Wednesday, August 16, 2017

Links for 08-16-17

    Posted by on Wednesday, August 16, 2017 at 10:14 AM in Economics, Links | Permalink  Comments (202) 

    Tuesday, August 15, 2017

    Fed Watch: Retail Sales, Dudley, Wages

    Tim Duy:

    Retail Sales, Dudley, Wages, by Tim Duy: Some quick thoughts for the day.
    First, New York Federal Reserve President William Dudley gave an extended interview to the Associate Press. Definitely worth the time to read. Some highlights:
    1.) Dudley never put a Trump bump in his forecast, so his forecast is essentially unchanged:
     I think we’re still on the same trajectory we’ve been on for several years. Above trend growth, gradually tightening labor market, inflation -- somewhat below our objective -- but we do expect as the labor market continues to tighten, to see firmer wage gains and that will ultimately filter into inflation moving up towards our 2% objective.
    2.) He expects inflation numbers to improve. He wants us to ignore the year-over-year numbers (of course, recent month-over-month numbers are not great):
    Well, the reason why inflation won’t get up to 2% very quickly on a year-over-year basis is because we’ve had these very low inflation readings over the last 4 or 5 months. So it’s going to take time for those to sort of drop out of the year-over-year calculation.
    3.) Assuming the forecast continues as he expects, he believes the Fed will hike rates again: 
    I think it depends on how the economic forecast evolves. If it evolves in line with my expectations, I would expect -- I would be in favor of doing another rate hike later this year.
    4.) Bubble? What bubble?
    My own view is that -- I’m not particularly concerned about where our asset prices are today for a couple of reasons. The main one is that I think that the asset prices are pretty consistent with what we’re seeing in terms of the actual performance of the economy.
    5.) But - and I think this is important - financial conditions continue to easy despite rate hikes:
    Now the reason why I think you’d want to continue to gradually remove monetary policy accommodation, even with inflation somewhat below target, is that 1) monetary policy is still accommodative, so the level of short-term rates is pretty low, and 2) and this is probably even more important, financial conditions have been easing rather than tightening. So despite the fact that we’ve raised short-term interest rates, financial conditions are easier today than they were a year ago.
    The stock market’s up, credit spreads have narrowed, the dollar has weakened, and those have more than offset the effects of somewhat higher short-term rates and the very modest increases that we’ve seen in longer-term yields.
    6.) Balance sheet normalization is coming:
    Well, we obviously have to have the FOMC meeting to make that decision at the next FOMC meeting. But, I don’t think the expectations of market participants are unreasonable. In June, following the June FOMC meeting, we laid out a plan in terms of how we would actually do our balance sheet normalization. How we would allow Treasury and agency mortgage-backed securities to gradually run off our portfolio over time.
    And so the plan is out there. It’s been I think generally well-received, and fully anticipated. People expect it to take place. In the last FOMC statement, we said that we expected this to happen relatively soon. So, I expect it to happen relatively soon.
    7.) At the end of the day, the balance sheet reduction might amount to very little:
    My own view is, if I had to say today, we’re probably going to see a balance sheet five years from now that’s probably in the order of 2-1/2 to 3-1/2 trillion rather than the 4-1/2 trillion dollar balance sheet.
    Overall, Dudley continues to adhere to what amounts to the Fed's median forecast, and that means he thinks another rate hike this year is solidly in play.
    Separately, retail sales for July were up:


    The monthly data is noisy, so be wary that it reflects the true state of spending. The three-month and twelve-month changes (for core sales) are similar at 3.2% and 3.6% respectively and more likely reflect the underlying trend. Basically, the consumer continues to press forward at a modest pace. Stop worrying about consumer spending. It isn't an imminent threat to the outlook.
    And why should it be a threat? Like, job growth, wage growth is actually fairly solid. The headline weakness in wage growth is all about demographic shift, at least according to new research from Mary Daly of the Federal Reserve Bank of San Francisco. Via Bloomberg:
    Fresh research from the San Francisco Fed provides an explanation: baby boomers. As they retire in droves, their exit from the workforce is distorting the data for average earnings, according to a blog post published Monday on the bank’s website.
    “Wage growth isn’t as disappointing as it looks,” Mary Daly, director of economic research at the San Francisco Fed, said in an interview. “Wage growth, when cleaned up, looks consistent with other measures seen in the labor market.”
     The implication is that the labor market low wage growth does not necessarily imply the labor market is weak. It is an artifact of demographic change. That change has been fairly persistent, but at the end of the note Daly holds out some hope that it may be changing:
    Overall, these factors have combined to hold down growth in the median weekly earnings measure by a little under 2 percentage points (Figure 2), a sizable effect relative to the normal expected gains.
    Most recently, the effect from flows into and out of full-time work has started to tick upward and might be a sign of stronger growth ahead.
    We will see.

      Posted by on Tuesday, August 15, 2017 at 12:03 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (9) 

      Fed Shouldn't View Productivity as an Exogenous Factor

      Tim Duy:

      Fed Shouldn't View Productivity as an Exogenous Factor: The Federal Reserve has an opportunity to test a hypothesis critical to the health of the U.S. economy: Can persistently loose monetary policy boost the pace of productivity growth? Sadly, for now, an adherence to a strict Phillips curve framework for the economy and fear of financial instability will prevent the Fed from venturing down this path. ...[Continued at Bloomberg Prophets]...

        Posted by on Tuesday, August 15, 2017 at 12:03 PM in Economics, Monetary Policy | Permalink  Comments (22) 

        Do Low Interest Rates Punish Savers?

        Roger Farmer:

        Do Low Interest Rates Punish Savers?: This is the second of my posts on the conference: Applications of Behavioural Economics, and Multiple Equilibrium Models to Macroeconomic Policy, held at the Bank of England on July 3rd and 4th. I feature two papers written by officials from the Federal Reserve System. James Bullard, President of the Federal Reserve Bank of St. Louis, discusses the implications of his recent research for low interest rates. And Kevin Lansing, a Research Advisor at the Federal Reserve Bank of San Francisco, discusses his work on multiple equilibria. ...

          Posted by on Tuesday, August 15, 2017 at 09:35 AM in Academic Papers, Economics | Permalink  Comments (18) 

          Links for 08-15-17

            Posted by on Tuesday, August 15, 2017 at 09:32 AM in Economics, Links | Permalink  Comments (75) 

            Monday, August 14, 2017

            Paul Krugman: When the President Is Un-American

            "we don’t need to wonder whether an anti-American cabal ... has seized power in Washington. It has:":

            When the President Is Un-American, by Payl Krugman, NY Times: ...what makes America America is that it is built around an idea: the idea that all men are created equal, and are entitled to basic human rights. Take away that idea and we’re just a giant version of a two-bit autocracy. ...
            Real Americans understand that our nation is built around values, not the “blood and soil” of the marchers’ chants; what makes you an American is your attempt to live up to those values, not the place or race your ancestors came from. ...
            But the man who began his political ascent by falsely questioning Barack Obama’s place of birth — a blood-and-soil argument if ever there was one — clearly cares nothing about the openness and inclusiveness that have always been essential parts of who we are...
            Real Americans understand that our nation was born in a rebellion against tyranny. They feel an instinctive aversion to tyrants..., and an underlying sympathy for democratic regimes...
            But the present occupant of the White House has made no secret of preferring the company, not of democratic leaders, but of authoritarian rulers...
            Real Americans expect public officials to be humbled by the responsibility that comes with the job. They’re not supposed to be boastful blowhards ... like Trump...
            Real Americans understand that being a powerful public figure means facing criticism... Foreign autocrats may rage against unflattering news reports, threaten to inflict financial harm on publications they dislike, talk about imprisoning journalists; American leaders aren’t supposed to sound like that.
            Finally, real Americans who manage to achieve high office realize that they are ... meant to use their position for the public good. ... Now we have a leader who is transparently exploiting his office for personal enrichment, in ways that all too obviously amount in practice to influence-buying by domestic malefactors and foreign governments alike.
            In short, these days we have a president who is really, truly, deeply un-American, someone who doesn’t share the values and ideals that made this country special...., it’s remarkable that Trump won’t even pretend to be outraged at Putin’s meddling with our election. ...
            Whatever role foreign influence may have played and may still be playing, however, we don’t need to wonder whether an anti-American cabal, hostile to everything we stand for, determined to undermine everything that truly makes this country great, has seized power in Washington. It has: it’s called the Trump administration.

              Posted by on Monday, August 14, 2017 at 03:34 PM in Politics | Permalink  Comments (124) 

              The Republican Retreat From Market-Based Regulation

              I have a new column:

              The Republican Retreat From Market-Based Regulation: During the debate over the repeal of Obamacare, Republicans made frequent reference to their desire for a “free market” for health care. This is consistent with the GOP’s long-standing support of deregulation and free market principles.
              But all well-functioning markets are regulated to one degree or another. ...

                Posted by on Monday, August 14, 2017 at 09:43 AM in Economics, Fiscal Times, Regulation | Permalink  Comments (19) 

                Fed Watch: Don't Add To The Fire

                Tim Duy:

                Don't Add To The Fire: Vox has an article out this morning with the title "The real "deep state" sabotage is happening at the Fed." It begins:
                Trump administration officials are notorious for their suspicion that a “deep state” of career military, intelligence, diplomatic, or civil service professionals is seeking to sabotage their work. But for a clearer example of sabotage — albeit without much in the way of a conspiracy — Trump would do well to cast his gaze at the Federal Reserve, which, dating back to before his inauguration, has been waging war on an inflationary menace that appears not to exist.
                I have no qualms with the criticism that the Fed's is excessively focused on inflation or, more accurately, possibly working with a broken model of inflation. That's fair game. 
                What I find disturbing and quite frankly irresponsible is the use of "deep state" language to describe the Fed. This is the language used by the far right to discredit and undermine faith in our government institutions. For the left to adopt the same language adds to the fire already burning. 
                Take this language into consideration with the rage already directed against the Federal Reserve. This, for instance:
                A Sayre man has been arrested in connection with what authorities says is a foiled plot to blow up a bank building in Downtown Oklahoma City with a truck filled with fake explosives.
                Jerry Drake Varnell, 23, of Sayre, initially wanted to blow up the Federal Reserve Building in Washington, D.C., but settled on attempting to detonate a bomb at the BancFirst building at 101 N Broadway in downtown Oklahoma City, according to court documents.
                An undercover FBI agent posed as someone who could help Varnell to blow up the building, according to a complaint filed Sunday in U.S. District Court for the Western District of Oklahoma. Varnell allegedly told an FBI informant that he wanted to blow up the Federal Reserve Building in Washington, D.C., with a device similar to the one used in the 1995 Oklahoma City bombing because he was upset with the government.
                I am honestly just simply disappointed that Vox chose to add to the hate directed at the Fed by using the inflammatory language of the far right. I have had plenty of criticisms of the Fed over the years. I am concerned that their model of inflation isn't working, and that their estimate of the natural rate of interest is too high. But that type of criticism is a far cry from describing the institution as the "deep state." We have seen time and time again that fomenting that kind of thought only leads to bloodshed. The last thing we need is the left helping to incite another Oklahoma City bombing on Constitution Ave. - or anywhere for that matter.

                  Posted by on Monday, August 14, 2017 at 09:36 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (92) 

                  Saturday, August 12, 2017

                  Links for 08-12-17

                    Posted by on Saturday, August 12, 2017 at 02:11 PM in Economics, Links | Permalink  Comments (187) 

                    Friday, August 11, 2017

                    Paul Krugman: The Axis of Climate Evil

                    "Where does climate denial come from?":

                    The Axis of Climate Evil, by Paul Krugman, NY Times: ...At this point the evidence for human-caused global warming just keeps getting more overwhelming, and the plausible scenarios for the future — extreme weather events, rising sea levels, drought, and more — just keep getting scarier.
                    In a rational world urgent action to limit climate change would be the overwhelming policy priority for governments everywhere.
                    But the U.S. government is, of course, now controlled by a party within which climate denial — rejecting not just scientific evidence but also obvious lived experience, and fiercely opposing any effort to slow the trend — has become a defining marker of tribal identity. ...
                    So where does climate denial come from? ... The answer, I’d argue, is that there are actually three groups involved — a sort of axis of climate evil.
                    First, and most obvious, there’s the fossil fuel industry — think the Koch brothers — which has an obvious financial stake in continuing to sell dirty energy. And the industry ... has systematically showered money on think tanks and scientists willing to express skepticism about climate change. ...
                    Still, the mercenary interests of fossil fuel companies aren’t the whole story here. There’s also ideology.
                    An influential part of the U.S. political spectrum — think the Wall Street Journal editorial page — is opposed to any and all forms of government economic regulation; it’s committed to Reagan’s doctrine that government is always the problem, never the solution. ...
                    Some conservatives ... support market-friendly intervention to limit greenhouse gas emissions. But all too many prefer simply to deny the existence of the issue — if facts conflict with their ideology, they deny the facts.
                    Finally, there are a few public intellectuals — less important than the plutocrats and ideologues, but if you ask me even more shameful — who adopt a pose of climate skepticism out of sheer ego. In effect, they say: “Look at me! I’m smart! I’m contrarian! I’ll show you how clever I am by denying the scientific consensus!” And for the sake of this posturing, they’re willing to nudge us further down the road to catastrophe.
                    Which brings me back to the current political situation. Right now progressives are feeling better than they expected to a few months ago: Donald Trump and his frenemies in Congress are accomplishing a lot less than they hoped, and their opponents feared. But that doesn’t change the reality that the axis of climate evil is now firmly in control of U.S. policy, and the world may never recover.

                      Posted by on Friday, August 11, 2017 at 09:34 AM in Economics, Environment, Politics | Permalink  Comments (65) 

                      Thursday, August 10, 2017

                      Links for 08-10-17

                        Posted by on Thursday, August 10, 2017 at 10:58 AM in Economics, Links | Permalink  Comments (135) 

                        Wednesday, August 09, 2017

                        Links for 08-09-17

                          Posted by on Wednesday, August 9, 2017 at 12:44 PM in Economics, Links | Permalink  Comments (70) 

                          Fed Watch: Multiple Jobholders Are Not A Weak Spot In The Employment Report

                          Tim Duy:

                          Multiple Jobholders Are Not A Weak Spot In The Employment Report, by Tim Duy: Along with every decent employment report comes the efforts to debunk that report. I see that an article from Pedro Nicolaci Da Costa at Business Insider is making the rounds tonight. In it Da Costa directs us to this in particular from Komal Sri-Kumar:
                          The plight of low-income workers is underlined by yet another statistic. According to BLS numbers, 7.6 million workers held multiple jobs last month, up 2% from 7.4 million in July 2016. The principal reason workers hold more than one position is that no single job provides a sufficient income. In a robust economic recovery, the number of full-time workers should be rising, and the number of workers employed part-time or holding multiple jobs, should decline. The rise in the number of multiple job holders is troubling, and is yet another signal that there is still slack in the labor market. Are we there yet? No, we are still far from full employment.
                          Let's look at a picture of this one:


                          Sri-Kumar claims that in a robust economic expansion, the number of multiple job holders should be declining. In other words, multiple job holders should be a countercyclical indicator. But even the most cursory look at the data tells you that the number of multiple job holders is a procyclical indicator. It should rise as the economy gains steam and there is more opportunity for those who need or want second jobs to find such employment.
                          The trend of multiple job holders is very clearly not a sign of weakness in the economy, but a sign of strength. 
                          It is also worth noting that as a percentage of the employed, the number of multiple job holders has been in a two decade decline:
                          Note that the job market of the late 1990's is considered one of the best, yet at the same time the percentage of multiple job holders was rising and high. A decline in the number of multiple job holders, both in absolute and percentage terms, was actually a leading indicator of recession. In other words, if you are concerned about opportunities for those who need or want multiple jobs, you should be hoping these metrics move higher, not lower.
                          Bottom Line: The rise in the number of multiple job holders is a sign of economic strength, not weakness. Regardless of what the bears might say, the July employment report was solid. Get over it. Worry about the inability of this Administration to deal with a crisis like North Korea instead.

                            Posted by on Wednesday, August 9, 2017 at 10:35 AM in Economics, Unemployment | Permalink  Comments (12) 

                            A Malthus-Swan Model of Economic Growth

                            Continuing with recent posts on models with multiple equilibria, this is by Luis C. Corchón (link is to a draft)

                            A Malthus-Swan Model of Economic Growth, by Luis C. Corchón Departmento de Economía Universidad Carlos III de Madrid Calle Madrid, Journal of Dynamics and Games, July 2016: [Open link to working paper]: Abstract. In this paper we introduce in the Solow-Swan growth model a labor supply based on Malthusian ideas. We show that this model may yield several steady states and that an increase in total factor productivity might decrease the capital-labor ratio in a stable equilibrium.
                            “Why has it taken economists so long to learn that demography influences growth?” Jeff Williamson (1998)[13]
                            1. Introduction. In this note we propose a model which combines the classical Solow (1956)[10] and Swan (1956)[11] model with ideas about population growth that are borrowed from Malthus (1798)[9]. We will refer to our model as a Malthus- Swan-Solow (MSS) model. Our model has no technical progress, no institutional change, no human capital and no land.
                            We assume that the rate of growth of population depends on the real wage in a continuous way. This function is a generalization of one used by Hansen and Prescott (2002)[7].
                            We find that, as in the classical Solow-Swan model, there exist a steady state value of capital-labor ratio, see Proposition 1. However this steady state is not necessarily unique: Proposition 2 and Example 3 show that there might be an odd number of steady state capital-labor ratios. And only the smaller and the larger values of these capital-labor ratio are locally stable, see Proposition 4. This implies that there might be two, very different values of per capita income in the steady state: one with a small and another with a large value of per capita income. Finally we find that an increase in total factor productivity may increase or decrease the capital-labor ratio in a stable steady state (Proposition 5) but it always increases per capita income (Proposition 6).
                            Summing up, the consideration of endogenous population in the Solow-Swan model brings new insights with respect to the standard model regarding the number, stability and comparative static properties of steady states. ...

                              Posted by on Wednesday, August 9, 2017 at 10:26 AM in Academic Papers, Economics, Macroeconomics | Permalink  Comments (7) 

                              Tuesday, August 08, 2017

                              Links for 08-08-17

                                Posted by on Tuesday, August 8, 2017 at 11:00 AM in Economics, Links | Permalink  Comments (240) 

                                The Marriage of Psychology with Multiple Equilibria in Economics

                                Roger Farmer:

                                The Marriage of Psychology with Multiple Equilibria in Economics: This is the first of a new weekly blog series, Monday’s Macro Memo with Roger Farmer, which will discuss a wide range of economic issues of the day. The blog will appear on both the NIESR site and on Roger Farmer’s Economic Window and in the first few weeks, I will be posting a series of videos, recorded at a conference held at the Bank England  on July 3rd and 4th of 2017.  The conference was titled "Applications of Behavioural Economics and Multiple Equilibrium Models to Macroeconomic Policy"...
                                I had been planning, for some time, to run a conference on the topic of multiple equilibria sponsored by Warwick University. Andy Haldane and Sujit Kapadia had been talking with Alan Taylor of U.C. Davis about organizing a conference on the topic of behavioural economics. After talking with Andy, Sujit and Alan, we decided it would be ideal to combine our plans into a single conference that would highlight the promise of studying the marriage of psychology with multiple equilibria in economics. The video ... explains why this is a fruitful idea.

                                Roger goes on to discuss how "psychology enters the picture," and why the Robert Lucas idea that "the expectations of market participants are determined by economic fundamentals ... makes little or no sense in models ... where there are multiple equilibria." Also:

                                In addition to the introductory video, linked above, we also recorded videos from many of the conference presenters and discussants. I will be releasing these videos in a series of posts in the coming weeks and I will discuss the research associated with the accompanying topic. You can find links to the original papers on the conference website linked here. Stay tuned.

                                  Posted by on Tuesday, August 8, 2017 at 05:30 AM in Academic Papers, Conferences, Economics, Video | Permalink  Comments (10) 

                                  Monday, August 07, 2017

                                  Paul Krugman: What’s Next for Progressives?

                                  There's more than one way to get to universal coverage:

                                  What’s Next for Progressives?, by Paul Krugman, NY Times: ...If Democrats regain control of Congress and the White House, what will they do with the opportunity?
                                  Well, some progressives — by and large people who supported Bernie Sanders... — are already trying to revive one of his signature proposals: expanding Medicare to cover everyone. Some even want to make support for single-payer a litmus test for Democratic candidates.
                                  So it’s time for a little pushback. ...
                                  Look at the latest report by the nonpartisan Commonwealth Fund, comparing health care performance among advanced nations. America is at the bottom; the top three performers are Britain, Australia, and the Netherlands. And the thing is, these three leaders have very different systems.
                                  Britain has true socialized medicine: The government provides health care directly through the National Health Service. Australia has a single-payer system, basically Medicare for All... But the Dutch have what we might call Obamacare done right: individuals are required to buy coverage from regulated private insurers, with subsidies to help them afford the premiums.
                                  And the Dutch system works, which suggests that a lot could be accomplished via incremental improvements in the A.C.A...
                                  Meanwhile, the political logic that led to Obamacare rather than Medicare for all still applies. ... The ... 156 million people who currently get insurance through their employer ... are largely satisfied with their coverage. Moving to single-payer would mean taking away this coverage and imposing new taxes;... you’d have to convince most of these people both that they would save more in premiums than they pay in additional taxes, and that their new coverage would be just as good...
                                  This might in fact be true, but it would be one heck of a hard sell. Is this really where progressives want to spend their political capital?
                                  What would I do instead? I’d enhance the A.C.A., not replace it, although I would strongly support reintroducing some form of public option ... that could eventually lead to single-payer.
                                  Meanwhile, progressives should move beyond health care and focus on other holes in the U.S. safety net.
                                  When you compare the U.S. social welfare system with those of other wealthy countries, what really stands out now is our neglect of children. ...
                                  I have nothing against single-payer; it’s what I’d support if we were starting fresh. But we aren’t: Getting there from here would be very hard... Even idealists need to set priorities, and Medicare-for-all shouldn’t be at the top of the list.

                                    Posted by on Monday, August 7, 2017 at 12:10 PM in Economics, Health Care | Permalink  Comments (224) 

                                    Fed Watch: July Employment Recap

                                    Tim Duy:

                                    July Employment Recap, by Tim Duy: The July employment report came in on the high side of expectations and sufficiently strong to keep the Fed's policy plans for this year and next intact despite low inflation. On average central bankers will have a hard time backing down from rate hike plans with job growth still in excess of that necessary to hold unemployment stable. They may believe the economy is not yet at full employment, but they don't want to be too far below their estimate of the neutral interest rate before they hit full employment. And they don't think that point can be very far off.
                                    Nonfarm payrolls gained 209k, solidly above expectations of 180k:NfpA0817
                                    The pace of job growth is easing, but only gradually. The 12-month average was 180k, compared to 205k in July of last year. The unemployment rate edged down to 4.3%, back to the level of June. The labor force participation rate rose, but remains in the range it has enjoyed since 2016:


                                    The Fed will take note that job growth remains in excess of labor force growth. That difference generally drives unemployment lower:


                                    The big labor force gains occurred at the beginning of 2016, which helped stabilize the unemployment rate. The current dynamic will almost certainly push unemployment lower and past the Fed's comfort levels, probably sooner than later.
                                    The Fed will see hopeful signs in the wage numbers. Average wages grew at a 4.19% annualized rate in July, giving credence to the theory that the slowdown in wage growth earlier this year was temporary:
                                    To be sure though, one month does not a trend make. But the Fed will not be making a decision on one month of data. Balance sheet normalization will almost certainly begin in September (barring a disruptive debt ceiling battle), leaving December for a potential rate hike. If wage data continues to come in closer to July's number than June's, the Fed will feel more confident that they a.) have the correct estimate of the natural rate of unemployment and b.) that inflation will return to their 2% target over the medium run. Hence, the December rate hike remains in play.
                                    Solid job growth seems likely to continue. That at least is the story told by temporary help payrolls:

                                    We are well past the flattening out of early last year. For those looking for an imminent recession, this isn't showing one. And for those looking for a market crash, look at the similar behavior of this indicator in 1995. As is now well known, that market crash was still a long ways off.
                                    Bottom Line: A solid report that suggests further declines in the unemployment rate in the months ahead. The Fed will want to stay preemptive in this environment. I don't foresee them backing off their rate forecast for this year and next very easily.

                                      Posted by on Monday, August 7, 2017 at 05:30 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (26) 

                                      Sunday, August 06, 2017

                                      Links for 08-06-17

                                        Posted by on Sunday, August 6, 2017 at 05:46 PM in Economics, Links | Permalink  Comments (131) 

                                        On the Formation of Capital and Wealth

                                        A new paper by Mordecai Kurz of Stanford University:

                                        On the Formation of Capital and Wealth Draft: Abstract We show modern information technology (in short IT) is the cause of rising income and wealth inequality since the 1970's and has contributed to slow growth of wages and decline in the natural rate. We first study all US firms whose securities trade on public exchanges. Surplus wealth of a firm is the difference between wealth created (equity and debt) and its capital. We show (i) aggregate surplus wealth rose from -$0.59 Trillion in 1974 to $24 Trillion which is 79% of total market value in 2015 and reflects rising monopoly power. The added wealth was created mostly in sectors transformed by IT. Declining or slow growing firms with broadly distributed ownership have been replaced by IT based firms with highly concentrated ownership. Rising fraction of capital has been financed by debt, reaching 78% in 2015. We explain why IT innovations enable and accelerate the erection of barriers to entry and once erected, IT facilitates maintenance of restraints on competition. These innovations also explain rising size of firms. We next develop a model where firms have monopoly power. Monopoly surplus is unobservable and we deduce it with three methods, based on surplus wealth, share of labor or share of profits. Share of monopoly surplus rose from zero in early 1980's to 23% in 2015. This last result is, remarkably, deduced by all three methods. Share of monopoly surplus was also positive during the first, hardware, phase of the IT revolution. It was zero in 1950-1962, reaching 7.3% in 1965 before falling back to zero in 1970. Standard TFP computation is shown to be biased when firms have monopoly power.

                                          Posted by on Sunday, August 6, 2017 at 05:45 PM in Academic Papers, Economics | Permalink  Comments (3) 

                                          Commodity Connectedness

                                          Commodity Connectedness: Forthcoming paper here

                                          We study connectedness among the major commodity markets, summarizing and visualizing the results using tools from network science.

                                          Among other things, the results reveal clear clustering of commodities into groups closely related to the traditional industry taxonomy, but with some notable differences.

                                          Many thanks to Central Bank of Chile for encouraging and supporting the effort via its 2017 Annual Research Conference.

                                            Posted by on Sunday, August 6, 2017 at 05:45 PM in Academic Papers, Economics | Permalink  Comments (1) 

                                            Modeling Economic Systems as Locally-Constructive Sequential Games

                                            Leigh Tesfatsion:

                                            Modeling Economic Systems as Locally-Constructive Sequential Games: Abstract: Real-world economies are open-ended dynamic systems consisting of heterogeneous interacting participants. Human participants are decision-makers who strategically take into account the past actions and potential future actions of other participants. All participants are forced to be locally constructive, meaning their actions at any given time must be based on their local states; and participant actions at any given time affect future local states. Taken together, these properties imply real-world economies are locally constructive sequential games. This paper discusses a modeling approach, agent-based computational economics (ACE), that permits researchers to study economic systems from this point of view. ACE modeling principles and objectives are first concisely presented. The remainder of the paper then highlights challenging issues and edgier explorations that ACE researchers are currently pursuing.

                                            A bit more:

                                            This working paper discusses how agent-based computational economics (ACE) permits the modeling and implementation of economic systems as locally constructive sequential games. Section 2 of the paper characterizes seven specific ACE modeling principles in order to distinguish ACE more carefully from other modeling approaches, such as general equilibrium modeling and game theory within economics, and standard usages of state-space modeling by economists, engineers, and physicists.
                                            Sections 3-6 cover ACE research objectives, the ACE enabling of comprehensive empirical validation, and the growing use of ACE computational platforms to cross the "valley of death" between policy conceptualization and real-world policy implementation.
                                            Edgier ACE explorations are cited and summarized in Sections 7-8. These include:
                                            (i) the study of labor markets as evolutionary sequential games with endogenous hiring, firing, and quits (Section 7.1);
                                            (ii) the study of macroeconomies with anticipatory learning by locally-constructive consumers and firms attempting to achieve intertemporal objectives (Section 7.2);
                                            (iii) the study of risk management by strategically interacting rural and urban decision-makers residing within a watershed affected by climate and hydrological processes (Section 7.3);
                                            (iv) the study of new market design features for U.S. electric power systems (Section 7.4;
                                            (v) the use of ACE modeling principles as design principles guiding the development of decentralized "transactive energy" architectures for U.S. transmission and distribution systems (Section 7.5);
                                            (vi) a spectrum of experiment-based models ranging from 100% human subject to 100% computer agent (Section 8).
                                            This paper is an invited paper for the Journal of Economic Methodology

                                              Posted by on Sunday, August 6, 2017 at 05:45 PM Permalink  Comments (0) 

                                              Do Older Americans Have More Income Than We Think?

                                              Adam Bee and Joshua W. Mitchell of the Census Bureau

                                              Do Older Americans Have More Income Than We Think?, July 25, 2017 Working Paper Number: SEHSD-WP2017-39: Introduction The Current Population Survey Annual Social and Economic Supplement (CPS ASEC) is the source of the nation’s official household income and poverty statistics. In 2012, the CPS ASEC showed that median household income was $33,800 for householders aged 65 and over and the poverty rate was 9.1 percent for persons aged 65 and over. When we instead use an extensive array of administrative income records linked to the same CPS ASEC sample, we find that median household income was $44,400 (30 percent higher) and the poverty rate was just 6.9 percent. We demonstrate that large differences between survey and administrative record estimates are present within most demographic subgroups and are not easily explained by survey design features or processes such as imputation. Further, we show that the discrepancy is mainly attributable to underreporting of retirement income from defined benefit pensions and retirement account withdrawals. Using archived survey and administrative record data, we extend our analysis back to 1990 and provide evidence of underreporting from an earlier period. We also document a growing divergence over time between the two measures of median income which is in turn driven by the growth in retirement income underreporting. Turning to synthetic cohort analysis, we show that in recent years, most households do not experience substantial declines in total incomes upon retirement or any increases in poverty rates. Our results have important implications for assessing the relative value of different sources of income available to older Americans, including income from the nation’s largest retirement program, Social Security. We caution, however, that our findings apply to the population aged 65 and over in 2012 and cannot easily be extrapolated to future retirees.

                                                Posted by on Sunday, August 6, 2017 at 05:45 PM in Academic Papers, Economics | Permalink  Comments (15) 

                                                Saturday, August 05, 2017

                                                Links for 08-05-17

                                                  Posted by on Saturday, August 5, 2017 at 01:45 PM in Economics, Links | Permalink  Comments (141) 

                                                  The Transformation of the ‘American Dream’

                                                  Robert Shiller:

                                                  The Transformation of the ‘American Dream’: “The American Dream is back.” President Trump made that claim in a speech in January.
                                                  They are ringing words, but what do they mean? Language is important, but it can be slippery. Consider that the phrase, the American Dream, has changed radically through the years.
                                                  Mr. Trump and Ben Carson, the secretary of housing and urban development, have suggested it involves owning a beautiful home and a roaring business, but it wasn’t always so. Instead, in the 1930s, it meant freedom, mutual respect and equality of opportunity. It had more to do with morality than material success.
                                                  This drift in meaning is significant...

                                                    Posted by on Saturday, August 5, 2017 at 01:45 PM in Economics | Permalink  Comments (13) 

                                                    How Air-Conditioning Conquered America (Even the Pacific Northwest)

                                                    Emily Badger and Alan Blinder:

                                                    How Air-Conditioning Conquered America (Even the Pacific Northwest): Air-conditioning has been remarkably good at creating demand for itself.
                                                    It enabled the sweeping postwar development of the South... In automobiles, it made the commutes between air-conditioned homes and air-conditioned offices possible. In the Southwest, its arrival facilitated new methods of rapid construction, replacing traditional building designs that once naturally withstood the region’s desert climate.
                                                    By doing all of this, air-conditioning has contributed to the intensive energy demand that worsens climate change that, well, forces us to rely on air-conditioning, a feedback loop environmentalists fear.
                                                    And so here we are, in 2017, with temperatures racing past 100 degrees in the Pacific Northwest, the region of the country that has historically relied the least on air-conditioning. And now more people, even there, are installing the technology. ...

                                                      Posted by on Saturday, August 5, 2017 at 01:45 PM in Economics, Environment | Permalink  Comments (8) 

                                                      Friday, August 04, 2017

                                                      Paul Krugman: Obamacare Rage in Retrospect

                                                      "What was Obamacare rage about?":

                                                      Obamacare Rage in Retrospect, by Paul Krugman, NY Times: I guess it ain’t over until the portly golfer sings, but it does look as if Obamacare will survive. ...
                                                      It’s true that the tweeter in chief retains considerable ability to sabotage care, but Republicans are basically begging him to stop, believing — correctly — that the public will blame them for any future deterioration in coverage.
                                                      Why did Obamacare survive? The shocking answer: It’s still here because it does so much good. ...
                                                      Which raises a big question: Why did the prospect of health reform produce so much popular rage in 2009 and 2010?
                                                      I’m not talking about the rage of G.O.P. apparatchiks, who hated and feared the A.C.A., not because they thought it would fail, but because they were afraid it would work. (It has.) Nor am I talking about the rage of some wealthy people furious that their taxes were going up to pay for lesser mortals’ care.
                                                      No, I’m talking about the people who screamed at their congressional representatives in town halls... What was Obamacare rage about?
                                                      Much of it was orchestrated by pressure groups like Freedom Works, and it’s a good guess that some of the “ordinary citizens” who appeared at town halls were actually right-wing activists. Still, there was plenty of genuine popular rage, stoked by misinformation and outright lies from the usual suspects: Fox News, talk radio and so on. ...
                                                      The question then becomes why so many people believed these lies. The answer, I believe, comes down to a combination of identity politics and affinity fraud.
                                                      Whenever I see someone castigating liberals for engaging in identity politics, I wonder what such people imagine the right has been doing all these years. For generations, conservatives have conditioned many Americans to believe that safety-net programs are all about taking things away from white people and giving stuff to minorities.
                                                      And those who stoked Obamacare rage were believed because they seemed to some Americans like their kind of people — that is, white people defending them against you-know-who.
                                                      So what’s the moral of this story? ...
                                                      It’s certainly not encouraging to realize how easily many Americans were duped by right-wing lies, pushed into screaming rage against a reform that would actually improve their lives.
                                                      On the other hand, the truth did eventually prevail, and Republicans’ inability to handle that truth is turning into a real political liability. And in the meantime, Obamacare has made America a better place.

                                                        Posted by on Friday, August 4, 2017 at 10:06 AM in Economics, Health Care, Politics | Permalink  Comments (121) 

                                                        Thursday, August 03, 2017

                                                        Why These Job Numbers Matter to the Fed

                                                        Tim Duy:

                                                        Why These Job Numbers Matter to the Fed: Even though the Federal Reserve is poised to start shrinking its $4.5 trillion balance sheet, the outlook for continued rate increases is very much in doubt following the recent slowdown in inflation. That makes the monthly jobs report on Friday even more important than usual as investors and analysts try to figure out whether the central bank will continue to take its cues from labor market strength rather than inflation weakness as it charts a course for monetary policy. ...[Continued at Bloomberg Prophets]...

                                                          Posted by on Thursday, August 3, 2017 at 05:52 PM in Economics, Monetary Policy, Unemployment | Permalink  Comments (53) 

                                                          Links for 08-03-17

                                                            Posted by on Thursday, August 3, 2017 at 01:02 PM in Economics, Links | Permalink  Comments (172) 

                                                            Cryptocurrencies: Some Lessons from Monetary Economics

                                                            Jesús Fernández-Villaverde at VoxEU:

                                                            On the economics of currency competition: In 1976, Friedrich Hayek published a short pamphlet, The Denationalization of Money. Worried that political constraints in developed countries prevented central banks from tackling the high inflation at that time, he argued that money-issuing should be opened to market forces, and the government monopoly on the provision of means of exchange should be abolished. Hayek envisioned a system of private monies in which the forces of competition would induce banks to provide a stable means of exchange (Hayek 1999). Despite some attention (e.g. Salin 1984), for decades Hayek’s proposal was considered more a curiosity than a workable idea.

                                                            Technological developments over the last few years have made Hayek’s proposal a reality. This is the result of many individual decisions, rather than the outcome of a planned policy change (a process that Hayek would have appreciated). Nowadays it is straightforward to create privately issued money as a cryptocurrency. Thanks to fascinating advances in cryptography and computer science, cryptocurrencies are robust to over-issuing, the double-spending problem, and counterfeiting (Narayanan et al. 2016). Cryptocurrencies are different from the notes issued by financial institutions during times of free banking (Dowd 1992) for three reasons:

                                                            • Most cryptocurrencies are fully fiduciary. Notes in the free banking era usually represented claims against deposits in gold or other assets.
                                                            • Cryptocurrencies are not directly related to credit. They are issued by computer networks.
                                                            • Cryptocurrencies such as Ethereum can also work as a sophisticated automatic escrow account. It is effortless to add to the code a condition that states: “Peter will pay Mary 10 ethereum if, tomorrow at noon, the temperature in Philadelphia according to is above 80 degrees.” Once that code is in place, the verification of the condition and the payment, if the condition is satisfied, would automatically be implemented.

                                                            Today, any person with internet access can use a bewildering array of cryptocurrencies as means of exchange. Everyone has heard about Bitcoin, whose market capitalisation (the price per unit times the circulating supply), as of 6 July 2017, exceeds $42 billion. This is only slightly below the market capitalisation of Ford Motor Company. Six other cryptocurrencies (Ethereum, Ripple, Litecoin, Ethereum Classic, NEM, and Dash) have market caps of more than $1 billion, and another 37 have market caps between $100 and $999.99 million. Cryptocurrencies still represent a trivial fraction of all payments in the world economy, but these shares may perhaps increase exponentially over the next few years. Cryptocurrencies may even become widespread in emerging economies with dysfunctional government monies.

                                                            How will currency competition work?

                                                            This raises positive questions. Will a system of private money deliver price stability? Will one currency drive all others from the market, or will several of these currencies coexist along the equilibrium path? Do private monies require commodity backing? Will the market provide the socially optimum amount of money? Can private monies and a government-issued money compete? Can a unit of account be separated from a medium of exchange?

                                                            It also raises normative questions. Should governments prevent the circulation of private monies? Should the private monies be taxed? Should we revisit the role of governments as issuers of money?

                                                            There are even questions relevant for entrepreneurs. What is the best strategy to jump-start the circulation of a currency? How do you maximise the seigniorage that comes from it?

                                                            Surely, we need a formal theory of currency competition. In a recnet paper, my co-author and I take a first pass at this problem (Fernández-Villaverde and Sanches 2016). We build a model of competition among privately issued fiduciary currencies by extending Lagos and Wright’s (2005) environment, which is a workhorse of modern monetary economics. The standard Lagos–Wright model has been augmented by including entrepreneurs who can issue their own currencies to maximise profits or by automata following a predetermined algorithm (as in Bitcoin). Otherwise, the model is standard. In this framework, competition is perfect. All private currencies have the same ability to settle payments, and each entrepreneur behaves parametrically with respect to prices.

                                                            Despite its simplicity, our analysis offers several valuable insights.

                                                            • In general, a monetary equilibrium with private monies will not deliver price stability. When money is issued by a profit-maximising entrepreneur, that person will try to maximise the real value of seigniorage. There are many cost functions when minting money, so this maximisation does not imply that the entrepreneur delivers a stable currency. For example, if the cost function is strictly convex, entrepreneurs will always have an incentive to mint additional units of the currency. When Hayek conjectured that a system of private monies competing among themselves would provide a stable means of exchange, he was, in general, wrong. When money is issued by an automaton, there is no particular reason why the quantity of money will be compatible with price stability (except by coincidence). Bitcoin has already decided how many new units of currency will be issued in 2022, even though nobody knows what the demand for currency will be in that year.
                                                            • Even when the cost function of minting money is such that we have an equilibrium with price stability, there is a continuum of equilibrium trajectories where the value of private monies monotonically converges to zero. The self-fulfilling inflationary episodes construed by Obstfeld and Rogoff (1983) and Lagos and Wright (2003) in economies with government-issued money are not an exclusive feature of public monies. Self-fulfilling inflationary episodes are, instead, the consequence of using intrinsically useless tokens (even if they are electronic and issued by private profit-maximising, long-lived entrepreneurs), whose valuation can change depending on expectations about the future.

                                                            But, as economists, we do not care about price stability per se. The goal of a well-behaved monetary system must be to achieve some efficiency goal. There is a third, and perhaps most important, result:

                                                            • A purely private monetary system does not provide the socially optimum quantity of money even in the equilibrium with stable prices. Despite having entrepreneurs that take prices parametrically, competition cannot provide an optimal outcome because entrepreneurs do not internalise, by minting additional tokens, the pecuniary externalities they create in the market with trading frictions at the core of all essential models of money (Wallace 2001). These pecuniary externalities mean that, at a fundamental level, the market for currencies is very different from the market for goods such as wheat, and the forces that drive optimal outcomes under perfect competition in the market for wheat will fail in the market for money. The ‘price’ of money itself does not play a fully-allocative role: if one believes that money is used because there are frictions in transactions, one should not believe that the market can provide the right amount of money. (This argument slightly modifies the ideas in Friedman 1960.)

                                                            These three results cast serious doubts on Hayek’s proposal of currency competition. In most cases, a system of private monies will not deliver price stability and, even when it does, it will always be subject to self-fulfilling inflationary episodes, and it will supply a suboptimal amount of money. Currency competition works only sometimes, and partially.

                                                            How can Hayek be vindicated? A simple possibility is to think about the existence of productive capital. If entrepreneurs use the seigniorage to purchase productive capital, and this capital is sufficiently productive, then there is an equilibrium in which a system of private monies may achieve social efficiency. Other possibilities would include the presence of market power (different currencies are slightly different from each other in their ability to make payments) and, thus, a franchise value that a private entrepreneur may want to preserve (allegedly, this environment may be closer to what Hayek envisioned than our perfect competition world). We also know, however, that long-run market power does not necessarily deliver the right outcomes and that incentives to cheat always exist (Mailath and Samuelson 2006).

                                                            The impact on monetary policy

                                                            Finally, given that government-issued money is different from private money because it has fiscal backing, what are the effects of cryptocurrencies on government monetary policy? How is monetary policy changed by the presence of alternative means of exchange? The first case of interest is when the government follows a standard money-growth rule. Under this policy, profit-maximising entrepreneurs will frustrate the government's attempt to implement a positive real return on money through deflation when the public is willing to hold private currencies. There are, fortunately, alternative policies that can simultaneously promote stability and efficiency. For example, the government may peg the real value of its money. Under this rule, the government can implement an efficient allocation (supply the amount of money that maximises social welfare) as the unique equilibrium outcome, although it would imply that the government drives private money out of the economy.

                                                            There is an important lesson here: the threat of competition from private monies imposes market discipline on any government that issues currency. If a central bank, for example, does not provide a sufficiently ‘good’ money, then it will have difficulties in implementing allocations. This may be the best feature of cryptocurrencies. In a world in which we can switch to Bitcoin or Ethereum, central banks need to provide, paraphrasing Adam Smith, a tolerable administration of money. Currency competition may have a large upside for human welfare after all.

                                                            Author’s note: This column borrows heavily from my remarks ‘Cryptocurrencies: Some Lessons from Monetary Economics’ given at ‘The Structural Foundations of Monetary Policy’ conference at the Hoover Institution, Stanford University, May 2017.


                                                            Dowd, K (1992), The Experience of Free Banking, Routledge.

                                                            Fernández-Villaverde, J and D Sanches (2016), "Can Currency Competition Work?", CEPR Discussion Paper 11095.

                                                            Friedman, M (1960), A Program for Monetary Stability, Fordham University Press.

                                                            Hayek, F (1999), "The denationalization of money: An analysis of the theory and practice of concurrent currencies", in S Kresge (ed.) The Collected Works of F A Hayek, Good Money, Part 2, The University of Chicago Press.

                                                            Lagos, R and R Wright (2003), "Dynamics, cycles, and sunspot equilibria in “genuinely dynamic, fundamentally disaggregative” models of money", Journal of Economic Theory, 109(2): 156–171.

                                                            Lagos, R and R Wright (2005), "A unified framework for monetary theory and policy analysis", Journal of Political Economy, 113(3): 463–484.

                                                            Mailath, G and L Samuelson (2006), Repeated Games and Reputation, Oxford University Press.

                                                            Narayanan, A, J Bonneau, E Felten, A Miller, and S Goldfeder (2016), Bitcoin and Cryptocurrency Technologies, Princeton University Press.

                                                            Obstfeld, M, and K Rogoff (1983), "Speculative hyperinflations in maximizing models: Can we rule them out?", Journal of Political Economy, 91(4): 675–87.

                                                            Salin, P (1984), Currency Competition and Monetary Union. Martinus Nijhoff Publishers.

                                                            Wallace, N (2001), "Whither monetary economics?", International Economic Review, 42(4): 847–69.

                                                              Posted by on Thursday, August 3, 2017 at 09:13 AM Permalink  Comments (16)