank of Israel, said in an interview Thursday. Market drama is increased by delay, he added.
                                                      No, markets know exactly what the compass is. That's why futures markets reacted so quickly Monday. Because those traders read the FOMC statements:
                                                      This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
                                                      Monday went well beyond typical volatility. The Fed could justify hiking rates if stocks were moving sideways. Or even drifting downward slowly. But Monday? Monday was something different, something that pointed to some significant fragilities in financial markets. And if you think those fragilities will lessen by higher rates, well that's just delusional.
                                                      From the New York Times we get this:
                                                      Lim Say Boon, the chief investment officer for DBS Bank in Singapore, questioned any optimism over maintaining interest rates at their current low level.
                                                      “If markets are unhappy about a September rate hike, would they be happy with a December hike?” he wrote in an analyst note on Thursday. “I am not sure what ‘victory’ would look like for those in the market who are ‘rioting’ against a rate hike in September. There is also a risk of the Fed being seen as hostage to an angry mob in the market — cowed because the mob is smashing up the ‘furniture.’ ”
                                                      The precedent was the taper. Former Federal Reserve Chairman balked at tapering in September 2013, let markets digest the policy change, and then moved forward in December 2013. No problem. The stuff about "hostage to an angry" mob is code for "my trade is going sideways and I need someone to blame."
                                                      Former Philadelphia Federal Reserve President Charles Plosser offers no surprises in these comments:
                                                      “I think the Fed needs to be careful and not overreact to short-term events,” Mr. Plosser said. The Fed’s policy committee “should keep the focus on the longer term.”
                                                      I would say that Monday shocked the Fed into looking at the longer term, such as the deterioration in inflation expectations, long a favored indicator that fell out of favor  because it became inconvenient:


                                                      More Plosser:
                                                      “The less the Fed says about [the selloff] the better, because it creates the impression that monetary policy is responsible for markets, which it’s not,” he said.
                                                      Actually, the Fed is responsible for maintaining financial conditions conducive to maximum sustainable growth so, yes, monetary policy is responsible for financial markets. And those markets are how the Fed transmits policy no less. So the Fed can't just say "it's not our problem" because it kind of is their problem.
                                                      Stephanie Rhule at Bloomberg uses the Fed's flagging commitment to September to pull out a oldie but goodie:
                                                      The Federal Reserve has had many opportunities to raise rates over the last several years and—whether it was because of too many snowstorms, too few jobs, or not enough consumers hitting the malls—the Fed didn't raise. Why? Because it didn't have to. When the unemployment rate dropped to 7 percent in 2013 and 6.5 percent in 2014, many said this was enough cause to finally raise rates off the extraordinary zero bound. The Fed kept moving the goalposts and said: not just yet.
                                                      ...For those feverishly predicting September vs. December, in terms of timing, you can scratch that concern off the list. The timing on everyone's mind is simply the fear of an additional major market fall. Wouldn't it be great if the Fed had raised rates two years ago, so it would have room to cut in the event that the economy follows the markets into a recession? Now it can't hike because the markets are a mess, and it can't cut because we are already at zero.
                                                      Really, everything would be better now if the Fed had been hiking two years ago when unemployment was 6.5%?  We needed to choke off growth in 2013? Markets could barely swallow the taper by the end of 2013. In what world does anyone think the economy could have handled any level of rate hikes then that would have provided a realistic cushion now?
                                                      Rex Nutting at Market Watch uses the week's events to moralize on the "Greenspan put":
                                                      ...This “Greenspan put” means investing in the stock market is a one-way bet...
                                                      ...I believe the market selloff has made a September rate hike even more compelling than it was before, because it gives Fed Chair Janet Yellen the opportunity she needs to kill the “Greenspan put” once and for all...
                                                      ...if supposedly risky investments like corporate equities and bonds are actually guaranteed by the Fed’s “Greenspan put,” then investors aren’t embracing risk at all...
                                                      Hmmm...I know plenty of people who don't think that investing in stock markets is a one-way bet. Like all those WorldCom investors. Or more generally anyone caught up in 2000. Or 2008. And apparently Millenials don't trust stocks, so they didn't get the message about the "Greenspan put." So let's end this now: Way too many people have lost way too much money for this supposed "Greenspan put" to be a real thing. It is more code for "my trade is going sideways and I need someone to blame."
                                                      Nutting extends his moralizing to Fed officials:
                                                      ...Officials have been obliquely warning that some stock market valuations are too high to be justified by fundamentals. In truth, the correction in the U.S. markets has been welcomed at the Marriner Eccles Building. The Fed doesn’t mind the dip in the Dow, because it punishes complacency and because the selloff has been relatively orderly. There’s been no panic on Wall Street...
                                                      I don't think a guy like Vice Chair Stanley Fisher is sitting around thinking that he needs to take a chunk out of everyone's 401k just to teach them a lesson. OK, so maybe Kansas City Federal Reserve President Esther George is thinking that, but that would be a minority position. 
                                                      Hey, it's been a hard couple of weeks. Things changed. That certain rate hike became alot less certain. Maybe that changes back by September 17. Maybe not. All of us Fed watchers probably won't come to agreement until September 16. Getting emotional and moralizing about change isn't going to stop it. I have learned through the years to heed the advice of a fictional financier:
                                                      Stocks dropped sharply. It is a clear sign, on top of other signs, that financial conditions are tightening ahead of the Fed, and arguably too much ahead of the Fed. If the Fed heeds that warning you have to remember that's their job. Smoothly functioning financial markets. Lender of last resort. All that stuff. Maybe things work out just fine if they don't heed that warning. I am not interested in taking that risk. Not enough upside for me.
                                                      But if they take that risk, it won't be because they want to send the markets a message that they are in charge, or that the "Greenspan put" needs to be put to rest, or that they can't been seen as cowering to the markets, or that they need to stay the course because they already signaled a rate hike, or because foreign central bankers are demanding the Fed hike rates, or because they need to build ammo for the next crisis, or any other reason that comes from barstool moralizing after one too many. If they hike rates it will be for one simple reason: The recent market turmoil does little to shake their faith in the Phillips Curve. That would be the heart of their argument. And if you are arguing for September, that should be the heart of your argument as well.

                                                        Posted by on Friday, August 28, 2015 at 12:15 AM Permalink  Comments (30)

                                                        Links for 08-28-15

                                                          Posted by on Friday, August 28, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (108)

                                                          Thursday, August 27, 2015

                                                          Shiller: Rising Anxiety That Stocks Are Overpriced

                                                          Robert Shiller (a reason to agree with Tim Duy):

                                                          Rising Anxiety That Stocks Are Overpriced: Over the five trading days between Aug. 17 and Aug. 24, the U.S. stock market dropped 10 percent — the official definition of a “correction,” with similar or greater drops in other countries. ...
                                                          But there are reasons to question whether this was a quick, effective slap on the wrist, or if the market is still too overactive, and thus asking for a more extended punishment. ...
                                                          It is entirely plausible that the shaking of investor complacency in recent days will, despite intermittent rebounds, take the market down significantly and within a year or two restore CAPE ratios to historical averages. This would put the S. & P. closer to 1,300 from around 1,900 on Wednesday, and the Dow at 11,000 from around 16,000. They could also fall further; the historical average is not a floor.
                                                          Or maybe this could be another 1998. We have no statistical proof. We are in a rare and anxious “just don’t know” situation, where the stock market is inherently risky because of unstable investor psychology.

                                                            Posted by on Thursday, August 27, 2015 at 10:08 AM in Economics, Financial System | Permalink  Comments (66)

                                                            'Q2 GDP Revised up to 3.7%'

                                                            Are you as convinced as Tim is that rate hikes are off the table at the Fed's next meeting?:

                                                            Q2 GDP Revised up to 3.7%, by Bill McBride, Calculated Risk: From the BEA: Gross Domestic Product: First Quarter 2015 (Third Estimate)

                                                            Real gross domestic product -- the value of the goods and services produced by the nation's economy less the value of the goods and services used up in production, adjusted for price changes -- increased at an annual rate of 3.7 percent in the second quarter of 2015, according to the "second" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.6 percent.

                                                            The GDP estimate released today is based on more complete source data than were available for the "advance" estimate issued last month. In the advance estimate, the increase in real GDP was 2.3 percent. With the second estimate for the second quarter, nonresidential fixed investment and private inventory investment increased. ... [emphasis added]

                                                            Here is a Comparison of Advance and Second Estimates. PCE growth was revised up from 2.9% to 3.1%. Residential investment was revised up from 6.6% to 7.8%.

                                                            Solid growth. And above the consensus of 3.2%.

                                                              Posted by on Thursday, August 27, 2015 at 09:42 AM in Economics, Monetary Policy | Permalink  Comments (43)

                                                              'The Day Macroeconomics Changed'

                                                              Simon Wren-Lewis:

                                                              The day macroeconomics changed: It is of course ludicrous, but who cares. The day of the Boston Fed conference in 1978 is fast taking on a symbolic significance. It is the day that Lucas and Sargent changed how macroeconomics was done. Or, if you are Paul Romer, it is the day that the old guard spurned the ideas of the newcomers, and ensured we had a New Classical revolution in macro rather than a New Classical evolution. Or if you are Ray Fair..., who was at the conference, it is the day that macroeconomics started to go wrong.
                                                              Ray Fair is a bit of a hero of mine. ...
                                                              I agree with Ray Fair that what he calls Cowles Commission (CC) type models, and I call Structural Econometric Model (SEM) type models, together with the single equation econometric estimation that lies behind them, still have a lot to offer, and that academic macro should not have turned its back on them. Having spent the last fifteen years working with DSGE models, I am more positive about their role than Fair is. Unlike Fair, I want “more bells and whistles on DSGE models”. I also disagree about rational expectations...
                                                              Three years ago, when Andy Haldane suggested that DSGE models were partly to blame for the financial crisis, I wrote a post that was critical of Haldane. What I thought then, and continue to believe, is that the Bank had the information and resources to know what was happening to bank leverage, and it should not be using DSGE models as an excuse for not being more public about their concerns at the time.
                                                              However, if we broaden this out from the Bank to the wider academic community, I think he has a legitimate point. ...
                                                              What about the claim that only internally consistent DSGE models can give reliable policy advice? For another project, I have been rereading an AEJ Macro paper written in 2008 by Chari et al, where they argue that New Keynesian models are not yet useful for policy analysis because they are not properly microfounded. They write “One tradition, which we prefer, is to keep the model very simple, keep the number of parameters small and well-motivated by micro facts, and put up with the reality that such a model neither can nor should fit most aspects of the data. Such a model can still be very useful in clarifying how to think about policy.” That is where you end up if you take a purist view about internal consistency, the Lucas critique and all that. It in essence amounts to the following approach: if I cannot understand something, it is best to assume it does not exist.

                                                                Posted by on Thursday, August 27, 2015 at 09:23 AM in Economics, Macroeconomics, Methodology | Permalink  Comments (2)

                                                                'Mind the Gap: Assessing Labor Market Slack'

                                                                Joseph Tracy, Robert Rich, Samuel Kapon, and Ellen Fu say "that roughly 90 percent of the labor gap that opened up following the recession has been closed":

                                                                Mind the Gap: Assessing Labor Market Slack, Liberty Street Economics, NY Fed: Indicators of labor market slack enable economists to judge pressures on wages and prices. Direct measures of slack, however, are not available and must be constructed. Here, we build on our previous work using the employment-to-population (E/P) ratio and develop an updated measure of labor market slack based on the behavior of labor compensation. Our measure indicates that roughly 90 percent of the labor gap that opened up following the recession has been closed.
                                                                An earlier post, “A Mis-Leading Labor Market Indicator,” argued that the gap between the E/P ratio and a demographically adjusted version of the same ratio is a useful measure of labor market slack. A challenge in constructing this measure is that it requires a normalization (a level shift) to “re-center” the demographically adjusted E/P ratio. In this earlier post, we normalized by assuming that the average labor gap should be zero over a long period of time. Although this approach was easy to implement, it had the disadvantage of not being linked to wage behavior.
                                                                To better motivate an E/P-based approach, we turn to Phillips curve models that relate wage growth to labor market slack. The specification we consider relates nominal wage growth to an E/P gap variable (defined as the difference between a demographically adjusted E/P ratio and the actual E/P ratio), as well as expected inflation and trend productivity growth. Expected inflation is subtracted from nominal wage growth to derive an expected real wage growth series, which is then regressed on a constant, the E/P gap, and trend productivity growth. The E/P gap is normalized so that the estimated intercept of the Phillips curve model is set to zero. This approach implies that when the resulting normalized E/P gap is zero, expected real wage growth adjusted for the return to labor productivity is, on average, zero. That is, a labor market with no slack will have nominal wage growth, on average, equal to expected inflation plus a return to labor productivity.
                                                                We estimate Phillips curve models for three wage measures: compensation per hour, average hourly earnings, and the employment cost index. We construct four-quarter-ahead growth rates starting in the first quarter of 1982, the earliest start date for which all three measures are available, and ending in the second quarter of 2015. Expected inflation is measured using survey data on ten-year CPI inflation expectations, and trend productivity growth is a twelve-quarter moving average of (annualized) productivity growth rates. Adopting the same approach we took in another post—“U.S. Potential Economic Growth: Is it Improving with Age?”—we have extended the data sample used to estimate the demographically adjusted E/P ratio back to the early 1960s. This provides us with roughly thirteen million observations on individuals that we divide into 280 cohorts based on decade of birth, sex, race/ethnicity, and educational attainment. For each cohort, we estimate a cohort-specific profile for average employment rates by age that abstracts from cyclical effects. Aggregating these predicted employment rates across individuals produces a demographically adjusted E/P ratio, with the quarterly series derived as an average of the three monthly values.
                                                                The three Phillips curve models yield similar normalizations, so we average them instead of selecting one. The chart below shows the actual E/P ratio along with the demographically adjusted E/P ratio based on this new normalization.

                                                                E/P: Actual and Adjusted

                                                                The next chart plots the estimated E/P gap (the difference between the two series in the chart above) along with the three expected real wage growth measures adjusted for trend productivity growth. By our definition, a positive E/P gap indicates slack in the labor market. The periods in which the estimated E/P gap is zero line up well with the periods in which our adjusted real wage growth measures are also close to zero. Moreover, periods in which the adjusted wage measures have exceeded zero generally correspond to episodes of tight labor markets (negative E/P gaps), while periods in which the measures are below zero are typically associated with slack in the labor market (positive E/P gaps).

                                                                E/P Gap and Wage Measures

                                                                The current normalized E/P gap is estimated to be 32 basis points, which represents an 89 percent reduction from the 283-basis-point gap in November 2010. This finding suggests that the labor market has made considerable progress in its recovery, but is still not yet back to neutral. To gain additional perspective on this finding, we can compare the current gap with those that existed in two earlier tightening episodes. At the time the FOMC began to raise rates in February 1994, the gap was 92 basis points; at the end of that tightening cycle, it was 14 basis points. And when the Committee began to raise rates in June 2004, the gap was -38 basis points; at the end of that tightening cycle, the gap was -125 basis points. To assess labor market slack and understand the behavior of labor compensation in the quarters ahead, it will be particularly important to mind the gap.

                                                                  Posted by on Thursday, August 27, 2015 at 12:15 AM in Economics, Monetary Policy, Unemployment | Permalink  Comments (89)

                                                                  Links for 08-27-15

                                                                    Posted by on Thursday, August 27, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (85)

                                                                    Wednesday, August 26, 2015

                                                                    Fed Watch: Dudley Puts The Kibosh On September

                                                                    Tim Duy:

                                                                    Dudley Puts The Kibosh On September, by Tim Duy: Monday's action on Wall Street was too much for the Fed. That day, Atlanta Federal Reserve President Dennis Lockhart pulled back his previous dedication to a September rate hike earlier, reverting to only an expectation that rates rise sometimes this year. But today New York Federal Reserve President William Dudley explicitly called September into question. Via the Wall Street Journal:

                                                                    In light of market volatility and foreign developments, “at this moment, the decision to begin the normalization process at the September [Federal Open Market Committee] meeting seems less compelling to me than it did several weeks ago. But normalization could become more compelling by the time of the meeting as we get additional information” about the state of the economy, he told reporters.

                                                                    While this comment was sufficiently nuanced to leave open the possibility of September, in reality Dudley pretty much ended the debate. He only reinforced expectations that September was off the table, and time is running out to pull back expectations. Incoming data, what little there is at this point, would need to come in well above expectations to bring September back into play. And that is just mostly like not going to happen.

                                                                    What about October or December? I tend to think that October is off the table due to a lack of a press conference. Yes, I know the Fed claims every meeting is live, but the reality is that they have reinforced the perception that major policy shifts occur only on meetings with scheduled press conferences. If the Fed  wants eight live meetings a year, they need eight press conferences. December remains open with sufficiently strong data, but does the Fed really want to attempt the first rate hike when financial markets are already tight seasonally?

                                                                    Fundamentally, the problem for the Federal Reserve is that US financial conditions have tightened since the end of the quantitative easing, and will most likely continue to tighten as the rest of the world, notably now China, eases further. In effect, easier policy in the rest of the world requires, all else equal, easier policy in the US as well. Hence this from the FT:

                                                                    Interest rate futures indicate that investors now see just a 24 per cent chance of a rate increase in September, down from more than 50 per cent earlier this month. The probable path of rate rises in 2016 has also moderated markedly, according to Bloomberg futures data.

                                                                    The path of rates necessary to maintain stable growth in the US will be lower in response to easing conditions elsewhere. This is something known to bond market participants who as a group have long been more dovish than FOMC participants. But it was the equity market participants that shocked the Fed into the same realization.

                                                                    To be sure, critics will loudly proclaim that the Fed must hike in September if only to prove they are not governed by the equity markets. That call will be heard in the next FOMC meeting as well, but it will be a minority view. A thousand point drop in the Dow will not be ignored by the majority of the FOMC. Dismissing what are obviously fragile financial market conditions would be a hawkish signal the FOMC does not want to send. Hiking rates is not going to send a calming message of confidence. That never works. If the history of financial crises has taught us anything, it is that failure to respond with easier policy only adds to the turmoil.

                                                                    Bottom Line: The Fed has long argued that the timing of the first rate hike does not matter. I had thought so as well, but that is clearly no longer the case. A rate hike during a period of substantial financial market turmoil would matter a great deal. It looks like the Fed's plans to raise rate will once again be overtaken by events.

                                                                      Posted by on Wednesday, August 26, 2015 at 11:35 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (108)

                                                                      Ray Fair: The Future of Macro

                                                                      Ray Fair:

                                                                      The Future of Macro: There is an interesting set of recent blogs--- Paul Romer 1, Paul Romer 2, Brad DeLong, Paul Krugman, Simon Wren-Lewis, and Robert Waldmann---on the history of macro beginning with the 1978 Boston Fed conference, with Lucas and Sargent versus Solow. As Romer notes, I was at this conference and presented a 97-equation model. This model was in the Cowles Commission (CC) tradition, which, as the blogs note, quickly went out of fashion after 1978. (In the blogs, models in the CC tradition are generally called simulation models or structural econometric models or old fashioned models. Below I will call them CC models.)
                                                                      I will not weigh in on who was responsible for what. Instead, I want to focus on what future direction macro research might take. There is unhappiness in the blogs, to varying degrees, with all three types of models: DSGE, VAR, CC. Also, Wren-Lewis points out that while other areas of economics have become more empirical over time, macroeconomics has become less. The aim is for internal theoretical consistency rather than the ability to track the data.
                                                                      I am one of the few academics who has continued to work with CC models. They were rejected for basically three reasons: they do not assume rational expectations (RE), they are not identified, and the theory behind them is ad hoc. This sounds serious, but I think it is in fact not. ...

                                                                      He goes on to explain why. He concludes with:

                                                                      ... What does this imply about the best course for future research? I don't get a sense from the blog discussions that either the DSGE methodology or the VAR methodology is the way to go. Of course, no one seems to like the CC methodology either, but, as I argue above, I think it has been dismissed too easily. I have three recent methodological papers arguing for its use: Has Macro Progressed?, Reflections on Macroeconometric Modeling, and Information Limits of Aggregate Data. I also show in Household Wealth and Macroeconomic Activity: 2008--2013 that CC models can be used to examine a number of important questions about the 2008--2009 recession, questions that are hard to answer using DSGE or VAR models.
                                                                      So my suggestion for future macro research is not more bells and whistles on DSGE models, but work specifying and estimating stochastic equations in the CC tradition. Alternative theories can be tested and hopefully progress can be made on building models that explain the data well. We have much more data now and better techniques than we did in 1978, and we should be able to make progress and bring macroeconomics back to it empirical roots.
                                                                      For those who want more detail, I have gathered all of my research in macro in one place: Macroeconometric Modeling, November 11, 2013.

                                                                        Posted by on Wednesday, August 26, 2015 at 08:34 AM in Economics, Macroeconomics, Methodology | Permalink  Comments (80)

                                                                        'It’s Getting Tighter'

                                                                        Paul Krugman has advice for the Fed:

                                                                        It’s Getting Tighter: When thinking about the market madness and its possible real effects, here’s something you — where by “you” I mean the Fed in particular — really, really need to keep in mind: the markets have already, in effect, tightened monetary conditions quite a lot.
                                                                        First of all, if break-evens (the difference between interest rates on ordinary bonds and inflation-protected bonds) are any guide, inflation expectations have fallen sharply...
                                                                        Second, while interest rates on Treasuries are down, rates on private securities viewed as even moderately risky are up quite a lot...
                                                                        So real borrowing costs are up sharply for many private borrowers. This is a significant headwind for the U.S. economy, which was hardly growing like gangbusters in any case.
                                                                        A Fed hike now looks like an even worse idea than it did a few days ago.

                                                                          Posted by on Wednesday, August 26, 2015 at 12:33 AM in Economics, Monetary Policy | Permalink  Comments (66)

                                                                          'John Kenneth Galbraith on Writing, Inspiration, and Simplicity'

                                                                          From Tim Taylor:

                                                                          John Kenneth Galbraith on Writing, Inspiration, and Simplicity: John Kenneth Galbraith (1908-2006) was trained as an economist, but in books like The Affluent Society (1958) and The New Industrial State (1967), his found his metier as a social critic. In these books and voluminous other writings, Galbraith didn't propose well-articulated economic theories, and carry out systematic empirical tests, but instead offered big-picture perspectives of the economy and society of his time. His policy advice was grindingly predictable: big and bigger doses of progressive liberalism, what he sometimes called "new socialism." 

                                                                          For a sense of how mainstream and Democratic-leaning economists of the time dismissed Galbraith's work, classic example is this scathing-and-smiling review of The New Industrial State by Robert Solow in the Fall 1967 issue of The Public Interest. Galbreath's response appears in the same issue. Connoisseurs of academic blood sports will enjoy the exchange.

                                                                          Here, I come not to quarrel with Galbraith's economics, but to praise him as one of the finest writers on economics and social science topics it has ever been my pleasure to read. I take as my text his essay on "Writing, Typing, and Economics," which appeared in the March 1978 issue of The Atlantic and which I recently rediscovered. Here are some highlights:

                                                                          "All writers know that on some golden mornings they are touched by the wand — are on intimate terms with poetry and cosmic truth. I have experienced those moments myself. Their lesson is simple: It's a total illusion. And the danger in the illusion is that you will wait for those moments. Such is the horror of having to face the typewriter that you will spend all your time waiting. I am persuaded that most writers, like most shoemakers, are about as good one day as the next (a point which Trollope made), hangovers apart. The difference is the result of euphoria, alcohol, or imagination. The meaning is that one had better go to his or her typewriter every morning and stay there regardless of the seeming result. It will be much the same. ..."
                                                                          "My advice to those eager students in California would be, "Do not wait for the golden moment. It may well be worse." I would also warn against the flocking tendency of writers and its use as a cover for idleness. It helps greatly in the avoidance of work to be in the company of others who are also waiting for the golden moment. The best place to write is by yourself, because writing becomes an escape from the terrible boredom of your own personality. It's the reason that for years I've favored Switzerland, where I look at the telephone and yearn to hear it ring. ..."
                                                                          "There may be inspired writers for whom the first draft is just right. But anyone who is not certifiably a Milton had better assume that the first draft is a very primitive thing. The reason is simple: Writing is difficult work. Ralph Paine, who managed Fortune in my time, used to say that anyone who said writing was easy was either a bad writer or an unregenerate liar. Thinking, as Voltaire avowed, is also a very tedious thing which men—or women—will do anything to avoid. So all first drafts are deeply flawed by the need to combine composition with thought. Each later draft is less demanding in this regard. Hence the writing can be better. There does come a time when revision is for the sake of change—when one has become so bored with the words that anything that is different looks better. But even then it may be better. ..." 
                                                                          "Next, I would want to tell my students of a point strongly pressed, if my memory serves, by Shaw. He once said that as he grew older, he became less and less interested in theory, more and more interested in information. The temptation in writing is just the reverse. Nothing is so hard to come by as a new and interesting fact. Nothing is so easy on the feet as a generalization. I now pick up magazines and leaf through them looking for articles that are rich with facts; I do not care much what they are. Richly evocative and deeply percipient theory I avoid. It leaves me cold unless I am the author of it. ..." 
                                                                          "In the case of economics there are no important propositions that cannot be stated in plain language. Qualifications and refinements are numerous and of great technical complexity. These are important for separating the good students from the dolts. But in economics the refinements rarely, if ever, modify the essential and practical point. The writer who seeks to be intelligible needs to be right; he must be challenged if his argument leads to an erroneous conclusion and especially if it leads to the wrong action. But he can safely dismiss the charge that he has made the subject too easy. The truth is not difficult. Complexity and obscurity have professional value—they are the academic equivalents of apprenticeship rules in the building trades. They exclude the outsiders, keep down the competition, preserve the image of a privileged or priestly class. The man who makes things clear is a scab. He is criticized less for his clarity than for his treachery.
                                                                          "Additionally, and especially in the social sciences, much unclear writing is based on unclear or incomplete thought. It is possible with safety to be technically obscure about something you haven't thought out. It is impossible to be wholly clear on something you do not understand. Clarity thus exposes flaws in the thought. The person who undertakes to make difficult matters clear is infringing on the sovereign right of numerous economists, sociologists, and political scientists to make bad writing the disguise for sloppy, imprecise, or incomplete thought. One can understand the resulting anger." 

                                                                            Posted by on Wednesday, August 26, 2015 at 12:24 AM in Economics | Permalink  Comments (28)

                                                                            'Incentive Pay and Gender Compensation Gaps for Top Executives'

                                                                            Stefania Albanesi, Claudia Olivetti, and Maria Prados at the NY Fed's Liberty Street Economics:

                                                                            Incentive Pay and Gender Compensation Gaps for Top Executives: The persistence of a gender gap in wages is shaping the debate over women’s equality in the workplace and underscores the challenge facing policymakers as they consider their potential role in closing it. While the disparity affects females at all income levels, women in professional and managerial occupations tend to experience greater gender-pay differences than those in working-class jobs. The rise in the use of incentive pay, which has been linked to the growth of income inequality (Lemieux, MacLeod, and Parent), might have contributed to the gender gap in earnings (Albanesi and Olivetti). In this post, which is based on our related New York Fed staff report, we document three new facts about gender differences in the structure of executive compensation.

                                                                             Evidence on Gender Differences in Executive Pay

                                                                            Our research focuses on the top five executives by title in public companies (chair/chief executive officer (CEO), vice chair, president, chief financial officer, and chief operating officer) in Standard and Poor’s ExecuComp database between 1992 and 2005. Only 3.2 percent of people in these roles are women.

                                                                            Fact 1: Female executives receive a lower share of incentive pay in total compensation than males. This difference accounts for 93 percent of the unconditional gender gap in total pay. ...

                                                                            Fact 2: Compensation of female executives is less sensitive to firm performance than males’. For example, a $1 million increase in firm value generates a $17,150 increase in firm-specific wealth for male executives but only a $1,670 increase for females. For each 1 percent increase in firm market value, compensation rises by $60,000 for men and only $10,000 for women. ...

                                                                            Fact 3: Compensation of female executives is more exposed to declines in firm value and less exposed to increases in firm value than males’. We find that a 1 percent rise in firm value is associated with a 13 percent rise in firm-specific wealth for female executives and a 44 percent rise for male executives. Conversely, a 1 percent decline in firm value is associated with a 63 percent decline in firm-specific wealth for female executives and a 33 percent decline for males. ...

                                                                            Are these gender differences in compensation efficient?

                                                                            Surveys of professionals and executives, time-use studies, and experimental and psychological studies suggest that:

                                                                            • Exclusion from informal networks, gender stereotyping, and lack of role models are perceived as substantial barriers to career advancements for female executives.
                                                                            • Married female professionals bear a disproportionately large share of childcare responsibilities relative to married men in similar circumstances.
                                                                            • Women display lower propensity to enter into competitive environments.
                                                                            • Women display lower propensity to initiate negotiations.
                                                                            • Women exhibit higher risk aversion.

                                                                            Based on the efficient paradigm of the pay-setting process, these gender differences in barriers to career advancement and preferences are consistent with Facts 1 and 2, but they would imply lower performance for firms headed by females, an outcome for which we find no evidence in our data. Moreover, this framework cannot explain Fact 3.

                                                                            We find instead that the gender differences in pay and pay-performance sensitivity are consistent with the “skimming” or “managerial power” view of executive compensation. According to this theory, board members are captive to executives, who use that position to influence their compensation packages in a way that increases their average pay and undermines incentives. In this scenario, the goal of the executive is to prevent pay from falling when firm performance deteriorates and to boost pay when the company is doing well. However, as we document in our paper, top female executives are less entrenched than their male counterparts, since they are usually younger, with fewer years of tenure and weaker networks. Thus, they are more limited than male executives in their ability to control their own compensation.

                                                                            Our analysis suggests that performance pay schemes should be held to closer scrutiny. Increasing transparency about an executive’s compensation, both in absolute terms and relative to counterparts’, might mitigate gender-pay inequality for top executives. A recent Securities and Exchange Commission ruling that says that companies have to disclose whether executive pay is in line with the company’s financial performance seems to be a good step in this direction.

                                                                            Our findings also raise concern about the standing of all professional women as incentive pay schemes proliferate outside the executive ranks. The failure of the efficient contracting paradigm to explain the gender differences in the structure of executive compensation points to possible distortions in the link between pay and performance. To the extent that performance pay amplifies earnings differentials resulting from actual or perceived differences in attributes between workers,  it can exacerbate inequality and can severely distort the allocation of resources, if designed incorrectly.

                                                                              Posted by on Wednesday, August 26, 2015 at 12:17 AM in Economics | Permalink  Comments (3)

                                                                              Links for 08-26-15

                                                                                Posted by on Wednesday, August 26, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (98)

                                                                                Tuesday, August 25, 2015

                                                                                'The Politics of Income Inequality'

                                                                                I have a new column:

                                                                                The Politics of Income Inequality: f the policies favored by some Republicans seeking the nomination for president turned into reality, we’d roll back or eliminate our social insurance programs, cut taxes on the wealthy, cut spending even more to slash the deficit, and turn health care over to the private sector. 
                                                                                The “you’re on your own no matter what bad luck comes your way” society is a desirable outcome according to this view because it creates the correct incentives for people to be gainfully employed and take care of themselves. Never mind that history shows many people won’t prepare for retirement, purchase health care, set aside funds in case of job loss, and so on unless they are forced to do so by government programs, and will thus then end up being an even bigger burden to the rest of society, Those who support these policies appear to believe that this time will somehow be different. 
                                                                                What do these issues have in common? ...

                                                                                  Posted by on Tuesday, August 25, 2015 at 08:34 AM in Economics, Income Distribution, Politics | Permalink  Comments (82)

                                                                                  'Stupid China Stories'

                                                                                  Paul Krugman:

                                                                                  Stupid China Stories: So a stock crash in China triggered a big decline around the world..., why should events in China matter for the rest of us?
                                                                                  Well, you and I might think that it’s because China is a pretty big economy... So when China slumps, you can and should expect knock-on effects elsewhere.
                                                                                  But trust the Republican field to declare that it’s all Obama’s fault. Scott Walker wants Obama to cancel a state dinner with Xi; Donald Trump says that it’s because Obama has let China “dictate the agenda” (no, I have no idea what he thinks he means). And Chris Christie says that it’s because Obama has gotten us deep into China’s debt.
                                                                                  Actually, let’s play a bit with that last one, OK? You could, conceivably, tell a story in which America becomes dependent on Chinese loans; then, when China gets in trouble, it demands repayment, pushing us into crisis too. But any story along those lines has a corollary: we should be seeing a spike in US interest rates as our credit line gets pulled. What you actually see is falling rates: ...
                                                                                  Oh, why am I even bothering?...

                                                                                    Posted by on Tuesday, August 25, 2015 at 12:24 AM in China, Economics, Politics | Permalink  Comments (54)

                                                                                    'Great Recession Job Losses Severe, Enduring'

                                                                                    Nothing particularly surprising here -- the Great recession was unusually severe and unusually long, and hence had unusual impacts, but it's good to have numbers characterizing what happened:

                                                                                    Great Recession Job Losses Severe, Enduring: Of those who lost full-time jobs between 2007 and 2009, only about 50 percent were employed in January 2010 and only about 75 percent of those were re-employed in full-time jobs.
                                                                                    The economic downturn that began in December 2007 was associated with a rapid rise in unemployment and with an especially pronounced increase in the number of long-term unemployed. In "Job Loss in the Great Recession and its Aftermath: U.S. Evidence from the Displaced Workers Survey" (NBER Working Paper No. 21216), Henry S. Farber uses data from the Displaced Workers Survey (DWS) from 1984-2014 to study labor market dynamics. From these data he calculates both the short-term and medium-term effects of the Great Recession's sharply elevated rate of job losses. He concludes that these effects have been particularly severe.

                                                                                    Of the workers who lost full-time jobs between 2007 and 2009, Farber reports, only about 50 percent were employed in January 2010 and only about 75 percent of those were re-employed in full-time jobs. This means only about 35 to 40 percent of those in the DWS who reported losing a job in 2007-09 were employed full-time in January 2010. This was by far the worst post-displacement employment experience of the 1981-2014 period.
                                                                                    The adverse employment experience of job losers has also been persistent. While both overall employment rates and full-time employment rates began to improve in 2009, even those who lost jobs between 2011 and 2013 had very low re-employment rates and, by historical standards, very low full-time employment rates.
                                                                                    In addition, the data show substantial weekly earnings declines even for those who did find work, although these earnings losses were not especially large by historical standards. Farber suggests that the earnings decline measure from the DWS is appropriate for understanding how job loss affects the earnings that a full-time-employed former job-loser is able to command.
                                                                                    The author notes that the measures on which he focuses may understate the true economic cost of job loss, since they do not consider the value of time spent unemployed or the value of lost health insurance and pension benefits.
                                                                                    Farber concludes that the costs of job losses in the Great Recession were unusually severe and remain substantial years later. Most importantly, workers laid off in the Great Recession and its aftermath have been much less successful at finding new jobs, particularly full-time jobs, than those laid off in earlier periods. The findings suggest that job loss since the Great Recession has had severe adverse consequences for employment and earnings.

                                                                                      Posted by on Tuesday, August 25, 2015 at 12:15 AM in Academic Papers, Economics, Unemployment | Permalink  Comments (6)

                                                                                      'Thinking, Fast and Slow: Efforts to Reduce Youthful Crime in Chicago'

                                                                                      From the NBER Digest:

                                                                                      Thinking, Fast and Slow: Efforts to Reduce Youthful Crime in Chicago: Interventions that get youths to slow down and behave less automatically in high-stakes situations show positive results in three experiments.

                                                                                      Disparities in youth outcomes in the United States are striking. For example, among 15-to-24 year olds, the male homicide rate in 2013 was 18 times higher for blacks than for whites. Black males lose more years of potential life before age 65 to homicide than to heart disease, America's leading overall killer. A large body of research emphasizes that, beyond institutional factors, choices and behavior contribute to these outcomes. Those choices include decisions around dropping out of high school, involvement with drugs or gangs, and how to respond to confrontations that could escalate to serious violence.
                                                                                      In "Thinking, Fast and Slow? Some Field Experiments to Reduce Crime and Dropout in Chicago" (NBER Working Paper No. 21178), authors Sara B. Heller, Anuj K. Shah, Jonathan Guryan, Jens Ludwig, Sendhil Mullainathan, and Harold A. Pollack explain these behavioral differences using the psychology of automaticity. Because it is mentally costly to think through every situation in detail, all of us have automatic responses to some of the situations we encounter. These responses—automaticity—are tuned to situations we commonly face.
                                                                                      The authors present results from three large-scale, randomized experimental studies carried out in Chicago with economically disadvantaged male youth. All three experiments show sizable behavioral responses to fairly short-duration, automaticity-reducing interventions that get youths to slow down and behave less automatically in high-stakes situations.
                                                                                      The first intervention (called Becoming a Man, or BAM, developed by Chicago-area nonprofit Youth Guidance) involved 2,740 males in the 7th through 10th grades in 18 public schools on the south and west sides of the city. Some youths were offered an automaticity-reducing program once a week during school or an after-school sports intervention developed by Chicago nonprofit World Sport Chicago. The authors find that participation in the programming reduced arrests over the program year for violent crimes by 44 percent, and non-violent, non-property, non-drug crimes by 36 percent. Participation also increased engagement with school, which the authors estimate could translate into gains in graduation rates of between 7 and 22 percent.
                                                                                      A second study of BAM randomly assigned 2,064 male 9th and 10th graders within nine Chicago public high schools to the treatment or to a control condition. The authors found that arrests of youth in the treatment group were 31 percent lower than arrests in the control group.
                                                                                      The third intervention was delivered by trained detention staff to high-risk juveniles housed in the Cook County Juvenile Temporary Detention Center. The curriculum in this program, while different from the first two interventions, also focused on reducing automaticity. Some 5,728 males were randomly assigned to units inside the facility that did or did not implement the program. The authors found that those who received programming were about 16 percent less likely to be returned to the detention center than those who did not.
                                                                                      The sizable impacts the authors observe from all three interventions stand in stark contrast to the poor record of many efforts to improve the long-term life outcomes of disadvantaged youths. As with all randomized experiments, there is the question of whether these impacts generalize to other samples and settings. The interventions considered in this study would not be costly to expand. The authors estimate that the cost of the intervention for each participant in the first two studies was between $1,178 and $2,000. In the third case, the per-participant cost was about $60 per juvenile detainee. The results suggest that expanding these programs may be more cost-effective than other crime-prevention strategies that target younger individuals.
                                                                                      The authors also present results from various survey measures suggesting the results do not appear to be due to changes in mechanisms like emotional intelligence or self-control. On the other hand results from some decision-making exercises the authors carried out seem to support reduced automaticity as a key mechanism. The results overall suggest that automaticity can be an important explanation for disparities in outcomes.

                                                                                        Posted by on Tuesday, August 25, 2015 at 12:09 AM in Academic Papers, Economics | Permalink  Comments (9)

                                                                                        Links for 08-25-15

                                                                                          Posted by on Tuesday, August 25, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (163)

                                                                                          Monday, August 24, 2015

                                                                                          Paul Krugman: A Moveable Glut

                                                                                           What' causing so much instability in the world economy?

                                                                                          A Moveable Glut, by Paul Krugman, Commentary, NY Times: What caused Friday’s stock plunge? What does it mean for the future? Nobody knows, and not much. ...
                                                                                          Still, investors are clearly jittery..., the world as a whole still seems remarkably accident-prone. ... But why does the world economy keep stumbling? ...
                                                                                          More than a decade ago, Ben Bernanke famously argued that a ballooning U.S. trade deficit was the result, not of domestic factors, but of a “global saving glut”: a huge excess of savings over investment in China and other developing nations... He worried a bit about the fact that the inflow of capital was being channeled, not into business investment, but into housing; obviously he should have worried much more. ...
                                                                                          Of course, the boom became a bubble, which inflicted immense damage when it burst. Furthermore, that wasn’t the end of the story. There was also a flood of capital from Germany and other northern European countries to Spain, Portugal, and Greece. This too turned out to be a bubble, and the bursting of that bubble in 2009-2010 precipitated the euro crisis.
                                                                                          And still the story wasn’t over. With America and Europe no longer attractive destinations, the global glut went looking for new bubbles to inflate. It found them in emerging markets... It couldn’t last, and now we’re in the middle of an emerging-market crisis...
                                                                                          So where does the moving finger of glut go now? Why, back to America, where a fresh inflow of foreign funds has driven the dollar way up, threatening to make our industry uncompetitive again
                                                                                          What’s ... important now is that policy makers take seriously the possibility, I’d say probability, that excess savings and persistent global weakness is the new normal.
                                                                                          My sense is that there’s a deep-seated unwillingness, even among sophisticated officials, to accept this reality. Partly this is about special interests: Wall Street doesn’t want to hear that an unstable world requires strong financial regulation, and politicians who want to kill the welfare state don’t want to hear that government spending and debt aren’t problems in the current environment.
                                                                                          But there’s also, I believe, a sort of emotional prejudice against the very notion of global glut. Politicians and technocrats alike want to view themselves as serious people making hard choices — choices like cutting popular programs and raising interest rates. They don’t like being told that we’re in a world where seemingly tough-minded policies will actually make things worse. But we are, and they will.

                                                                                            Posted by on Monday, August 24, 2015 at 09:11 AM in Economics, Financial System | Permalink  Comments (152)

                                                                                            'The Fed Looks Set to Make a Dangerous Mistake'

                                                                                            Larry Summers says "Raising rates this year will threaten all of the central bank’s major objectives":

                                                                                            The Fed looks set to make a dangerous mistake: Will the Federal Reserve’s September meeting see US interest rates go up for the first time since 2006? Officials have held out the prospect that ... rates will probably be increased... Conditions could change... But ... raising rates ... would be a serious error that would threaten all three of the Fed’s major objectives— price stability, full employment and financial stability.
                                                                                            Like most major central banks, the Fed has ... a 2 per cent inflation target. The biggest risk is that inflation will be lower than this — a risk that would be exacerbated by tightening policy... Tightening policy will adversely affect employment levels... Higher interest rates will also increase the value of the dollar, making US producers less competitive... This is especially troubling at a time of rising inequality. Studies ... make it clear that the best social program for disadvantaged workers is an economy where employers are struggling to fill vacancies.
                                                                                            There may have been a financial stability case for raising rates six or nine months ago, as low interest rates were encouraging investors to take more risks... That debate is now moot. With credit becoming more expensive, the outlook for the Chinese economy clouded at best, emerging markets submerging, the US stock market in a correction, widespread concerns about liquidity, and expected volatility having increased at a near-record rate, markets are themselves dampening any euphoria or overconfidence. The Fed does not have to do the job. ...
                                                                                            It is no longer easy to think of economic conditions that can plausibly be seen as temporary headwinds. ... This is the “secular stagnation” diagnosis...
                                                                                            New conditions require new policies. There is much that should be done, such as steps to promote public and private investment so as to raise the level of real interest rates consistent with full employment. Unless these new policies are implemented, inflation sharply accelerates, or euphoria in markets breaks out, there is no case for the Fed to adjust policy interest rates.

                                                                                              Posted by on Monday, August 24, 2015 at 12:24 AM in Economics, Monetary Policy | Permalink  Comments (88)

                                                                                              Links for 08-24-15

                                                                                                Posted by on Monday, August 24, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (116)

                                                                                                Sunday, August 23, 2015

                                                                                                ''Young Economists Feel They Have to be Very Cautious''

                                                                                                From an interview of Paul Romer in the WSJ:

                                                                                                ...Q: What kind of feedback have you received from colleagues in the profession?

                                                                                                A: I tried these ideas on a few people, and the reaction I basically got was “don’t make waves.” As people have had time to react, I’ve been hearing a bit more from people who appreciate me bringing these issues to the forefront. The most interesting feedback is from young economists who say that they feel that they have to be very cautious, and they don’t want to get somebody cross at them. There’s a concern by young economists that if they deviate from what’s acceptable, they’ll get in trouble. That also seemed to me to be a sign of something that is really wrong. Young people are the ones who often come in and say, “You all have been thinking about this the wrong way, here’s a better way to think about it.”

                                                                                                Q: Are there any areas where research or refinements in methodology have brought us closer to understanding the economy?

                                                                                                A: There was an interesting [2013] Nobel prize in [economics], where they gave the prize to people who generally came to very different conclusions about how financial markets work. Gene Fama ... got it for the efficient markets hypothesis. Robert Shiller ... for this view that these markets are not efficient...

                                                                                                It was striking because usually when you give a prize, it’s because in the sciences, you’ve converged to a consensus. ...

                                                                                                  Posted by on Sunday, August 23, 2015 at 12:27 AM in Economics, Macroeconomics, Methodology | Permalink  Comments (37)

                                                                                                  Thomas Piketty: New Thoughts on Capital in the Twenty-First Century


                                                                                                    Posted by on Sunday, August 23, 2015 at 12:15 AM in Economics, Income Distribution, Video | Permalink  Comments (6)

                                                                                                    Links for 08-23-15

                                                                                                      Posted by on Sunday, August 23, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (102)