- Are Low Interest Rates Deflationary? (NBER) - García-Schmidt and Woodford
- Bernanke Blames Congress for Lagging Fiscal Recovery - New York Times
- A head scratcher of an argument on the VW fraud - Environmental Economics
- Increasing top income tax rates would reduce inequality - Marshall Steinbaum
- An increase in top income taxes reduces income inequality - Crooked Timber
- The Papal Encyclical and Climate Change Policy - Robert Stavins
- The Cadillac Tax: Why Economists, but Few Others, Love It - New York Times
- Fed’s Eric Rosengren Still Bullish on Economy - New York Times
- Has U.S. Corporate Bond Market Liquidity Deteriorated? - Liberty Street
- Arrgh, I've been name-shamed by Marc F. Bellemare!!! - Kids Prefer Cheese
- ‘Metrics Monday: Friends *Do* Let Friends Do IV - Marc Bellemare
- Banks and interest rates: be careful what you wish - Cecchetti & Schoenholtz
- Emerging economy corporate debt: The threat to financial stability - Vox EU
- Minimum wages in sub-Saharan Africa: A primer - Vox EU
Tuesday, October 06, 2015
Monday, October 05, 2015
Andrew Chang and Phillip Li:
Is Economics Research Replicable? Sixty Published Papers from Thirteen Journals Say “Usually Not”, by Andrew C. Chang and Phillip Li, Finance and Economics Discussion Series 2015-083. Washington: Board of Governors of the Federal Reserve System: Abstract We attempt to replicate 67 papers published in 13 well-regarded economics journals using author-provided replication files that include both data and code. Some journals in our sample require data and code replication files, and other journals do not require such files. Aside from 6 papers that use confidential data, we obtain data and code replication files for 29 of 35 papers (83%) that are required to provide such files as a condition of publication, compared to 11 of 26 papers (42%) that are not required to provide data and code replication files. We successfully replicate the key qualitative result of 22 of 67 papers (33%) without contacting the authors. Excluding the 6 papers that use confidential data and the 2 papers that use software we do not possess, we replicate 29 of 59 papers (49%) with assistance from the authors. Because we are able to replicate less than half of the papers in our sample even with help from the authors, we assert that economics research is usually not replicable. We conclude with recommendations on improving replication of economics research.
Is Donald Trump right to call NAFTA a "disaster"?: Recently, Donald Trump made a strong claim about the North American Free Trade Agreement (NAFTA) in an interview on CBS 60 Minutes:
"It's a disaster. ... We will either renegotiate it, or we will break it. Because, you know, every agreement has an end. ... Every agreement has to be fair. Every agreement has a defraud clause. We're being defrauded by all these countries."
Is he right? Was NAFTA a disaster? ...
I also talk about immigration.
Why are Republicans hostile to initiatives that promote wind and solar energy?:
Enemies of the Sun, by Paul Krugman, Commentary, NY Times: Does anyone remember the Cheney energy task force? Early in the George W. Bush administration, Vice President Dick Cheney released a report that was widely derided as a document written by and for Big Energy — because it was...
But here’s the thing: by the standards of today’s Republican Party, the Cheney report was enlightened, even left-leaning. One whole chapter was devoted to conservation, another to renewable energy. By contrast, recent speeches by Jeb Bush and Marco Rubio — still the most likely Republican presidential nominees — barely address either topic. When it comes to energy policy, the G.O.P. has become fossilized. That is, it’s fossil fuels, and only fossil fuels, all the way.
And that’s a remarkable development, because ... we’re ... living in an era of spectacular progress in wind and solar energy. Why has the right become so hostile to technologies that look more and more like the wave of the future? ...
Part of the answer is surely that promotion of renewable energy is linked in many people’s minds with attempts to limit climate change — and ... the association with climate science evokes visceral hostility on the right.
Beyond that,... follow the money. We used to say that the G.O.P. was the party of Big Energy, but these days it would be more accurate to say that it’s the party of Old Energy. In the 2014 election cycle the oil and gas industry gave 87 percent of its political contributions to Republicans; for coal mining the figure was 96, that’s right, 96 percent. Meanwhile, alternative energy went 56 percent for Democrats.
And Old Energy is engaged in a systematic effort to blacken the image of renewable energy, one that closely resembles the way it has supported “experts” willing to help create a cloud of doubt about climate science. An example: Earlier this year Newsweek published an op-ed article purporting to show that the true cost of wind power was much higher than it seems. But ... the article contained major factual errors, and its author had failed to disclose that he was the Charles W. Koch professor at Utah State, and a fellow of a Koch- and ExxonMobil-backed think tank. ...
While politicians on the right may talk about encouraging innovation and promoting an energy revolution, they’re actually defenders of the energy status quo, part of a movement trying to block anything that might disrupt the reign of fossil fuels.
From an interview in USA Today:
The decision about whether to prosecute individuals wasn't up to him, [Bernanke] says. "The Fed is not a law-enforcement agency," he says. "The Department of Justice and others are responsible for that, and a lot of their efforts have been to indict or threaten to indict financial firms. Now a financial firm is of course a legal fiction; it's not a person. You can't put a financial firm in jail."
From another report:
Asked if someone should have gone to jail, he replied, "Yeah, I think so."
There's a video of the interview at the first link.
- Is There a "Correct" Monetary Policy? Yes! - Brad DeLong
- Why Free Markets Make Fools of Us - Cass R. Sunstein
- Taking on the Drug Profiteers - James Surowiecki
- How the Fed Saved the Economy - Ben Bernanke
- Policy Makers Skeptical on Preventing Financial Crisis - NY Times
- Are macroprudential tools institutionally realistic? - William Dudley
- Political Pressure Is Undermining Research - ThinkProgress
- Some Unpleasant Labor Force Arithmetic - Stephen Williamson
- Whither Principal-Components Regressions? - No Hesitations
- Cointegration & Granger Causality - Dave Giles
Sunday, October 04, 2015
People on Twitter seemed interested in this:
Paying CEOs fat bonuses for stock performance doesn't work, by Lawrence Lewitinn, Yahoo Finance: It turns out offering CEOs huge bonuses to boost shareholder returns doesn’t actually work, according to a new study from Cornell University.
The analysis, done in conjunction with consultants Pearl Meyer & Partners, examined a decade’s worth of data from every company in the S&P 500. It compared companies that offer their top brass a total shareholder return (TSR) plan to those that don’t and found the increasingly popular pay plans haven't significantly boosted any of a number of key metrics. ...
To be fair, I should note that this is qualified. The end of the article points out that this "doesn’t rule out other performance bonuses" that avoid the problems associated with this particular method of trying to align the preferences of CEOs with those of stockholders. Nevertheless, I'm skeptical.
Nonrival Goods After 25 Years: Joshua Gans has a generous post that notes the 25th anniversary of the publication of my 1900 JPE article. I could not agree more with his observation that “there is more to be done …” in understanding the economics of ideas.
His post helped me see how to respond to a conversation I had this summer. I’ll use the excuse of the anniversary to focus for the month on such basics as the meaning of nonrival good. Doing so will be a shift for this blog, which until now has been concerned primarily with economics as a science and incidentally with my day job, which focuses on the interaction between urbanization and development.
I’m looking forward to revisiting these basics. ...
[He goes on to talk about excludability and nonrival goods.]
... What evidence is there that worries about a global economic slowdown are figuring prominently in recent oil prices? Exhibit one is the remarkable comovement between commodity and asset prices. Concerns about global economic weakness show up in commodity prices and asset markets across the board. ...
The turbulence in the global financial markets in the past few weeks has been widely attributed to a “China shock” that has increased the risks of a major downturn in global activity. Last month, this blog concluded that our regular “nowcasts” for global activity had not yet corroborated this narrative.
This month, we have identified the first clear evidence that the global economy has slowed down since mid year, with emerging markets and advanced economies both now growing more slowly. ...
- The Blanchard Touch - Paul Krugman
- How to be a good economist - Diane Coyle
- A Tax to Curb Excessive Trading Could Help Returns - NY Times
- Is the Devil in the Details? Estimating Global Poverty - INET
- Can monopoly power explain declining interest rates? - Nick Rowe
- Time for a new incentives estimate - Ken Thomas
- Puzzled By Peter Gourevitch - Paul Krugman
- Translating “net financial assets” - interfluidity
Saturday, October 03, 2015
We need to do more to "inoculate young children’s pliable brains against the ravages of poverty":
How poverty affects children’s brains, Washington Post: ... In a study published this year in Nature Neuroscience, several co-authors and I found that family income is significantly correlated with children’s brain size — specifically, the surface area of the cerebral cortex, which ... does most of the cognitive heavy lifting. Further, we found that increases in income were associated with the greatest increases in brain surface area among the poorest children. ...
Some feared the study would be used to reinforce the notion that people remain in poverty because they are less capable than those with higher incomes. As neuroscientists, we interpret the results very differently. We know that the brain is most malleable in the early years of life...
Our [new] clinical trial is designed to provide strong evidence regarding whether and how poverty reduction promotes cognitive and brain development. This study, however, will take at least five years to complete — far too long for young children living in poverty today. We should not wait until then to push for policies that can help inoculate young children’s pliable brains against the ravages of poverty. ...
The Romer Model turns 25: 25 years ago this month Paul Romer‘s paper, “Endogenous Technological Change” was published in the Journal of Political Economy. After over 20,000 citations, it is one of the most influential economics papers of that period. The short version of what that paper did was to provide a fully specified model whereby technological change (i.e., the growth of productivity) was driven not be outside (or exogenous) forces but, instead, by the allocation of resources to knowledge creation and with a complete description of the incentives involved that provided for that allocation. Other papers had attempted this in the past — as outlined in David Warsh’s great book of 2006 — and others provided alternatives at the same time (including Aghion, Howitt, Grossman, Helpman, Acemoglu and Weitzman) but Romer’s model became the primary engine that fueled a decade-long re-examination of long-term growth in economics; a re-examination that I was involved in back in my student days.
Recently, Romer himself has taken on others who, more recently, have continued to provide models of endogenous economic growth (most notably Robert Lucas) for not building on the work of himself and others that grounded the new growth theory in imperfect competition but instead trying to formulate models based on perfect competition instead. I don’t want to revisit that issue here but do want to note that “The Romer Model” is decidedly non-mathy. As a work of theoretical scholarship, every equation and assumption is carefully justified. The paper is laid out with as much text as there is mathematics. And in the end, you know how the model works, why it works and what drives its conclusions. ...
After explaining the contributions in detail, he also covers:
So why has work in this area somewhat petered out? ...
And ends with:
In summary, the Romer model was a milestone and led to much progress. It is a stunningly beautiful work of economic theory. But there is more to be done and my hope is we will see that happen in the future as the cumulative process that drives new knowledge can drive new economic knowledge as well.
The people who say "think of the children!" when stoking unfounded fears about the debt seem to have no problem with this. Maybe the children aren't really their main concern:
- The smartest economist you’ve never heard of - Washington Post
- The Investment Accelerator and the Woes of the World - Paul Krugman
- Defensive Suspension and the Panic of 1857 - Liberty Street Economics
- The Trans-Pacific Free-Trade Charade - Stiglitz and Hersh
- Errors as a source of macroeconomic frictions - Vox EU
- Economic policy arguments need more politics - Washington Post
- Macroprudential Policy in the U.S. Economy - Stanley Fischer
- Households’ expectations and spending - Bank Underground
- Illustrating Spurious Regressions - Dave Giles
- Not Enough Teachers - Economic Policy Institute
- Why Bankers Want Rate Hikes - Paul Krugman
Friday, October 02, 2015
From an interview with Thomas Piketty during a trip to South Africa:
...I think in all cases there is always a lot to learn from these historical experiences and probably the one … lesson is we don’t want, we don’t need 19th-century inequality to grow in the 21st century. We find the role of inequality may be justified by incentive and growth considerations, but certainly no extreme and sometimes obscene level of inequality of pay that we’ve seen in recent days, with top managerial compensation going to millions of dollars. You just don’t see the positive side of this in the performance, in the job creation. ... The idea that you need to pay top managers 100, 200 times the minimum wage to get them to work and otherwise they will just not do the work. That ideology is not consistent at all with the historical data that we have, which shows that you can develop with reasonable, not extreme inequality levels. ...
The comments on the interview, at least when I read them, were not supportive.
Job Growth Weakens in September: The Labor Department reported the economy created just 142,000 jobs in September, well below most forecasts. Furthermore, the prior two months' numbers were revised down as well, bringing the average for the last three months to 167,000. In addition, there was a drop in the length of the average workweek of 0.1 hour causing the index of aggregate hours to decline by 0.2 percent. The household survey also showed a weak picture of the labor market. While the unemployment rate was unchanged at 5.1 percent there was a drop of 0.2 percentage points in both the labor force participation rate and the employment-to-population (EPOP) ratio. The drop in the EPOP brought the ratio back to its level of October 2014.
The weakness in job growth in the establishment survey was spread widely across sectors. ...
The average hourly wage dropped slightly in September, bringing the annual rate of growth over the last three months compared with the prior three to 2.2 percent, the same as its rate over the last year. The drop in the hourly wage, combined with the fall in hours, led to a 0.3 percent drop in the average weekly wage.
The household survey also showed a weak picture of the labor market. While the unemployment rate was unchanged there was a drop of 0.2 percentage points in both the labor force participation rate and the employment to population ratio. The low EPOP is not primarily a demographic story. The EPOP for prime-age (25–54) men is still 3.5 percentage points below its pre-recession peak and 5.0 percentage points below its 2000 high. For prime-age women the September EPOP is 2.7 percentage points below the pre-recession peak and 4.7 percentage points below the high hit in 2000. Clearly this is not a story of people leaving the labor force to retire.
Other news in the household survey was mixed. The share of unemployment due to people who voluntarily quit their jobs remained at the low 9.8 percent rate of August, a level typically seen in recessions. The duration measures all fell slightly, reversing some increases in the prior two months. The one piece of clear good news in the survey was a drop of 447,000 in the number of people working part-time for economic reasons. This number is erratic, but this is an unusually large one-month decline.
On the whole this report suggests the labor market is considerably weaker than had been generally believed. The plunge in oil prices is taking a large toll on the formerly booming mining sector. In addition, the high dollar and the resulting trade deficit is a major hit to manufacturing. The 138,000 three-month average rate of private sector job growth is the lowest since February of 2011. The strong growth in government jobs is not likely to continue with budgets still tight. With GDP growth hovering near 2.0 percent, weaker job growth is to be expected, but it will make it much more difficult for the Federal Reserve Board to raise rates this year.
Why do Republican politicians support tax cuts for the wealthy despite their unpopularity (as documented in a part I left out), and their failure to spur economic growth?:
Voodoo Never Dies, by Paul Krugman, Commentary, NY Times: So Donald Trump has unveiled his tax plan. It would, it turns out, lavish huge cuts on the wealthy while blowing up the deficit.
This is in contrast to Jeb Bush’s plan, which would lavish huge cuts on the wealthy while blowing up the deficit, and Marco Rubio’s plan, which would lavish huge cuts on the wealthy while blowing up the deficit.
For what it’s worth, it looks as if Trump’s plan would make an even bigger hole in the budget than Jeb’s. Jeb justifies his plan by claiming that it would double America’s rate of growth; The Donald, ahem, trumps this by claiming that he would triple the rate of growth. But really, why sweat the details? It’s all voodoo. The interesting question is why every Republican candidate feels compelled to go down this path.
You might think that there was a defensible economic case for the obsession with cutting taxes on the rich. That is, you might think that if you’d spent the past 20 years in a cave (or a conservative think tank). ...
True, you can find self-proclaimed economic experts claiming to find overall evidence that low tax rates spur economic growth, but such experts invariably turn out to be on the payroll of right-wing pressure groups (and have an interesting habit of getting their numbers wrong)... There is no serious economic case for the tax-cut obsession.
Still,... every Republican who would be president is committed to a policy that is both demonstrably bad economics and deeply unpopular. What’s going on?
Well,..., it’s straightforward and quite stark: Republicans support big tax cuts for the wealthy because that’s what wealthy donors want. No doubt most of those donors have managed to convince themselves that what’s good for them is good for America. But at root it’s about rich people supporting politicians who will make them richer. Everything else is just rationalization.
Of course, once the Republicans settle on a nominee, an army of hired guns will be mobilized to obscure this stark truth. We’ll see claims that it’s really a middle-class tax cut, that it will too do great things for economic growth, and look over there — emails! And given the conventions of he-said-she-said journalism, this campaign of obfuscation may work.
But never forget that what it’s really about is top-down class warfare. That may sound simplistic, but it’s the way the world works.
For the Minsky fans:
Volatility, financial crises and Minsky's hypothesis, by Jon Danielsson, Marcela Valenzuela, Ilknur Zer, Vox EU: Received wisdom maintains that financial market volatility has a direct impact on the likelihood of financial crisis.
Perhaps the best expression of this is Minsky's (1982) hypothesis that economic agents observing low financial risk are induced to increase risk-taking, which in turn may lead to a crisis. This is the foundation of his famous statement, "stability is destabilizing".
More recently, this sentiment has found support amongst policymakers:
“Volatility in markets is at low levels, both actual and expected... to the extent that low levels of volatility may induce risk-taking behavior is a concern to me and to the Committee” -- Federal Reserve Chair Janet Yellen, 18 June 2014.
Such views find support in the recent theoretical literature, where economic agents react to volatility deviating from what they become to expect it to be.
Low volatility induces economic agents to take more risk, endogenously increasing the likelihood of future shocks. If the economic conditions deteriorate and the resulting bad investment decisions start to sour, volatility then increases, signaling a pending crisis.
However, we could not find any empirical literature documenting such a relationship between financial market volatility, risk taking, the real economy and crises. Perhaps we have made little empirical progress since Paul Samuelson's famous quip in 1966 that “Wall Street indexes predicted nine out of the last five recessions”!
The decomposition of volatility
This lack of empirical clarity has motivates us to take a new approach to verify the volatility-crisis relationship, focusing on unexpectedly high and unexpectedly low volatility.
Crises are rare events – recent history notwithstanding, an OECD member country suffers a banking crisis only once every 35 years, on average. Consequently, in order to obtain a meaningful statistical relationship between volatility and crises, it is helpful to take the long-term historical view.
Since no comprehensive data on historical volatilities is available, we constructed such a database from primary sources, one that spans 1800 to 2010 and covers 60 countries.
We make use of Reinhart and Rogoff’s (2009) banking and stock market dataset as our crisis indicator and use GDP per capita, inflation, change in government debt to GDP ratio, institution quality and fixed effects as controls.
We then ran a binomial regression model on the incidence of financial crises with lagged averages of volatility and controls as explanatory variables, finding little significance.
We surmise that this is due in part to the theoretical literature emphasizing volatility expectations and deviations therefrom, not the contemporaneous level of volatility.
Furthermore, volatility has a trend that evolves slowly over time, where one can identify regimes of high or low volatiles that last for many years and decades. Consequently, the expected level of volatility can be quite different across countries and time, weakening any empirical analysis focused solely on volatility levels.
We address this by decomposing volatility into unexpectedly low and high volatilities and using these as explanatory variables in the regression model.
In particular, borrowing terminology from the literature on output gap, we interpret the slow running volatility trend, calculated by a one-sided Hodrick-Prescott filter, as long-term expected volatility. Unexpectedly high and low volatility is then the deviation of volatility from above and below its trend, respectively.
We find a strong and significant relationship between unexpected volatilities and the likelihood of financial crises.
Unexpectedly low volatility increases the probability of both banking and stock market crises. This holds especially strongly if low volatility persists half a decade or longer.
We further investigate this by using the credit-to-GDP gap as a proxy for risk-taking, finding that unexpectedly low volatility significantly increases risk-taking. This result complements that of Taylor and Schularick (2009), where credit booms are destabilizing, leading to a banking crisis.
For stock market crises, but not banking crises, high volatility also increases the likelihood of a crisis, but only with much shorter lags, up to two or three years.
This is very much in line with what theory predicts and provides strong evidence for Minsky’s instability hypothesis. Low volatility induces risk-taking that leads to riskier investments. When those turn sour, the resulting high volatility signals a pending crisis.
These results are robust to a number of alternative specifications, for example on the definition of volatility, filtering, lag lengths, sample selections and model specifications.
We find that the relationship between unexpected volatility and the likelihood of a future crisis becomes stronger over time. This is not surprising since the importance of stock markets and the prevalence of limited liability corporations have steadily been increasing.
The main exception to this is the Bretton Woods era when financial markets were tightly regulated and capital flows controlled, causing the volatility-crisis relationship to weaken significantly.
While the common view maintains that volatility directly affects the probability of a crisis, this has been proven difficult to verify empirically.
In what we believe is the first study to do so, we find direct empirical evidence that the level of volatility is not a good indicator of crisis, but that unexpectedly high and low volatilities are.
This is directly in line with what is predicted by theory and provides a validation of Minsky's hypothesis – stability is destabilizing.
Market volatility is of clear interest to policymakers, with the quote of chairwoman Yellen above just one example.
By documenting how volatility can affect the risk-taking behavior of economic agents and hence, the incidence of financial crises, policymakers and market participants alike would gain a valuable tool in understanding crises, tail events and systemic risk.
Author's note: Jon Danielsson thanks the Economic and Social Research Council (UK). Marcela Valenzuela thanks Fondecyt and Instituto Milenio.
Disclaimer: The views in this column are solely those of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or of any other person associated with the Federal Reserve System.
Danielsson, J, M Valenzuela, and I Zer (2015), “Learning from History: Volatility and Financial Crises”, SSRN.
Minsky, H (1992), “The financial instability hypothesis”, Working Paper.
Reinhart, C M and K S Rogoff (2009), “This Time is Different: Eight Centuries of Financial Folly”, Princeton University Press.
Samuelson, P (1966), “Science and stocks”, Newsweek.
Taylor, S (2009), “Credit booms go wrong”, VoxEU, 8 December.
Yellen, J (2014), press conference, Federal Reserve Board, 18 June.
- Unemployment in the 1930s. - Eric Rauchway
- Nonsense on data revisions - mainly macro
- Prisoners of Derp - Paul Krugman
- Uncle Sam Spam - John Cochrane
- Charles Evans: Leadership and Monetary Policy - Brad DeLong
- A new international database on financial fragility - Vox EU
- Commitment and Extraction of Ransoms - Cheap Talk
- The trade slowdown - Stumbling and Mumbling
- What NOT To Do When Data Are Missing - Dave Giles
- What is a morphogenic society? - Understanding Society
- The Rich Get Hit Harder by Inflation Than the Poor - Noah Smith
- People in newspapers who don’t make proper use of data - Angry Bear
Thursday, October 01, 2015
For a long time, I have been making the argument that part of the reason for the inequality problem is distortions in the distribution of income driven by market imperfections such as monopoly power that allows prices to exceed marginal costs. What I didn't realize is that this can also affect measurements of productivity growth:
The relationship between U.S. productivity growth and the decline in the labor share of national income, by Nick Bunker: One of the ongoing debates about the state of the U.S. economy is the extent to which the profits from productivity gains are increasingly going to the owners of capital instead of wage earners. These researchers are debating the extent to which the labor share of income, once considered a constant by economists, is on the decline.
But what if the decline of national income going to labor actually affects the measured rate of U.S. productivity growth? In a blog post published last week, University of Houston economist Dietz Vollrath sketches out a model showing just that scenario. ...
Vollrath argues that businesses with more market power are able to charge higher markups on their goods and services, meaning their pricing is higher than the cost of producing an additional goods or services compared to pricing in a perfectly competitive market. So in this situation where markups are high, goods and services are being produced less efficiently, with the increased profits going to the owners of capital.
Vollrath argues that this is how measured productivity growth is affected by the decline of the labor share of income. Market power is important for thinking about measured productivity growth because, as Vollrath says, it “dictates how efficiently we use our inputs.” ... Impeding the most efficient use of capital and labor via marked-up prices will reduce measured productivity. ... Perhaps this could explain some of the reason why measured productivity growth looks so meager in the seeming age of innovation...
But Vollrath’s story isn’t a complete explanation of the fall in measured productivity, as he acknowledges...
But Vollrath’s market power explanation for falling productivity growth, alongside the falling share of national income going to wage earners, is supported by some evidence. Work by Massachusetts Institute of Technology graduate student Matt Rognlie, for example, found evidence of higher markups.
Whether and how the decline of the labor share of income affects productivity growth is obviously a topic far too large for a couple of blog posts. But Vollrath’s model is especially interesting for connecting two important trends in recent years: the slowdown in productivity growth and the declining labor share. It’s worth, at the very least, a bit more investigation.
Two posts on housing. First, how will an increase in interest rates impact mortgage markets?:
The costs of interest rate liftoff for homeowners: Why central bankers should focus on inflation, by Carlos Garriga, Finn Kydland, and Roman Šustek: The Federal Reserve Bank and the Bank of England left their policy interest rates unchanged this month... But an interest rate liftoff in the near future remains on the table in both the US and the UK, provided the headwinds from China ease off and there is further evidence of improvements in the domestic economy. Inflation, however, still hovers in both economies stubbornly around zero percent.
Interest rates set by central banks influence the economy through various transmission mechanisms. But one channel affects the typical household directly – the cost of servicing mortgage debt. ... Changes in the interest rate set by the central bank affect the size of mortgage payments, but differently for different types of loans. In addition, the real value of these payments depends on inflation. ...
To sum up, the effects of the liftoff on homeowners depend on three factors:
- The prevalent mortgage type in the economy (fixed or adjustable rate mortgages);
- The speed of the liftoff; and
- What happens to inflation during the course of the liftoff.
If inflation stays constant at near zero then in the US, where fixed rate mortgage loans dominate, the liftoff will affect only new homeowners. In the UK, where adjustable rate mortgage loans dominate, the negative effects will in contrast be felt strongly by both new and existing homeowners.
However, if the liftoff is accompanied by sufficiently high inflation as in our examples, the negative effects will be weaker in both countries. In the US, the initial negative effect on new homeowners will be compensated by gradual positive effects on existing homeowners. And in the UK, provided the liftoff is sufficiently slow, neither existing nor new homeowners may face significantly higher real costs of servicing their mortgage debt. But if the liftoff is too fast, both types of homeowners in the UK will face higher real mortgage costs in the medium term, even if the liftoff is accompanied by positive inflation with no change in real rates.
Therefore, if the purpose of the liftoff is to ‘normalize’ nominal interest rates without derailing the recovery, central bankers in both the US and the UK should wait until the economies convincingly show signs of inflation taking off. Furthermore, the liftoff should be gradual and in line with inflation.
Second, allowing less creditworthy borrowers to refinance could stimulate the economy:
‘Home Affordable Refinancing Program’: Impact on borrowers, by Sumit Agarwal, Gene Amromin, Souphala Chomsisengphet, Tomasz Piskorski, Amit Seru, and Vincent Yao: Mortgage refinancing is one of the main ways households can benefit from a decline in the cost of credit. This column uses the US Government’s Home Affordable Refinancing Program (HARP) as a laboratory to examine the government’s ability to impact refinancing activity and spur household consumption. The results suggest that less creditworthy borrowers significantly increase their spending following refinancing. To the extent that such borrowers have the largest marginal propensity to consume, allowing them to refinance under the program could increase overall consumption and alleviate uneven economic outcomes across the country.
Marx on peasant consciousness: One of Marx's more important pieces of political writing is the The Eighteenth maire of Louis Bonaparte (1851) (pdf). Here is his analysis of the causes of the specific nature of peasant political consciousness leading to the election of Napoleon III:The small-holding peasants form an enormous mass whose members live in similar conditions but without entering into manifold relations with each other. Their mode of production isolates them from one another instead of bringing them into mutual intercourse. The isolation is furthered by France‘s poor means of communication and the poverty of the peasants. Their field of production, the small holding, permits no division of labor in its cultivation, no application of science, and therefore no multifariousness of development, no diversity of talent, no wealth of social relationships. Each individual peasant family is almost self-sufficient, directly produces most of its consumer needs, and thus acquires its means of life more through an exchange with nature than in intercourse with society. A small holding, the peasant and his family; beside it another small holding, another peasant and another family. A few score of these constitute a village, and a few score villages constitute a department. Thus the great mass of the French nation is formed by the simple addition of homologous magnitudes, much as potatoes in a sack form a sack of potatoes. Insofar as millions of families live under conditions of existence that separate their mode of life, their interests, and their culture from those of the other classes, and put them in hostile opposition to the latter, they form a class. Insofar as there is merely a local interconnection among these small-holding peasants, and the identity of their interests forms no community, no national bond, and no political organization among them, they do not constitute a class. They are therefore incapable of asserting their class interest in their own name, whether through a parliament or a convention. They cannot represent themselves, they must be represented. Their representative must at the same time appear as their master, as an authority over them, an unlimited governmental power which protects them from the other classes and sends them rain and sunshine from above. The political influence of the small-holding peasants, therefore, finds its final expression in the executive power which subordinates society to itself.
This a particularly interesting analysis of the social psychology of group solidarity, and one that has contemporary significance as well. It sheds a lot of light on how Marx thinks about the formation of class consciousness -- even as it significantly misunderstands the agency of rural people.
What are the limitations of the French peasantry, according to Marx here? They are isolated, burdened, unsophisticated, primitive, apolitical, and ignorant of the larger forces around them. Therefore, Marx says, they cannot constitute a unified and purposive political force. (The photo of a battalion of Vietnam Minh troops in Indochina just a century later refutes this conception.)
From this description we can draw several positive ideas about the foundations of collective solidarity. Here are the elements that Marx takes to be crucial in the formation of collective consciousness in this passage:
- The group needs to possess "manifold relations" to each other.
- There needs to be effective communication and transportation across space, not just local interaction.
- There needs to be a degree of economic interdependence.
- There need to be shared material conditions in the system of production.
- There needs to be an astute appreciation of the social and economic environment.
- There needs to be organization and leadership to help articulate a shared political consciousness and agenda.
And Marx seems to have something like a necessary and sufficient relation in mind between these conditions and the emergence of collective consciousness: these conditions are jointly sufficient and individually necessary for collective consciousness in an extended group.
There are several crucial ideas here that survive into current thinking about solidarity and mobilization. So Marx's thinking about collective consciousness was prescient. It is interesting to consider where his thoughts about collective solidarity came from. How did he come to have insightful ideas about the social psychology of mobilization and solidarity in the first place? This isn't a topic that had a history of advanced theory and thinking in 1851.
Two sources seem likely. First is the tradition of French socialist thought in which Marx was immersed in the 1840s. French socialist thinkers were in fact interested in the question of how a revolutionary spirit came to be among a group of people. And second is Marx's own experience of working people in Paris in 1843-45. He writes of his own observations of working people in the Economic and Philosophic Manuscripts in 1844:When communist artisans associate with one another, theory, propaganda, etc., is their first end. But at the same time, as a result of this association, they acquire a new need – the need for society – and what appears as a means becomes an end. In this practical process the most splendid results are to be observed whenever French socialist workers are seen together. Such things as smoking, drinking, eating, etc., are no longer means of contact or means that bring them together. Association, society and conversation, which again has association as its end, are enough for them; the brotherhood of man is no mere phrase with them, but a fact of life, and the nobility of man shines upon us from their work-hardened bodies.
Here Marx gives as much importance to the substantive relations of friendship and everyday association as he does to shared material interests in the formation of the class consciousness of French workers.
Marx's misunderstanding of the political capacity and consciousness of peasant communities has been noted by many scholars of rural revolutions. James Scott once opened a public lecture on the revolutions of the twentieth century by saying that his lecture would only treat the peasant revolutions of the century. But he then paused and laughed, and said, this isn't much of a limitation, because they were all peasant revolutions! Marx's assumption that only urban workers were capable of revolutionary consciousness was a serious misreading of the coming century of anti-capitalist and anti-colonial struggles. (Here is an earlier post on Scott's studies of peasant politics. Scott's accounts can be found in Weapons of the Weak: Everyday Forms of Peasant Resistance and The Moral Economy of the Peasant: Rebellion and Subsistence in Southeast Asia. Eric Wolf's Peasant Wars of the Twentieth Century picks up similar themes.)
Also interesting in the Eighteenth Brumaire is Engels' statement on the law of history as class struggle in his preface to the third edition of the book:In addition, however, there was still another circumstance. It was precisely Marx who had first discovered the great law of motion of history, the law according to which all historical struggles, whether they proceed in the political, religious, philosophical or some other ideological domain, are in fact only the more or less clear expression of struggles of social classes, and that the existence and thereby the collisions, too, between these classes are in turn conditioned by the degree of development of their economic position, by the mode of their production and of their exchange determined by it. This law, which has the same significance for history as the law of the transformation of energy has for natural science -- this law gave him here, too, the key to an understanding of the history of the Second French Republic. He put his law to the test on these historical events, and even after thirty-three years we must still say that it has stood the test brilliantly.
Engels plainly endorses the idea of laws of motion of society and the idea of class conflict as the primary motor of historical change. "History is a history of class struggle." There is not much room for contingency or conjunctural causation here! But this is a dimension of Marxist theory that is plainly incorrect. Far better is to understand history in a more multi-factoral way in which contingency, conjunction, and agency all play a role.
- Commodities and Cranks - Paul Krugman
- Natural Experiment Sheds Light on Herding - Liberty Street
- Business Investment in the United States - Jason Furman
- The Case Against Raising Interest Rates - Josh Bivens
- Department of "Huh?!" - Brad DeLong
- The Fed Puzzle - Paul Krugman
- Theory vs. Data in economics - Noahpinion
- Doubling Down on Abenomics - David Beckworth
- Huffing And Puffing Ideologically Over The Ex-Im Bank - EconoSpeak
- Pundits outpredicted by people you’ve never heard of - Washington Post
- How to analyse housing markets - Cameron Murray
- Exchange Rates Moving - Tim Taylor
- Forecasting - Kids Prefer Cheese
- Tontines Explained - Paul Krugman
Wednesday, September 30, 2015
“I think the left wants slow growth because that means people are more dependent upon government,” Bush told Fox Business’ Maria Bartiromo.
Remember, this is the establishment candidate for the GOP nomination — and he thinks he’s living in Atlas Shrugged.
Back when Romney made his "47 percent" remark, Rich Lowry of the National Review Online responded:
...The contention is that if people aren’t paying federal income taxes, they are essentially freeloaders who will vote themselves more government benefits knowing that they don’t have to pay for them. As NR’s Ramesh Ponnuru has pointed out, there’s no evidence for this dynamic. ...
Fear of the creation of a class of “takers” can slide into disdain for people who are too poor — or have too many kids or are too old — to pay their damn taxes. For a whiff of how politically unattractive this point of view can be, just look at the Romney fundraising video.
Bush didn't learn a thing from Romney' venture down this road. "There's no evidence" for the charge itself, it's a political loser except with a certain population that would vote Republican in any case, and it falsely asserts that Democrats are opposed to policies that spur economic growth (hence our repeated calls for things like infrastructure to provide jobs, get the economy ready for a highly competitive international economy, and avoid the potential for secular stagnation?).
What we are opposed to, or what I am opposed to -- guess I should speak for myself -- is growth where all the benefits are captured by those at the top. Imperfections in economic institutions along with changes in the rules of the game pushed forward by those with political influence have caused those at the top to be rewarded in excess of their contribution to economic output, while those at the bottom have gotten less than their contribution. It's not "taking" to increase taxes at the top and return income to those who actually earned it, to the real makers who toil each day at jobs they'd rather not do to support their families. It's a daily struggle for many, a struggle that would be eased if they simply earned an amount equivalent to their contributions. That's why it's so "politically unattractive", people explicitly or implicitly understand they have been, for lack of a better word, screwed by the system. The blame is sometimes misplaced, but that doesn't change the nature of the problem. They don't want "free stuff," they want what they deserve, and there is nothing whatsoever wrong with that.
The other thing I'm opposed to is tax cuts for those at the top that make this problem even worse without delivering any corresponding benefits. These tax cuts redistribute income upward and cause the income received by workers to fall even further below their contribution, and there's no corresponding benefit to economic growth (or if there is, it's very, very small). We keep hearing that putting money in the hands of the "makers' at the top will produce magical growth, but the reality is that these are the true takers, the ones who are receiving far more from the economy than they contribute, while those who actually work their butts off each day to make the things we all need and enjoy struggle to pay their bills.
Curious to hear what people think of this:
On the Ethics of Redistribution, by V. V. Chari and Christopher Phelan, The Region, FRB Minneapolis: When evaluating economic inequality, economists frequently employ the ethical principle referred to as behind-the-veil-of-ignorance. Originated by Nobel Laureate John Harsanyi and philosopher John Rawls, this criterion imagines the social contract that would be developed by a society of risk-averse people who don’t yet know where each of them will end up in that society’s distribution of income.1 ...
From behind the veil of ignorance, no individual could know into which country (or economic class) he or she will be born. Behind-the-veil, risk-averse people would therefore want to ensure that people born in rich countries do not adopt policies that hurt people born in poor countries. Nevertheless, analysts almost invariably ignore the effects of domestic tax policy on those in other nations. But consistent use of the behind-the-veil criterion would mean that analysts cannot treat people who live in rich, developed economies differently than they treat people who live in poor, less-developed economies. ...
Increasing world trade is an example of the tension between policies that help those in developing countries versus those that help those lower in the income distribution in developed countries. According to a World Bank Study, in the three decades between 1981 and 2010, the rate of extreme poverty in the developing world (subsisting on less than $1.25 per day) has gone down from more than one out of every two citizens to roughly one out of every five, all while the population of the developing world increased by 59 percent.8 This reduction in extreme poverty represents the single greatest decrease in material human deprivation in history.
But this decrease in extreme poverty in the developing world has coincided with a marked increase in income inequality in the developed world, and the latter has received much more attention, at least from policy analysts in these richer nations.
One possible cause of both trends has been the increase in international trade, which lessens the market value of less-skilled labor in developed countries while increasing its value in developing countries.9 If one uses a behind-the-veil criterion focused only on developed countries, then the increase in trade has made things worse. If instead one considers the entire world, then the trade increase has made the world phenomenally better. ...
We conclude that using the behind-the-veil-of-ignorance criterion to advocate for redistributive policies within developed countries while ignoring the effect of these policies on people in poor countries violates the criterion itself and is therefore fundamentally misguided.
Many economic analysts use social welfare functions in which, implicitly, only the well-being of domestic residents matters. This type of analysis is acceptable as long as the analyst acknowledges that such a social welfare function is not developed from deeper ethical considerations. A giant literature in public finance justifies such social welfare functions by appealing to the veil-of-ignorance. Our point simply is that those who use this criterion should weight the welfare of poor people in Chad, the world’s poorest nation, very heavily. To our knowledge, very little if any of the relevant research does so.
I think I buried the main point on this one for MoneyWatch. There has been quite a bit of criticism of the Fed's messaging on the timing of a rate liftoff. But while the messaging has been far from perfect, the bigger problem is the Fed's overly rosy forecasts. The Fed's forecasting models generally impose what is known as a stationarity assumption in response to demand-side shocks -- that is, the models have a relatively fast return to full employment baked into them. The rosy forecasts lead the Fed to adopt a relatively hawkish stance that has to be adjusted as more sobering data arrive. Thus, observers see the Fed continually revising its message, putting itself on a different "data dependent" path each time, and the succession of revisions causes observers to conclude that the Fed's messaging is off-base. But if the forecasts had been better, messaging wouldn't be so much of a problem:
Is communication the Fed's big problem?, Commentary: The Federal Reserve has gotten plenty of criticism for its recent communications about its monetary policy intentions. For example, Mark Gilbert at Bloomberg complained that "...the forward guidance policy adopted in recent years by many central banks is in tatters, and is probably doing more harm than good in telling companies and consumers when borrowing costs are likely to rise and at how fast."
Edward Luce at the Financial Times had similar sentiments, concluding that "Ms Yellen has juggled with different types of communication. They call this learning by doing. As the next countdown begins, her goal must be to share her thinking more clearly."
Is the Fed guilty as charged, and why is this important? ...
Education is not the only cause of inequality, but it's part of the problem:
Are American schools making inequality worse?, American Educational Research Association: The answer appears to be yes. Schooling plays a surprisingly large role in short-changing the nation's most economically disadvantaged students of critical math skills, according to a study published today in Educational Researcher, a peer-reviewed journal of the American Educational Research Association.
Findings from the study indicate that unequal access to rigorous mathematics content is widening the gap in performance on a prominent international math literacy test between low- and high-income students, not only in the United States but in countries worldwide.
Using data from the 2012..., researchers from Michigan State University and OECD confirmed not only that low-income students are more likely to be exposed to weaker math content in schools, but also that a substantial share of the gap in math performance between economically advantaged and disadvantaged students is related to those curricular inequalities. ...
"Our findings support previous research by showing that affluent students are consistently provided with greater opportunity to learn more rigorous content, and that students who are exposed to higher-level math have a better ability to apply it to addressing real-world situations of contemporary adult life, such as calculating interest, discounts, and estimating the required amount of carpeting for a room," said Schmidt, a University Distinguished Professor of Statistics and Education at Michigan State University. "But now we know just how important content inequality is in contributing to performance gaps between privileged and underprivileged students."
In the United States, over one-third of the social class-related gap in student performance on the math literacy test was associated with unequal access to rigorous content. The other two-thirds was associated directly with students' family and community background. ...
"Because of differences in content exposure for low- and high-income students in this country, the rich are getting richer and the poor are getting poorer," said Schmidt. "The belief that schools are the great equalizer, helping students overcome the inequalities of poverty, is a myth."
Burroughs, a senior research associate at Michigan State University, noted that the findings have major implications for school officials, given that content exposure is far more subject to school policies than are broader socioeconomic conditions.
- The diffusion of European diesel automobiles - Vox EU
- Interview with Amy Finkelstein - FRB Minneapolis
- Comfortable? - Stumbling and Mumbling
- Computer Use and Learning - Tim Taylor
- Peer-to-peer pressure - Tim Harford
- Heidi Williams, Macarthur Genius - Digitopoly
- The monetary damage of "Volkswagen’s Deception" - John Whitehead
- Brookings fellow Litan resigns after Warren accusations - Reuters
- Finance and growth – beware the measurement - Vox EU
- Why Does Wall Street Want Higher Rates? - Noah Smith
Tuesday, September 29, 2015
Magic plans meet the reality called the Fed:
Trump World and the Fed, by Dean Baker: ...Suppose that Donald Trump's tax cut really is the magic elixir that would get the economy to 6.0 percent annual growth. But what if the people at the Fed's Open Market Committee (FOMC) don't recognize this fact? Suppose the FOMC thinks the economy is still bound by the pre-Trump tax cut rules and believes that inflation will start to accelerate out of control if the unemployment rate falls much below its current 5.1 percent level.
In this case, we would expect to see the Fed raise interest rates sharply as they saw the Trump tax cuts boosting growth. ... If the Fed raises interest rates high enough, it could fully offset the boost that Trump's tax cut is giving to the economy. In this case, even though the Trump tax cuts might have been the best thing for the economy since the Internet (okay, better than the Internet), we wouldn't see any dividend because the Fed would not allow it.
For this reason, the Fed's likely response to a tax cut is a fundamental question that reporters should be asking. If the Fed is likely to simply slam on the brakes to offset any possible stimulus, then a tax plan will have little prospect of providing a growth dividend.
Maybe they aren't asking because they know in their heart of hearts that the plan will be lucky to boost growth at all.
The Price Impact of Margin-Linked Shorts: The real money peer-to-peer prediction market PredictIt just made a major announcement: they plan to margin-link short positions. This will lead to an across-the board decline in the prices of many contracts, especially in the two nominee markets. Given that the prices in this market are already being referenced by the campaigns, this change could well have an impact on the race.
What margin-linking short positions does is to make it substantially cheaper to bet simultaneously against multiple candidates. Instead of a trader's worst-case loss being computed separately for each position, it is computed based on the recognition that only one candidate can eventually win. So a bet against both Bush and Rubio ought to require less cash than a bet against just one of the two, since we know that a loss on one bet implies a win on the other.
In an earlier post I argued that a failure to margin-link short positions was a design flaw that results in artificially inflated prices for all contracts in a given market, making the interpretation of these prices as probabilities untenable. The problem can be seen by looking at some of the current prices in the GOP nominee market:
The "Buy No" column tells us the price per contract of betting against a candidate for the nomination, with each contract paying out a dollar if the named individual fails to secure the nomination. One could buy five of these contracts (Rubio, Bush, Trump, Fiorina, and Carson) for a total of $3.91, and even of one of these were to win, the payoff from the bet would be $4. If, on the other hand, Cruz or Kasich were to be nominated, the bet would pay $5. There is no risk of loss involved.
Margin-linking shorts recognizes this fact, and would make this basket of five bets collectively cost nothing at all. This would be about as pure an arbitrage opportunity as one is likely to find in real money markets. Aggressive bets would be placed on all contracts simultaneously, with consequent price declines.
A useful effect of this change in design is that manipulating the market becomes much harder. Buying contracts to push up a price would be met by a wall of resistance as long as the sum of all contract prices yields an opportunity for arbitrage. To sustain manipulation would require a trader not only to put a floor on the favored contract, but a ceiling on all others. This has been done before, but would be considerably more costly than under the current market design.
I'd be interested to see which prices are affected most as the transition occurs, and how much prices move in anticipation of the change. But no matter how the aggregate decline is distributed across contracts, this example illustrates one important fact about financial markets in general: prices depend not just on beliefs about the likelihood of future events, but also on detailed features of market design. Too uncritical an acceptance of the efficient markets hypothesis can lead us to overlook this somewhat obvious but quite important point.
And Then There Were None: ...I ... want to weigh in for a minute on Donald Trump’s tax plan — which would, surprise, lavish huge cuts on the wealthy while blowing up the deficit. That’s in contrast to Jeb Bush’s plan, which would lavish huge cuts on the wealthy while blowing up the deficit, and Marco Rubio’s plan, which would lavish huge cuts on the wealthy while blowing up the deficit.
At this point there are no Republican candidates deviating at all from the usual pattern. Why, it’s almost as if nobody in the party ever cared about deficits except as an excuse to slash social spending, and is totally committed to redistributing income upward.
And there is, of course, no evidence — zero, nada, zilch — that cutting taxes on the rich will yield large economic benefits.
What we’re seeing here is a party completely incapable of reforming …
Sharun Mukand and Dani Rodrik at Vox EU:
The political economy of liberal democracy, Vox EU: There are more democracies in the world today than non-democracies, according to data from Polity IV.1 Yet, few of those are what we would call liberal democracies – regimes that go beyond electoral competition and protect the rights of minorities, the rule of law, and free speech and practice non-discrimination in the provision of public goods.
Hungary, Ecuador, Mexico, Turkey, and Pakistan, for example, are all classified as electoral democracies by the Freedom House.2 But in these and many other countries, harassment of political opponents, censorship or self-censorship in the media, and discrimination against minority ethnic/religious groups run rampant. Fareed Zakaria coined the term ‘illiberal democracy’ for political regimes such as these that hold regular elections but routinely violate rights (Zakaria 1997). More recently, political scientists Steve Levitsky and Lucan Way (2010) have used the term ‘competitive authoritarianism’ to describe what they view as hybrid regimes between democracy and autocracy.
Democracy developed in Western Europe out of a liberal tradition that emphasized individual rights and placed limits on state coercion (Ryan 2012, Fawcett 2014, Fukuyama 2014). In Britain, France, Germany, and even the US, mass enfranchisement arrived only after liberal thought had become entrenched. Most of the world’s new democracies, by contrast, emerged in the absence of a liberal tradition and did little to foster one. As the shortcomings of these democracies have become more evident, it has become commonplace to talk about a ‘democratic recession’ (Diamond 2015). ...
Circumstances supporting civil rights But liberal democracies do exist, and the question is how they can ever be sustained in equilibrium. We discuss several circumstances that can mitigate the bias against civil rights in democracies.
- First, there may not be a clear, identifiable cleavage – ethnic, religious, or otherwise – that divides the majority from the minority.
In highly homogenous societies, the ‘majority’ derives few benefits from excluding the ‘minority’ from public goods and suffers few costs from providing equal access. This may account for the emergence of liberal democracy in Sweden during the early part of the 20th century or in Japan and South Korea more recently.
- Second, the two cleavages that distinguish the majority from the minority and the elite from the non-elite may be in close alignment.
In such a case, the elite will seek both property and civil rights as part of the political settlement with the majority. Think, for example, of the position of the white minority government in South Africa prior to the transition to democracy in 1994.
- Third, the majority may be slender and need the support of the minority to mount a serious challenge to the elite.
Or there may be no clear-cut majority, with society characterized by a preponderance of cross-cutting cleavages. In these cases, repeated game incentives may ensure that each group recognizes the rights of others in return for its rights being protected by them. Lebanon’s ‘consociational’ democracy may have been an example of this, before differential population growth and outside intervention upset the pre-existing balance of power among different religious denominations.
The role of societal cleavages As these examples make clear, two societal cleavages play a crucial role in our story.
- First, there is the divide between the propertied elite and the poor masses.
This is largely an economic divide and is determined by the division of land, capital and other assets in society, as well as access to the opportunities for accumulating those assets. Standard class-based accounts of the dynamics of political regimes emphasize primarily this cleavage.
- Second, there is a cleavage between what we call a majority and a minority.
This particular divide may be identity based, deriving from ethnic, religious, linguistic, or regional affiliations. Or it may be ideological – as with secular modernizers versus religious conservatives in Turkey, and Western-oriented liberals versus traditionalists in Russia. (We will call this second cleavage an ‘identity’ cleavage for short, but it should be kept in mind that the relevant majority-minority cleavage will run often on ideological lines.) These two cleavages may align, as they did in South Africa, but more often than not, they will not. Their divergence is what allows us to make an analytical and substantive distinction between electoral and liberal democracy.
In our formal model, the majority-minority split exerts a variety of influences on the prospects for liberal democracy. First, and most crucially, it makes the majority favor electoral over liberal democracy. By discriminating against the minority, the majority can enjoy more public goods for itself. But there are effects that go in the opposite direction too. Under some circumstances, the split can make the elite favor liberal democracy. We identify two such consequences. First, the rate of taxation is generally lower under liberal democracy as the majority reap fewer benefits from redistributive taxation when they have to share public goods with the minority. So the elite may support liberal democracy when the income/class cleavage is very deep. Second, when the elite’s identity aligns with that of the minority, the elite have a direct stake in civil rights too. These channels can produce a rich mix of results.
Concluding remarks We suggest that the differential fortunes of liberal democracy in Western Europe and the developing world are related to the nature of dominant cleavages at the time of the social mobilization that ushered in democracy. In the West, the transition to democracy occurred as a consequence of industrialization at a time when the major division in society was the one between capitalists and workers. In most developing nations, on the other hand, mass politics was the product of decolonization and wars of national liberation, with identity cleavages as the main fault line. Our framework suggests that the second kind of transition is particularly inimical to liberal democracy. ...
- Sunlight on Tax Havens - Brad DeLong and Michael DeLong
- How Practical is Japan's New NGDP Target? - David Beckworth
- Housing Bubbles, College, and Labor Market Opportunities - NBER
- Capital Regulation Across Financial Intermediaries - Daniel Tarullo
- Evolution in the Bank Holding Company - Liberty Street Economics
- A bit of pushback against the empirical tide - Noahpinion
- The benign deficit - Stumbling and Mumbling
- Don’t Fear the IMF - Ricardo Hausmann
- The Boehner Shock - Simon Johnson
- Japan Deflation - John Cochrane
- The state of climate negotiations - Vox EU
- Regressions as Ecosystems - Marc Bellemare
- Look Out for the Great Trade Stagnation - Noah Smith
- Déjà vu in emerging markets - Cecchetti & Schoenholtz
- Household Debt and Business Cycles Worldwide - NBER
Monday, September 28, 2015
Advice about selling goods on eBay from the NBER Digest:
Cheap Talk, Round Numbers, and Signaling Behavior: In the marketplace for ordinary goods, buyers and sellers have many characteristics that are hidden from each other. From the seller's perspective, it may be beneficial to reveal some of these characteristics. For example, a patient seller may want to signal unending willingness to wait in order to secure a good deal. At the same time, an impatient seller may want to signal a desire to sell a good quickly, albeit at a lower price.
This insight is at the heart of Cheap Talk, Round Numbers, and the Economics of Negotiation (NBER Working Paper No. 21285) by Matthew Backus, Thomas Blake, and Steven Tadelis. The authors show that sellers on eBay behave in a fashion that is consistent with using round numbers as signals of impatience.
The authors analyze data from eBay's bargaining platform using its collectibles category—coins, antiques, toys, memorabilia, and the like. The process is one of sequential offers not unlike haggling in an open-air market. A seller lists an initial price, to which buyers may make counteroffers, to which sellers may make counteroffers, and so on. If a price is agreed upon, the good sells. The authors analyze 10.5 million listed items, out of which 2.8 million received offers and 2.1 million ultimately sold. Their key finding is that items listed at multiples of $100 receive lower offers on average than items listed at nearby prices, ultimately selling for 5 to 8 percent less.
It is tempting to label such behavior a mistake. However, items listed at these round numbers receive offers 6 to 11 days sooner and are 3 to 5 percent more likely to sell than items listed at "precise" numbers. Furthermore, even experienced sellers frequently list items at round numbers, suggesting it is an equilibrium behavior best modeled by rationality rather than seller error. It appears that impatient sellers are able to signal their impatience and are happy to do it, even though it nets them a lower price.
One concern with the analysis is that round-number pricing might provide a signal about the good being sold, rather than the person or firm selling it. To address this issue, the authors use data on goods originally posted with prices in British pounds. These prices are automatically translated to U.S. dollars for the American market. Hence, the authors can test what happens when goods intended to be sold at round numbers are, in fact, sold at non-round numbers. This removes the round-number signal while holding the good's features constant. In this setting, they find that buyers of goods priced in non-round dollar amounts systematically realize higher prices, though the effect is not as strong as that in their primary sample. This evidence indicates the round numbers themselves have a significant effect on bargaining outcomes.
The authors find additional evidence on the round-number phenomenon in the real estate market in Illinois from 1992 to 2002. This is a wholly different market than that for eBay collectibles, with much higher prices and with sellers typically receiving advice from professional listing agents. But here, too, there is evidence that round-number listings lead to lower sales prices. On average, homes listed at multiples of $50,000 sold for $600 less.
Kevin Williamson at the National Review Online tells Republican candidates to get real:
The Thing about Tax Cut, by Kevin D. Williamson: Every Republican tax-reform plan should be rooted in this reality: If you are going to have federal spending that is 21 percent of GDP, then you can have a.) taxes that are 21 percent of GDP; b.) deficits. There is no c.
If, on the other hand, you have a credible program for reducing spending to 17 or 18 percent of GDP, which is where taxes have been coming in, please do share it.
The problem with the Growth Fairy model of balancing budgets is that while economic growth would certainly reduce federal spending as a share of GDP if spending were kept constant, there is zero evidence that the government of these United States has the will or the inclination to enact serious spending controls when times are good (Uncork the champagne!) or when times are bad (Wicked austerity! We must have stimulus!). So even if we buy Jeb Bush’s happy talk about growth, or Donald Trump’s, the idea that spending is just going to magically sit there, inert, while the economy zips forward and the tax coffers fill up, is delusional.
There are no tax cuts when the government is running deficits, only tax deferrals.
Remembering that the "math simply does not add up" for Republicans -- partly that's Williamson's point -- let's take a look at the evidence on government spending as a share of potential GDP. This is from Paul Krugman in 2013, but the underlying trends do not change. He explains why this is the best measure to use when looking at this question:
The Non-Surge in Government Spending: The fiscal debate in Washington is dominated by things everyone knows that happen not to be true. One of those things is the notion that we have a fiscal crisis... The crucial thing to understand here is that you do need to take the state of the business cycle into account; it’s not enough simply to do what Nate Silver, for example, does, and look at spending as a share of GDP — a calculation that can be deeply misleading in the aftermath of a severe recession followed by a slow recovery.
Why does this matter? First, if the economy is depressed — if GDP is low relative to potential — the share of spending in GDP will correspondingly look high. ...
Second, there are some programs — unemployment benefits, food stamps, to some extent Medicaid — that tend to spend more when the economy is depressed and more people are in distress. And rightly so! You don’t want to take a temporary spike in UI payments after a deep slump as a sign of runaway spending.
So how can we get a better picture? First, express spending as a share of potential rather than actual GDP; we can use the CBO estimates of potential for that purpose. Second, keep your eye on the business cycle — and, in particular, on how spending is evolving now that a gradual recovery is underway.
So, let’s look first at a longish time series of total government spending as a share of potential GDP:
Ratio of government spending to potential GDP
What you see is not a sustained upward trend: there’s actually a considerable fall during the Clinton years, reflecting in part falling defense spending, then a more modest rise in the Bush years, mainly reflecting spending on the War on Terror (TM), and finally a temporary surge associated with the financial crisis — but much of that surge has already been reversed.
Here’s a closeup on Bush’s last two years and Obama’s first four:
That was the spending surge that was. ...
The claim is that "the idea that spending is just going to magically sit there, inert, while the economy zips forward and the tax coffers fill up, is delusional." Here's an updated graph using the latest data:
Taking away the surge from the crisis, which has been reversed, the trend in the last few decades looks pretty flat to me. To the extent that there is a tendency for the ratio to move upward in recent years, it's hardly the fault of Democrats. There is something delusional here, but it's not that spending as a share of potential GDP -- the right way to look at this question -- always rises when times are good or bad, or that Democratic administrations cannot keep spending under control.
No sense hiding from evidence that works against my support of immigration. This is from George Borjas (if you are unfamiliar with the Mariel boatlift, see here):
The Wage Impact of the Marielitos: A Reappraisal, by George J. Borjas, NBER Working Paper No. 21588 [open link]: This paper brings a new perspective to the analysis of the Mariel supply shock, revisiting the question and the data armed with the accumulated insights from the vast literature on the economic impact of immigration. A crucial lesson from this literature is that any credible attempt to measure the wage impact of immigration must carefully match the skills of the immigrants with those of the pre-existing workforce. The Marielitos were disproportionately low-skill; at least 60 percent were high school dropouts. A reappraisal of the Mariel evidence, specifically examining the evolution of wages in the low-skill group most likely to be affected, quickly overturns the finding that Mariel did not affect Miami’s wage structure. The absolute wage of high school dropouts in Miami dropped dramatically, as did the wage of high school dropouts relative to that of either high school graduates or college graduates. The drop in the relative wage of the least educated Miamians was substantial (10 to 30 percent), implying an elasticity of wages with respect to the number of workers between -0.5 and -1.5. In fact, comparing the magnitude of the steep post-Mariel drop in the low-skill wage in Miami with that observed in all other metropolitan areas over an equivalent time span between 1977 and 2001 reveals that the change in the Miami wage structure was a very unusual event. The analysis also documents the sensitivity of the estimated wage impact to the choice of a placebo. The measured impact is much smaller when the placebo consists of cities where pre-Mariel employment growth was weak relative to Miami.
Trump Plan Is Tax Cut for the Rich, Even Hedge Fund Managers: Donald Trump’s tax plan, released Monday, does not live up to the populist language he has offered on taxes all summer.
When talking about taxes in this campaign, Donald Trump has often sounded like a different kind of Republican. He says he will take on “the hedge fund guys” and their carried interest loophole. He thinks it’s “outrageous” how little tax some multimillionaires pay. But his plan calls for major tax cuts not just for the middle class but also for the richest Americans — even the dreaded hedge fund managers. And despite his campaign’s assurances that the plan is “fiscally responsible,” it would grow budget deficits by trillions of dollars over a decade.
You could call Mr. Trump’s plan a higher-energy version of the tax plan Jeb Bush announced earlier this month: similar in structure, but with lower rates and wider tax brackets, meaning individual taxpayers would pay even less than under Mr. Bush, and the government would lose even more tax revenue. ...
A document from the Trump campaign says all these tax cuts would be “fully paid for” by the elimination of deductions and by a one-time tax on foreign profits of American firms held abroad. That math simply does not add up: As discussed above, rich people do not currently take enough tax deductions to offset the tax rate cuts Mr. Trump proposes, and the one-time foreign profits tax might raise $250 billion, not close to the trillions of revenue that would be lost through tax rate cuts.
At a news conference Monday, Mr. Trump offered another way his tax plan would pay for itself: economic growth, perhaps as fast as 6 percent a year, again a higher-energy estimate than the 4 percent Mr. Bush has proposed. But there is no evidence to support the idea that such rapid growth can be produced through tax cuts.
"That math simply does not add up" could be applied to Republican tax plans in general. There's always some sort of magical thinking that makes their plans work (or, perhaps, better described as cunning deception that relies upon the press remaining effectively silent, or playing the "he said she said" game that gives people little information about truth, in the face of absurd claims). Talk like a populist, act like a plutocrat seems to be a winning formula -- somehow many who have been disaffected by the economic system believe Republicans are on their side, and have their best interests at heart, that all the unfairness they see around them (which is not always real, but rather stoked by the closed loop news system they adhere to) will be addressed by a Republican administration. Not gonna happen.
Why is Boehner quitting?:
The Blackmail Caucus, a.k.a. the Republican Party, by Paul Krugman, Commentary, NY Times: John Boehner was a terrible, very bad, no good speaker of the House. Under his leadership, Republicans pursued an unprecedented strategy of scorched-earth obstructionism, which did immense damage to the economy and undermined America’s credibility around the world. ...
For me, Mr. Boehner’s defining moment remains what he said and did ... when a newly inaugurated President Obama was trying to cope with the disastrous recession that began under his predecessor. ...
In 2008 a stimulus plan passed Congress with bipartisan support, and the case for a further stimulus in 2009 was overwhelming. But with a Democrat in the White House, Mr. Boehner demanded that policy go in the opposite direction, declaring that “American families are tightening their belts. But they don’t see government tightening its belt.” And he called for government to “go on a diet.” This was know-nothing economics, and incredibly irresponsible at a time of crisis...
The Boehner era has been one in which Republicans have accepted no responsibility for helping to govern the country, in which they have opposed anything and everything the president proposes.
What’s more, it has been an era of budget blackmail, in which threats that Republicans will shut down the government or push it into default unless they get their way have become standard operating procedure. ...
So why is he out? Basically because the obstructionism failed..., despite all Mr. Boehner’s efforts to bring him down, Mr. Obama is looking more and more like a highly successful president. For the base,..., this is a nightmare. And all too many ambitious Republican politicians are willing to tell the base that it’s Mr. Boehner’s fault, that he just didn’t try blackmail hard enough.
This is nonsense, of course. In fact, the controversy over Planned Parenthood that probably triggered the Boehner exit — shut down the government in response to obviously doctored videos? — might have been custom-designed to illustrate just how crazy the G.O.P.’s extremists have become, how unrealistic they are about what confrontational politics can accomplish.
But Republican leaders who have encouraged the base to believe all kinds of untrue things are in no position to start preaching political rationality.
Mr. Boehner is quitting because he found himself caught between the limits of the politically possible and a base that lives in its own reality. But don’t cry for (or with) Mr. Boehner; cry for America, which must find a way to live with a G.O.P. gone mad.
Why We Must End Upward Pre-Distribution to the Rich: You often hear inequality has widened because globalization and technological change have made most people less competitive, while making the best educated more competitive.
There’s some truth to this. The tasks most people used to do can now be done more cheaply by lower-paid workers abroad or by computer-driven machines.
But this common explanation overlooks a critically important phenomenon: the increasing concentration of political power in a corporate and financial elite that has been able to influence the rules by which the economy runs.
As I argue in my new book, “Saving Capitalism: For the Many, Not the Few” (out this week), this transformation has amounted to a pre-distribution upward. ...
After a large number of examples illustrating how changes in the rules of the game driven by political influence have worked against the economic interests of the working class, he concludes
... The underlying problem, then, is not just globalization and technological changes that have made most American workers less competitive. Nor is it that they lack enough education to be sufficiently productive.
The more basic problem is that the market itself has become tilted ever more in the direction of moneyed interests that have exerted disproportionate influence over it, while average workers have steadily lost bargaining power—both economic and political—to receive as large a portion of the economy’s gains as they commanded in the first three decades after World War II.
Reversing the scourge of widening inequality requires reversing the upward pre-distributions within the rules of the market, and giving average people the bargaining power they need to get a larger share of the gains from growth.
The answer to this problem is not found in economics. It is found in politics. Ultimately, the trend toward widening inequality in America, as elsewhere, can be reversed only if the vast majority join together to demand fundamental change.
The most important political competition over the next decades will not be between the right and left, or between Republicans and Democrats. It will be between a majority of Americans who have been losing ground, and an economic elite that refuses to recognize or respond to its growing distress.
- Are reserves still “special”? - Bank Underground
- Understanding the current Fed - Jared Bernstein
- What if the Fed is wrong? - Gavyn Davies
- I Believe Krugman Over Hamilton on a Chinese Slowdon - Brad DeLong
- The Future Irrelevancy Of Behavioral Economics - Adam Ozinek
- Macroeconomics and Reality Revisited - Mathew Kahn
- Website 10th Anniversary: 10 Things I Got Right - Thomas Palley
- 1099 as antitrust - interfluidity
Sunday, September 27, 2015
The end of an essay by David Warsh:
... Many regulators and bankers contend that the thousand-page Dodd Frank Act complicated the task of a future panic rescue by compromising the independence of the Fed. Next time the Treasury Secretary will be required to sign off on emergency lending.
Bank Regulators? Some economists, including Gorton, worry that by focusing on its new “liquidity coverage ratio” the Bank for International Settlements, by now the chief regulator of global banking, will have rendered the international system more fragile rather than less by immobilizing collateral.
Bankers? You know that the young ones among them are already looking for the Next New Thing.
Meanwhile, critics left and right in the US Congress are seeking legislation that would curb the power of the Fed to respond to future crises.
So there is plenty to worry about in the years ahead. Based on the experience of 2008, when a disastrous meltdown was avoided, there is also reason to hope that central bankers will once again cope. Remember, though, as the Duke of Wellington said of the Battle of Waterloo, it was a close-run thing.
Update: See Brad Delong's reply.
Economic importance of China: How important would an economic downturn in China be for the United States? Paul Krugman reviews some of the reasons why the United States perhaps shouldn’t worry too much...
I’ve long believed that to understand business cycles we need to consider not just net flows but also gross interdependencies. A downturn in China will affect some businesses much more than others. If specialized labor and capital do not easily move to other sectors, that can end up having significant multiplier effects.
For example, while China may only account for 15% of world GDP, it has been a huge factor in commodity markets over the last decade. ... Of course, lower commodity prices [from the slowdown in China] will force layoffs for oil companies and miners but leave more money in the hands of consumers. However, additional spending from that channel has been more modest than many of us were anticipating.
Another concern comes from financial linkages. A Chinese downturn will unquestionably be a big hit for certain financial institutions. Exactly who those will be and what it means for the rest of us, I don’t know. As Warren Buffett observed, “you only find out who is swimming naked when the tide goes out.”
The bottom line is that an economic slowdown in China already is a very big deal for some U.S. workers and businesses. I don’t know what the ultimate implications for the U.S. of a significant recession in China would be.
But things I don’t know cause me to worry.
Inequality goes beyond income and wealth, it extends to the political arena:
The Soaring Price of Political Access, Editorial, NY Times: ... This year,... the two national parties reported to be planning tenfold increases in the rates V.I.P. donors will be charged to secure the right to attend exclusive dinners and presidential convention forums with candidates and party leaders.
This means that top-tier Republican donors will pay $1.34 million per couple for the privilege of being treated as party insiders, while the Democratic Party will charge about $1.6 million, according to The Washington Post. Four years ago the most an individual could give to a national party was $30,800. This time, that top $1.34 million ticket for a couple in the Republican National Committee’s Presidential Trust tier, reserved for the “most elite R.N.C. investors,” promises “influence messaging and strategy” opportunities at exclusive party dinners and retreats...
The prices for getting into the inner sanctum are rising because of loosened restrictions on political money from the courts and Congress. ...
The Republicans have rendered the election commission completely dysfunctional by blocking regulatory decisions and refusing to take action against improper practices. And now the Democrats are trying to get official approval of the very practices that eviscerate the law.
While Democrats led by Hillary Rodham Clinton have called for broad reforms of campaign fund-raising, Mrs. Clinton and party leaders say they will emulate Republican tactics in going after big money if that’s what it takes to compete. At what cost to democracy is the looming question for voters.
There was a time when unions provided a bit of countervailing influence over politicians, and hence provided a way to consolidate the political power of individual workers. That influence has faded over time, in no small part due to the very imbalances in political power that unions helped to overcome. Unfortunately, no new institutions have risen to take their place. Until that happens, until the power of individuals is magnified through collective coordination, if ever, it's hard for me to see how the problem of inequality of income, and the problem of inequality of political influence will be overcome.
Saturday, September 26, 2015
From an interview with Olivier Blanchard:
...IMF Survey: In pushing the envelope, you also hosted three major Rethinking Macroeconomics conferences. What were the key insights and what are the key concerns on the macroeconomic front?
Blanchard: Let me start with the obvious answer: That mainstream macroeconomics had taken the financial system for granted. The typical macro treatment of finance was a set of arbitrage equations, under the assumption that we did not need to look at who was doing what on Wall Street. That turned out to be badly wrong.
But let me give you a few less obvious answers:
The financial crisis raises a potentially existential crisis for macroeconomics. Practical macro is based on the assumption that there are fairly stable aggregate relations, so we do not need to keep track of each individual, firm, or financial institution—that we do not need to understand the details of the micro plumbing. We have learned that the plumbing, especially the financial plumbing, matters: the same aggregates can hide serious macro problems. How do we do macro then?
As a result of the crisis, a hundred intellectual flowers are blooming. Some are very old flowers: Hyman Minsky’s financial instability hypothesis. Kaldorian models of growth and inequality. Some propositions that would have been considered anathema in the past are being proposed by "serious" economists: For example, monetary financing of the fiscal deficit. Some fundamental assumptions are being challenged, for example the clean separation between cycles and trends: Hysteresis is making a comeback. Some of the econometric tools, based on a vision of the world as being stationary around a trend, are being challenged. This is all for the best.
Finally, there is a clear swing of the pendulum away from markets towards government intervention, be it macro prudential tools, capital controls, etc. Most macroeconomists are now solidly in a second best world. But this shift is happening with a twist—that is, with much skepticism about the efficiency of government intervention. ...
Paul Krugman returns to a familiar theme:
Economics: What Went Right: ...I’m at EconEd; here are my slides for later today. The theme of my talk is something I’ve emphasized a lot over the past few years: basic macroeconomics has actually worked remarkably well in the post-crisis world, with those of us who took our Hicks seriously calling the big stuff — the effects of monetary and fiscal policy — right, and those who went with their gut getting it all wrong. ...
One thing I do try is to concede that one piece of the conventional story hasn’t worked that well, namely the Phillips curve, where the “clockwise spirals” of previous protracted large output gaps haven’t materialized. Maybe it’s about what happens at very low inflation rates.
What’s notable about the Fed’s urge to raise rates, however, is that Fed officials, including Janet Yellen, are acting as if they have high confidence in their models of inflation dynamics –which is the one thing we really haven’t done well at recently. I really fear that we’re looking at incestuous amplification here.
Agree about the uncertainty about inflation dynamics, but fear Fed officials will interpret it as risks on the upside that must be nullified through interest rate hikes. As for the Phillips curve, here's a graph from his talk:
As Krugman says, "Maybe it’s about what happens at very low inflation rates." I would add that the combination of the zero bound, low inflation, and downward wage rigidity may be able to explain the change in the Phillips curve -- I'm not quite ready to give up yet.
More generally, estimating inflation dynamics has been far from successful. For example, in many VAR models (a widely used empirical specification for establishing relationships among macroeconomic series), a shock to the federal funds rate often causes prices to go up (theory says they should go down). This can be overcome somewhat by including commodity prices in the model. The idea is that when the Fed expects inflation to go up it raises the federal funds rate, and since the policy does not complete eliminate the inflation, the data will show a positive correlation between the federal funds rate and inflation. Commodity prices are thought to embody and be sensitive to future expected inflation, so including this variable helps to solve the "price puzzle" as it is known. Even so, the results are highly sensitive to specification, and when you work with these models regularly you come away believing that the estimated price dynamics are not very good at all.
But the Fed must forecast in order to do policy. There are lags (though I've argued they are likely shorter than common wisdom suggests), and the Fed must act before a clear picture emerges. The question is how the Fed should react to such uncertainty about its inflation forecasts, and to me -- given the corresponding uncertainties about the state of the labor market and the asymmetric nature of the costs of mistakes about inflation and unemployment (plus the distributional issues -- who gets hurt by each mistake?), it counsels patience rather than urgency on the inflation front.
Matthew Yglesias takes up a quote from Bush (I highlighted this yesterday):
Jeb Bush can't explain the cost of his tax cuts correctly: ...Jeb Bush ... talking to CNBC's John Harwood about the impact of his plan on the deficit:
Everybody freaks out about the deficit. And I worry about the structural deficit for sure. But if we grow our economy at a faster rate, the dynamic nature of tax policy will kick in. And so we'll be in the hole around $1.2 trillion over 10 years. And these are moderate growth effects. I'm not using the ones that I believe. I'm more optimistic.There's never been a time where there hasn't been a dynamic effect of taxation. That's not a risk at all. That's just a simple fact. Take the contrary argument here for a second: If tax policy doesn't matter, why don't we just tax everything?
Bush is referring to an estimate prepared for media consumption by John Cogan, Martin Feldstein, Glenn Hubbard, and Kevin Warsh — four men who are smart economists in good standing but who are also very much partisan Republicans. The right way to think about an estimate they put together is that it represents the outer limit of what a person is willing to claim on behalf of the growth impacts of Bush's tax cut and feel like he can still look at his graduate students with a straight face.
And guess what? The paper doesn't say what Bush says it says. ...
Obviously even if Bush were able to get his basic facts right, the underlying claim about the growth-boosting impact of the tax cuts is disputable. Jeb's brother claimed that the growth-boosting power of his tax cuts would avoid increasing the deficit, and we got eight years of fairly dismal economic performance.
The argument Republicans can make is that growth would have been even faster without the drag from Obama's policies.. But that's where comparisons to the past are useful. These comparisons establish a baseline on what we should expect. So let's take a look. This is from Calculated Risk. It shows private sector employment under recent past presidents:
So Obama's job growth is all but tied with Reagan's, he beats both Bushes, G.W. by a considerable margin, but loses to Clinton and Carter. The most relevant comparison here is to G.W. Bush since Jeb promises to follow his policies for the most part, and by that comparison Obama wins soundly.
What about public sector jobs? Government has expanded under Obama correct? So if you add private sector jobs to public sector jobs, or course Obama looks even better than for private sector jobs alone and wins handily -- it's the undue influence of government expansion that is driving the overall job numbers, not his economic policies.
That story falls apart when the data are examined:
Obama is the big "loser" here in terms of public sector job creation, a source of annoyance for me (that's not what you do in a recession, instead wait until the economy improves to make these kinds of cuts -- it's stimulative, it avoids sending people to unemployment and a dismal job market and compounding our problems, and it avoids the need to increase social services to help the unemployed during their struggle to find new employment). But to Republicans, Obama ought to be a hero.
Okay, but surely Obamacare has been a job-killer, right? Republicans are noted for their forecasting ability, that runaway inflation we've had, the spike in interest rates, the stimulative effects of austerity (well, they are noted for how bad their forecasts have been), so surely they are right about this too. Obamacare has killed jobs and caused employers to shift people to part-time work, right?
That story falls apart when the data are examined (this should be the first thing to think when Republicans start spouting claims about economics). This is from Jared Bernstein:
Smell Something, Say Something: Obamacare, O’Reilly, and full-time jobs: ...I heard Fox’s Bill O’Reilly claim that the Affordable Care Act “has made it more difficult to create full-time jobs in America,” (around 2:30 in the video). The figure below, which indexes both full-time and part-time jobs to 100 in 2010, belies his claim. As ACA measures have been introduced, most notably the arrival of the subsidized exchanges and the Medicaid expansion in 2014, there’s been no noticeable change and certainly no Obamacare-induced shift to part-time work. Other data show that the number of involuntary part-time workers is down 18 percent—1.4 million fewer workers—since 2013.
No one’s claiming that the ACA is having miraculous effects on job growth, or even that it’s responsible for the full-time job growth you see above. ... My point is that while Obamacare is having its intended effect of making coverage more affordable and thereby lowering the uninsured rate, I’ve not seen any data that would lead an objective person to conclude it’s having a meaningful impact on the job market one way or the other.
In other words, those who still want to repeal Obamacare need a new rationale besides “it’s not working” or “it’s a job killer.” It is working and it’s not killing jobs. Those who claim otherwise are, in fact, fact-killers. ...
If you want slow growth, poor job creation, tax cuts for the wealthy, harder times for everyone else as social programs are cut on the false pretenses of ending dependency and building character (we know what the true goals are for most Republicans), if you want health care to be harder to get for those "others", environmental policies to be rolled back in the name of "business interests", if you want all of this and more -- we haven't even touched on issues like the supreme court, war, and Federal Reserve appointments -- Jeb is the man for you.
- Boehner and the Belt - Paul Krugman
- Obamacare, O’Reilly, and full-time jobs - Jared Bernstein
- Income redistribution: Where should we start ? - Crooked Timber
- Trends in Employer-Provided Health Insurance - Tim Taylor
- On the benefits of reducing uncertainty about policy - Bank Underground
- Lessons Learned on the 30th Anniversary of the Plaza Accord - John Taylor
Friday, September 25, 2015
The politics in the UK is so much better than here. Politicians in the UK would never think of using smokescreens like concern over the deficit to conceal their true intentions:
The path from deficit concern to deficit deceit, by Simon Wren-Lewis: ...A few days ago Lord Turnbull had the opportunity to question the Chancellor on his drive for further austerity. This is a part of what he said.“I think what you are doing actually, is, the real argument is you want a smaller state and there are good arguments for that and some people don’t agree but you don’t tell people you are doing that. What you tell people is this story about the impoverishment of debt which is a smokescreen. The urgency of reducing debt, the extent, I just can’t see the justification for it.”
A former head of the civil service, who had initially supported Osborne on the deficit, was now accusing him of deliberate deceit. Big news you might have thought. And quite a turnaround in just 5 years.
Yet it is not surprising. Osborne’s fiscal plans really have no basis in economics. That leaves two alternatives. Either Osborne is just stupid and cannot take advice, or he has other motives. George Osborne is clearly not stupid, which leaves only the second possibility. It is therefore entirely logical that Lord Turnbull should come to agree with what some of us were saying some time ago.
What a strange world we are now in. The government goes for rapid deficit reduction as a smokescreen for reducing the size of the state. No less than a former cabinet secretary accuses the Chancellor of this deceit. Yet when a Labour leadership contender adopts an anti-austerity policy he is told it is extreme and committing electoral suicide. Is it any wonder that a quarter of a million Labour party members voted for change.
This worked so well for Romney:
Our message is one of hope and aspiration," he said at the East Cooper Republican Women’s Club annual Shrimp Dinner. "It isn't one of division and get in line and we'll take care of you with free stuff. Our message is one that is uplifting -- that says you can achieve earned success.
Bush says this is how he will win back black voters, but I have a feeling his message of "hope and inspiration" and the reference to "free stuff" is for another group of voters.
If the pope was a scientist, Bush would listen?:
“I oppose the president’s policy as it relates to climate change because it will destroy the ability to re-industrialize the country, to allow for people to get higher wage jobs, for people to rise up,” Bush said, according to the Huffington Post.
This is not the first time Bush has rejected the pope’s teachings on climate, but it may be the first time he has given the “not a scientist” reason.
“He’s not a scientist, he’s a religious leader,” Bush says
In fact, the pope studied chemistry and worked as a chemist. ...
He couldn't possibly be using concern about people's ability to "rise up" as a cover for supporting business interests, could he?
Tax cuts work, ignore the evidence:
HARWOOD: Do you regard your brother's economic tenure—which pursued a broadly similar strategy to what you're proposing—as a proof point that this strategy works?
BUSH: Well, look, he was impacted by some big secular events. The tech bubble, 9/11—those had huge impacts. There was growth. And there was some job growth.
Wage growth has been flat for a long time in our country. We have this big challenge that we have to fix. And that's part of the mission I'm on—growth by itself isn't going to create higher wages. But higher growth will generate more wage growth than no growth. And if you do it in the right way, where you're putting money in people's pockets, you can create economic activity.
The tax cuts will trickle down and let people "rise up" just like they did before. Oh wait. This is the "earned success" he talks so much about. It has nothing to do with supporting wealthy interests, it's all about economic growth and helping the disadvantaged. On the "earned success" point, it's hard not to recall Molly Ivins on George Bush:
Jim Hightower's great line about [George] Bush, "Born on third and thinks he hit a triple," is still painfully true. Bush has simply never acknowledged that not only was he born with a silver spoon in his mouth -- he's been eating off it ever since..., he doesn't admit to himself or anyone else that he owes his entire life to being named George W. Bush. He didn't just get a head start by being his father's son -- it remained the single most salient fact about him for most of his life. He got into Andover as a legacy. He got into Yale as a legacy. He got into Harvard Business School as a courtesy (he was turned down by the University of Texas Law School). He got into the Texas Air National Guard -- and sat out Vietnam -- through Daddy's influence. (I would like to point out that that particular unit of FANGers, as regular Air Force referred to the "Fucking Air National Guard," included not only the sons of Governor John Connally and Senator Lloyd Bentsen, but some actual black members as well -- they just happened to play football for the Dallas Cowboys.) Bush was set up in the oil business by friends of his father. He went broke and was bailed out by friends of his father. He went broke again and was bailed out again by friends of his father; he went broke yet again and was bailed out by some fellow Yalies.
That Bush's administration is salted with the sons of somebody-or-other should come as no surprise. I doubt it has ever even occurred to Bush that there is anything wrong with a class-driven good-ol'-boy system. ...
But of course, nothing like that could possibly be true of self-made, I did it all by myself Jeb! Bush success (he "made it!" himself).
Finally, surprise of surprises, when asked about the impact of his tax cut policies on the deficit, he gives the standard response, economic growth, like that his brother would have gotten if he wasn't so darn unlucky, will nullify much of the impact that tax cuts have on the deficit:
Everybody freaks out about the deficit. And I worry about the structural deficit for sure. But if we grow our economy at a faster rate, the dynamic nature of tax policy will kick in. ... There's never been a time where there hasn't been a dynamic effect of taxation. That's not a risk at all. That's just a simple fact.
It's also a "simple fact" (he hasn't moved on to "complicated facts" yet, apparently) that the Bush tax cuts did not trickle down, inequality was made worse by the Bush policies, and those in the lower parts of the income distribution had a harder time "rising up" because of these policies, and other policies that stripped away social support.
Jeb's I will do what my brother did, except this time it will work for those who are not in the top of the income distribution, is not exactly inspiring. Unless, of course, you are used to eating with silver spoons.