I think I have to change my mind: Back when Card and Krueger first suggested that there was substantial effective monopsony power in the low-wage labor market and thus that there would be no disemployment effect from (modest) increases in the minimum wage to make it binding, I said: "Clever, but nahhh." The reason for their findings, I thought, was that labor demand is just inelastic in the short and perhaps the medium run--but maybe not in the long run.
I confess that I think I have to change my mind. Economists do not fail to find disemployment effects from (modest) increases in the minimum wage that make it binding because labor demand is inelastic and statistical power is insufficient. Employers actually do have substantial monopsony power in the low-wage labor market--even though they shouldn't. And the minimum wage is best thought of as an anti-monopsony rate-regulation policy that raises low-wage employment, raises average low-wage earnings, and brings the market closer to its competitive equilibrium:
Sandra Black, Jason Furman, Laura Giuliano and Wilson Powell: Minimum Wage Increases and Earnings in Low-Wage Jobs ...
Posted by Mark Thoma on Friday, December 2, 2016 at 10:26 AM in Economics, Income Distribution, Market Failure, Unemployment |
Be careful what you vote for:
Seduced and Betrayed by Donald Trump, by Paul Krugman, NY Times: Donald Trump won the Electoral College (though not the popular vote) on the strength of overwhelming support from working-class whites, who feel left behind by a changing economy and society. And they’re about to get their reward... Yes, the white working class is about to be betrayed.
The evidence of that coming betrayal is obvious in the choice of an array of pro-corporate, anti-labor figures for key positions. In particular..., the selection of Tom Price, an ardent opponent of Obamacare and advocate of Medicare privatization, as secretary of health and human services probably ... means that the Affordable Care Act is doomed...
What the choice of Mr. Price suggests is that the Trump administration is, in fact, ready to see millions lose insurance. And many of those losers will be Trump supporters...., we’re probably looking at more than five million ... who just voted to make their lives nastier, more brutish, and shorter. ...
And ... no, Mr. Trump can’t bring back the manufacturing jobs ... lost mainly to technological change, not imports...
There will be nothing to offset the harm workers suffer when Republicans rip up the safety net.
Will there be a political backlash, a surge of buyer’s remorse? Maybe. ... But we do need to consider the tactics that he will use to obscure the scope of his betrayal.
One tactic, which we’ve already seen with ... Carrier..., will be to distract the nation with bright, shiny, trivial objects. True, this tactic will work only if news coverage is both gullible and innumerate.
No, Mr. Trump didn’t “stand up” to Carrier — he seems to have offered it a bribe. And we’re talking about a thousand jobs in a huge economy...
But judging from the coverage of the deal so far, assuming that the news media will be gullible and innumerate seems like a good bet.
And if and when the reality that workers are losing ground starts to sink in, I worry that the Trumpists will do what authoritarian governments often do to change the subject away from poor performance: go find an enemy. ... Even as he took a big step toward taking health insurance away from millions, Mr. Trump started ranting about taking citizenship away from flag-burners. This was not a coincidence.
The point is to keep your eye on what’s important. Millions of Americans have just been sucker-punched. They just don’t know it yet.
Posted by Mark Thoma on Friday, December 2, 2016 at 10:26 AM in Economics, Politics |
Unemployment Rate Falls to 4.6 Percent in November, a New Low for Recovery: The unemployment rate fell to 4.6 percent in November, almost equal to the pre-recession lows in 2007. However, the sharp decline was partly due to people leaving the labor force, the employment to-population ratio (EPOP) was unchanged at 59.7 percent. It actually fell slightly for prime-age workers (ages 25-54), from 78.2 percent to 78.1 percent, although it is still 0.7 percentage points above its year ago level.
The establishment survey put job growth at 178,000, roughly in line with expectations. The revisions for the prior two months’ data were largely offsetting, leaving the average for the last three months at 176,000.
This would be a healthy pace for an economy that is near full employment, but the low EPOP suggests that the economy still has a substantial way to before the labor force is fully employed. While there is some evidence of an acceleration in the pace of wage growth, it is very weak.
The average hourly wage reportedly fell 3 cents in November after a sharp jump reported for October. These erratic movements are likely due to measurement error, but the November fall does weaken the case for accelerating wage growth. Wages have risen by 2.5 percent over the last year.
When we factor in the shift from non-wage to wage compensation (mostly a reduction in health care benefits), this means there is essentially no evidence of wage acceleration whatsoever. The Employment Cost Index showed a rise of just 2.3 percent in compensation over the last year. If the average hourly wage for the last three months is compared with the prior three months, there is a bit more evidence with an annual rate of increase of 2.9 percent, but this is still very limited.
It is also worth noting that the labor share of corporate income is still far from recovering to its pre-recession level. It actually fell slightly in the third quarter, from 68.9 percent to 68.3 percent. While there is a modest upward trend in the labor share over the last two years, it is still more than 3.0 percentage points below the pre-recession level.
The somewhat slower pace of job growth could be associated with a speedup in productivity growth. Productivity grew at an annual rate of 3.1 percent in the third quarter, the fastest pace in two years. The quarterly numbers are highly erratic, and the 3.1 percent figure followed three quarters with negative growth, but it could be the beginning of an uptick in the growth rate. Productivity growth has been extraordinarily weak in this recovery, which is the reason that job growth has been relatively rapid in spite of weak GDP growth.
If the weak productivity growth is explained by the availability of low cost labor, which can be profitable to hire for low productivity jobs, then a tightening labor market would be expected to lead to more rapid productivity growth as workers switch from low paying, low productivity growth, to higher paying, higher productivity jobs.
Apart from the decline in the EPOP, most other data in the household survey was positive, most notably a drop of 220,000 in the number of people involuntarily working part-time to a new post-recession low. At the same time, those choosing to work part-time jumped by 327,000. This is likely a dividend of the Affordable Care Act with workers now having the option to get insurance through the exchanges so that they don't need full-time jobs to get insurance through an employer. This number is now up by almost 2.2 million from December 2013, the month before the exchanges came into existence.
The percentage of unemployment due to people quitting their jobs rose to 12.5 percent. This is a new high for the recovery, which is equal to the pre-recession quit rates, although it is still almost 3.0 percentage points below the peaks hit in 2000. The duration measures all showed moderate improvements, with the average and median durations of unemployment spells hitting new lows for the recovery.
On the whole this report shows a relatively positive picture of the labor market. Job growth is still proceeding at a reasonable pace although wage growth remains moderate. The big question is how many people will come back into the labor force, but with no evidence of inflation, there seems little risk in waiting for the answer.
Posted by Mark Thoma on Friday, December 2, 2016 at 10:26 AM in Economics, Unemployment |
Posted by Mark Thoma on Friday, December 2, 2016 at 12:06 AM in Economics, Links |
Some concrete proposals for economists and the media: You can now listen to my SPERI/New Statesman prize lecture in full here, or even watch it all here. The talk looks at recent UK history, involving austerity and Brexit, to argue that there are serious problems in how the broadcast media treats economics. The two main problems I talk about are exclusion and balance. Exclusion, where academic economists are simply ignored because they are not part of the Westminster bubble, can lead journalists to assume statements made by politicians are true even though an economist knows they are false or at least highly questionable. I give a number of examples in the talk... Balance is where a view that represents a consensus among academic economists is treated as just another opinion, to be balanced by the opposite view. This simply devalues knowledge. ...
Solutions to these problems must start with academic economists themselves. It is asking too much to expect journalists to know whether a view put forward by an economist represents a consensus among academics or an idiosyncratic view. An obvious way to remedy this is through regular, topical polls of as many academic economists as possible. (I prefer this approach to sampling selected academic ‘leaders’...) ... What these establish is whether a consensus exists or not on key issues. They are much better at doing this than letters to newspapers.
The reason why this is far better than getting more academics on programs like Newsnight (not that I have any problem with that) is that it can then prevent the problem of balance. I use in the talk the example of climate change to show how the broadcast media could treat a consensus view among economists (90% or more agreement) as knowledge, not as simply an opinion to be balanced against another. Getting the broadcasters to do that will not be easy... Our target audience should not be Newsnight but the 6pm or 10pm news programs, which may be the only non-partisan news that readers of the right wing press ever see. We need political correspondents to routinely say what the economic consensus is, and use it to interrogate politicians when they deviate from it. ...
Only once this pressure is brought to bear on the media will we see the media begin to improve its own capability in the area of economics. ...
The broadcast media should be a defense against populism, not the means by which populism takes hold. If you treat knowledge as just an opinion, of course people will vote for whatever sounds good to their ears. ...
We cannot expect people to make sensible decisions about these issues if expertise on these issues (not just economic, but legal, constitutional etc) is kept locked away in specialist programs they will never see, or ignored altogether. We must stop allowing politicians to dictate what is knowledge and what is just an opinion.
 The lecture and this post are about the UK. Although the general points I make about expertise are universal, my specific recommendations only apply to a broadcast media that is not under government control and is regulated to prevent partisan broadcasting. Although my knowledge of the US is far less, it seems to me the problems there are deeper still, particularly now we have a POTUS and Congress who show no respect for truth. ...
Posted by Mark Thoma on Thursday, December 1, 2016 at 11:24 AM in Economics, Press |
Alexander Naumov at Bank Underground.
Global growth: The *old* normal?: “Too slow for too long”, referring to global GDP growth, was the title of a recent IMF publication. But is world economic growth really that slow? Looking at the data over the past several decades, global growth since the crisis does not appear particularly weak; at least not in a historical perspective
Still, there is more to this chart…
Two more observations stand out. First, global growth was very strong in the five years immediately before the global financial crisis, but this period was rather an exception than a rule in the past 35 years that the latest IMF dataset covers. Second, the composition of global growth has changed dramatically. That is, while growth has been in line with historical norms globally, the contribution of advanced economies (AEs), shown in blue, has shrunk considerably; whereas the contribution of emerging market economies (EMEs) shown in red, has grown substantially.
Finally, even if world GDP growth today is close to trend, it is being buttressed by unprecedented monetary policy actions. So the answer to the question of how weak global growth currently is, among other things, will depend on your view of how much stimulus the current low policy rates and other unconventional measures provide to the real economy.
Posted by Mark Thoma on Thursday, December 1, 2016 at 11:24 AM in Economics |
The Future of Aid for Health: Yesterday, I gave a keynote speech at the World Innovation Summit for Health on “The Future of Aid for Health”. When I agreed to give the speech, which built on the work of a Commission I chaired several years ago on Global Health 2035, I did not imagine the degree of uncertainty that the US election would bring to the global health area and indeed to the global community.
We are in uncharted territory. No one can know what the attitude of the new US administration will be to funding foreign assistance of any kind or to global cooperation in the health area. Certainly an “America first” strategy is not highly propitious. Global health has been an area of bipartisan cooperation with major initiatives launched during both Democratic and Republican administrations and has some Congressional champions in both parties so perhaps things will work out.
Rather than dwelling on political uncertainties I could not dispel, I chose to concentrate on something that should be a priority for those concerned with reducing premature death around the world, for those looking to foreign assistance as forward defense of US interests, and to those primarily interested in reducing budgets—assuring the optimal allocation of aid resources.
My argument was simple. The world needs to move decisively away from the current regime where 80 percent of health assistance is devoted to supporting national health care delivery and only 20 percent is devoted to global service delivery towards a model where half of assistance is devoted to global goods. ...
While I have often disagreed with particular judgments or been distressed that political considerations sometime carried the day my experience in policymaking in the United States and at the international level is that reason has always had its day in court and usually carried the day.
I desperately hope this tradition continues. But when the President of the United States is someone who believes that vaccines cause autism, that Barack Obama was born in Kenya, and that global climate change is a hoax, I am far from certain how decisions will be made going forward.
Posted by Mark Thoma on Thursday, December 1, 2016 at 11:01 AM in Economics, Health Care |
Posted by Mark Thoma on Thursday, December 1, 2016 at 12:06 AM in Economics, Links |
Employment Going South. Literally: From 1990 to 2015, the US economy as a whole increased employment by about 30 million (30,056,664 according to the BLS). Employment in 1990 was 118,900,000, so that meant that there was a roughly 25% increase in employment over that 25 year period, with a little more than 1 million jobs added per year, on average.
I’m not going to surprise anyone by saying that these 30 million jobs were not spread equally across the entire US. What I didn’t have a good sense of, personally, was how disparate the change in employment was across the US. This post is just some documentation about the absolute size of the change in job distribution across the US. ...
... Again, I’m not claiming that this is some kind of revelation here. The movement of population, and hence jobs, from the Northeast/Midwest to the Sunbelt is well known. What I found interesting was putting some tangible numbers of the shift. The little counter-factual I’m doing here is not very rigorous; there is no particular reason to believe that the 1990 distribution is the “right” distribution of jobs to compare against. But the 1990 distribution does have the feature of being prior to NAFTA and prior to China’s accession to the WTO, both of which are at times cited as sources of manufacturing job losses in the upper Midwest and Northeast.
The scale of the relative job changes, though, indicates that more of the losses have to do with free trade within the US than free trade outside of the US. The areas with relative decline lost 13 million jobs compared to the 1990 distribution of jobs. In total the US shed 6 million manufacturing jobs from 1990 to 2015 (18 million to 12 million, roughly). So this relative decline cannot possibly be a function only of manufacturing and international trade in manufactured goods. There is just too much relative movement out of the declining counties to attribute to this. This is a sloppy way of thinking about how this would work counter-factually (I’m ignoring spillovers entirely), but if you magically added 6 million extra jobs to those counties in relative decline, they would still be in relative decline compared to the Sunbelt in terms of jobs. They’d have 84.4 million jobs (as opposed to 78.4 million), but you’d expect them to have 95.6 million based on the 1990 distribution, so they would still be 11.2 million jobs off the pace.
The breadth of relative loss, though, seems striking, and is the one thing I did not appreciate prior to looking at this data. 909 counties lost jobs in absolute terms, which is 29% of all counties. Another 1,279 counties, 41% of all counties, gained jobs in absolute terms buy lost in relative terms. 944 counties, 30%, gained in relative terms. Just as many counties gained in relative terms as lost in absolute terms. The winning locations - Houston, Dallas, Atlanta, Miami, Phoenix, Denver, Vegas - won big, but the losing was spread across a wide area.
More jobs in 2015 are still located in places in relative decline (78.4 million) than are in places in relative ascent (70.5 million). Of those 78.4 million, 18 million (or about 12% of jobs) are in counties that experienced absolute job losses over the last 25 years. Most jobs are still in places that look to be losing out to Sunbelt cities over time. To the extent that your local economy plays a role in forming your opinions, this seems relevant, although I am going to stop now before I try to do any amateur political science or sociology.
Posted by Mark Thoma on Wednesday, November 30, 2016 at 01:53 PM in Economics, Unemployment |
I have a new article at MoneyWatch:
Infrastructure, jobs and wages: It's not so simple: Whether Donald Trump implements a major infrastructure rebuilding program remains to be seen, but he has certainly created the expectation that it could happen. The U.S. surely needs more infrastructure spending, and not just on new projects -- updating of existing systems is also needed.
Discussions about increasing outlays on infrastructure frequently include claims about the positive impact these programs would have on employment and wages, often referring to the fiscal policy “multiplier.” For example, it’s often claimed that government spending on infrastructure has a multiplier between 1.5 and 2.
Does this mean we should expect a significant increase in employment and income if the government undertakes major new investment in the nation’s infrastructure? Let’s take a closer look. ...
Posted by Mark Thoma on Wednesday, November 30, 2016 at 10:20 AM in Economics, Fiscal Policy, MoneyWatch |
Gerald E. Scorse:
One tax policy Americans yugely favor, The Hill: Nobody likes taxes, but roughly nine out of 10 Americans want income from investments to be taxed at least as much as other income. Republican leaders, tone-deaf,... close their eyes to a reform enacted under President Ronald Reagan: equal taxes on capital gains, dividends, and ordinary income such as wages. It’s one policy the country would love to have back, yugely. ...
The landslide national preference for at least equal taxes on investments—for tax fairness, not tax breaks—meshes perfectly with the populist belief that the system is rigged in favor of the rich. ... According to an analysis by the non-partisan Tax Policy Center, the top 1 percent of Americans receives over 62 percent of the benefits from lower rates on capital gains, dividends and related tax preferences; for the top 10 percent, the total benefit share is just short of 80 percent.
That’s more than alright with Republicans, whose tax plans will likely drive those percentages even higher—in exactly the opposite direction of the reform ushered in a generation ago by President Reagan. He took Main Street’s side on taxing Wall Street gains, but the GOP likes to pretend it never happened. ...
Donald Trump rode the populist tide all the way to the White House. Let’s see if President Trump listens to the populist yearning—the yuge populist yearning—for equal taxes on income from wealth and income from work.
Posted by Mark Thoma on Wednesday, November 30, 2016 at 10:20 AM in Economics, Income Distribution, Politics, Taxes |
Posted by Mark Thoma on Wednesday, November 30, 2016 at 12:06 AM in Economics, Links |
Federal Reserve Governor Jerome Powell (for a more optimistic take on the "new normal," see Is Our Economic Future Behind Us? by Joel Mokyr):
Recent Economic Developments and Longer-Run Challenges: ...Longer-Run Challenges Productivity and Growth
Let's turn to longer-run challenges, and start by asking why growth has been so slow, and how fast we are likely to grow going forward. This next slide shows the five-year trailing average annual real GDP growth rate (figure 8). By this measure, growth averaged about 3.2 percent annually through the 1970s, the 1980s, and the 1990s. But growth began to decline after 2000 and then nose-dived with the onset of the Global Financial Crisis in 2007 and the slow expansion that followed. Since the financial crisis ended in 2009, forecasters have gradually reduced their estimates of long-run trend growth from about 3 percent to about 2 percent--a seemingly small difference that would make a huge difference in living standards over time.3
How much of this decline is just a particularly bad business cycle, and how much represents a long-run downshift? To get at that question, let's take a deeper look at the growth slowdown. We can think of economic growth as coming from two sources: more hours worked (labor supply) or higher output per hour (productivity). Hours worked mainly depends on growth in the labor force, which has been slowing since the mid-2000s as the baby-boom generation ages. As you can see, the labor force is now growing at only about 0.5 percent per year (figure 9). Another way to see this is through the sustained increase in the ratio of people over 65 to those who are in their prime working years (figure 10). This long-expected demographic fact has now arrived, and it has challenging implications for our potential growth and also for our fiscal policy.4
The unexpected part of the growth slowdown reflects weak productivity growth rather than lower labor supply. Labor productivity has increased only 1/2 percent per year since 2010--the smallest five-year rate of increase since World War II and about one-fourth of the average postwar rate (figure 11). The slowdown in productivity has been worldwide and is evident even in countries that were little affected by the crisis (figure 12). Given the global nature of the phenomenon, it is unlikely that U.S.-specific factors are mainly responsible.
A portion of the productivity slowdown is undoubtedly due to low levels of investment by businesses. The financial crisis and the Great Recession left firms with excess capacity, reducing incentives to invest. If businesses expect slower growth to continue, that will also hold down investment.
The other important factor is the decline in what economists call total factor productivity, or TFP, which is the part of productivity that is not explained by capital investment or increases in the skills of the labor force. TFP is thought to be mainly a function of technological innovation and efficiency gains.
There is no consensus about the future direction of productivity.5 The pessimists argue that the big paradigm-changing innovations, such as electrification or the advent of computers, are behind us. If that is so, then our standard of living will increase more slowly going forward. The optimists think that this slowdown is only a passing phase and that the age of robots and machine learning will transform our economy in coming decades. Still others argue that we are currently underestimating productivity and output because of the real difficulties we face in measuring GDP in a modern economy. For example, how do we measure the value-added of free digital services like Facebook or Twitter?6
The future is, as always, uncertain. But I would sum up the growth discussion as follows. Growth in the labor force has slowed, and we can estimate it with reasonable confidence to be only about 0.5 percent. Growth in productivity is both more important and much harder to predict. Productivity varies significantly over time, as figure 11 showed. If productivity growth returns to, say, 1.5 percent, then the U.S. economy could grow at about 2.0 percent over the long term. Actual growth may turn out to be weaker or stronger, and the choices we make as a society will have something to say about that.
Why Are Long-Term Interest Rates So Low?
Let's turn to the related question of why long-term interest rates are so extraordinarily low in advanced economies around the world. The yield on our own benchmark 10-year U.S. Treasury security has increased lately, but at 2.3 percent it is still far below what was normal before the financial crisis. In fact, this next chart shows that, as growth and inflation have fallen, longer term interest rates have fallen as well over the past 35 years (figure 13).
So why are long-term interest rates so low? Many of you will no doubt be thinking, "They are low because you people at the Fed set them low!" While there is an element of truth there, that is not the whole story. The FOMC has considerable control over short-term interest rates. We have much less influence over long-term rates, which are set in the marketplace. Long-term interest rates represent the price that balances the supply of saving by lenders and demand for funds by borrowers, such as businesses needing to fund their capital expenditures. Lenders expect to receive a real return and to be compensated for inflation and for the risk of nonpayment. Meanwhile, borrowers adjust their demand for funds based on their changing assessment of the risks and expected returns of their investment projects. When desired saving rises or investment demand falls, then long-term interest rates will decline. Today's very low level of long-term rates suggests that both of these factors are at play.
Both expectations of slower growth and the aging of our population are having significant effects on desired saving and investment and are thus important causes of lower interest rates. If the economy is expanding more slowly, then the level of investment needed to meet demand will be lower. The lower path of growth reduces future income prospects of households, and they will tend to raise their saving. The pending retirement of baby boomers means higher saving, because people tend to save the most in the years just before their retirement. In addition, the lower rate of return on capital owing to lower productivity growth will lead to less investment and lower interest rates.
As with productivity, the factors behind the fall in U.S. interest rates include an important global component, as rates are low around the world. Indeed, although our rates are near historical lows, U.S. Treasury rates are among the highest among the major advanced economy sovereigns (figure 14).
Is This the New Normal?
What can we do to prevent low growth, low inflation, and low interest rates from becoming the new normal? We need to focus on ways to increase our long-term growth and spread that prosperity as broadly as possible. I hasten to add that these policies are, for the most part, outside the purview of the Federal Reserve. We need policies that support productivity growth, business hiring and investment, labor force participation, and the development of skills. We need effective fiscal and regulatory policies that inspire public confidence. Increased spending on public infrastructure may raise private-sector productivity over time, particularly with the growth of the stock of public infrastructure near an all-time low.7 Greater support for public and private research and development, and policies that improve product and labor market dynamism may also be fruitful.8 Monetary policy can contribute by supporting a strong and durable expansion in a context of price stability.
The low interest rate environment presents special challenges for monetary policy. In setting our target for the federal funds rate, a good place to start is to identify the rate that would prevail if the economy were at 2 percent inflation and full employment--the so-called neutral rate. "Neutral" in this context means that the rate is neither contractionary nor expansionary. If the fed funds rate is lower than the neutral rate, then policy is stimulative or accommodative, which will tend to raise growth and inflation. If the fed funds rate is higher than the neutral rate, then policy is tight and will tend to slow growth and reduce inflation.
But we can only estimate the neutral rate, and those estimates are subject to substantial uncertainty. Before the crisis, the long-run neutral rate was generally thought to be roughly stable at around 4.25 percent. Since the crisis, estimates have steadily declined, and the median estimate by FOMC participants stood at 2.9 percent in September. Many analysts believe that the neutral rate is even lower than that today and will only return to its long-run value over time.9 The low level of the neutral interest rate has several important implications. First, today's low rates are not as stimulative as they seem--consider that, despite historically low rates, inflation has run consistently below target and housing construction remains far below pre-crisis levels. Second, with rates so low, central banks are not well positioned to counteract a renewed bout of weakness. Third, persistently low interest rates can raise financial stability concerns. A long period of very low interest rates could lead to excessive risk-taking and, over time, to unsustainably high asset prices and credit growth. These are risks that we monitor carefully. Higher growth would increase the neutral rate and help address these issues.
Turning to the outlook for monetary policy, incoming data show an economy that is growing at a healthy pace, with solid payroll job gains and inflation gradually moving up to 2 percent. In my view, the case for an increase in the federal funds rate has clearly strengthened since our previous meeting earlier this month. Of course, the path of rates will depend on the path of the economy. With inflation below target, relatively slow growth, and some slack remaining in the economy, the Committee has been patient about raising rates. That patience has paid dividends. But moving too slowly could eventually mean that the Committee would have to tighten policy abruptly to avoid overshooting our goals.
To wrap up, since the end of the Great Recession in 2009, our economy has recovered slowly but steadily. Today, we are reasonably close to achieving full employment and our 2 percent inflation objective. But we face real challenges over the medium and longer terms. Our aging population will mean slower growth, all else held equal. If living standards are to continue to rise, we need policies that will support productivity and allow our dynamic economy to generate widespread gains in prosperity.
Posted by Mark Thoma on Tuesday, November 29, 2016 at 10:29 AM in Economics, Fed Speeches, Monetary Policy |
Jayme Wiebold at Regblog:
Currency Authority Proposes Ban on Bank Investments in Commercial Metals: In addition to typical banking activities such as issuing home loans and administering savings accounts, should your neighborhood bank be able to buy and trade metals like copper and gold? Presently, financial institutions can legally participate in commodities markets—which include trading in these precious metals—creating a state of affairs that some regulators and politicians say may increase commodities prices for consumers and create financial instability. ...
The Office of the Comptroller of the Currency, which regulates and supervises national banks and federal savings associations, recently ... proposed [a] rule that would prohibit banking institutions from buying or selling metals including copper, aluminum, and gold. ...
Designating dealing in certain commercial metals as an out-of-bounds activity for commercial banks marks a reversal of position for the Currency Comptroller. It previously issued an interpretive letter stating that national banks could buy and sell copper—an industrial metal—because such trading was functionally equivalent to trading in precious metals like gold—an activity considered within the “business of banking.”
As indicated by the proposed rule, the Comptroller no longer believes that investing in copper markets is principally the same as dealing with coins made from precious metal or other types of gold. ...
The Comptroller’s proposed rule comes on the heels of a report it co-authored with the Federal Reserve and Federal Deposit Insurance Corporation, which contains several recommendations to ensure the separation of traditional banking activities from more commercial activities. The report specifically states that the Comptroller would publish a proposed rule about limits on trading copper.
In the report, the Federal Reserve also recommends several other reforms that aim to “help ensure the separation of banking and commerce.” It proposes repealing a rule that allows bank holding companies to participate in commodities activities similar to those addressed by the Comptroller’s proposed rule for national banks and recommends strengthening standards for other commodity-related activities like trading derivatives. The report’s authors also recommend repealing authority for financial holding companies to participate in merchant banking activities like buying a stake of ownership in a company instead of providing a traditional loan.
The Comptroller’s proposed rule is part of a growing trend of regulatory and political pressure to separate traditional banking activity from commercial activity. ...
Posted by Mark Thoma on Tuesday, November 29, 2016 at 10:13 AM in Economics, Financial System, Regulation |
Antonio Fatás (I have an article that will post tomorrow that makes a similar point about multipliers over the business cycle):
The OECD procyclical revision of fiscal policy multipliers: The OECD just published its November 2016 Global Economic Outlook. Their projections suggest an acceleration of global growth rates in particular in countries with plans for a fiscal expansion. In the case of the US, and based on the "plans" of the Trump administration, the OECD projects an acceleration of GDP growth to 3% in 2018. ...
But I am puzzled that they ... are upgrading their estimates of fiscal policy multipliers (in particular for tax cuts) at the wrong time in the business cycle, when the economy must be closer to full employment.
Here is the history: back in 2011 many advanced economies switched to contractionary fiscal policy at a time where their growth rates were low and unemployment rates remained very high. During those years the OECD seemed be ok with fiscal consolidation given the high government debt levels (consolidation was necessary). They understood that there were some negative effects on demand but as they assumed multipliers or about 0.5 (in the middle of a crisis with very high unemployment rates!) the cost did not seem that high.
Today, in an economy with unemployment rate below 5%, and wages and inflation slowly returning to normal values and a central bank ready to raise interest rate, the OECD turns around and decides to change the fiscal policy multipliers to something close to 1 even if the announced fiscal measures consists mostly of tax cuts to the wealthier households with low propensity to consume.
This is what I would call a procyclical revision of fiscal policy multipliers. Encourage consolidations in the middle of a crisis and expansion in good times. Not quite what optimal fiscal policy should look like.
And, of course, the media (including the Financial Times) reported on the OECD study as a validation of the new US administration policies.
And I leave for another (longer) post the absence of any serious discussion of the risks associated to a Trump presidency. This is coming from an organization that has been obsessed with the risks of inflation and excessive asset appreciation during the crisis.
Posted by Mark Thoma on Tuesday, November 29, 2016 at 09:51 AM in Economics, Fiscal Policy |
Posted by Mark Thoma on Tuesday, November 29, 2016 at 12:06 AM in Economics, Links |
From the NBER:
Immigrants and Firms' Outcomes: Evidence from France, by Cristina Mitaritonna, Gianluca Orefice, and Giovanni Peri, NBER Working Paper No. 22852 Issued in November 2016: In this paper we analyze the impact of an increase in the local supply of immigrants on firms’ outcomes, allowing for heterogeneous effects across firms according to their initial productivity. Using micro-level data on French manufacturing firms spanning the period 1995-2005, we show that a supply-driven increase in the share of foreign-born workers in a French department (a small geographic area) increased the total factor productivity of firms in that department. Immigrants were prevalently highly educated and this effect is consistent with a positive complementarity and spillover effects from their skills. We also find this effect to be significantly stronger for firms with low initial productivity and small size. The positive productivity effect of immigrants was also associated with faster growth of capital, larger exports and higher wages for natives. Highly skilled natives were pushed towards firms that did not hire too many immigrants spreading positive productivity effects to those firms too. Because of stronger effects on smaller and initially less productive firms, the aggregate effects of immigrants at the department level on average productivity and employment was small.
Posted by Mark Thoma on Monday, November 28, 2016 at 12:53 PM in Academic Papers, Economics, Immigration |
"So how bad will the effects of Trump-era corruption be?":
Why Corruption Matters, by Paul Krugman, NY Times: Remember all the news reports suggesting, without evidence, that the Clinton Foundation’s fund-raising created conflicts of interest? Well, now the man who benefited from all that innuendo is ... giving us an object lesson in what real conflicts of interest look like as authoritarian governments around the world shower favors on his business empire. ...
And his early appointments suggest that he won’t be the only player using political power to build personal wealth. ... America has just entered an era of unprecedented corruption at the top. ...
Normally, policy reflects some combination of practicality — what works? — and ideology — what fits my preconceptions? And our usual complaint is that ideology all too often overrules the evidence.
But now we’re going to see a third factor powerfully at work: What policies can officials, very much including the man at the top, personally monetize? And the effect will be disastrous. ...
But what’s truly scary is the potential impact of corruption on foreign policy. Again, foreign governments are already trying to buy influence by adding to Mr. Trump’s personal wealth, and he is welcoming their efforts.
In case you’re wondering, yes, this is illegal, in fact unconstitutional, a clear violation of the emoluments clause. But who’s going to enforce the Constitution? Republicans in Congress? Don’t be silly.
Destruction of democratic norms aside, however, think about the tilt this de facto bribery will give to U.S. policy. What kind of regime can buy influence by enriching the president and his friends? The answer is, only a government that doesn’t adhere to the rule of law.
Think about it: Could Britain or Canada curry favor with the incoming administration by waiving regulations to promote Trump golf courses or directing business to Trump hotels? No — those nations have free presses, independent courts, and rules designed to prevent exactly that kind of improper behavior. On the other hand, someplace like Vladimir Putin’s Russia can easily funnel vast sums to the man at the top in return for, say, the withdrawal of security guarantees for the Baltic States.
One would like to hope that national security officials are explaining to Mr. Trump just how destructive it would be to let business considerations drive foreign policy. But reports say that Mr. Trump has barely met with those officials, refusing to get the briefings that are normal for a president-elect.
So how bad will the effects of Trump-era corruption be? The best guess is, worse than you can possibly imagine.
Posted by Mark Thoma on Monday, November 28, 2016 at 09:57 AM in Economics, Politics |
Posted by Mark Thoma on Monday, November 28, 2016 at 12:06 AM in Economics, Links |
A secular religion that lasted one century: The death of Fidel Castro made me think again of the idea that I had for a while about our lack of understanding of what is the place of communism in global history of mankind. We have thousands of historical volumes on communism, and similarly thousands of volumes of apologia and critiques of Communism, but we have no conception of what its position in global history was—e.g. whether colonialism would have ended without communism, whether communism kept capitalism less unequal, whether it promoted social mobility, or made transition from agrarian to industrial societies in Asia much faster etc. As Diego Castaneda mentioned in today’s tweet, we probably will not be able to assess communism for a while, probably until the passions that it arose have died down.
The death of Fidel Castro is a useful marker because he was the last canonic communist revolutionary: the leader of a revolution that overthrew the previous order of things, nationalized property, and ruled through a single party-state. We can pretty confidently state that no communist revolutionary in that canonic mould that was so common in the 20th century, from Lenin, Trotsky, Stalin, Mao, Liu Shaoqi, Tito and Fidel will arise in this century. The ideas of nationalized property and central planning are dead. In a very symmetrical way, the arrival of Utopia to power that began in glacial Petrograd in November 1917 ended with the death of its last actual, physical, proponent, in a far-away Caribbean nation, in November 2016.
Let me go over some grossly simplified ideas that, perhaps one day, I will expound more fully in a book format. ...
Posted by Mark Thoma on Sunday, November 27, 2016 at 10:56 AM in Economics |
...Earnings mobility for children from the very broad middle—parents whose income ranges from the bottom 10 percent all the way to the cusp of the top 10 percent—is not tied strongly to family income. These children tend to move up or down the income distribution without regard to their starting point in life. This may be one element of insecurity among the middle class: in spite of their best efforts, their children may be as likely to lose ground and fall in the income distribution as they are to rise.
The situation is very different for children raised by top-earning parents...
Much more here.
Posted by Mark Thoma on Sunday, November 27, 2016 at 10:48 AM in Economics, Income Distribution |
On Krugman And The Working Class, by Tim Duy: Paul Krugman on the election:
The only way to make sense of what happened is to see the vote as an expression of, well, identity politics — some combination of white resentment at what voters see as favoritism toward nonwhites (even though it isn’t) and anger on the part of the less educated at liberal elites whom they imagine look down on them.
To be honest, I don’t fully understand this resentment.
To not understand this resentment is to pretend this never happened:
“You know, to just be grossly generalistic, you could put half of Trump’s supporters into what I call the basket of deplorables. Right?” she said to applause and laughter. “The racist, sexist, homophobic, xenophobic, Islamaphobic — you name it. And unfortunately there are people like that. And he has lifted them up.”
Clinton effectively wrote off nearly half the country at that point. Where was the liberal outrage at this gross generalization? Nowhere – because Clinton’s supporters believed this to be largely true. The white working class had already been written off. Hence the applause and laughter.
In hindsight, I wonder if the election was probably over right then and there.
In particular, I don’t know why imagined liberal disdain inspires so much more anger than the very real disdain of conservatives who see the poverty of places like eastern Kentucky as a sign of the personal and moral inadequacy of their residents.
But they do know the disdain of conservatives. Clinton followed right along the path of former Presidential candidate Mitt Romney:
It was the characterization of “half of Trump’s supporters” on Friday that struck some Republicans as similar to the damning “47 percent” remark made by their own nominee, Mitt Romney, in his 2012 campaign against President Obama. At a private fund-raiser Mr. Romney, who Democrats had already sought to portray as a cold corporate titan, said 47 percent of voters were “dependent upon government, who believe that they are victims” and who “pay no income tax.”
There was, of course, liberal outrage at Romney.
Krugman forgets that Trump was not the choice of mainstream Republicans. Trump’s base overthrew the mainstream – they felt the disdain of mainstream Republicans just as they felt the disdain of the Democrats, and returned the favor.
I doubt very much that these voters are looking for the left’s paternalistic attitude:
One thing is clear, however: Democrats have to figure out why the white working class just voted overwhelmingly against its own economic interests, not pretend that a bit more populism would solve the problem.
That Krugman can wonder at the source of the disdain felt toward the liberal elite while lecturing Trump’s voters on their own self-interest is really quite remarkable.
I don’t know that the white working class voted against their economic interest. I don’t pretend that I can define their preferences with such accuracy. Maybe they did. But the working class may reasonably believe that neither party offers them an economic solution. The Republicans are the party of the rich; the Democrats are the party of the rich and poor. Those in between have no place.
That sense of hopelessness would be justifiably acute in rural areas. Economic development is hard work in the best of circumstances; across the sparsely populated vastness of rural America, it is virtually impossible. The victories are – and will continue to be – few and far between.
The tough reality of economic development is that it will always be easier to move people to jobs than the jobs to people. Which is akin to telling many, many voters the only way possible way they can live an even modest lifestyle is to abandon their roots for the uniformity of urban life. They must sacrifice their identities to survive. You will be assimilated. Resistance is futile. Follow the Brooklyn hipsters to the Promised Land.
This is a bitter pill for many to swallow. To just sit back and accept the collapse of your communities. And I suspect the white working class resents being told to swallow that pill when the Democrats eagerly celebrate the identities of everyone else.
And it is an especially difficult pill given that the decline was forced upon the white working class; it was not a choice of their own making. The tsunami of globalization washed over them with nary a concern on the part of the political class. To be sure, in many ways it was inevitable, just as was the march of technology that had been eating away at manufacturing jobs for decades. But the damage was intensified by trade deals that lacked sufficient redistributive policies. And to add insult to injury, the speed of decline was hastened further by the refusal of the US Treasury to express concern about currency manipulation twenty years ago. Then came the housing crash and the ensuing humiliation of the foreclosure crisis.
The subsequent impact on the white working class – the poverty, the opioid epidemic, the rising death rates – are well documented. An environment that serves as fertile breeding ground for resentment, hatred and racism, a desire to strike back at someone, anyone, simply to feel some control, to be recognized. Hence Trump.
Is there a way forward for Democrats? One strategy is to do nothing and hope that the fast growing Sunbelt shifts the electoral map in their favor. Not entirely unreasonable. Maybe even the white working class turns on Trump when it becomes evident that he has no better plan for the white working class than anyone else (then again maybe he skates by with a few small but high profile wins). But who do they turn to next?
And how long will a "hold the course" strategy take? One more election cycle? Or ten? How much damage to our institutions will occur as a result? Can the Democrats afford the time? Or should they find a new standard bearer that can win the Sunbelt states and bridge the divide with the white working class? I tend to think the latter strategy has the higher likelihood of success. But to pursue such a strategy, the liberal elite might find it necessary to learn some humility. Lecturing the white working class on their own self-interest hasn’t worked in the past, and I don’t see how it will work in the future.
Posted by Mark Thoma on Sunday, November 27, 2016 at 10:13 AM in Economics, Politics |
Posted by Mark Thoma on Sunday, November 27, 2016 at 12:06 AM in Economics, Links |
Posted by Mark Thoma on Saturday, November 26, 2016 at 12:06 AM in Economics, Links |
John Lewis at the Bank of England Bank Underground:
America is not always like the rest of the world: Macroeconomists like to use US data to test and develop theories- the coverage is generally very good, and the world’s largest economy is an obvious benchmark. But what if the US happens to be very atypical in some respects? For example the evolution of the income distribution…
Using the dataset collated by Nolan et al and OECD data, I calculated the growth in real median incomes vs real GDP per capita from about 1980 to 2010. If the two had grown at the same rate, the bar would be 100%- In fact, median post-tax US income only grew by about a quarter of the pace that real GDP per head did- quite unlike other countries. Some of this might reflect measurement, reporting or data compilation issues, since GDP figures are compiled from different raw data to the household income measures. Indeed the difference looks less stark when you use growth in the mean income as the yardstick (the dots).
But when you delve deeper into household incomes, the US still looks quite different. As before, the darker dots show the evolution of the median income relative to the mean. The lighter dots show what happened at other percentiles. We see that the bottom half of the distribution had much slower relative growth in the US than elsewhere.
So when thinking about causes or consequences of changes to the US income distribution, we should remember that the US may be atypical and these insights may not carry over to other countries.
Posted by Mark Thoma on Friday, November 25, 2016 at 10:20 AM in Economics |
What should Democrats do to win the votes of the white working class?:
The Populism Perplex, by Paul Krugman, NY Times: ...what put Donald Trump in striking distance was overwhelming support from whites without college degrees. So what can Democrats do to win back at least some of those voters?
Recently Bernie Sanders offered an answer: Democrats should “go beyond identity politics.” What’s needed, he said, are candidates who understand that working-class incomes are down, who will “stand up to Wall Street, to the insurance companies, to the drug companies, to the fossil fuel industry.”
But is there any reason to believe that this would work? Let me offer some reasons for doubt. ...
Any claim that changed policy positions will win elections assumes that the public will hear about those positions. How is that supposed to happen, when most of the news media simply refuse to cover policy substance? ...
Beyond this, the fact is that Democrats have already been pursuing policies that are much better for the white working class... Yet this has brought no political reward. ...
Now, you might say that health insurance is one thing, but what people want are good jobs. Eastern Kentucky used to be coal country, and Mr. Trump, unlike Mrs. Clinton, promised to bring the coal jobs back. ... But it’s a nonsensical promise..., there may be a backlash when the coal and manufacturing jobs don’t come back, while health insurance disappears.
But maybe not. Maybe a Trump administration can keep its supporters on board, not by improving their lives, but by feeding their sense of resentment.
For let’s be serious here: You can’t explain the votes of places like Clay County as a response to disagreements about trade policy. The only way to make sense of what happened is to see the vote as an expression of, well, identity politics — some combination of white resentment at what voters see as favoritism toward nonwhites (even though it isn’t) and anger ... at liberal elites whom they imagine look down on them.
To be honest, I don’t fully understand this resentment. In particular, I don’t know why imagined liberal disdain inspires so much more anger than the very real disdain of conservatives who see the poverty of places like eastern Kentucky as a sign of ... personal and moral inadequacy...
One thing is clear, however: Democrats have to figure out why the white working class just voted overwhelmingly against its own economic interests, not pretend that a bit more populism would solve the problem.
Posted by Mark Thoma on Friday, November 25, 2016 at 09:32 AM in Economics, Politics |
Posted by Mark Thoma on Friday, November 25, 2016 at 12:06 AM in Economics, Links |
Me, at CBS MoneyWatch:
America's working age population is finally growing again: For most of the last two decades, the growth rate of America’s workforce has been declining because baby boomers have been retiring at a faster pace than younger workers are entering the labor force. However, the potential workforce recently began growing again. What impact will this have on the economy? ...
Posted by Mark Thoma on Thursday, November 24, 2016 at 09:27 AM in Economics, MoneyWatch |
Populists as Snake Oil Sellers: Simon wonders why disenchantment with globalization has caused people to turn to what he calls snake oil salesmen. That phrase is apt, because snake oil salesmen thrived for decades. And some of the reasons they did so might be relevant today.
My source here is a wonderful paper (pdf) by Werner Troesken which describes the massive growth in patent medicines in 19th century America. This suggests to me four points of similarity between snake oil salesmen and populist politicians....
Posted by Mark Thoma on Thursday, November 24, 2016 at 08:14 AM in Economics, Politics |
Posted by Mark Thoma on Thursday, November 24, 2016 at 08:14 AM
Posted by Mark Thoma on Thursday, November 24, 2016 at 12:06 AM in Economics, Links |
Posted by Mark Thoma on Wednesday, November 23, 2016 at 12:06 AM in Economics, Links |
Populism and the media: This could be the subtitle of the talk I will be giving later today. I will have more to say in later posts, plus a link to the full text..., but I thought I would make this important point here about why I keep going on about the media. In thinking about Brexit and Trump, talking about the media is not in competition with talking about disenchantment over globalisation and de-industrialisation, but a complement to it. I don’t blame the media for this disenchantment, which is real enough, but for the fact that it is leading people to make choices which are clearly bad for society as a whole, and in many cases will actually make them worse off. They are choices which in an important sense are known to be wrong.
Many will say on reading that last sentence that this is just your opinion, but in a way that illustrates the basic problem. Take Brexit. We know that erecting trade barriers is harmful: the only question is whether in this case it will be pretty harmful or very harmful. Some of this is already in the process of happening, as the depreciation reduces real wages. We also know that erecting barriers against your neighbours is extremely unlikely to be offset in any significant way by doing deals with countries further away. This is knowledge derived largely from empirical evidence and uncontroversial theory and agreed almost unanimously by economists.
The moment you reduce it to just another opinion, to be balanced by opposing opinions, as happened in the broadcast media during the Brexit campaign, you allow that knowledge to be ignored when critical choices are made. ...
Posted by Mark Thoma on Tuesday, November 22, 2016 at 10:05 AM in Economics, Press |
Ellyn Terry at the Atlanta Fed's macroblog:
Outside Looking In: Why Has Labor Force Participation Increased?: The labor force participation rate (LFPR) is an estimate of the share of the population actively engaged in the labor market. The LFPR has increased about 30 basis points over the past year (from the third quarter of 2015 to the third quarter of 2016)—a modest reversal in the precipitous decline in the LFPR that began in 2008. What accounts for this stabilization and—given the demographic and cyclical forces in play—how much longer can it last?
The following is perspective through the lens of the reasons people give for not participating in the labor force. Perhaps the component most responsive to changes in labor market conditions is what I will refer to as the "shadow labor force," which is made up of people who are not in the official labor force and are not actively seeking employment, but who say they want a job. (This group includes people discouraged over job prospects.) During tough times, the share of the population in the shadows rises, and during good times it falls. In the third quarter of 2016, about 2.3 percent of the population fell into this category—down from a high of 2.8 percent but still a bit above prerecession levels (see the chart).
But focusing solely on the decline in the shadow labor force to explain the recent reversal in the LFPR would be a mistake. In fact, high unemployment in the aftermath of the Great Recession was accompanied not only by a rise in the share of the shadow labor force, but also by an increase in the share of the population who said they didn't currently want a job—because of either a health issue or engagement in some other activity. Although some of this likely reflects trends already at work before the recession, some of it was also probably a cyclical response to weak job opportunities.
The chart below shows how these various factors cumulatively contribute to the decline in the LFPR between the third quarter of 2007 and the third quarter of 2016. It shows that, in addition to a larger share in the shadow labor force, the reasons for the decline between 2007 and 2016 also stemmed from a greater age-adjusted share who were too sick or disabled to work (purple) or in school instead of working (light blue). Interestingly, the share out of the labor force but wanting a job (dark blue) actually exerted the smallest downward force on LFPR of all of these three reasons. The green section represents the impact of the baby boomers: an increasing share of the population of retirement age. Partly offsetting this shift in the age distribution was a decrease in the propensity of these workers to actually retire (orange).
The next chart shows that almost all the nonparticipation factors that had put downward pressure on the LFPR since 2007 have reversed course and contributed positively to an increase in the LFPR during the past year. In particular, there was a decline in the share of the population who cited nonparticipation because of poor health or enrollment in school or were otherwise wanting but not looking for work. This decline in the schooling and illness nonparticipation rates is particularly noteworthy because it stands in contrast to the increasing trends that were in place prior to the recession (to read more, visit our LFP Dynamics page).
The only significant factor continuing to depress the LFPR during the past year is the impact of an increasing share of the population in age groups with relatively low labor force attachment. This factor brings me to the second question I posed earlier in this post: What will this picture look like going forward? Unfortunately, I think the answer is that it's very hard to say.
Other things equal, it seems reasonable to think that the nonparticipation rates attributable to age-adjusted schooling and poor health will eventually revert to the upward trends occurring before the recession, a reversion that will push down the LFPR. Probably the biggest wild card for the future is what will happen with decisions concerning retirement (and hence older individuals' LFPR). The trend toward retiring later in life has risen and fallen a couple of times during the past two decades. The positive role that later retirement has played in mitigating the overall decline in the LFPR in recent years—coupled with the steadily increasing share of the population approaching traditional retirement age—suggests that deferred retirement will be an especially important factor to keep an eye on. This point is nicely illustrated in this piece by our colleagues at the Kansas City Fed, who look at the role of later retirement in reducing the rate of outflow of people from the labor force.
Posted by Mark Thoma on Tuesday, November 22, 2016 at 09:48 AM in Economics, Unemployment |
Posted by Mark Thoma on Tuesday, November 22, 2016 at 12:06 AM in Economics, Links |
What Size Fiscal Deficits for the United States: The US government can borrow at interest rates very close to zero. Surely the long-term benefits of public investment are greater than zero. Isn’t it obvious that the case for more government borrowing is overwhelming...?
The answer? Not so fast.
True, US government borrowing costs are very low. ...
True, if the economy were operating far below potential, the case for large deficits would then be a very strong one. Surely public investment should be increased and financed by debt under such circumstances. ...
So is it an open and shut case? No.
The US economy is operating close to its potential..., we are close to full employment. ...
This implies that if US policymakers wanted to avoid an overheating economy, greater public spending would have to be offset by a reduction in some component of private spending (which, presumably, would be achieved by an increase in interest rates by the Federal Reserve). To the extent that the reduction came from private investment..., private capital that would be crowded out. Given the poor state of public capital in the United States, the case is still there for an increase in public spending, and a corresponding higher deficit, but it is clearly weaker.
Is there a case for doing more? The answer is a qualified yes.
There is a case for temporarily overheating the US economy. The reason goes under the ugly name of “hysteresis”..., the notion that the long period of low growth and high unemployment has led to some permanent damage, which can be partly undone by a period of overheating of the economy. The most obvious case here is labor force participation... A period of very low unemployment may lead some of them to come back into the labor force. ...
What is the bottom line? There is no case ... for all-out fiscal deficits. But there is a case for a fiscal expansion, based on carefully targeted public investment. Two remarks are needed here. Maintenance of existing infrastructure..., which has been badly neglected, may be less glamorous and less politically attractive than brand-new projects, but it is where the government is likely to get the best bang for its buck. Public-private partnerships, which have been mentioned by the Trump program, may not be the right tool: By aiming at projects that can at least partly pay for themselves financially, they may generate the wrong kind of public investment. Maintenance and the most useful public projects may have high social returns, but they are likely to have low financial returns.
Posted by Mark Thoma on Monday, November 21, 2016 at 12:14 PM in Economics, Fiscal Policy |
I have a new column:
The Political Winds in Economics: In recent years, much has been written about how the economics profession is drifting to the left. For example, Noah Smith writes:
“…almost all of the most prominent economists in the public sphere -- Paul Krugman, Summers, Thomas Piketty, and the rest -- lean to the left, and lean significantly more to the left than in years past. Conservative economists are largely hiding out in academia…”
But like Noah, I am skeptical that this represents a permanent change. ...
Posted by Mark Thoma on Monday, November 21, 2016 at 10:21 AM in Economics, Politics |
Beware of Trumps bearing gifts:
Build He Won’t, by Paul Krugman, NY Times: ...is public investment an area in which progressives and the incoming Trump administration can find common ground? Some people, including Bernie Sanders, seem to think so.
But remember that we’re dealing with a president-elect whose business career is one long trail of broken promises and outright scams — someone who just paid $25 million to settle fraud charge... Given that history..., you should probably assume that it’s a scam until proven otherwise.
And we already know enough about his infrastructure plan to suggest, strongly, that it’s basically fraudulent...
The ... Trump team is ... calling for huge tax credits: billions of dollars in checks written to private companies that invest in approved projects, which they would end up owning. ...
There are three questions you should immediately ask.
First, why do it this way? Why not just have the government do the spending..., the eventual burden on taxpayers will be every bit as high if not higher.
Second, how is this scheme supposed to deal with infrastructure needs that can’t be turned into profit centers? Our top priorities should include things like repairing levees and cleaning up hazardous waste; where’s the revenue stream? Maybe the government can promise to pay fees in perpetuity..., but that makes it even clearer that we’re basically engaged in a gratuitous handout to select investors.
Third, what reason do we have to believe that this scheme will generate new investment, as opposed to repackaging things that would have happened anyway? For example, many cities will have to replace their water systems in the years ahead, one way or another; if that replacement takes place under the Trump scheme rather than through ordinary government investment, we haven’t built additional infrastructure, we’ve just privatized what would have been public assets — and the people acquiring those assets will have paid just 18 cents on the dollar, with taxpayers picking up the rest of the tab.
Again, all of this is unnecessary. If you want to build infrastructure, build infrastructure. It’s hard to see any reason for a roundabout, indirect method that would ... provide both the means and the motive for large-scale corruption ... unless the inevitable corruption is a feature, not a bug. ...
Cronyism and self-dealing are going to be the central theme of this administration... And people who value their own reputations should take care to avoid any kind of association with the scams ahead.
Posted by Mark Thoma on Monday, November 21, 2016 at 01:30 AM in Economics, Fiscal Policy, Infrastructure |
Posted by Mark Thoma on Monday, November 21, 2016 at 12:06 AM in Economics, Links |
This is from the Journal of Economic Perspectives (the link is open):
Game Theory in Economics and Beyond, by Larry Samuelson, Journal of Economic Perspectives vol. 30, no. 4, Fall 2016 (pp. 107-30): Abstract Within economics, game theory occupied a rather isolated niche in the 1960s and 1970s. It was pursued by people who were known specifically as game theorists and who did almost nothing but game theory, while other economists had little idea what game theory was. Game theory is now a standard tool in economics. Contributions to game theory are made by economists across the spectrum of fields and interests, and economists regularly combine work in game theory with work in other areas. Students learn the basic techniques of game theory in the first-year graduate theory core. Excitement over game theory in economics has given way to an easy familiarity. This essay first examines this transition, arguing that the initial excitement surrounding game theory has dissipated not because game theory has retreated from its initial bridgehead, but because it has extended its reach throughout economics. Next, it discusses some key challenges for game theory, including the continuing problem of dealing with multiple equilibria, the need to make game theory useful in applications, and the need to better integrate noncooperative and cooperative game theory. Finally it considers the current status and future prospects of game theory.
Posted by Mark Thoma on Sunday, November 20, 2016 at 12:50 PM in Academic Papers, Economics |
Infrastructure Build or Privatization Scam?: Trumpists are touting the idea of a big infrastructure build, and some Democrats are making conciliatory noises about working with the new regime on that front. But remember who you’re dealing with: if you invest anything with this guy, be it money or reputation, you are at great risk of being scammed. So, what do we know about the Trump infrastructure plan, such as it is?
Crucially, it’s not a plan to borrow $1 trillion and spend it on much-needed projects — which would be the straightforward, obvious thing to do. It is, instead, supposed to involve having private investors do the work both of raising money and building the projects — with the aid of a huge tax credit that gives them back 82 percent of the equity they put in. To compensate for the small sliver of additional equity and the interest on their borrowing, the private investors then have to somehow make profits on the assets they end up owning.
You should immediately ask three questions about all of this.
First, why involve private investors at all? ...
One answer might be that this way you avoid incurring additional public debt. But that’s just accounting confusion. ... The government’s future cash flow is no better..., and worse if it strikes a bad deal, say because the investors have political connections.
Second, how is this kind of scheme supposed to finance investment that doesn’t produce a revenue stream? Toll roads are not the main thing we need right now; what about sewage systems, making up for deferred maintenance, and so on? You could bring in private investors by guaranteeing them future government money... But this ... would simply be government borrowing through the back door — with much less transparency, and hence greater opportunities for giveaways to favored interests.
Third, how much of the investment thus financed would actually be investment that wouldn’t have taken place anyway? ... Suppose that there’s a planned tunnel, which is clearly going to be built... In that case we haven’t promoted investment at all, we’ve just in effect privatized a public asset — and given the buyers 82 percent of the purchase price in the form of a tax credit.
Again, all of these questions could be avoided by doing things the straightforward way: if you think we should build more infrastructure, then build more infrastructure, and never mind the complicated private equity/tax credits stuff. You could try to come up with some justification for the complexity of the scheme, but one simple answer would be that it’s not about investment, it’s about ripping off taxpayers. Is that implausible, given who we’re talking about?
Posted by Mark Thoma on Saturday, November 19, 2016 at 10:27 AM in Economics, Fiscal Policy |
Posted by Mark Thoma on Saturday, November 19, 2016 at 12:06 AM in Economics, Links |