Monday, June 29, 2015

Fed Watch: Events Continue to Conspire Against the Fed

Tim Duy:

Events Continue to Conspire Against the Fed, by Tim Duy: Federal Reserve policymakers just can't catch a break lately. Riding on the back of strong data in the second half of last year, they were positioning themselves to declare victory and begin the process of policy normalization, AKA "raising interest rates." Then the bottom fell out. Data in the first half of the year turned sloppy. Although policymakers on average - and Federal Reserve Chair Janet Yellen in particular - could reasonably believe the underlying momentum of the economy had not changed, that the data reflected largely temporary factors, the case for a rate hike by mid-year evaporated all the same. The risk of being wrong was simply more than they were willing to bear in the absence of clear inflation pressures.

The story was clearly shifting by the end of June. Key data on jobs and the consumer firmed as expected, raising the possibility that September was in play. Salvation from ZIRP, finally. Federal Reserve Governor Jerome Powell called it a coin toss. Via Bloomberg:

Speaking at a Wall Street Journal event in Washington Tuesday, Powell said he forecast stronger growth than in the first half of 2015, growth in the labor market and a “greater basis for confidence” in inflation returning to 2 percent.

“If those things are realized, I feel that it is time, it will be time, potentially as soon as September,” he said. “I don’t think the odds are 100 percent. I think they’re probably in the 50-50 range that we will realize those conditions, but that’s my forecast.”

Earlier, San Francisco Federal Reserve President John Williams said he expected two rate hikes this year. Via Reuters:

"Definitely my own forecast would be having us raise rates two times this year, but that would depend on the data," San Francisco Fed President John Williams told reporters at the bank's headquarters.

Rate increases of a quarter percentage point each would be reasonable, he said, with little point in making rate increases any smaller.

Given that we have basically written off the possibility of a rate hike in October (Fed not positioning for a rate hike every meeting and no one expects October for a first hike in the absence of the press conference), that leaves September and December for hikes.

Over the weekend, New York Federal Reserve President William Dudley also raised the possibility of September in an interview with the Financial Times:

A Federal Reserve interest-rate hike will be “very much in play” at the central bank’s September meeting if the recent strengthening of the US economy continues, according to one of America’s top central bankers.

William Dudley, the president of the Federal Reserve Bank of New York, said recent evidence of accelerating wage gains, improving incomes, and growing household spending had alleviated some of his concerns about the sustainability of momentum in America’s jobs market.

Former Federal Reserve Governor Laurence Meyer expects Yellen to also be comfortable with two rate hikes in 2015 by the time September rolls around. Via Bloomberg:

"We expect the incoming data between now and the September meeting to help ease concerns about the growth outlook, prompting Chair Yellen and a majority of the FOMC to see two hikes this year as appropriate," Meyer said in a note to clients.

No, September was not a sure bet, but you could see how the data evolved to get you there. But then came Greece. Greece - will it never end? Financial markets were roiled as Greek Prime Minister Alexis Tsipras abandoned the latest round of bailout negotiations with the EU, IMF, and ECB and instead pursued a national referendum on the last version of the bailout proposal. Most of you know the story from that point on - run on Greek banks, the ECB ends further ELA extensions, a bank holiday is declared, likely missing a payment to the IMF etc., etc.

At this juncture, everything in Greece is now in flux. Greece will be holding a referendum on a deal that apparently no longer exists, so it is not clear what negotiations would happen even if it passes. Moreover, it seems likely that the economic damage that will occur in the next week or longer will almost certainly require an even bigger give on the part of Greece's creditors. Is that going to happen? There is no exit plan to force Greece out of the Euro. What if Greece refuses to leave? How does Europe respond to a growing humanitarian crisis Greece as the economy collapsed? This could drag on and on and on.

As would be reasonably expected, the jump in risk sank equities across the globe, in the process stripping away US stock gains for 2015. Not that there was much to give - it only took a little over 2% on the SP500. Yields on Treasuries sank in a safe-haven bid, and market participants pushed Federal Reserve rate hike expectations out beyond 2015.

At this moment, there is obviously little to confirm that 2015 is off the table. To be sure, we know the Fed is watching the situation closely. Back to the FT and Dudley:

That said, Mr Dudley warned that the financial market implications of a Greek exit from the euro could be graver than many investors seemed to believe, because it would set a “huge precedent” indicating that euro membership was reversible.

People “underestimate all the different channels in terms of how contagion works”, the central banker said. “We saw that in the financial crisis. People did not anticipate that the Lehman failure was going to affect the economy and financial markets to the degree that it did.”

At the risk of being guilty of underestimating contagion, I am optimistic that the ring fencing around Greece will hold. This will be a political disaster for Europe, and a humanitarian disaster for Greece, but I expect will ultimately prove to have limited impact beyond those borders.

Famous last words.

Of course, even if that is correct, we don't know it to be correct, and thus the Fed will again proceed cautiously, just like they did in the face of the weak first quarter. Hence, all else equal, pushing out the timing of the first hike is reasonable. September, though, is a long ways off, and plenty can happen between now and then. So what will the Fed be watching?

First is the data, as they have emphasized again and again. We have three labor reports between now and September, beginning this week. Strong monthly gains coupled with falling unemployment rates and further evidence of wage growth would go a long way to supporting a rate hike. All would give the Fed the faith that inflation will soon be heading toward target. This is especially the case if recent consumer spending and housing numbers hold and if business investment picks up. And it would be further helpful if the global economy did not sink under the weight of Greece. Essentially, the Fed wants to be confident that the first quarter was a fluke and thus the economy is in fact fairly resilient.

Second is the financial fallout from Greece. Mostly, they will be carefully watching to see if the Greece crisis impacts domestic credit markets and banking. Do interest rate spreads widen? Do lenders tighten underwriting conditions? Does interbank lending proceed without impediments? If they see conditions emerge like this, I would expect them to match market expectations and just stay out of the rate hike business until the fallout from Greece is clear. This likely holds even in the face of solid US data. There will (or at least should) recognize that periods of substantial unrest in credit markets are not the time to be raising rates.

Bottom Line: The Fed was already approaching the first rate hike cautiously, wary of even dipping their toes in the water. The crisis in Greece will make them even more cautious. Like their response to the first quarter data, until they see a clear path, they will be on the sidelines. That said, given the plethora of warnings not to underestimate the global impact of the crisis in Greece, one should be watching the opposite side of the story. Solid data and limited Greece impact would leave December at a minimum, and even September, in play.

    Posted by on Monday, June 29, 2015 at 03:00 PM in Economics, Fed Watch, International Finance, Monetary Policy | Permalink  Comments (17)


    Stiglitz: Troika has 'Kind of Criminal Responsibility'

    From Time:

    Joseph Stiglitz to Greece’s Creditors: Abandon Austerity Or Face Global Fallout: ... “They have criminal responsibility,” he says of the so-called troika of financial institutions that bailed out the Greek economy in 2010, namely the International Monetary Fund, the European Commission and the European Central Bank. “It’s a kind of criminal responsibility for causing a major recession,” Stiglitz tells TIME in a phone interview.
    Along with a growing number of the world’s most influential economists, Stiglitz has begun to urge the troika to forgive Greece’s debt – estimated to be worth close to $300 billion in bailouts – and to offer the stimulus money that two successive Greek governments have been requesting.
    Failure to do so, Stiglitz argues, would not only worsen the recession in Greece – already deeper and more prolonged than the Great Depression in the U.S. – it would also wreck the credibility of Europe’s common currency, the euro, and put the global economy at risk of contagion. ...

      Posted by on Monday, June 29, 2015 at 11:21 AM in Economics, International Finance, Politics | Permalink  Comments (138)


      'The Stimulative Effect of Redistribution'

      Bart Hobijn and Alexander Nussbacher in the SF Fed's Economic Letter:

      The Stimulative Effect of Redistribution, by Bart Hobijn and Alexander Nussbacher: The idea of taking from the rich and giving to the poor goes back long before the legend of Robin Hood. This kind of redistribution sounds desirable out of a sense of fairness. However, economists often judge a policy less on whether it is fair, and more in terms of whether it is efficient or inefficient, as well as whether it stimulates or slows economic activity.
      In this Economic Letter we evaluate the stimulative effect of redistributing income from rich to poor households in a few distinct steps. We first provide a simple back-of-the-envelope calculation of the potential stimulus from redistributive policies. We then review the two main assumptions behind this policy prescription. We argue that the stimulative impact of such policies is likely to be lower than the simple calculation suggests. ...

        Posted by on Monday, June 29, 2015 at 11:03 AM in Economics, Fiscal Policy, Income Distribution, Taxes | Permalink  Comments (16)


        'U.S. Income Inequality Persists Amid Overall Growth in 2014'

        Emmanuel Saez:

        U.S. income inequality persists amid overall growth in 2014, by Emmanuel Saez, WCEG: Income inequality in the United States grew more acute in 2014, yet the bottom 99 percent of income earners registered the best real income growth (after factoring in inflation) in 15 years. The latest data from the U.S. Internal Revenue Service show that incomes for the bottom 99 percent of families grew by 3.3 percent over 2013 levels, the best annual growth rate since 1999. But incomes for those families in the top 1 percent of earners grew even faster, by 10.8 percent, over the same period. ...
        More broadly, the top 1 percent of families captured 58 percent of total real income growth per family from 2009 to 2014, with the bottom 99 percent of families reaping only 42 percent. ...
        The higher tax rates for top U.S. income earners enacted in 2013 as part of the Obama Administration and Congress’ federal budget deal seem to have had only a fleeting impact on the outsized accumulation of pre-tax income by families in the top 1 percent and 0.1 percent of income earners.
        To be sure, there was a shifting  of income among high-income earners ... as these wealthy families sought to avoid the higher rates enacted in 2013. This adjustment created a spike in the share of top incomes accumulated by the very wealthy in 2012 followed by a trough in 2013. By 2014, however, top incomes shares were back to their upward trajectory. This suggests that the higher tax rates starting in 2013, while not negligible, will not be sufficient by themselves to curb the enormous increase in pre-tax income concentration that has taken place in the United States since the 1970s.

          Posted by on Monday, June 29, 2015 at 09:34 AM in Economics, Income Distribution | Permalink  Comments (22)


          Paul Krugman: Greece Over the Brink

          Just say no:

          Greece Over the Brink, by Paul Krugman, Commentary, NY Times: It has been obvious for some time that the creation of the euro was a terrible mistake. Europe never had the preconditions for a successful single currency....
          Leaving a currency union is, however, a much harder and more frightening decision than never entering in the first place...
          But the situation in Greece has now reached what looks like a point of no return. Banks are temporarily closed and the government has imposed capital controls... It seems highly likely that the government will soon have to start paying pensions and wages in scrip, in effect creating a parallel currency. And next week the country will hold a referendum on whether to accept the demands of the “troika” ... for yet more austerity.
          Greece should vote “no,” and the Greek government should be ready, if necessary, to leave the euro.
          To understand why I say this, you need to realize that most ... of what you’ve heard about Greek profligacy and irresponsibility is false. Yes, the Greek government was spending beyond its means in the late 2000s. But ... all the austerity measures ... been more than enough to eliminate the original deficit and turn it into a large surplus.
          So why didn’t this happen? Because the Greek economy collapsed, largely as a result of those very austerity measures, dragging revenues down with it.
          And this collapse, in turn, had a lot to do with the euro, which trapped Greece in an economic straitjacket. Cases of successful austerity ... typically involve large currency devaluations... But Greece, without its own currency, didn’t have that option. ...
          It’s easy to get lost in the details, but the essential point now is that Greece has been presented with a take-it-or-leave-it offer that is effectively indistinguishable from the policies of the past five years. ...
          Don’t be taken in by claims that troika officials are just technocrats explaining to the ignorant Greeks what must be done. These supposed technocrats are in fact fantasists who have disregarded everything we know about macroeconomics, and have been wrong every step of the way. This isn’t about analysis, it’s about power — the power of the creditors to pull the plug on the Greek economy, which persists as long as euro exit is considered unthinkable.
          So it’s time to put an end to this unthinkability. Otherwise Greece will face endless austerity, and a depression with no hint of an end.

            Posted by on Monday, June 29, 2015 at 08:10 AM in Economics, International Finance, Politics | Permalink  Comments (143)


            Links for 06-29-15

              Posted by on Monday, June 29, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (79)


              Sunday, June 28, 2015

              'Former Finance Minister of Cyprus on the Greek Crisis'

              Branko Milanovic:

              Former Finance Minister of Cyprus on the Greek crisis: While on vacations in Greece, I had a chance today (Sunday 28 June) to have a long discussion with Michael Sarris who was Cypriot Minister of Finance between 2005 and 2008 when the Euro was introduced in Cyprus and then again Minister of Finance during the March 2013 crisis when Cyprus faced negotiations with “the institutions” very similar to those faced today by Greece.  Very few people in the world have as informed and first-hand knowledge of the situation as Michael Sarris does. Here are my questions and his answers. ...

                Posted by on Sunday, June 28, 2015 at 09:41 AM in Economics, International Finance, Politics | Permalink  Comments (67)


                Links for 06-28-15

                  Posted by on Sunday, June 28, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (124)


                  Saturday, June 27, 2015

                  Greece: It’s the Politics, Stupid!

                  Gloomy European Economist Francesco Saraceno:

                  It’s the Politics, Stupid!: I have been silent on Greece, because scores of excellent economists from all sides commented at length...
                  But last week has transformed in certainty what had been a fear since the beginning. The troika, backed by the quasi totality of EU governments, were not interested in finding a solution that would allow Greece to recover while embarking in a fiscally sustainable path. No, they were interested in a complete and public defeat of the “radical” Greek government. ...
                  What happened...? Well, contrary to what is heard in European circles, most of the concessions came from the Greek government. On retirement age, on the size of budget surplus (yes, the Greek government gave up its intention to stop austerity, and just obtained to soften it), on VAT, on privatizations, we are today much closer to the Troika initial positions than to the initial Greek position. Much closer.
                  The point that the Greek government made repeatedly is that some reforms, like improving the tax collection capacity, actually demanded an increase of resources, and hence of public spending. Reforms need to be disconnected from austerity, to maximize their chance to work.  Syriza, precisely like the Papandreou government in 2010 asked for time and possibly money. It got neither.
                  Tsipras had only two red lines it would and it could not cross: Trying to increase taxes on the rich (most notably large coroporations), and not agreeing to further cuts to low pensions. if he crossed those lines, he would become virtually indistinguishable from Samaras and from the policies that led Greece to be a broken State.
                  What the past week made clear is that this, and only this was the objective of the creditors. This has been since the beginning about politics. Creditors cannot afford that an alternative to policies followed since 2010 in Greece and in the rest of the Eurozone materializes.
                  Austerity and structural reforms need to be the only way to go. Otherwise people could start asking questions; a risk you don’t want to run a few months before Spanish elections. Syriza needed to be made an example. You cannot  survive in Europe, if you don’t embrace the Brussels-Berlin Consensus. Tsipras, like Papandreou, was left with the only option too ask for the Greek people’s opinion, because there has been no negotiation, just a huge smoke screen. Those of us who were discussing pros and cons of the different options on the table, well, we were wasting our time.
                  And if Greece needs to go down to prove it, so be it. If we transform the euro in a club in which countries come and go, so be it.
                  The darkest moment for the EU.

                    Posted by on Saturday, June 27, 2015 at 09:09 AM in Economics, International Finance, Politics | Permalink  Comments (128)


                    Links for 06-27-15

                      Posted by on Saturday, June 27, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (215)


                      Friday, June 26, 2015

                      'Most of America's Poor Have Jobs'

                      I want to highlight this article in today's links:

                      Most of America's poor have jobs, study finds, EurekAlert!: The majority of the United States' poor aren't sitting on street corners. They're employed at low-paying jobs, struggling to support themselves and a family.
                      In the past, differing definitions of employment and poverty prevented researchers from agreeing on who and how many constitute the "working poor."
                      But a new study by sociologists at BYU, Cornell and LSU provides a rigorous new estimate. Their work suggests about 10 percent of working households are poor. Additionally, households led by women, minorities or individuals with low education are more likely to be poor, but employed. ...
                      BYU professor Scott Sanders says the findings dispel the notion that most impoverished Americans don't work so they can rely on government handouts.
                      "The toxic idea is if we clump all those people together and treat them as the same people, then we don't solve the real problem that the majority of people in poverty are working, trying to improve their lives, and we treat them all as deadbeats,"...
                      "It's been the push, that if we can get people working, then they'll get out of poverty," Sanders said. "But we have millions of Americans working, playing by the rules, and they're still trapped in poverty."

                        Posted by on Friday, June 26, 2015 at 10:31 AM in Economics, Social Insurance | Permalink  Comments (59)


                        'Lunch with the FT: Thomas Piketty'

                        A small part of an interview of Thomas Piketty in the Financial Times:

                        ... Piketty says his interest in inequality crystallised after the collapse of the Berlin Wall and the first Gulf war. He recalls visiting Moscow in 1991 and being struck by “the lines in front of shops”. He came back vaccinated against communism — “I believe in capitalism, private property, the market” — but also with a question central to his work: “How come those people had been so afraid of inequality and capitalism in the 19th and 20th century that they created such a monstrosity? How can we tackle inequality without repeating this disaster?” ...

                        And a point I've been making for a long time about taxes and incentives:

                        ... Though Piketty concedes that the global wealth tax he recommends is a “utopian” dream, he also says a confiscatory tax rate of more than 80 per cent on earnings exceeding $1m would work. In fact, he continues, such a rate was in place for five decades before the presidency of Ronald Reagan, and would curb exuberant executive pay without hurting productivity. “It did not kill US capitalism then — productivity grew the fastest during that time,” he notes. “This idea, according to which no one will accept to work hard for less than $10m per year . . .  It’s OK to pay someone 10, 20 times the average worker’s salary but do you really need to pay them 100 or 200 times to get their arses in gear?” ...

                          Posted by on Friday, June 26, 2015 at 10:18 AM in Economics, Income Distribution | Permalink  Comments (36)


                          Paul Krugman: Hooray for Obamacare

                          Health care reform is succeeding:

                          Hooray for Obamacare, by Paul Krugman, Commentary, NY Times: Was I on the edge of my seat, waiting for the Supreme Court decision on Obamacare subsidies? No — I was pacing the room, too nervous to sit, worried that the court would use one sloppily worded sentence to deprive millions of health insurance, condemn tens of thousands to financial ruin, and send thousands to premature death.
                          It didn’t. ...
                          The Affordable Care Act is now in its second year of full operation; how’s it doing? The answer is, better than even many supporters realize.
                          Start with the act’s most basic purpose, to cover the previously uninsured. Opponents of the law insisted that it would actually reduce coverage; in reality, around 15 million Americans have gained insurance. ...
                          What about costs? In 2013 there were dire warnings about a looming “rate shock”; instead, premiums came in well below expectations. ...
                          And there has also been a sharp slowdown in the growth of overall health spending, which is probably due in part to the cost-control measures, largely aimed at Medicare...
                          What about economic side effects? One of the many, many Republican votes against Obamacare involved passing something called the Repealing the Job-Killing Health Care Law Act... But there’s no job-killing in the data: The U.S. economy has added more than 240,000 jobs a month on average since Obamacare went into effect, its biggest gains since the 1990s.
                          Finally, what about claims that health reform would cause the budget deficit to explode? In reality, the deficit has continued to decline, and the Congressional Budget Office recently reaffirmed its conclusion that repealing Obamacare would increase, not reduce, the deficit.
                          Put all these things together, and what you have is a portrait of policy triumph...
                          Now, you might wonder why a law that works so well and does so much good is the object of so much political venom — venom that is, by the way, on full display in Justice Antonin Scalia’s dissenting opinion, with its rants against “interpretive jiggery-pokery.” But what conservatives have always feared about health reform is the possibility that it might succeed, and in so doing remind voters that sometimes government action can improve ordinary Americans’ lives.
                          That’s why the right went all out to destroy the Clinton health plan in 1993, and tried to do the same to the Affordable Care Act. But Obamacare has survived, it’s here, and it’s working. The great conservative nightmare has come true. And it’s a beautiful thing.

                            Posted by on Friday, June 26, 2015 at 09:24 AM Permalink  Comments (29)


                            Links for 06-26-15

                              Posted by on Friday, June 26, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (134)


                              Thursday, June 25, 2015

                              'Please Stop Hurting Poor People With Your Skills Training Programs'

                               Chris Blattman:

                              Dear governments and aid agencies: Please stop hurting poor people with your skills training programs: Here is an incredible number: From 2002 to 2012 the World Bank and its client governments invested $9 billion dollars across 93 skills training programs for the poor and unemployed. In lay terms, that is a hundred freaking million dollars per program.
                              Unfortunately, these skills probably did very little to create jobs or reduce poverty. Virtually every program evaluation tells us the same thing: training only sometimes has a positive impact. Almost never for men. And the programs are so expensive—often $1000 or $2000 per person—that it’s hard to find one that passes a simple cost-benefit test.
                              You might think to yourself: That’s not so bad. Nobody hurt the poor. Plus the trainers and the firms probably benefited. So it’s not a total loss. If you think this, I urge you to transfer to an organization where you can no longer affect the world. I can think of a couple UN agencies with excellent benefits.
                              Because when you take billions of dollars a year (because the World Bank is hardly the only spender on skills programs) and you spend them on vocational bridges to nowhere, you have denied those dollars to programs that actually work: an anti-retroviral treatment, a deworming pill, a cow, a well, or a cash transfer. You have destroyed value in the world. ...
                              If you’re thinking to yourself “hey, I would like to read 20,000 more words on this, preferably in dry prose,” well do I have the paper for you. A new review paper with Laura Ralston: Generating employment in poor and fragile states: Evidence from labor market and entrepreneurship programs. ...
                              Fortunately the paper includes a 4-page executive summary. And, even better, an abstract!...

                                Posted by on Thursday, June 25, 2015 at 10:44 AM in Development, Economics | Permalink  Comments (30)


                                'Breaking Greece'

                                Paul Krugman:

                                Breaking Greece: I’ve been staying fairly quiet on Greece... But given reports from the negotiations in Brussels, something must be said...
                                This ought to be a negotiation about targets for the primary surplus, and then about debt relief that heads off endless future crises. And the Greek government has agreed to what are actually fairly high surplus targets, especially given the fact that the budget would be in huge primary surplus if the economy weren’t so depressed. But the creditors keep rejecting Greek proposals on the grounds that they rely too much on taxes and not enough on spending cuts. So we’re still in the business of dictating domestic policy.
                                The supposed reason for the rejection of a tax-based response is that it will hurt growth. The obvious response is, are you kidding us? The people who utterly failed to see the damage austerity would do — see the chart, which compares the projections in the 2010 standby agreement with reality — are now lecturing others on growth? Furthermore, the growth concerns are all supply-side, in an economy surely operating at least 20 percent below capacity. ...
                                At this point it’s time to stop talking about “Graccident”; if Grexit happens it will be because the creditors, or at least the IMF, wanted it to happen.

                                  Posted by on Thursday, June 25, 2015 at 09:44 AM in Economics, International Finance, Politics | Permalink  Comments (55)


                                  'Personal Income increased 0.5% in May, Spending increased 0.9%'

                                  Calculated Risk:

                                  Personal Income increased 0.5% in May, Spending increased 0.9%, by Bill McBride: The BEA released the Personal Income and Outlays report for May:

                                  Personal income increased $79.0 billion, or 0.5 percent ... in May... Personal consumption expenditures (PCE) increased $105.9 billion, or 0.9 percent.
                                  ...
                                  Real PCE -- PCE adjusted to remove price changes -- increased 0.6 percent in May, compared with an increase of less than 0.1 percent in April. ... The price index for PCE increased 0.3 percent in May, compared with an increase of less than 0.1 percent in April. The PCE price index, excluding food and energy, increased 0.1 percent in May, the same increase as in April.

                                  The May price index for PCE increased 0.2 percent from May a year ago. The May PCE price index, excluding food and energy, increased 1.2 percent from May a year ago.

                                  ...The increase in personal income was higher than expected.  And the increase in PCE was above the 0.7% increase consensus.  A strong report. ...This suggests a rebound in PCE in Q2, and decent Q2 GDP growth.

                                    Posted by on Thursday, June 25, 2015 at 09:37 AM in Economics | Permalink  Comments (12)


                                    Links for 06-25-15

                                      Posted by on Thursday, June 25, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (162)


                                      Wednesday, June 24, 2015

                                      'Growth’s Secret Weapon: The Poor and the Middle Class'

                                      Era Dabla-Norris, Kalpana Kochhar, and Evridiki Tsounta at the IMF:

                                      Growth’s Secret Weapon: The Poor and the Middle Class: The gap between the rich and the poor is at its widest in decades in advanced countries, and inequality is also rising in major emerging markets...  It is becoming increasingly clear that these developments have profound economic implications.
                                      Earlier IMF work has shown that income inequality is bad for growth and its sustainability. Our new research shows that income distribution itself—not just the level of income inequality—matters for growth.
                                      Specifically, we find that making the rich richer by one percentage point lowers GDP growth in a country over the next five years by 0.08 percentage points—whereas making the poor and the middle class one percentage point richer can raise GDP growth by as much as 0.38 percentage points...  Put simply, boosting the incomes of the poor and the middle class can help raise growth prospects for all.
                                      One possible explanation is that the poor and the middle class tend to consume a higher fraction of their income than the rich. ... What this means is that the poor and the middle class are key engines of growth. But with inequality on the rise, those engines are stalling.
                                      Over the longer run, persistent inequality means that the the poor and the middle class have fewer opportunities to get educated, enhance their skills, and pursue their entrepreneurial dreams.  As a result, labor productivity and growth suffer. ...

                                        Posted by on Wednesday, June 24, 2015 at 09:10 AM in Economics, Income Distribution | Permalink  Comments (79)


                                        'Raisins: When Insiders Set the Rules'

                                        Tim Taylor:

                                        Raisins: When Insiders Set the Rules: Earlier this week, the US Supreme Court in Horne et al. vs. Department of Agriculture overturned an arrangement that had stood since 1937 for the sale of raisins. The case turned on what is apparently a non-obvious question, given that this program had been around for eight decades and lower courts had ruled differently: Does taking 47% of someone's crop count as a a "taking" in the legal sense prohibited by the 5th Amendment to the US  Constitution, which ends with the words " ... nor shall private property be taken for public use, without just compensation." Chief Justice John Roberts wrote the decision for an 8-1 majority. He begins with a compact overview of past practice:

                                        The Agricultural Marketing Agreement Act of 1937 authorizes the Secretary of Agriculture to promulgate “marketing orders” to help maintain stable markets for particular agricultural products. The marketing order for raisins requires growers in certain years to give a percentage of their crop to the Government, free of charge. The required allocation is determined by the Raisin Administrative Committee, a Government entity composed largely of growers and others in the raisin business appointed by the Secretary of Agriculture. In 2002–2003, this Committee ordered raisin growers to turn over 47 percent of their crop. In 2003–2004, 30 percent. 
                                        Growers generally ship their raisins to a raisin “handler,” who physically separates the raisins due the Government (called “reserve raisins”), pays the growers only for the remainder (“free-tonnage raisins”), and packs and sells the free-tonnage raisins. The Raisin Committee acquires title to the reserve raisins that have been set aside, and decides how to dispose of them in its discretion. It sells them in noncompetitive markets, for example to exporters, federal agencies, or foreign governments; donates them to charitable causes; releases them to growers who agree to reduce their raisin production; or disposes of them by “any other means” consistent with the purposes of the raisin program. 7 CFR §989.67(b)(5) (2015). Proceeds from Committee sales are principally used to subsidize handlers who sell raisins for export (not including the Hornes, who are not raisin exporters). Raisin growers retain an interest in any net proceeds from sales the Raisin Committee makes, after deductions for the export subsidies and the Committee’s administrative expenses. In the years at issue in this case, those proceeds were less than the cost of producing the crop one year, and nothing at all the next. 

                                        Readers who want to plow through the discussions of "takings" and "just compensation" in the decision can feel free to do so. What's interesting to me, from an economic point of view, is that the marketing arrangement for raisins embodies a certain misguided notion of how to create a healthy economy--a notion that still has some resonance today.

                                        In the midst of the Great Depression, firms were losing money and wages were falling. For politicians, the answer to low profits and low wages straightforward. Form organizations of producers that would limit competition and hold down production, thus pushing up prices and helping producers earn profits. On the labor side, set industry guidelines and later minimum wage laws to prevent wages from falling.

                                        This economic philosophy was embodied the National Industrial Recovery Act passed in 1933. Back in my undergraduate days, I took a class in US economic history with Michael Weinstein, who had recently published his 1980 book, Recovery and Distribution Under the National Industrial Recovery Act. The book offered a careful statistical analysis to illuminate the underlying economic themes. When producers all group together to hold down output, the remaining incumbent firms might make higher profits on the sales that remain--but this is literally the opposite of economic growth. Also, it forces consumers to pay higher prices. Trying to push up wages in the middle of a Great Depression can help those who manage to keep their jobs, but when employment is in the neighborhood of 25%, it doesn't help the economy expand, either.

                                        It is revealing that the Raisin Administrative Committee, which sets the proportion of "reserve raisins" to be taken from growers and handlers, lacks any meaningful representation from consumers, or other firms in related industries, or the public more broadly, or those who might wish to enter the market for raisins. ...

                                        In short, the economic arrangements for raisins are an example of what so often happens when economic policy is set by a combination of government and existing firms: the focus tends to be on profits for those existing firms, backed up either by government regulations that function like implicit subsidies or by explicit subsidies. Economic growth ultimately comes from innovation and productivity, not from attempts to tilt the market to favored incumbent firms. ...

                                          Posted by on Wednesday, June 24, 2015 at 09:09 AM in Economics | Permalink  Comments (40)


                                          Links for 06-24-15

                                            Posted by on Wednesday, June 24, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (205)


                                            Tuesday, June 23, 2015

                                            Fed Watch: Dovish Fed

                                            Tim Duy:

                                            Dovish Fed, by Tim Duy: Coming on the heels of a dovish FOMC meeting and press conference, it might be surprising that San Francisco Federal Reserve President John Williams is still looking for two rate hikes this year. Via Bloomberg:

                                            “We are getting closer and closer,” to raising rates, he told reporters on Friday after delivering a speech in San Francisco. Williams, a voter this year on the policy-setting Federal Open Market Committee, was head of research at the regional bank when it was led by now-Chair Janet Yellen.
                                            “My own forecast would be having us raise rates two times this year,” he said. “But that would depend on the data.”
                                            Why raise rates this year despite anemic inflation and moderate economic growth? He still expects the Fed will be moving closer to its stated goals in the second half of the year and moving sooner means moving slower:
                                            Williams also said that raising rates earlier rather than later would allow the Fed to tighten gradually, which he favors because the U.S. economy still faces significant headwinds.
                                            “If we raise rates sooner rather than later, then we can do it more gradually,” he said.
                                            It is worth reiterating just how gradual the Fed is planning to raise rates. This I think remains more important than the timing of the first hike. Note that the midpoint forecasts from the Summary of Economic Projections imply a 0 percent equilibrium interest rate at the end of 2016, and just slightly higher than that in 2017:

                                            RSTAR062215

                                            And note that this is a somewhat more dovish projection than that made in March:

                                            RSTAR0a62215

                                            which was also more dovish than the prior SEP. Essentially, this Fed is jointly both hawkish and dovish - even as they warn they are moving ever closer to that first rate hike, they continue to push down the expected path of subsequent hikes. Persistently slow growth, low productivity, and low inflation are wearing on their outlook. Consequently, they continue to extend their expectations of a low interest rate environment. Policymakers are clearly moving toward market expectations in this regard.
                                            Whether reality matches expectations remains an open question. Treasury rates have pulled up off their February lows, taking mortgages rates along for the ride. The Fed will be carefully monitoring this situation; they do not want mortgage rates in particular to climb ahead of the economy. The memories of the taper tantrum - and the subsequent stumble in the housing market - still sting. This time around, however, higher rates are being driven not by a shift in the expected Federal Reserve reaction function, but instead by an improved economic outlook. If housing markets can handle the higher rates (note the return of the first-time buyer), and there is reason to believe they will if wage growth continues to accelerate, then the Fed will feel more confident that they are getting across a message consistent with the evolution of activity. And they will thus be more willing to begin the normalization process in 2015 as they currently anticipate. 
                                            Policymakers would like to orchestrate a smoother transition to more normal policy than that of the botched tapering signal. This time around they are more clearly signaling a transition in which interest rates are moving in line with an improvement in the broader equilibrium that includes stronger wage growth and inflation closer to target. They learned a lesson from the taper tantrum of 2013: Make sure the signals you send are consistent with the path of activity. Learning that lesson speaks well for the sustainability of the recovery. 
                                            Bottom Line: Don't be surprised if you hear more Fed officials say they are still looking to rate hikes this year. Between being close to meeting their goals and the desire to move early to move slowly, the bar to hiking rates is probably not all that high. Watch instead for data that will either confirm or deny the Fed's near- and medium-term outlook. Seemingly paradoxically, that outlook has been increasingly dovish even as the countdown to the first rate hike ticks toward zero.

                                              Posted by on Tuesday, June 23, 2015 at 12:24 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (38)


                                              Links for 06-23-15

                                                Posted by on Tuesday, June 23, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (180)


                                                Monday, June 22, 2015

                                                Paul Krugman: Slavery’s Long Shadow

                                                Race still matters:

                                                Slavery’s Long Shadow, by Paul Krugman, Commentary, NY Times: America is a much less racist nation than it used to be, and I’m not just talking about the still remarkable fact that an African-American occupies the White House. ...
                                                Yet racial hatred is still a potent force in our society, as we’ve just been reminded to our horror. And I’m sorry to say this, but the racial divide is still a defining feature of our political economy, the reason America is unique among advanced nations in its harsh treatment of the less fortunate and its willingness to tolerate unnecessary suffering among its citizens. ...
                                                Now,... you might wonder if things have changed... Unfortunately, the answer is that they haven’t, as you can see by looking at how states are implementing — or refusing to implement — Obamacare.
                                                For those who haven’t been following this issue, in 2012 the Supreme Court gave individual states the option, if they so chose, of blocking the Affordable Care Act’s expansion of Medicaid, a key part of the plan to provide health insurance to lower-income Americans. But why would any state choose to exercise that option? After all, states were being offered a federally-funded program that would provide major benefits to millions of their citizens, pour billions into their economies, and help support their health-care providers. Who would turn down such an offer?
                                                The answer is, 22 states at this point, although some may eventually change their minds. And what do these states have in common? Mainly, a history of slaveholding...
                                                And it’s not just health reform: a history of slavery is a strong predictor of everything from gun control (or rather its absence), to low minimum wages and hostility to unions, to tax policy.
                                                So will it always be thus? Is America doomed to live forever politically in the shadow of slavery?
                                                I’d like to think not. For one thing, our country is growing more ethnically diverse, and the old black-white polarity is slowly becoming outdated. For another, as I said, we really have become much less racist, and in general a much more tolerant society on many fronts. Over time, we should expect to see the influence of dog-whistle politics decline.
                                                But that hasn’t happened yet. Every once in a while you hear a chorus of voices declaring that race is no longer a problem in America. That’s wishful thinking; we are still haunted by our nation’s original sin.

                                                  Posted by on Monday, June 22, 2015 at 08:43 AM in Economics, Politics | Permalink  Comments (85)


                                                  Links for 06-22-15

                                                    Posted by on Monday, June 22, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (181)


                                                    Sunday, June 21, 2015

                                                    Links for 06-21-15

                                                    I got a bit behind:

                                                      Posted by on Sunday, June 21, 2015 at 02:12 PM in Economics, Links | Permalink  Comments (81)


                                                      Friday, June 19, 2015

                                                      'Shared Security, Shared Growth'

                                                      The last paragraph of a long essay by Nick Hanauer & David Rolf on Shared Security, Shared Growth:

                                                      ... We must do more than just offer voters a new economic theory—we must draw a sharp contrast with conservatives by proposing bold new policies predicated on the economic primacy of the middle class. The Shared Security System is one such proposal. But more than just demonstrating an innovative solution to providing economic security that is adapted to the sharing economy, a bold new proposal like the Shared Security System would demonstrate progressives’ unwavering and unequivocal commitment to the middle class—to the proposition that growth and prosperity come not from tax cuts for the rich, but from inclusive policies focused on creating a secure middle class. By establishing our twenty-first-century Shared Security System, we will usher in a new era of middle-class economic security, and by so doing also provide American businesses with the economic stability and certainty that they demand.

                                                        Posted by on Friday, June 19, 2015 at 10:30 AM in Economics, Social Insurance | Permalink  Comments (95)


                                                        Paul Krugman: Voodoo, Jeb! Style

                                                         Selling tax cuts for the wealthy with unrealistic promises about growth:

                                                        Voodoo, Jeb! Style, by Paul Krugman, Commentary, NY Times: On Monday Jeb Bush — or I guess that’s Jeb!,... gave us a first view of his policy goals. First, he says that if elected he would double America’s rate of economic growth to 4 percent. Second, he would make it possible for every American to lose as much weight as he or she wants, without any need for dieting or exercise.
                                                        O.K., he didn’t actually make that second promise. But he might as well have. It would have been just as realistic as promising 4 percent growth, and considerably less irresponsible. ...
                                                        Mr. Bush ... believes that the growth in Florida’s economy during his time as governor offers a role model for the nation as a whole. Why is that funny? Because everyone except Mr. Bush knows that, during those years, Florida was booming thanks to the mother of all housing bubbles. When the bubble burst, the state plunged into a deep slump... The key to Mr. Bush’s record of success, then, was good political timing: He managed to leave office before the unsustainable nature of the boom he now invokes became obvious.
                                                        But Mr. Bush’s economic promises reflect more than self-aggrandizement. They also reflect his party’s habit of boasting about its ability to deliver rapid economic growth, even though there’s no evidence at all to justify such boasts. It’s as if a bunch of relatively short men made a regular practice of swaggering around, telling everyone they see that they’re 6 feet 2 inches tall. ...
                                                        Why, then, all the boasting about growth? The short answer, surely, is that it’s mainly about finding ways to sell tax cuts for the wealthy..., low taxes on the rich are an overriding policy priority on the right — and promises of growth miracles let conservatives claim that everyone will benefit from trickle-down, and maybe even that tax cuts will pay for themselves.
                                                        There is, of course, a term for basing a national program on this kind of self-serving (and plutocrat-serving) wishful thinking. Way back in 1980, George H.W. Bush, running against Reagan for the presidential nomination, famously called it “voodoo economic policy.” And while Reaganolatry is now obligatory in the G.O.P., the truth is that he was right.
                                                        So what does it say about the state of the party that Mr. Bush’s son — often portrayed as the moderate, reasonable member of the family — has chosen to make himself a high priest of voodoo economics? Nothing good.

                                                          Posted by on Friday, June 19, 2015 at 09:01 AM in Economics, Politics | Permalink  Comments (190)


                                                          Links for 06-19-15

                                                            Posted by on Friday, June 19, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (153)


                                                            Thursday, June 18, 2015

                                                            'Wage Increases Do Not Signal Impending Inflation'

                                                            This note from Carola Binder was intended for the Fed meeting earlier this week, but it applies equally well to meetings yet to come:

                                                            Wage Increases Do Not Signal Impending Inflation: When the FOMC meets..., they will surely be looking for signs of impending inflation. Even though actual inflation is below target, any hint that pressure is building will be seized upon by more hawkish committee members as impetus for an earlier rate rise. The relatively strong May jobs report and uptick in nominal wage inflation are likely to draw attention in this respect.
                                                            Hopefully the FOMC members are aware of new research by two of the Fed's own economists, Ekaterina Peneva and Jeremy Rudd, on the passthrough (or lack thereof) of labor costs to price inflation. The research, which fails to find an important role for labor costs in driving inflation movements, casts doubts on wage-based explanations of inflation dynamics in recent years. They conclude that "price inflation now responds less persistently to changes in real activity or costs; at the same time, the joint dynamics of inflation and compensation no longer manifest the type of wage–price spiral that was evident in earlier decades." ...

                                                              Posted by on Thursday, June 18, 2015 at 10:15 AM in Economics, Inflation, Monetary Policy, Unemployment | Permalink  Comments (31)


                                                              Blow Up the Tax Code and Start Over???

                                                              Here we go again with the flat tax proposals. This time it's Rand Paul:

                                                              Blow Up the Tax Code and Start Over, by Rand Paul: Some of my fellow Republican candidates for the presidency have proposed plans to fix the tax system. These proposals are a step in the right direction, but the tax code has grown so corrupt, complicated, intrusive and antigrowth that I’ve concluded the system isn’t fixable.
                                                              So on Thursday I am announcing an over $2 trillion tax cut that would repeal the entire IRS tax code—more than 70,000 pages—and replace it with a low, broad-based tax of 14.5% on individuals and businesses. I would eliminate nearly every special-interest loophole. The plan also eliminates the payroll tax on workers and several federal taxes outright, including gift and estate taxes, telephone taxes, and all duties and tariffs. I call this “The Fair and Flat Tax.” ...

                                                              He might call it that, but even he admits the rich will pay a lower rate:

                                                              The left will argue that the plan is a tax cut for the wealthy. But most of the loopholes in the tax code were designed by the rich and politically connected. Though the rich will pay a lower rate along with everyone else, they won’t have special provisions to avoid paying lower than 14.5%.

                                                              Why not just get rid of the special provisions? Why is a flat tax more equitable than taxes based upon ability to pay (i.e. a progressive structure)?

                                                              And, of course, this won't provide enough revenue to fund government. How does he solve this? With two pieces of magic. First, magic budget cuts that he leaves unspecified (because proposing what it would actually take to close the budget gap would require severe cuts to social programs that people want to retain), and second, magic economic growth.

                                                              On the budget cuts, we get: 

                                                              my plan would actually reduce the national debt by trillions of dollars over time when combined with my package of spending cuts.

                                                              That's it. Somehow, the spending cuts will magically occur (and since we are imagining, guess who they would fall on?). But the biggest magic is the effect on the economy. It's an "economic steroid injection"!!!:

                                                              As a senator, I have proposed balanced budgets and I pledge to balance the budget as president.
                                                              Here’s why this plan would balance the budget: We asked the experts at the nonpartisan Tax Foundation to estimate what this plan would mean for jobs, and whether we are raising enough money to fund the government. The analysis is positive news: The plan is an economic steroid injection. Because the Fair and Flat Tax rewards work, saving, investment and small business creation, the Tax Foundation estimates that in 10 years it will increase gross domestic product by about 10%, and create at least 1.4 million new jobs.
                                                              And because the best way to balance the budget and pay down government debt is to put Americans back to work, my plan would actually reduce the national debt by trillions of dollars over time when combined with my package of spending cuts.

                                                              I bet it would almost be as good for the economy as the Bush tax cuts. Oh wait...

                                                                Posted by on Thursday, June 18, 2015 at 09:12 AM in Budget Deficit, Economics, Social Insurance, Taxes | Permalink  Comments (45)


                                                                'Thinking About the All Too Thinkable'

                                                                Paul Krugman:

                                                                Thinking About the All Too Thinkable: The path toward non-Grexit — toward Greece and its creditors reaching a deal that keeps it in the euro — is getting narrower, although it’s not yet completely closed. ...
                                                                At this point quite a few people on the creditor/Troika side of the negotiations seem almost to welcome the prospect. But this is bizarre in terms of their underlying interests. Yes, the lives of the officials would become easier, for a while, because they wouldn’t have to deal with Syriza. But from the point of view of the creditors, Grexit would be a pure negative. They would almost surely receive less in payments than they would under any deal that keeps Greece in, and the proof that the euro is in fact reversible would grease the rails for future crises, even if the ECB is able to contain this one.
                                                                And as Martin Wolf points out, Greece will still be there, and will still need dealing with.
                                                                The Greeks, on the other hand, should feel conflicted. There would probably be a lot of financial chaos in the immediate aftermath of euro exit. And maybe the apocalyptic warning from the Bank of Greece that devaluation would push the nation back into the Third World is right, although I’d like to know about the model and historical examples that would justify this claim. But absent that kind of implosion, a devalued currency should eventually produce an export-led recovery — I understand the cynicism one hears, but demand curves do slope downwards even in Greece.
                                                                The point is that nobody should be casual or confident here. But the creditors should actually be even more worried than the Greeks about a potential exit that has no upside for the rest of Europe.

                                                                  Posted by on Thursday, June 18, 2015 at 09:09 AM in Economics, Financial System, International Finance | Permalink  Comments (26)


                                                                  Links for 06-18-15

                                                                    Posted by on Thursday, June 18, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (155)


                                                                    Wednesday, June 17, 2015

                                                                    Fed Watch: June FOMC Recap

                                                                    Tim Duy:

                                                                    June FOMC Recap, by Tim Duy: The FOMC meeting ended largely as expected with a nod toward recent data improvement but no change in policy. It is still reasonable to believe that lift-off will occur in September, but only if incoming data removes any residual concern about the sloppy data from earlier this year. Still, as Federal Reserve Chair Janet Yellen emphasized today, the lift-off itself is less important than the subsequent path of rates. That path remains subdued.
                                                                    The FOMC statement itself was little changed - see the Wall Street Journal statement tracker here. Key is the opening line that validates the belief that the first quarter weakness was largely transitory:
                                                                    Information received since the Federal Open Market Committee met in April suggests that economic activity has been expanding moderately after having changed little during the first quarter.
                                                                    Otherwise, growth is expected to continue at a moderate pace that justifies an extended period of low interest rates. The updated forecasts saw reduced growth expectations this year as expected, while the near-term unemployment forecast was raised modestly (I had felt the Fed would be wary of doing this given their tendency to be overly pessimistic on this point). Longer term forecasts were essentially unchanged. The forecasts:

                                                                    FEDFORE

                                                                    The highest interest rate forecasts for 2015 were eliminated as was virtually required given the lack of any rate hike today. The median rate forecast suggests a rate hike this year, as did Yellen in her press conference. Still, she also said they are looking for decisive evidence to justify a rate hike, and I suspect that evidence will not arrive prior to the July meeting. Maybe September. Maybe not. It's all meeting by meeting now, you know.
                                                                    Interestingly, although the inflation and unemployment forecasts for 2016 and 2017 were largely unchanged, the median interest rate projection fell along with the most hawkish forecasts. See this handy chart from Fulcrum Asset Management:

                                                                    FULCRUM

                                                                    No change in the inflation and unemployment forecasts combined with a slower and longer path to normal rates suggests a modest change in the reaction function. In effect, the Fed has turned more dovish as the timing of lift-off is delayed. Even with unemployment falling to current estimates of full employment next year, they do not believe the economy needs (or maybe could withstand) a rapid pace of hikes. Persistently low inflation and wage growth is taking its toll on policy expectations. And even the most hawkish participants are falling in line with this story.
                                                                    Bottom Line: Fed policy unchanged as expected, door still open for a rate hike in September, but the lower rate path indicates a modestly more dovish Fed resigned to a persistent low interest rate environment. It's the rate path we need to be watching, not the timing of the first hike.

                                                                      Posted by on Wednesday, June 17, 2015 at 02:02 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (24)


                                                                      'TPP Versus NAFTA'

                                                                      Paul Krugman:

                                                                      TPP Versus NAFTA: Many people — myself included — thought that TPP would, in the end, follow the model of NAFTA: a Democratic president would push the agreement through Congress, but the bulk of the votes would be Republican. But it doesn’t seem to be going that way. Why?
                                                                      Lydia DePillis suggests that procedural differences and the changed political environment are what changed. Maybe. But I’d suggest three additional factors.
                                                                      First, while non-trade issues like dispute settlement and intellectual property already loomed large in NAFTA, it was nonetheless more of a genuine trade agreement than TPP...
                                                                      Despite this, the real case for NAFTA involved foreign policy — which is also true for TPP (administration officials tell me that it’s really about geopolitics.) But that case was much more compelling for NAFTA, which was about rewarding Mexican reformers. ...
                                                                      Finally, I think it’s fair to say that the liberal intelligentsia has been somewhat radicalized by Republican extremism; making common cause with those who share your basic values matters more than it seemed to a couple of decades ago. ...
                                                                      So it really is a different game, and TPP supporters need to realize that old rules no longer apply.

                                                                        Posted by on Wednesday, June 17, 2015 at 12:17 PM in Economics, International Trade, Politics | Permalink  Comments (39)


                                                                        'Why Anti-Keynesian Views Survive'

                                                                        Simon Wren-Lewis:

                                                                        Speak for yourself, or why anti-Keynesian views survive:
                                                                        The evidence for the Keynesian worldview is very mixed. Most economists come down in favor or against it because of their prior ideological beliefs. Krugman is a Keynesian because he wants bigger government. I’m an anti-Keynesian because I want smaller government.
                                                                        Statements like this tell us rather a lot about those who make them. As statements about why people hold macroeconomic views they are wide of the mark. Of course there is confirmation bias, and ideological bias, but as the term ‘bias’ suggests, it does not mean that evidence has no impact on the views of the majority of academics.
                                                                        The big/small government idea makes no theoretical sense. Why would wanting a larger state make someone a Keynesian? Many Keynesians, and most New Keynesians, nowadays acknowledge that monetary policy should be used to manage demand when it can. They also know that any fiscal stimulus only works, or at least works best, if it involves temporary increases in government spending. So being a Keynesian is not a very effective way of getting a larger state.
                                                                        It is also obviously false empirically. ...
                                                                        Parts of the political right have always had a deep ideological problem with Keynesian analysis. As Colander and Landreth describe, the first US Keynesian textbook was banned. New Classical economists, for all the many positive contributions they brought to macro (in the view of most mainstream Keynesians), also tried to overthrow Keynesian analysis and they failed. 
                                                                        When anti-Keynesians tell you that support or otherwise for Keynesian macroeconomics depends on belief about the size of the state, they are telling something about where their own views come from. When they tell you everyone ignores evidence that conflicts with their views, they are telling you how they treat evidence. And the fact that some on the right take this position tells you why anti-Keynesian views continue to survive despite overwhelming evidence in favor of Keynesian theory.

                                                                          Posted by on Wednesday, June 17, 2015 at 08:31 AM Permalink  Comments (181)


                                                                          'Microcredit: Neither Miracle nor Mirage'

                                                                          On microcredit:

                                                                          Microcredit: Neither miracle nor mirage, by Orazio Attanasio, Britta Augsburg, Ralph De Haas, Heike Harmgart, Costas Meghir, Vox EU: Recent years have seen an intense debate between microfinance proponents and detractors on whether microcredit can lift people out of poverty. The microfinance industry has long painted a picture – often backed by inspiring individual success stories – in which households can escape poverty once they receive a microloan. Women are thought to benefit in particular as access to credit allows them to become economically and socially more independent. More recently, doubts have emerged about the ability of microcredit to improve living standards in a structural way. Some point out that many villages where microcredit was first introduced in the 1970s are still as poor today as they were then. Others take offense at the very high interest rates that some microfinance institutions (MFIs) charge.

                                                                          What has been absent from this heated debate is solid evidence. To fill this gap, a number of research teams across the world started randomized evaluations (large field experiments) to rigorously measure the impact of access to microcredit on borrowers and their households. Studies were set up in Bosnia and Herzegovina, Ethiopia, India, Mexico, Mongolia, Morocco, and the Philippines. Research took place in both urban and rural areas and evaluated both individual-liability and joint-liability (group) loans. Some of the participating microfinance institutions were for-profit organizations whereas others were non-profits. Nominal annual interest rates varied between 12% (Ethiopia) and 110% (Mexico).

                                                                          Four main lessons

                                                                          Together, these studies have produced a rigorous body of evidence on the impact of microcredit in a wide variety of settings. Earlier this year the research results were published in a special issue of the American Economic Journal: Applied Economics (references at the end of this article). They paint a remarkably consistent picture and contain four main lessons:

                                                                          • Across all seven studies, microcredit did not lead to substantial increases in borrowers’ income. It did not help to lift poor households out of poverty. This holds both when measured over the short term (18 months) and over the longer run (three to six years).

                                                                          A possible explanation for this finding is that while microcredit clients overwhelmingly reported using loans at least partially for business purposes, many of them also reported to have used part of their loans for consumption. Another possible explanation is that not all borrowers are natural entrepreneurs. Of those that use microcredit to open or expand a small business, some borrowers are more successful than others. Though business investments and expenses increased for borrowers in several countries, researchers did not find any overall effect on borrowers’ profits in Bosnia and Herzegovina, Ethiopia, India, Mexico, and Mongolia. In the evaluation in Bosnia, we only found positive profit impacts among a small segment of all borrowers.

                                                                          • Access to microcredit also did not appear to have tangible impacts on borrowers’ well-being or the well-being of others in their households.

                                                                          For instance, three of four studies found no effect on female decision-making power and independence. In Mexico, where the microfinance institutions emphasized empowerment, women did enjoy a small but significant increase in decision-making power. In six studies, microcredit access did not increase children’s schooling.

                                                                          • On the upside, the data collected by the research teams show that households with access to microcredit enjoyed greater freedom in deciding how they earned and spent money.

                                                                          In Bosnia and Herzegovina and in Morocco, microcredit allowed people to change their mix of employment activities, reducing earnings from wage labor and increasing income from self-employment activities. In the Philippines, it also helped households insure themselves against income shocks and to manage risk. In Mexico, households with access to microcredit did not need to sell off assets when hit by an income shock.

                                                                          • Importantly, there is no evidence of systematic harmful impacts of access to microcredit.

                                                                          For instance, overall stress levels among borrowers were no different from the comparison group in Bosnia and Herzegovina or the Philippines, though male borrowers experienced significantly higher levels of stress in the Philippines.

                                                                          Implications for the microfinance industry

                                                                          Small changes to product design may have a big influence on how people use and benefit from microcredit. For instance, repayment begins for the typical microloan two weeks after loan disbursement and payment is usually required on an inflexible weekly basis. This can be an effective strategy to limit default, but may also limit borrowers’ income growth. In India, granting (some) borrowers a grace period – so that they can build a business before they need to start repaying – led to increased short-run business investment and long-run profits, but also increased default rates (Field et al. 2013). In addition, monthly or seasonal repayment schedules that better reflect borrowers’ income flows can help borrowers to make better use of their loans. For instance, microfinance institutions like Enda Arabe in Tunisia and FINCA in Armenia offer loan products where repayment schedules are matched with expected cash flows (which depend on the seasonality of agricultural products). Further research is needed to evaluate the impact of such flexible loan products in terms of repayment rates and poverty outcomes. In Mali, researchers found that a credit product designed around agricultural timing had positive impacts and did not lead to increased defaults (Beaman et al. 2014).

                                                                          Related to the previous point, microfinance institutions and borrowers could benefit from better segmenting the market and offering larger, more flexible products to clients most likely to perform well, and smaller, less flexible loans to less promising borrowers. Better ex ante differentiation is, however, not straightforward and would require better screening methodologies (Fafchamps and Woodruff  2014).

                                                                          In addition, financial institutions can pilot better ways to help high-performing micro-entrepreneurs become eligible for small and medium enterprises (SME) lending. Today, successful and growing clients that need more funding may get stuck, too large for microfinance but not yet viable clients at traditional lending institutions. Microfinance institutions could set up arrangements with local banks to transfer such successful clients (for a fee) to a bank so that they can continue their growth trajectory. Likewise, banks with both microfinance and SME department should ensure that fast-growing micro clients can easily graduate to SME status.

                                                                          Lastly, we note that the rapid expansion of lender competition can tempt some clients to borrow from various lenders (double dipping) which may result in over-borrowing and repayment problems. A potential mechanism to prevent such problems is to let lenders share borrower information via a credit registry. These considerations are particularly urgent for countries, such as Tunisia, that are currently opening up their microfinance sector to increased competition.

                                                                          References

                                                                          Angelucci, M, D Karlan and J Zinman (2015), “Microcredit Impacts: Evidence from a Randomized Microcredit Program Placement Experiment by Compartamos Banco”, American Economic Journal: Applied Economics 7(1), 151-82.

                                                                          Attanasio, O, B Augsburg, R De Haas, E Fitzsimons and H Harmgart (2015), “The Impacts of Microfinance: Evidence from Joint-Liability in Mongolia”, American Economic Journal: Applied Economics 7(1), 90-122.

                                                                          Augsburg, B, R De Haas, H Harmgart and C Meghir (2015), “The Impacts of Microcredit: Evidence from Bosnia and Herzegovina”, American Economic Journal: Applied Economics 7(1), 183-203.

                                                                          Beaman, L, D Karlan, B Thuysbaert and C Udry (2014), “Self-Selection into Credit Markets: Evidence from Agriculture in Mali”, mimeo.

                                                                          Banerjee, A, E Duflo, R Glennerster and C Kinnan (2015), “The Miracle of Microfinance? Evidence from a Randomized Evaluation”, American Economic Journal: Applied Economics 7(1), 22-53.

                                                                          Banerjee, A, D Karlan and J Zinman (2015), “Six Randomized Evaluations of Microcredit: Introduction and Further Steps”, American Economic Journal: Applied Economics 7(1), 1-21.

                                                                          Crépon, B, F Devoto, E Duflo and W Parienté (2015), “Estimating the Impact of Microcredit on Those Who Take It Up: Evidence from a Randomized Experiment in Morocco”, American Economic Journal: Applied Economics 7(1), 123-50.

                                                                          Fafchamps, M and C Woodruff (2014), “Identifying Gazelles: Expert Panels vs. Surveys as a Means to Identify Firms with Rapid Growth Potential”, CAGE Online Working Paper Series 213.

                                                                          Field, E, R Pande, J Papp and N Rigol (2013), “Does the Classic Microfinance Model Discourage Entrepreneurship among the Poor? Experimental Evidence from India”, The American Economic Review, 103(6), 2196-2226.

                                                                          Karlan, D and J Zinman (2011), “Microcredit in Theory and Practice: Using Randomized Credit Scoring for Impact Evaluation”, Science 332(6035), 1278-1284.

                                                                          Tarozzi, A, J Desai and K Johnson (2015), “The Impacts of Microcredit: Evidence from Ethiopia”, American Economic Journal: Applied Economics 7(1), 54-89.

                                                                            Posted by on Wednesday, June 17, 2015 at 08:10 AM Permalink  Comments (2)


                                                                            Links for 06-17-15

                                                                              Posted by on Wednesday, June 17, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (123)


                                                                              Tuesday, June 16, 2015

                                                                              Fed Watch: FOMC Preview

                                                                              Tim Duy:

                                                                              FOMC Preview: This month my FOMC preview is over at Bloomberg.  The intro:

                                                                              The Federal Open Market Committee meets this week to discuss the path of monetary policy.

                                                                              Any possibility of a rate hike at the meeting’s conclusion on Wednesday was already crushed under the weight of weak data early in the year. To be sure, the data support the transitory nature of the weakness, justifying Federal Reserve Chair Janet Yellen’s optimism last month, but it remains too little, too late. Instead, turn to September as the next opportunity for the first rate hike of this cycle. 

                                                                              To read the rest, please visit Bloomberg.

                                                                                Posted by on Tuesday, June 16, 2015 at 09:42 AM Permalink  Comments (16)


                                                                                The Good and Bad Parts of Online Education

                                                                                I have a new column:

                                                                                The Good and Bad Parts of Online Education: Is online education the solution to widening inequality, rapidly rising costs, and lack of access to high quality courses? Will it lead to the demise of traditional “brick and mortar” institutions? I was initially very skeptical about the claims being made about online education, but after teaching several of these course during the past academic year my own assessment has become much more positive.
                                                                                My main worry, as expressed in a previous column, was that the availability of online courses degrees would create a two-tiered education system and exaggerate inequality instead of reducing it. I still worry about that, but I didn’t give online education enough credit for the things that it can do. Here are some of the positives and negatives of online versus traditional education gleaned from my experience teaching both types of courses. ...

                                                                                  Posted by on Tuesday, June 16, 2015 at 07:59 AM in Economics, Technology, Universities | Permalink  Comments (30)


                                                                                  Links for 06-16-15

                                                                                    Posted by on Tuesday, June 16, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (165)