Labor Market Slack and Monetary Policy, by David G. Blanchflower and Andrew T. Levin, NBER Working Paper No. 21094: In the wake of a severe recession and a sluggish recovery, labor market slack cannot be gauged solely in terms of the conventional measure of the unemployment rate (that is, the number of individuals who are not working at all and actively searching for a job). Rather, assessments of the employment gap should reflect the incidence of underemployment (that is, people working part time who want a full-time job) and the extent of hidden unemployment (that is, people who are not actively searching but who would rejoin the workforce if the job market were stronger). In this paper, we examine the evolution of U.S. labor market slack and show that underemployment and hidden unemployment currently account for the bulk of the U.S. employment gap. Next, using state-level data, we find strong statistical evidence that each of these forms of labor market slack exerts significant downward pressure on nominal wages. Finally, we consider the monetary policy implications of the employment gap in light of prescriptions from Taylor-style benchmark rules.
This is from the Liberty Street Economics Blog at the NY Fed:
Credit Supply and the Housing Boom, by Alejandro Justiniano, Giorgio Primiceri, and Andrea Tambalotti: There is no consensus among economists as to what drove the rise of U.S. house prices and household debt in the period leading up to the recent financial crisis. In this post, we argue that the fundamental factor behind that boom was an increase in the supply of mortgage credit, which was brought about by securitization and shadow banking, along with a surge in capital inflows from abroad. This argument is based on the interpretation of four macroeconomic developments between 2000 and 2006 provided by a general equilibrium model of housing and credit.
The financial crisis precipitated the worst recession since the Great Depression. The spectacular rise in house prices and household debt during the first half of the 2000s, which is illustrated in the first two charts, was a crucial factor behind these events. Yet, economists disagree on the fundamental causes of this credit and housing boom.
A common narrative attributes the surge in debtand house prices to a loosening of collateral requirements for mortgages, associated with higher initial loan-to-value (LTV) ratios, multiple mortgages on the same property, and expansive home equity lines of credit.
The fact that collateral requirements became looser, at least for certain borrowers, is fairly uncontroversial. But can higher LTVs account for the unprecedented increase in house prices and debt, while remaining consistent with other macroeconomic developments during the same period?
Two facts suggest that the answer to this question is no. First, if the relaxation of collateral constraints had been widespread, it should have resulted in a surge of mortgage debt relative to the value of real estate. In the data, however, household debt and real estate values rose in tandem, leaving their ratio roughly unchanged over the first half of the 2000s, as shown in the chart below. In fact, this ratio only spiked when home prices tumbled, starting in 2006.
Second, more relaxed collateral requirements make it possible for the borrowers to demand more credit. Therefore, interest rates should rise to convince the lenders to satisfy this additional demand. In the data, however, real mortgage interest rates fell during the 2000s, as shown below in the fourth chart.
The fall in mortgage interest rates depicted in the fourth chart points to a shift in credit supply as an alternative explanation of the credit and housing boom of the early 2000s. We develop this hypothesis within a simple general equilibrium model in Justiniano, Primiceri, and Tambalotti (2015).
In the model, borrowing is limited by a collateral constraint linked to real estate values. Changes to this constraint, such as when the maximum LTV increases, shift the demand for credit. On the lending side, there is a limit to the amount of funds that savers can direct toward mortgage finance, which is equivalent to a leverage restriction on financial intermediaries. Changes to this constraint shift the supply of credit.
Lending constraints capture a host of technological and institutional factors that restrain the flow of savings into the mortgage market. Starting in the late 1990s, the explosion of securitization together with changes in the regulatory environment lowered many of these barriers, increasing the supply of mortgage credit.
The pooling and tranching of mortgages into mortgage-backed securities (MBS) played a central role in loosening lending constraints through several channels. First, tranching creates highly rated assets out of pools of risky mortgages. These assets can then be purchased by those institutional investors that are restricted by regulation to hold only fixed-income securities with high ratings. As a result, the boom in securitization channeled into mortgages a large pool of savings that had previously been directed toward other safe assets, such as government bonds. Second, investing in these senior MBS tranches freed up intermediary capital, owing to their lower regulatory charges. This form of “regulatory arbitrage” allowed banks to increase leverage without raising new capital, expanding their ability to supply credit to mortgage markets. Third, securitization allowed banks to convert illiquid loans into liquid funds, reducing their funding costs and hence increasing their capacity to lend.
International factors also played an important role in increasing the supply of funds available to American home buyers, as global saving flowed into U.S. safe assets, including agency MBS, before the financial crisis (Bernanke, Bertaut, Pounder, DeMarco, and Kamin 2011).
The fifth chart plots the effects of a relaxation of lending constraints in our model. When savers and financial institutions are less restricted in their lending, the supply of credit increases and interest rates fall. Since access to credit requires collateral, the increased availability of funds at lower interest rates makes the existing collateral—houses—scarcer and hence more valuable. As a result of higher real estate values, borrowers can increase their debt, even though their debt-to-collateral ratio remains unchanged. These responses of debt, house prices, aggregate leverage, and mortgage rates match well the empirical facts illustrated in the previous four charts. We conclude from this experiment that a shift in credit supply, associated with looser lending constraints, was the fundamental driver of the credit and housing boom that preceded the Great Recession.
This interpretation of the sources of the credit and housing boom is consistent with the microeconometric evidence presented in the influential work of Mian and Sufi (2009, 2010). They show that an expansion in credit supply was the fundamental driver of the surge in household debt and that borrowing against the increased value of real estate accounts for a significant fraction of this build-up in debt.
Our model, by providing a theoretical perspective on the important factors behind the financial crisis, should prove useful as a framework to study policies that might prevent a repeat of this experience.
Disclaimer The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of Chicago, the Federal Reserve Bank of New York, or the Federal Reserve System. Any errors or omissions are the responsibility of the author.
Europe responded with loans that kept the cash flowing, but only on condition that Greece pursue extremely painful policies. These included spending cuts and tax hikes that, if imposed on the United States, would amount to $3 trillion a year. There were also wage cuts on a scale that’s hard to fathom, with average wages down 25 percent from their peak.
These immense sacrifices were supposed to produce recovery. Instead, the destruction of purchasing power deepened the slump, creating Great Depression-level suffering and a huge humanitarian crisis. ...
It has been an endless nightmare... Can Greek exit from the euro be avoided?
Yes, it can. The irony of Syriza’s victory is that it came just at the point when a workable compromise should be possible. ...
By late 2014 Greece had managed to eke out a small “primary” budget surplus... That’s all that creditors can reasonably demand... Meanwhile, all those wage cuts have made Greece competitive on world markets — or would ... if some stability can be restored.
The shape of a deal is therefore clear: basically, a standstill on further austerity, with Greece agreeing to make significant but not ever-growing payments to its creditors. Such a deal would set the stage for economic recovery, perhaps slow at the start, but finally offering some hope.
But right now that deal doesn’t seem to be coming together..., creditors are demanding things — big cuts in pensions and public employment — that a newly elected government of the left simply can’t agree to, as opposed to reforms like an improvement in tax enforcement that it can. ...
To make things even worse, political uncertainty is hurting tax receipts, probably causing that hard-earned primary surplus to evaporate. The sensible thing, surely, is to show some patience on that front: if and when a deal is reached, uncertainty will subside and the budget should improve... But in the pervasive atmosphere of distrust, patience is in short supply.
It doesn’t have to be this way. True, avoiding a full-blown crisis would require that creditors advance a significant amount of cash, albeit cash that would immediately be recycled into debt payments. But consider the alternative. The last thing Europe needs is for fraying tempers to bring on yet another catastrophe, this one completely gratuitous.
Theories of native-immigrant complementarities (as described in Lewis 2013) and of efficient task specialisation (as proposed in Peri and Sparber 2009) have been articulated in order to explain those findings. They suggest that:
The inflow of low-skilled immigrants may encourage natives to upgrade and adjust their jobs taking advantage of immigrant-native complementarity as those two groups specialise in different occupations.
Critics of those studies, however, argue that lacking a genuine random supply shock to the distribution of immigrants and without the ability of following native workers over time one cannot establish the causality of that relationship. Moreover, some argue that European labour markets are different and those results cannot be extended to immigration in Europe.
Our new research provides a cleaner and more convincing test of the causal effect of low-skilled immigrants on labour market outcomes of natives (Foged and Peri 2015). In it we use a panel of all residents of Denmark between 1991 and 2008 and exploit an exogenous dispersion of refugees across Danish municipalities and a later surge in immigrants to track how such exogenous shock affected native workers. We focus especially on the effects on workers at the low end of the wage and income spectrum, specifically the less educated and those who were young and with low job-tenure.
An ideal setting: Dispersal policy and immigration surge in Denmark
Immigrants represented a limited share (three percent or less) of total employment in Denmark until 1994, equally divided between those from EU countries and those from other countries. Refugees were distributed across municipalities between 1986 and 1998 following the Spatial Dispersal Policy (Damm 2009). This policy implied that the Danish Refugee Council, independently of the economic characteristics and preferences of the refugees, distributed them across municipalities based only on information on their nationality and family size. The goal of the dispersal policy was to distribute the total of the refugees uniformly across municipalities and to provide them with housing for a year (hence most of them accepted the offer). Clusters of refugees from specific countries in specific municipalities were generated by the dispersal due to the timing of their arrival and house availability when they arrived. These clusters were completely uncorrelated to the labour market conditions of the municipalities and to the economic characteristics of the immigrants.
Then, beginning in 1995, the presence of non-EU immigrants had a rapid surge. In particular, as shown in Figure 1, immigrant inflows from specific refugee-sending countries experienced a strong and sudden increase due to a sequence of international conflicts (Yugoslavia, Somalia, Afghanistan, and Iraq).
Figure 1. Refugee-country immigrants in Denmark
Notes: Growth in immigrant populations since 1 January 1995 from major source countries for refugee inflows between 1986-1998 and from Eastern Europe.
When the dispersal policy was phased out and family reunification became the main channel of entry between 1995 and 1998, the location of those new immigrants from refugee countries was driven by their inclination to locate near the communities of co-nationals formed earlier by the dispersal policy. This unique combination of events provides us with an ideal random supply shock to immigrants. This shock is represented by the increase of refugee-country immigrants after 1995, distributed to the municipalities that experienced dispersal-driven clustering of these refugee-country immigrants between 1986 and 1995.
Labour market effects on the less educated
The refugee-country immigrants were quite representative of non-European immigrants in terms of their education and skills. Forty to fifty percent of them did not have post-secondary education (only 32% of natives did not). Similarly, the more basic occupations (‘sales and elementary service occupations’) employed 13% of these immigrants and only 4% of the natives. In particular, by measuring the ‘manual skill’ content of occupations, we establish that refugee-country immigrants, as typical of non-European immigrants, were in large part concentrated in manual-intensive occupations.
In our analysis, we first test how non-college educated native workers responded to an increase of refugee-country immigrants.
We find that, especially for native workers who moved across establishments, refugee-country immigrants spurred significant occupational mobility and increased specialisation into complex jobs, using more intensively analytical and communication skills and less intensively manual skills.
This upgrade to less manual intensive and more complex jobs was accompanied by a significant wage increase. Certainly the high job mobility, facilitated by the flexibility and competitiveness of the Danish labour market, were key catalysts for the observed native workers’ response.
A clean way to visualise the effect on native outcomes is Figure 2 that shows a difference-in-difference representation of the effect of exposure to refugee-country immigration. The figure plots the difference in job complexity and hourly wage between less educated natives in municipalities with large and small (top and bottom quartile) increases in refugee-country immigrants as determined by the dispersal policy and the post-1994 surge (1994 is year 0). We see that the differences in occupation complexity (panel A) and wages (panel E) for low-skilled natives increased significantly after 1994 in favour of the municipalities that received the surge of refugee-country immigrants.
Figure 2. The short- and long-run differences in native outcomes in a high-versus-low immigration municipality
Notes: Parameter estimates and 95% confidence limits on the difference in outcomes between the upper and lower quartile of immigrant exposure.
The figures (and regression results in the study) suggest that the complexity index increased with 3% more and wages increased up to 2% more for low-skilled natives in high exposed municipalities (with a 1.6 percentage point increase in the refugee immigrant share) relative to the less exposed municipalities. This took place over 13 years and it appears to be a permanent positive change.
We then focus on the groups with lower wage and higher probability of unemployment, namely those who were young and had a low-tenure job as of 1994 and we compare their performance between high and low refugee-immigration municipalities. These groups are also those with larger potential lifetime gains from changing occupation and upgrading. And in fact, for those groups, job complexity and wages increased the most. Older (over 45 years of age) and long-tenured workers did not take advantage of immigration complementarity, did not experience a wage growth, and some may have retired earlier.
Summary and concluding remarks
Overall, our study finds that a labour market that encourages occupational mobility and allows low-skilled immigrants can generate an effective mechanism to produce upward wage and skill mobility of less educated natives, especially the young and low-tenure ones.
Card, D (1990) “The impact of the Mariel boatlift on the Miami labor market”, Industrial and Labor Relations Review, ILR Review, Cornell University, vol. 43(2), pages 245-257, January.
Damm, A P (2009), “Determinants of recent immigrants' location choices: quasi-experimental evidence”, Journal of Population Economics 22 (1):145-174.
Foged, M and G Peri (2015), “Immigrants’ Effect on Native Workers: New Analysis on Longitudinal Data”, IZA Discussion Paper No. 8961
Rachel M F (2001), “The Impact Of Mass Migration On The Israeli Labor Market”, The Quarterly Journal of Economics, MIT Press, vol. 116(4), pages 1373-1408, November.
Lewis, E (2013), “Immigration and Production Technology”, Annual Review of Economics 5 (1):165-191.
Manacorda M, A Manning and J Wadsworth (2012), “The Impact Of Immigration On The Structure Of Wages: Theory And Evidence From Britain”, Journal of the European Economic Association, European Economic Association, vol. 10(1), pages 120-151, 02.
Ottaviano, G I P and G Peri (2012), “Rethinking the Effect of Immigration on Wages”, Journal of the European Economic Association 10 (1):152-197.
Peri, G and C Sparber (2009), “Task Specialization, Immigration and Wages”, American Economic Journal: Applied Economics 1 (3):135-169.
This seems implausible to me, yet there seems to be evidence for it:
Are we kidding ourselves on competition?, by Joshua Gans: ...Consider a situation where there are 10 firms in a market and they compete with one another. Now suppose that all shareholders — say because they are following the dicta of diversification — allocate their wealth in equal proportion across those 10 firms. That means that each owner of the firm — even if there are thousands of these — cares equally about each firm’s profits.
So ask yourself: when those shareholders vote on the composition of boards or the management of the firm, or, importantly how the management of the firm is compensated, are they going to vote for managers who will care only about the profits of the firm they manage or about the profits more broadly? The answer is obvious: they will look to managers who manage in the interest of shareholders and so that means they care about all firm profits and not just the one of their own firm.
In a world where shareholders can get what they want, we won’t have competition in this outcome but, more likely, a collusive outcome. What is more, the firms won’t have to go to all the difficulty of violating antitrust laws to obtain this outcome, they will do it unilaterally. There are no laws against that. ...
Now this isn’t just speculation. Jose Azar, an economist now at Charles River Associates, did his Princeton PhD on this topic. His theory paper is here and it builds on others including Gordon (1990), Hansen and Lott (1995) and O’Brien and Salop (2000). Frank Wolak and I came up with a similar set of issues related to cross-ownership and hedging in electricity markets (for vertical ownership) and verified anti-competitive consequences arising from this. But Azar, along with Martin Schmalz and Isabel Tecu have demonstrated that cross-ownership has anti-competitive impacts on the US airline industry. They find that cross ownership increases US airline prices 3–5%. When they use the event whereby BlackRock acquired Barclays Global Investors (a merger changing the shares of common ownership in airlines), they found such ownership could indicate 10% bumps in pricing with US airline ticket prices rising by 0.6% as a result of that merger alone. ...
The point here is that we cannot really ignore this issue as economists or as policy-makers. We have “known” about it for decades. Now’s the time to take it seriously.
Declining Desire to Work and Downward Trends in Unemployment and Participation, by Regis Barnichon and Andrew Figura: Abstract The US labor market has witnessed two apparently unrelated trends in the last 30 years: a decline in unemployment between the early 1980s and the early 2000s, and a decline in labor force participation since the early 2000s. We show that a substantial factor behind both trends is a decline in desire to work among individuals outside the labor force, with a particularly strong decline during the second half of the 90s. A decline in desire to work lowers both the unemployment rate and the participation rate, because a nonparticipant who wants to work has a high probability to join the unemployment pool in the future, while a nonparticipant who does not want to work has a low probability to ever enter the labor force. We use cross-sectional variation to estimate a model of non-participants' propensity to want a job, and we find that changes in the provision of welfare and social insurance, possibly linked to the mid-90s welfare reforms, explain about 50 percent of the decline in desire to work.
External and Public Debt Crises, by Cristina Arellano, Andrew Atkeson, and Mark Wright: Abstract In recent years, the members of two advanced monetary and economic unions -- the nations of the Eurozone and the states of the United States of America -- experienced debt crises with spreads on government borrowing rising dramatically. Despite the similar behavior of spreads on public debt, these crises were fundamentally different in nature. In Europe, the crisis occurred after a period of significant increases in government indebtedness from levels that were already substantial, whereas in the USA state government borrowing was limited and remained roughly unchanged. Moreover, whereas the most troubled nations of Europe experienced a sudden stop in private capital flows and private sector borrowers also faced large rises in spreads, there is little evidence that private borrowing in US states was differentially affected by the creditworthiness of state governments. In this sense, we can say that the US States experienced a public debt crisis , whereas the nations of Europe experienced an external debt crisis affecting both public and private borrowers. Why did Europe experience an external debt crisis and the US States only a public debt crisis? And, why did the members of other economic unions, such as the provinces of Canada, not experience a debt crisis at all despite high and rising provincial public debt levels? In this paper, we construct a model of default on domestic and external public debt and interference in private external debt contracts and use it to argue that these different debt experiences result from the interplay of differences in the ability of governments to interfere in the private external debt contracts of their citizens, with differences in the flexibility of state fiscal institutions. We also assemble a range of empirical evidence that suggests that the US States are less fiscally flexible but more constrained in their ability to interfere in private contracts than the members of other economic unions, which simultaneously exposes the states to public debt crises while insulating them from an external debt crisis affecting private sector borrowers within the state. In contrast, Eurozone nations are more fiscally flexible but have a greater ability to interfere with the contracts, which together allow for more public borrowing at the cost of a joint public and private external debt crisis. Lastly, Canadian provincial governments are both fiscally flexible and limited in their ability to interfere, which allows both for more public borrowing and limits the likelihood of either a public or external debt crisis occurring. We draw lessons from these findings for the future design of Eurozone economic and legal institutions.
The debate continues on why businesses aren’t investing more in machinery, equipment, and plants. In advanced economies, business investment – the largest component of private investment – has contracted much more since the global financial crisis than after historical recessions. There are worrying signs that this has contributed to the erosion of long-term economic growth.
Getting the diagnosis right is critical for devising policies to encourage firms to invest more. If low investment is mainly a symptom of a weak economic environment – with firms responding to weak sales as some suggest1 – then calls for expanding overall economic activity could be justified.2 If, on the other hand, if special impediments are mainly to blame, – such as policy uncertainty or financial sector weaknesses, as others suggest (European Investment Bank 2013, and Buti and Mohl 2014, for example), – then these must be removed before investment can rise.
Weak economic activity key factor
Our analysis in chapter 4 of the IMF’s April 2015 World Economic Outlook suggests that the weak economic environment is the overriding factor holding back business investment.
Investment contracted more severely following the global financial crisis than in historical recessions, but the contraction in output was also much more severe (Figure 1). The joint behavior of business investment and output has therefore not been unusual. The relative response of investment was, overall, two to three times greater than that of output in previous recessions, and this relative response was similar in the current context. If anything, investment dipped slightly less relative to the output contraction than in previous recessions.
Figure 1. Real business investment and output relative to forecasts: Historical recessions versus Global Financial Crisis (Percent deviation from forecasts in the year of recession, unless noted otherwise; years on x-axis, unless noted otherwise)
Sources: Consensus Economics; Haver Analytics; national authorities; and IMF staff estimates. Note: For historical recessions, t = 0 is the year of recession. Deviations from historical recessions (1990–2002) are relative to spring forecasts in the year of the recession. Recessions are as identified in Claessens, Kose, and Terrones 2012. For the global financial crisis (GFC), t = 0 is 2008. Deviations are relative to pre-crisis (spring 2007) forecasts. Shaded areas denote 90 percent confidence intervals. Panels 1 and 2 present data for the advanced economies (AEs). GFC crisis and non-crisis advanced economies are as identified in Laeven and Valencia 2012.
At the same time, the endogenous nature of investment and output – that is, the simultaneous feedback from output to investment and then back to output – complicates the interpretation of these results. To correct for this endogeneity, we use an instrumental variables approach and estimate the historical relationship between investment and output based on macroeconomic fluctuations not triggered by a contraction in business investment. Our instruments are changes in fiscal policy motivated primarily by the desire to reduce the budget deficit and not by a response to the current or prospective state of the economy (Devries and others, et al 2011). We use the results to predict the contraction in investment that would have been expected to occur after 2007 based on the observed contraction in output. We then compare the predicted decline in investment after 2007 with the actual decline in investment.
Based on this estimated historical investment-output relation, business investment has deviated little from what could be expected given the weakness in economic activity (Figure 2). In other words, firms have reacted to weak sales – both current and prospective – by reducing capital spending. Indeed, in surveys, businesses typically report lack of customer demand as the dominant challenge they face.
Figure 2. Real business investment in advanced economies: Actual and predicted based on economic activity (Percent deviation of investment from spring 2007 forecasts)
Sources: Consensus Economics; Haver Analytics; national authorities; and IMF staff estimates. Note: Prediction based on historical investment-output relation and post-crisis decline in output relative to pre-crisis forecasts. Shaded areas denote 90 percent confidence intervals.
Factors beyond output
Beyond this general pattern, we find a few cases of investment weakness that go beyond what can be explained by output – particularly in Eurozone countries with high borrowing spreads during the 2010-2011 sovereign debt crisis. After controlling for financial constraints and policy uncertainty, the degree of unexplained investment weakness declines for these economies, suggesting a role for these factors beyond the weakness in output. At the same time, identifying the effect of these factors is challenging based on macroeconomic data, particularly given the limited number of observations for each country since the crisis.
Confirmation of these additional factors at play comes from our analysis of investment decisions by different types of firms. Investment by firms in sectors that rely more on external funds (such as machinery producers) has fallen more since the crisis than investment by other types of firms. And firms whose stock prices typically respond more to measures of aggregate uncertainty have cut back more on investment – even after the role of weak sales is accounted for. This suggests that, given the irreversible and lumpy nature of some investment projects, uncertainty has played a role in discouraging business investment.
Figure 3 provides a simple illustration of this finding by reporting the evolution of investment for publically-listed firms in the highest 25% and the lowest 25% of the external dependence distribution for all advanced economies since 2007. By 2009 investment had dropped by 50% (relative to the forecast) among firms in more financially dependent sectors – about twice as much as for those in less financially dependent sectors. In the case of policy uncertainty, investment had dropped by about 50% by 2011, relative to the forecast, in sectors more sensitive to uncertainty – more than twice as much as in less sensitive sectors.
Figure 3. Firm investment since the Crisis, by firm type (Percent; impulse responses based on local projection method)
Sources: Thomson Reuters Worldscope; and IMF staff calculations. Note: Less (more) financially dependent and less (more) sensitive firms are those in the lowest (highest) 25 percent of the external dependence and news-based sensitivity distributions, respectively, as described in the chapter. Shaded areas (less dependent/sensitive) and dashed lines (more dependent/sensitive) denote 90 percent confidence intervals.
Policies to boost investment
We conclude that a comprehensive policy effort to expand output is needed to sustainably raise private investment. Fiscal and monetary policies can encourage firms to invest, although such policies are unlikely to fully return restore investment fully to pre-crisis trends. More public infrastructure investment could also spur demand in the short term, raise supply in the medium term, and thus 'crowd in’ private investment where conditions are right. And structural reforms, – such as those to strengthen labor force participation, – could improve the outlook for potential output and thus encourage private investment. Finally, to the extent that financial constraints hold back private investment, there is also a role for policies aimed at relieving crisis-related financial constraints, including through tackling debt overhang and cleaning up bank balance sheets.
Devries, P, J Guajardo, D Leigh, and A Pescatori (2011) “A New Action-Based Dataset of Fiscal Consolidation in OECD Countries”, IMF Working Paper 11/128, International Monetary Fund, Washington.
European Investment Bank (2013), Investment and Investment Finance in Europe, Luxembourg.
Krugman, P (2011), “Explaining Business Investment.” The New York Times, 3 December.
Lewis, S, N Pain, J Strasky, and F Mankyna (2014), “Investment Gaps after the Crisis”, Economics Department Working Paper 1168, Organisation for Economic Co-operation and Development, Paris.
1 See Chinn (2011) and Krugman (2011) for example.
2 Lewis and others (2014) find that, although it has been a major factor, low output growth since the crisis cannot fully account for the weak investment weakness in some of the major advanced economies.
First paper at the NBER Annual Conference on Macroeconomics
Expectations and Investment, by Nicola Gennaioli, Yueran Ma, and Andrei Shleifer: Abstract Using micro data from Duke University quarterly survey of Chief Financial Officers, we show that corporate investment plans as well as actual investment are well explained by CFOs’ expectations of earnings growth. The information in expectations data is not subsumed by traditional variables, such as Tobin’s Q or discount rates. We also show that errors in CFO expectations of earnings growth are predictable from past earnings and other data, pointing to extrapolative structure of expectations and suggesting that expectations may not be rational . This evidence, like earlier findings in finance, points to the usefulness of data on actual expectations for understanding economic behavior.
Trends and Cycles in China's Macroeconomy, by Chun Chang, Kaji Chen, Daniel Waggoner, and Tao Zha: Abstract We make three contributions in this paper. First, we provide a core of macroeconomic time series usable for systematic research on China. Second, we document, through various empirical methods, the robust findings about striking patterns of trend and cycle. Third, we build a theoretical model that accounts for these facts. The model's mechanism and assumptions are corroborated by institutional details, disaggregated data, and banking time series, all of which are distinctive of Chinese characteristics. The departure of our theoretical model from standard ones offers a constructive framework for studying China's macroeconomy.
Demystifying the Chinese Housing Boom, byHanming Fang, Quanlin Gu, Wei Xiong, and Li-An Zhou: Abstract We construct housing price indices for 120 major cities in China in 2003 - 2013 based on sequential sales of new homes within the same housing developments. By using these indices and detailed information on mortgage borrowers across these cities, we find enormous housing price appreciation during the decade, which was accompanied by equally impressive growth in household income, except in a few first-tier cities. Housing market participation by households from the low-income fraction of the urban population remained steady. Nevertheless, bottom-income mortgage borrowers endured severe financial burdens by using price-to-income ratios over eight to buy homes, which reflected their expectations of persistently high income growth into the future. Such future income expectations could contract substantially in the event of a sudden stop in the Chinese economy and present an important source of risk to the housing market.
Networks and the Macroeconomy: An Empirical Exploration, by Daron Acemoglu, Ufuk Akcigit, and William Kerr: Abstract The propagation of macroeconomic shocks through input-output and geographic networks can be a powerful driver of macroeconomic fluctuations. We first exposit that in the presence of Cobb-Douglas production functions and consumer preferences, there is a specific pattern of economic transmission whereby demand-side shocks propagate upstream (to input supplying industries) and supply-side shocks propagate downstream (to customer industries) and that there is a tight relationship between the direct impact of a shock and the magnitudes of the downstream and the upstream indirect effects. We then investigate the short-run propagation of four different types of industry-level shocks: two demand-side ones (the exogenous component of the variation in industry imports from China and changes in federal spending) and two supply-side ones (TFP shocks and variation in knowledge/ideas coming from foreign patent- ing). In each case, we find substantial propagation of these shocks through the input-output network, with a pattern broadly consistent with theory. Quantitatively, the network-based propagation is larger than the direct effects of the shocks, sometimes by several fold. We also show quantitatively large effects from the geographic network, capturing the fact that the local propagation of a shock to an industry will fall more heavily on other industries that tend to collocate with it across local markets. Our results suggest that the transmission of various different types of shocks through economic networks and industry inter-linkages could have first-order implications for the macroeconomy.
But you can’t say the same about the eurozone... Why has Europe done so badly? In the past few weeks, I’ve seen a number of speeches and articles suggesting that the problem lies in the inadequacy of our economic models — that ... macroeconomic theory ... failed to offer useful policy guidance... But is this really the story?
No, it isn’t..., basic textbook models ... have performed very well. The trouble is that policy makers in Europe decided to reject those basic models in favor of alternative approaches that were innovative, exciting and completely wrong. ...
In America, the White House and the Federal Reserve mainly stayed faithful to standard Keynesian economics. ... Meanwhile, the Fed ignored ominous warnings that it was “debasing the dollar”...
In Europe, by contrast, policy makers were ready and eager to throw textbook economics out the window in favor of new approaches. The European Commission ... eagerly seized upon supposed evidence for “expansionary austerity... Meanwhile, the European Central Bank took inflation warnings to heart and raised interest rates in 2011 even though unemployment was still very high. ...
European policy makers ... sought justifications for the harsh policies they were determined, for political and ideological reasons, to impose on debtor nations; they lionized economists, like Harvard’s Alberto Alesina, Carmen Reinhart, and Kenneth Rogoff, who seemed to offer that justification. As it turned out, however, all that exciting new research was deeply flawed, one way or another.
And while new ideas were crashing and burning, that old-time economics was going from strength to strength. ...
The point is that it’s wrong to claim ... that policy failed because economic theory didn’t provide the guidance policy makers needed. In reality, theory provided excellent guidance, if only policy makers had been willing to listen. Unfortunately, they weren’t. And they still aren’t. ...
But back to the question of new ideas and their role in policy. It’s hard to argue against new ideas in general. In recent years, however, innovative economic ideas, far from helping to provide a solution, have been part of the problem. We would have been far better off if we had stuck to that old-time macroeconomics, which is looking better than ever.
I am here today (as is Tyler Cowen, he explains the rules we have to follow):
NATIONAL BUREAU OF ECONOMIC RESEARCH, INC. 30th Annual Conference on Macroeconomics Martin Eichenbaum and Jonathan Parker, Organizers April 17 and 18, 2015 The Royal Sonesta Hotel Cambridge, MA
Friday, April 17:
8:30 am - Continental Breakfast
9:00 am - Nicola Gennaioli, Università Bocconi, Yueran Ma, Harvard University, Andrei Shleifer, Harvard University and NBER, Expectations and Investment
Discussants: Chris Sims, Princeton University and NBER, Monika Piazzesi, Stanford University and NBER
10:30 am - Break
11:00 am - Tao Zha, Emory University and NBER, Chun Chang, SAIF Shanghai Jiao, Tong University, Kaiji Chen, Emory University, Daniel F. Waggoner, Federal Reserve Bank of Atlanta, Trends and Cycles in China's Macroeconomy
Discussants: Mark Watson, Princeton University and NBER, John Fernald, Federal Reserve Bank of San Francisco
12:30 pm Lunch – Skyline Rooms
2:00 pm - Hanming Fang, University of Pennsylvania and NBER, Quanlin Gu, Peking University, Wei Xiong, Princeton University and NBER, Li-An Zhou, Peking University, Demystifying the Chinese Housing Boom
Discussants: - Martin Schneider, Stanford University and NBER, Erik Hurst, University of Chicago and NBER
Discussants: Richard Rogerson, Princeton University and NBER, Robert Hall, Stanford University and NBER
10:30 am - Break
11:00 am - Cristina Arellano, Federal Reserve Bank of Minneapolis and NBER, Andrew Atkeson, University of California at Los Angeles and NBER, Mark L. J. Wright, Federal Reserve Bank of Chicago and NBER, External and Public Debt Crises
Discussants - Ricardio Reis, Columbia University and NBER, Harald Uhlig, University of Chicago and NBER
But as the coal industry fights for survival, it has ... embarked on a global campaign to promote coal as the solution to energy poverty. This disingenuous claim is predicated on the notion that coal is the cheapest way of providing electricity to the one-fifth of the world’s population lacking access to an electricity grid.
This ... is extremely misleading. If ever implemented, it would actually significantly worsen the condition of the 1.3 billion people mired in energy poverty.
Most developing countries face serious challenges that are already being exacerbated by climate change-related extreme weather events. They are being battered by stronger storms, more destructive floods, deeper and longer droughts and disruptive switches in the seasonal timing of rain. ... Food security and water supplies are being compromised, natural resources stressed, and critical infrastructure crippled.
Access to affordable and reliable energy is, of course, essential for sustainable development, poverty reduction, improved access to education and healthcare, and the promotion of public safety and stable government. We should not waver in our commitment to remedy energy poverty...
But the relative merits of different energy options must be considered over the long term with an emphasis on three factors: financial cost, reliability, and impact on society and the environment. And when viewed through this lens, renewable energy – particularly solar photovoltaic energy, or PV – far outranks coal as the best future energy choice for developing nations. ...
Senator Warren puts forward two main sets of proposals. The first is to more strongly discourage the deception of customers. This is hard to argue against. Some parts of the financial sector are well-run, providing essential services at reasonable prices and with sound ethics throughout. Other parts of finance have drifted, frankly, into deceiving people – on fees, on risks, on terms and conditions – as a primary source of profits. We don’t allow this kind of cheating in the non-financial sector and we shouldn’t allow it in finance either.
The unfortunate and indisputable truth is that our rule-making and law-enforcement agencies completely fell asleep prior to 2008 with regard to protecting borrowers and even depositors against predation. Even worse, since the financial crisis, the Securities and Exchange Commission, the Justice Department, and the Federal Reserve Board of Governors proved hard or near impossible to awake from this slumber.
We need simple, clear rules that ensure transparency and full disclosure in all financial transactions – and we need to enforce those rules. This is what was done with regard to securities markets after the debacle of the early 1930s. ...
The second proposal is to end the greatest cheat of all – the implicit subsidies received by the largest financial institutions, structured so as to encourage excessive and irresponsible risk-taking. These consequences of these subsidies have already caused massive macroeconomic damage – this is why our crisis in 2008-09 was so severe and the recovery so slow. Yet we have made painfully little progress towards really ending the problems associated with some very large financial firms – and their debts – being viewed by markets and policymakers as being too big to fail. ...
Redistribution Can Involve Less Government Rather than More: Thomas Edsall presents some interesting polling results in his NYT column indicating less public support for government policies to redistribute income even as the distribution of income is becoming increasingly unequal. He argues that this presents a paradox for Democrats who are concerned about inequality.
Actually the situation is less paradoxical when we consider the possibility that government policies are largely responsible for growing inequality. This is most obvious is with the bailout of the financial industry in 2008. Without the help of the TARP and the Fed, Goldman Sachs, Citigroup, Morgan Stanley, and most of the other Wall Street behemoths would be out of business. This would have drastically reduced the wealth and income of many of the richest people in the country.
The government has also redistributed income upward by supporting an over-valued dollar that has eliminated millions of manufacturing jobs and put downward pressure on the wages of non-college educated workers more generally. In addition, a Federal Reserve Board policy that raises interest rates to keep people from getting jobs any time the labor market gets tight enough to support wage growth has also had the effect of reducing the wages of most workers.
Also our trade policy of selective protectionism, which exposes manufacturing workers to competition with the lowest paid workers in the world, while largely protecting doctors, lawyers, and other highly paid professionals (who comprise much of the one percent), has the effect of redistributing income upward. Similarly, our policy of patent protection redistributes hundreds of billions of dollars a year from ordinary workers to drug companies and other beneficiaries of these government-granted monopolies.
In these areas and others the government has acted to redistribute income upward. A politician who wanted to reduce inequality could focus on having less government action in these areas. That would be consistent with the polls cited by Edsall indicating that the public wanted a smaller role for the government.
Just one comment. I don't like the word "redistribution" as it is used here since it implies the current distribution of income is correct and just. I don't think it is for a variety of reasons I've hammered on over the years. Returning income/wealth to its rightful owners is not redistribution in the sense the word generally implies (i.e. taking from someone who has earned the income and giving it to someone who has not -- it's the opposite, taking it back from those who haven't earned it, generally those at the top of the income distribution, and returning it to those who have).
Speaking of "Gloomy European Economist" Francesco Saraceno' (see post below this one):
What Structural Reforms?, by Francesco Saraceno: I am ready to bet that the latest IMF World Economic Outlook ... will make a certain buzz for a box. It is box 3.5, at page 36 of chapter 3, which has been available on the website for a few days now. In that box, the IMF staff presents lack of evidence on the relationship between structural reforms and total factor productivity, the proxy for long term growth and competitiveness. (Interestingly enough people at the IMF tend to put their most controversial findings in boxes, as if they wanted to bind them).
What is certainly going to stir controversy is the finding that while long term growth is negatively affected by product market regulation, excessive labour market regulation does not hamper long term performance.
It is not the first time that the IMF surprises us with interesting analysis that goes against its own previous conventional wisdom. I will write more about this shortly. Here I just want to remark how these findings are relevant for our old continent.
The austerity imposed to embraced by eurozone crisis countries has taken the shape of expenditure cuts and labour market deregulation, whose magic effects on growth and competitiveness have been sold to reluctant and exhausted populations as the path to a bright future. I already noted, two years ago, that the short-run pain was slowly evolving into long-run pain as well, and that the gain of structural reforms was nowhere to be seen. The IMF tells us, today, that this was to be expected.
The guy who should be happy is Alexis Tsipras; he has been resisting since January pressure from his peers (and the Troika, that includes IMF staff!) to further curb labour market regulations, and recently presented a list of reforms that mostly pledges to reduce crony capitalism, tax evasion and product market rigidities. Exactly what the IMF shows to be effective in boosting growth. ...
This happens in Washington. Problem is, Greece, and Europe at large, seem to be light years away from the IMF research department. We already saw, for example with the mea culpa on multipliers, that IMF staff in program countries does not necessarily read what is written at home. Let’s see whether the discussion on Greece’s reforms will mark a realignment between the Fund’s research work and the prescriptions they implement/suggest/impose on the ground.
About that confidence fairy. This is from Simon Wren-Lewis
Confidence: Francesco Saraceno reminds us about the days in which very important people believed in the confidence fairy (aka expansionary fiscal austerity), which are not so very far away. He also points to some recent ECB research which shows that confidence - as measured by surveys - clearly falls following fiscal austerity. The confidence fairy, rather than waving her wand to make everything alright again, may be making austerity worse.
However, looking at the research in detail revealed some results I found at first surprising. In particular, revenue cuts have a bigger effect on consumer confidence than spending cuts. In terms of GDP impacts, theory - and most but not all empirical evidence - suggests that temporary spending cuts will have a larger impact on overall activity than temporary tax increases, if there is no monetary offset and incentive effects are not very large. Do these empirical results contradiction this?
To answer that you need to ask two further questions. First, what does consumer confidence actually measure? Second, and perhaps more interesting, what information do fiscal announcements actually reveal. ...[goes on to explain]...
Trying to evaluate the impact of past fiscal actions is complicated, in large part because it is difficult to know what the counterfactual was, or what people thought the counterfactual was. Were changes thought to temporary or permanent? (Governments hardly ever say, and even if they did would they be trusted?) To what extent do people internalise the government’s budget constraint? If they do, are fiscal changes telling us about the timing of taxes or spending, or their mix, or something else? It seems to me that these difficulties arise whether we are trying to assess the impact of fiscal changes on confidence, or on activity itself.
Traditionally, economists treated supply and demand as separate matters. ... The Fed, in this traditional view, can affect how demand fluctuates around the long-run trend, but it can’t affect the long-run trend itself.
But in real life, supply and demand are not so easily separated. The labor force is a function not just of the number of people of working age (a supply-side factor), but also how long they’ve been unemployed and thus how useful their skills are (a demand-side factor). Business investment in new equipment isn’t just a function of the state of technology (a supply side factor), but what they anticipate sales to be in coming years (a demand side factor).
This means that policies that affect demand in the short run can, conceivably, affect supply in the long run, as well. ...
Jay Powell, a Fed governor, makes the point in a speech last week. ... Mr. Powell suggests, the Fed should not assume capacity is written in stone and immune to monetary policy: “Should we think of this supply-side damage as permanent or temporary?” he said in his speech last week. “It seems plausible that at least part of the damage can be reversed. ...
This means, Mr. Powell says, the Fed should be more skeptical than usual when superficial evidence suggests the economy is approaching capacity. While he dances around the implications for monetary policy a bit, the conclusion is obvious: the Fed should stay easier, for longer, which should “not only help restore some of our economy’s potential,” but get inflation back up to 2% faster.
Mr. Powell’s logic is quite compelling and provides an important reason why the Fed should err on the side of letting unemployment fall well below traditional measures of the “natural rate” of unemployment before tightening. ...
The Gap In Monetary and Fiscal Policy, by Mark Thoma: One of the big questions for policymakers is how much of the current downturn represents of temporary cyclical fluctuation and how much of it is a permanent reduction in out productive capacity. If the downturn is mostly temporary, then we will eventually bounce back to the old output trend line. Something like this:
But if it's mostly permanent, i.e. if the trend has fallen to a lower value and will stay there, then the picture is different:
In the first case, highly stimulative policy is appropriate to help the economy get back to the long-run trend as soon as possible. There's still a lot of ground to cover, and policy can help. But in the second case the economy is already back to it's long-run trend at most points in time, or nearly so, and there is no need for policymakers to do much of anything at all. At least that's what we're told.
However, I think this misses part of the story. What it misses is that AS shocks themselves can be both permanent and temporary, and some people may be confusing one for the other. For example, when there as a large AD shock in the form of a change in preferences, say that people no longer like good A as it has gone out of fashion and have now decided B is the must have good, then there will be high unemployment in industry A and excess demand for labor and other resources in industry B. As workers and resources leave industry A, our productive capacity falls and it stays lower until the workers and other resources eventually find their way into industry B. When this process is complete, productive capacity returns to where it was before, or perhaps goes even higher. Thus, there is a short-run cycle in productive capacity that mirrors the business cycle.
A standard business cycle type AD shock will temporarily depress capacity and produce similar effects. Suppose that interest rates go up, taxes go up, government spending goes down, investment falls --pick your story -- causing aggregate demand to fall. When, as a result, businesses lay people off, idle equipment, etc., productive capacity will fall. It can be cranked up again, and will be when the economy recovers, but rehiring labor and taking equipment out of mothballs takes time. In the interim the natural rate of output falls and, just as with a change in the preference for good A versus good B, a negative aggregate demand shock can cause "frictions" on the supply side that temporarily increase the natural rate of unemployment. And there are many other ways this can happen as well.
The point is that there can be short-run cyclical AS effects, and failing to account for these can lead to policy errors. Consider the following diagram:
Up until the point where the line splits into three pieces, assume the economy is in long-run equilibrium with output at the natural rate (we can discuss whether the natural rate actually exists another time, I want to work in the standard model for the moment since that is where the policy discussion is centered). Then, for some reason, aggregate demand falls leading the economy into a recession. As AD falls, people are laid off, equipment is stored, factories are shuttered, and so on and the economy's capacity to produce falls in the short-run as shown by the blue line on the diagram.
But this is a temporary, not a permanent situation. Eventually people will be put back to work, trucks in parking lots will be back on the road, factories will reopen -- you get the picture -- and productive capacity will grow as the economy recovers. I believe many people are treating what is ultimately a temporary fall in capacity as a permanent change, and they are making the wrong policy recommendations as a result.
In fact, there's no reason to think productive capacity can't return to its long-run trend just as fast or faster than output can recover. If so, then it would be a mistake to do as many are doing presently and treat the blue short-run y* line as a constraint for policy, conclude that the gap is small and hence there's nothing for policy to do. Capacity will recover, and policymakers must take this into account when looking at whether additional policy can help the economy. If capacity can grow fast as the economy recovers, then it poses little constraint and policymakers should try to return us to the long-run trend as soon as possible. That is, aggressive policy is still called for even if productive capacity is presently relatively low. ...
One last point about the diagram. I drew the long-run line so there is a long-run decline in the trend of our productive capacity after the recession (i.e. a permanent shock). However, it's hard to see because, consistent with my beliefs, I do not think the change in our long-run capacity to produce goods and services will be as negative as many others. So the effect is not large in the diagram (I acknowledge I'm more optimistic on this point than many others that I respect). But even if the long-run trend had fallen by more than shown in the diagram, say by 50%, the points above would still hold. If the capacity to produce recovers as the economy recovers, and does so relatively fast, then policymakers should not be constrained by the belief that the natural rate of output is relatively low at the present time. Aggressive policy is still the best course of action.
If I were to do this today -- several years later -- I would draw the last graph so that the permanent fall in productive capacity is larger (i.e. the Y*LR line would be lower). But, as explained in the last paragraph, the main point still holds.
Secular Stagnation: The Long View, by Matt Nesvisky: Growth economists are divided on whether the U.S. is facing a period of "secular stagnation" - an extended period of slow economic growth in the coming decades. In "Secular Stagnation: The Long View" (NBER Working Paper No. 20836), Barry Eichengreen considers four factors that could contribute to a persistent period of below-potential output and slow growth: a rise in saving due to the global integration of emerging markets, a decline in the rate of population growth, an absence of attractive investment opportunities, and a drop in the relative price of investment goods. He concludes that a decline in the relative price of investment goods is the most likely contributor to an excess of saving over investment.
With regard to long-term future growth rates, a key point of debate is how to interpret, and project forward, the "Third Industrial Revolution": the computer age and the new economy it has created. Some argue that the economic impact of digital technology has largely run its course, while others maintain that we have yet to experience the full effect of computerization. In this context, Eichengreen looks at the economic consequences of the age of steam and of the age of electrification. His analysis identifies two dimensions of the economic impact: "range of applicability" and "range of adaptation."
Range of applicability refers to the number of sectors or activities to which the key innovations can be applied. Use of the steam engine of the first industrial revolution for many years was limited to the textile industry and railways, which accounted for only a relatively small fraction of economic activity. Electrification in the second industrial revolution, says Eichengreen, had a larger impact on output and productivity growth because it affected a host of manufacturing industries, many individual households, and a wide range of activities within decades of its development.
The "computer revolution" of the second half of the 20th century had a relatively limited impact on overall economic growth, Eichengreen writes, because computerization had deeply transformative effects on only a limited set of industries, including finance, wholesale and retail trade, and the production of computers themselves. This perspective suggests that the implications for output and productivity of the next wave of innovations will depend greatly on their range of applicability. Innovations such as new tools (quantum computers), materials (graphene), processes (genetic modification), robotics, and enhanced interactivity of digital devices all promise a broad range of applications.
Range of adaptation refers to how comprehensively economic activity must be reorganized before positive impacts on output and productivity occur. Eichengreen reasons that the greater the required range of adaptation, the higher the likelihood that growth may slow in the short run, as costly investments in adaptation must be made and existing technology must be disrupted.
Yet the slow productivity growth in the United States in recent years may have positive implications for the future, he writes. Many connected activities and sectors - health care, education, industrial research, and finance - are being disrupted by the latest technologies. But once a broad range of adaptations is complete, productivity growth should accelerate, he reasons. "This is not a prediction," Eichengreen concludes, "but a suggestion to look to the range of adaptation required in response to the current wave of innovations when seeking to interpret our slow rate of productivity growth and when pondering our future."
Moore's Law at 50: So many important aspects of the US and world economy turn on developments in information and communications technology and their effects These technologies were driving productivity growth, but will they keep doing so? These technologies have been one factor creating the rising inequality of incomes, as many middle-managers and clerical workers found themselves displaced by information technology, while a number of high-end workers found that these technologies magnified their output. Many other technological changes--like the smartphone, medical imaging technologies, decoding the human gene, or various developments in nanotechnology--are only possible based on a high volume of cheap computing power. Information technology is part of what has made the financial sector larger, as the technologies have been used for managing (and mismanaging) risks and returns in ways barely dreamed of before. The trends toward globalization and outsourcing have gotten a large boost because information technology made it easier
In turn, the driving force behind information and communications technology has been Moore's law, which can understood as the proposition that the number of components packed on to a computer chip would double every two years, implying a sharp fall in the capabilities of information technology. But the capability of making transistors ever-smaller, at least with current technology, is beginning to run into physical limits. IEEE Spectrum has published a "Special Report: 50 Years of Moore's Law," with a selection of a dozen short articles looking back at Moore's original formulation of the law, how it has developed over time, and prospects for the law continuing. Here are some highlights.
It's very hard to get an intuitive sense of the exponential power of Moore's law, but Dan Hutcheson takes a shot at it with few well-chosen sentences and a figure. He writes:
In 2014, semiconductor production facilities made some 250 billion billion (250 x 1018) transistors. This was, literally, production on an astronomical scale. Every second of that year, on average, 8 trillion transistors were produced. That figure is about 25 times the number of stars in the Milky Way and some 75 times the number of galaxies in the known universe. The rate of growth has also been extraordinary. More transistors were made in 2014 than in all the years prior to 2011.
Here's a figure from Hutcheson showing the trends of semiconductor output and price over time. Notice that both axes are measured as logarithmic scales: that is, they rise by powers of 10. The price of a transistor was more than a dollar back in the 1950s, and now it's a billionth of a penny.
As the engineering project of making the components on a computer chip smaller and smaller is beginning to get near some physical limits. What might happen next?
Chris Mack makes the case that Moore's law is is not a fact of nature; instead, it's the result of competition among chip-makers, who viewed it as the baseline for their technological progress, and thus set their budgets for R&D and investment according to keeping up this pace. He argues that as technological constraints begin to bind, the next step will be for combining capabilities on a chip. ...
Andrew Huang makes the intriguing claim that a slowdown in Moore's law might be useful for other sources of productivity growth. He argues that when the power of information technology is increasing so quickly, there is an understandably heavy focus on adapting to these rapid gains. But if gains in raw information processing slow down, there would be room for more focus on making the devices that use information technology cheaper to produce, easier to use, and cost-effective in many ways.
Jonathan Koomey and Samuel Naffziger point out that computing power has become so cheap that we often aren't using what we've got--which suggests the possibility of efficiency gains in energy use and computer utilization...
A small part of a much longer post from David Andolfatto (followed by some comments of my own):
In defense of modern macro theory: The 2008 financial crisis was a traumatic event. Like all social trauma, it invoked a variety of emotional responses, including the natural (if unbecoming) human desire to find someone or something to blame. Some of the blame has been directed at segments of the economic profession. It is the nature of some of these criticisms that I'd like to talk about today. ...
The dynamic general equilibrium (DGE) approach is the dominant methodology in macro today. I think this is so because of its power to organize thinking in a logically consistent manner, its ability to generate reasonable conditional forecasts, as well as its great flexibility--a property that permits economists of all political persuasions to make use of the apparatus. ...
The point I want to make here is not that the DGE approach is the only way to go. I am not saying this at all. In fact, I personally believe in the coexistence of many different methodologies. The science of economics is not settled, after all. The point I am trying to make is that the DGE approach is not insensible (despite the claims of many critics who, I think, are sometimes driven by non-scientific concerns). ...
Once again (lest I be misunderstood, which I'm afraid seems unavoidable these days) I am not claiming that DGE is the be-all and end-all of macroeconomic theory. There is still a lot we do not know and I think it would be a good thing to draw on the insights offered by alternative approaches. I do not, however, buy into the accusation that there "too much math" in modern theory. Math is just a language. Most people do not understand this language and so they have a natural distrust of arguments written in it. .... Before criticizing, either learn the language or appeal to reliable translations...
As for the teaching of macroeconomics, if the crisis has led more professors to pay more attention to financial market frictions, then this is a welcome development. I also fall in the camp that stresses the desirability of teaching more economic history and placing greater emphasis on matching theory with data. ... Thus, one could reasonably expect a curriculum to be modified to include more history, history of thought, heterodox approaches, etc. But this is a far cry from calling for the abandonment of DGE theory. Do not blame the tools for how they were (or were not) used.
I've said a lot of what David says about modern macroeconomic models at one time or another in the past, for example it's not the tools of macroeconomics, it's how they are used. But I do think he leaves out one important factor, the need to ask the right question (and why we didn't prior to the crisis). This is from August, 2009:
In The Economist, Robert Lucas responds to recent criticism of macroeconomics ("In Defense of the Dismal Science"). Here's my entry at Free Exchange in response to his essay:
I agree that the analytical tools economists use are not the problem. We cannot fully understand how the economy works without employing models of some sort, and we cannot build coherent models without using analytic tools such as mathematics. Some of these tools are very complex, but there is nothing wrong with sophistication so long as sophistication itself does not become the main goal, and sophistication is not used as a barrier to entry into the theorist's club rather than an analytical device to understand the world.
But all the tools in the world are useless if we lack the imagination needed to build the right models. We ... have to ask the right questions before we can build the right models.
The problem wasn't the tools that macroeconomists use, it was the questions that we asked. The major debates in macroeconomics had nothing to do with the possibility of bubbles causing a financial system meltdown. That's not to say that there weren't models here and there that touched upon these questions, but the main focus of macroeconomic research was elsewhere. ...
The interesting question to me, then, is why we failed to ask the right questions. ...
Why did we, for the most part, fail to ask the right questions? Was it lack of imagination, was it the sociology within the profession, the concentration of power over what research gets highlighted, the inadequacy of the tools we brought to the problem, the fact that nobody will ever be able to predict these types of events, or something else?
It wasn't the tools, and it wasn't lack of imagination. As Brad DeLong points out, the voices were there—he points to Michael Mussa for one—but those voices were not heard. Nobody listened even though some people did see it coming. So I am more inclined to cite the sociology within the profession or the concentration of power as the main factors that caused us to dismiss these voices. ...
I don't know for sure the extent to which the ability of a small number of people in the field to control the academic discourse led to a concentration of power that stood in the way of alternative lines of investigation, or the extent to which the ideology that markets prices always tend to move toward their long-run equilibrium values caused us to ignore voices that foresaw the developing bubble and coming crisis. But something caused most of us to ask the wrong questions, and to dismiss the people who got it right, and I think one of our first orders of business is to understand how and why that happened.
The criticism of real business cycle models and their close cousins, the so-called New Keynesian models, is misdirected and reflects a misunderstanding of the purpose for which those models were devised.6 These models were designed to describe aggregate economic fluctuations during normal times when markets can bring borrowers and lenders together in orderly ways, not during financial crises and market breakdowns.
Which to me is another way of saying we didn't foresee the need to ask questions (and build models) that would be useful in a financial crisis -- we were focused on models that would explain "normal times" (which is connected to the fact that we thought the Great Moderation would continue due to arrogance on behalf of economists leading to the belief that modern policy tools, particularly from the Fed, would prevent major meltdowns, financial or otherwise). That is happening now, so we'll be much more prepared if history repeats itself, but I have to wonder what other questions we should be asking, but aren't.
Let me add one more thing (a few excerpts from a post in 2010) about the sociology within economics:
One of the objections often raised is that Krugman and DeLong are not, strictly speaking, macroeconomists. But if Krugman, DeLong, and others are expressing the theoretical and empirical results concerning macroeconomic policy accurately, does it really matter if we can strictly classify them as macroeconomists? Why is that important except as an attempt to discredit the message they are delivering? ... Attacking people rather than discussing ideas avoids even engaging on the issues. And when it comes to the ideas -- here I am talking most about fiscal policy -- as I've already noted in the previous post, the types of policies Krugman, DeLong, and others have advocated (and I should include myself as well) can be fully supported using modern macroeconomic models. ...
So, in answer to those who objected to my defending modern macro, you are partly right. I do think the tools and techniques macroeconomists use have value, and that the standard macro model in use today represents progress. But I also think the standard macro model used for policy analysis, the New Keynesian model, is unsatisfactory in many ways and I'm not sure it can be fixed. Maybe it can, but that's not at all clear to me. In any case, in my opinion the people who have strong, knee-jerk reactions whenever someone challenges the standard model in use today are the ones standing in the way of progress. It's fine to respond academically, a contest between the old and the new is exactly what we need to have, but the debate needs to be over ideas rather than an attack on the people issuing the challenges.
The mythic quest for early warnings: Economists and policymakers are on a quest. They are looking for the elixir that will protect their economies from financial crises. Their strategy is to find an indicator that provides an early warning of collapse, and then respond with preventative measures.
We think the approach of waiting for warnings is seriously flawed. The necessary information may never be in our grasp. And even if it were, our ability to respond rapidly and effectively is far from clear. Rather than treating the symptoms of illness after they start to develop, we believe the better strategy is early immunization: the more resilient the financial system, the less reliance we will have on faulty or nonexistent warnings.
To back up a bit, there are now an abundance of indices designed to measure financial system stress. ... [reviews work on scores of indicators] These findings are compelling. They tell us that forecasting systemic stress is extremely difficult and that ordinary financial market indicators efficiently summarize what information there is. ...
We do not mean to strike too harsh a tone. Having accurate measures of where we stand is extremely useful. ...
Will researchers eventually develop measures that tell us not just where we stand, but where we are going? Is the quest for early warning indicators destined to succeed? It’s possible that with more detailed data on what is going on in both financial institutions and financial markets that we will be able to anticipate big risks on the horizon. We hope so, but shouldn’t plan on it: there are important grounds for skepticism. ...
Where does this leave us? Our answer is that we have yet another reason to be skeptical of time-varying, discretionary regulatory policy. In an earlier post, we noted that the combination of high information requirements, long transmission lags and significant political resistance made it unlikely time-varying capital requirements will be effective in reducing financial vulnerabilities. Our conclusion then, which we reiterate now, is that the solution is to build a financial system that is safe and resilient all of the time, since we really never know what is coming. That means a regulatory system based on economic function, not legal form, with sufficient capital buffers to guard against all but the very worst possibilities.
In the end, a financial system that relies on an early warning indicator of imminent financial collapse seems destined to fail.
I don't think we should stop trying to find indicators that would be useful to regulators (and neither do they), just because we haven't found them yet doesn't mean no such indicators exist -- they may. But I fully agree that regulation should be based upon the state of the art, and presently we haven't found reliable indicators of forthcoming problems in financial markets.
Please pay no attention..., there has never been a time ... when the alleged personal traits of candidates mattered less. As we head into 2016, each party is quite unified on major policy issues — and these unified positions are very far from each other. ...
For example, any Democrat would, if elected, seek to maintain the basic U.S. social insurance programs — Social Security, Medicare, and Medicaid..., while also preserving and extending the Affordable Care Act. Any Republican would seek to destroy Obamacare, make deep cuts in Medicaid, and probably try to convert Medicare into a voucher system.
Any Democrat would retain the tax hikes on high-income Americans..., and possibly seek more. Any Republican would try to cut taxes on the wealthy ... while slashing programs that aid low-income families.
Any Democrat would try to preserve the 2010 financial reform... Any Republican would seek to roll it back...
And any Democrat would try to move forward on climate policy, through executive action if necessary, while any Republican ... would block efforts to limit greenhouse gas emissions.
How did the parties get this far apart? Political scientists suggest that it has a lot to do with income inequality. As the wealthy grow richer..., their policy preferences have moved to the right — and they have pulled the Republican Party ever further in their direction. Meanwhile, the influence of big money on Democrats has at least eroded a bit, now that Wall Street, furious over regulations and modest tax hikes, has deserted the party en masse. The result is a level of political polarization not seen since the Civil War. ...
As you can probably tell, I’m dreading the next 18 months, which will be full of sound bites and fury, signifying nothing. O.K., I guess we might learn a few things — Where will Ms. Clinton come out on ... the Trans-Pacific Partnership? ... — but the differences between the parties are so clear and dramatic that it’s hard to see how anyone who has been paying attention could be undecided even now, or be induced to change his or her mind between now and the election.
One thing is for sure: American voters will be getting a real choice. May the best party win.
"Thomas Piketty and Joseph E. Stiglitz discuss the causes of, consequences of, and remedies for inequality. With opening remarks from Clive Cowdery, George Soros, OECD Secretary General Angel Gurria, Institute President Rob Johnson and Institute Board Members Anatole Kaletsky and Lord Adair Turner."
Governments can and should step in when private markets fail to provide important goods and services:
Where Government Excels, by Paul Krugman, Commentary, NY Times: As Republican presidential hopefuls trot out their policy agendas — which always involve cutting taxes on the rich while slashing benefits for the poor and middle class — some real new thinking is happening on the other side of the aisle. Suddenly,... many Democrats have decided to break with Beltway orthodoxy, which always calls for cuts in “entitlements.” Instead, they’re proposing that Social Security benefits actually be expanded. ... Democrats finally seem to be standing up to antigovernment propaganda and recognizing ... there are some things the government does better than the private sector.
Like all advanced nations, America mainly relies on private markets ... to provide its citizens with the things they want and need, and hardly anyone ... would propose changing that. ...
Yet we also know that some things ... must be done by government. Every economics textbooks talks about “public goods” like national defense... But are public goods the only area where the government outperforms the private sector? By no means.
One classic example of government doing it better is health insurance. ... And there’s another major example...: providing retirement security. ...
In an idealized world, 25-year-old workers would base their decisions about how much to save on a realistic assessment of what they will need ... in their 70s. They’d also be smart ... in how they invested those savings...
And in the real world..., Social Security is a shining example of a system that works. ... It provides older Americans who worked hard all their lives with a chance of living decently in retirement... The only problem is that the decline of private pensions, and their replacement with inadequate 401(k)-type plans, has left a gap that Social Security isn’t currently big enough to fill. So why not make it bigger?
Needless to say, suggestions along these lines are already provoking near-hysterical reactions, not just from the right, but from self-proclaimed centrists..., calling for cuts to Social Security has long been seen inside the Beltway as a “badge of seriousness, a way of showing how statesmanlike and tough-minded you are.” ...
But true seriousness means looking at what works and what doesn’t. Privatized retirement schemes work very badly; Social Security works very well. And we should build on that success.
The Opportunity Dodge, The American Prospect: We think of America as the land of opportunity, but the United States actually has low rates of upward mobility relative to other advanced nations... Creating more opportunity is therefore a worthy goal. However, when the goal of more opportunity is offered instead of addressing income inequality, it’s a dodge and an empty promise—because opportunity does not thrive amid great inequalities. ...
The opportunity dodgers .... ignore that income inequality and intergenerational mobility are closely linked..., one of the most robust and long-standing social science research findings is that ... the circumstances in which children grow up ... greatly shapes educational advancement. So, promoting education solutions to mobility without addressing income inequality is ultimately playing pretend. We can’t substantially change opportunity without changing the actual lived circumstances of disadvantaged and working-class youth. ...
Acknowledging that income inequality and poverty greatly affect schooling success means we need to improve the circumstances of poor children’s lives by providing stable, adequate housing and healthy, safe environments. Decent income for their parents is essential. ...
Last, it is important to recognize that some people are always going to end up on the bottom and middle rungs since ... somebody has to be below average. Economic policy must also be concerned that low- and moderate-income families have decent incomes, health care, and retirement. The opportunity dodgers are really saying they do not care how low- and middle-income families actually live.
BB and the Permahawks: Ben Bernanke comes down firmly against the idea that concerns about financial instability should lead central banks to raise interest rates even in a depressed economy. Good — and I was especially pleased to see him citing the Swedish example and the Ignoring of Lars Svensson as a case study.
One odd thing, however, is that I’m not at all sure that most people — even economists — would be able to figure out who, exactly, Bernanke is arguing with. And that is, I think, an important omission. We can and should have a pure economics debate about appropriate interest rate policy; but if we’re trying to understand the political economy — and we should, because this is about getting good decisions as well as good analysis — it is definitely relevant to note that the people making the financial stability argument for higher rates are permahawks, who keep coming up with new justifications for an unchanging policy demand. ...
Anyway, I think Ben Bernanke did us a bit of a disservice by not linking to whoever it is he’s arguing with. It would help to know that John Taylor and the BIS are on the other side, because this would let readers place their position here in context with their other positions.
I really hope The Economist is right about this, but I'm a bit more pessimistic:
Economic history is dead; long live economic history?: Two years ago, in a very interesting paper, Peter Temin bemoaned the decline of economic history as a research topic at universities. He took the example of what happened at the Massachusetts Institute of Technology (MIT) to prove his point. There, the subject reached its peak in the 1970s, when three members of the faculty taught economic history. But from then it declined until economic history vanished both from the faculty and the graduate programme around 2010.
But is economic history really dead? Last weekend, Britain's Economic History Society hosted its annual three-day conference in Telford, attempting to show the subject was still alive and kicking. The economic historians present at the gathering were bullish about the future. Although the subject's woes at MIT have been echoed across research universities in both America and Europe, since the financial crisis there has been something of a minor revival.
What revival does the article have in mind?:
renewed vigour can be most clearly seen in the debates economists are now having with each other
Economic history may well be dead as a subject studied in independent academic departments, as it was at universities in the 1970s. But as a subject that is needed as part of the study of economics and the making of public policy, economic history is—and should be—very much alive.
Conceptually, the Great Moderation led to the mistaken belief that the business cycle had been tamed and additional risks could be safely taken Efficient-markets theory provided a convenient pretext for failure to address new risks created by financial innovation and to adequately regulate the shadow banking system and securitization markets. And then there was the tendency for macroeconomists to forget as many lessons of the Great Depression as they remembered.
How is it possible that the ideas of Austrian School without supporting evidence in practice still dominate the macroeconomic policy in Europe?
The answer, I think, is that the Austrian School got it half right: Hayek, Mises and others highlighted how credit booms and busts were intrinsic to the market system. The histories of the 1920s and 2000s both bear them out. But they, or at least some of their followers, then went on to endorse liquidationism as the appropriate response to these problems, which is a logical nonsequitur.
What, if at all possible, will the experience of the Great Recession change regarding economic thinking in the future?
The fact is that economic thinking changes only very slowly. Senior professors of economics, with tenure, are set in their ways. They’ve been at it too long to change how they think even in the face of evidence incompatible with their theories. Better to disregard the evidence in that case, the thinking goes.
The field changes as students graduate and new scholars influenced by the Great Recession, by historical evidence and by Big Data begin to repopulate the field, making economics a more fundamentally empirical and historical discipline. I see at least some signs that this is beginning to happen.
Do You Have to Choose Growth or Development?: A number of posts/comments have been floating around the last few days that deal with the goals or the World Bank. Lant Pritchett published a piece that asks whether rich countries are in fact good partners for poor countries looking to develop. Pritchett is worried that rich-country development agencies (including the World Bank) have altered their focus from promoting overall economic development, and “defined development down” to be only about alleviating the conditions for the extremely poor – those earning less than $1 per day. ... Pritchett argues that this is to ignore the goals/values/hopes of actual people in those developing countries, who very much would like some material economic growth, please.
I’m very much on Pritchett’s side on this, with a caveat I’ll get to later in the post. I wrote a post back when I started this blog on defining development economics. I contrasted “development economics” with the “economics of poverty”. ...
Pritchett is arguing, in my mind, for the World Bank to return to thinking about growth economics, or about development in the classic sense. Looking for projects like ports, roads, energy generation, and the like. Scale-intensive activities that need someone to coordinate the investment, and investments that will not take place organically because they are essentially public goods. Things that might allow or push economies into sustained growth. ...
Acting to alleviate poverty is a noble, useful, moral activity. But you do not get sustained growth as a freebie on top of it. What Pritchett is arguing (I think. I’m putting words in his mouth here.) is that the Bank has presumed that their poverty alleviation efforts will generate growth as a byproduct. They haven’t, and most likely won’t. Growth is a distinct dimension of development different from poverty alleviation.
Now, here is my caveat to supporting Pritchett’s position. Who cares if it is specifically the World Bank that provides that infrastructure investment supporting economic growth? If the aims and goals of the World Bank have changed to poverty alleviation, fine. Let that be their focus, and the business of promoting growth can be left in the hands of other entities.
This has essentially already happened, and it isn’t clear why one should try to stop it. ... Development banks such as the Inter-American Development Bank, the African Development Bank, the Asian Development Bank, and the new bank proposed by China are all in the business of lending for large infrastructure projects. Let them.
I think Pritchett is wasting his time here, trying to turn the World Bank to a new (actually, old) heading. The Bank is a gargantuan organization, and has reached the point where self-perpetuation is as important as the actual mission. This isn’t to trash the World Bank, it’s no worse than any other large organization on this front. But if the nature of the interventions that the Bank wants to undertake has changed, so be it. Argue instead for increased funding to the existing development banks. Argue for the US to drop its opposition to the Chinese-led development bank. It may be useful or best to separate the poverty alleviation and growth-promotion, anyway. But you need both. Poverty alleviation alone is not a robust path to long-run sustained economic development.
The Financial Pressures of the Middle Class: Many references to the “middle class” are based on a simplistic definition, such as the middle 50 percent of families by income or wealth. While this may be effective for discovering, for example, trends in wealth distribution over time, these definitions uncover little about the characteristics of individual middle-class families and about how these families fare over time. A recent report from the St. Louis Fed's Center for Household Financial Stability sought to provide a demographic definition of the middle class and found that the middle class may be under more financial pressure than has been otherwise reported.
Senior Economic Adviser William Emmons and Lead Policy Analyst Bryan Noeth, both with the center, noted, “Our version of the demographically defined middle class reveals that families that are neither rich nor poor may be under more downward economic and financial pressure than common but simplistic rank-based measures of income or wealth would suggest.”
Defining the Middle Class
Emmons and Noeth separated families into three groups, all headed by someone at least 40 years old:
Thrivers, which are families likely to have income and wealth significantly above average in most year and are headed by someone with a two- or four-year college degree who is non-Hispanic white or Asian
Middle class, which are families likely to have income and wealth near average in most year and are headed by someone who is white or Asian with exactly a high school diploma or black or Hispanic with a two- or four-year college degree
Stragglers, which are families likely to have income and wealth significantly below average in most years and are headed by someone with no high school diploma of any race or ethnicity and black or Hispanic families with at most a high school diploma
The authors assigned black and Hispanic families with college degrees to the middle class and with high school degrees to the stragglers category due to the well-documented fact that black and Hispanic families typically have significantly lower income and wealth than their similarly educated white and Asian counterparts.
Income and Wealth
Using data from the Survey of Consumer Finances, Emmons and Noeth found that the median incomes of thrivers and stragglers were slightly higher in 2013 than in 1989, rising 2 percent and 8 percent, respectively. The middle class, however, experienced a decline in median income of 16 percent over the same period.
Regarding wealth, thrivers experienced an increase in median wealth of 22 percent over the period 1989-2013. The middle class and stragglers experienced large declines, with the median wealth of the middle class dropping 27 percent and of the stragglers dropping 54 percent over the same period.
Emmons and Noeth also examined the performance of each group relative to the population as a whole. They found that the median income of the middle class as they defined it grew 21 percent less than the overall median income from 1989 through 2013. The cumulative growth shortfall in wealth for the median demographically defined middle-class family was about 24 percent compared to overall median wealth. ...
Demographic Structure and the Macroeconomy: The disappointing recovery after the crisis has sparked renewed interest in the medium-run outlook of advanced economies. Lower population growth and its impact on labour supply gained widespread prominence. This column takes a more general view identifying the impact of the evolution of demographic structure, or the entire age profile, on the macroeconomy. Age profile changes have significant implications for savings, investment and growth but also affect innovation activities. The population aging predicted for the next decades is found to be a significant factor in reducing output growth and real interest rates across OECD countries.
In Search of Better Macroeconomic Models: Modern macroeconomic models did not perform well during the Great Recession. What needs to be done to fix them? Can the existing models be patched up, or are brand new models needed? ...
It's mostly about the recent debate on whether we need microfoundations in macroeconomics.
How the Geography of Jobs Affects Unemployment: In postwar America, many families moved away from urban centers into the rapidly developing suburbs. Culturally, these new communities were associated with economic opportunity, signifying middle-class values and upward mobility.
The path to economic mobility is no longer a highway leading from downtown to the suburbs. For example, the number of suburban residents in poverty may now exceed the number of urban-dwellers in poverty. According to the Brookings Institution, suburban poverty rose from 10 million in 2000 to 16.5 million in 2012, compared to an increase in urban poverty from 10.4 million to 13.5 million over the same period...
This geographic picture of opportunity and wealth adds complexity to questions about whether unfortunate circumstances, such as poverty, might be determined in part by where someone lives. To be sure, where one chooses to live is about more than job opportunities, which are weighed against housing options, commuting costs, lifestyle choice, social networks, and more. In equilibrium, housing prices and wages should make households indifferent among locations. In other words, some people might choose to live far away from jobs, possibly accepting a costlier commute, because they are "compensated" by factors such as lower housing costs.
But the places where people are distributed by market forces seem to lead, in some cases, to worse labor market outcomes. An explanation of those outcomes was first identified in 1968 as an account of how black unemployment rates were elevated by discriminatory housing policies. That explanation, commonly known as the "spatial mismatch hypothesis," posits constraints on where people are able to live.
The scope of spatial mismatch research has broadened beyond discrimination. Researchers seek to understand the constraints that certain households face when deciding where to live, helping to explain phenomena like prolonged unemployment, lower wages, longer commutes, and geographically concentrated poverty. This research may shed some light on how anti-poverty programs could take geography into account to be more effective. ...