- Austerity Arithmetic - Paul Krugman
- Banks and Greece’s bailouts - interfluidity
- Teaching finance after the crisis - Vox EU
- Fluctuations in the financial system - Vox EU
- Europe Wins - Paul Krugman
- End of the global dip - Gavyn Davies
- Meanwhile In China - Paul Krugman
- Goffman on close encounters - Understanding Society
- Economists Between Two Worlds - Economic Principals
Monday, July 06, 2015
Sunday, July 05, 2015
Via Vox EU:
De-industrialisation, ‘new Speenhamland’ and neo-liberalism, by Jim Tomlinson: In the run-up to the recent general election, 65 Social Policy professors wrote to the Guardian in the following terms:
"Now the majority of children and working-age adults in poverty live in working, not workless, households. In other words – and ironically in view of the coalition’s rhetoric – many of those forced to claim the working-age benefits targeted for further cuts are not what the prime minister calls ‘shirkers’ but, in fact, ‘hard working families’" (5th May).
Plainly, the authors were concerned to make an immediate political point about the government’s austerity policies. But the sentences cited above, I suggest, indicate a profound, long-term shift in the social security system and beneath that, a shift of the British economy.
To indicate the significance of this shift we need to go back to two key moments in Britain’s modern history. First is 1795, when the Speenhamland system was introduced in a parish of that name near Newbury in the South of England. Under this system, wages deemed to be below those sufficient for subsistence were subsidized through the Poor Law out of taxes (local poor rates). This system was not actually new, nor did it become universal, but it has been widely recognized as symbolizing the rejection of a crucial principle of liberal political economy (Polanyi 1947). The principle is that wages should be determined in a market, and should not be subsidized out of the public purse. Hostility to Speenhamland was widespread amongst the governing class of the time and especially amongst political economists, who argued that such a system created no incentives for the workers to maximize their wages, nor for employers to pay what was affordable to them. These perverse consequences were held-up as the typical result of well-intentioned but misguided intervention in the labor market. Eventually, at another key moment, under the Poor Law Amendment Act of 1834, such subsidies were outlawed, and liberal political economy emerged triumphant.
Another component of this political economy was the assumption that wages would not need to be subsidized to provide adequate wages; that waged work would be an effective route out of poverty. Of course, this principle was breached at the margins by such mechanisms as Wages Boards (later Councils) which imposed minimum pay on certain sectors of the economy. But here, of course, there was no state subsidy; the state just insisted that employers pay the minimum wage.
The classic mid-20th century Beveridge analysis of the sources of poverty suggested the problem lay fundamentally in ‘interruption to earnings’ (by unemployment, sickness, or age) along with large numbers of children, the latter to be addressed by ‘Family Allowances’ (Cutler et al 1987). While this analysis always misrepresented the labor market, not least in its barely-qualified notion of the ‘male-breadwinner household’, its fundamental idea that normally paid work would provide a route out of poverty has underpinned most modern understandings of how society works down to the present day.
But as the social policy professors’ letter indicates, we have come a long way from a Beveridgean world. My argument is that structural changes in the labor market have brought about profound changes in the social security system. What has changed in the period of de-industrialization has been the numbers earning poverty wages, and being supported by in-work benefits. Effectively we have moved towards a huge ‘new Speenhamland’ system of ‘outdoor relief’ of the employed; or, viewed differently, large subsidies to employers, which has mitigated, but not cured the problem of poverty-level wages (Farnsworth 2012). ...
- No, Puerto Rico Isn't Greece - Paul Krugman
- Greece and the political capture of the IMF - mainly macro
- The Inevitable, Indispensable Property Tax - The New York Times
- The something for nothing culture - Chris Dillow
- Greece vs Puerto Rico and what's "systemic." - John Cochrane
- Insurance and Reaganomics - Paul Krugman
- Currency is not destiny - Vox EU
Saturday, July 04, 2015
Professor Hubbard’s Claim about Wage and Compensation Stagnation Is Not True: ...A New York Times editorial points out ... that Glenn Hubbard, a leading conservative economist and key adviser to GOP candidate Jeb Bush, does not seem to believe there is a wage stagnation problem. As an earlier New York Times article pointed out: “Mr. Hubbard argued that ‘compensation didn’t stagnate,’ citing large increases that employers have paid out in health and pension benefits.”
Hubbard is definitely mistaken, as the New York Times indicates and as I demonstrate below by examining actual wage and benefit trends. Shifting the discussion from wages to compensation (wages and benefits) does not alter any of the salient facts about stagnant pay in recent years, especially for the typical worker or for low-wage workers, and not even for the ‘average’ worker (including high wage as well as low and middle-wage workers). In fact, there has been an even greater growth of inequality in total compensation than there has been in wages alone.
The intuition behind Hubbard’s claim is that the costs of benefits provided by employers–especially those for health care insurance–have risen rapidly, suggesting that compensation has risen far more quickly than wages. What this ignores, of course, is that many workers in the bottom half receive very few health or pension benefits and employers provide fewer and fewer workers with health insurance and pension benefits each year. Hubbard’s intuition also ignores that employers have actually cut back on some benefits, particularly pensions, with a concomitant decline in the quality of those benefits (such as by providing defined contribution rather than defined benefit plans). ...
"The macroeconomy is inherently unstable and ... booms and busts arise endogenously as the results of market incentives":
Stability of a market economy, by Paul Beaudry, Dana Galizia, and Franck Portier, Vox EU: There are two polar views about the functioning of a market economy.
- On the one hand, there is the view that such a system is inherently stable, with market forces tending to direct the economy to a smooth growth path.
According to such a belief, most of the fluctuations in the macroeconomy result from either individually optimal adjustments to changes in the environment or from improper government interventions. In such a case, the role of macroeconomic policy should be to do no harm; if policymakers hold back from actively influencing the economy, market forces would take care of the rest and foster desirable outcomes.
- On the other hand, there is the view that the market economy is inherently unstable, and that left to itself it will repeatedly go through periods of socially costly booms and busts, with recurrent periods of sustained high levels of unemployment.
According to this view, macroeconomic policy is needed to help stabilize an unruly system.
Most modern macroeconomic models, such as those used by large central banks and governments, are somewhere in between these two extremes. However, they are by design much closer to the first view than the second, and this is generally not fully appreciated. In fact, most commonly used macroeconomic models have the feature that, in the absence of outside disturbances, the economy is expected to converge to a stable path. In this sense, these models are based on the premise that a decentralized economy is a stable system and that market forces, in of themselves, do not tend to produce boom and busts. The only reason why we see economic cycles in mainstream macroeconomic models is due to outside forces that perturb an otherwise stable system. We can call such a framework the stable-with-shocks view of the macroeconomy.
Stable-with-shocks view of the macroeconomy
There are many reasons why the economic profession has mostly adopted the stable-with-shocks view of macroeconomic fluctuations.
- First, if we take a step back, and look at aggregate economic outcomes over long periods of time (say 100 years), the most striking feature is the stable growth path (see Figure 1).
Disregarding the two world wars, although the economy fluctuated, these fluctuations were small in comparison to the growth path. In particular, when looking over such long periods, it becomes clear that the economy looks more like a globally stable system than an unstable system.
- Secondly, a huge fraction of economic theory suggests that market forces will favor stable outcomes.
- Thirdly, the stable-with-shocks framework is very tractable and flexible, allowing one to analyze economic outcomes using linear techniques.
Figure 1. Long-run evolution of GDP per capita
Source: Bolt and van Zanden (2014).
Figure 2. Unemployment rates
Source: FRED, Federal Reserve Bank of St. Louis.
Notwithstanding these attractive features of the stable-with-shocks view of the macroeconomy, the ubiquitous and recurrent nature of cycles in most market economies, as illustrated by the fluctuations of unemployment rates (see Figure 2), strongly suggests that a market economy, by its very nature, may create recurrent boom and bust independently of outside disturbances. This idea is well captured by the statement that “a bust sows the seed of the next boom”. Although, such an idea has a long tradition in the economics literature (Kalecki 1937, Kaldor 1940, Hicks 1950, Goodwin 1951), it is not present in most modern macro-models.
Capturing economic fluctuations: New framework
In a companion paper (Beaudry et al. 2015), we have developed and explored an empirical framework that allows one to examine whether economic fluctuations may best be captured by the stable-with-shocks type framework or whether they may be better characterized as reflecting some sort of instability. To examine such an issue, one needs to depart from the preponderant convention in macroeconomics of focusing on linear models to analyze outcomes. A frequent criticism of macro-modelling, mostly from non-mainstream macroeconomists, is that the profession’s focus on linear models may have substantially biased our understanding of how the economy actually functions. As Blanchard (2014) writes, “We in the field did think of the economy as roughly linear, constantly subject to different shocks, constantly fluctuating, but naturally returning to its steady state over time.”
Within a linear set-up, a dynamic system is either stable or unstable. In contrast, in a non-linear setup, a system can be globally stable while simultaneously being locally unstable. It is this latter characteristic that has the potential to be relevant in macroeconomics given that in the long run the economy appears rather stable, while in the short run it exhibits substantial volatility. By looking at the economy through a lens that allows for the possibility of non-linear dynamics, one is de facto permitting an interpretation of the economic fluctuations where endogenous cyclical behavior or even chaos may emerge; both features that are well known to arise in many dynamic environments. In other words, by looking at the economy using non-linear techniques we can ask whether market forces are tending to favor recurrent booms and busts, or whether they favor stability.
Our main finding is that, instead of favoring the conventional stable-with-shocks view for aggregate dynamics, our results suggest that the macroeconomy is inherently unstable and that booms and busts arise endogenously as the results of market incentives.
In fact, we found that for the US economy, market forces tend in of themselves to generate a cycle that lasts about eight years. However, these cycles are not regular or identical over time. Instead, outside forces play an important role in accelerating, amplifying, and postponing the forces that create cycles.
What causes business cycles?
So what causes the economy to be unstable and exhibit business cycles? According to our analysis, this results from simple incentives that favour the coordination of behavior across households. In particular, in a market economy where individuals face unemployment risk, households have an incentive to buy housing and durable goods at similar time. The reason for these coordinated purchases is that when others are making large purchases, this reduces unemployment; then when unemployment is low, it is a less risky time to make large purchases since taking on debt is easier. However, let us emphasize that we are not finding that business cycles are driven primarily by animal spirits.
- Instead, we are arguing that business cycles are driven by individually rational, but socially costly, mass behavior based on fundamentals.
- In our view, the recovery phase of a cycle starts when the stock of housing and durables have been depleted enough to lead some people to go out and make new purchases even if unemployment is still high.
This incites others to do the same, which eventually sustains the recovery and leads to a boom. Interestingly, the boom does not stop when people have the ‘right’ stock of goods, but households instead over-shoot because the boom period is a good time to buy even knowing that a recession will eventually come. Once household have sufficiently over-accumulated, they will in mass stop purchasing, knowing that others are also stopping and knowing that they can wait out a recession benefiting for some time from the services of housing and durables bought during the expansion. The expansion therefore ends and a recession begins. Once this stock of good is again sufficiently depleted, the cycle will restart. Stated this way, business cycles appear very deterministic. However, there are always other developments in the economy that interact with this consumer cycle to create unique features. For example, the consumer cycle generally competes with forces affecting business investment, thereby causing the length and duration of a cycle to be affected by technological developments driving firm investment.
But why should we care if the macroeconomy is locally unstable versus if it is locally stable? Society’s understanding of how the economy functions, especially what creates business cycles, greatly affects how we design stabilization policy.
In the current dominant paradigm, there is a tendency to see monetary policy as the central tool for mitigating the business cycle. This view makes sense if excessive macroeconomic fluctuations reflect mainly the slow adjustment of wages and prices to outside disturbances within an otherwise stable system.
However, if the system is inherently unstable and exhibits forces that favor recurrent booms and busts of about seven to ten years intervals, then it is much less likely that monetary policy is the right tool for addressing macroeconomic fluctuations. Instead, in such a case we are likely to need policies aimed at changing the incentives that lead household to bunch their purchasing behavior in the first place.
Beaudry, P , D Galizia, and F Portier, “Reviving the Limit Cycle View of Macroeconomic Fluctuations”, CEPR Discussion Paper 10645 and NBER working paper 21241.
Blanchard, O J (2014), “Where Danger Lurks”, Finance & Development, 51(3), 28-31.
Bolt, J and J L van Zanden (2014), “The Maddison Project: collaborative research on historical national accounts”, The Economic History Review, 67 (3): 627–651.
Goodwin, R (1951): “The Nonlinear Accelerator and the Persistence of Business Cycles”, Econometrica, 19(1), 1–17.
Hicks, J (1950), A Contribution to the Theory of the Trade Cycle, Clarendon Press, Oxford.
Kaldor, N (1940), “A Model of the Trade Cycle”, The Economic Journal, 50(197), 78–92.
Kalecki, M (1937), “A Theory of the Business Cycle”, The Review of Economic Studies, 4(2), 77–97.
- Greece - interfluidity
- The ideologues of the Eurozone - mainly macro
- Did the IMF provide support to Syriza? - Antonio Fatas
- Greece is solvent but illiquid: Policy implications - Vox EU
- Thoughts on the news from Greece - Nick Rowe
- Mises’s Unwitting Affirmation of the Hawtrey-Cassel - Uneasy Money
- Why We Shouldn’t Pay for the Political Spending of... - Robert Reich
- Marginal product theory at work…not! - Jared Bernstein
Friday, July 03, 2015
Behavioral Economics is Rational After All: There are some deep and interesting issues involved in the debate over behavioral economics. ...
My point here, is that neoclassical economics can absorb the criticisms of the behaviourists without a major shift in its underlying assumptions. The 'anomalies' pointed out by psychologists are completely consistent with maximizing behaviour, as long as we do not impose any assumptions on the form of the utility function defined over goods that are dated and indexed by state of nature.
There is a deeper, more fundamental critique. If we assert that the form of the utility function is influenced by 'persuasion', then we lose the intellectual foundation for much of welfare economics. That is a much more interesting project that requires us to rethink what we mean by individualism. ...
Was the creation of the euro a mistake? Should it be eliminated?:
Europe’s Many Economic Disasters, by Paul Krugman, Commentary, NY Times: ... Why are there so many economic disasters in Europe? Actually, what’s striking at this point is how much the origin stories of European crises differ. Yes, the Greek government borrowed too much. But the Spanish government didn’t — Spain’s story is all about private lending and a housing bubble. And Finland’s story doesn’t involve debt at all. It is, instead, about weak demand for forest products, still a major national export, and the stumbles of Finnish manufacturing, in particular of its erstwhile national champion Nokia.
What all of these economies have in common, however, is that by joining the eurozone they put themselves into an economic straitjacket. ...
Does this mean that creating the euro was a mistake? Well, yes. But that’s not the same as saying that it should be eliminated now that it exists. The urgent thing now is to loosen that straitjacket. This would involve action on multiple fronts...
But there are many European officials and politicians who are opposed to anything and everything that might make the euro workable, who still believe that all would be well if everyone exhibited sufficient discipline. And that’s why there is even more at stake in Sunday’s Greek referendum than most observers realize.
One of the great risks if the Greek public votes yes — that is, votes to accept the demands of the creditors, and hence repudiates the Greek government’s position and probably brings the government down — is that it will empower and encourage the architects of European failure. The creditors will have demonstrated their strength, their ability to humiliate anyone who challenges demands for austerity without end. And they will continue to claim that imposing mass unemployment is the only responsible course of action.
What if Greece votes no? This will lead to scary, unknown terrain. Greece might well leave the euro, which would be hugely disruptive in the short run. But it will also offer Greece itself a chance for real recovery. And it will serve as a salutary shock to the complacency of Europe’s elites.
Or to put it a bit differently, it’s reasonable to fear the consequences of a “no” vote, because nobody knows what would come next. But you should be even more afraid of the consequences of a “yes,” because in that case we do know what comes next — more austerity, more disasters and eventually a crisis much worse than anything we’ve seen so far.
- Nine Myths About the Greek Crisis – James K. Galbraith
- Interview with Al Roth - Tim Taylor
- Mental health stigma - Vox EU
- First-day criminal recidivism - Vox EU
- Interview with Gill Marcus - Cecchetti & Schoenholtz
- Deliberative democracy and the age of social media - Daniel Little
- The West Coast Port Dispute and the GDP Slowdown? - Liberty Street
Thursday, July 02, 2015
... Two big facts, however, suggest that the link between child poverty and parental failure is weak. One comes from the DWP's own report:
Children in families where at least one adult was in work made up around 64 per cent of all children in low income [before housing costs] in 2013/14 (p46 of this pdf).
Think what it means to be in work. It means you've impressed an employer sufficiently to get hired, and you are managing to turn up roughly on time most days. You have, in short, got your shit together. And yet you're still unable to get your family out of relative poverty.
Secondly, Andrew Dickerson and Gurleen Popli point out that there is zero correlation between material child poverty and a measure of parental involvement based upon facts such as whether parents read to their children or given them regular meal times and bed times. There is, therefore, no link between bad parenting (on this measure) and material poverty.
These two facts suggest another, bigger reason for child poverty. Quite simply, it has become harder for less skilled people to provide for their families. ...
Job Growth Slows in June: There is still little evidence of any acceleration of wage growth.
The Labor Department reported that the economy added 223,000 jobs in June. While this was in line with most economists' predictions, there were downward revisions of 60,000 to the data for the prior two months. This brings the average over the last three months to 221,000, compared to a monthly average of 245,000 over the last year.
The job growth was almost entirely in the service sector...
This report gives little hope for an uptick in wage growth. The average hourly wage over the last three months has risen at a 2.2 percent annual rate compared to the average over the prior three months. This is little different from the 2.0 percent rate of wage growth over the last year. Among major industry groups, the only one that shows much evidence of an acceleration in wage growth is restaurants. This is likely to due to the effect of minimum wage hikes in many states and cities.
The household survey also showed a mixed picture. The unemployment rate fell by 0.2 percentage points to 5.3 percent, the lowest rate for the recovery. However, this was entirely due to people dropping out of the labor force as the employment-to-population ratio (EPOP) slipped back by 0.1 percentage points to 59.3 percent. The one notable positive is that employment rates for African Americans seem to have risen, with the EPOP more than a full percentage point above the year ago level for the first half of 2015.
The overall drop in EPOPs is consistent with the sharp drop in the number of long-term unemployed reported in June, from 28.6 percent to 25.8 percent of the unemployed, as many of these workers likely dropped out of the labor market. ...
This report together with the prior two suggests the rate of job growth may be slowing somewhat. While a monthly pace of 221,000 would be strong for an economy near full employment, with the EPOP for prime age workers still about 3 percentage points below pre-recession levels, it will take several years at this rate to eliminate labor market slack.
- More Musings on "Monetary Economics" - Brad DeLong
- Geographical Notes on Puerto Rico - Paul Krugman
- Puerto Rico: Echoes from Greece - Tim Taylor
- Answers to Questions About Dynamic Analysis - CBO
- Can the Grexit Lemon Be Made into Lemonade? - Joe Gagnon
- Gold Standard or Gold-Exchange Standard - Uneasy Money
- “To Lean or Not to Lean?” That is the Question - IMF Blog
- The Economy’s Missing Metrics - The New York Times
- Discussing the Global Economy's Effects - macroblog
- On the economics of the Neolithic Revolution - A Fine Theorem
Wednesday, July 01, 2015
Ahead of the Employment Report, by Tim Duy: A rare Thursday release of the employment report is on tap for tomorrow, and all eyes will be watching to see if it falls in line with the other, more optimistic US data of late. Indeed, it increasingly looks like this year's growth scare was driven by temporary factors, not a fundamental downturn in the US economy. Consequently, anything reasonably close to expectations would bolster the case of those FOMC members looking for a first rate hike later this year, as early as September.
The ISM report for June was in-line with expectations, with fairly good internal components. Note in particular the bounce-back in the employment component:
Other employment data also indicates the underlying trends in the labor market are holding. Initial unemployment claims - a leading indicator - give no cause for worry:
And the ADP employment report came in slightly ahead of expectations at a private sector job gain of 237k for June. All of this suggests that the consensus for tomorrow's headline number of 230k is reasonable, although I am inclined to bet that the actual number will beat consensus.
The usual headline numbers, however, may not be the stars of the show. Attention will rightly be on the wage numbers. Further evidence that wage growth is accelerating would indicate that the labor market is finally closing in a full employment. Such data would point to a rate hike sooner than later as it would raise the Fed's confidence that inflation will be trending toward target. See Federal Reserve Governor Stanley Fischer today:
Regarding inflation, an important factor working to increase confidence in the inflation outlook will be continued improvement in the labor market. Theoretical and empirical evidence suggests that inflation will eventually begin to rise as resource utilization tightens. And while the link between wages and inflation can be tenuous, it is encouraging that we are seeing tentative indications of an acceleration in labor compensation.
Tantalizing evidence on wage growth comes from the Atlanta Federal Reserve Bank:
With fairly low inflation, this suggests that real wages growth is indeed accelerating, which helps account for the relatively solid consumer confidence numbers we are seeing. Demand for new cars and trucks also remains strong, although I sense that we are not likely to see higher numbers going forward.
Also from the Atlanta Fed is their GDP tracker, which continues to head back to consensus range:
This is in-line with Fischer's assessment of the economy:
The U.S. economy slowed sharply in the first quarter of this year, with the most recent estimate being that real GDP declined 0.2 percent at an annual rate. Household spending slowed, while both business investment and net exports declined. Much of this slowdown seemed to reflect transitory factors, including harsh winter weather, labor disputes at West Coast ports, and probably statistical noise. Confirming that view, the latest monthly data on real consumption provide welcome evidence that consumer demand is rebounding, and that economic activity likely expanded at an annual rate of about 2.5 percent in the second quarter.
What about Greece? St. Louis Federal Reserve President James Bullard dismissed Greece as a reason for concern. Michael Derby at the Wall Street Journal reports:
What’s happening in Europe “would not change the timing of any rate hike. I would say September is still very much in play” for raising rates, Mr. Bullard told reporters after a speech in St. Louis. More broadly, he said “every meeting is in play depending on the data,” which he said had been “stronger” recently. He also described recent inflation data as being “more lively” and set to rise further over time.
I doubt other Federal Reserve officials are quite as confident, but they have plenty of time between now and September to assess the situation. As I said Monday, they will be looking for evidence of credit market spillovers. If they don't see it, the economic data will rule the day. Bullard also argued the case of a faster pace of rate hikes:
“The Fed should hedge against the possibility of a third major macroeconomic bubble in coming years by shading interest rates somewhat higher than otherwise” would be the case based on historical norms, Mr. Bullard said. “The benefit would be a longer, more stable economic expansion.”Mr. Bullard warned “my view is that low interest rates tend to feed the bubble process.” He did not point to any major imbalances right now even as he flagged high stock market levels as something to watch, acknowledging the role of technology could be changing how the economy interacts with financial markets.
Derby correctly notes, however, that this places Bullard out of the Fed consensus:
Mr. Bullard’s suggesting that rates may need to be lifted more aggressively in the future puts him at odds with some of his central bank colleagues. Many key Fed officials are now gravitating to the view that changes in labor market demographics and other forces may mean the Fed could keep rates at a lower level relative to historic benchmarks. Most officials now expect that the long-term fed funds rate target, now at near zero levels, will likely stand at around 3.75%.
Fischer, for example, still argues for a gradual pace of normalization and is much more sanguine on the financial market excess:
Once we begin to remove policy accommodation, the Committee's assessment is that economic conditions will likely warrant raising the federal funds rate only gradually. Thus, we expect that the target federal funds rate will remain for some time below levels viewed as normal in the longer run. But that is only a forecast, and monetary policy will, in practice, be determined by the data--primarily data on inflation and unemployment.What about financial stability? We are aware of the possibility that low interest rates maintained for a prolonged period could prompt an excessive buildup in leverage or cause underwriting standards to erode as investors take on risks they cannot measure or manage appropriately in a reach for yield. At this point, the evidence does not indicate that such vulnerabilities pose a significant threat, but we are carefully monitoring developments in this area.
Fischer is closer to the FOMC consensus than Bullard on these points.
Bottom Line: Incoming data continues to support the case that the underlying pace of activity is holding, alleviating concerns that kept the Fed on the sidelines in the first half of this year. I anticipate the employment report, or, more accurately, the sum of the next three reports, to say the same. Accelerating wage growth could very well be the trigger for a September rate hike, while Greece could push any rate hike beyond 2015. I myself, however, tend to be optimistic the Greece situation will not spiral out of control.
Path to Grexit tragedy paved by political incompetence: Since our last episode, the crisis in Greece has escalated further. Negotiations between the government and its creditors collapsed over the weekend, and restrictions on bank withdrawals will now follow.
The next step is for the government to issue the equivalent of IOUs to pay salaries and pensions. The country is seemingly on the slippery slope to exiting the euro.
Many of us doubted that it would come to this. In particular, I doubted that it would come to this.
Nearly a decade ago, I analyzed scenarios for a country leaving the eurozone. I concluded that this was exceedingly unlikely to happen. The probability of a Grexit, or any Otherexit, I confidently asserted, was vanishingly small.
My friend and UC Berkeley colleague Brad DeLong regularly reminds us of the need to “mark our views to market.” So where did this prediction go wrong?
Why a euro exit didn’t make sense
My analysis was based on a comparison of economic costs and benefits of a country exiting the euro. The costs, I concluded, would be severe and heavily front-loaded.
Raising the possibility, however remote, of exit from the euro would ignite a bank run in said country. The authorities would be forced to shutter the financial system. Economic activity would grind to a halt. Losing access to not just their savings but also imported petrol, medicines and foodstuffs, angry citizens would take to the streets.
Not only would any subsequent benefits, by comparison, be delayed, but they would be disappointingly small.
With the government printing money to finance its spending, inflation would accelerate, and any improvement in export competitiveness due to depreciation of the newly reintroduced national currency would prove ephemeral.
In Greece’s case, moreover, there is the problem that the country’s leading export, refined petroleum, is priced in dollars and relies on imported oil, which is also priced in dollars. So much for the advantages of a depreciated currency.
Agricultural exports for their part will take several harvests to ramp up. And attracting more tourists won’t be easy against a drumbeat of political unrest.
What went wrong?
How did Greece end up in this pickle? Some say that the specter of a bank run was no longer a deterrent to exit once that bank run started anyway due to the deep depression into which the Greek economy had sunk.
But what is remarkable is how the so-called bank run remained a jog – it was still perfectly manageable until the Greek government called its referendum on the terms of the bail out deal offered by international creditors, negotiations broke down and exit became a real possibility.
Nonperforming loans — ones that are in default or close to it — were already rising, to be sure, but the banks still had all the liquidity they needed. The European Central Bank supported the Greek banking system with emergency liquidity assistance (ELA) right up to the very end of June. Only when Greece stopped negotiating did the Central Bank stop increasing ELA. And only then did a full-fledged bank run break out.
So I stand by the economic argument. Where I need to mark my views to market, however, is for underestimating the role of politics. In particular, I underestimated the extent of political incompetence – not just of the Greek government but even more so of its creditors.
In January Syriza had run on a platform of no more spending cuts or tax increases but also of keeping the euro. It should have anticipated that some compromise would be needed to square this circle. In the event, that realization was strangely late in coming.
And Prime Minister Alexis Tsipras and his government should have had the courage of its convictions. If it was unwilling to accept the creditors’ final offer, then it should have stated its refusal, pure and simple. If it preferred to continue negotiating, then it should have continued negotiating. The decision to call a referendum in midstream only heightened uncertainty. It was a transparent effort to evade responsibility. It was the action of leaders more interested in retaining office than in minimizing the cost to the country of the crisis.
A hard lesson learned
Still, this incompetence pales in comparison with that of the European Commission, the ECB and the IMF.
The three institutions opposed debt restructuring in 2010 when the crisis still could have been resolved at low cost. They continued to resist it in 2015, when a debt write-down was the obvious concession to Mr Tsipras & Company. The cost would have been small. Pretending instead that Greece’s debts could be repaid hardly enhanced their credibility.
Instead, the creditors first calculated the size of the primary budget surpluses that Greece would have to run in order to hypothetically repay its debt. They then required the government to raise taxes and cut spending sufficiently to produce those surpluses.
They ignored the fact that, in so doing, they consigned the country to an even deeper depression. By privileging their own balance sheets, they got the Greek government and the outcome they deserved.
The implication is clear. Never underestimate the ability of politicians to do the wrong thing. I will try to remember next time.
Gara Afonso and João Santos at the NY Fed's Liberty Street Economics blog:
What Do Bond Markets Think about “Too-Big-to-Fail” Since Dodd-Frank?: In our previous post, we concluded that, in rating agencies’ views, there is no clear consensus on whether the Dodd-Frank Act has eliminated “too-big-to-fail” in the United States. Today, we discuss whether bond market participants share these views.
As we discussed in our post on Monday, the Dodd-Frank Act includes provisions to address whether banks remain “too big to fail.” Title II of the Act creates an orderly liquidation mechanism for the Federal Deposit Insurance Corporation (FDIC) to resolve failed systemically important financial institutions (SIFIs). ...
Since the Dodd-Frank Act makes it easier to intervene at the holding company level, we predict that, relative to the pre-Dodd-Frank era, investors’ perceptions of the risk of holding bonds of a parent company would have increased relative to the risk of holding bonds of its subsidiary bank. To test this hypothesis, we compared how bond spreads evolved for a matched pair of bonds—one issued by the parent company and one by its subsidiary bank. This approach lets us isolate any differential effect of the new resolution procedure on the parent company relative to its subsidiary. A downside, though, is that there are only a few cases where both the parent and the subsidiary have the same bonds traded in financial markets.
Contrary to our hypothesis, the difference in option-adjusted spreads to Treasuries of the parent companies and their subsidiary banks ... has not widened since the Dodd-Frank Act was enacted. ...
Our previous post demonstrated that rating agencies do not have a unanimous view of the current level of government support of U.S. commercial banks and their holding companies. The results here indicate that market participants’ perceptions of the relative risk have not increased as one would have expected given the new resolution framework introduced by the Dodd-Frank Act. ...
Together the evidence suggests that rating agencies and market participants may have some doubts about the ability, so far, of the Dodd-Frank Act to deal with “too big to fail.” However, some observers have argued that once all provisions of the Dodd-Frank Act are implemented, any remaining expectations of government support will disappear. Time will tell.
- The psychology of saving - Tim Harford
- Focusing on High-Cost Patients - Tim Taylor
- U.S. Leaves Markets Out of Fight Against Carbon Emissions - NY Times
- Monetary Policy in the US and Developing Countries - Stanley Fischer
- Macroeconomic Effects of High-Frequency Uncertainty - Econbrowser
- Sources of stock-market fluctuations: New evidence - Vox EU
- Will the U.S. keep winning indefinitely? ISDS, that is - Ken Thomas
- Inequality, the state & the left - Chris Dillow
- Euros without the Eurozone - Moneyness
- Greek Stragedy? - Cheap Talk
Tuesday, June 30, 2015
I have a new column:
The Problem with Completely Free Markets: The Supreme Court’s decision last week saved Obamacare from the Republican’s latest attempt to get government out of health care. But if Republicans can find another way to attack the Affordable Care Act, they surely will.
Healthcare is not, of course, the only place where Republicans object to government intervention in private markets. They believe that markets free of government rules and regulations almost always outperform markets where the government is involved. So it’s a good time to review why this faith in free markets is sometimes misplaced, and how government involvement in some markets can improve their performance. ...
- The Awesome Gratuitousness of the Greek Crisis - Paul Krugman
- The "Hangover Theory" of the Crash Fails - Brad DeLong
- Quantum mental processes? - Understanding Society
- A Primer on the Greek Crisis - Anil Kashyap
- Wage Growth Held Steady in May - macroblog
- Double bubble trouble in China - Gavyn Davies
- Are Uber Drivers Employees? - James Surowiecki
- ‘Metrics Monday: Proxy Variables - Marc Bellemare
- Temporal Aggregation: Tests of Linear Restrictions - Dave Giles
- The Hard Work of Taking Apart Post-Work Fantasy - Mike Konczal
- Washington Post and NY Times on the Greek Crisis - Robert Waldmann
- Poking Holes in China's Great Financial Wall - Cecchetti & Schoenholtz
- Rating Agencies and “Too-Big-to-Fail” Since Dodd-Frank - Liberty Street
- The Economics of George Orwell - Roger Farmer
- Sharing user search data - Digitopoly
- The Internet of Things - Tim Taylor
Monday, June 29, 2015
Events Continue to Conspire Against the Fed, by Tim Duy: Federal Reserve policymakers just can't catch a break lately. Riding on the back of strong data in the second half of last year, they were positioning themselves to declare victory and begin the process of policy normalization, AKA "raising interest rates." Then the bottom fell out. Data in the first half of the year turned sloppy. Although policymakers on average - and Federal Reserve Chair Janet Yellen in particular - could reasonably believe the underlying momentum of the economy had not changed, that the data reflected largely temporary factors, the case for a rate hike by mid-year evaporated all the same. The risk of being wrong was simply more than they were willing to bear in the absence of clear inflation pressures.
The story was clearly shifting by the end of June. Key data on jobs and the consumer firmed as expected, raising the possibility that September was in play. Salvation from ZIRP, finally. Federal Reserve Governor Jerome Powell called it a coin toss. Via Bloomberg:
Speaking at a Wall Street Journal event in Washington Tuesday, Powell said he forecast stronger growth than in the first half of 2015, growth in the labor market and a “greater basis for confidence” in inflation returning to 2 percent.
“If those things are realized, I feel that it is time, it will be time, potentially as soon as September,” he said. “I don’t think the odds are 100 percent. I think they’re probably in the 50-50 range that we will realize those conditions, but that’s my forecast.”
Earlier, San Francisco Federal Reserve President John Williams said he expected two rate hikes this year. Via Reuters:
"Definitely my own forecast would be having us raise rates two times this year, but that would depend on the data," San Francisco Fed President John Williams told reporters at the bank's headquarters.
Rate increases of a quarter percentage point each would be reasonable, he said, with little point in making rate increases any smaller.
Given that we have basically written off the possibility of a rate hike in October (Fed not positioning for a rate hike every meeting and no one expects October for a first hike in the absence of the press conference), that leaves September and December for hikes.
Over the weekend, New York Federal Reserve President William Dudley also raised the possibility of September in an interview with the Financial Times:
A Federal Reserve interest-rate hike will be “very much in play” at the central bank’s September meeting if the recent strengthening of the US economy continues, according to one of America’s top central bankers.
William Dudley, the president of the Federal Reserve Bank of New York, said recent evidence of accelerating wage gains, improving incomes, and growing household spending had alleviated some of his concerns about the sustainability of momentum in America’s jobs market.
Former Federal Reserve Governor Laurence Meyer expects Yellen to also be comfortable with two rate hikes in 2015 by the time September rolls around. Via Bloomberg:
"We expect the incoming data between now and the September meeting to help ease concerns about the growth outlook, prompting Chair Yellen and a majority of the FOMC to see two hikes this year as appropriate," Meyer said in a note to clients.
No, September was not a sure bet, but you could see how the data evolved to get you there. But then came Greece. Greece - will it never end? Financial markets were roiled as Greek Prime Minister Alexis Tsipras abandoned the latest round of bailout negotiations with the EU, IMF, and ECB and instead pursued a national referendum on the last version of the bailout proposal. Most of you know the story from that point on - run on Greek banks, the ECB ends further ELA extensions, a bank holiday is declared, likely missing a payment to the IMF etc., etc.
At this juncture, everything in Greece is now in flux. Greece will be holding a referendum on a deal that apparently no longer exists, so it is not clear what negotiations would happen even if it passes. Moreover, it seems likely that the economic damage that will occur in the next week or longer will almost certainly require an even bigger give on the part of Greece's creditors. Is that going to happen? There is no exit plan to force Greece out of the Euro. What if Greece refuses to leave? How does Europe respond to a growing humanitarian crisis Greece as the economy collapsed? This could drag on and on and on.
As would be reasonably expected, the jump in risk sank equities across the globe, in the process stripping away US stock gains for 2015. Not that there was much to give - it only took a little over 2% on the SP500. Yields on Treasuries sank in a safe-haven bid, and market participants pushed Federal Reserve rate hike expectations out beyond 2015.
At this moment, there is obviously little to confirm that 2015 is off the table. To be sure, we know the Fed is watching the situation closely. Back to the FT and Dudley:
That said, Mr Dudley warned that the financial market implications of a Greek exit from the euro could be graver than many investors seemed to believe, because it would set a “huge precedent” indicating that euro membership was reversible.
People “underestimate all the different channels in terms of how contagion works”, the central banker said. “We saw that in the financial crisis. People did not anticipate that the Lehman failure was going to affect the economy and financial markets to the degree that it did.”
At the risk of being guilty of underestimating contagion, I am optimistic that the ring fencing around Greece will hold. This will be a political disaster for Europe, and a humanitarian disaster for Greece, but I expect will ultimately prove to have limited impact beyond those borders.
Famous last words.
Of course, even if that is correct, we don't know it to be correct, and thus the Fed will again proceed cautiously, just like they did in the face of the weak first quarter. Hence, all else equal, pushing out the timing of the first hike is reasonable. September, though, is a long ways off, and plenty can happen between now and then. So what will the Fed be watching?
First is the data, as they have emphasized again and again. We have three labor reports between now and September, beginning this week. Strong monthly gains coupled with falling unemployment rates and further evidence of wage growth would go a long way to supporting a rate hike. All would give the Fed the faith that inflation will soon be heading toward target. This is especially the case if recent consumer spending and housing numbers hold and if business investment picks up. And it would be further helpful if the global economy did not sink under the weight of Greece. Essentially, the Fed wants to be confident that the first quarter was a fluke and thus the economy is in fact fairly resilient.
Second is the financial fallout from Greece. Mostly, they will be carefully watching to see if the Greece crisis impacts domestic credit markets and banking. Do interest rate spreads widen? Do lenders tighten underwriting conditions? Does interbank lending proceed without impediments? If they see conditions emerge like this, I would expect them to match market expectations and just stay out of the rate hike business until the fallout from Greece is clear. This likely holds even in the face of solid US data. There will (or at least should) recognize that periods of substantial unrest in credit markets are not the time to be raising rates.
Bottom Line: The Fed was already approaching the first rate hike cautiously, wary of even dipping their toes in the water. The crisis in Greece will make them even more cautious. Like their response to the first quarter data, until they see a clear path, they will be on the sidelines. That said, given the plethora of warnings not to underestimate the global impact of the crisis in Greece, one should be watching the opposite side of the story. Solid data and limited Greece impact would leave December at a minimum, and even September, in play.
Joseph Stiglitz to Greece’s Creditors: Abandon Austerity Or Face Global Fallout: ... “They have criminal responsibility,” he says of the so-called troika of financial institutions that bailed out the Greek economy in 2010, namely the International Monetary Fund, the European Commission and the European Central Bank. “It’s a kind of criminal responsibility for causing a major recession,” Stiglitz tells TIME in a phone interview.
Along with a growing number of the world’s most influential economists, Stiglitz has begun to urge the troika to forgive Greece’s debt – estimated to be worth close to $300 billion in bailouts – and to offer the stimulus money that two successive Greek governments have been requesting.
Failure to do so, Stiglitz argues, would not only worsen the recession in Greece – already deeper and more prolonged than the Great Depression in the U.S. – it would also wreck the credibility of Europe’s common currency, the euro, and put the global economy at risk of contagion. ...
Bart Hobijn and Alexander Nussbacher in the SF Fed's Economic Letter:
The Stimulative Effect of Redistribution, by Bart Hobijn and Alexander Nussbacher: The idea of taking from the rich and giving to the poor goes back long before the legend of Robin Hood. This kind of redistribution sounds desirable out of a sense of fairness. However, economists often judge a policy less on whether it is fair, and more in terms of whether it is efficient or inefficient, as well as whether it stimulates or slows economic activity.
In this Economic Letter we evaluate the stimulative effect of redistributing income from rich to poor households in a few distinct steps. We first provide a simple back-of-the-envelope calculation of the potential stimulus from redistributive policies. We then review the two main assumptions behind this policy prescription. We argue that the stimulative impact of such policies is likely to be lower than the simple calculation suggests. ...
U.S. income inequality persists amid overall growth in 2014, by Emmanuel Saez, WCEG: Income inequality in the United States grew more acute in 2014, yet the bottom 99 percent of income earners registered the best real income growth (after factoring in inflation) in 15 years. The latest data from the U.S. Internal Revenue Service show that incomes for the bottom 99 percent of families grew by 3.3 percent over 2013 levels, the best annual growth rate since 1999. But incomes for those families in the top 1 percent of earners grew even faster, by 10.8 percent, over the same period. ...
More broadly, the top 1 percent of families captured 58 percent of total real income growth per family from 2009 to 2014, with the bottom 99 percent of families reaping only 42 percent. ...
The higher tax rates for top U.S. income earners enacted in 2013 as part of the Obama Administration and Congress’ federal budget deal seem to have had only a fleeting impact on the outsized accumulation of pre-tax income by families in the top 1 percent and 0.1 percent of income earners.
To be sure, there was a shifting of income among high-income earners ... as these wealthy families sought to avoid the higher rates enacted in 2013. This adjustment created a spike in the share of top incomes accumulated by the very wealthy in 2012 followed by a trough in 2013. By 2014, however, top incomes shares were back to their upward trajectory. This suggests that the higher tax rates starting in 2013, while not negligible, will not be sufficient by themselves to curb the enormous increase in pre-tax income concentration that has taken place in the United States since the 1970s.
Just say no:
Greece Over the Brink, by Paul Krugman, Commentary, NY Times: It has been obvious for some time that the creation of the euro was a terrible mistake. Europe never had the preconditions for a successful single currency....
Leaving a currency union is, however, a much harder and more frightening decision than never entering in the first place...
But the situation in Greece has now reached what looks like a point of no return. Banks are temporarily closed and the government has imposed capital controls... It seems highly likely that the government will soon have to start paying pensions and wages in scrip, in effect creating a parallel currency. And next week the country will hold a referendum on whether to accept the demands of the “troika” ... for yet more austerity.
Greece should vote “no,” and the Greek government should be ready, if necessary, to leave the euro.
To understand why I say this, you need to realize that most ... of what you’ve heard about Greek profligacy and irresponsibility is false. Yes, the Greek government was spending beyond its means in the late 2000s. But ... all the austerity measures ... been more than enough to eliminate the original deficit and turn it into a large surplus.
So why didn’t this happen? Because the Greek economy collapsed, largely as a result of those very austerity measures, dragging revenues down with it.
And this collapse, in turn, had a lot to do with the euro, which trapped Greece in an economic straitjacket. Cases of successful austerity ... typically involve large currency devaluations... But Greece, without its own currency, didn’t have that option. ...
It’s easy to get lost in the details, but the essential point now is that Greece has been presented with a take-it-or-leave-it offer that is effectively indistinguishable from the policies of the past five years. ...
Don’t be taken in by claims that troika officials are just technocrats explaining to the ignorant Greeks what must be done. These supposed technocrats are in fact fantasists who have disregarded everything we know about macroeconomics, and have been wrong every step of the way. This isn’t about analysis, it’s about power — the power of the creditors to pull the plug on the Greek economy, which persists as long as euro exit is considered unthinkable.
So it’s time to put an end to this unthinkability. Otherwise Greece will face endless austerity, and a depression with no hint of an end.
- Greece – the day after: Time for a fresh start? - Vox EU
- Seigniorage transfers and runs on common currencies - Nick Rowe
- Grexit: The staggering cost of central bank dependence - Vox EU
- Was Grexit Invevitable? - David Beckworth
- Grisis - Paul Krugman
- The Generations of Economics - Economic Principals
- Joseph Schumpeter on "Liquidationism" - Brad DeLong
- We Must Fight Economic Apartheid in America - Robert Reich
- SS Overpayments only 0.13% of Budget - Bud Meyers
- Explaining the black-white wage gap - Vox EU
- Inequality: the right's problem - Stumbling and Mumbling
- Uber, sharing and the compensation mechanism - Digitopoly
Sunday, June 28, 2015
Former Finance Minister of Cyprus on the Greek crisis: While on vacations in Greece, I had a chance today (Sunday 28 June) to have a long discussion with Michael Sarris who was Cypriot Minister of Finance between 2005 and 2008 when the Euro was introduced in Cyprus and then again Minister of Finance during the March 2013 crisis when Cyprus faced negotiations with “the institutions” very similar to those faced today by Greece. Very few people in the world have as informed and first-hand knowledge of the situation as Michael Sarris does. Here are my questions and his answers. ...
Saturday, June 27, 2015
Gloomy European Economist Francesco Saraceno:
It’s the Politics, Stupid!: I have been silent on Greece, because scores of excellent economists from all sides commented at length...
But last week has transformed in certainty what had been a fear since the beginning. The troika, backed by the quasi totality of EU governments, were not interested in finding a solution that would allow Greece to recover while embarking in a fiscally sustainable path. No, they were interested in a complete and public defeat of the “radical” Greek government. ...
What happened...? Well, contrary to what is heard in European circles, most of the concessions came from the Greek government. On retirement age, on the size of budget surplus (yes, the Greek government gave up its intention to stop austerity, and just obtained to soften it), on VAT, on privatizations, we are today much closer to the Troika initial positions than to the initial Greek position. Much closer.
The point that the Greek government made repeatedly is that some reforms, like improving the tax collection capacity, actually demanded an increase of resources, and hence of public spending. Reforms need to be disconnected from austerity, to maximize their chance to work. Syriza, precisely like the Papandreou government in 2010 asked for time and possibly money. It got neither.
Tsipras had only two red lines it would and it could not cross: Trying to increase taxes on the rich (most notably large coroporations), and not agreeing to further cuts to low pensions. if he crossed those lines, he would become virtually indistinguishable from Samaras and from the policies that led Greece to be a broken State.
What the past week made clear is that this, and only this was the objective of the creditors. This has been since the beginning about politics. Creditors cannot afford that an alternative to policies followed since 2010 in Greece and in the rest of the Eurozone materializes.
Austerity and structural reforms need to be the only way to go. Otherwise people could start asking questions; a risk you don’t want to run a few months before Spanish elections. Syriza needed to be made an example. You cannot survive in Europe, if you don’t embrace the Brussels-Berlin Consensus. Tsipras, like Papandreou, was left with the only option too ask for the Greek people’s opinion, because there has been no negotiation, just a huge smoke screen. Those of us who were discussing pros and cons of the different options on the table, well, we were wasting our time.
And if Greece needs to go down to prove it, so be it. If we transform the euro in a club in which countries come and go, so be it.
The darkest moment for the EU.
Friday, June 26, 2015
I want to highlight this article in today's links:
Most of America's poor have jobs, study finds, EurekAlert!: The majority of the United States' poor aren't sitting on street corners. They're employed at low-paying jobs, struggling to support themselves and a family.
In the past, differing definitions of employment and poverty prevented researchers from agreeing on who and how many constitute the "working poor."
But a new study by sociologists at BYU, Cornell and LSU provides a rigorous new estimate. Their work suggests about 10 percent of working households are poor. Additionally, households led by women, minorities or individuals with low education are more likely to be poor, but employed. ...
BYU professor Scott Sanders says the findings dispel the notion that most impoverished Americans don't work so they can rely on government handouts.
"The toxic idea is if we clump all those people together and treat them as the same people, then we don't solve the real problem that the majority of people in poverty are working, trying to improve their lives, and we treat them all as deadbeats,"...
"It's been the push, that if we can get people working, then they'll get out of poverty," Sanders said. "But we have millions of Americans working, playing by the rules, and they're still trapped in poverty."
A small part of an interview of Thomas Piketty in the Financial Times:
... Piketty says his interest in inequality crystallised after the collapse of the Berlin Wall and the first Gulf war. He recalls visiting Moscow in 1991 and being struck by “the lines in front of shops”. He came back vaccinated against communism — “I believe in capitalism, private property, the market” — but also with a question central to his work: “How come those people had been so afraid of inequality and capitalism in the 19th and 20th century that they created such a monstrosity? How can we tackle inequality without repeating this disaster?” ...
And a point I've been making for a long time about taxes and incentives:
... Though Piketty concedes that the global wealth tax he recommends is a “utopian” dream, he also says a confiscatory tax rate of more than 80 per cent on earnings exceeding $1m would work. In fact, he continues, such a rate was in place for five decades before the presidency of Ronald Reagan, and would curb exuberant executive pay without hurting productivity. “It did not kill US capitalism then — productivity grew the fastest during that time,” he notes. “This idea, according to which no one will accept to work hard for less than $10m per year . . . It’s OK to pay someone 10, 20 times the average worker’s salary but do you really need to pay them 100 or 200 times to get their arses in gear?” ...
Health care reform is succeeding:
Hooray for Obamacare, by Paul Krugman, Commentary, NY Times: Was I on the edge of my seat, waiting for the Supreme Court decision on Obamacare subsidies? No — I was pacing the room, too nervous to sit, worried that the court would use one sloppily worded sentence to deprive millions of health insurance, condemn tens of thousands to financial ruin, and send thousands to premature death.
It didn’t. ...
The Affordable Care Act is now in its second year of full operation; how’s it doing? The answer is, better than even many supporters realize.
Start with the act’s most basic purpose, to cover the previously uninsured. Opponents of the law insisted that it would actually reduce coverage; in reality, around 15 million Americans have gained insurance. ...
What about costs? In 2013 there were dire warnings about a looming “rate shock”; instead, premiums came in well below expectations. ...
And there has also been a sharp slowdown in the growth of overall health spending, which is probably due in part to the cost-control measures, largely aimed at Medicare...
What about economic side effects? One of the many, many Republican votes against Obamacare involved passing something called the Repealing the Job-Killing Health Care Law Act... But there’s no job-killing in the data: The U.S. economy has added more than 240,000 jobs a month on average since Obamacare went into effect, its biggest gains since the 1990s.
Finally, what about claims that health reform would cause the budget deficit to explode? In reality, the deficit has continued to decline, and the Congressional Budget Office recently reaffirmed its conclusion that repealing Obamacare would increase, not reduce, the deficit.
Put all these things together, and what you have is a portrait of policy triumph...
Now, you might wonder why a law that works so well and does so much good is the object of so much political venom — venom that is, by the way, on full display in Justice Antonin Scalia’s dissenting opinion, with its rants against “interpretive jiggery-pokery.” But what conservatives have always feared about health reform is the possibility that it might succeed, and in so doing remind voters that sometimes government action can improve ordinary Americans’ lives.
That’s why the right went all out to destroy the Clinton health plan in 1993, and tried to do the same to the Affordable Care Act. But Obamacare has survived, it’s here, and it’s working. The great conservative nightmare has come true. And it’s a beautiful thing.
- Most of America's poor have jobs - EurekAlert!
- The Court and the Three-Legged Stool - Paul Krugman
- Inflation Undershoots Fed’s 2% Target for 37th Consecutive Month - WSJ
- Who’s Speaking Up for the American Worker? - The New York Times
- Interpreting the yield curve: Pessimism or precaution? - Vox EU
- Banning Bottled Water: Unintended Consequences - Tim Taylor
- How monetary systems cope with a multitude of dollars - Moneyness
- The Long Unwind of Excess Money Demand - David Beckworth
- Managerialism vs innovation - Stumbling and Mumbling
- U.S. Monetary Policy: Avoiding Dark Corners - iMFdirect
- The big picture - mainly macro
Thursday, June 25, 2015
Dear governments and aid agencies: Please stop hurting poor people with your skills training programs: Here is an incredible number: From 2002 to 2012 the World Bank and its client governments invested $9 billion dollars across 93 skills training programs for the poor and unemployed. In lay terms, that is a hundred freaking million dollars per program.
Unfortunately, these skills probably did very little to create jobs or reduce poverty. Virtually every program evaluation tells us the same thing: training only sometimes has a positive impact. Almost never for men. And the programs are so expensive—often $1000 or $2000 per person—that it’s hard to find one that passes a simple cost-benefit test.
You might think to yourself: That’s not so bad. Nobody hurt the poor. Plus the trainers and the firms probably benefited. So it’s not a total loss. If you think this, I urge you to transfer to an organization where you can no longer affect the world. I can think of a couple UN agencies with excellent benefits.
Because when you take billions of dollars a year (because the World Bank is hardly the only spender on skills programs) and you spend them on vocational bridges to nowhere, you have denied those dollars to programs that actually work: an anti-retroviral treatment, a deworming pill, a cow, a well, or a cash transfer. You have destroyed value in the world. ...
If you’re thinking to yourself “hey, I would like to read 20,000 more words on this, preferably in dry prose,” well do I have the paper for you. A new review paper with Laura Ralston: Generating employment in poor and fragile states: Evidence from labor market and entrepreneurship programs. ...
Fortunately the paper includes a 4-page executive summary. And, even better, an abstract!...
Breaking Greece: I’ve been staying fairly quiet on Greece... But given reports from the negotiations in Brussels, something must be said...
This ought to be a negotiation about targets for the primary surplus, and then about debt relief that heads off endless future crises. And the Greek government has agreed to what are actually fairly high surplus targets, especially given the fact that the budget would be in huge primary surplus if the economy weren’t so depressed. But the creditors keep rejecting Greek proposals on the grounds that they rely too much on taxes and not enough on spending cuts. So we’re still in the business of dictating domestic policy.
The supposed reason for the rejection of a tax-based response is that it will hurt growth. The obvious response is, are you kidding us? The people who utterly failed to see the damage austerity would do — see the chart, which compares the projections in the 2010 standby agreement with reality — are now lecturing others on growth? Furthermore, the growth concerns are all supply-side, in an economy surely operating at least 20 percent below capacity. ...
At this point it’s time to stop talking about “Graccident”; if Grexit happens it will be because the creditors, or at least the IMF, wanted it to happen.
Personal Income increased 0.5% in May, Spending increased 0.9%, by Bill McBride: The BEA released the Personal Income and Outlays report for May:Personal income increased $79.0 billion, or 0.5 percent ... in May... Personal consumption expenditures (PCE) increased $105.9 billion, or 0.9 percent.
Real PCE -- PCE adjusted to remove price changes -- increased 0.6 percent in May, compared with an increase of less than 0.1 percent in April. ... The price index for PCE increased 0.3 percent in May, compared with an increase of less than 0.1 percent in April. The PCE price index, excluding food and energy, increased 0.1 percent in May, the same increase as in April.
The May price index for PCE increased 0.2 percent from May a year ago. The May PCE price index, excluding food and energy, increased 1.2 percent from May a year ago.
...The increase in personal income was higher than expected. And the increase in PCE was above the 0.7% increase consensus. A strong report. ...This suggests a rebound in PCE in Q2, and decent Q2 GDP growth.
- Short Term Economic Prospects in Kansas - Econbrowser
- The Persistence of ACA Denialism - Paul Krugman
- Forecasting in Unstable Environments - Carola Binder
- Greece: negotiating without trust - Antonio Fatas
- Why Don’t the Poor Rise Up? - The New York Times
- Most of the Way With Obamacare - Paul Krugman
- Middle-Class Blacks, in Low-Income Neighborhoods - NYTimes
- Monkeying around with Multipliers - Robert Waldmann
- Benjamin Strong Goes Astray in 1928 - Uneasy Money
- Donkey Kong Economics - Paul Krugman
Wednesday, June 24, 2015
Era Dabla-Norris, Kalpana Kochhar, and Evridiki Tsounta at the IMF:
Growth’s Secret Weapon: The Poor and the Middle Class: The gap between the rich and the poor is at its widest in decades in advanced countries, and inequality is also rising in major emerging markets... It is becoming increasingly clear that these developments have profound economic implications.
Earlier IMF work has shown that income inequality is bad for growth and its sustainability. Our new research shows that income distribution itself—not just the level of income inequality—matters for growth.
Specifically, we find that making the rich richer by one percentage point lowers GDP growth in a country over the next five years by 0.08 percentage points—whereas making the poor and the middle class one percentage point richer can raise GDP growth by as much as 0.38 percentage points... Put simply, boosting the incomes of the poor and the middle class can help raise growth prospects for all.
One possible explanation is that the poor and the middle class tend to consume a higher fraction of their income than the rich. ... What this means is that the poor and the middle class are key engines of growth. But with inequality on the rise, those engines are stalling.
Over the longer run, persistent inequality means that the the poor and the middle class have fewer opportunities to get educated, enhance their skills, and pursue their entrepreneurial dreams. As a result, labor productivity and growth suffer. ...
Raisins: When Insiders Set the Rules: Earlier this week, the US Supreme Court in Horne et al. vs. Department of Agriculture overturned an arrangement that had stood since 1937 for the sale of raisins. The case turned on what is apparently a non-obvious question, given that this program had been around for eight decades and lower courts had ruled differently: Does taking 47% of someone's crop count as a a "taking" in the legal sense prohibited by the 5th Amendment to the US Constitution, which ends with the words " ... nor shall private property be taken for public use, without just compensation." Chief Justice John Roberts wrote the decision for an 8-1 majority. He begins with a compact overview of past practice:The Agricultural Marketing Agreement Act of 1937 authorizes the Secretary of Agriculture to promulgate “marketing orders” to help maintain stable markets for particular agricultural products. The marketing order for raisins requires growers in certain years to give a percentage of their crop to the Government, free of charge. The required allocation is determined by the Raisin Administrative Committee, a Government entity composed largely of growers and others in the raisin business appointed by the Secretary of Agriculture. In 2002–2003, this Committee ordered raisin growers to turn over 47 percent of their crop. In 2003–2004, 30 percent.Growers generally ship their raisins to a raisin “handler,” who physically separates the raisins due the Government (called “reserve raisins”), pays the growers only for the remainder (“free-tonnage raisins”), and packs and sells the free-tonnage raisins. The Raisin Committee acquires title to the reserve raisins that have been set aside, and decides how to dispose of them in its discretion. It sells them in noncompetitive markets, for example to exporters, federal agencies, or foreign governments; donates them to charitable causes; releases them to growers who agree to reduce their raisin production; or disposes of them by “any other means” consistent with the purposes of the raisin program. 7 CFR §989.67(b)(5) (2015). Proceeds from Committee sales are principally used to subsidize handlers who sell raisins for export (not including the Hornes, who are not raisin exporters). Raisin growers retain an interest in any net proceeds from sales the Raisin Committee makes, after deductions for the export subsidies and the Committee’s administrative expenses. In the years at issue in this case, those proceeds were less than the cost of producing the crop one year, and nothing at all the next.
Readers who want to plow through the discussions of "takings" and "just compensation" in the decision can feel free to do so. What's interesting to me, from an economic point of view, is that the marketing arrangement for raisins embodies a certain misguided notion of how to create a healthy economy--a notion that still has some resonance today.In short, the economic arrangements for raisins are an example of what so often happens when economic policy is set by a combination of government and existing firms: the focus tends to be on profits for those existing firms, backed up either by government regulations that function like implicit subsidies or by explicit subsidies. Economic growth ultimately comes from innovation and productivity, not from attempts to tilt the market to favored incumbent firms. ...
In the midst of the Great Depression, firms were losing money and wages were falling. For politicians, the answer to low profits and low wages straightforward. Form organizations of producers that would limit competition and hold down production, thus pushing up prices and helping producers earn profits. On the labor side, set industry guidelines and later minimum wage laws to prevent wages from falling.
This economic philosophy was embodied the National Industrial Recovery Act passed in 1933. Back in my undergraduate days, I took a class in US economic history with Michael Weinstein, who had recently published his 1980 book, Recovery and Distribution Under the National Industrial Recovery Act. The book offered a careful statistical analysis to illuminate the underlying economic themes. When producers all group together to hold down output, the remaining incumbent firms might make higher profits on the sales that remain--but this is literally the opposite of economic growth. Also, it forces consumers to pay higher prices. Trying to push up wages in the middle of a Great Depression can help those who manage to keep their jobs, but when employment is in the neighborhood of 25%, it doesn't help the economy expand, either.
It is revealing that the Raisin Administrative Committee, which sets the proportion of "reserve raisins" to be taken from growers and handlers, lacks any meaningful representation from consumers, or other firms in related industries, or the public more broadly, or those who might wish to enter the market for raisins. ...
- Cowboys, Aliens, and Stimulus - Paul Krugman
- Does a Multiverse Fermi Paradox Disprove the Multiverse? - SciAm
- Comments on New Home Sales and Prices - Calculated Risk
- Approaching the Promised Land? Yes and No - macroblog
- The Penske View of Macroeconomic Policy - David Beckworth
- Commodity market volatility more perception than reality - EurekAlert!
- Here's How to Make the Fed More Transparent and Accountable - TAP
- Debt, equity, and differences among financial bubbles - Nick Bunker
- Uber and the Not-Quite-Independent Contractor - Justin Fox
- Combating Climate Change With Science, Rather Than Hope - NYTimes
- Does the hidden hand need to hold a stake in society? - Tim Johnson
- Bonus Culture: Competitive Pay, Screening, Multitasking - A Fine Theorem
- The 4% growth target - Jérémie Cohen-Setton
- More on Slavery's Shadow - Paul Krugman
- Economics Gets Real - Noah Smith
- Driverless Money - George Selgin
- Last Greek thoughts - John Cochrane
Tuesday, June 23, 2015
Dovish Fed, by Tim Duy: Coming on the heels of a dovish FOMC meeting and press conference, it might be surprising that San Francisco Federal Reserve President John Williams is still looking for two rate hikes this year. Via Bloomberg:
“We are getting closer and closer,” to raising rates, he told reporters on Friday after delivering a speech in San Francisco. Williams, a voter this year on the policy-setting Federal Open Market Committee, was head of research at the regional bank when it was led by now-Chair Janet Yellen.“My own forecast would be having us raise rates two times this year,” he said. “But that would depend on the data.”
Why raise rates this year despite anemic inflation and moderate economic growth? He still expects the Fed will be moving closer to its stated goals in the second half of the year and moving sooner means moving slower:
Williams also said that raising rates earlier rather than later would allow the Fed to tighten gradually, which he favors because the U.S. economy still faces significant headwinds.“If we raise rates sooner rather than later, then we can do it more gradually,” he said.
It is worth reiterating just how gradual the Fed is planning to raise rates. This I think remains more important than the timing of the first hike. Note that the midpoint forecasts from the Summary of Economic Projections imply a 0 percent equilibrium interest rate at the end of 2016, and just slightly higher than that in 2017:
And note that this is a somewhat more dovish projection than that made in March:
which was also more dovish than the prior SEP. Essentially, this Fed is jointly both hawkish and dovish - even as they warn they are moving ever closer to that first rate hike, they continue to push down the expected path of subsequent hikes. Persistently slow growth, low productivity, and low inflation are wearing on their outlook. Consequently, they continue to extend their expectations of a low interest rate environment. Policymakers are clearly moving toward market expectations in this regard.
Whether reality matches expectations remains an open question. Treasury rates have pulled up off their February lows, taking mortgages rates along for the ride. The Fed will be carefully monitoring this situation; they do not want mortgage rates in particular to climb ahead of the economy. The memories of the taper tantrum - and the subsequent stumble in the housing market - still sting. This time around, however, higher rates are being driven not by a shift in the expected Federal Reserve reaction function, but instead by an improved economic outlook. If housing markets can handle the higher rates (note the return of the first-time buyer), and there is reason to believe they will if wage growth continues to accelerate, then the Fed will feel more confident that they are getting across a message consistent with the evolution of activity. And they will thus be more willing to begin the normalization process in 2015 as they currently anticipate.
Policymakers would like to orchestrate a smoother transition to more normal policy than that of the botched tapering signal. This time around they are more clearly signaling a transition in which interest rates are moving in line with an improvement in the broader equilibrium that includes stronger wage growth and inflation closer to target. They learned a lesson from the taper tantrum of 2013: Make sure the signals you send are consistent with the path of activity. Learning that lesson speaks well for the sustainability of the recovery.
Bottom Line: Don't be surprised if you hear more Fed officials say they are still looking to rate hikes this year. Between being close to meeting their goals and the desire to move early to move slowly, the bar to hiking rates is probably not all that high. Watch instead for data that will either confirm or deny the Fed's near- and medium-term outlook. Seemingly paradoxically, that outlook has been increasingly dovish even as the countdown to the first rate hike ticks toward zero.
- Say it ain't so, Jack - Ben Bernanke
- 2013 And All That - Paul Krugman
- Core Inflation and Trend Inflation - Stock and Watson
- Why Small Booms Can Cause Big Busts - Brad DeLong
- Big Discovery! Booms Might Cause Busts - Noah Smith
- E.P.A. Warns of High Cost of Climate Change - The New York Times
- Monetary policy and financial inclusion - Cecchetti & Schoenholtz
- ‘Metrics Monday: What to Do With Missing Data - Marc Bellemare
- How Sovereign Debt Accelerated the First Industrial Revolution - NBER
- Transmission of Asset Purchases: The Role of Reserves - FRBSF
- The eurozone's 'five presidents' report': An assessment - CER
- Top CEO Compensation Soars... - EPI
- The paranoia of power - mainly macro
- Inequality’s Toll on Growth - IMF Blog
- A safety net fit for the sharing economy - FT.com
- Competition and streaming deals - Digitopoly
- Government spending multipliers and the business cycle - Vox EU
- Measuring the health impact of airborne particulates - Vox EU
Monday, June 22, 2015
Race still matters:
Slavery’s Long Shadow, by Paul Krugman, Commentary, NY Times: America is a much less racist nation than it used to be, and I’m not just talking about the still remarkable fact that an African-American occupies the White House. ...
Yet racial hatred is still a potent force in our society, as we’ve just been reminded to our horror. And I’m sorry to say this, but the racial divide is still a defining feature of our political economy, the reason America is unique among advanced nations in its harsh treatment of the less fortunate and its willingness to tolerate unnecessary suffering among its citizens. ...
Now,... you might wonder if things have changed... Unfortunately, the answer is that they haven’t, as you can see by looking at how states are implementing — or refusing to implement — Obamacare.
For those who haven’t been following this issue, in 2012 the Supreme Court gave individual states the option, if they so chose, of blocking the Affordable Care Act’s expansion of Medicaid, a key part of the plan to provide health insurance to lower-income Americans. But why would any state choose to exercise that option? After all, states were being offered a federally-funded program that would provide major benefits to millions of their citizens, pour billions into their economies, and help support their health-care providers. Who would turn down such an offer?
The answer is, 22 states at this point, although some may eventually change their minds. And what do these states have in common? Mainly, a history of slaveholding...
And it’s not just health reform: a history of slavery is a strong predictor of everything from gun control (or rather its absence), to low minimum wages and hostility to unions, to tax policy.
So will it always be thus? Is America doomed to live forever politically in the shadow of slavery?
I’d like to think not. For one thing, our country is growing more ethnically diverse, and the old black-white polarity is slowly becoming outdated. For another, as I said, we really have become much less racist, and in general a much more tolerant society on many fronts. Over time, we should expect to see the influence of dog-whistle politics decline.
But that hasn’t happened yet. Every once in a while you hear a chorus of voices declaring that race is no longer a problem in America. That’s wishful thinking; we are still haunted by our nation’s original sin.
- Powering desalination with the sun - MIT News
- Don’t sweat the debt if fiscal space is ample - Vox EU
- Financial crises since 2007 - croaking cassandra
- Renegotiating Greek’s debt - Econbrowser
- VoxEU Told You So: Greek Crisis Columns - Brad DeLong
- Time to transform world’s currency system - FT.com
- The Practicals Take a Hand - Economic Principals