Tuesday, September 23, 2014

'Credibility'

Chris Dillow:

"Credibility": At the end of an interview with Ed Balls this morning, Sarah Monague (02h 22m in) gave us a wonderful example of the ideological presumptions of supposedly neutral BBC reporting. She asked Nick Robinson: "It's about economic credibility here, isn't it?"
What's going on here is a double ideological trick.
First, "credibility" is defined in terms of whether Labour's plans are sufficiently fiscally tight*. This imparts an austerity bias to political discourse. There's no necessary reason for this. We might instead define credibility in terms of whether the party is offering enough to working people, and decry the derisory rise in the minimum wage as lacking credibility from the point of view of the objective of improving the lot of the low-paid.
Which brings me to a second trick. Credible with whom? We might ask: are Balls' policies credible with bond markets - the guys who lend governments money - or will they instead cause a significant rise in borrowing costs? Or we could ask: are they credible with working people? ... The judges of what's credible seem to be her and Nick themselves - who, not uncoincidentally, are wealthy, public school-educated people.
This poses the question: what is the origin of this double bias? ...

    Posted by on Tuesday, September 23, 2014 at 08:55 AM in Economics, Policy | Permalink  Comments (2)


    Fed Watch: Fisher on Wages

    Tim Duy:

    Fisher on Wages, by Tim Duy: Dallas Federal Reserve President Richard Fisher said Friday the US economy was threatend by higher wages. Via Reuters:
    Fisher said on Friday he worries that further declines in unemployment nationally could lead to broader wage inflation. To head that off, and also to address what he called rising excesses in financial markets, Fisher said he prefers to raise rates by springtime, sooner than many investors currently anticipate.
    After a snarky tweet, I wondered if he was not misquoted or misinterpreted. But he definitely warns that wage growth is set to accelerate in his Fox News interview (begin at the 3:50 mark). The crux of his argument is that wage growth accelerates when unemployment hits 6.1% and he uses strong wage growth in Texas as an example. He seems genuinely concerned that wage growth is negative outcome - that wage growth in Texas is a precursor to a terrible outcome for the US economy as a whole.
    His entire tone is odd, and I feel compelled to clean up his argument, at least as much as is possible.
    Fisher says that he presented evidence at the last FOMC meeting that 6.1% was the tipping point for wage acceleration. I can't disagree - I said as much this past March. The updated chart:

    FISHER092214

    Another version:

    FISHERa092214

    It is reasonable to expect that wage growth will accelerate as unemployment moves below 6%. I believe this is something of a test of the hypothesis that alternative measures of under-utilization more accurately convey information about the degree of slack. If that hypothesis is correct, then wage growth should not accelerate.
    That said, why should Fisher fear wage growth? I don't see how one can expect real wages to rise in the absence of nominal wage growth in excess of inflation. And once you accept the possibility of real wage growth, you recognize the link between wage growth and inflation could be very weak. And so it is:

    FISHERb092214

    Note the period of disinflation that pulls inflation down to it's range since the mid-90s across a wide-variety of wage growth rates. The past 20 years give no reason to believe that 4% wage inflation cannot happily coexist with 2% price inflation.
    So if wage inflation does not necessarily translate into price inflation, why worry at all? Why is Fisher even worried about wages? The key is really just this quote:
    This is like duck hunting, you shot ahead of the mallard rather than try to get it from behind, otherwise you can't hit it.
    It is all about the timing. I think his argument might be more effective is he said this:
    • The reason low unemployment does not cause inflation - or, essentially, why the Phillips curve is now flat - is that policymakers remove financial accommodation ahead of actual inflation. This is implicit in the Summary of Economic Projections. The reason inflation stabilizes near target is because unemployment settles near its natural rate, guided there by higher interest rates.
    • To judge the appropriate timing and magnitude of financial market accommodation, the Federal Reserve traditionally used the unemployment rate as a key indicator of slack in the economy. Accommodation would be reduced as the unemployment rate moved close to its natural rate, and conditions tightened has unemployment moved below the natural rate.
    • The Texas experience suggests that these traditional measures remain relevant - this should be his key point. Low unemployment rates stoke wage inflation as firms compete for workers, just as it has in the past.
    • Rather than act disgusted by higher wage growth, he should say that the Fed needs to ensure that such growth translates into real wage growth, and the Fed accomplishes this by adjusting accommodation to maintain its price inflation target. The Fed wants to hold unemployment in a zone consistent with both real wage growth and low and stable inflation. This requires nominal wage growth in excess of 2%.
    • It follows then that given the unemployment rate is already near 6%, it is not reasonable for the Fed to suggest that the first rate hike is a "considerable period" off in the future. The Fed traditionally moves ahead of inflation, and higher wage growth, which will soon be at hand, will be evidence that the first rate hike needs to be pulled forward.
    Stated like this, I suspect a large portion of the FOMC would be sympathetic. For example, recall San Francisco Federal Reserve President John Williams from this past March:
    “At that point if we don’t start to adjust monetary policy there’d be a risk of overshooting,” he said. “You don’t wait until you’re at full employment before you start to raise interest rates from zero.”
    That said, most members lack Fisher's certainty that wages gains are set to accelerate and indicate that labor market slack has dwindled to the point that it is appropriate to remove financial accommodation. There remains the concern that the unemployment rate is not the best measure of labor market slack. They would prefer to wait until they have firm evidence of the absence of labor market slack and risk a small overshoot of inflation.
    Moreover, as we now know, showing their anti-inflationary resolve did not do the Fed any favors in 2006 and 2007. As a whole, the Fed is acutely aware of this result. It has not gone unnoticed that the while the economy has suffered from repeated recessions since the great Moderation began, it has not suffered from a bout of inflation. It is reasonable to thus conclude that on average, the Fed has been too tight, not too loose. Hence again why the FOMC is willing to be patient in the normalization process.
    Bottom Line: Fisher suggests that wage inflation by itself is a concern and needs to be brought to a halt. This is of course incorrect. Fisher sees an inflation threat in any and all data. Indeed, there could really be no other reason to be concerned about wage inflation. I suspect that Fisher has pivoted to concerns about wage inflation because his much feared price inflation has never emerged. That said, there is an element of truth here as well. Unemployment is nearing a range that is typically associated with faster wage growth. The Fed will respond to reduced slack in labor markets with less accommodation, and they will see accelerating wage growth as a signal that slack has largely been eliminated. But they are in no rush to do so any faster than necessary. Hence the slow taper and the subsequent delay in hiking rates. The balance of risks may be in the direction of tighter than expected policy, but the Fed needs to see more convincing data before they actually move in that direction.

      Posted by on Tuesday, September 23, 2014 at 12:24 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (34)


      Links for 9-23-14

        Posted by on Tuesday, September 23, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (32)


        Monday, September 22, 2014

        'Forecasting with the FRBNY DSGE Model'

        The NY Fed hopes that someday the FRBNY DSGE model will be useful for forecasting. Presently, the model has "huge margins for improvement. The list of flaws is long..." (first in a five-part series):

        Forecasting with the FRBNY DSGE Model, by Marco Del Negro, Bianca De Paoli, Stefano Eusepi, Marc Giannoni, Argia Sbordone, and Andrea Tambalotti, Liberty Economics, FRBNY: The Federal Reserve Bank of New York (FRBNY) has built a DSGE model as part of its efforts to forecast the U.S. economy. On Liberty Street Economics, we are publishing a weeklong series to provide some background on the model and its use for policy analysis and forecasting, as well as its forecasting performance. In this post, we briefly discuss what DSGE models are, explain their usefulness as a forecasting tool, and preview the forthcoming pieces in this series.
        The term DSGE, which stands for dynamic stochastic general equilibrium, encompasses a very broad class of macro models, from the standard real business cycle (RBC) model of Nobel prizewinners Kydland and Prescott to New Keynesian monetary models like the one of Christiano, Eichenbaum, and Evans. What distinguishes these models is that rules describing how economic agents behave are obtained by solving intertemporal optimization problems, given assumptions about the underlying environment, including the prevailing fiscal and monetary policy regime. One of the benefits of DSGE models is that they can deliver a lens for understanding the economy’s behavior. The third post in this series will show an example of this role with a discussion of the forces behind the Great Recession and the following slow recovery.
        DSGE models are also quite abstract representations of reality, however, which in the past severely limited their empirical appeal and forecasting performance. This started to change with work by Schorfheide and Smets and Wouters. First, they popularized estimation (especially Bayesian estimation) of these models, with parameters chosen in a way that increased the ability of these models to describe the time series behavior of economic variables. Second, these models were enriched with both endogenous and exogenous propagation mechanisms that allowed them to better capture patterns in the data. For this reason, estimated DSGE models are increasingly used within the Federal Reserve System (the Board of Governors and the Reserve Banks of Chicago and Philadelphia have versions) and by central banks around the world (including the New Area-Wide Model developed at the European Central Bank, and models at the Norges Bank and the Sveriges Riksbank). The FRBNY DSGE model is a medium-scale model in the tradition of Christiano, Eichenbaum, and Evans and Smets and Wouters that also includes credit frictions as in the financial accelerator model developed by Bernanke, Gertler, and Gilchrist and further investigated by Christiano, Motto, and Rostagno. The second post in this series elaborates on what DSGE models are and discusses the features of the FRBNY model.
        Perhaps some progress was made in the past twenty years toward empirical fit, but is it enough to give forecasts from DSGE models any credence? Aren’t there many critics out there (here is one) telling us these models are a failure? As it happens, not many people seem to have actually checked the extent to which these model forecasts are off the mark. Del Negro and Schorfheide do undertake such an exercise in a chapter of the recent Handbook of Economic Forecasting. Their analysis compares the real-time forecast accuracy of DSGE models that were available prior to the Great Recession (such as the Smets and Wouters model) to that of the Blue Chip consensus forecasts, using a period that includes the Great Recession. They find that, for nowcasting (forecasting current quarter variables) and short-run forecasting, DSGE models are at a disadvantage compared with professional forecasts. Over the medium- and long-run terms, however, DSGE model forecasts for both output and inflation become competitive with—if not superior to—professional forecasts. They also find that including timely information from financial markets such as credit spreads can dramatically improve the models’ forecasts, especially in the Great Recession period.
        These results are based on what forecasters call “pseudo-out-of-sample” forecasts. These are not truly “real time” forecasts, because they were not produced at the time. (To our knowledge, there is little record of truly real time DSGE forecasts for the United States, partly because these models were only developed in the mid-2000s.) For this reason, in the fourth post of this series, we report forecasts produced in real time using the FRBNY DSGE model since 2010. These forecasts have been included in internal New York Fed documents, but were not previously made public. Although the sample is admittedly short, these forecasts show that while consensus forecasts were predicting a relatively rapid recovery from the Great Recession, the DSGE model was correctly forecasting a more sluggish recovery.
        The last post in the series shows the current FRBNY DSGE forecasts for output growth and inflation and discusses the main economic forces driving the predictions. Bear in mind that these forecasts are not the official New York Fed staff forecasts; the DSGE model is only one of many tools employed for prediction and policy analysis at the Bank.
        DSGE models in general and the FRBNY model in particular have huge margins for improvement. The list of flaws is long, ranging from the lack of heterogeneity (the models assume a representative household) to the crude representation of financial markets (the models have no term premia). Nevertheless, we are sticking our necks out and showing our forecasts, not because we think we have a “good” model of the economy, but because we want to have a public record of the model’s successes and failures. In doing so, we can learn from both our past performance and readers’ criticism. The model is a work in progress. Hopefully, it can be improved over time, guided by current economic and policy questions and benefiting from developments in economic theory and econometric tools.

          Posted by on Monday, September 22, 2014 at 09:58 AM in Econometrics, Economics, Monetary Policy | Permalink  Comments (8)


          Paul Krugman: Those Lazy Jobless

          Why are conservatives are blaming the victims of the recession despite "evidence and logic" to the contrary?:

          Those Lazy Jobless, by Paul Krugman, Commentary, NY Times: Last week John Boehner, the speaker of the House, explained to an audience at the American Enterprise Institute what’s holding back employment in America: laziness. People, he said, have “this idea” that “I really don’t have to work. I don’t really want to do this. I think I’d rather just sit around.” Holy 47 percent, Batman!
          It’s hardly the first time a prominent conservative has said something along these lines. Ever since a financial crisis plunged us into recession it has been a nonstop refrain on the right that the unemployed aren’t trying hard enough, that they are taking it easy thanks to generous unemployment benefits, which are constantly characterized as “paying people not to work.” And the urge to blame the victims of a depressed economy has proved impervious to logic and evidence.
          But it’s still amazing — and revealing — to hear this line being repeated now. For the blame-the-victim crowd has gotten everything it wanted: Benefits, especially for the long-term unemployed, have been slashed or eliminated. So now we have rants against the bums on welfare when they aren’t bums — they never were — and there’s no welfare. Why? ...
          Is it race? That’s always a hypothesis worth considering in American politics. It’s true that most of the unemployed are white, and they make up an even larger share of those receiving unemployment benefits. But conservatives may not know this, treating the unemployed as part of a vaguely defined, dark-skinned crowd of “takers.”
          My guess, however, is that it’s mainly about the closed information loop of the modern right. In a nation where the Republican base gets what it thinks are facts from Fox News and Rush Limbaugh, where the party’s elite gets what it imagines to be policy analysis from the American Enterprise Institute or the Heritage Foundation, the right lives in its own intellectual universe, aware of neither the reality of unemployment nor what life is like for the jobless. You might think that personal experience — almost everyone has acquaintances or relatives who can’t find work — would still break through, but apparently not.
          Whatever the explanation, Mr. Boehner was clearly saying what he and everyone around him really thinks, what they say to each other when they don’t expect others to hear. Some conservatives have been trying to reinvent their image, professing sympathy for the less fortunate. But what their party really believes is that if you’re poor or unemployed, it’s your own fault.

            Posted by on Monday, September 22, 2014 at 12:24 AM in Economics, Politics, Unemployment | Permalink  Comments (93)


            Fed Watch: Hawkish Undertone

            Tim Duy:

            Hawkish Undertone, by Tim Duy: The Fed co«ntinuous to moves toward policy normalization.
            Slowly. Very slowly.
            They believe they are making every effort to avoid a premature withdrawal of accommodation. Every step is sequenced. And that sequencing did not allow for the removal of the considerable period language just yet.
            That said, Federal Reserve Chair Janet Yellen noted in the associated press conference that, considerable period or not, the statement does not represent a promise to maintain a particular policy path. Moreover, the ambiguous definition of "considerable time" gives the Fed sufficient flexibility without breaking a promise in any event. Assuming asset prices end in October as the Fed expects, even a rate hike as early as March could still be considered a "considerable period." So too arguably would be a hike as early as January. It seems then that the considerable period language could survive longer than I anticipated.
            Of course, if the statement is not a promise and "considerable period" has no fixed meaning, then the path of policy is strictly data dependent. And that is the idea now emphasized repeatedly by Yellen and Co. If the economy performs better than expected, rates hikes will come sooner and faster currently anticipated. If worse, the withdrawal of monetary accommodation will be delayed.
            This is where the dot-plot comes into play. If we combine the midpoint of the economic estimates with the median of the rate expectations, you see the central tendency of the FOMC is to still expect a considerable period of time until rate normalization:

            TAYLOR091714

            Normalization is coming. But slowly. Very slowly. They have yet to see sufficient evidence to believe that policy will need to be considerably more aggressive than expected.
            But where must the FOMC believe the balance of risks lies? Given the progress toward goals already achieved, and the wide spread between traditional metrics of appropriate policy and expected actual policy, it is reasonable to believe the FOMC is cautious that the risks are balanced toward tighter than expected policy. Indeed, the slow but steady increases in federal funds rate projections suggests that the data are indeed moving in such a direction. Hence, the Fed wants to disabuse market participants of the notion that the statement represents a promise. It is an only a policy expectation dependent on a particular set of assumptions. When those assumptions change, so too will the expectation.
            Simply put, the Fed believes the statement accurately conveys their expectations given the current state of knowledge. It must then be somewhat disconcerting to the FOMC that while the possibility of a tighter than anticipating policy path is very real, financial market participants appear to believe the risks are weighted in the opposite direction. That, at least, is the message delivered by the San Francisco Federal Reserve in a well-publicized research note. The note also suggested much less uncertainty about the rate outlook than that of the FOMC. See also the Financial Times:
            The FOMC’s median rate for the fed funds rate by the end of 2015 was raised to 1.375 per cent from 1.125 per cent, with the key overnight borrowing rate seen reaching 2.875 per cent, rather than 2.50 per cent by the end of 2016.
            In contrast, the bond market expects a funds rate of 0.76 per cent by the end of 2015 and 1.82 per cent a year later.
            When asked about these divergent expectations, Yellen suggested that other research found more aligned expectations. And even if the expectations did differ, they can be explained by different forecasts:
            They are taking into account the possibility that there can be different economic outcomes, including--even if they're not very likely--ones in which outcomes will be characterized by low inflation or low growth and the appropriate path of rates will be low. So, differences in probabilities of different outcomes can explain part of that.
            I would suggest another explanation. Financial market participants are attempting to find Yellen's dots as an indicator of the median policy expectation (note that Jon Hilsenrath of the Wall Street Journal asked her to reveal her dots during the press conference). The focus has fallen on the lower sets of dots in recognition of her reputation as a policy doves and, I think, the view that she repeatedly made an explicit policy promise with her optimal control framework. Specifically:

            Yellen20121113a

            No policy liftoff until 2016 - a rate path that is more consistent with the lower or lowest set of dots in the Fed's SEP than the median policy expectation. The assumption is that Yellen's dots are bigger in practice than the other dots, hence an emphasis on expecting a more prolonged period of low rates than the median FOMC participant.
            It would be helpful if Yellen revisited her optimal control theory now that unemployment is hovering near 6%. But it is reasonable to believe that she is less certain of her previously suggested path of monetary policy now that the Fed is closer to meeting its stated goals. Hence the ambiguity in her message beginning with Jackson Hole. She is telling us that the time of commitment to low interest rates is drawing to an end. The data now take precedence. As long as the data cut in the direction of what are believed to be Yellen's dots, then those dots will yield a fairly accurate forecast. But if the data cut in a more positive direction, then more hawkish dots will have been the better forecast.
            And, importantly, the Federal Reserve wants market participants to figure this out on there own. Policymakers believe they have sent sufficient signals regarding their likely reaction function. Now they want to see participants adjust pricing according to that reaction function, not on the basis of some promise that was never really a promise in the first place. Or, in Yellen's own words:
            What can I say is that it is important for market participants to understand what our likely response or reaction function is to the data and our job is to try to communicate as clearly as we can the way in which our policy stance will depend on the data, and I promise to try to do that.
            Bottom Line: The outcome of last week's meeting had little impact on my policy outlook. I continue to expect a rate hike in the middle of next year, with my distribution of risks weighted toward second over third quarter outcomes. And note that the second quarter would include a June meeting - still nine months away. I anticipate a generally positive pace of activity that will push the unemployment rate well below 6% by that time. As the unemployment rate moves below 6%, the FOMC will simply worry that accommodation is straying too far past traditional metrics to be consistent with stable inflation. They would not want this to come as a surprise, hence the emphasis on the ambiguity of the forecast. An ultra-low rate future is not guaranteed. The Fed is emphasizing the uncertainty of the forecast to ensure that market participants recognize another future is possible - and even perhaps more likely - than the lowest set of dots, as suggested by the upward drift in median rate projections. If that upward drift is prescient, don't say the Fed didn't warn you. Follow the data, just as the Fed is telling you.

              Posted by on Monday, September 22, 2014 at 12:15 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (29)


              Links for 9-22-14

                Posted by on Monday, September 22, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (26)


                Sunday, September 21, 2014

                'Climate Realities'

                Robert Stavins:

                Climate Realities: ...It is true that, in theory, we can avoid the worst consequences of climate change with an intensive global effort over the next several decades. But given real-world economic and, in particular, political realities, that seems unlikely..., let’s look at the sobering reality.
                The world is now on track to more than double current greenhouse gas concentrations in the atmosphere by the end of the century. This would push up average global temperatures by three to eight degrees Celsius and could mean the disappearance of glaciers, droughts in the mid-to-low latitudes, decreased crop productivity, increased sea levels and flooding, vanishing islands and coastal wetlands, greater storm frequency and intensity, the risk of species extinction and a significant spread of infectious disease.
                The United Nations has set a goal of keeping global temperatures from rising by no more than two degrees Celsius above preindustrial levels. ... Meeting this goal would require a worldwide reduction in greenhouse gas emissions of 40 to 70 percent by midcentury, according to the Intergovernmental Panel on Climate Change. That’s an immense challenge. ...
                Of course, the political climate in the United States presents its own challenges. It will require immense effort — and profound good fortune — to find political openings that can resolve the debilitating partisan divide on climate change. But if destructive politics have been at the heart of the problem, the best hope may be that creative politics and leadership can help provide a solution.

                He also talks about the cost of climate change (saying it will be large), as do Peter Dorman  (in response to Paul Krugman) and John Quiggin. See also Scientists Report Global Rise in Greenhouse Gas Emissions.

                  Posted by on Sunday, September 21, 2014 at 10:17 AM in Economics, Environment, Market Failure, Politics | Permalink  Comments (29)


                  'Capitalism & the Low-Paid'

                  Chris Dillow:

                  Capitalism & the low-paid: Is capitalism compatible with decent living standards for the worst off*? This old Marxian question is outside the Overton window, but it's the one raised by Ed Miliband's promise to raise the minimum wage to £8 by 2020. ...
                  * Note for rightists: As Adam Smith said, the notion of what's decent rises as incomes rise. And the fact that capitalism has massively improved workers' living standards in the past does not guarantee it will do so in future. As Marx said, a mode of production which increases productive powers can eventually restrain them. And as Bertrand Russell pointed out, inductive reasoning can go badly wrong. ...

                    Posted by on Sunday, September 21, 2014 at 10:16 AM in Economics, Income Distribution | Permalink  Comments (27)


                    Links for 9-21-14

                      Posted by on Sunday, September 21, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (96)


                      Saturday, September 20, 2014

                      Finance Sector Wages: Explaining Their High Level and Growth

                      Joanne Lindley and Steven McIntosh:

                      Finance sector wages: explaining their high level and growth, by Joanne Lindley and Steven, Vox EU: Individuals who work in the finance sector enjoy a significant wage advantage. This column considers three explanations: rent sharing, skill intensity, and task-biased technological change. The UK evidence suggests that rent sharing is the key. The rising premium could then be due to changes in regulation and the increasing complexity of financial products creating more asymmetric information. ...

                        Posted by on Saturday, September 20, 2014 at 08:18 PM in Economics, Financial System, Income Distribution | Permalink  Comments (35)


                        Links for 9-20-14

                          Posted by on Saturday, September 20, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (118)


                          Friday, September 19, 2014

                          'The Political Economy of a Universal Basic Income'

                          Since I posted the original, it's only fair to post the response:

                          The political economy of a universal basic income, by Steve Waldman, Interfluidity: So you should read these two posts by Max Sawicky on proposals for a universal basic income, because you should read everything Max Sawicky writes. (Oh wait. Two more!) Sawicky is a guy I often agree with, but he is my mirror Spock on this issue. I think he is 180° wrong on almost every point. ...

                            Posted by on Friday, September 19, 2014 at 07:39 AM in Economics, Politics, Social Insurance | Permalink  Comments (73)


                            'Home Free?'

                            James Surowiecki:

                            Home Free?, by James Surowiecki: In 2005, Utah set out to fix a problem that’s often thought of as unfixable: chronic homelessness. The state had almost two thousand chronically homeless people. Most of them had mental-health or substance-abuse issues, or both. At the time, the standard approach was to try to make homeless people “housing ready”: first, you got people into shelters or halfway houses and put them into treatment; only when they made progress could they get a chance at permanent housing. Utah, though, embraced a different strategy, called Housing First: it started by just giving the homeless homes.
                            Handing mentally ill substance abusers the keys to a new place may sound like an example of wasteful government spending. But it turned out to be the opposite: over time, Housing First has saved the government money. ...

                              Posted by on Friday, September 19, 2014 at 07:39 AM in Economics, Housing, Social Insurance | Permalink  Comments (14)


                              Paul Krugman: Errors and Emissions

                              Don't pay any attention to "the prophets of climate despair":

                              Errors and Emissions, by Paul Krugman, Commentary, NY Times: This just in: Saving the planet would be cheap; it might even be free. But will anyone believe the good news?
                              I’ve just been reading two new reports on the economics of fighting climate change: a big study by a blue-ribbon international group, the New Climate Economy Project, and a working paper from the International Monetary Fund. Both claim that strong measures to limit carbon emissions would have hardly any negative effect on economic growth, and might actually lead to faster growth. This may sound too good to be true, but it isn’t. These are serious, careful analyses. ...
                              Enter the prophets of climate despair, who wave away all this analysis and declare that the only way to limit carbon emissions is to bring an end to economic growth.
                              You mostly hear this from people on the right, who normally say that free-market economies are endlessly flexible and creative. But when you propose putting a price on carbon, suddenly they insist that industry will be completely incapable of adapting to changed incentives. Why, it’s almost as if they’re looking for excuses to avoid confronting climate change, and, in particular, to avoid anything that hurts fossil-fuel interests, no matter how beneficial to everyone else.
                              But climate despair produces some odd bedfellows: Koch-fueled insistence that emission limits would kill economic growth is echoed by some who see this as an argument not against climate action, but against growth. ... To be fair, anti-growth environmentalism is a marginal position even on the left, but it’s widespread enough to call out nonetheless.
                              And you sometimes see hard scientists making arguments along the same lines, largely (I think) because they don’t understand what economic growth means. They think of it as a crude, physical thing, a matter simply of producing more stuff, and don’t take into account the many choices — about what to consume, about which technologies to use — that go into producing a dollar’s worth of G.D.P.
                              So here’s what you need to know: Climate despair is all wrong. The idea that economic growth and climate action are incompatible may sound hardheaded and realistic, but it’s actually a fuzzy-minded misconception. If we ever get past the special interests and ideology that have blocked action to save the planet, we’ll find that it’s cheaper and easier than almost anyone imagines.

                                Posted by on Friday, September 19, 2014 at 12:24 AM in Economics, Environment, Politics | Permalink  Comments (47)


                                Links for 9-19-14

                                  Posted by on Friday, September 19, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (75)


                                  Thursday, September 18, 2014

                                  National Attitudes on International Trade

                                  [Travel day -- heading south for the winter -- so just a few quick ones before hitting the road.]

                                  Tim Taylor:

                                  National Attitudes on International Trade: Americans, who are sometimes caricatured as being especially supportive of free trade, are actually among those most opposed. People from the low-income countries of the world, far from feeling oppressed by international trade, are often among its stronger supporters. The Pew Research Center has a new survey out--"Faith and Skepticism about Trade, Foreign Investment"--on the responses of people in 44 nations to questions about the effects and consequences of international trade. Here is a sampling of the evidence...

                                    Posted by on Thursday, September 18, 2014 at 09:40 AM in Economics, International Trade | Permalink  Comments (20)


                                    'What's So BadAbout Monopoly Power?'

                                    At MoneyWatch:

                                    What's so bad about monopoly power?: Google (GOOG) has been negotiating with European regulatory authorities since 2010 in an attempt to settle an antitrust case concerning its search engine, and its third attempt to settle the case has been rejected. Google may also face new antitrust problems over its Android mobile operating system, and it's not alone in facing tough antitrust scrutiny in Europe. Microsoft (MSFT) has also been the subject of a long-running battle in Europe over market dominance issues. But what's motivating this scrutiny from European regulators? What's so bad about a company amassing monopoly power? ....

                                    [Also, from yesterday, What do economists mean by "slack"?]

                                      Posted by on Thursday, September 18, 2014 at 09:39 AM in Economics, Market Failure, Regulation | Permalink  Comments (17)


                                      Tax Cuts Can Do More Harm Than Good

                                      More on the new work from William Gale and Andrew Samwick (I've posted on this before, but given the strength of beliefs about tax cuts, it seems worthwhile to highlight it again):

                                      Tax Cuts Can Do More Harm Than Good: Tax cuts are the one guaranteed path to prosperity. Or so politicians have told Americans for so long that the claim has become a secular dogma.
                                      But tax cuts can do more harm than good, a new report shows. It draws on decades of empirical evidence analyzed with standard economic principles used in business, academia and government.
                                      What ultimately matters is the way a tax cut is structured and how it affects behavior. A well-designed tax cut can help increase future prosperity, but a poorly structured one can result in a meaner future with fewer jobs, less compensation and higher costs to society.
                                      William G. Gale of the Brookings Institution, a nonprofit Washington policy research house, and Andrew Samwick, a Dartmouth College professor, last week issued the report, “Effects of Income Tax Changes on Economic Growth.”
                                      Gale said he expects emailed brickbats from those who have incorporated the tax cut dogma into their views without really understanding the issue. ...

                                        Posted by on Thursday, September 18, 2014 at 09:39 AM in Economics, Taxes | Permalink  Comments (8)


                                        Interview with Michael Woodford

                                        From the Minneapolis Fed:

                                        Interview with Michael Woodford: Columbia University economist on Fed mandates, effective forward guidance and cognitive limits in human decision making.

                                          Posted by on Thursday, September 18, 2014 at 09:39 AM in Economics, Monetary Policy | Permalink  Comments (2)


                                          Links for 9-18-14

                                            Posted by on Thursday, September 18, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (119)


                                            Wednesday, September 17, 2014

                                            'Empathy for the Poor'

                                            Tim Taylor:

                                            Empathy for the Poor: A Meditation: The U.S. Census Bureau has just published its annual report with estimates of the U.S. poverty rate, which was 14.5% in 2013, down a touch from 15.0% in 2012. It's easy to have sympathy for those with low incomes. But for many of us, myself included, true empathy with the one-seventh or so of Americans who are below the  poverty line is more difficult. It can be difficult to avoid falling into easy and ill-informed moralizing that if those with low incomes just managed their food budget a little better, or saved a little bit of money, worked a few more hours, or avoided taking out that high-interest loan, then their economic lives could be more stable and their longer-term prospects improved.

                                            When I find myself sucked into a discussion of how the poor live their lives, I think of the comments of George Orwell in his underappreciated 1937 book, The Road to Wigan Pier, which details the lives of the poor and working poor in northern industrial areas of Britain like Lancashire and Yorkshire during the Depression. Orwell, of course, was writing from a leftist and socialist perspective, deeply sympathetic to the poor. Bur Orwell is also painfully honest about his reactions and views. At one point Orwell laments that the poor make such rotten choices about food--but then he also points out how unsatisfactory it feels to patronizingly tell those with low incomes how to spend what little they have. Here's Orwell...

                                              Posted by on Wednesday, September 17, 2014 at 11:32 AM in Economics, Income Distribution | Permalink  Comments (173)


                                              Links for 9-17-14

                                                Posted by on Wednesday, September 17, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (138)


                                                Tuesday, September 16, 2014

                                                Rethinking New Economic Thinking

                                                I have a new column:

                                                Rethinking New Economic Thinking: Efforts such as Rethinking Economics and The Institute for New Economic Thinking are noteworthy attempts to, as INET says, “broaden and accelerate the development of new economic thinking that can lead to solutions for the great challenges of the 21st century. The havoc wrought by our recent global financial crisis has vividly demonstrated the deficiencies in our outdated current economic theories, and shown the need for new economic thinking – right now. 
                                                It is certainly true that mainstream, modern macroeconomic models failed us prior to and during the Great Recession. The models failed to give any warning at all about the crisis that was about to hit – if anything those using modern macro models resisted the idea that a bubble was inflating in housing markets – and the models failed to give us the guidance we needed to implement effective monetary and fiscal policy responses to our economic problems. 
                                                But amid the calls for change in macroeconomics there is far too much attention on the tools and techniques that macroeconomists use to answer questions, and far too little attention on what really matters... ...[continue reading]...

                                                  Posted by on Tuesday, September 16, 2014 at 08:19 AM in Economics, Fiscal Times, Macroeconomics | Permalink  Comments (28)


                                                  'Making the Case for Keynes'

                                                  Peter Temin and David Vines have a new book:

                                                  Making the case for Keynes, by Peter Dizikes, MIT News Office: In 1919, when the victors of World War I were concluding their settlement against Germany — in the form of the Treaty of Versailles — one of the leading British representatives at the negotiations angrily resigned his position, believing the debt imposed on the losers would be too harsh. The official, John Maynard Keynes, argued that because Britain had benefitted from export-driven growth, forcing the Germans to spend their money paying back debt rather than buying British products would be counterproductive for everyone, and slow global growth.
                                                  Keynes’ argument, outlined in his popular 1919 book, “The Economic Consequences of the Peace,” proved prescient. But Keynes is not primarily regarded as a theorist of international economics: His most influential work, “The General Theory of Employment, Interest, and Money,” published in 1936, uses the framework of a single country with a closed economy. From that model, Keynes arrived at his famous conclusion that government spending can reduce unemployment by boosting aggregate demand.
                                                  But in reality, says Peter Temin, an MIT economic historian, Keynes’ conclusions about demand and employment were long intertwined with his examination of international trade; Keynes was thinking globally, even when modeling locally.
                                                  “Keynes was interested in the world economy, not just in a single national economy,” Temin says. Now he is co-author of a new book on the subject, “Keynes: Useful Economics for the World Economy,” written with David Vines, a professor of economics at Oxford University, published this month by MIT Press.
                                                  In their book, Temin and Vines make the case that Keynesian deficit spending by governments is necessary to reignite the levels of growth that Europe and the world had come to expect prior to the economic downturn of 2008. But in a historical reversal, they believe that today’s Germany is being unduly harsh toward the debtor states of Europe, forcing other countries to pay off debts made worse by the 2008 crash — and, in turn, preventing them from spending productively, slowing growth and inhibiting a larger continental recovery.
                                                  “If you have secular [long-term] stagnation, what you need is expansionary fiscal policy,” says Temin, who is the Elisha Gray II Professor Emeritus of Economics at MIT.
                                                  Additional government spending is distinctly not the approach that Europe (and, to a lesser extent, the U.S.) has pursued over the last six years, as political leaders have imposed a wide range of spending cuts — the pursuit of “austerity” as a response to hard times. But Temin thinks it is time for the terms of the spending debate to shift.  
                                                  “The hope David and I have is that our simple little book might change people’s minds,” Temin says.
                                                  “Sticky” wages were the sticking point
                                                  In an effort to do so, the authors outline an intellectual trajectory for Keynes in which he was highly concerned with international, trade-based growth from the early stages of his career until his death in 1946, and in which the single-country policy framework of his “General Theory” was a necessary simplification that actually fits neatly with this global vision.
                                                  As Temin and Vines see it, Keynes, from early in his career, and certainly by 1919, had developed an explanation of growth in which technical progress leads to greater productive capacity. This leads businesses in advanced countries to search for international markets in which to sell products; encourages foreign lending of capital; and, eventually, produces greater growth by other countries as well.
                                                  “Clearly, Keynes knew that domestic prosperity was critically determined by external conditions,” Temin and Vines write.
                                                  Yet as they see it, Keynes had to overcome a crucial sticking point in his thought: As late as 1930, when Keynes served on a major British commission investigating the economy, he was still using an older, neoclassical idea in which all markets reached a sort of equilibrium. 
                                                  This notion implies that when jobs were relatively scarce, wages would decline to the point where more people would be employed. Yet this doesn’t quite seem to happen: As economists now recognize, and as Keynes came to realize, wages could be “sticky,” and remain at set levels, for various psychological or political reasons. In order to arrive at the conclusions of the “General Theory,” then, Keynes had to drop the assumption that wages would fluctuate greatly.
                                                  “The issue for Keynes was that he knew that if prices were flexible, then if all prices [including wages] could change, then you eventually get back to full employment,” Temin says. “So in order to avoid that, he assumed away all price changes.”
                                                  But if wages will not drop, how can we increase employment? For Keynes, the answer was that the whole economy had to grow: There needed to be an increase in aggregate demand, one of the famous conclusions of the “General Theory.” And if private employers cannot or will not spend more money on workers, Keynes thought, then the government should step in and spend.
                                                  “Keynes is very common-sense,” Temin says, in “that if you put people to work building roads and bridges, then those people spend money, and that promotes aggregate demand.”
                                                  Today, opponents of Keynes argue that such public spending will offset private-sector spending without changing overall demand. But Temin contends that private-sector spending “won’t be offset if those people were going to be unemployed, and would not be spending anything. Given jobs, he notes, “They would spend money, because now they would have money.”
                                                  Keynes’ interest in international trade and international economics never vanished, as Temin and Vines see it. Indeed, in the late stages of World War II, Keynes was busy working out proposals that could spur postwar growth within this same intellectual framework — and the International Monetary Fund is one outgrowth of this effort.
                                                  History repeating?
                                                  “Keynes: Useful Economics for the World Economy” has received advance praise from some prominent scholars. ... Nonetheless, Temin is guarded about the prospect of changing the contemporary austerity paradigm.
                                                  “I can’t predict what policy is going to do in the next couple of years,” Temin says. And in the meantime, he thinks, history may be repeating itself, as debtor countries are unable to make capital investments while paying off debt.
                                                  Germany has “decided that they are not willing to take any of the capital loss that happened during the crisis,” Temin adds. “The [other] European countries don’t have the resources to pay off these bonds. They’ve had to cut their spending to get the resources to pay off the bonds. If you read the press, you know this hasn’t been working very well.”

                                                    Posted by on Tuesday, September 16, 2014 at 08:10 AM in Economics, History of Thought, International Finance, Macroeconomics | Permalink  Comments (58)


                                                    Links for 9-16-14

                                                      Posted by on Tuesday, September 16, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (68)


                                                      Monday, September 15, 2014

                                                      'Polanyi's Paradox and the Shape of Employment Growth'

                                                      "A key observation of the paper is that journalists and expert commentators overstate the extent of machine substitution for human labor and ignore the strong complementarities":

                                                      Polanyi's Paradox and the Shape of Employment Growth, by David Autor, NBER Working Paper No. 20485, September 2014 [open link]: In 1966, the philosopher Michael Polanyi observed, “We can know more than we can tell... The skill of a driver cannot be replaced by a thorough schooling in the theory of the motorcar; the knowledge I have of my own body differs altogether from the knowledge of its physiology.” Polanyi’s observation largely predates the computer era, but the paradox he identified—that our tacit knowledge of how the world works often exceeds our explicit understanding—foretells much of the history of computerization over the past five decades. This paper offers a conceptual and empirical overview of this evolution. I begin by sketching the historical thinking about machine displacement of human labor, and then consider the contemporary incarnation of this displacement—labor market polarization, meaning the simultaneous growth of high-education, high-wage and low-education, low-wages jobs—a manifestation of Polanyi’s paradox. I discuss both the explanatory power of the polarization phenomenon and some key puzzles that confront it. I then reflect on how recent advances in artificial intelligence and robotics should shape our thinking about the likely trajectory of occupational change and employment growth. A key observation of the paper is that journalists and expert commentators overstate the extent of machine substitution for human labor and ignore the strong complementarities. The challenges to substituting machines for workers in tasks requiring adaptability, common sense, and creativity remain immense. Contemporary computer science seeks to overcome Polanyi’s paradox by building machines that learn from human examples, thus inferring the rules that we tacitly apply but do not explicitly understand.

                                                        Posted by on Monday, September 15, 2014 at 09:09 AM in Economics, Income Distribution, Unemployment | Permalink  Comments (18)


                                                        Paul Krugman: How to Get It Wrong

                                                        What "accounts for the terrible performance of Western economies since 200"?:

                                                        How to Get It Wrong, by Paul Krugman, Commentary, NY Times: Last week I participated in a conference organized by Rethinking Economics... And Mammon knows that economics needs rethinking...
                                                        It seems to me, however, that it’s important to realize that the enormous intellectual failure of recent years took place at several levels. Clearly, economics as a discipline went badly astray... But the failings of economics were greatly aggravated by the sins of economists, who far too often let partisanship or personal self-aggrandizement trump their professionalism. Last but not least, economic policy makers systematically chose to hear only what they wanted to hear. And it is this multilevel failure — not the inadequacy of economics alone — that accounts for the terrible performance of Western economies since 2008.
                                                        In what sense did economics go astray? Hardly anyone predicted the 2008 crisis... More damning was the widespread conviction among economists that such a crisis couldn’t happen. Underlying this complacency was the dominance of an idealized vision of capitalism, in which individuals are always rational and markets always function perfectly. ...
                                                        Still, many applied economists retained a more realistic vision of the world, and textbook macroeconomics, while it didn’t predict the crisis, did a pretty good job of predicting how things would play out in the aftermath. ...
                                                        But while economic models didn’t perform all that badly..., all too many influential economists did — refusing to acknowledge error, letting naked partisanship trump analysis, or both. ...
                                                        But would it have mattered if economists had behaved better? Or would people in power have done the same thing regardless?
                                                        If you imagine that policy makers have spent the past five or six years in thrall to economic orthodoxy, you’ve been misled. On the contrary, key decision makers have been highly receptive to innovative, unorthodox economic ideas — ideas that also happen to be wrong but which offered excuses to do what these decision makers wanted to do anyway. ...
                                                        I’m not saying either that economics is in good shape or that its flaws don’t matter. It isn’t, they do, and I’m all for rethinking and reforming a field.
                                                        The big problem with economic policy is not, however, that conventional economics doesn’t tell us what to do. In fact, the world would be in much better shape than it is if real-world policy had reflected the lessons of Econ 101. If we’ve made a hash of things — and we have — the fault lies not in our textbooks, but in ourselves.

                                                          Posted by on Monday, September 15, 2014 at 12:24 AM Permalink  Comments (117)


                                                          Links for 9-15-14

                                                            Posted by on Monday, September 15, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (42)


                                                            Sunday, September 14, 2014

                                                            'Stupidest Article Ever Published?'

                                                            Via email, I was asked if this is the "stupidest article ever published?":

                                                            The Inflation-Debt Scam

                                                            If not, it's certainly in the running.

                                                              Posted by on Sunday, September 14, 2014 at 09:23 AM in Budget Deficit, Econometrics, Inflation | Permalink  Comments (109)


                                                              Links for 9-14-14

                                                                Posted by on Sunday, September 14, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (102)


                                                                Saturday, September 13, 2014

                                                                'Taxes and Growth'

                                                                Dietz Vollrath:

                                                                Taxes and Growth, The Growth Economics blog: William Gale and Andy Samwick have a new Brookings paper out on the relationship of tax rates and economic growth in the U.S. ... Short answer, there is no relationship. They do not identify any change in the trend growth rate of real GDP per capita with changes in marginal income tax rates, capital gains tax rates, or any changes in federal tax rules. ...

                                                                One of the first pieces of evidence they show is from a paper by Stokey and Rebelo (1995). ... You can see that the introduction of very high tax rates during WWII, which effectively became permanent features of the economy after that, did not change the trend growth rate of GDP per capita in the slightest. ...

                                                                The next piece of evidence is from a paper by Hungerford (2012), who basically looks only at the post-war period, and looks at whether the fluctuations in top marginal tax rates (on either income or capital gains) are related to growth rates. You can see ... that they are not. If anything, higher capital gains rates are associated with faster growth.

                                                                The upshot is that there is no evidence that you can change the growth rate of the economy – up or down – by changing tax rates – up or down. Their conclusion is more coherent than anything I could gin up, so here goes:

                                                                The argument that income tax cuts raise growth is repeated so often that it is sometimes taken as gospel. However, theory, evidence, and simulation studies tell a different and more complicated story. Tax cuts offer the potential to raise economic growth by improving incentives to work, save, and invest. But they also create income effects that reduce the need to engage in productive economic activity, and they may subsidize old capital, which provides windfall gains to asset holders that undermine incentives for new activity.

                                                                The effects of tax cuts on growth are completely uncertain.

                                                                  Posted by on Saturday, September 13, 2014 at 09:22 AM in Economics, Taxes | Permalink  Comments (37)


                                                                  Links for 9-13-14

                                                                    Posted by on Saturday, September 13, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (125)


                                                                    Friday, September 12, 2014

                                                                    'In Defense of Social Insurance'

                                                                    MaxSpeaks:

                                                                    In defense of social insurance: On Twitter I said: “The basic income movement is an attack on the strongest political pillar of social-democracy: social insurance.” I’ve inveighed against the Universal Basic Income in the past, so here I go again. Another edition of old man yelling at clouds.
                                                                    Throughout history, in certain communal settings some variant of the Marxian “From each according to his abilities, to each according to his needs,” has applied. In a naive sense, the UBI is not far off from that ideal. What economists call a demogrant* — a fixed, unrestricted, unconditional transfer payment to every individual (to each according to his needs**) — would presumably be financed by some kind of progressive tax (from each according to his abilities). I have no quarrel with the ideal. The problem is that it’s an utter fantasy that beclouds thinking about more plausible social policies. It’s a distraction from the need to defend really-existing social insurance and to attack the devolution of the safety net (about which a bit more below). ...

                                                                      Posted by on Friday, September 12, 2014 at 08:54 AM in Economics, Social Insurance | Permalink  Comments (79)


                                                                      Paul Krugman: The Inflation Cult

                                                                      What accounts for the survival of the inflationistas?:

                                                                      The Inflation Cult, by Paul Krugman, Commentary, NY Times: Wish I’d said that! Earlier this week, Jesse Eisinger..., writing on The Times’s DealBook blog, compared people who keep predicting runaway inflation to “true believers whose faith in a predicted apocalypse persists even after it fails to materialize.” Indeed. ... And the remarkable thing is that these always-wrong, never-in-doubt pundits continue to have large public and political influence.
                                                                      There’s something happening here. What it is ain’t exactly clear. ... I’ve written before about how the wealthy tend to oppose easy money, perceiving it as being against their interests. But that doesn’t explain the broad appeal of prophets whose prophecies keep failing.
                                                                      Part of that appeal is clearly political; there’s a reason why ... Mr. Ryan warns about both a debased currency and a government that redistributes from “makers” to “takers.” Inflation cultists almost always link the Fed’s policies to complaints about government spending. They’re completely wrong about the details — no, the Fed isn’t printing money to cover the budget deficit — but it’s true that governments whose debt is denominated in a currency they can issue have more fiscal flexibility, and hence more ability to maintain aid to those in need...
                                                                      And anger against “takers” — anger that is very much tied up with ethnic and cultural divisions — runs deep. Many people, therefore, feel an affinity with those who rant about looming inflation... I’d argue, the persistence of the inflation cult is an example of the “affinity fraud” crucial to many swindles, in which investors trust a con man because he seems to be part of their tribe. In this case, the con men may be conning themselves as well as their followers, but that hardly matters.
                                                                      This tribal interpretation of the inflation cult helps explain the sheer rage you encounter when pointing out that the promised hyperinflation is nowhere to be seen. It’s comparable to the reaction you get when pointing out that Obamacare seems to be working, and probably has the same roots.
                                                                      But what about the economists who go along with the cult? They’re all conservatives, but aren’t they also professionals who put evidence above political convenience? Apparently not.
                                                                      The persistence of the inflation cult is, therefore, an indicator of just how polarized our society has become, of how everything is political, even among those who are supposed to rise above such things. And that reality, unlike the supposed risk of runaway inflation, is something that should scare you.

                                                                        Posted by on Friday, September 12, 2014 at 12:24 AM in Economics, Inflation | Permalink  Comments (73)


                                                                        Links for 9-12-14

                                                                          Posted by on Friday, September 12, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (62)


                                                                          Thursday, September 11, 2014

                                                                          What Is It Good For? Absolutely Nothing.

                                                                          I've been looking for the perfect anti-war screed, but so far haven't found it.

                                                                          So let me just say, I hate war, and I don't care if it's Bush or Obama giving the orders.

                                                                          That is all.

                                                                            Posted by on Thursday, September 11, 2014 at 04:01 PM in Economics, Iraq and Afghanistan | Permalink  Comments (63)


                                                                            'The Economics of Digital Currencies'

                                                                            The Bank of England examines bitcoin:

                                                                            Overview Digital currencies represent both innovations in payment systems and a new form of currency. This article examines the economics of digital currencies and presents an initial assessment of the risks that they may, in time, pose to the Bank of England’s objectives for monetary and financial stability. A companion piece provides an introduction to digital currency schemes, including some historical context for their development and an outline of how they work.
                                                                            From the perspective of economic theory, whether a digital currency may be considered to be money depends on the extent to which it acts as a store of value, a medium of exchange and a unit of account. How far an asset serves these roles can differ, both from person to person and over time. And meeting these economic definitions does not necessarily imply that an asset will be regarded as money for legal or regulatory purposes. At present, digital currencies are used by relatively few people. For these people, data suggest that digital currencies are primarily viewed as stores of value — albeit with significant volatility in their valuations (see summary chart) — and are not typically used as media of exchange. At present, there is little evidence of digital currencies being used as units of account.
                                                                            This  article argues that the incentives embedded in the current design of digital currencies pose impediments to their widespread usage. A key attraction of such schemes at present is their low transaction fees. But these fees may need to rise as usage grows and may eventually be higher than those charged by incumbent payment systems.
                                                                            Most digital currencies incorporate a pre-determined path towards a fixed eventual supply. In addition to making it extremely unlikely that a digital currency, as currently designed, will achieve widespread usage in the long run, a fixed money supply may also harm the macroeconomy: it could contribute to deflation in the prices of goods and services, and in wages. And importantly, the inability of the money supply to vary in response to demand would likely cause greater volatility in prices and real activity. It is important to note, however, that a fixed eventual supply is not an inherent requirement of digital currency schemes.
                                                                            Digital currencies do not currently pose a material risk to monetary or financial stability in the United Kingdom, given the small size of such schemes. This could conceivably change, but only if they were to grow significantly. The Bank continues to monitor digital currencies and the risks they pose to its mission.

                                                                              Posted by on Thursday, September 11, 2014 at 09:42 AM in Economics, Monetary Policy | Permalink  Comments (15)


                                                                              'Scotland and the SNP: Fooling Yourselves and Deceiving Others'

                                                                              Simon Wren-Lewis on Scottish independence:

                                                                              Scotland and the SNP: Fooling yourselves and deceiving others: There are many laudable reasons to campaign for Scottish independence. But how far should those who passionately want independence be prepared to go to achieve that goal? Should they, for example, deceive the Scottish people about the basic economics involved? That seems to be what is happening right now. The more I look at the numbers, the clearer it becomes that over the next five or ten years there would more, not less, fiscal austerity under independence. ...
                                                                              Scotland’s fiscal position would be worse as a result of leaving the UK for two main reasons. First, demographic trends are less favourable. Second, revenues from the North Sea are expected to decline. ...
                                                                              The SNP do not agree with this analysis. The main reason in the near term is that they have more optimistic projections for North Sea Oil. ... So how do the Scottish government get more optimistic numbers? John McDermott examines the detail here, but perhaps I can paraphrase his findings: whenever there is room for doubt, assume whatever gives you a higher number. ... It is basically fiddling the analysis to get the answer you want. Either wishful thinking or deception. ...
                                                                              Is this deception deliberate? I suspect it is more the delusions of people who want something so much they cast aside all doubts and problems. This is certainly the impression I get from reading a lot of literature...
                                                                              When I was reading this literature, I kept thinking I had seen this kind of thing before: being in denial about macroeconomic fundamentals because they interfered with a major institutional change that was driven by politics. Then I realised what it was: the formation of the Euro in 2000. Once again economists were clear and pretty united about what the key macroeconomic problem was (‘asymmetric shocks’), and just like now this was met with wishful thinking that somehow it just wouldn’t happen. It did, and the Eurozone is still living with the consequences.
                                                                              So maybe that also explains why I feel so strongly this time around. I have no political skin in this game: a certain affection for the concept of the union, but nothing strong enough to make me even tempted to distort my macroeconomics in its favour. If Scotland wants to make a short term economic sacrifice in the hope of longer term gains and political freedom that is their choice. But they should make that choice knowing what it is, and not be deceived into believing that these costs do not exist. 

                                                                                Posted by on Thursday, September 11, 2014 at 09:04 AM in Economics | Permalink  Comments (20)


                                                                                'Trapped in the ''Dark Corners'''?

                                                                                A small part of Brad DeLong's response to Olivier Blanchard. I posted a shortened version of Blanchard's argument a week or two ago:

                                                                                Where Danger Lurks: Until the 2008 global financial crisis, mainstream U.S. macroeconomics had taken an increasingly benign view of economic fluctuations in output and employment. The crisis has made it clear that this view was wrong and that there is a need for a deep reassessment. ...
                                                                                That small shocks could sometimes have large effects and, as a result, that things could turn really bad, was not completely ignored by economists. But such an outcome was thought to be a thing of the past that would not happen again, or at least not in advanced economies thanks to their sound economic policies. ... We all knew that there were “dark corners”—situations in which the economy could badly malfunction. But we thought we were far away from those corners, and could for the most part ignore them. ...
                                                                                The main lesson of the crisis is that we were much closer to those dark corners than we thought—and the corners were even darker than we had thought too. ...
                                                                                How should we modify our benchmark models—the so-called dynamic stochastic general equilibrium (DSGE) models...? The easy and uncontroversial part of the answer is that the DSGE models should be expanded to better recognize the role of the financial system—and this is happening. But should these models be able to describe how the economy behaves in the dark corners?
                                                                                Let me offer a pragmatic answer. If macroeconomic policy and financial regulation are set in such a way as to maintain a healthy distance from dark corners, then our models that portray normal times may still be largely appropriate. Another class of economic models, aimed at measuring systemic risk, can be used to give warning signals that we are getting too close to dark corners, and that steps must be taken to reduce risk and increase distance. Trying to create a model that integrates normal times and systemic risks may be beyond the profession’s conceptual and technical reach at this stage.
                                                                                The crisis has been immensely painful. But one of its silver linings has been to jolt macroeconomics and macroeconomic policy. The main policy lesson is a simple one: Stay away from dark corners.

                                                                                And I responded:

                                                                                That may be the best we can do for now (have separate models for normal times and "dark corners"), but an integrated model would be preferable. An integrated model would, for example, be better for conducting "policy and financial regulation ... to maintain a healthy distance from dark corners," and our aspirations ought to include models that can explain both normal and abnormal times. That may mean moving beyond the DSGE class of models, or perhaps the technical reach of DSGE models can be extended to incorporate the kinds of problems that can lead to Great Recessions, but we shouldn't be satisfied with models of normal times that cannot explain and anticipate major economic problems.

                                                                                Here's part of Brad's response:

                                                                                But… but… but… Macroeconomic policy and financial regulation are not set in such a way as to maintain a healthy distance from dark corners. We are still in a dark corner now. There is no sign of the 4% per year inflation target, the commitments to do what it takes via quantitative easing and rate guidance to attain it, or a fiscal policy that recognizes how the rules of the game are different for reserve currency printing sovereigns when r < n+g. Thus not only are we still in a dark corner, but there is every reason to believe that should we get out the sub-2% per year effective inflation targets of North Atlantic central banks and the inappropriate rhetoric and groupthink surrounding fiscal policy makes it highly likely that we will soon get back into yet another dark corner. Blanchard’s pragmatic answer is thus the most unpragmatic thing imaginable: the “if” test fails, and so the “then” part of the argument seems to me to be simply inoperative. Perhaps on another planet in which North Atlantic central banks and governments aggressively pursued 6% per year nominal GDP growth targets Blanchard’s answer would be “pragmatic”. But we are not on that planet, are we?

                                                                                Moreover, even were we on Planet Pragmatic, it still seems to be wrong. Using current or any visible future DSGE models for forecasting and mainstream scenario planning makes no sense: the DSGE framework imposes restrictions on the allowable emergent properties of the aggregate time series that are routinely rejected at whatever level of frequentist statistical confidence that one cares to specify. The right road is that of Christopher Sims: that of forecasting and scenario planning using relatively instructured time-series methods that use rather than ignore the correlations in the recent historical data. And for policy evaluation? One should take the historical correlations and argue why reverse-causation and errors-in-variables lead them to underestimate or overestimate policy effects, and possibly get it right. One should not impose a structural DSGE model that identifies the effects of policies but certainly gets it wrong. Sims won that argument. Why do so few people recognize his victory?

                                                                                Blanchard continues:

                                                                                Another class of economic models, aimed at measuring systemic risk, can be used to give warning signals that we are getting too close to dark corners, and that steps must be taken to reduce risk and increase distance. Trying to create a model that integrates normal times and systemic risks may be beyond the profession’s conceptual and technical reach at this stage…

                                                                                For the second task, the question is: whose models of tail risk based on what traditions get to count in the tail risks discussion?

                                                                                And missing is the third task: understanding what Paul Krugman calls the “Dark Age of macroeconomics”, that jahiliyyah that descended on so much of the economic research, economic policy analysis, and economic policymaking communities starting in the fall of 2007, and in which the center of gravity of our economic policymakers still dwell.

                                                                                  Posted by on Thursday, September 11, 2014 at 08:50 AM in Economics, Macroeconomics, Methodology | Permalink  Comments (8)


                                                                                  Links for 9-11-14

                                                                                    Posted by on Thursday, September 11, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (100)


                                                                                    Wednesday, September 10, 2014

                                                                                    The Durbin-Schumer Inversion Proposal

                                                                                    Pro-Growth Liberal (pgl):

                                                                                    Durbin-Schumer Inversion Proposal: Bernie Becker reports on an interesting proposal in the Senate:
                                                                                    Schumer’s bill takes aim at a maneuver known as earnings stripping, a process by which U.S. subsidiaries can take tax deductions on interest stemming from loans from a foreign parent. The measure comes as Democrats continue to criticize companies, like Burger King, that have sought to shift their legal address abroad … Schumer’s bill would cut in half the amount of interest deduction that companies can claim, from 50 percent to 25 percent. It also seeks to limit companies that have already inverted from claiming the deduction in future years, requiring IRS on certain transactions between a foreign parent and U.S. company for a decade.
                                                                                    Had Walgreen decided to move its tax domicile to Switzerland, this proposal would limit the amount of income shifting that might take place after the inversion. But consider companies like Burger King and AbbVie. They are already sourcing the vast majority of their profits overseas. The reason that the effective tax rates are about 20 percent and not in the teens is that they have to pay taxes on repatriated earnings. An inversion would still eliminate the repatriation taxes and alas the horse has left the barn as far these two companies and their aggressive transfer pricing. The proposal is a very good one but Congress should still encourage the IRS to conduct transfer pricing reviews of what companies such as these have done in the past.

                                                                                      Posted by on Wednesday, September 10, 2014 at 09:46 AM in Economics, Taxes | Permalink  Comments (42)


                                                                                      'More Education = More Income'

                                                                                      Eduardo Porter:

                                                                                      A Simple Equation: More Education = More Income, by Eduardo Porter, NY Times: ...the gap between the wages of a family of two college graduates and a family of high school graduates..., between 1979 and 2012...,grew by some $30,000, after inflation. This ... amounts to a powerful counterargument to anybody who doubts the importance of education in the battle against the nation’s entrenched inequality.
                                                                                      But in the American education system, inequality is winning, gumming up the mobility that broad-based prosperity requires. ... Only one in 20 Americans aged 25 to 34 whose parents didn’t finish high school has a college degree. The average across 20 rich countries in the O.E.C.D. analysis is almost one in four. ...
                                                                                      Given the payoff, the fact that many of those who would benefit most are not investing in a college education suggests an epic failure. And the growing cadre of countries that outperform the United States suggests failure is hardly inevitable. ...
                                                                                      Mr. Schleicher told me that, while places like Japan, Singapore and Canada have learned how to educate socially disadvantaged children, in the United States social background plays an outsize role in the educational outcomes. ... “But a lot depends on policy. There is a lot we can do.”
                                                                                      Decimating public education is not to anyone’s advantage...

                                                                                        Posted by on Wednesday, September 10, 2014 at 09:36 AM in Economics, Income Distribution, Universities | Permalink  Comments (19)


                                                                                        'The Biggest Lie of the New Century'

                                                                                        Barry Ritholtz:

                                                                                        The Biggest Lie of the New Century: Yesterday, we looked at why bankers weren't busted for crimes committed during the financial crisis. Political corruption, prosecutorial malfeasance, rewritten legislation and cowardice on the part of government officials were among the many reasons.
                                                                                        But I saved the biggest reason so many financial felons escaped justice for today: They dumped the cost of their criminal activities on you, the shareholder (never mind the taxpayer). ... Many of these executives committed crimes; got big bonuses for doing so; and paid huge fines using shareholder assets (i.e., company cash), helping them avoid prosecution.
                                                                                        As for claims, like those of white-collar crime defense attorney Mark F. Pomerantz, that “the executives running companies like Bank of America, Citigroup and JP Morgan were not committing criminal acts,” they simply implausible if not laughable. Consider a brief survey of some of the more egregious acts of wrongdoing: ...

                                                                                          Posted by on Wednesday, September 10, 2014 at 08:02 AM in Economics, Financial System, Regulation | Permalink  Comments (27)


                                                                                          Links for 9-10-14

                                                                                            Posted by on Wednesday, September 10, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (101)


                                                                                            Tuesday, September 09, 2014

                                                                                            'The Great Recession Casts a Long Shadow on Family Finances'

                                                                                            From the St. Louis Fed:

                                                                                            The Great Recession Casts a Long Shadow on Family Finances, by Ray Boshara, William Emmons, and Bryan Noeth,St. Louis Fed’s Center for Household Financial Stability: The income and wealth of the typical American family declined between 2010 and 2013, according to the Federal Reserve’s latest Survey of Consumer Finances.1 ... These declines reduced the median real (inflation-adjusted) family income and net worth in the U.S. in 2013 to $46,668 (from $49,022 in 2010) and to $81,400 (from $82,521 in 2010), respectively. ...
                                                                                            Combined with significant declines between 2007 and 2010 on both measures, the cumulative decline in median real family income between 2007 and 2013 was 12.1 percent, while median real net worth declined 40.1 percent. The financial impact of the Great Recession was so severe that all the gains achieved during the 1990s and 2000s were wiped out. Median real family income was 1.0 percent lower in 2013 than in 1989, while median real net worth in 2013 was 4.3 percent below its 1989 level.
                                                                                            As discouraging as these declines are, several economically vulnerable groups have fared even worse..., the median real income among families headed by someone under 40 has fallen from 96 percent of the overall median income in 1989 to only 87 percent in 2013. The median income of families headed by an African-American or someone of Hispanic origin (of any race) reached only 67 percent of the overall median in 2013, down from 70 percent in 2007. Among families headed by someone without a high-school degree, the median real income in 2013 was only 48 percent of the overall median, down from 51 percent three years earlier. ...
                                                                                            Those groups typically classified as economically vulnerable have experienced severe balance-sheet stress, too..., the median real net worth of a family headed by someone under 40 declined from 23 percent of the overall median in 1989 to only 18 percent in 2013. The progress made by African-American and Hispanic families in closing the wealth gap with the overall population through 2010 was largely reversed by 2013, leaving the median wealth of these groups at only 16 percent of the overall median. And the median wealth of families headed by someone with less than a high-school education plunged from 51 percent of the overall median wealth in 1989 to just 21 percent in 2013. Reflecting recent research conducted by the St. Louis Fed’s Center for Household Financial Stability, age, race and education continue to be among the strongest predictors of who gained and lost wealth during and after the Great Recession.2
                                                                                            Even in the sixth year of economic recovery, the Great Recession’s impact on American families’ income and wealth continues to be felt widely.3 The most economically vulnerable groups of families generally have suffered even larger setbacks than the typical family in the overall population.
                                                                                            The data now affirm what most Americans have been feeling since the recession ended—that their own recovery is not yet complete. And as many families continue to accumulate new debt at a slower pace or actually “delever” their balance sheets, shedding the debts accumulated in the run-up to the financial crisis, we believe less than robust economic growth will continue. ...

                                                                                              Posted by on Tuesday, September 9, 2014 at 10:29 AM in Economics | Permalink  Comments (55)