Wednesday, May 04, 2016

The Productivity Slump and What to Do about It

Jared Bernstein:

The productivity slump and what to do about it:, I’d like to explore ... the significant downshift in productivity growth. ... I’m afraid the slowdown is real... I think there are 5 reasons: slower growth of capital per worker, slower TFP, capital misallocation, the absence of full employment, and dysfunctional government (labor quality has been pretty constant, so it isn’t much implicated in the slowdown). ...
First, as I detail here, there’s The Big Short problem: we have been misallocating capital to non-productive finance. ...
Second, we are failing to tap a full employment productivity multiplier (FEPM). Among the pantheon of wrong-headed economic theories is the one that says: firms failing to operate at the edge of their productivity potential will be competed out of business by more productive firms. Unfortunately, in slack labor and credit markets, inefficient firms can handily maintain profit margins by squeezing workers and rolling over cheap loans. At full employment, workers have more bargaining clout, labor costs go up, and inefficiencies become more costly (Josh Bivens agrees and offers some evidence.)
Third, analysis by Barry Eichengreen et al suggests that dysfunctional government eventually grinds down productivity growth. This strikes me as intuitive: an $18 trillion economy requires a government that can efficiently diagnose problems and prescribe solutions in areas of climate, infrastructure, education, innovation, social insurance, poverty and more. Our government, on the other hand, tends to engage in aimless votes to defund Obamacare and shudder the EPA and IRS.
So, how can we better allocate capital, move toward full employment and restore functional government? ... A deep infrastructure dive ... would be a big twofer, both on the productivity and full employment fronts. And by tightening the job market, there’d be positive feedback impact from the FEPM. ...
But here’s another idea with multiple benefits in this space: pay for these productivity enhancing investments with a small tax on financial transactions. That would both raise revenues needed for public investment and raise the cost of non-productive, “noise” trading. ...

    Posted by on Wednesday, May 4, 2016 at 08:00 AM in Economics, Productivity | Permalink  Comments (64) 

    Ben Bernanke and Democratic Helicopter Money

    Simon Wren-Lewis:

    Ben Bernanke and Democratic Helicopter Money: “The fact that no responsible government would ever literally drop money from the sky should not prevent us from exploring the logic of Friedman’s thought experiment, which was designed to show—in admittedly extreme terms—why governments should never have to give in to deflation.”
    The quote above is from a post by Ben Bernanke... I put it up front because it expresses a macroeconomic truth that no one should ever forget: persistent recessions and deflation are never inevitable, and always represent the failure of policy makers to do the right thing.
    There are many useful points in his post, but I just want to talk about one: Bernanke is in fact not talking about helicopter money in its traditional sense, but what I have called elsewhere ‘democratic helicopter money’.
    When most people talk about HM, they imagine some scheme whereby the central bank sends ‘everyone’ a cheque in the post, or transmits some money to each individual some other way. It is what economists would call a reverse lump sum tax, or reverse poll tax: the amount you get is independent of your income. That makes it different from a normal tax cut.
    In practice the central bank could only really do this with the cooperation of governments. It would not want to take the decision about what 'everyone' means on its own. (Do we include children or not. How do we find everyone?) But once those details had been sorted out, a system would be in place that the central bank could operate whenever it needed to.
    Bernanke suggests an alternative. The central bank sets aside a sum of newly created money, and the fiscal authorities then spend it as they wish. They could decide to use all the money to build bridges or schools rather than give it to individuals. There might be two reasons for doing HM this way. First, for some reason the fiscal authorities are reluctant to spend if they have to fund it by creating more debt, so it may allow them to get around this (normally self-imposed) ‘constraint’. Second, a money financed fiscal expansion could be more expansionary than a bond financed fiscal expansion. Lets leave the second advantage to one side, as the first is sufficient in a world obsessed by government debt.
    I have talked about something similar in the past (first here, but later here and here), which I have called democratic helicopter money. This label also seems appropriate for Bernanke’s scheme, because the elected government decides on the form of fiscal expansion. The difference between what I had discussed earlier under this label and Bernanke’s suggestion is that in my scheme the fiscal authorities and the central bank talk to each other before deciding on how much money to create and what it will be spent on (although the initiative always comes from the central bank, and would only happen in a recession where interest rates were at their lower bound). The reason I think talking would be preferable is simply that it helps the central bank decide how much money it needs to create. ...
    While democratic HM is not talked about much among economists (Bernanke excepted), I think there are good political economy reasons why it may be the form of HM that is eventually tried. As I have said, conventional HM of the cheque in the post kind almost certainly requires the involvement of government. Once governments realise what is going on, they may naturally think why set up something new when they could decide how the money is spent themselves in a more traditional manner. Democratic HM is essentially a method of doing a money financed fiscal expansion in a world of independent central banks.
    Which brings me back to the quote at the head of this post. The straight macroeconomics of most versions of HM is clear: all the discussion is about institutional and distributional details. If it is beyond us to manage to set in place any of them before the next recession that would be a huge indictment of our collective imagination, and is probably a testament to the power of imaginary fears and taboos created in very different circumstances.

      Posted by on Wednesday, May 4, 2016 at 07:36 AM in Economics, Fiscal Policy, Monetary Policy | Permalink  Comments (18) 

      Neo-Fisherian Policies Impart Unavoidable Instability

      My colleagues have a new paper on interest rate pegs in New Keynesian models:

      Interest Rate Pegs in New Keynesian Models by George W. Evans and Bruce McGough Abstract: John Cochrane asks: "Do higher interest rates raise or lower inflation?" We find that pegging the interest rate at a higher level will induce instability and most likely lead to falling inflation and output over time. Eventually, this will precipitate a change of policy. ...
      Conclusions: Following the Great Recession, many countries have experienced repeated periods with realized and expected inflation below target levels set by policymakers. Should policy respond to this by keeping interest rates near zero for a longer period or, in line with neo-Fisherian reasoning, by increasing the interest rate to the steady-state level corresponding to the target inflation rate? We have shown that neo-Fisherian policies, in which interest rates are set according to a peg, impart unavoidable instability. In contrast, a temporary peg at low interest rates, followed by later imposition of the Taylor rule around the target inflation rate, provides a natural return to normalcy, restoring inflation to its target and the economy to its steady state.

        Posted by on Wednesday, May 4, 2016 at 05:15 AM in Academic Papers, Economics, Monetary Policy | Permalink  Comments (16) 

        Links for 05-04-16

          Posted by on Wednesday, May 4, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (137) 

          Tuesday, May 03, 2016

          The Davos Lie

          Kevin O'Rourke:

          The Davos lie: ... If there's one thing that people agree about in Davos, it's that globalisation is a Good Thing. ...
          As is well known, many Western societies have become more unequal over the past two decades... During the 1980s and 1990s, the consensus was that this growing inequality was due not to international trade, but to technological change that was systematically favouring skilled over unskilled workers. ...
          More recently, however, the debate has swung back towards the view that trade is important in explaining rising inequality...
          Unfortunately for Davos, globalisation's losers are becoming increasingly hostile to trade (and immigration)..., ordinary people's attitudes towards globalisation are exactly what Heckscher-Ohlin economics would predict. ...
          Economists can tut-tut all they want about working-class people refusing to buy into the benefits of globalisation, but as social scientists we surely need to think about the predictable political consequences of economic policies. Too much globalisation, without domestic safety nets and other policies that can adequately protect globalisation's losers, will inevitably invite a political backlash. Indeed, it is already upon us.

            Posted by on Tuesday, May 3, 2016 at 08:33 AM in Economics, Income Distribution, International Trade | Permalink  Comments (90) 

            The Political Consequences of Slow Economic Growth

            I have a new column:

            How Slow Economic Growth Could Thwart a Clinton Presidency : Much has been written about the economic consequences of the slowdown in economic growth in recent years, but what about the political implications? If the slowdown continues, and there is reason to believe that it will, how will it affect the ability of the next president to implement his, or more likely her, economic agenda?
            If Hillary Clinton wins in November and economic growth remains low, the call from Republicans for tax cuts will become louder than it already is. ...
            If growth remains low we will also hear much more about how government regulation is stifling business activity. ...

            And so on (it's already started, John Cochrane, calling for deregulation "While the current presidential front-runners are not championing economic growth, House Speaker Paul Ryan and other House members are.").

              Posted by on Tuesday, May 3, 2016 at 07:05 AM in Economics, Fiscal Times, Politics | Permalink  Comments (31) 

              When Markets Aren't Perfect, Government Can Help

              At CBS MoneyWatch:

              When Markets Aren't Perfect, Government Can Help, by Mark Thoma: In response to a question about economic theory and its role in the financial crisis, Nobel Prize-winning economist Joseph Stiglitz said:
              "The strange thing about the economics profession over the last 35 year is that there has been two strands: One very strongly focusing on the limitations of the market, and then another saying how wonderful markets were. Unfortunately too much attention was being paid to that second strand."
              Even worse, those who have pointed out the markets' limitations have often been attacked as anti-market, against capitalism or favoring large government. That' a mischaracterization of this point of view. ...

                Posted by on Tuesday, May 3, 2016 at 05:52 AM in Economics, Market Failure | Permalink  Comments (19) 

                Links for 05-03-16

                  Posted by on Tuesday, May 3, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (126) 

                  Monday, May 02, 2016

                  Growth of Income and Welfare in the U.S, 1979-2011

                  From the NBER:

                  Growth of income and welfare in the U.S, 1979-2011, by John Komlos, NBER Working Paper No. 22211 Issued in April 2016: We estimate growth rates of real incomes in the U.S. by quintiles using the Congressional Budget Office’s (CBO) post-tax, post-transfer data as basis for the period 1979-2011. We improve upon them by including only the present value of earnings that will accrue in retirement and excluding items included in the CBO income estimates such as “corporate taxes borne by labor” that do not increase either current purchasing power or utility. We estimate a high and a low growth rate using two price indexes, the CPI and the Personal Consumption Expenditure index. The major consistent findings include what in the colloquial is referred to as the “hollowing out” of the middle class. According to these estimates, the income of the middle class 2nd and 3rd quintiles increased at a rate of between 0.1% and 0.7% per annum, i.e., barely distinguishable from zero. Even that meager rate was achieved only through substantial transfer payments. In contrast, the income of the top 1% grew at an astronomical rate of between 3.4% and 3.9% per annum during the 32-year period, reaching an average annual value of $918,000, up from $281,000 in 1979 (in 2011 dollars). Hence, the post-tax, post-transfer income of the 1% relative to the 1st quintile increased from a factor of 21 in 1979 to a factor of 51 in 2011. However, income of no other group increased substantially relative to that of the lowest quintile. Oddly, the income of even those in the 96-99 percentiles increased only from a multiple of 8.1 to a multiple of 11.3. We next estimate growth in welfare assuming diminishing marginal utility of income. A logarithmic utility function yields a growth in welfare for the middle class of roughly 0.01% to 0.07% per annum, which is indistinguishable from zero. With interdependent utility functions only the welfare of the 5th quintile experienced meaningful growth while those of the first four quintiles tend to be either negligible or even negative.

                  [Open link to earlier version.]

                    Posted by on Monday, May 2, 2016 at 11:22 AM in Academic Papers, Economics, Income Distribution | Permalink  Comments (8) 

                    The Legacy of Joan Robinson

                    This is by Barkley Rosser (I left quite a bit out, including the connections to the Sander's campaign):

                    The Legacy of Joan Robinson: ... Joan Violet Maurice Robinson (1903-1983) was without doubt the most important woman economist born before 1930 and maybe still the most important woman economist ever. ...

                    While she nearly got a Nobel Prize, and certainly deserved one, she suffered professionally from being a woman. She was only appointed a Lecturer at Cambridge in 1937, well after she had already published several highly innovative and influential works. She was only made a Full Professor at Girton College at Cambridge University (which she had attended) in 1965, the year her husband retired from his professorship. Rumor has it that she came closest to receiving the Nobel Prize in 1975, the year Kantorovich and Koopmans got it for linear programming (which created a major stink among mathematicians who said that at a minimum George Dantzig should have shared it). I do not know if she was thought of as a possible third for them or a replacement for them, perhaps with Piero Sraffa sharing, who also never got one while arguably deserving it, who could have shared it credibly with Leontief in 1973 for input-output analysis. The Encyclopedia Britannica reports that her leftwing political views may have played a role in her not getting it. I also heard it from a primary source that Assar Lindbeck, the committee's dominant figure then, once said that if either Joan Robinson or James Buchanan got it, it would be over his dead body, although Buchanan did get it in 1986, with Lindbeck still on the committee and not dead, although Joan Robinson had been dead for three years by then.

                    As evidence that she was clearly in contention in the mid-70s, I shall report something I observed on an elevator in the New York Hilton during the 1973 AEA meetings (the first I ever attended). Lionel McKenzie, another who never got the prize but should have, was talking to somebody else. McKenzie told this other person that "they are going to give it to Joan Robinson next for her Economics of Imperfect Competition, but she will refuse it." As it was, she never got the chance to do so.

                    Speaking of that 1933 book, that was her first major publication and remains one of her most important, indeed worthy of a trip to Stockholm in and of itself. Among other things in it, she invented the word "monopsony." While she later wrote less about monopolistic competition, one can see that it remained very much on her mind if one reads her excellent 1977 article in the JEL, "What are the Questions?" a good overview of how she viewed economics near the end of her life. She spends quite a bit of it going on about the issue of monopoly power and its importance. I note that this is one area where her concerns are very relevant to current economics, with many now posing that increased monopoly power in the US economy may be playing a role in secular stagnation.

                    She was indeed a core Keynesian, one of the three people thanked by Keynes himself in the Preface to his 1936 General Theory. She also supported Kalecki, whom Keynes had in to Cambridge, but by all accounts did not like. In 1937 she wrote her influential essay on "Beggar thy neighbour policies," which made the concept associated with competitive devaluations widely known, although the term had appeared before previously, used once by Adam Smith and also by a British economist named Gower in 1932.

                    In 1941 she published her famous Essay on Marxian Economics, in which she rejected the labor theory of value and basically supported redoing Marx along Keynesian and Sraffian lines. She would indeed later praise both Maoist China and North Korea, but saw China in particular as possibly offering another way of modifying Marx along useful lines. However, Robinson was always known for her pithy remarks, and one from that era was "There is only one thing worse than being exploited, and that is not being exploited" (that is, unemployed).

                    The 1950s may have seen the high water mark of her work. She set off the Cambridge capital theory debates with her 1954 paper in the Review of Economic Studies, "The production function and the theory of capital," in which she took apart the idea of aggregate capital, with Paul Samuelson in 1966 agreeing that she was right. The first time I ever met Samuelson (in the early 70s) I gave him a hard time about this issue, and he just completely agreed with her and said that capital must be modeled as being heterogeneous. One of the more hidden but very important roles she played in the 1950s was to work on Piero Sraffa to finally complete his short, but important, 1960 book, Production of Commodities by Commodities: A Prelude to a Critique of Economic Theory. He had been working on it for 35 years, but it was still only a prelude to a critique, not a critique itself. Samuelson claimed that if he had published it in 1930, he would indeed have shared the Nobel Prize with Leontief.

                    In 1956 she published what is probably her magnum opus, although now widely ignored, The Accumulation of Capital, which in contrast to her later critiques of analytical equilibrium analysis in favor of looking at "historical time," was in fact a study of various equilibrium growth models, many of which she provided amusing names for such as "bastard golden age" and "creeping platinum age." She did not generally use formal equations but rather favored figures and graphs backed up by clear verbal descriptions and discussions. Apparently in 1949 Koopmans asked her to be on the board of the Econometric Society, but she refused on the grounds that she did not want to be part of something that produced things she could not read. After 1960 her work increasingly moved towards more methodological issues, such as her 1962 Economic Philosophy, as well as work looking at development issues, especially in India, but also her highly controversial work on China and North Korea. ...

                    The final, and maybe most important, influence of Joan Robinson today is on Post Keynesian economics, or post-Keynesian economics...
                    Joan Robinson's thought and career are both relevant and currently influencing many economists today, including many who have never heard of her through some of her ideas simply entering into basic textbooks, such as "monopsony."

                      Posted by on Monday, May 2, 2016 at 08:44 AM in Economics, History of Thought | Permalink  Comments (100) 

                      Paul Krugman: The Diabetic Economy

                      "How should we think about these incredibly low interest rates?":

                      The Diabetic Economy, by Paul Krugman, Commentary, NY Times: Things are terrible here in Portugal, but not quite as terrible as they were a couple of years ago. The same thing can be said about the European economy as a whole. That is, I guess, the good news.

                      The bad news is that eight years after what was supposed to be a temporary financial crisis, economic weakness just goes on and on... And that’s something that should worry everyone, in Europe and beyond. ...
                      Look at what financial markets are saying.
                      When long-term interest rates on safe assets are very low, that’s an indication that investors don’t see a strong recovery on the horizon. Well, German five-year bonds currently yield minus 0.3 percent...
                      How should we think about these incredibly low interest rates? Recently Narayana Kocherlakota ... offered a brilliant analogy. Responding to critics of easy money who denounce low rates as “artificial” ... he suggested that we compare low interest rates to the insulin injections that diabetics must take.
                      Such injections aren’t part of a normal lifestyle, and may have bad side effects, but they’re necessary to manage the symptoms of a chronic disease.
                      In the case of Europe, the chronic disease is persistent weakness in spending... The insulin of cheap money helps fight that weakness, even if it doesn’t provide a cure. ...
                      The thing is, it’s not hard to see what Europe should be doing to help cure its chronic disease. The case for more public spending, especially in Germany — but also in France, which is in much better fiscal shape than its own leaders seem to realize — is overwhelming. ...
                      But doing the right thing seems to be politically out of the question. Far from showing any willingness to change course, German politicians are sniping constantly at the central bank, the only major European institution that seems to have a clue...
                      Put it this way: Visiting Europe can make an American feel good about his own country.
                      Yes, one of our two major parties is poised to nominate a dangerous blowhard for president — but ... the odds are that he won’t actually end up in the White House.
                      Meanwhile, the overall economic and political situation in America gives ample grounds for hope, which is in very short supply over here.
                      I’d love to see Europe emerge from its funk. The world needs more vibrant democracies! But at the moment it’s hard to see any positive signs.

                        Posted by on Monday, May 2, 2016 at 07:37 AM in Economics, Fiscal Policy, Monetary Policy | Permalink  Comments (78) 

                        Links for 05-02-16

                          Posted by on Monday, May 2, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (134) 

                          Sunday, May 01, 2016

                          Technology versus the Distribution of Workers in Aggregate Productivity

                          Dietrich Vollrath:

                          Technology versus the Distribution of Workers in Aggregate Productivity: There was a recent post by an engineer rebutting Robert Gordon’s (and others) thesis that technological change was slowing down. The evidence cited is a series of plots and figures showing how specific technologies (battery storage, energy efficiency, computer speed, etc..) are advancing just as fast as they have for decades, if not faster. And there were a number of responses along the lines of “See, Gordon is wrong!”.
                          The mistake here is that this doesn’t constitute evidence that Gordon is wrong. But the mistake is partly forgivable because Gordon himself indulges in these kinds of anecdotal arguments to advance his thesis, and so it seems as if you could refute his conclusions by offereing alternative anecdotes.
                          But the important part of Gordon’s argument is not that specific technologies are or are not advancing. It is that aggregate productivity growth is slowing down. And aggregate productivity growth depends not only on individual technologies, but crucially on the distribution of workers using those technologies. Arguing about only those individual technologies is like using an increase in the price of milk to argue that inflation must be high.
                          Aggregate productivity growth depends on what we can call “within-sector” growth, which is going to be tied closely to those individual technologies. But it also depends on “across-sector” growth, which is tied to the movement of workers from one sector (or job) to another. If workers are shifting from high- to low-productivity sectors or jobs, then aggregate productivity growth may fall even though nothing happened to actual technological change.
                          I’ll make this more clear below, but here’s a quick summary of what I’ll try to establish. Gordon’s critics could well be right about their individual technologies, and yet wrong about this having anything to do with aggregate growth, because those sectors may not employ many people. And Gordon can be right about aggregate growth, but wrong about individual technologies stagnating, because the movement of workers to low-productivity sectors may be dragging down growth. In short, you cannot talk about aggregate productivity growth without talking about both technology and the distribution of workers across sectors.
                          Gruesome Detail...

                            Posted by on Sunday, May 1, 2016 at 08:12 AM in Economics, Productivity | Permalink  Comments (43) 

                            Saturday, April 30, 2016

                            When Europe Stumbled

                            Paul Krugman:

                            When Europe Stumbled: Doing some homework on the European economy...

                            ... What was happening in 2011-2012? Europe was doing a lot of austerity. But so, actually, was the U.S., between the expiration of stimulus and cutbacks at the state and local level. The big difference was monetary: the ECB’s utterly wrong-headed interest rate hikes in 2011, and its refusal to do its job as lender of last resort as the debt crisis turned into a liquidity panic, even as the Fed was pursuing aggressive easing.
                            Policy improved after that... But I think you can make the case that the policy errors of 2011-2012 rocked the euro economy back on its heels...
                            Oh, and America might have turned European too if the Bernanke-bashers of the right had gotten what they wanted.

                              Posted by on Saturday, April 30, 2016 at 02:13 PM in Economics, Fiscal Policy, Monetary Policy | Permalink  Comments (59) 

                              Links for 04-30-16

                                Posted by on Saturday, April 30, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (127) 

                                Friday, April 29, 2016

                                Listen Carefully for Signs of the Next Global Recession

                                Robert Shiller:

                                Listen Carefully for Signs of the Next Global Recession: Economists are good at measuring the past but inconsistent at forecasting future events, particularly recessions. That’s because recessions aren’t caused merely by concrete changes in the markets. Beliefs and stories passed on by thousands of individuals are important factors, maybe even the main ones, in determining big shifts in the economy.

                                That is likely to be the case again, whenever we next endure a global recession. Worries that a big downturn might be imminent seem to have abated, but they still abound. In April, for example, the International Monetary Fund reported in its World Economic Outlook that while very modest growth is likely this year, the world economy was in a “fragile conjuncture.”

                                It is therefore worth asking what actually sets off a real global recession. ...

                                He end with:

                                We don’t know whether any specific event — say, an unexpected spike in oil prices or a decline in the stock market — will help transform any of the current social stories into a truly virulent economic disruption. We don’t know what is coming or when. But history does tell us that human imagination can spontaneously transform discrete events into world-shaking narratives of unexpected color and force.

                                  Posted by on Friday, April 29, 2016 at 09:55 AM in Economics | Permalink  Comments (25) 

                                  Paul Krugman: Wrath of the Conned

                                   The fall of the Republican establishment:

                                  Wrath of the Conned, by Paul Krugman, Commentary, NY Times: ... Think about where we were a year ago. At the time, Hillary Clinton and Jeb Bush were widely seen as the front-runners for their parties’ nods. If there was any dissent from the commentariat, it came from those suggesting that Mr. Bush might be supplanted by a fresher, but still establishment, face, like Marco Rubio.
                                  And now here we are. But why did Mrs. Clinton ... go the distance, while the G.O.P. establishment went down to humiliating defeat? ... [B]asically it comes down to fundamental differences between the parties and how they serve their supporters.
                                  Both parties make promises to their bases. But while the Democratic establishment more or less tries to make good on those promises, the Republican establishment has essentially been playing bait-and-switch for decades. And voters finally rebelled against the con.
                                  First, about the Democrats: Their party defines itself as the protector of the poor and the middle class, and especially of nonwhite voters. Does it fall short of fulfilling this mission much of the time? Are its leaders sometimes too close to big-money donors? Of course. Still, if you look at the record of the Obama years, you see real action on behalf of the party’s goals.
                                  Above all, you have the Affordable Care Act, which has given about 20 million Americans health insurance, with the gains biggest for the poor, minorities and low-wage workers. That’s what you call delivering for the base... And this was paid for largely with higher taxes on the rich...
                                  Things are very different among Republicans. Their party has historically won elections by appealing to racial enmity and cultural anxiety, but its actual policy agenda is dedicated to serving the interests of the 1 percent, above all through tax cuts for the rich — which even Republican voters don’t support, while they truly loathe elite ideas like privatizing Social Security and Medicare.
                                  What Donald Trump has been doing is telling the base that it can order à la carte. He has, in effect, been telling aggrieved white men that they can feed their anger without being forced to swallow supply-side economics, too. Yes, his actual policy proposals still involve huge tax cuts for the rich...
                                  Mr. Trump is playing a con game of his own, and they’ll eventually figure that out, too. But it won’t happen right away, and in any case it won’t help the party establishment. Sad!

                                    Posted by on Friday, April 29, 2016 at 07:15 AM Permalink  Comments (124) 

                                    Fed Watch: Warning: Hawkishness Ahead

                                    Tim Duy:

                                    Warning: Hawkishness Ahead, by Tim Duy: The Fed has proven very dovish since their December rate hike. Tumultuous financial markets gave the Fed doves the upper hand, leading the Fed to pause in it’s “normalization” campaign and cut in half the expected pace of rate hikes this year.
                                    But be prepared for the tenor of the song to change. I would not be surprised to see doves shedding their feathers to reveal the hawk underneath.
                                    Boston Federal Reserve President Eric Rosengren exemplifies this shift. Twice in recent weeks, Rosengren, typically considered a notable dove, warned that financial markets were underestimating the odds of rates hikes this year. The Fed made clear in the dots they expect at least two hikes; financial markets anticipate only one.
                                    What is going on here? First, as I said earlier this week, the Fed is not happy that markets wrote of a June rate hike. I am wary that the data arrives to support a rate hike, but don’t think the Fed is ready to give up on that hike just yet.
                                    One thing to remember is that the Fed still prefers to hike early and slowly if possible. They are more aware of the asymmetric risks they face than in December, and hence recognize that they should error on the side of looser policy in an uncertain environment. Hence skip March and April. But once the risk subsides, they will return to old habits. And old habits in this case mean a return to quarterly rate hikes.
                                    My assumption is that they want the option to both hike quarterly and hike three times should the economic environment shift. That means they are thinking June-September-December is a possibility still (the dots are just a forecast, they are not committed to just two rate hikes). So they really need to keep the June option open, otherwise they run a greater risk of bunching up the next few hikes. Which means they want to raise the odds of a June hike to something closer to 50-50. The recent FOMC statement, in which declined to mention the risks, was an early signal of the direction they want to move.
                                    And note that not mentioning the risks at all is arguably a de facto assessment of balanced risks in the world of central banking. My suspicion is the Fed feared that actually saying “balanced” would be a stronger indicator than they wanted to send. But they still said a lot by saying nothing at all.
                                    Now, why should the Fed have a change of heart? Didn’t Federal Reserve Chair Janet Yellen just go all dovish? How can they change their story so fast?
                                    They can change their story within the scope of six weeks. Just like they did from the December to January meetings. And they have the one good reason to change the story: The dramatically change in financial market conditions.
                                    The tightening in financial markets during the winter was the proximate cause of a more cautious Fed. The data didn’t help, to be sure, but more on that later. The combination of a surging dollar, collapsing oil, and a stock market headed only south signaled that the Fed’s policy stance has turned too hawkish, too fast. The Fed relented and heeded the market’s warnings.
                                    But things are different now. US stock market rebounded. The dollar is languishing. And oil is holding its gains, despite disappointment with the lack of an output agreement.
                                    This improvement will not go unnoticed on Constitution Ave. Even among the doves.
                                    That brings us to the data story. To be sure, incoming data this quarter has been lackluster. But that might soon be changing. Gavyn Davies, writing for the FT, is spinning a more optimistic tale:
                                    The Fulcrum nowcast suggest that US activity growth fell continuously from the beginning of 2015 to February 2016, by which time it was around 1.0 per cent. However, in a potentially important change, the nowcast moved sharply higher in March and April, and it is now fluctuating around 2.0-2.5 per cent. This change was rapidly reflected in the prices of US risk assets, which recovered slightly before, and then along with, the daily US nowcasts.
                                    Financial markets do not wait for quarterly GDP to be published, and they often ignore it altogether when it does finally appear. We prefer to ignore the noise from quarterly GDP, while focusing attention on the underlying activity factor that is driving the business cycle.
                                    He includes this picture:


                                    Be forewarned: The Fed is primed by financial markets to change their story. If the data shifts as well, they will be looking hard at June. I don’t think the data will line up in time, but the possibility should be on your radar. There is a lot of data between the April and June meetings – two releases of many critical indicators. Too much data to be complacent.
                                    Bottom Line: Remember, the Fed can turn hawkish as quickly as it turned dovish.

                                      Posted by on Friday, April 29, 2016 at 03:00 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (25) 

                                      Links for 04-29-16

                                        Posted by on Friday, April 29, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (98) 

                                        Thursday, April 28, 2016

                                        Another Weak Quarter for U.S. GDP

                                        Jim Hamilton:

                                        Another weak quarter for U.S. GDP: The Bureau of Economic Analysis announced today that U.S. real GDP grew at a 0.5% annual rate in the first quarter. That’s disappointing, even by standards of the weak growth that has become the norm since getting out of the Great Recession. ...
                                        Housing investment was one bright point. Another was growth in government spending at the state and local level which more than made up for a drop at the federal level. An important drag came from the decline in exports, reflecting economic weakness outside the United States. The biggest negative was a drop in nonresidential fixed investment, which by itself subtracted 3/4 of a percent from the Q1 annual growth rate. ... Further declines in investment spending in the oil-producing sector contributed to that. ...
                                        The disappointing Q1 GDP numbers brought our Econbrowser Recession Indicator Index up to 15.7%. ... That’s still significantly below the 67% threshold at which our algorithm would declare that the U.S. had entered a new recession. ...
                                        U.S. growth is certainly facing some significant headwinds, and lower oil prices do not appear to have helped. Nevertheless, the employment numbers have been showing strong momentum, and housing can make further positive contributions in the coming two years. Maybe not enough to get us back to 3%. But we can still hope to get back to 2%.

                                        The White House's view: Advance Estimate of Gross Domestic Product for the First Quarter of 2016, by Jason Furman,

                                        [I should add that the estimate will be revised later, and there are questions about the seasonal adjustment procedure for 1st quarter numbers.]

                                          Posted by on Thursday, April 28, 2016 at 09:35 AM in Economics | Permalink  Comments (41) 

                                          High-Risk Pools Don't Work, Have Never Worked, and Won't Work in the Future

                                           Kevin Drum:

                                          High-Risk Pools Don't Work, Have Never Worked, and Won't Work in the Future: Even among conservative voters, Obamacare's protection of people with pre-existing conditions has always been popular. ... But popular or not, Paul Ryan wants nothing to do with it:

                                          ..."Less than 10 percent of people under 65 are what we call people with pre-existing conditions, who are really kind of uninsurable," Ryan, a Wisconsin Republican, told a student audience at Georgetown University. "Let's fund risk pools at the state level to subsidize their coverage, so that they can get affordable coverage," he said. "You dramatically lower the price for everybody else. You make health insurance so much more affordable, so much more competitive and open up competition."

                                          It's true that the cost of covering sick people raises the price of insurance for healthy people. That's how insurance works. But there's no magic here. It costs the same to treat sick people whether you do it through Obamacare or through a high-risk pool—and it doesn't matter whether you fund it via taxes for Obamacare or taxes for something else. However, there are some differences:

                                          • Handling everyone through a single system is more efficient and more convenient.
                                          • High-risk pools have a lousy history. They just don't work.
                                          • Implementing them at the state level guarantees a race to the bottom, since no state wants to attract lots of sick people into its program.
                                          • Ryan's promise to fund high-risk pools is empty. He will never support the taxes it would take to do it properly, and he knows it.

                                          This is just more hand waving. Everyone with even a passing knowledge of the health care business knows that high-risk pools are a disaster, but Republicans like Ryan keep pitching them anyway as some kind of bold, new, free-market alternative to Obamacare. They aren't. They've been around forever and everyone knows they don't work.

                                          See also Shorter Paul Ryan to Cancer Patients: Die Quickly from Charles Gaba.

                                          Sorry, that's really the only headline which came to mind when I read this story...

                                          The magic solution to the problem, according to Ryan and the GOP, is "high risk pools", which simply means separating out the sickest, most expensive people in the country and dumping them into a separate program.

                                          With the "bad apples" (ie, human beings with terrible medical problems) safely tucked out of the way, the average cost of treating everyone else supposedly suddenly becomes less pricey.

                                          This is the exact opposite of the entire point of health insurance in the first place...spreading the risk. In addition, as Jean P. Hall notes in this Commonwealth Fund analysis, it doesn't actually save anyone a dime...

                                          Harold Pollack put it far more succinctly for the Twitter age:

                                          @charlesornstein @LenMNichols @Reuters_Health high risk pools are among the very worst ideas in health policy.

                                          — Harold Pollack (@haroldpollack) April 28, 2016

                                            Posted by on Thursday, April 28, 2016 at 09:23 AM in Economics, Health Care | Permalink  Comments (24) 

                                            A Conversation With Joseph Stiglitz

                                            From an interview of Joe Stiglitz:

                                            ...White: ... To what extent do you feel economist and economic theory is culpable for the crisis? What is the role of an economist going forward?
                                            Stiglitz: The prevalent ideology—when I say prevalent  it’s not all economists— held that markets were basically efficient, that they were stable. You had people like Greenspan and Bernanke saying things like “markets don't generate bubbles.” They had precise models that were precisely wrong and gave them confidence in theories that led to the policies that were responsible for the crisis, and responsible for the growth in inequality. Alternative theories would have led to very different policies. For instance, the tax cut in 2001 and 2003 under President Bush. Economists that are very widely respected were cutting taxes at the top, increasing inequality in our society when what we needed was just the opposite. Most of the models used by economists ignored inequality. They pretended that macroeconomy was unaffected by inequality. I think that was totally wrong. The strange thing about the economics profession over the last 35 year is that there has been two strands: One very strongly focusing on the limitations of the market, and then another saying how wonderful markets were. Unfortunately too much attention was being paid to that second strand.
                                            What can we do about it? We've had this very strong strand that is focused on the limitations and market imperfections. A very large fraction of the younger people, this is what they want to work on. It's very hard to persuade a young person who has seen the Great Recession, who has seen all the problems with inequality, to tell them inequality is not important and that markets are always efficient. They'd think you're crazy. ...

                                            When I first started blogging, I used to do posts with the title "Market Failure in Everything." as a counter to "the prevalent ideology." Maybe I should revive something similar.

                                              Posted by on Thursday, April 28, 2016 at 06:59 AM in Economics, Market Failure | Permalink  Comments (16) 

                                              Links for 04-28-16

                                                Posted by on Thursday, April 28, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (101) 

                                                Wednesday, April 27, 2016

                                                No Rate Hike. Will it Happen in June?

                                                Output growth has slowed, labor markets and inflation have improved, less concern about the global economy, no rate hike. An increase in the target rate is on the table for June, but far from certain at this point:

                                                Press Release, Release Date: April 27, 2016: Information received since the Federal Open Market Committee met in March indicates that labor market conditions have improved further even as growth in economic activity appears to have slowed. Growth in household spending has moderated, although households' real income has risen at a solid rate and consumer sentiment remains high. Since the beginning of the year, the housing sector has improved further but business fixed investment and net exports have been soft. A range of recent indicators, including strong job gains, points to additional strengthening of the labor market. Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and falling prices of non-energy imports. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

                                                Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

                                                Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.

                                                In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

                                                The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

                                                Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo. Voting against the action was Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.

                                                  Posted by on Wednesday, April 27, 2016 at 11:17 AM in Economics, Monetary Policy | Permalink  Comments (23) 

                                                  Millennials are Increasingly Rejecting Voodoo Economics

                                                  Some good news from Catherine Rampell:

                                                  Millennials are increasingly rejecting voodoo economics: As my colleague Max Ehrenfreund noted, the latest youth poll from Harvard’s Institute of Politics suggests that young people are becoming more liberal. Compared with responses from the past few years, today’s 18-to-29-year-olds are more likely to believe “basic health insurance is a right for all people,” “basic necessities, such as food and shelter, are a right that government should provide to those unable to afford them,” and “the government should spend more to reduce poverty.”
                                                  Here’s another interesting data point that I haven’t seen others mention: Young people have also become less likely to believe the central tenet of supply-side (a.k.a. “voodoo”) economics.
                                                  Just 35 percent of respondents said they agreed with the statement that tax cuts are an effective way to increase growth, which is 5 percentage points lower than last year and the lowest share since the poll first asked a question with this phrasing. This is bad news for Republican candidates...

                                                    Posted by on Wednesday, April 27, 2016 at 07:25 AM Permalink  Comments (63) 

                                                    The World Needs More U.S. Government Debt

                                                    Narayana Kocherlakota:

                                                    The World Needs More U.S. Government Debt: ...The federal government is causing great harm by failing to issue enough debt. ...
                                                    To some, the idea that the U.S. government isn't issuing enough debt may seem counterintuitive -- after all, federal debt outstanding has more than doubled over the past 10 years. But scarcity is not about supply alone. In the wake of the financial crisis, households and businesses are demanding more safe assets to protect themselves against sudden downturns. Similarly, regulators are requiring banks to hold more safe assets. Market prices tell us that the government needs to produce more safety in order to meet this increased demand.
                                                    The scarcity of safety creates hardships... Retirees can’t get adequate returns on their nest eggs. Banks can't earn enough on safe, long-term investments to cover the costs of attracting deposits (interest rates on which can’t fall much below zero). ...
                                                    The inadequate provision of safe assets also has profound implications for financial stability. Without enough Treasury bonds to go around, investors “reach for yield” by buying apparently safe securities from the private sector (remember all those triple-A-rated subprime-mortgage investments of the 2000s?). If such behavior becomes widespread, it can create systemic risks that tip the financial system into crisis. ...
                                                    No private entity would behave like this. Imagine a corporation with such a safe cash flow and such low borrowing costs. It would issue debt to fund expansions or payouts to its shareholders.
                                                    Analogously, the U.S. government should issue more debt, using the proceeds to invest in infrastructure, cut taxes or both. Instead, political forces have imposed artificial constraints on debt -- constraints that punish savers, choke off economic growth and could sow the seeds of the next financial crisis.

                                                      Posted by on Wednesday, April 27, 2016 at 07:09 AM in Economics, Financial System, Fiscal Policy | Permalink  Comments (56) 

                                                      Links for 04-27-16

                                                        Posted by on Wednesday, April 27, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (152) 

                                                        Tuesday, April 26, 2016

                                                        The Fed Is Meeting in April to Talk About June

                                                        Tim Duy:

                                                        The Fed will stand pat this week. We know it, they know it. So what then will the Fed talk about for two days?
                                                        The April meeting of the Federal Open Market Committee (FOMC) will be about the June meeting. Policymakers' fundamental challenge is that the FOMC doesn't want to rule out a June hike, but the markets already have. They need to decide if they want to make a play for a June hike and how to communicate such a message. They'll probably want to keep the option for a June hike open and hence will alter this week’s statement accordingly. ... Continued at Bloomberg...

                                                          Posted by on Tuesday, April 26, 2016 at 12:36 PM in Economics, Monetary Policy | Permalink  Comments (14) 

                                                          Police versus Prisons

                                                          Curious what you think:

                                                          Police versus Prisons, by Alex Tabarrok: ...The ... United States spends much more per-capita on prison guards than does the rest of the world. Given our prison population, that isn’t surprising. What is surprising is that on a per-capita basis we spend 35% less on police than the world average. That’s crazy.
                                                          Our focus on prisons over police may be crazy but it is consistent with what I called Gary Becker’s Greatest Mistake, the idea that an optimal punishment system combines a low probability of being punished with a harsh punishment if caught. That theory runs counter to what I have called the good parenting theory of punishment in which optimal punishments are quick, clear, and consistent and because of that, need not be harsh.
                                                          We need to change what it means to be “tough on crime.” Instead of longer sentences let’s make “tough on crime” mean increasing the probability of capture for those who commit crimes.
                                                          Increasing the number of police on the street, for example... Indeed, in a survey of crime and policing that Jon Klick and I wrote in 2010 we found that a cost-benefit analysis would justify doubling the number of police on the street....,a dollar spent on policing is more effective at reducing crime than a dollar spent on imprisoning.
                                                          Unfortunately, selling the public on more policing is likely to be difficult. ... We aren’t likely to get more policing until people are convinced that we have better policing. Moreover, people are right to be skeptical because the type of policing that works is not simply boots on the ground. ...
                                                          Greater trust can come with body cameras as well as community oversight and other efforts to bring transparency and accountability. Most importantly, the drug war has eroded trust between police and community and that has led to an endogenous equilibrium in which some communities are rife with both drugs and crime. Fortunately, marijuana decriminalization and legalization have begun to move resources away from the war on drugs. .... As we move resources away from drug crime, police will have more resources to raise the punishment rate for those traditional crimes like murder, robbery and rape that communities everywhere do want punished.

                                                            Posted by on Tuesday, April 26, 2016 at 07:43 AM in Economics | Permalink  Comments (46) 

                                                            On Multipliers

                                                            Chris Dillow:

                                                            On multipliers: Richard Murphy writes:

                                                            [The government and OBR] believe that austerity generates growth and so cuts the deficit. The trouble for them is that all the evidence shows that the opposite is true: cuts shrink national income and government spending increases it.

                                                            This has attracted cheap abuse from some... Such abuse is wrong, and misses the point. It’s wrong, because - in the context he is writing about – Richard is right to claim that fiscal multipliers are big. There’s widespread agreement (pdf) that multipliers are bigger in recessions (pdf) than in normal times. For example, Lawrence Christiano, Martin Eichenbaum, and Sergio Rebelo say (pdf):

                                                            The government-spending multiplier can be much larger than one when the zero lower bound on the nominal interest rate binds.

                                                            The fact that Osborne’s austerity has failed to cut the deficit as much as expected is wholly consistent with this. Bigger multipliers than Osborne assumed meant that austerity depressed output by more than he expected thus making it harder to reduce borrowing.

                                                            In this sense, Richard’s critics are plain wrong. However, multipliers aren’t always big. They vary. ... One important factor here is the monetary offset. ... If inflation is around its target, the Bank of England would respond to fiscal expansion by raising rates, resulting in a lower multiplier. This might or might not be a good thing – the appropriate fiscal-monetary policy mix is a legitimate matter of debate – but it would mean that the fiscal multiplier might be disappointingly small. ...

                                                            In this sense, advocates of a fiscal expansion after 2020 might be making the same error as advocates of expansionary fiscal contraction in 2010 – they are wrongly assuming that the same fiscal multiplier applies at all times. It doesn’t.

                                                            I’m making two points here, one about economics and one about politics. ...

                                                            The political point is that Labour supporters should not rely upon a big multiplier as a case for fiscal expansion. And not need they do so. Lots of leftist policies ... can be designed without reliance upon fragile claims about the macroeconomy.

                                                            [Note: link fixed.]

                                                              Posted by on Tuesday, April 26, 2016 at 07:11 AM in Economics, Fiscal Policy | Permalink  Comments (20) 

                                                              How Does Trade with China affect U.S. Elections?

                                                              At MoneyWatch:

                                                              How will global trade affect the U.S. elections?, by Mark Thoma: In textbook economic models, adjusting to changes in the economy is deceptively simple. If the labor market suffers a "shock" due, for example, to increased globalization, it adjusts quickly to restore full employment.
                                                              In the real world, it doesn't happen like this. It takes time for workers to find new jobs, if they can find them. New businesses and new job openings at existing businesses aren't created instantaneously. And wage adjustments, which create the incentives for workers to move and new jobs to be created, don't happen as fast as the textbooks generally assume.
                                                              And now, the effect of international trade and globalization has become a big issue in the presidential campaign. Recent research showing that a large number of manufacturing jobs have been lost to China helps explain why. But what evidence shows that trade with China actually changes voting behavior?
                                                              A recent paper from the National Bureaus of Economic Research attempts to answer this question. ...

                                                                Posted by on Tuesday, April 26, 2016 at 06:30 AM in China, Economics, Politics | Permalink  Comments (19) 

                                                                Links for 04-26-16

                                                                  Posted by on Tuesday, April 26, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (218) 

                                                                  Monday, April 25, 2016

                                                                  An Interview with David Card and Alan Krueger

                                                                  On the run so no time to pull excerpts -- this is is worth reading.

                                                                    Posted by on Monday, April 25, 2016 at 08:09 AM in Economics | Permalink  Comments (1) 

                                                                    Paul Krugman: The 8 A.M. Call

                                                                    Are the presidential candidates prepared to handle an economic crisis?:

                                                                    The 8 A.M. Call, by Paul Krugman, NY Times: Back in 2008, one of the ads Hillary Clinton ran during the contest for the Democratic nomination featured an imaginary scene in which the White House phone rings at 3 a.m. with news of a foreign crisis, and asked, “Who do you want answering that phone?” ... As it turned out ... Mr. Obama, a notably coolheaded type who listens to advice, handled foreign affairs pretty well...
                                                                    That 3 a.m. call is one thing; but what about the 8 a.m. call – the one warning that financial markets will melt down as soon as they open? ...
                                                                    At this point there are three candidates who have a serious chance of receiving their party’s presidential nomination. ... So what do we know about their economic policy skills?
                                                                    Well, Mrs. Clinton isn’t just the most knowledgeable, well-informed candidate in this election, she’s arguably the best-prepared candidate on matters economic ever to run for president. ...
                                                                    On the other side, I doubt that anyone will be shocked if I say that Mr. Trump doesn’t know much about economic policy, or for that matter any kind of policy. He still seems to imagine, for example, that China is taking advantage of America by keeping its currency weak — which was true once upon a time, but bears no resemblance to current reality.
                                                                    Oh, and coping with crisis in the modern world requires a lot of international cooperation. Things like currency swap lines... How well do you think that kind of cooperation would work in a Trump administration?
                                                                    Yet things could be worse. The Donald doesn’t know much, but Ted Cruz knows a lot that isn’t so..., he demands a gold standard to produce a “sound dollar.” He chose, as his senior economic adviser, Phil Gramm — an architect of financial deregulation who helped set the stage for the 2008 crisis, then dismissed warnings of recession when that crisis came, calling America a “nation of whiners.”
                                                                    Mr. Cruz is ... utterly divorced from reality and impervious to evidence... A financial crisis with him in the White House could be, let’s say, an interesting experience.
                                                                    I don’t know how much play the candidates’ readiness for economic emergencies will get in the general election. There will, after all, be so many horrifying positions, on everything from immigration to Planned Parenthood, to dissect. But let’s try to make some room for this issue. For that 8 a.m. call is probably coming, one way or another.

                                                                      Posted by on Monday, April 25, 2016 at 06:44 AM in Economics, Financial System, Politics | Permalink  Comments (121) 

                                                                      Links for 04-25-16

                                                                        Posted by on Monday, April 25, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (162) 

                                                                        Sunday, April 24, 2016

                                                                        Presidential Candidates and Fed Accountability

                                                                        Carola Binder:

                                                                        Presidential Candidates and Fed Accountability: In an interview with Fortune, Donald Trump gave his views on  Federal Reserve Chair Janet Yellen, who will come up for reappointment in 2018. "I don’t want to comment on reappointment, but I would be more inclined to put other people in," he remarked, despite his opinion that Yellen "has done a serviceable job." ...
                                                                        Recently, Narayana Kocherlakota, who was President of the Federal Reserve Bank of Minneapolis from 2009 through 2015, has been urging Presidential candidates to address their views on the Fed. ...
                                                                        The other candidate who has said most about the Fed is Bernie Sanders, who wrote an op-ed about the Fed in the New York Times in December. Sanders' remarks focus mainly on Fed governance and financial regulation, though he also comments on the Fed's interest rate policy...
                                                                        I asked Bernanke whether he thought that the presidential candidates should talk about monetary policy and the (re)appointment of the Fed Chair. He agreed with Kocherlakota that candidates should talk about what they would like to see in a Fed Chair, but said that he does not think it's a good idea to politicize individual interest rate decisions, emphasizing that the Fed does not have goal independence, but does have instrument independence. In other words, Congress has given the Fed a monetary policy mandate—full employment and price stability—but does not specify what the Fed needs to do to try to achieve those goals.
                                                                        Anyone who wants to is welcome to evaluate the Fed on how successfully they are achieving that mandate. Anyone who wants to is also welcome to evaluate the merits of the mandate itself. Different people will come to different evaluations depending on their own beliefs and preferences. But neither of these two evaluations requires an audit of monetary policy by the Government Accountability Office, as both Sanders and Trump have advocated.
                                                                        Anyone who is dissatisfied with the mandate itself can go through the usual channels of political change in a democracy and pressure Congress to change the mandate. Congress, by design, is susceptible to such pressure: they need votes. Presidential candidates are in a good position to draw public attention to the Fed's mandate and urge change if they believe it is necessary. Sanders, for example, could propose redefining the Fed's full employment mandate to mean unemployment below 4 percent. I'm not quite sure what kind of mandate Trump would support. It is also fair game for any member of the public to evaluate the Fed on how successfully they are achieving their mandate. But Congress does not (or at least, should not) tell the Fed how to set interest rates to achieve its mandate, and Presidential candidates shouldn't either.

                                                                          Posted by on Sunday, April 24, 2016 at 02:17 PM in Economics, Monetary Policy, Politics | Permalink  Comments (9) 

                                                                          Causes and consequences of the oil price decline of 2014-2015 (Video)

                                                                            Posted by on Sunday, April 24, 2016 at 08:40 AM in Economics, Oil | Permalink  Comments (2) 

                                                                            Links for 04-24-16

                                                                              Posted by on Sunday, April 24, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (111) 

                                                                              Saturday, April 23, 2016

                                                                              Early Analysis of Seattle’s $15 Wage Law: Effect on Prices Minimal

                                                                              From UW News and Information:

                                                                              Early analysis of Seattle’s $15 wage law: Effect on prices minimal one year after implementation: Most Seattle employers surveyed in a University of Washington-led study said in 2015 that they expected to raise prices on goods and services to compensate for the city’s move to a $15 per hour minimum wage.

                                                                              But a year after the law’s April 2015 implementation, the study indicates such increases don’t seem to be happening.

                                                                              The interdisciplinary Seattle Minimum Wage Study team, centered in the Evans School for Public Policy & Governance surveyed employers and workers and scanned area commodity and service prices. The team’s report found “little or no evidence” of price increases in Seattle relative to other areas, its report states. ...

                                                                                Posted by on Saturday, April 23, 2016 at 01:42 PM in Economics | Permalink  Comments (48) 

                                                                                Boris Is Bad Enough

                                                                                Paul Krugman:

                                                                                Boris Is Bad Enough: Thank you, Boris Johnson. You’ve finally given me the moral courage to weigh in on a subject I’ve been avoiding: Brexit... It’s not as easy a case as I’d like – but Johnson’s intervention makes it clear: Britain should stay in, lest it empower people like him.
                                                                                Let me start with the economics. There are a number of estimates of the economic impact of Brexit out there..., but I like to have a quick-and-dirty calculation I understand; it’s not out of line with other, more detailed results. ... Brexit would reduce British real income by 1.7 percent. Call it 2 percent, with the understanding that there are big error margins around all of this. ... 2 percent is a lot! It’s very, very hard to come up with policies that will make a country 2 percent richer in perpetuity. You’d have to have very good reasons to leave the EU to be willing to make that big a sacrifice.
                                                                                What about income distribution, which is a big issue in many trade agreements? In this case, it’s pretty much irrelevant... So Trumpsandersism shouldn’t matter here.
                                                                                So what’s this all about? In a word, governance. The case for Brexit is, basically, that EU membership ties Britain to a very badly run institution. And that case is, unfortunately, reasonably strong. ... But... If Britain does leave the EU..., who will it be empowering instead? ...
                                                                                And that’s where Boris Johnson’s tirade against President Obama is so wonderfully clarifying. It tells us who the anti-EU wing of the Conservatives really are; it tells us not just that they are pretty close to UKIP, but that intellectually and emotionally they live in the same fever swamps as the American right. And they would, all too probably, take on a strong, even dominant role in British politics post-Brexit.
                                                                                So Britain, don’t do this. You would pay a fairly large economic price, and in return you would get governance so bad that it would make the EU look good.

                                                                                  Posted by on Saturday, April 23, 2016 at 08:19 AM in Economics | Permalink  Comments (47) 

                                                                                  Links for 04-23-16

                                                                                    Posted by on Saturday, April 23, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (157) 

                                                                                    Friday, April 22, 2016

                                                                                    How History Can Help

                                                                                    First, from MIT news:

                                                                                    How history can help us solve global economic issues: ...Professor Anne McCants is an historian whose research projects span multiple centuries of European economic development..., she has worked for decades to better understand the standards of living in the past and those features of the economy that contribute to social welfare. ...
                                                                                    Q: How can the field of history help us in solving the world’s economic issues?
                                                                                    A: In the same way that cosmology and geology (the two historical sciences) have been absolutely critical to most important developments in science — for example, we depend on the fossil record, the tectonic record, and the cosmic record for much of the evidence necessary for the study of everything from biology to theoretical physics — so too the study of history provides the accumulated evidence of how human systems function, and more importantly thrive.
                                                                                    History matters because without a credible story about where we have been before, we truly have no idea where we are now. And without evidence about past sequences of cause and effect, it is well-nigh impossible to develop intelligent plans for the future. ...
                                                                                    Q: What is the key barrier you see to multi-disciplinary, sociotechnical collaborations, and how can we overcome it?
                                                                                    A: In a way, all humans are historians. Every decision we make is framed on the basis of what we believe to be true about the past. The key, of course, is for us to be good historians, knowing true and useful things about the past, or at the very least having a method that explicitly seeks that as its goal. All of the disciplines benefit then by working alongside history, to increase their stock of evidence on which to draw, and to ensure the validity and reliability of that evidence. ...
                                                                                    Q: What has your extensive experience as an historian of economic development taught you that can help in the process of making tools that can enable anyone to innovate?
                                                                                    A: Economic history viewed on a very long timescale tells us that innovation and population size/density are highly correlated. The mechanism here is easy enough to imagine. Great ideas often emerge serendipitously, and more people represent more opportunities for such moments. Once one person has a good idea, many can go on to benefit from it, so there is not the per capita diminishment of good ideas the way there is for a field of grain, for example. Broadly then, innovation has been greatest in places where there are many people.
                                                                                    However, economic history viewed on shorter time horizons tells us that population size alone is not enough. Rather, it is in populations where lots of people are both permitted and capable of “having a go,” to quote my colleague Deirdre McCloskey, where innovation thrives best.
                                                                                    What allows people to have a go? Two conditions are critical: 1) being accorded the social dignity to speak their minds and pursue their own goals; and 2) access to the human capital that allows them to achieve their full potential. Both of these factors are severely limited by rigid systems of hierarchy and by the conditions of poverty.   Hierarchical systems depend on keeping people in their “place.” And for the majority, being in place means a priori not having a go. Poverty works its damage through the second mechanism, namely it sabotages human capital in a process that starts at birth, indeed even before birth.
                                                                                    If your mother is nutritionally deficient or immunocompromised during your gestation; if you are born with a low birthweight; if your protein intake in infancy and early childhood is too low to support your inherited growth potential; if you ingest lead or other toxins from a contaminated household environment as a toddler; if you are not exposed to a rich human vocabulary long before you can read; if your home is plagued by insecurity of multiple kinds so that your own response is the early and frequent production of an abundance of stress hormones; we know from detailed medical, economic, and historical research that all of these conditions un-level the playing field long before the “game” as we typically measure it even begins — that is, before you head off to school, take your first exams, participate in your first sports, or try to form your own first relationships.
                                                                                    So, the tools needed for anyone to be able to innovate have to start with programs that mitigate the terrible (and multiplying) effects of poverty, especially on the youngest members of our society. And we have to create the social conditions that allow everyone the full human dignity to try and have a go.
                                                                                    Q: What economic, sociopolitical, or cultural issues do you think most need to be addressed to make progress toward the global economic goals MIT has identified?
                                                                                    A: ... We fret endlessly (as we well might) about the quality of our schools, and admission to and curriculum in our universities. Yet we too rarely talk about the damage that social exclusion and economic inequality intermingled with absolute poverty do before children come anywhere near such institutions.

                                                                                    Second, from today's links, this is from Anton Howes:

                                                                                    How Innovation Accelerated in Britain 1651-1851: I successfully defended my PhD thesis a few weeks ago, and will soon be turning it into a publishable book manuscript.
                                                                                    In 1651 Britain had just finished a destructive civil war. Tens of thousands had died. Its monarch had been beheaded. Its mode of government overturned. In its weakened state, it was about to engage in the first of many wars with the Dutch Republic for supremacy over trade. 
                                                                                    Fast forward two centuries to 1851 and Britain was a country triumphant. It was the world’s technological leader, and now pressed its advantage to accumulate the largest empire in history. ...
                                                                                    The dramatic transformation - an Industrial Revolution - had been brought about by an acceleration in the rate of innovation. I am interested in what caused that acceleration. ...
                                                                                    So to discover the causes of Britain’s unprecedented acceleration of innovation, I delved into just about every recorded activity, behaviour and experience of 677 innovators of the time. ...
                                                                                    After staring at my data for long enough, I began to notice a pattern. People went on to innovate if inventors had been among their teachers, colleagues, employers, employees, neighbours, friends, family, and acquaintances. And the more I looked, the more examples I found. Of the hundreds of inventors I studied, nearly all of them began to innovate after meeting inventors. Inspiration mattered - inventing seemed to spread from person to person.
                                                                                    But this wasn’t the spread of a particular technique, design or blueprint. It was the spread of a new approach - the very idea of inventing. ... Hundreds of people in Britain began to see room for for improvement everywhere. ...
                                                                                    So people became innovators because others inspired them with a mentality of improvement. But we need to explain why this mentality was so uniquely virulent in Britain in the period. There were epidemics of innovation in prior societies - the Dutch Golden Age, Song Dynasty China, the Renaissance. So why did it become endemic only in Britain?** I think there was something special about this particular strain of the mentality of improvement.
                                                                                    The vast majority (over 80%) actively tried to spread innovation. They published about it, lectured about it, funded it, and advised on it. They founded and joined societies devoted to spreading it further. ...
                                                                                    Innovators in Britain very rarely kept secrets. Even the 40% or so patent-holders very rarely sued for infringement; and they very rarely lobbied to extend them beyond the usual time limits. ...
                                                                                    Like any ideology, it had its disagreements. James Watt believed himself entitled to protect his patents from infringement... But ultimately, the vast majority of Britain’s inventors adhered to two commandments: improve, and pass it on.
                                                                                    Here, my thesis reaches its limits. I can’t explain why Britain was unique by looking at Britain alone. The ideological commitment to proselytising innovation seems a likely candidate to me because it was so widespread: nothing else came close to being as common. But I need to compare the experience of inventors in Britain with those in other societies where invention failed to accelerate. More on that later.

                                                                                      Posted by on Friday, April 22, 2016 at 08:57 AM in Economics | Permalink  Comments (39) 

                                                                                      Putting a Price on Carbon is Not the End-All Be-All

                                                                                      David Roberts:

                                                                                      Putting a price on carbon is a fine idea. It's not the end-all be-all:  What is the most important policy tool for fighting climate change? Ask just about any economist and the answer will be the same: a price on carbon emissions.
                                                                                      Not only is there a robust consensus among economists, but they have been remarkably successful in spreading the gospel to the wider world as well. Climate activists, wonks, funders, politicians, progressives, and even conservatives (the few who take climate seriously) all sing from the same hymnal. It has become conventional wisdom that a price on carbon is the sine qua non of serious climate policy.
                                                                                      But it is worth keeping carbon pricing in perspective. It has become invested with such symbolic significance that it is inspiring some unhelpful purism on policy and magical thinking on politics.
                                                                                      Slowing climate change will require a suite of policies, regulatory reforms, and investments. Carbon pricing will be an important part of that portfolio. But only a part. It is not the only legitimate climate policy, the one true sign of seriousness on global warming, or a substitute for the difficult and painstaking political work that will be required to transition to a sustainable energy system.
                                                                                      I have no interest in a carbon-pricing backlash. But maybe a sidelash — a reality check.
                                                                                      This post will be a two-parter. Tomorrow I'm going to get into politics, how it shapes carbon taxes, and what's to be done with the revenue.
                                                                                      But first, I want to take a step back. In this post, I'll have a quick look at why carbon pricing has become so central to climate economics and raise some questions about its primacy in policy and political circles. ...

                                                                                        Posted by on Friday, April 22, 2016 at 07:30 AM in Economics, Environment | Permalink  Comments (35) 

                                                                                        Paul Krugman: In Hamilton’s Debt

                                                                                         "Alexander Hamilton knew better":

                                                                                        In Hamilton’s Debt, by Paul Krugman, NY Times: The Treasury Department picked an interesting moment to announce a revision in its plans to change the faces on America’s money. Plans to boot Alexander Hamilton off the $10 bill in favor of a woman have been shelved. Instead, Harriet Tubman ... will move onto the face of the $20 bill. ...
                                                                                        But let me leave the $20 bill alone and talk about how glad I am to see Hamilton retain his well-deserved honor. ... Hamilton proposed that the federal government assume and honor all of the debts individual states had run up during the Revolutionary War, imposing new tariffs on imported goods to raise the needed revenue. ...
                                                                                        But why did Hamilton want to take on those state debts? Partly to establish a national reputation as a reliable borrower, so that funds could be raised cheaply in the future. Partly, also, to give wealthy, influential investors a stake in the new federal government, thereby creating a powerful pro-federal constituency.
                                                                                        Beyond that, however, Hamilton argued that the existence of a significant, indeed fairly large national debt would be good for business. Why? Because ... bonds issued by the U.S. government would provide a safe, easily traded asset that the private sector could use as a store of value, as collateral for deals, and in general as a lubricant for business activity. As a result, the debt would become a “national blessing,” making the economy more productive.
                                                                                        This argument anticipates ... one of the hottest ideas in modern macroeconomics: the notion that we are suffering from a global “safe asset shortage.”...
                                                                                        As a result, investors have been bidding up the prices of government debt, leading to incredibly low interest rates. But it would be better for almost everyone, the story goes, if governments were to issue more debt, investing the proceeds in much-needed infrastructure even while providing the private sector with the collateral it needs to function. ...
                                                                                        Unfortunately, policy makers won’t do the right thing, largely because they keep listening to fiscal scolds — people who insist that public debt is a terrible thing even when borrowing costs almost nothing. ... Alexander Hamilton knew better.
                                                                                        Unfortunately, Hamilton isn’t around to help counter foolish debt phobia. But maybe reminding policy makers of his wisdom is one way to chip away at the wall of folly that still constrains policy. And having his face out there every time someone pulls out a ten can’t hurt, either.

                                                                                          Posted by on Friday, April 22, 2016 at 06:47 AM in Economics | Permalink  Comments (44) 

                                                                                          Links for 04-22-16

                                                                                            Posted by on Friday, April 22, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (101) 

                                                                                            Thursday, April 21, 2016

                                                                                            Why Wages Aren’t Keeping Up

                                                                                            Robert Solow:

                                                                                            The Future of Work: Why Wages Aren’t Keeping Up: ... The suggestion I want to make is that one important reason for the failure of real wages to keep up with productivity is that the division of rent in industry has been shifting against the labor side for several decades. This is a hard hypothesis to test in the absence of direct measurement. But the decay of unions and collective bargaining, the explicit hardening of business attitudes, the popularity of right-to-work laws, and the fact that the wage lag seems to have begun at about the same time as the Reagan presidency all point in the same direction: the share of wages in national value added may have fallen because the social bargaining power of labor has diminished. This is not to say that international competition and the biased nature of new technology have no role to play, only that they are not the whole story. Internal social change and the division of rent matter too.
                                                                                            Now I would like to connect this hypothesis with another change taking place in the labor market. Lacking anything more euphonious, I will call it the casualization of labor. The proportion of part-time workers has been rising: both those who prefer it that way and those who would rather have a full-time job. So is the number of temporary workers... So are the numbers of workers on fixed-term contracts and independent contractors, many of whom are doing the same work as they once did as regular employees. These are all good-faith members of the labor force; they are employed but without what used to be thought of as a regular job.
                                                                                            This shift toward more casual labor interacts with the issue of the division of rents. Casual workers have little or no effective claim to the rent component of any firm’s value added. They have little identification with the firm, and they have correspondingly little bargaining power. Unions find them difficult to organize, for obvious reasons. If the division of corporate rents has indeed been shifting against labor, an increasingly casual work force will find it very hard to reverse that trend.

                                                                                              Posted by on Thursday, April 21, 2016 at 07:02 AM in Economics, Income Distribution | Permalink  Comments (94) 

                                                                                              John Kasich’s Interview with The Washington Post Editorial Board

                                                                                              This is pretty funny:

                                                                                              A transcript of John Kasich’s interview with The Washington Post editorial board:
                                                                                              ... CATHERINE RAMPELL, COLUMNIST: On the balanced budget question, you have positioned yourself as the sole candidate of fiscal responsibility based on your record in Ohio and previously in Congress, but arguably of all of the candidates still standing you have released the least details about budgeting, about taxes. You’re the only candidate that the Tax Foundation, Tax Policy Center, Committee for a Responsible [Federal] Budget have said they can’t score your tax plan because it’s too thin on details.
                                                                                              KASICH:  Yes. Well,... look, I mean, we’re working through it. I’ve cut taxes in Ohio. It’s not confusing. I’m going to have a 28, 25 and 10 percent rate. We’re going to have an increase in the earned income tax credit.
                                                                                              RAMPELL:  Yes, but that doesn’t lead to surpluses. That doesn’t lead to – ...
                                                                                              KASICH: Well, you get the surpluses three ways:  ...Common sense regulations so you’re not crushing small business. ...
                                                                                              Two, lower taxes. ...
                                                                                              And the third thing is a fiscal plan. Now, I will tell you how we’ll run the fiscal plan. And I can lay out all – you’re going to send welfare and Medicaid and, you know, this job training and all that back to the states. ...
                                                                                              So it’s not that hard to budget. Entitlements?  I’ve already talked about Social Security. You’re going to have to means test it and say if you’ve had, you know, significant income over your lifetime; and we’re trying to put the details to what that number is, you’ll get Social Security. You’ll get less and people that depend on it will get what they need.
                                                                                              RAMPELL:  So to clarify, you’re saying you would balance through spending cuts?
                                                                                              KASICH:  No, no, no. You get it through economic growth. That’s the way you get it. Economic growth. Our tax plan, all that projects 3.9 percent economic growth. It’s not some flimsy put-together – you know... I don’t put together smoke and mirrors ... it’s one of the reasons why I got in trouble with conservatives – I have never operated from a – one of these dynamic models. Okay?  But there’s a legitimate amount of dynamic activity. And I just don’t get beyond what I think is a legitimate pale.
                                                                                              MARCUS:  Well, but you have a tax cut that – as far as I can see though it’s been unscoreable for the reasons that Catherine says – that most closely approximates Jeb Bush’s. Jeb Bush’s tax cut was scored on a non-dynamic basis by the Tax Policy Center as costing about $6.8 trillion. ...
                                                                                              KASICH: Well, look, I would tell you that look at the plan and see how they project it. I believe that we have not overused dynamic scoring...– I think that what we’ve done is a set of reasonable assumptions. Now, who’s working on it?  People like Kerry Knott, worked for [former congressman] Dick Armey. I mean, we got a lot of people looking at it. ...
                                                                                              MARCUS:  So, but your path to balance, which doesn’t include Social Security ... rests on sustained economic growth rate approaching four percent, which ... has not really been seen in ... recent American history. So –
                                                                                              KASICH:  You know why?  Because they over-regulate, over-tax and blow up the budget. ... Tax cuts matter because I believe they provide economic growth. I don’t think you should make numbers up. ...

                                                                                              This part was amusing too:

                                                                                              TOM TOLES, EDITORIAL CARTOONIST:  Do you support a market tax on carbon..., doesn’t it get to the problem in a significant way?

                                                                                              KASICH:  No.

                                                                                              STROMBERG:  So the economists are wrong on this, then?
                                                                                              KASICH:  Well, which economists?
                                                                                              STROMBERG:  Essentially all of them.
                                                                                              KASICH:  Well no, I can get you an economist out of Ohio University, and he wouldn’t agree with these economists. ...

                                                                                              A bit later:

                                                                                              KASICH:  ...Somebody comes to me and says, you know, some bunch of economists or scientists that say, “Look, this is a problem” — of course I’d listen to them. ...

                                                                                                Posted by on Thursday, April 21, 2016 at 12:15 AM in Economics, Politics | Permalink  Comments (54) 

                                                                                                Links for 04-21-16

                                                                                                  Posted by on Thursday, April 21, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (101) 

                                                                                                  Wednesday, April 20, 2016

                                                                                                  101 Boosterism

                                                                                                  Paul Krugman:

                                                                                                  101 Boosterism: I see that @drvox is writing a big piece on carbon pricing – and agonizing over length and time. I don’t want to step on his forthcoming message, but what he’s said so far helped crystallize something I’ve meant to write about for a while, a phenomenon I’ll call “101 boosterism.”
                                                                                                  The name is a takeoff on Noah Smith’s clever writing about “101ism”, in which economics writers present Econ 101 stuff about supply, demand, and how great markets are as gospel, ignoring the many ways in which economists have learned to qualify those conclusions in the face of market imperfections. His point is that while Econ 101 can be a very useful guide, it is sometimes (often) misleading when applied to the real world.
                                                                                                  My point is somewhat different: even when Econ 101 is right, that doesn’t always mean that it’s important – certainly not that it’s the most important thing about a situation. In particular, economists may delight in talking about issues where 101 refutes naïve intuition, but that doesn’t at all mean that these are the crucial policy issues we face. ...

                                                                                                  He goes on to talk about this in the context of international trade and carbon pricing (too hard to excerpt without leaving out important parts of his discussion).

                                                                                                    Posted by on Wednesday, April 20, 2016 at 11:51 AM in Econometrics, Environment, International Trade, Market Failure, Policy | Permalink  Comments (80)