This is not a subtweet:
This Is Not A Trade Agreement, by Paul Krugman: OK, Greg Mankiw has me puzzled. Has he really read nothing about TPP? Is he completely unaware of the nature of the argument?
Personally, I’m a lukewarm opponent of the deal, but I don’t see it as the end of the Republic and can even see some reasons (mainly strategic) to support it. One thing that should be totally obvious, however, is that it’s off-point and insulting to offer an off-the-shelf lecture on how trade is good because of comparative advantage, and protectionists are dumb. For this is not a trade agreement. It’s about intellectual property and dispute settlement; the big beneficiaries are likely to be pharma companies and firms that want to sue governments.
Those are the issues that need to be argued. David Ricardo is irrelevant.
Posted by Mark Thoma on Sunday, April 26, 2015 at 09:41 AM in Economics, International Trade |
Mediamacro myth 6: 2013 recovery vindication: The idea that austerity during the first two years of the coalition government was vindicated by the 2013 recovery is so ludicrous that it is almost embarrassing to have to explain why. The half-truths in this case are so flimsy they do not deserve that label. I can think of two reasons why that claim could have any credibility. The first is that people confuse levels and rates or change. The second is that some critics of austerity might have occasionally overstated their case.
To see the first point, imagine that a government on a whim decided to close down half the economy for a year. That would be a crazy thing to do, and with only half as much produced everyone would be a lot poorer. However a year later when that half of the economy started up again, economic growth would be around 100%. The government could claim that this miraculous recovery vindicated its decision to close half the economy down the year before. That would be absurd, but it is a pretty good analogy with claiming that the 2013 recovery vindicated 2010 austerity.
The second point is that some critics of austerity did on a few occasions allow their rhetoric to get the better of them, and suggested that if austerity continued a recovery would never come. That was always an overstatement. ...
What any knowledgeable and honest media reporting should have done is tear the vindication argument to shreds. ...
Posted by Mark Thoma on Sunday, April 26, 2015 at 09:22 AM in Economics, Media, Press |
Via Diane Coyle, a quote from Alfred Marshall’s Elements of the Economics of Industry:
...He wrote that earlier economists:
“Paid almost exclusive attention to the motives of individual action, But it must not be forgotten that economists, like all other students of social science, are concerned with individuals chiefly as members of the social organism. As a cathedral is something more than the stones of which it is built, as a person is more than a series of thoughts and feelings, so the life of society is something more than the sum of the lives of its individual members. It is true that the action of the whole is made up of that of its constituent parts; and that in most economic problems the best starting point is to be found in the motives that affect the individual….. but it is also true that economics has a great and increasing concern in motives connected with the collective ownership of property and the collective pursuit of important aims.”
Posted by Mark Thoma on Sunday, April 26, 2015 at 09:05 AM in Economics, Methodology |
Posted by Mark Thoma on Sunday, April 26, 2015 at 12:06 AM
Posted by Mark Thoma on Saturday, April 25, 2015 at 12:06 AM in Economics, Links |
No Price Like Home: Global House Prices, 1870-2012, by Katharina Knoll, Moritz Schularic, and Thomas Steger: Abstract: How have house prices evolved over the long‐run? This paper presents annual house prices for 14 advanced economies since 1870. Based on extensive data collection, we show that real house prices stayed constant from the 19th to the mid‐20th century, but rose strongly during the second half of the 20th century. Land prices, not replacement costs, are the key to understanding the trajectory of house prices. Rising land prices explain about 80 percent of the global house price boom that has taken place since World War II. Higher land values have pushed up wealth‐to‐income ratios in recent decades.
Posted by Mark Thoma on Friday, April 24, 2015 at 01:35 PM in Academic Papers, Economics, Housing |
John Cochrane weighs in on the discussion of unit roots:
Unit roots, redux: Arnold Kling's askblog and Roger Farmer have a little exchange on GDP and unit roots. My two cents here.
I did a lot of work on this topic a long time ago, in How Big is the Random Walk in GNP? (the first one) Permanent and Transitory Components of GNP and Stock Prices” (The last, and I think best one) "Multivariate estimates" with Argia Sbordone, and "A critique of the application of unit root tests", particularly appropriate to Roger's battery of tests.
The conclusions, which I still think hold up today:
Log GDP has both random walk and stationary components. Consumption is a pretty good indicator of the random walk component. This is also what the standard stochastic growth model predicts: a random walk technology shock induces a random walk component in output but there are transitory dynamics around that value.
A linear trend in GDP is only visible ex-post, like a "bull" or "bear" market. It's not "wrong" to detrend GDP, but it is wrong to forecast that GDP will return to the linear trend or to take too seriously correlations of linearly detrended series, as Arnold mentions. Treating macro series as cointegrated with one common trend is a better idea.
Log stock prices have random walk and stationary components. Dividends are a pretty good indicator of the random walk component. (Most recently, here.) ...
Both Arnold and Roger claim that unemployment has a unit root. Guys, you must be kidding. ...
He goes on to explain.
Posted by Mark Thoma on Friday, April 24, 2015 at 01:10 PM in Econometrics, Economics, Macroeconomics |
Monopsony and market power in the labor market: We’ve all heard the term “monopoly,” even if it’s just in the context of the board game. But a related term, or even another face of monopoly, is monopsony. A monopsony is when a firm is the sole purchaser of a good or service whereas a monopoly is when one firm is the sole producer of a good or service. Most examples of monopsony have to do with the purchase of workers’ time in the labor market, where a firm is the sole purchaser of a certain kind of labor. Just as the United States is seeing increasing evidence of monopoly power and cartelization on the producer side, we also need to pay attention to the effects of monopsony power in the labor market.
The classic example of a monopsony is a company coal town, where the coal company acts the sole employer and therefore the sole purchaser of labor in the town. Now why should we care about this? The monopsony power of the coal company allows it to set wages below the productivity of their workers. In other words, employers gain the power to depress wages.
But employers don’t have to be sole employer for monopsonic behavior to arise. If there are a few powerful firms, collusion could drive down wages as well. ...
One of my job market papers -- it was long ago -- assumed monopsony power in labor markets as a way of flipping the correlation between real wages and employment/output from negative to positive (which is more consistent with the empirical evidence starting with Dunlop and Tarshis in the 1930's. For a nice discussion of this evidence, see Keynesian Controversies on Wages, by John Pencavel.
Posted by Mark Thoma on Friday, April 24, 2015 at 09:18 AM in Economics |
Some bad ideas just won't die:
Zombies of 2016, by Paul Krugman, Commentary, NY Times: Last week,...Chris Christie ... gave a speech in which he tried to position himself as a tough-minded fiscal realist. In fact, however, his supposedly tough-minded policy idea was a classic zombie — an idea that should have died long ago in the face of evidence that undermines its basic premise, but somehow just keeps shambling along.
...Mr. Christie ... thought he was being smart and brave by proposing that we raise the age of eligibility for both Social Security and Medicare to 69. Doesn’t this make sense now that Americans are living longer?
No, it doesn’t..., almost all the rise in life expectancy has taken place among the affluent. The bottom half of workers,... who rely on Social Security most, have seen their life expectancy at age 65 rise only a bit more than a year since the 1970s. Furthermore,... many ... still have to perform manual labor.
And while raising the retirement age would impose a great deal of hardship, it would save remarkably little money. ...
And there are plenty of other zombies out there. Consider, for example, the zombification of the debate over health reform. ...
Finally, one of the interesting political developments ... has been the triumphant return of voodoo economics, the “supply-side” claim that tax cuts for the rich stimulate the economy so much that they pay for themselves.
In the real world, this doctrine has an unblemished record of failure..
In the world of Republican politics, however, voodoo’s grip has never been stronger. Would-be presidential candidates must audition in front of prominent supply-siders to prove their fealty to failed doctrine. ... Supply-side economics, it’s now clear, is the ultimate zombie: no amount of evidence or logic can kill it.
So why has the Republican Party experienced a zombie apocalypse? One reason, surely, is the fact that most Republican politicians represent states or districts that will never, ever vote for a Democrat, so the only thing they fear is a challenge from the far right. Another is the need to tell Big Money what it wants to hear: a candidate saying anything realistic about Obamacare or tax cuts won’t survive the Sheldon Adelson/Koch brothers primary.
Whatever the reasons, the result is clear. Pundits will try to pretend that we’re having a serious policy debate, but, as far as issues go, 2016 is already set up to be the election of the living dead.
Posted by Mark Thoma on Friday, April 24, 2015 at 08:01 AM in Economics, Health Care, Politics, Social Security, Taxes |
Posted by Mark Thoma on Friday, April 24, 2015 at 12:06 AM in Economics, Links |
Can happiness be reduced to a mathematical equation?:
Can we predict happiness?, by Robb Rutledge, Max Planck University College London Centre for Computational Psychiatry and Ageing Research: What makes us happy? Well-being researchers have identified many variables related to happiness, but we still don’t know exactly how the events of our daily lives combine to influence how we feel from moment to moment. People should get happier when good things happen, but clearly this is not the whole story.
We designed a study to investigate the relationship between rewards and happiness. We brought people into the lab and asked them repeatedly about their happiness as they chose between safe and risky monetary options. Risky choices were gambles with equal probabilities (like a coin toss) of a better or worse outcome. If they chose to gamble on a given trial, they then found out whether they won or lost.
Based on the data, we developed a mathematical equation to predict how self-reported happiness depends on past events. ...
Posted by Mark Thoma on Thursday, April 23, 2015 at 08:38 AM in Economics |
Robert Hall at Vox EU:
This column is a lead commentary in the VoxEU Debate "Secular Stagnation"
Secular Stagnation in the US, by Robert E. Hall: The disappointing post-crisis performance of the US economy and even more disappointing performance of continental Europe and Japan have revived interest in the possibility of secular stagnation. Under stagnation, real incomes fail to grow or even shrink, and the economy’s output falls farther and farther below its earlier upward trend. Rising unemployment may also occur. Summers (2014) ignited interest in the possibility of secular stagnation.
One important factor in stagnations is the inability or reluctance of the central bank to lower interest rates as low as would seem to be appropriate, given the ability of low rates to stimulate output and employment. The Federal Reserve and the Bank of Japan have kept rates slightly positive since the crisis, while the ECB did the same until recently, when it pushed the rate just slightly negative. All three economies had combinations of high unemployment and substandard inflation that unambiguously called for lower rates, according to standard principles of modern monetary economics.
Extreme slack persists in continental Europe and Japan, but in the US, several labor-market indicators, such as low short-term unemployment and high levels of unfilled job openings, indicate the end of the period of slack that followed the crisis, while others, such as long-term unemployment and involuntary part-time work, still show slack but are declining and will probably reach normal levels in the coming year.1 Forecasters believe that the Fed will unpin the short-term interest rate in the middle of 2015 or a bit later in the year. Markets for forward rates agree.
European versus US secular stagnation: Demand versus supply factors
Thus a consensus is forming that inadequate demand will no longer be a factor in whatever US stagnation occurs in coming years. In Japan and Europe, on the other hand, the case for boosting demand is strong and inadequate demand is almost surely a main cause of the stagnation.
Despite the resumption of normal conditions in the US labor market and the consensus that slack is gone, the US economy is stagnated in the sense that the standard of living stopped growing around 2000. Family purchasing power today is just the same as in that year. Figure 1 shows that it grew briskly during the 1990s, slowed markedly prior to the crisis, dropped below its 2000 level as a result of the crisis, and grew slowly in recent years.
Two episodes of low purchasing-power growth despite a growing economy appear in the figure. From 2002 through 2007 (recovery from the 2001 recession), and 2010 to 2013 (the recovery from the 2008-09 Great Recession). The unemployment rate reached 4.8% in 2007 – well below the long-run average rate of 5.8% and is right at that long-run rate today. The evidence is strong that inadequate demand is not behind the general stagnation of purchasing power, though it was a factor in the period immediately following the Crisis. As of 2014, the US has had a decade and a half of a new kind of secular stagnation, one associated with declining supply.
Causes of US secular supply stagnation
Four factors account for the stagnation of purchasing power in the US economy: 1) declining labor share; 2) depleted capital; 3) reduced productivity growth; and 4) declining labor-force participation. I will discuss indexes that capture each of these factors in turn using indices that all start at unity in 1989. An index of total purchasing power from earnings is the result of multiplying the four indexes together.
Labor’s declining share of income.
Figure 2 shows an index of labor’s share (including fringe benefits) of total US income. It tends to be level in recessions, fall during the first half of ensuing expansions, then rise back to a high level at the next recession. But superimposed on that pattern is a general decline that cumulates to about 10% over the period. Like the general declining trend in earnings, the decline in the share seems to have started around 2000. Economists have pursued multiple explanations of the decline, but no consensus has formed.
Slow overall productivity growth.
Figure 3 shows that productivity grew rapidly from 1989 to 2007. The Great Recession caused a dip in productivity, as did past recessions (due mainly to idle facilities). Though productivity grew at normal rates during the recovery, it did not make up for the shock of the crisis, so the average growth since 2006 has been below par.2 Household earnings suffered proportionately. See Fernald (2014) for further discussion of productivity.
Depleted capital per household.
Figure 4 shows the third factor – the amount of capital available to equip the average worker. With more plant, equipment, and software, workers earn more. Capital per household rose rapidly during the 1990s, but more slowly after 2000. Capital per household actually fell during the Great Recession, and its more recent growth has not come close to placing capital per household where it would have been if the trend of the 1990s had continued.
Low labor-force participation.
Figure 5 displays the average household’s involvement in the workplace as measured by an index of annual hours of work of household members. Hours per household grew rapidly until 2000, fell as usual during the recession of 2001, flattened but did not grow during the boom of 2002 through 2007, unlike previous booms, collapsed in the Great Recession, and have risen during the recovery that is still underway. The decline in hours since 2000 is the single biggest factor in the decline in household earnings.3 Recent growth in hours per household offers some hope for the return of earnings growth in coming years.
Why hours worked declined
Because declining hours account for the biggest part of the stagnation of earnings, I will dig deeper, by breaking them down into three components: Labor-market participants per household; fraction of participants working; and hours per worker.
Figure 6 shows an index of participants per household.
As the chart illustrates, participation rose during the 1990s, especially in the second half of the decade, but has fallen since. The Great Recession depressed participation only slightly and does not appear to have been an important determinant of the overall decline in involvement in the labor market. Of course, the recession was a time when fewer participants were actually working and more were looking for work.
Economists have been working hard on trying to understand the surprising decline in participation, which exceeds forecasts that were made in earlier years. Most research agrees that the slack labor market had a relatively small discouraging effect. Another suspect that has been found to have at most a small role is changes in the composition of the working-age population – the negative effect of aging of the population on participation just offsets the positive effect of higher educational attainment. A large increase in the fraction of households subject to taxes imposed on families benefiting from food stamps, disability, and other safety-net programs may be a factor.
Figure 7 shows an index of the fraction of participants who were actually working – the remainder were unemployed and actively looking for work.
This factor was flat on average, falling in recessions and rising in the ensuing recoveries. It has risen recently, as unemployment has fallen to the upper-five-percent range. It is not an important element of the stagnation of earnings as of today.
Figure 8 tracks hours of work per week for the average household.
It was quite constant over most of the period, but fell sharply during the Great Recession and recovered only about half of the decline since. It is too early to judge whether hours per worker will return soon to its earlier level or remain as an element of the stagnation of earnings.
Work versus other time uses
Some indication about the changing balance between work and other uses of time comes from the American Time Use Survey, which began in 2003. Table 1 shows the change in weekly hours between 2003 and 2013 in a variety of activities.
For men, the biggest change by far is the decline of 2.5 hours per week at work, a big drop relative to a normal 40- hour work week.
A small part of the decline is attributable to higher unemployment—the unemployment rate was 6.0% in 2003 and 7.4% in 2013.
The decline for women is much smaller, at 0.8 hours per week.
For both sexes, the big increases were in personal care (including sleep) and leisure (mainly video-related activities). Essentially no change occurred in time spent in education. Women cut time spent on housework.
Is there hope for a return to normal growth of household purchasing power?
Capital seems likely to continue to return to its historical growth path, as Figure 4 suggests. For the three other major categories, forecasting is a challenge. There has been no sign of a reversal of the decline in labor’s share of total income and no body of research that supports the idea that it will. Productivity growth is definitely under way, at rates similar to those in the 1970s and 1980s, but well below the rates of the 1950s, 1960s, and 1990s. In particular, there is no sign that a burst of productivity growth will make up for the complete stall in productivity growth around the crisis, as Figure 3 shows.
Most importantly, there is no sign suggesting a departure from the decline in labor-force participation shown in Figure 6. Some commentators have declared a turnaround in participation based on recent monthly data, but Figure 9 suggests this is wishful thinking. Participation has declined along a straight line during the period of improving conditions in the labor market, suggesting a complete disconnect between participation and the state of the labor market.
One possibility for growth in purchasing power is that unemployment may dip below 5.5% -- the level that some believe defines full employment. The unemployment rate reached 3.8% in 2000 and 4.4% in 2007, in both cases at the ends of long expansions, without triggering inflation much above the Fed’s target of around 2%.
I reiterate that these conclusions apply to the United States. In continental Europe, the case is strong that demand has far from recovered. In Japan, unemployment is at low levels but the performance of the economy is substandard.
Fernald, John (2014). “Productivity and Potential Output Before, During, and After the Great Recession”, NBER Macro Annual, 2014, forthcoming.
Lawrence H. Summers, “U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound” Business Economics Vol. 49, No. 2 National Association for Business Economics
1 Complete backup for all of the calculations is available from my website, stanford.edu/~rehall
2 See Fernald (2014) for a discussion of the evidence.
3 See Foote and Ryan (2015).
Posted by Mark Thoma on Thursday, April 23, 2015 at 12:33 AM in Economics, Productivity |
Simon Wren-Lewis is attempting to debunk a series of "mediamacro myths". This is the first in the series:
Mediamacro myth 1: 2010 Britain faced a financial crisis: The idea that the Coalition rescued Britain from a crisis is routinely put forward as fact by both the Conservatives and Nick Clegg. Every time the media let such statements pass (as they invariably do), the language seems to get more florid: Clegg’s latest is that the coalition was born in the “midst of an economic firestorm”. 
The facts say this is pure nonsense. The economy had begun to recover from the recession, and this recovery might have continued if it had not been hit on the head by domestic and Eurozone austerity. As Larry Elliott makes clear (see also here), there was no sign of any market panic, either in the markets for Sterling or government debt. ...
So where is the half-truth that gives the ‘firestorm’ myth some credence? It is of course the Eurozone crisis, and the idea that the UK could suffer a similar fate to the Eurozone periphery. But academic macroeconomists understand that the situation of a country with its own central bank, like the UK, is quite different from a country without, because the central bank can (and in the UK will) act as a lender of last resort, so the government will never ‘run out of money’. That simple fact is sufficient to prevent any crisis happening for an economy like the UK. ...
Why is it so important to keep up the pretence that in 2010 the UK economy was ‘on the brink’ of a financial crisis? Because only then can the pain of the subsequent few years be excused. The truth is that the failure to recover until 2013 was not the inevitable cost of rescuing the economy from crisis, but an avoidable choice by the Coalition government. The delayed recovery, and the damage that did to living standards, was at least in part a direct consequence of attempts to reduce the deficit far too early, and there was no impending crisis that forced the government's hand. 
Posted by Mark Thoma on Thursday, April 23, 2015 at 12:24 AM in Economics, Media, Politics, Press |
Posted by Mark Thoma on Thursday, April 23, 2015 at 12:06 AM in Economics, Links |
Airbrushing Austerity: Ken Rogoff weighs in on the secular stagnation debate, arguing basically that it’s Minsky, not Hansen — that we’re suffering from a painful but temporary era of deleveraging, and that normal policy will resume in a few years.
As far as I can tell, however, Rogoff doesn’t address the key point that Larry Summers and others, myself included, have made — that even during the era of rapid credit expansion, the economy wasn’t in an inflationary boom and real interest rates were low and trending downward — suggesting that we’re turning into an economy that “needs” bubbles to achieve anything like full employment.
But what I really want to do right now is note something else, which is visible in the Rogoff piece and in many other things one reads lately — a backward-looking view of the austerity fever that swept policymaking circles in 2010 and airbrushes out the reality of intellectual folly. You see this sort of thing when people who predicted soaring interest rates from crowding out right away now claim that they were only talking about long-term solvency; when people who issued dire warnings about runaway inflation say that they were only suggesting a risk, or maybe talking about financial stability; and so on down the line.
So, in Rogoff’s version of austerity fever all that was really going on was that policymakers were excessively optimistic, counting on a V-shaped recovery; all would have been well if they had read their Reinhart-Rogoff on slow recoveries following financial crises.
Sorry, but no — that’s not how it happened. ...
Posted by Mark Thoma on Wednesday, April 22, 2015 at 06:51 AM in Economics |
Rajiv Sethi comments on the charge that Navinder Singh Sarao manipulated prices through "spoofing":
Spoofing in an Algorithmic Ecosystem: A London trader recently charged with price manipulation appears to have been using a strategy designed to trigger high-frequency trading algorithms. Whether he used an algorithm himself is beside the point: he made money because the market is dominated by computer programs responding rapidly to incoming market data, and he understood the basic logic of their structure.
Specifically, Navinder Singh Sarao is accused of having posted large sell orders that created the impression of substantial fundamental supply in the S&P E-mini futures contract:
The authorities said he used a variety of trading techniques designed to push prices sharply in one direction and then profit from other investors following the pattern or exiting the market.
The DoJ said by allegedly placing multiple, simultaneous, large-volume sell orders at different price points — a technique known as “layering”— Mr Sarao created the appearance of substantial supply in the market.
Layering is a type of spoofing, a strategy of entering bids or offers with the intent to cancel them before completion.
Who are these "other investors" that followed the pattern or exited the market? Surely not the fundamental buyers and sellers placing orders based on an analysis of information about the companies of which the index is composed. Such investors would not generally be sensitive to the kind of order book details that Sarao was trying to manipulate (though they may buy or sell using algorithms sensitive to trading volume in order to limit market impact). Furthermore, as Andrei Kirilenko and his co-authors found in a transaction level analysis, fundamental buyers and sellers account for a very small portion of daily volume in this contract.
As far as I can tell, the strategies that Sarao was trying to trigger were high-frequency trading programs that combine passive market making with aggressive order anticipation based on privileged access and rapid responses to incoming market data. Such strategies correspond to just one percent of accounts on this exchange, but are responsible for almost half of all trading volume and appear on one or both sides of almost three-quarters of traded contracts.
The most sophisticated algorithms would have detected Sarao's spoofing and may even have tried to profit from it, but less nimble ones would have fallen prey. In this manner he was able to syphon off a modest portion of HFT profits, amounting to about four million dollars over four years.
What is strange about this case is the fact that spoofing of this kind is, to quote one market observer, as common as oxygen. It is frequently used and defended against within the high frequency trading community. So why was Sarao singled out for prosecution? I suspect that it was because his was a relatively small account, using a simple and fairly transparent strategy. Larger firms that combine multiple strategies with continually evolving algorithms will not display so clear a signature.
It's important to distinguish Sarao's strategy from the ecology within which it was able to thrive. A key feature of this ecology is the widespread use of information extracting strategies, the proliferation of which makes direct investments in the acquisition and analysis of fundamental information less profitable, and makes extreme events such as the flash crash practically inevitable.
Posted by Mark Thoma on Wednesday, April 22, 2015 at 06:48 AM in Economics, Financial System |
Faster productivity growth would be great. I’m just not at all sure we can count on it to lift middle-class incomes: Recently, a number of economists and commentators have suggested that faster productivity growth would be a big way to boost the income of middle-class households. I’m all for faster productivity growth, though I’d argue no one knows how to reliably make it happen. But given the wedge of inequality between productivity and low and middle incomes, wages, and wealth, I’m skeptical that this would work as well as some think.
So I wrote this paper exploring the issue and adding some of my own estimates. Here’s the intro...
I tried to make a similar point here: Full Employment Alone Won’t Solve Problem of Stagnating Wages.
Posted by Mark Thoma on Wednesday, April 22, 2015 at 12:33 AM in Economics, Income Distribution, Productivity |
Posted by Mark Thoma on Wednesday, April 22, 2015 at 12:06 AM in Economics, Links |
I have a new column:
An Economic Agenda for Hillary Clinton: As Hillary Clinton campaigns for the nomination for president, what should be on her economic agenda? Setting aside the political reality that Republicans will attempt to block most anything she tries to do, here is a list of objectives:...
Posted by Mark Thoma on Tuesday, April 21, 2015 at 06:21 AM in Economics, Politics |
Olivier Blanchard at Vox EU:
Rethinking macroeconomic policy: Introduction, by Olivier Blanchard: On 15 and 16 April 2015, the IMF hosted the third conference on “Rethinking Macroeconomic Policy”. I had initially chosen as the title and subtitle “Rethinking Macroeconomic Policy III. Down in the trenches”.1 I thought of the first conference in 2011 as having identified the main failings of previous policies, the second conference in 2013 as having identified general directions, and this conference as a progress report.
My subtitle was rejected by one of the co-organisers, namely Larry Summers. He argued that I was far too optimistic, that we were nowhere close to knowing where were going. Arguing with Larry is tough, so I chose an agnostic title, and shifted to “Rethinking Macro Policy III. Progress or confusion?”
Where do I think we are today? I think both Larry and I are right. I do not say this for diplomatic reasons. We are indeed proceeding in the trenches. But where the trenches are eventually going remains unclear. This is the theme I shall develop in my remarks, focusing on macroprudential tools, monetary policy, and fiscal policy.
» Continue reading "'Rethinking Macroeconomic Policy'"
Posted by Mark Thoma on Tuesday, April 21, 2015 at 06:15 AM in Economics, Macroeconomics, Methodology |
Paul Krugman on John Taylor's claim that deviations from his Taylor Rule caused the financial crisis:
...if it’s really that easy for monetary errors to endanger financial stability — if a deviation from perfection so small that it leaves no mark on the inflation rate is nonetheless enough to produce the second-worst financial crisis in history — this is an overwhelming argument for draconian bank regulation. Modest monetary mistakes will happen, so if you believe that these mistakes caused the global financial crisis you must surely believe that we need to do whatever it takes to make the system less fragile. Strange to say, however, I don’t seem to be hearing that from Taylor or anyone else in that camp.
Posted by Mark Thoma on Tuesday, April 21, 2015 at 06:12 AM in Economics, Financial System, Monetary Policy, Regulation |
Posted by Mark Thoma on Tuesday, April 21, 2015 at 12:06 AM in Economics, Links |
Let's hope the Fed is listening:
Labor Market Slack and Monetary Policy, by David G. Blanchflower and Andrew T. Levin, NBER Working Paper No. 21094: In the wake of a severe recession and a sluggish recovery, labor market slack cannot be gauged solely in terms of the conventional measure of the unemployment rate (that is, the number of individuals who are not working at all and actively searching for a job). Rather, assessments of the employment gap should reflect the incidence of underemployment (that is, people working part time who want a full-time job) and the extent of hidden unemployment (that is, people who are not actively searching but who would rejoin the workforce if the job market were stronger). In this paper, we examine the evolution of U.S. labor market slack and show that underemployment and hidden unemployment currently account for the bulk of the U.S. employment gap. Next, using state-level data, we find strong statistical evidence that each of these forms of labor market slack exerts significant downward pressure on nominal wages. Finally, we consider the monetary policy implications of the employment gap in light of prescriptions from Taylor-style benchmark rules.
Posted by Mark Thoma on Monday, April 20, 2015 at 11:42 AM in Academic Papers, Economics, Monetary Policy, Unemployment |
This is from the Liberty Street Economics Blog at the NY Fed:
Credit Supply and the Housing Boom, by Alejandro Justiniano, Giorgio Primiceri, and Andrea Tambalotti: There is no consensus among economists as to what drove the rise of U.S. house prices and household debt in the period leading up to the recent financial crisis. In this post, we argue that the fundamental factor behind that boom was an increase in the supply of mortgage credit, which was brought about by securitization and shadow banking, along with a surge in capital inflows from abroad. This argument is based on the interpretation of four macroeconomic developments between 2000 and 2006 provided by a general equilibrium model of housing and credit.
The financial crisis precipitated the worst recession since the Great Depression. The spectacular rise in house prices and household debt during the first half of the 2000s, which is illustrated in the first two charts, was a crucial factor behind these events. Yet, economists disagree on the fundamental causes of this credit and housing boom.
A common narrative attributes the surge in debtand house prices to a loosening of collateral requirements for mortgages, associated with higher initial loan-to-value (LTV) ratios, multiple mortgages on the same property, and expansive home equity lines of credit.
The fact that collateral requirements became looser, at least for certain borrowers, is fairly uncontroversial. But can higher LTVs account for the unprecedented increase in house prices and debt, while remaining consistent with other macroeconomic developments during the same period?
Two facts suggest that the answer to this question is no. First, if the relaxation of collateral constraints had been widespread, it should have resulted in a surge of mortgage debt relative to the value of real estate. In the data, however, household debt and real estate values rose in tandem, leaving their ratio roughly unchanged over the first half of the 2000s, as shown in the chart below. In fact, this ratio only spiked when home prices tumbled, starting in 2006.
Second, more relaxed collateral requirements make it possible for the borrowers to demand more credit. Therefore, interest rates should rise to convince the lenders to satisfy this additional demand. In the data, however, real mortgage interest rates fell during the 2000s, as shown below in the fourth chart.
The fall in mortgage interest rates depicted in the fourth chart points to a shift in credit supply as an alternative explanation of the credit and housing boom of the early 2000s. We develop this hypothesis within a simple general equilibrium model in Justiniano, Primiceri, and Tambalotti (2015).
In the model, borrowing is limited by a collateral constraint linked to real estate values. Changes to this constraint, such as when the maximum LTV increases, shift the demand for credit. On the lending side, there is a limit to the amount of funds that savers can direct toward mortgage finance, which is equivalent to a leverage restriction on financial intermediaries. Changes to this constraint shift the supply of credit.
Lending constraints capture a host of technological and institutional factors that restrain the flow of savings into the mortgage market. Starting in the late 1990s, the explosion of securitization together with changes in the regulatory environment lowered many of these barriers, increasing the supply of mortgage credit.
The pooling and tranching of mortgages into mortgage-backed securities (MBS) played a central role in loosening lending constraints through several channels. First, tranching creates highly rated assets out of pools of risky mortgages. These assets can then be purchased by those institutional investors that are restricted by regulation to hold only fixed-income securities with high ratings. As a result, the boom in securitization channeled into mortgages a large pool of savings that had previously been directed toward other safe assets, such as government bonds. Second, investing in these senior MBS tranches freed up intermediary capital, owing to their lower regulatory charges. This form of “regulatory arbitrage” allowed banks to increase leverage without raising new capital, expanding their ability to supply credit to mortgage markets. Third, securitization allowed banks to convert illiquid loans into liquid funds, reducing their funding costs and hence increasing their capacity to lend.
International factors also played an important role in increasing the supply of funds available to American home buyers, as global saving flowed into U.S. safe assets, including agency MBS, before the financial crisis (Bernanke, Bertaut, Pounder, DeMarco, and Kamin 2011).
The fifth chart plots the effects of a relaxation of lending constraints in our model. When savers and financial institutions are less restricted in their lending, the supply of credit increases and interest rates fall. Since access to credit requires collateral, the increased availability of funds at lower interest rates makes the existing collateral—houses—scarcer and hence more valuable. As a result of higher real estate values, borrowers can increase their debt, even though their debt-to-collateral ratio remains unchanged. These responses of debt, house prices, aggregate leverage, and mortgage rates match well the empirical facts illustrated in the previous four charts. We conclude from this experiment that a shift in credit supply, associated with looser lending constraints, was the fundamental driver of the credit and housing boom that preceded the Great Recession.
This interpretation of the sources of the credit and housing boom is consistent with the microeconometric evidence presented in the influential work of Mian and Sufi (2009, 2010). They show that an expansion in credit supply was the fundamental driver of the surge in household debt and that borrowing against the increased value of real estate accounts for a significant fraction of this build-up in debt.
Our model, by providing a theoretical perspective on the important factors behind the financial crisis, should prove useful as a framework to study policies that might prevent a repeat of this experience.
The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of Chicago, the Federal Reserve Bank of New York, or the Federal Reserve System. Any errors or omissions are the responsibility of the author.
Posted by Mark Thoma on Monday, April 20, 2015 at 09:04 AM in Economics, Financial System, Housing |
Is there any hope for Greece?:
Greece on the Brink, by Paul Krugman, Commentary, NY Times: ... At the end of 2009 Greece faced a crisis driven by two factors: High debt, and inflated costs and prices that left the country uncompetitive.
Europe responded with loans that kept the cash flowing, but only on condition that Greece pursue extremely painful policies. These included spending cuts and tax hikes that, if imposed on the United States, would amount to $3 trillion a year. There were also wage cuts on a scale that’s hard to fathom, with average wages down 25 percent from their peak.
These immense sacrifices were supposed to produce recovery. Instead, the destruction of purchasing power deepened the slump, creating Great Depression-level suffering and a huge humanitarian crisis. ...
It has been an endless nightmare... Can Greek exit from the euro be avoided?
Yes, it can. The irony of Syriza’s victory is that it came just at the point when a workable compromise should be possible. ...
By late 2014 Greece had managed to eke out a small “primary” budget surplus... That’s all that creditors can reasonably demand... Meanwhile, all those wage cuts have made Greece competitive on world markets — or would ... if some stability can be restored.
The shape of a deal is therefore clear: basically, a standstill on further austerity, with Greece agreeing to make significant but not ever-growing payments to its creditors. Such a deal would set the stage for economic recovery, perhaps slow at the start, but finally offering some hope.
But right now that deal doesn’t seem to be coming together..., creditors are demanding things — big cuts in pensions and public employment — that a newly elected government of the left simply can’t agree to, as opposed to reforms like an improvement in tax enforcement that it can. ...
To make things even worse, political uncertainty is hurting tax receipts, probably causing that hard-earned primary surplus to evaporate. The sensible thing, surely, is to show some patience on that front: if and when a deal is reached, uncertainty will subside and the budget should improve... But in the pervasive atmosphere of distrust, patience is in short supply.
It doesn’t have to be this way. True, avoiding a full-blown crisis would require that creditors advance a significant amount of cash, albeit cash that would immediately be recycled into debt payments. But consider the alternative. The last thing Europe needs is for fraying tempers to bring on yet another catastrophe, this one completely gratuitous.
Posted by Mark Thoma on Monday, April 20, 2015 at 07:28 AM in Economics |
Posted by Mark Thoma on Monday, April 20, 2015 at 12:06 AM in Economics, Links |
From Vox EU:
How immigrants and job mobility help low-skilled workers, by Mette Foged, Giovanni Peri: Existing studies – largely based on the analyses of large immigration episodes (e.g. Friedberg 2001, Card 1991), and the experience of the US and the UK (Ottaviano and Peri 2012, Manacorda et al 2012) – show that immigration can be absorbed with small changes in employment and wages of natives.
Theories of native-immigrant complementarities (as described in Lewis 2013) and of efficient task specialisation (as proposed in Peri and Sparber 2009) have been articulated in order to explain those findings. They suggest that:
- The inflow of low-skilled immigrants may encourage natives to upgrade and adjust their jobs taking advantage of immigrant-native complementarity as those two groups specialise in different occupations.
Critics of those studies, however, argue that lacking a genuine random supply shock to the distribution of immigrants and without the ability of following native workers over time one cannot establish the causality of that relationship. Moreover, some argue that European labour markets are different and those results cannot be extended to immigration in Europe.
Our new research provides a cleaner and more convincing test of the causal effect of low-skilled immigrants on labour market outcomes of natives (Foged and Peri 2015). In it we use a panel of all residents of Denmark between 1991 and 2008 and exploit an exogenous dispersion of refugees across Danish municipalities and a later surge in immigrants to track how such exogenous shock affected native workers. We focus especially on the effects on workers at the low end of the wage and income spectrum, specifically the less educated and those who were young and with low job-tenure.
An ideal setting: Dispersal policy and immigration surge in Denmark
Immigrants represented a limited share (three percent or less) of total employment in Denmark until 1994, equally divided between those from EU countries and those from other countries. Refugees were distributed across municipalities between 1986 and 1998 following the Spatial Dispersal Policy (Damm 2009). This policy implied that the Danish Refugee Council, independently of the economic characteristics and preferences of the refugees, distributed them across municipalities based only on information on their nationality and family size. The goal of the dispersal policy was to distribute the total of the refugees uniformly across municipalities and to provide them with housing for a year (hence most of them accepted the offer). Clusters of refugees from specific countries in specific municipalities were generated by the dispersal due to the timing of their arrival and house availability when they arrived. These clusters were completely uncorrelated to the labour market conditions of the municipalities and to the economic characteristics of the immigrants.
Then, beginning in 1995, the presence of non-EU immigrants had a rapid surge. In particular, as shown in Figure 1, immigrant inflows from specific refugee-sending countries experienced a strong and sudden increase due to a sequence of international conflicts (Yugoslavia, Somalia, Afghanistan, and Iraq).
Figure 1. Refugee-country immigrants in Denmark
Notes: Growth in immigrant populations since 1 January 1995 from major source countries for refugee inflows between 1986-1998 and from Eastern Europe.
When the dispersal policy was phased out and family reunification became the main channel of entry between 1995 and 1998, the location of those new immigrants from refugee countries was driven by their inclination to locate near the communities of co-nationals formed earlier by the dispersal policy. This unique combination of events provides us with an ideal random supply shock to immigrants. This shock is represented by the increase of refugee-country immigrants after 1995, distributed to the municipalities that experienced dispersal-driven clustering of these refugee-country immigrants between 1986 and 1995.
Labour market effects on the less educated
The refugee-country immigrants were quite representative of non-European immigrants in terms of their education and skills. Forty to fifty percent of them did not have post-secondary education (only 32% of natives did not). Similarly, the more basic occupations (‘sales and elementary service occupations’) employed 13% of these immigrants and only 4% of the natives. In particular, by measuring the ‘manual skill’ content of occupations, we establish that refugee-country immigrants, as typical of non-European immigrants, were in large part concentrated in manual-intensive occupations.
In our analysis, we first test how non-college educated native workers responded to an increase of refugee-country immigrants.
- We find that, especially for native workers who moved across establishments, refugee-country immigrants spurred significant occupational mobility and increased specialisation into complex jobs, using more intensively analytical and communication skills and less intensively manual skills.
This upgrade to less manual intensive and more complex jobs was accompanied by a significant wage increase. Certainly the high job mobility, facilitated by the flexibility and competitiveness of the Danish labour market, were key catalysts for the observed native workers’ response.
A clean way to visualise the effect on native outcomes is Figure 2 that shows a difference-in-difference representation of the effect of exposure to refugee-country immigration. The figure plots the difference in job complexity and hourly wage between less educated natives in municipalities with large and small (top and bottom quartile) increases in refugee-country immigrants as determined by the dispersal policy and the post-1994 surge (1994 is year 0). We see that the differences in occupation complexity (panel A) and wages (panel E) for low-skilled natives increased significantly after 1994 in favour of the municipalities that received the surge of refugee-country immigrants.
Figure 2. The short- and long-run differences in native outcomes
in a high-versus-low immigration municipality
Notes: Parameter estimates and 95% confidence limits on the difference in outcomes between the upper and lower quartile of immigrant exposure.
The figures (and regression results in the study) suggest that the complexity index increased with 3% more and wages increased up to 2% more for low-skilled natives in high exposed municipalities (with a 1.6 percentage point increase in the refugee immigrant share) relative to the less exposed municipalities. This took place over 13 years and it appears to be a permanent positive change.
We then focus on the groups with lower wage and higher probability of unemployment, namely those who were young and had a low-tenure job as of 1994 and we compare their performance between high and low refugee-immigration municipalities. These groups are also those with larger potential lifetime gains from changing occupation and upgrading. And in fact, for those groups, job complexity and wages increased the most. Older (over 45 years of age) and long-tenured workers did not take advantage of immigration complementarity, did not experience a wage growth, and some may have retired earlier.
Summary and concluding remarks
Overall, our study finds that a labour market that encourages occupational mobility and allows low-skilled immigrants can generate an effective mechanism to produce upward wage and skill mobility of less educated natives, especially the young and low-tenure ones.
Card, D (1990) “The impact of the Mariel boatlift on the Miami labor market”, Industrial and Labor Relations Review, ILR Review, Cornell University, vol. 43(2), pages 245-257, January.
Damm, A P (2009), “Determinants of recent immigrants' location choices: quasi-experimental evidence”, Journal of Population Economics 22 (1):145-174.
Foged, M and G Peri (2015), “Immigrants’ Effect on Native Workers: New Analysis on Longitudinal Data”, IZA Discussion Paper No. 8961
Rachel M F (2001), “The Impact Of Mass Migration On The Israeli Labor Market”, The Quarterly Journal of Economics, MIT Press, vol. 116(4), pages 1373-1408, November.
Lewis, E (2013), “Immigration and Production Technology”, Annual Review of Economics 5 (1):165-191.
Manacorda M, A Manning and J Wadsworth (2012), “The Impact Of Immigration On The Structure Of Wages: Theory And Evidence From Britain”, Journal of the European Economic Association, European Economic Association, vol. 10(1), pages 120-151, 02.
Ottaviano, G I P and G Peri (2012), “Rethinking the Effect of Immigration on Wages”, Journal of the European Economic Association 10 (1):152-197.
Peri, G and C Sparber (2009), “Task Specialization, Immigration and Wages”, American Economic Journal: Applied Economics 1 (3):135-169.
Posted by Mark Thoma on Sunday, April 19, 2015 at 05:39 AM in Economics, Immigration |
Posted by Mark Thoma on Sunday, April 19, 2015 at 12:06 AM in Economics, Links |
This seems implausible to me, yet there seems to be evidence for it:
Are we kidding ourselves on competition?, by Joshua Gans: ...Consider a situation where there are 10 firms in a market and they compete with one another. Now suppose that all shareholders — say because they are following the dicta of diversification — allocate their wealth in equal proportion across those 10 firms. That means that each owner of the firm — even if there are thousands of these — cares equally about each firm’s profits.
So ask yourself: when those shareholders vote on the composition of boards or the management of the firm, or, importantly how the management of the firm is compensated, are they going to vote for managers who will care only about the profits of the firm they manage or about the profits more broadly? The answer is obvious: they will look to managers who manage in the interest of shareholders and so that means they care about all firm profits and not just the one of their own firm.
In a world where shareholders can get what they want, we won’t have competition in this outcome but, more likely, a collusive outcome. What is more, the firms won’t have to go to all the difficulty of violating antitrust laws to obtain this outcome, they will do it unilaterally. There are no laws against that. ...
Now this isn’t just speculation. Jose Azar, an economist now at Charles River Associates, did his Princeton PhD on this topic. His theory paper is here and it builds on others including Gordon (1990), Hansen and Lott (1995) and O’Brien and Salop (2000). Frank Wolak and I came up with a similar set of issues related to cross-ownership and hedging in electricity markets (for vertical ownership) and verified anti-competitive consequences arising from this. But Azar, along with Martin Schmalz and Isabel Tecu have demonstrated that cross-ownership has anti-competitive impacts on the US airline industry. They find that cross ownership increases US airline prices 3–5%. When they use the event whereby BlackRock acquired Barclays Global Investors (a merger changing the shares of common ownership in airlines), they found such ownership could indicate 10% bumps in pricing with US airline ticket prices rising by 0.6% as a result of that merger alone. ...
The point here is that we cannot really ignore this issue as economists or as policy-makers. We have “known” about it for decades. Now’s the time to take it seriously.
[There's a bit more in the original post.]
Posted by Mark Thoma on Saturday, April 18, 2015 at 10:08 AM in Economics, Market Failure, Regulation |
Declining Desire to Work and Downward Trends in Unemployment and Participation, by Regis Barnichon and Andrew Figura: Abstract The US labor market has witnessed two apparently unrelated trends in the last 30 years: a decline in unemployment between the early 1980s and the early 2000s, and a decline in labor force participation since the early 2000s. We show that a substantial factor behind both trends is a decline in desire to work among individuals outside the labor force, with a particularly strong decline during the second half of the 90s. A decline in desire to work lowers both the unemployment rate and the participation rate, because a nonparticipant who wants to work has a high probability to join the unemployment pool in the future, while a nonparticipant who does not want to work has a low probability to ever enter the labor force. We use cross-sectional variation to estimate a model of non-participants' propensity to want a job, and we find that changes in the provision of welfare and social insurance, possibly linked to the mid-90s welfare reforms, explain about 50 percent of the decline in desire to work.
External and Public Debt Crises, by Cristina Arellano, Andrew Atkeson, and Mark Wright: Abstract In recent years, the members of two advanced monetary and economic unions -- the nations of the Eurozone and the states of the United States of America -- experienced debt crises with spreads on government borrowing rising dramatically. Despite the similar behavior of spreads on public debt, these crises were fundamentally different in nature. In Europe, the crisis occurred after a period of significant increases in government indebtedness from levels that were already substantial, whereas in the USA state government borrowing was limited and remained roughly unchanged. Moreover, whereas the most troubled nations of Europe experienced a sudden stop in private capital flows and private sector borrowers also faced large rises in spreads, there is little evidence that private borrowing in US states was differentially affected by the creditworthiness of state governments. In this sense, we can say that the US States experienced a public debt crisis , whereas the nations of Europe experienced an external debt crisis affecting both public and private borrowers. Why did Europe experience an external debt crisis and the US States only a public debt crisis? And, why did the members of other economic unions, such as the provinces of Canada, not experience a debt crisis at all despite high and rising provincial public debt levels? In this paper, we construct a model of default on domestic and external public debt and interference in private external debt contracts and use it to argue that these different debt experiences result from the interplay of differences in the ability of governments to interfere in the private external debt contracts of their citizens, with differences in the flexibility of state fiscal institutions. We also assemble a range of empirical evidence that suggests that the US States are less fiscally flexible but more constrained in their ability to interfere in private contracts than the members of other economic unions, which simultaneously exposes the states to public debt crises while insulating them from an external debt crisis affecting private sector borrowers within the state. In contrast, Eurozone nations are more fiscally flexible but have a greater ability to interfere with the contracts, which together allow for more public borrowing at the cost of a joint public and private external debt crisis. Lastly, Canadian provincial governments are both fiscally flexible and limited in their ability to interfere, which allows both for more public borrowing and limits the likelihood of either a public or external debt crisis occurring. We draw lessons from these findings for the future design of Eurozone economic and legal institutions.
Posted by Mark Thoma on Saturday, April 18, 2015 at 06:01 AM in Conferences, Economics, Macroeconomics |
From Vox EU:
Explaining the dearth of private investment, by Aqib Aslam, Samya Beidas-Strom, Daniel Leigh, Seok Gil Park, Hui Tong: Business investment in advanced economies contracted sharply during the global crisis and has recovered little since. This column argues that the main factor holding back investment is overall economic weakness. In some countries other contributing factors include financial constraints and policy uncertainty. Fixing the investment dearth will require fixing the general weakness in economic activity.
The debate continues on why businesses aren’t investing more in machinery, equipment, and plants. In advanced economies, business investment – the largest component of private investment – has contracted much more since the global financial crisis than after historical recessions. There are worrying signs that this has contributed to the erosion of long-term economic growth.
Getting the diagnosis right is critical for devising policies to encourage firms to invest more. If low investment is mainly a symptom of a weak economic environment – with firms responding to weak sales as some suggest1 – then calls for expanding overall economic activity could be justified.2 If, on the other hand, if special impediments are mainly to blame, – such as policy uncertainty or financial sector weaknesses, as others suggest (European Investment Bank 2013, and Buti and Mohl 2014, for example), – then these must be removed before investment can rise.
Weak economic activity key factor
Our analysis in chapter 4 of the IMF’s April 2015 World Economic Outlook suggests that the weak economic environment is the overriding factor holding back business investment.
Investment contracted more severely following the global financial crisis than in historical recessions, but the contraction in output was also much more severe (Figure 1). The joint behavior of business investment and output has therefore not been unusual. The relative response of investment was, overall, two to three times greater than that of output in previous recessions, and this relative response was similar in the current context. If anything, investment dipped slightly less relative to the output contraction than in previous recessions.
Figure 1. Real business investment and output relative to forecasts: Historical recessions versus Global Financial Crisis (Percent deviation from forecasts in the year of recession, unless noted otherwise; years on x-axis, unless noted otherwise)
Sources: Consensus Economics; Haver Analytics; national authorities; and IMF staff estimates.
At the same time, the endogenous nature of investment and output – that is, the simultaneous feedback from output to investment and then back to output – complicates the interpretation of these results. To correct for this endogeneity, we use an instrumental variables approach and estimate the historical relationship between investment and output based on macroeconomic fluctuations not triggered by a contraction in business investment. Our instruments are changes in fiscal policy motivated primarily by the desire to reduce the budget deficit and not by a response to the current or prospective state of the economy (Devries and others, et al 2011). We use the results to predict the contraction in investment that would have been expected to occur after 2007 based on the observed contraction in output. We then compare the predicted decline in investment after 2007 with the actual decline in investment.
Note: For historical recessions, t = 0 is the year of recession. Deviations from historical recessions (1990–2002) are relative to spring forecasts in the year of the recession. Recessions are as identified in Claessens, Kose, and Terrones 2012. For the global financial crisis (GFC), t = 0 is 2008. Deviations are relative to pre-crisis (spring 2007) forecasts. Shaded areas denote 90 percent confidence intervals. Panels 1 and 2 present data for the advanced economies (AEs). GFC crisis and non-crisis advanced economies are as identified in Laeven and Valencia 2012.
Based on this estimated historical investment-output relation, business investment has deviated little from what could be expected given the weakness in economic activity (Figure 2). In other words, firms have reacted to weak sales – both current and prospective – by reducing capital spending. Indeed, in surveys, businesses typically report lack of customer demand as the dominant challenge they face.
Figure 2. Real business investment in advanced economies: Actual and predicted based on economic activity (Percent deviation of investment from spring 2007 forecasts)
Sources: Consensus Economics; Haver Analytics; national authorities; and IMF staff estimates.
Factors beyond output
Note: Prediction based on historical investment-output relation and post-crisis decline in output relative to pre-crisis forecasts. Shaded areas denote 90 percent confidence intervals.
Beyond this general pattern, we find a few cases of investment weakness that go beyond what can be explained by output – particularly in Eurozone countries with high borrowing spreads during the 2010-2011 sovereign debt crisis. After controlling for financial constraints and policy uncertainty, the degree of unexplained investment weakness declines for these economies, suggesting a role for these factors beyond the weakness in output. At the same time, identifying the effect of these factors is challenging based on macroeconomic data, particularly given the limited number of observations for each country since the crisis.
Confirmation of these additional factors at play comes from our analysis of investment decisions by different types of firms. Investment by firms in sectors that rely more on external funds (such as machinery producers) has fallen more since the crisis than investment by other types of firms. And firms whose stock prices typically respond more to measures of aggregate uncertainty have cut back more on investment – even after the role of weak sales is accounted for. This suggests that, given the irreversible and lumpy nature of some investment projects, uncertainty has played a role in discouraging business investment.
Figure 3 provides a simple illustration of this finding by reporting the evolution of investment for publically-listed firms in the highest 25% and the lowest 25% of the external dependence distribution for all advanced economies since 2007. By 2009 investment had dropped by 50% (relative to the forecast) among firms in more financially dependent sectors – about twice as much as for those in less financially dependent sectors. In the case of policy uncertainty, investment had dropped by about 50% by 2011, relative to the forecast, in sectors more sensitive to uncertainty – more than twice as much as in less sensitive sectors.
Figure 3. Firm investment since the Crisis, by firm type (Percent; impulse responses based on local projection method)
Sources: Thomson Reuters Worldscope; and IMF staff calculations. Note: Less (more) financially dependent and less (more) sensitive firms are those in the lowest (highest) 25 percent of the external dependence and news-based sensitivity distributions, respectively, as described in the chapter. Shaded areas (less dependent/sensitive) and dashed lines (more dependent/sensitive) denote 90 percent confidence intervals.
Policies to boost investment
We conclude that a comprehensive policy effort to expand output is needed to sustainably raise private investment. Fiscal and monetary policies can encourage firms to invest, although such policies are unlikely to fully return restore investment fully to pre-crisis trends. More public infrastructure investment could also spur demand in the short term, raise supply in the medium term, and thus 'crowd in’ private investment where conditions are right. And structural reforms, – such as those to strengthen labor force participation, – could improve the outlook for potential output and thus encourage private investment. Finally, to the extent that financial constraints hold back private investment, there is also a role for policies aimed at relieving crisis-related financial constraints, including through tackling debt overhang and cleaning up bank balance sheets.
Buti, M and P Mohl (2014), “Lacklustre Investment in the Eurozone: Is There a Puzzle?”, VoxEU.org.
Chinn, M (2011) “Investment Behavior and Policy Implications”, Econbrowser: Analysis of Current Economic Conditions and Policy (blog).
Devries, P, J Guajardo, D Leigh, and A Pescatori (2011) “A New Action-Based Dataset of Fiscal Consolidation in OECD Countries”, IMF Working Paper 11/128, International Monetary Fund, Washington.
European Investment Bank (2013), Investment and Investment Finance in Europe, Luxembourg.
Krugman, P (2011), “Explaining Business Investment.” The New York Times, 3 December.
Lewis, S, N Pain, J Strasky, and F Mankyna (2014), “Investment Gaps after the Crisis”, Economics Department Working Paper 1168, Organisation for Economic Co-operation and Development, Paris.
1 See Chinn (2011) and Krugman (2011) for example.
2 Lewis and others (2014) find that, although it has been a major factor, low output growth since the crisis cannot fully account for the weak investment weakness in some of the major advanced economies.
Posted by Mark Thoma on Saturday, April 18, 2015 at 05:38 AM in Economics |
Posted by Mark Thoma on Saturday, April 18, 2015 at 12:06 AM in Economics, Links |
First paper at the NBER Annual Conference on Macroeconomics
Expectations and Investment, by Nicola Gennaioli, Yueran Ma, and Andrei Shleifer: Abstract Using micro data from Duke University quarterly survey of Chief Financial Officers, we show that corporate investment plans as well as actual investment are well explained by CFOs’ expectations of earnings growth. The information in expectations data is not subsumed by traditional variables, such as Tobin’s Q or discount rates. We also show that errors in CFO expectations of earnings growth are predictable from past earnings and other data, pointing to extrapolative structure of expectations and suggesting that expectations may not be rational . This evidence, like earlier findings in finance, points to the usefulness of data on actual expectations for understanding economic behavior.
Trends and Cycles in China's Macroeconomy, by Chun Chang, Kaji Chen, Daniel Waggoner, and Tao Zha: Abstract We make three contributions in this paper. First, we provide a core of macroeconomic time series usable for systematic research on China. Second, we document, through various empirical methods, the robust findings about striking patterns of trend and cycle. Third, we build a theoretical model that accounts for these facts. The model's mechanism and assumptions are corroborated by institutional details, disaggregated data, and banking time series, all of which are distinctive of Chinese characteristics. The departure of our theoretical model from standard ones offers a constructive framework for studying China's macroeconomy.
Demystifying the Chinese Housing Boom, byHanming Fang, Quanlin Gu, Wei Xiong, and Li-An Zhou: Abstract We construct housing price indices for 120 major cities in China in 2003 - 2013 based on sequential sales of new homes within the same housing developments. By using these indices and detailed information on mortgage borrowers across these cities, we find enormous housing price appreciation during the decade, which was accompanied by equally impressive growth in household income, except in a few first-tier cities. Housing market participation by households from the low-income fraction of the urban population remained steady. Nevertheless, bottom-income mortgage borrowers endured severe financial burdens by using price-to-income ratios over eight to buy homes, which reflected their expectations of persistently high income growth into the future. Such future income expectations could contract substantially in the event of a sudden stop in the Chinese economy and present an important source of risk to the housing market.
Networks and the Macroeconomy: An Empirical Exploration, by Daron Acemoglu, Ufuk Akcigit, and William Kerr: Abstract The propagation of macroeconomic shocks through input-output and geographic networks can be a powerful driver of macroeconomic fluctuations. We first exposit that in the presence of Cobb-Douglas production functions and consumer preferences, there is a specific pattern of economic transmission whereby demand-side shocks propagate upstream (to input supplying industries) and supply-side shocks propagate downstream (to customer industries) and that there is a tight relationship between the direct impact of a shock and the magnitudes of the downstream and the upstream indirect effects. We then investigate the short-run propagation of four different types of industry-level shocks: two demand-side ones (the exogenous component of the variation in industry imports from China and changes in federal spending) and two supply-side ones (TFP shocks and variation in knowledge/ideas coming from foreign patent- ing). In each case, we find substantial propagation of these shocks through the input-output network, with a pattern broadly consistent with theory. Quantitatively, the network-based propagation is larger than the direct effects of the shocks, sometimes by several fold. We also show quantitatively large effects from the geographic network, capturing the fact that the local propagation of a shock to an industry will fall more heavily on other industries that tend to collocate with it across local markets. Our results suggest that the transmission of various different types of shocks through economic networks and industry inter-linkages could have first-order implications for the macroeconomy.
Posted by Mark Thoma on Friday, April 17, 2015 at 07:00 AM in Conferences, Economics, Macroeconomics |
Not all macroeconomic models failed during the Great Recession. "Old-time macroeconomics" ... "provided excellent guidance":
That Old-Time Economics, by Paul Krugman, Commentary, NY Times: America has yet to achieve a full recovery from the ... financial crisis. Still, it seems fair to say that we’ve made up much, though by no means all, of the lost ground.
But you can’t say the same about the eurozone... Why has Europe done so badly? In the past few weeks, I’ve seen a number of speeches and articles suggesting that the problem lies in the inadequacy of our economic models — that ... macroeconomic theory ... failed to offer useful policy guidance... But is this really the story?
No, it isn’t..., basic textbook models ... have performed very well. The trouble is that policy makers in Europe decided to reject those basic models in favor of alternative approaches that were innovative, exciting and completely wrong. ...
In America, the White House and the Federal Reserve mainly stayed faithful to standard Keynesian economics. ... Meanwhile, the Fed ignored ominous warnings that it was “debasing the dollar”...
In Europe, by contrast, policy makers were ready and eager to throw textbook economics out the window in favor of new approaches. The European Commission ... eagerly seized upon supposed evidence for “expansionary austerity... Meanwhile, the European Central Bank took inflation warnings to heart and raised interest rates in 2011 even though unemployment was still very high. ...
European policy makers ... sought justifications for the harsh policies they were determined, for political and ideological reasons, to impose on debtor nations; they lionized economists, like Harvard’s Alberto Alesina, Carmen Reinhart, and Kenneth Rogoff, who seemed to offer that justification. As it turned out, however, all that exciting new research was deeply flawed, one way or another.
And while new ideas were crashing and burning, that old-time economics was going from strength to strength. ...
The point is that it’s wrong to claim ... that policy failed because economic theory didn’t provide the guidance policy makers needed. In reality, theory provided excellent guidance, if only policy makers had been willing to listen. Unfortunately, they weren’t. And they still aren’t. ...
But back to the question of new ideas and their role in policy. It’s hard to argue against new ideas in general. In recent years, however, innovative economic ideas, far from helping to provide a solution, have been part of the problem. We would have been far better off if we had stuck to that old-time macroeconomics, which is looking better than ever.
Posted by Mark Thoma on Friday, April 17, 2015 at 04:50 AM
I am here today (as is Tyler Cowen, he explains the rules we have to follow):
NATIONAL BUREAU OF ECONOMIC RESEARCH, INC.
30th Annual Conference on Macroeconomics
Martin Eichenbaum and Jonathan Parker, Organizers
April 17 and 18, 2015
The Royal Sonesta Hotel
Friday, April 17:
8:30 am - Continental Breakfast
9:00 am - Nicola Gennaioli, Università Bocconi, Yueran Ma, Harvard University, Andrei Shleifer, Harvard University and NBER, Expectations and Investment
Discussants: Chris Sims, Princeton University and NBER, Monika Piazzesi, Stanford University and NBER
10:30 am - Break
11:00 am - Tao Zha, Emory University and NBER, Chun Chang, SAIF Shanghai Jiao, Tong University, Kaiji Chen, Emory University, Daniel F. Waggoner, Federal Reserve Bank of Atlanta, Trends and Cycles in China's Macroeconomy
Discussants: Mark Watson, Princeton University and NBER, John Fernald, Federal Reserve Bank of San Francisco
12:30 pm Lunch – Skyline Rooms
2:00 pm - Hanming Fang, University of Pennsylvania and NBER, Quanlin Gu, Peking University, Wei Xiong, Princeton University and NBER, Li-An Zhou, Peking University, Demystifying the Chinese Housing Boom
Discussants: - Martin Schneider, Stanford University and NBER, Erik Hurst, University of Chicago and NBER
3:30 pm Break
4:00 pm - Daron Acemoglu, Massachusetts Institute of Technology and NBER, Ufuk Akcigit, University of Pennsylvania and NBER, William Kerr, Harvard University and NBER, Network and the Macroeconomy: An Empirical Exploration
Discussants: - Xavier Gabaix New York University and NBER, Lawrence Christiano, Northwestern University and NBER
5:30 pm - Adjourn and Group Dinner - Skyline Rooms, Dinner speaker: Ben Bernanke, Brookings Institution
Saturday, April 18:
8:30 am - Continental Breakfast
9:00 am - Regis Barnichon, CREI, Andrew Figura, Federal Reserve Board, Declining Desire to Work and Downward Trends in Unemployment and Participation
Discussants: Richard Rogerson, Princeton University and NBER, Robert Hall, Stanford University and NBER
10:30 am - Break
11:00 am - Cristina Arellano, Federal Reserve Bank of Minneapolis and NBER, Andrew Atkeson, University of California at Los Angeles and NBER, Mark L. J. Wright, Federal Reserve Bank of Chicago and NBER, External and Public Debt Crises
Discussants - Ricardio Reis, Columbia University and NBER, Harald Uhlig, University of Chicago and NBER
12:30 pm - Adjourn
Posted by Mark Thoma on Friday, April 17, 2015 at 04:13 AM
Posted by Mark Thoma on Friday, April 17, 2015 at 12:06 AM in Economics, Links |
Posted by Mark Thoma on Thursday, April 16, 2015 at 09:11 AM in Economics, Macroeconomics, Video |
This is from Al Gore and David Blood (it is relatively long, so you may want to "read the whole thing"). Comments?:
Cheap coal is a lie – stand up to the industry’s cynical fightback: It is becoming increasingly difficult to avoid the reality that the days of coal ... are numbered. In a world where carbon emissions will increasingly have to be constrained, coal, as the dirtiest of the fossil fuels, is the energy asset most vulnerable ... to seeing its market value collapse well ahead of its previously anticipated useful life. ...
But as the coal industry fights for survival, it has ... embarked on a global campaign to promote coal as the solution to energy poverty. This disingenuous claim is predicated on the notion that coal is the cheapest way of providing electricity to the one-fifth of the world’s population lacking access to an electricity grid.
This ... is extremely misleading. If ever implemented, it would actually significantly worsen the condition of the 1.3 billion people mired in energy poverty.
Most developing countries face serious challenges that are already being exacerbated by climate change-related extreme weather events. They are being battered by stronger storms, more destructive floods, deeper and longer droughts and disruptive switches in the seasonal timing of rain. ... Food security and water supplies are being compromised, natural resources stressed, and critical infrastructure crippled.
Access to affordable and reliable energy is, of course, essential for sustainable development, poverty reduction, improved access to education and healthcare, and the promotion of public safety and stable government. We should not waver in our commitment to remedy energy poverty...
But the relative merits of different energy options must be considered over the long term with an emphasis on three factors: financial cost, reliability, and impact on society and the environment. And when viewed through this lens, renewable energy – particularly solar photovoltaic energy, or PV – far outranks coal as the best future energy choice for developing nations. ...
Posted by Mark Thoma on Thursday, April 16, 2015 at 05:02 AM in Development, Economics, Environment |
No More Cheating: Restoring the Rule of Law in Financial Markets, by Simon Johnson: ... In a speech on Wednesday, Senator Elizabeth Warren (D., MA) laid out a vision for better financial markets. This is not a left-wing or pro-big government agenda. Senator Warren’s proposals are, first and foremost, pro-market. She wants – and we should all want – financial firms and markets that work for customers, that encourage innovation, and that do not build up massive risks which can threaten the financial system and bring down the economy.
Senator Warren puts forward two main sets of proposals. The first is to more strongly discourage the deception of customers. This is hard to argue against. Some parts of the financial sector are well-run, providing essential services at reasonable prices and with sound ethics throughout. Other parts of finance have drifted, frankly, into deceiving people – on fees, on risks, on terms and conditions – as a primary source of profits. We don’t allow this kind of cheating in the non-financial sector and we shouldn’t allow it in finance either.
The unfortunate and indisputable truth is that our rule-making and law-enforcement agencies completely fell asleep prior to 2008 with regard to protecting borrowers and even depositors against predation. Even worse, since the financial crisis, the Securities and Exchange Commission, the Justice Department, and the Federal Reserve Board of Governors proved hard or near impossible to awake from this slumber.
We need simple, clear rules that ensure transparency and full disclosure in all financial transactions – and we need to enforce those rules. This is what was done with regard to securities markets after the debacle of the early 1930s. ...
The second proposal is to end the greatest cheat of all – the implicit subsidies received by the largest financial institutions, structured so as to encourage excessive and irresponsible risk-taking. These consequences of these subsidies have already caused massive macroeconomic damage – this is why our crisis in 2008-09 was so severe and the recovery so slow. Yet we have made painfully little progress towards really ending the problems associated with some very large financial firms – and their debts – being viewed by markets and policymakers as being too big to fail. ...
Posted by Mark Thoma on Thursday, April 16, 2015 at 04:24 AM in Economics, Financial System, Regulation |
Posted by Mark Thoma on Thursday, April 16, 2015 at 12:06 AM in Economics, Links |
Posted by Mark Thoma on Wednesday, April 15, 2015 at 10:15 AM in Economics, Financial System, Video |
Redistribution Can Involve Less Government Rather than More: Thomas Edsall presents some interesting polling results in his NYT column indicating less public support for government policies to redistribute income even as the distribution of income is becoming increasingly unequal. He argues that this presents a paradox for Democrats who are concerned about inequality.
Actually the situation is less paradoxical when we consider the possibility that government policies are largely responsible for growing inequality. This is most obvious is with the bailout of the financial industry in 2008. Without the help of the TARP and the Fed, Goldman Sachs, Citigroup, Morgan Stanley, and most of the other Wall Street behemoths would be out of business. This would have drastically reduced the wealth and income of many of the richest people in the country.
The government has also redistributed income upward by supporting an over-valued dollar that has eliminated millions of manufacturing jobs and put downward pressure on the wages of non-college educated workers more generally. In addition, a Federal Reserve Board policy that raises interest rates to keep people from getting jobs any time the labor market gets tight enough to support wage growth has also had the effect of reducing the wages of most workers.
Also our trade policy of selective protectionism, which exposes manufacturing workers to competition with the lowest paid workers in the world, while largely protecting doctors, lawyers, and other highly paid professionals (who comprise much of the one percent), has the effect of redistributing income upward. Similarly, our policy of patent protection redistributes hundreds of billions of dollars a year from ordinary workers to drug companies and other beneficiaries of these government-granted monopolies.
In these areas and others the government has acted to redistribute income upward. A politician who wanted to reduce inequality could focus on having less government action in these areas. That would be consistent with the polls cited by Edsall indicating that the public wanted a smaller role for the government.
Just one comment. I don't like the word "redistribution" as it is used here since it implies the current distribution of income is correct and just. I don't think it is for a variety of reasons I've hammered on over the years. Returning income/wealth to its rightful owners is not redistribution in the sense the word generally implies (i.e. taking from someone who has earned the income and giving it to someone who has not -- it's the opposite, taking it back from those who haven't earned it, generally those at the top of the income distribution, and returning it to those who have).
Posted by Mark Thoma on Wednesday, April 15, 2015 at 07:39 AM in Economics, Income Distribution |
Speaking of "Gloomy European Economist" Francesco Saraceno' (see post below this one):
What Structural Reforms?, by Francesco Saraceno: I am ready to bet that the latest IMF World Economic Outlook ... will make a certain buzz for a box. It is box 3.5, at page 36 of chapter 3, which has been available on the website for a few days now. In that box, the IMF staff presents lack of evidence on the relationship between structural reforms and total factor productivity, the proxy for long term growth and competitiveness. (Interestingly enough people at the IMF tend to put their most controversial findings in boxes, as if they wanted to bind them).
What is certainly going to stir controversy is the finding that while long term growth is negatively affected by product market regulation, excessive labour market regulation does not hamper long term performance.
It is not the first time that the IMF surprises us with interesting analysis that goes against its own previous conventional wisdom. I will write more about this shortly. Here I just want to remark how these findings are relevant for our old continent.
The austerity imposed to embraced by eurozone crisis countries has taken the shape of expenditure cuts and labour market deregulation, whose magic effects on growth and competitiveness have been sold to reluctant and exhausted populations as the path to a bright future. I already noted, two years ago, that the short-run pain was slowly evolving into long-run pain as well, and that the gain of structural reforms was nowhere to be seen. The IMF tells us, today, that this was to be expected.
The guy who should be happy is Alexis Tsipras; he has been resisting since January pressure from his peers (and the Troika, that includes IMF staff!) to further curb labour market regulations, and recently presented a list of reforms that mostly pledges to reduce crony capitalism, tax evasion and product market rigidities. Exactly what the IMF shows to be effective in boosting growth. ...
This happens in Washington. Problem is, Greece, and Europe at large, seem to be light years away from the IMF research department. We already saw, for example with the mea culpa on multipliers, that IMF staff in program countries does not necessarily read what is written at home. Let’s see whether the discussion on Greece’s reforms will mark a realignment between the Fund’s research work and the prescriptions they implement/suggest/impose on the ground.
Posted by Mark Thoma on Wednesday, April 15, 2015 at 05:37 AM in Economics, Regulation |
About that confidence fairy. This is from Simon Wren-Lewis
Confidence: Francesco Saraceno reminds us about the days in which very important people believed in the confidence fairy (aka expansionary fiscal austerity), which are not so very far away. He also points to some recent ECB research which shows that confidence - as measured by surveys - clearly falls following fiscal austerity. The confidence fairy, rather than waving her wand to make everything alright again, may be making austerity worse.
However, looking at the research in detail revealed some results I found at first surprising. In particular, revenue cuts have a bigger effect on consumer confidence than spending cuts. In terms of GDP impacts, theory - and most but not all empirical evidence - suggests that temporary spending cuts will have a larger impact on overall activity than temporary tax increases, if there is no monetary offset and incentive effects are not very large. Do these empirical results contradiction this?
To answer that you need to ask two further questions. First, what does consumer confidence actually measure? Second, and perhaps more interesting, what information do fiscal announcements actually reveal. ...[goes on to explain]...
Trying to evaluate the impact of past fiscal actions is complicated, in large part because it is difficult to know what the counterfactual was, or what people thought the counterfactual was. Were changes thought to temporary or permanent? (Governments hardly ever say, and even if they did would they be trusted?) To what extent do people internalise the government’s budget constraint? If they do, are fiscal changes telling us about the timing of taxes or spending, or their mix, or something else? It seems to me that these difficulties arise whether we are trying to assess the impact of fiscal changes on confidence, or on activity itself.
Posted by Mark Thoma on Wednesday, April 15, 2015 at 05:20 AM in Economics, Fiscal Policy |
Posted by Mark Thoma on Wednesday, April 15, 2015 at 12:06 AM in Economics, Links |
I tried to make this point long ago (see below):
Sometimes, Boosting Supply Requires More Demand, by Greg Ip, WSJ: The Federal Reserve, everyone agrees, can boost growth in the short run. But can it do it over the long run? This once heretical concept is the latest argument in favor of the Fed taking its time about raising interest rates.
Traditionally, economists treated supply and demand as separate matters. ... The Fed, in this traditional view, can affect how demand fluctuates around the long-run trend, but it can’t affect the long-run trend itself.
But in real life, supply and demand are not so easily separated. The labor force is a function not just of the number of people of working age (a supply-side factor), but also how long they’ve been unemployed and thus how useful their skills are (a demand-side factor). Business investment in new equipment isn’t just a function of the state of technology (a supply side factor), but what they anticipate sales to be in coming years (a demand side factor).
This means that policies that affect demand in the short run can, conceivably, affect supply in the long run, as well. ...
Jay Powell, a Fed governor, makes the point in a speech last week. ... Mr. Powell suggests, the Fed should not assume capacity is written in stone and immune to monetary policy: “Should we think of this supply-side damage as permanent or temporary?” he said in his speech last week. “It seems plausible that at least part of the damage can be reversed. ...
This means, Mr. Powell says, the Fed should be more skeptical than usual when superficial evidence suggests the economy is approaching capacity. While he dances around the implications for monetary policy a bit, the conclusion is obvious: the Fed should stay easier, for longer, which should “not only help restore some of our economy’s potential,” but get inflation back up to 2% faster.
Mr. Powell’s logic is quite compelling and provides an important reason why the Fed should err on the side of letting unemployment fall well below traditional measures of the “natural rate” of unemployment before tightening. ...
This post is from March, 2012 (see also David Beckworth's comments on endogenous labor supply):
The Gap In Monetary and Fiscal Policy, by Mark Thoma: One of the big questions for policymakers is how much of the current downturn represents of temporary cyclical fluctuation and how much of it is a permanent reduction in out productive capacity. If the downturn is mostly temporary, then we will eventually bounce back to the old output trend line. Something like this:
But if it's mostly permanent, i.e. if the trend has fallen to a lower value and will stay there, then the picture is different:
In the first case, highly stimulative policy is appropriate to help the economy get back to the long-run trend as soon as possible. There's still a lot of ground to cover, and policy can help. But in the second case the economy is already back to it's long-run trend at most points in time, or nearly so, and there is no need for policymakers to do much of anything at all. At least that's what we're told.
However, I think this misses part of the story. What it misses is that AS shocks themselves can be both permanent and temporary, and some people may be confusing one for the other. For example, when there as a large AD shock in the form of a change in preferences, say that people no longer like good A as it has gone out of fashion and have now decided B is the must have good, then there will be high unemployment in industry A and excess demand for labor and other resources in industry B. As workers and resources leave industry A, our productive capacity falls and it stays lower until the workers and other resources eventually find their way into industry B. When this process is complete, productive capacity returns to where it was before, or perhaps goes even higher. Thus, there is a short-run cycle in productive capacity that mirrors the business cycle.
A standard business cycle type AD shock will temporarily depress capacity and produce similar effects. Suppose that interest rates go up, taxes go up, government spending goes down, investment falls --pick your story -- causing aggregate demand to fall. When, as a result, businesses lay people off, idle equipment, etc., productive capacity will fall. It can be cranked up again, and will be when the economy recovers, but rehiring labor and taking equipment out of mothballs takes time. In the interim the natural rate of output falls and, just as with a change in the preference for good A versus good B, a negative aggregate demand shock can cause "frictions" on the supply side that temporarily increase the natural rate of unemployment. And there are many other ways this can happen as well.
The point is that there can be short-run cyclical AS effects, and failing to account for these can lead to policy errors. Consider the following diagram:
Up until the point where the line splits into three pieces, assume the economy is in long-run equilibrium with output at the natural rate (we can discuss whether the natural rate actually exists another time, I want to work in the standard model for the moment since that is where the policy discussion is centered). Then, for some reason, aggregate demand falls leading the economy into a recession. As AD falls, people are laid off, equipment is stored, factories are shuttered, and so on and the economy's capacity to produce falls in the short-run as shown by the blue line on the diagram.
But this is a temporary, not a permanent situation. Eventually people will be put back to work, trucks in parking lots will be back on the road, factories will reopen -- you get the picture -- and productive capacity will grow as the economy recovers. I believe many people are treating what is ultimately a temporary fall in capacity as a permanent change, and they are making the wrong policy recommendations as a result.
In fact, there's no reason to think productive capacity can't return to its long-run trend just as fast or faster than output can recover. If so, then it would be a mistake to do as many are doing presently and treat the blue short-run y* line as a constraint for policy, conclude that the gap is small and hence there's nothing for policy to do. Capacity will recover, and policymakers must take this into account when looking at whether additional policy can help the economy. If capacity can grow fast as the economy recovers, then it poses little constraint and policymakers should try to return us to the long-run trend as soon as possible. That is, aggressive policy is still called for even if productive capacity is presently relatively low. ...
One last point about the diagram. I drew the long-run line so there is a long-run decline in the trend of our productive capacity after the recession (i.e. a permanent shock). However, it's hard to see because, consistent with my beliefs, I do not think the change in our long-run capacity to produce goods and services will be as negative as many others. So the effect is not large in the diagram (I acknowledge I'm more optimistic on this point than many others that I respect). But even if the long-run trend had fallen by more than shown in the diagram, say by 50%, the points above would still hold. If the capacity to produce recovers as the economy recovers, and does so relatively fast, then policymakers should not be constrained by the belief that the natural rate of output is relatively low at the present time. Aggressive policy is still the best course of action.
If I were to do this today -- several years later -- I would draw the last graph so that the permanent fall in productive capacity is larger (i.e. the Y*LR line would be lower). But, as explained in the last paragraph, the main point still holds.
Posted by Mark Thoma on Tuesday, April 14, 2015 at 08:44 AM in Economics, Fiscal Times, Monetary Policy |
From the NBER Digest:
Secular Stagnation: The Long View, by Matt Nesvisky: Growth economists are divided on whether the U.S. is facing a period of "secular stagnation" - an extended period of slow economic growth in the coming decades. In "Secular Stagnation: The Long View" (NBER Working Paper No. 20836), Barry Eichengreen considers four factors that could contribute to a persistent period of below-potential output and slow growth: a rise in saving due to the global integration of emerging markets, a decline in the rate of population growth, an absence of attractive investment opportunities, and a drop in the relative price of investment goods. He concludes that a decline in the relative price of investment goods is the most likely contributor to an excess of saving over investment.
With regard to long-term future growth rates, a key point of debate is how to interpret, and project forward, the "Third Industrial Revolution": the computer age and the new economy it has created. Some argue that the economic impact of digital technology has largely run its course, while others maintain that we have yet to experience the full effect of computerization. In this context, Eichengreen looks at the economic consequences of the age of steam and of the age of electrification. His analysis identifies two dimensions of the economic impact: "range of applicability" and "range of adaptation."
Range of applicability refers to the number of sectors or activities to which the key innovations can be applied. Use of the steam engine of the first industrial revolution for many years was limited to the textile industry and railways, which accounted for only a relatively small fraction of economic activity. Electrification in the second industrial revolution, says Eichengreen, had a larger impact on output and productivity growth because it affected a host of manufacturing industries, many individual households, and a wide range of activities within decades of its development.
The "computer revolution" of the second half of the 20th century had a relatively limited impact on overall economic growth, Eichengreen writes, because computerization had deeply transformative effects on only a limited set of industries, including finance, wholesale and retail trade, and the production of computers themselves. This perspective suggests that the implications for output and productivity of the next wave of innovations will depend greatly on their range of applicability. Innovations such as new tools (quantum computers), materials (graphene), processes (genetic modification), robotics, and enhanced interactivity of digital devices all promise a broad range of applications.
Range of adaptation refers to how comprehensively economic activity must be reorganized before positive impacts on output and productivity occur. Eichengreen reasons that the greater the required range of adaptation, the higher the likelihood that growth may slow in the short run, as costly investments in adaptation must be made and existing technology must be disrupted.
Yet the slow productivity growth in the United States in recent years may have positive implications for the future, he writes. Many connected activities and sectors - health care, education, industrial research, and finance - are being disrupted by the latest technologies. But once a broad range of adaptations is complete, productivity growth should accelerate, he reasons. "This is not a prediction," Eichengreen concludes, "but a suggestion to look to the range of adaptation required in response to the current wave of innovations when seeking to interpret our slow rate of productivity growth and when pondering our future."
Posted by Mark Thoma on Tuesday, April 14, 2015 at 12:24 AM in Academic Papers, Economics, Productivity |
Moore's Law at 50: So many important aspects of the US and world economy turn on developments in information and communications technology and their effects These technologies were driving productivity growth, but will they keep doing so? These technologies have been one factor creating the rising inequality of incomes, as many middle-managers and clerical workers found themselves displaced by information technology, while a number of high-end workers found that these technologies magnified their output. Many other technological changes--like the smartphone, medical imaging technologies, decoding the human gene, or various developments in nanotechnology--are only possible based on a high volume of cheap computing power. Information technology is part of what has made the financial sector larger, as the technologies have been used for managing (and mismanaging) risks and returns in ways barely dreamed of before. The trends toward globalization and outsourcing have gotten a large boost because information technology made it easier
In turn, the driving force behind information and communications technology has been Moore's law, which can understood as the proposition that the number of components packed on to a computer chip would double every two years, implying a sharp fall in the capabilities of information technology. But the capability of making transistors ever-smaller, at least with current technology, is beginning to run into physical limits. IEEE Spectrum has published a "Special Report: 50 Years of Moore's Law," with a selection of a dozen short articles looking back at Moore's original formulation of the law, how it has developed over time, and prospects for the law continuing. Here are some highlights.
It's very hard to get an intuitive sense of the exponential power of Moore's law, but Dan Hutcheson takes a shot at it with few well-chosen sentences and a figure. He writes:
In 2014, semiconductor production facilities made some 250 billion billion (250 x 1018) transistors. This was, literally, production on an astronomical scale. Every second of that year, on average, 8 trillion transistors were produced. That figure is about 25 times the number of stars in the Milky Way and some 75 times the number of galaxies in the known universe. The rate of growth has also been extraordinary. More transistors were made in 2014 than in all the years prior to 2011.
Here's a figure from Hutcheson showing the trends of semiconductor output and price over time. Notice that both axes are measured as logarithmic scales: that is, they rise by powers of 10. The price of a transistor was more than a dollar back in the 1950s, and now it's a billionth of a penny.
As the engineering project of making the components on a computer chip smaller and smaller is beginning to get near some physical limits. What might happen next?
Chris Mack makes the case that Moore's law is is not a fact of nature; instead, it's the result of competition among chip-makers, who viewed it as the baseline for their technological progress, and thus set their budgets for R&D and investment according to keeping up this pace. He argues that as technological constraints begin to bind, the next step will be for combining capabilities on a chip. ...
Andrew Huang makes the intriguing claim that a slowdown in Moore's law might be useful for other sources of productivity growth. He argues that when the power of information technology is increasing so quickly, there is an understandably heavy focus on adapting to these rapid gains. But if gains in raw information processing slow down, there would be room for more focus on making the devices that use information technology cheaper to produce, easier to use, and cost-effective in many ways.
Jonathan Koomey and Samuel Naffziger point out that computing power has become so cheap that we often aren't using what we've got--which suggests the possibility of efficiency gains in energy use and computer utilization...
Final note: I've written about Moore's law a couple of times previously this blog, including "Checkerboard Puzzle, Moore's Law, and Growth Prospects" (February 4, 2013) and "Moore's Law: At Least a Little While Longer" (February 18, 2014). These posts tend to emphasize that Moore's law may still be good for a few more doublings. But at that point, the course of technological progress in information technology, for better or worse, will take some new turns.
Posted by Mark Thoma on Tuesday, April 14, 2015 at 12:15 AM in Economics, Productivity, Technology |
Posted by Mark Thoma on Tuesday, April 14, 2015 at 12:06 AM in Economics, Links |