We seem to have turned the corner, but policymakers should not relax yet -- we still have a long way to go to get back to full employment:
Things Are Not O.K., by Paul Krugman, Commentary, NY Times: ...So, about that jobs report:... for once falling unemployment was the real thing, reflecting growing availability of jobs rather than workers dropping out of the labor force... That said, our economy remains deeply depressed. As the Economic Policy Institute points out,... even at January’s pace of job creation it would take us until 2019 to return to full employment.
And we should never forget that the persistence of high unemployment inflicts enormous, continuing damage on our economy and our society,... in particular,... that long-term unemployment ... means more Americans permanently alienated from the work force, more families exhausting their savings, and, not least, more of our fellow citizens losing hope.
So this encouraging employment report shouldn’t lead to any slackening in efforts to promote recovery. ... Policy makers should be doing everything they can to get us back to full employment as soon as possible.
Unfortunately, that’s not the way many people with influence on policy see it. Very early in this slump — basically, as soon as the threat of complete financial collapse began to recede — a significant number of people within the policy community began demanding an early end to efforts to support the economy. Some of their demands focused on the fiscal side, with calls for immediate austerity... But there have also been repeated demands that the Fed ... raise interest rates.
What’s the reasoning behind those demands? Well, it keeps changing. Sometimes it’s about the alleged risk of inflation... And the inflation hawks ... seem undeterred ... by the way the predicted explosion of inflation keeps not happening...
But there’s also a sort of freestanding opposition to low interest rates, a sense that there’s something wrong with cheap money and easy credit even in a desperately weak economy. I think of this as the urge to purge, after Andrew Mellon, Herbert Hoover’s Treasury secretary, who urged him to let liquidation run its course, to “purge the rottenness” that he believed afflicted America.
And every time we get a bit of good news, the purge-and-liquidate types pop up, saying that it’s time to stop focusing on job creation. ... And the sad truth is that the good jobs numbers have definitely made it less likely that the Fed will take the expansionary action it should.
So here’s what needs to be said about the latest numbers: yes, we’re doing a bit better, but no, things are not O.K. — not remotely O.K. This is still a terrible economy, and policy makers should be doing much more than they are to make it better.
I'm also worried that "Policymakers are Too Anxious to Reverse Course."
Posted by Mark Thoma on Monday, February 6, 2012 at 01:11 AM in Economics, Fiscal Policy, Inflation, Monetary Policy
Tim Duy:
Another Experiment?, by Tim Duy: In the fall of 2008, US authorities conducted a financial market experiment. They allowed a large and heavily interconnected firm, Lehman Brothers, to file for bankruptcy, apparently under the belief that the consequences should be limited as everyone knew this was coming. I think that, in retrospect, US policymakers wished they had pursued an alternative path. The experiment was not exactly successful.
Now it seems that European policymakers are willing to risk yet another such experiment. To be sure, they could still pull the rabbit out of the hat, but it is starting to look like the Troika and Greece have was they call in divorce court "irreconcilable differences." Via the Financial Times:
Lucas Papademos, the Greek premier, failed to make party leaders accept harsh terms in return for a second €130bn bail-out, pushing Athens closer to a disorderly default as early as next month...
...After five hours of discussions, the three leaders of Greece's national unity government had not accepted demands by international lenders for immediate deep spending cuts and labour market reforms as part of a new medium-term package.
The Troika does not look ready to back down either:
The talks with the three leaders of a national unity government came after the government failed to persuade the so-called “troika”– representatives of the European Commission, European Central Bank and International Monetary Fund – to ease conditions for the rescue deal.
Patience with Greek politicians has evaporated among its creditors. During a conference call on Saturday, eurozone finance ministers bluntly told Athens to deliver on its promises and agree to reforms or face default next month.
Apparently, the Troika is playing serious hardball:
Eurozone officials are deliberately refusing to allow Greece to sign off on a €200bn bond restructuring plan because the threat of default is the leverage they have to convince recalcitrant Greek ministers to implement necessary cuts.
Now, perhaps Greece's leaders are just putting up a fight to look good to their voters and thus this will all blow over tomorrow morning with another last minute deal cobbled together that no one really believes will work. Indeed, everyone already knows the numbers are too small:
A further complication is the uncertainty over supplementing the €130bn bail-out to take account of the deteriorating economic position in Greece.
Some officials believe around another €15bn is needed – funds that Germany and other countries have said they are unwilling to provide.
It doesn't really make sense for Greece to accept a deal they know is doomed to failure from the start. Especially as the terms of the deal - including a steep wage cut to improve competiveness - is virtually guaranteed to plunge the Greek economy deeper into recession.
Fundamentally, the problem is as it always was - any decent adjustment program has the stick and the carrot. The carrot usually comes partly in the form of a currency devaluation that accelerates the process of adjustment by providing stimulus via the external accounts. This short-run stimulus allows for structural changes to take root. The approach to Greece has always been just the stick - more austerity and structural change, no carrot.
And I have to admit that I find the enforced wage-cutting a draconian solution. Will this policy eventually be applied to Spain and Portugal and Ireland? Is this the future of Eurozone economic policy? There are two ways to reduce competitive imbalances. Inflate German wages up, or deflate everyone else down. I think the former would prove to be a lot more fun than the latter.
Truth be told, I honestly believe that Greece is beyond saving without a significant transfer, not loan, that buys real time for the Greek economy to adjust. That is the only way to compensate for the lack of currency adjustment and is the conclusion I wish the Troika would ultimately reach. But, I am also starting to think that the ECB has made the Troika overconfident. When the ECB finally decided that yes, serving as lender of last resort, at least to the financial system, is actually the job of a central bank, they dramatically eased financial market stress throughout Europe. That stress, however, was Greece's leverage. Absent that stress, the Troika appears to believe Greece is backed into a corner with no other way out but to submit to Troika demands.
This is a dangerous game. Sometimes the person backed into a corner makes a sucide run at their attackers. And maybe Greece has nothing else to lose at this point. To be sure, they will suffer a devastating blow if they exit the Euro, but at least it will be the process of self-determination, rather than the devastating blow of Troika imposed austerity.
And, while I am thinking about it, what exactly is the policy precedent the Troika is trying to set? That it is acceptable to force European citizens - a whole people - into poverty? When does this become a human rights issue?
In any event, I don't think financial market participants are really prepared for Greece to make a suicide run. Why should they be? This whole episode is like The Boy Who Cried Wolf. Everytime we come to the brink, and prognosticators call for the apocalypse, someone backs down. Why should this time be any different? Honestly, it is tough to argue with that logic. Expectations of imminent financial crisis have simply gone unmet, leaving markets relatively unphased by the most recent events in Greece. Perhaps the ECB haas done enough to let Greece slide out of the Euro without much noise.
It would be an interesting experiment to see unfold. I am curious to see if the ECB has indeed done enough. Not curious enough, however, to want to take such a risk. The Boy Who Cried Wolf ultimately had a poor ending.
Posted by Mark Thoma on Monday, February 6, 2012 at 12:10 AM in Economics, Fed Watch, Financial System, International Finance
Posted by Mark Thoma on Monday, February 6, 2012 at 12:06 AM in Economics, Links
Via the NBER:
Prospects for Nuclear Power, by Lucas W. Davis, NBER Working Paper No. 17674, December 2011: The prospects for a revival of nuclear power were dim even before the partial reactor meltdowns at the Fukushima nuclear plant. Nuclear power has long been controversial because of concerns about nuclear accidents, proliferation risk, and the storage of spent fuel. These concerns are real and important. In addition, however, a key challenge for nuclear power has been the high cost of construction for nuclear plants. Construction costs are high enough that it becomes difficult to make an economic argument for nuclear, even before incorporating these external costs. This is particularly true in countries like the United States where recent technological advances have dramatically increased the availability of natural gas.
[open link to paper.]
Posted by Mark Thoma on Sunday, February 5, 2012 at 12:28 PM in Academic Papers, Economics
Christina Romer says the case for promoting manufacturing is less than fully convincing:
Do Manufacturers Need Special Treatment?, by Christina Romer, Commentary, NY Times: Everyone seems to be talking about a crisis in manufacturing. Workers, business leaders and politicians lament the decline of this traditionally central part of the American economy. President Obama, in his State of the Union address, singled out manufacturing for special tax breaks and support. Many go further, by urging trade restrictions or direct government investment in promising industries.
A successful argument for a government manufacturing policy has to go beyond the feeling that it’s better to produce “real things” than services. American consumers value health care and haircuts as much as washing machines and hair dryers. And our earnings from exporting architectural plans for a building in Shanghai are as real as those from exporting cars to Canada.
The economic rationales for a policy aimed specifically at shoring up manufacturing largely fall into three categories. None are completely convincing: Market Failures ..., Jobs ..., Income Distribution ...
As an economic historian, I appreciate what manufacturing has contributed to the United States. It was the engine of growth that allowed us to win two world wars and provided millions of families with a ticket to the middle class. But public policy needs to go beyond sentiment and history. It should be based on hard evidence of market failures, and reliable data on the proposals’ impact on jobs and income inequality. So far, a persuasive case for a manufacturing policy remains to be made...
[I probably should have noted that I said something similar in my last column, i.e. "Manufacturing ... is not the only path to a better future. We need a strategy that creates the conditions for new, innovative firms of all sorts rather than focusing too much on any one area."]
Posted by Mark Thoma on Sunday, February 5, 2012 at 12:15 AM in Economics, Income Distribution, Market Failure, Unemployment
Posted by Mark Thoma on Sunday, February 5, 2012 at 12:06 AM in Economics, Links
I am worried that policymakers are too anxious to reverse course. That is, despite recent communications suggesting that policy will remain on hold or even be eased further, I'm worried that the Fed will increase interest rates too soon. In the past, any sign of green shoots has brought inflation worries to the forefront, and this time is unlikely to be different even though those fears have been groundless to date. But I'm even more worried that large scale deficit reduction will begin before the economy is strong enough to withstand a large negative shock to demand. Congress is clearly anxious to get on with it.
So here are two views of why we shouldn't relax just yet about the employment situation (beyond risks such as oil price spikes from trouble in the middle east and fallout from rekindled troubles in Europe), and why we should do more, not less, to promote recovery of employment:
Employment: Some good news, some bad news, by Julie Hotchkiss, macroblog: ...The median three-digit..AICS ... industry lost 7 percent of its jobs during the most recent recession. ... Industries faring the worst (those in the 75th percentile of job losses) shed 13 percent of their jobs. And what might be considered "fortunate" industries (those in the 25th percentile of job losses) saw only 3 percent of their jobs disappear over this time period. ... At the current rate of growth, those industries that experienced above-median job loss during the recession will not regain prerecession employment levels until the end of 2015. ... [note: prerecession levels is not full recovery since it ignores subsequent population growth.]
Does the projected labored employment recovery among these particularly hard-hit industries suggest there are more serious structural impediments to the efficient operation of the labor market today than there were after the previous two recessions? ...
Plotting the annual growth rates back to 1990 illustrates that the industries that were hardest hit during the most recent recession were also those with the greatest job losses during the previous two recessions. So there appears to be nothing special about these industries that led to their suffering during the most recent recession.
Additionally, the pattern of recovery of these hardest-hit industries is similar to that experienced after the previous two recessions. Like before, the worst performing industries (those with job losses in the 75th percentile) ... added jobs in 2011 at an average monthly rate of 0.22 percent; industries with below-median losses added jobs at an average monthly rate of 0.12 percent. This analysis does not suggest to me that unique structural features of this recession or recovery are holding employment growth back—it appears that the culprit is simply the extraordinarily deep hole the economy, and thus the job market, fell into this time around. The bad news, then, is that time may be the only answer for those industries to fully recover.
Time, or more help from policymakers (however, as noted above, forget about more help -- we'll be lucky if policymakers don't reverse course too soon). Here's more on why we shouldn't turn our backs on the unemployed anytime soon:
Still losing the war on unemployment, by Mohamed A. El-Erian, Commentary, Washington Post: ...While the [employment] numbers have markedly improved over the past year, too much of the commentary has been overly partial and, sometimes, dangerously misleading...
The pace of job creation is certainly picking up but, as yet, is insufficient to overcome our unemployment crisis. ... Meanwhile, attention is diverted from something critical to the future of the economy — namely, what is happening to the composition of U.S. joblessness.
The composition indicators have been flashing yellow, if not red, for a while. With 43.9 percent of the unemployed (5.5 million people) out of work for 27 weeks or more, today’s America faces the unusual challenge of “long-term unemployment”: The longer people are unemployed, the harder it is for them to return to the labor force at the same level of productivity and earnings, and the poorer the prospects for national competitiveness and prosperity.
The numbers for youth unemployment are even more disturbing. A staggering 23.2 percent of 16- to 19-year-olds in the labor force do not have jobs. A prolonged period of inactivity at that stage of life risks turning these younger adults from unemployed to unemployable.
These disturbing realities ... don’t cover the significant number of workers who are no longer counted because they have dropped out of the labor force... The longer that corrective measures are delayed, the harder the task at hand will be and the greater the eventual costs to society. ... In fact, our current unemployment crisis ...will ... further polarize an unusually dysfunctional political discourse, worsen income inequality, and fuel protest movements around the country. ...
Congress and the administration need to [do more]... Have no doubt, this is a complex, multiyear effort... One would think that, given all this, it has become more than paramount for Washington to elevate — not just in rhetoric but, critically, through sustained actions — the urgency of today’s unemployment crisis to the same level that it placed the financial crisis three years ago. ...
[Time to hit the road -- will post again when I can...]
Posted by Mark Thoma on Saturday, February 4, 2012 at 10:51 AM in Economics, Fiscal Policy, Monetary Policy
Posted by Mark Thoma on Saturday, February 4, 2012 at 12:06 AM in Economics, Links
Tim Duy:
Good News on Employment, by Tim Duy: With only a minimal drag from the government sector, the February employment report shined on the back of a solid gain in private sector hiring:
The last couple of months look more like the optimistic numbers seen early in 2011 before the mid-year slowdown raised the specter of another recession. As has been widely noted, there is little to complain about in this report. To be sure, in many respects we are still deep in the hole. Long-term unemployment remains a challenge:
Wage growth is meager:
And the employment to population ratio remains sits a levels not seen since the early 1980s:
Still, as noted earlier, these issues should be alleviated if job growth is sustained. And as a precursor to such improvements, the unemployment rate is falling, and at a reasonably quick pace:
What will this mean for the Fed? As I discussed earlier, the unemployment rate looked to be the weak link in the Fed's most recent forecast of 8.2-8.5% by year end. We are at 8.3% in January, and unless either waves of workers re-enter the job market or the economy shifts gears dramatically soon, we will be easily below 8% in just a couple of months. Under such a trajectory, I have to imagine that another round of QE, as well as the Fed's interest rate projection, are not sure bets at all.
To be sure, one can argue the Fed should seize this opportunity to entrench the recovery with more easing. After all, the employment to population ratio suggests plenty of slack in the labor market, as does minimal wage growth. And unit labor labor costs are moving sideways as well:
We know that at least one policymaker, Chicago Federal Reserve President Charles Evans, would already be easing much more aggressively, but we also know that others, such as Philadelphia Federal Reserve President Charles Plosser thinks the current rate outlook is not consistent with an improving economic environment. A couple of reports like this will find others in his camp as well.
I think it still premature to expect the Fed to dramatically shift forward their own expectations of a rate hike. That said, since the recession ended, Federal Reserve officials have tended to shift expectations away from more easing and toward tightening every time the data shows a little life, only to have to backtrack six months later when hopes are dashed. Assuming the Fed follows the same pattern, watch for a shift in tone from Fed officials.
I'm starting to wonder how the Fed will wiggle out of its interest rate commitment should the economy turn out to be stronger than the Fed's forecast. I still think the Fed needs to insure against potential problems -- it's far too soon to conclude our troubles are over, we're still in a deep, deep hole and a slower than tolerable recovery is certainly still possible, perhaps even likely -- but it does look as though there's a chance the Fed will have to reconsider its recent interest rate commitment ("exceptionally low levels for the federal funds rate at least through late 2014"). The FOMC does give itself an out by saying conditions are "likely to warrant" this policy, but it seems to me it has been interpreted as a pretty firm commitment. (Note: To be clear, I am not advocating interest rate increases any time soon -- I think the Fed is likely to pull the interest rate trigger too early rather than too late -- but given the Fed's inclination to raise rates sooner rather than later, how will it explain itself if that time to raise rates comes earlier than projected?)
Posted by Mark Thoma on Friday, February 3, 2012 at 12:18 PM in Economics, Fed Watch, Monetary Policy, Unemployment
With all the cheering about the jobs report this morning showing 243,000 jobs created last month and a fall in the unemployment rate to 8.3 percent, I thought it might be useful to present a contrary voice (especially since I'm at a conference and don't have time to do much myself). This is the most negative report I could find, and even then Dean Baker says that "The January report is undoubtedly one of the best reports that we have seen since the recession began." However, "While this is markedly better than what we had been seeing, at this rate we would not get back to full employment until 2020":
Strong Job Growth Leads to Drop in Black/Hispanic Unemployment, by Dean Baker: The Labor Department reported that the unemployment rate fell to 8.3 percent in January, bringing its drop over the last year to 0.8 percentage points. African Americans in particular saw an especially sharp decline in unemployment, with their overall rate falling by 2.2 percentage points to 13.6 percent, the lowest level since March of 2009. The unemployment rate for African American men over age 20 fell by 3.0 percentage points to 12.7 percent, the lowest level since November of 2008. The drop for women over age 20 was 1.3 percentage points to 12.6 percent. The unemployment rate for Hispanics dropped by 0.5 percentage points to 10.5 percent, the lowest since January of 2009. These numbers are erratic and may be partially reversed in future months.
The gains for whites were more modest, with the overall unemployment rate edging down by 0.1 percentage points to 7.4 percent. The unemployment rate for white men over age 20 fell by 0.2 percentage points to 6.9 percent, while it was unchanged for women over age 20 at 6.8 percent. The unemployment rate for all men and women over age 20 is now the same at 7.7 percent, the first time they have been equal since the recession began in December, 2007.
Other data in the household survey were more mixed. ...[continue reading]...
Posted by Mark Thoma on Friday, February 3, 2012 at 10:12 AM in Economics, Unemployment
I am here today:
NBER EF&G Research Meeting
Nir Jaimovich and Guido Lorenzoni, Organizers
February 3, 2012
Federal Reserve Bank of San Francisco
PROGRAM
8:30 am Continental Breakfast
9:00 am Gary Gorton, Yale University Guillermo Ordonez, Yale University Collateral Crises Discussant: Veronica Guerrieri, University of Chicago
10:00 am Coffee Break
10:30 am Elias Albagli, University of Southern California Christian Hellwig, Toulouse School of Economics Aleh Tsyvinski, Yale University A Theory of Asset Prices based on Heterogeneous Information Discussant: Laura Veldkamp, New York University
11:30 am Francisco Buera, Federal Reserve Bank of Minneapolis Joseph Kaboski, University of Notre Dame Yongseok Shin, Washington University in St. Louis The Macroeconomics of Microfinance Discussant: Abhijit Banerjee, MIT
12:30 pm Lunch
1:30 pm Cosmin Ilut, Duke University Martin Schneider, Stanford University Ambiguous Business Cycles Discussant: Lars Hansen, University of Chicago
2:30 pm Coffee Break
3:00 pm Ulrike Malmendier, University of California at Berkeley Stefan Nagel, Stanford University Learning from Inflation Experiences Discussant: Monika Piazzesi, Stanford University
4:00 pm Greg Kaplan, University of Pennsylvania Giovanni Violante, New York University A Model of the Consumption Response to Fiscal Stimulus Payments Discussant: Ricardo Reis, Columbia University
5:00 pm Adjourn
5:15 pm Reception and Dinner
Posted by Mark Thoma on Friday, February 3, 2012 at 08:10 AM in Academic Papers, Economics
Who does Romney care about?:
Romney Isn’t Concerned, by Paul Krugman, Commentary, NY Times: ...Earlier this week, Mr. Romney told a startled CNN interviewer, “I’m not concerned about the very poor. We have a safety net there.”
Faced with criticism, the candidate has claimed that he didn’t mean what he seemed to mean... But he quite clearly did mean what he said. ...
First of all, just a few days ago, Mr. Romney was denying that the very programs he now says take care of the poor actually provide any significant help. On Jan. 22, he asserted that ... because of the cost of a huge bureaucracy “very little of the money that’s actually needed by those that really need help ... actually reaches them.”
This claim, like much of what Mr. Romney says, was completely false:... between 90 percent and 99 percent of the dollars allocated to safety-net programs do, in fact, reach the beneficiaries. ...
Also, given this whopper about how safety-net programs actually work, how credible was Mr. Romney’s assertion ... that if the safety net needs a repair, “I’ll fix it”?
Now, the truth is that ... Mr. Romney ... wants to make the safety net weaker... Specifically, the candidate has endorsed Representative Paul Ryan’s plan for drastic cuts in federal spending — with almost two-thirds of the proposed spending cuts coming at the expense of low-income Americans. ...
So Mr. Romney’s position seems to be that we need not worry about the poor thanks to programs that he insists, falsely, don’t actually help the needy, and which he intends, in any case, to destroy.
Still, I believe Mr. Romney when he says he isn’t concerned about the poor. What I don’t believe is his assertion that he’s equally unconcerned about the rich, who are “doing fine.” After all, if that’s what he really feels, why does he propose showering them with money? ...
Mr. Romney’s tax plan would actually raise taxes on many lower-income Americans, while ... 80 percent of the tax cuts would go to people making more than $200,000 a year..., increasing the deficit by $180 billion a year — and making those draconian cuts in safety-net programs necessary.
Which brings us back to Mr. Romney’s lack of concern. You can say this...: He is opening up new frontiers in American politics. Even conservative politicians used to find it necessary to pretend that they cared about the poor. Remember “compassionate conservatism”? Mr. Romney has, however, done away with that pretense.
At this rate, we may soon have politicians who admit what has been obvious all along: that they don’t care about the middle class either, that they aren’t concerned about the lives of ordinary Americans, and never were.
Posted by Mark Thoma on Friday, February 3, 2012 at 02:46 AM in Economics, Politics, Social Insurance
Tim Duy:
How This Gets Even Uglier, by Tim Duy: At this risk of beating a dead horse, I reiterate that I don't see how the European situation comes to a happy conclusion. Conditions in Greece appear to be deteriorating rapidly. Via Athens News, retail sales are in freefall:
Retail sales by volume fell 8.9 percent year-on-year in November after a 10.8 percent drop in October, statistics service data showed on Tuesday.
Households, burdened by austerity measures to plug deficits and rising unemployment, have cut back on spending.
Consumer confidence has also been hurt by a climb in the jobless rate to 17.7 percent in the third quarter.
Officially, hope springs eternal:
"Increasing unemployment and austerity are likely to continue weighing on disposable incomes and consumer demand in the first months of 2012. However, a positive conclusion of the PSI deal and the approval of the second bailout package could provide a kind of positive shock to business and consumer sentiment," he added.
Right, good luck with that, as the next agreement is only about tightening the screws even more. How exactly will consumer confidence get a boost given an acceleration in wage cuts, a late holiday gift from the Troika. An interview with the IMF's Poul Thomsen, via Kathimerini:
Are you advocating wage cuts?
Let me begin by saying what I think we all agree on. Greece still has a large competitiveness gap. Closing this gap will require actions on many fronts, not only wages, but it is clear that wages for the economy as a whole are too large compared to Greece’s productivity. One could hope to magically raise productivity to levels that will justify the current wage level. We are trying, but there is a limit to this. Thus, part of the adjustment must come by more closely aligning productivity in individual enterprises with wages. Reforms to the wage setting mechanism, to the system for collective agreements could help in this regard. I think that most of us agree on what I have said so far. Where we need to be more convinced, is that such reforms can deliver results in the foreseeable future. If not, we believe that the government should consider more direct interventions for a temporary period, until reforms become effective. These could include limitations on the minimum wage and possibly the 13th and 14th salaries. We are still discussing this. It is too early to say. We need to better understand what kind of reforms the government has in mind.
Under conditions of never-ending austerity with no exchange rate release valve, what exactly is the half-life on any new plan to reduce Greece's debt to GDP ratio to 120% by 2020 (itself a questionable goal)? 3 months? 6 months? Back to deteriorating conditions, via Kathimerini:
Archbishop Ieronymos, the head of the Church of Greece, has taken the rare step of writing to Prime Minister Lucas Papademos to express serious concerns about the effectiveness of the government’s fiscal policy and the effect it is having on Greek people.
In his letter, Ieronymos also raises doubts about the role of the European Commission, European Central Bank and International Monetary Fund – or troika – in the country and whether Greece should agree to further austerity measures to receive its next bailout, suggesting that they are “larger doses of a medicine that is proving deadly.”
Ieronymos expresses concern about the impact of the crisis, describing a rise in suicides, homelessness and unemployment and the desperate state that an increasing number of Greeks find themselves. He warned that this was creating a dangerous social situation.
“Greeks’ unprecedented patience is running out, fear is giving way to rage and the danger of a social explosion cannot be ignored any more, neither by those who give orders nor by those who execute their deadly recipes,” he wrote.
Meanwhile, Germany appears to have underestimated the possibility of resurgent nationalism in the periphery. Via Athens News:
Twenty-eight MPs tabled a proposal in parliament on Thursday requesting a debate on the so-called occupation loan paid by the collaborationist government to Germany during the Second World War as well as the issues of reparations for victims of Nazi atrocities and looted treasures...
...The MPs stressed that the now united German state owes Greece, a Second World War victor, roughly 54bn euros before interest, underlining that Greece was the victim of unparalleled cruelty inflicted by the Nazi forces.
The signatories stressed that Greece has been the subject of an obvious injustice because it is the only country to which Germany has not paid reparations.
Reopening the wounds the Euro was meant to close.
Call me a pessimist, but I can't help but conclude that unless Greece gets real relief more quickly, the cost of being in the Euro will outweigh the costs of leaving. At this point, I am starting to wonder what was the bigger mistake - to allow Greece into the Euro in the first place, or to force them to stay?
Posted by Mark Thoma on Friday, February 3, 2012 at 01:50 AM in Economics, Fed Watch, International Finance
Posted by Mark Thoma on Friday, February 3, 2012 at 12:06 AM in Economics, Links
[Busy day today -- teaching then travel -- so another quick "hit and run" post.]
A column from a couple of weeks ago:
How Did the Fed Get Things So Wrong?, by Mark Thoma: The public’s faith in the Fed’s ability to protect the economy from economic problems has been shaken by the Fed’s failures before and during the Great Recession. The recent release of the transcripts from 2006 monetary policy meetings where Federal Reserve policymakers discuss and ridicule the suggestion that the economy is threatened by a dangerous housing bubble has undermined its reputation even further.
How did the Fed get things so wrong? How can policy be improved?
The first step in the policy process is for policymakers to be aware that there’s a problem in the economy, and access to reliable, timely, and informative data is critical. Unfortunately, there are substantial lags in the availability of data that indicate where the economy is headed, and it can be six months or longer before key variables such as GDP are known. This is a problem that doesn’t get enough attention, and in the information age we ought to be able to do better.
The fact that these data are not very timely, and are often revised substantially after they are released is not the Fed’s fault. But that doesn’t mean that the Fed can’t do more on its own. The Fed needs to do a much better job than it did before the crisis of using the data at its disposal to construct stress indices, measures of network reliability, price-rent ratios, credit measures, and so on to figure out what is happening in financial markets.
Prior to the crisis, policymakers were not asking the right questions and hence saw no need to collect such data, or to believe what the data they did have was telling them. Policymakers did not believe a severe financial meltdown was possible in modern economies featuring modern policy tools –those problems had been overcome long ago – so they hardly bothered to look for signs of bubble trouble. They are beginning to bring these measures into play now, and seem to have a better understanding of their importance, but only time will tell if they’ve truly learned their lesson.
But even if the Fed recognizes that a problem exists, how it responds to trouble depends critically upon the relative weights it attaches to its goals of low inflation, low unemployment, and financial stability.
When the public looks at the Fed’s recent policy choices, it sees a Fed that appears to place worries about inflation – which is a big concern of finance and business – over the high levels of unemployment that have caused so much misery for the working class. Is there a reason why financial and business interests, banking interests in particular, might be overrepresented at the policymaking table?
Yes, there is. The problem, in large part, is the way in which the presidents of the twelve Federal Reserve District banks are chosen. The district bank presidents, who are an important part of the monetary policymaking committee, are chosen by the Board of Directors for individual banks. The make-up of those boards is dominated by wealthy business and banking leaders, and that leads to suspicions that these interests are overrepresented in monetary policy decisions. The Dodd-Frank legislation recognizes this problem, but it’s not clear that the proposed solution of eliminating bankers from the selection process goes far enough.
A final problem policymakers must confront is the time it takes for policy to have an effect after it is put into place. It can take several months for policy to fully impact the economy after it is enacted, so it’s important for the Fed to react quickly in response to changing economic conditions. Unfortunately, policymakers were far too slow and timid in reacting to problems they encountered as the crisis unfolded. Had the Fed been more concerned about unemployment and less concerned about inflation, there might have been more urgency in its response.
The Fed’s errors can be placed into two broad categories, the failure to ask the right questions before the crisis, and the failure to act quickly and aggressively enough once the crisis began. The first problem had a lot to do with economists’ undue faith in their own models and abilities – the financial meltdown problem had been solved so no need to worry about that – while the second problem is at least partly due to the way in which the public interest is represented on the Fed.
I don’t know how to insulate economists from themselves, every few decades we seem to have the need to declare that we have solved important problems only to be spectacularly wrong, but the representation of the public interest in policy decisions can certainly be improved. That won’t fully overcome the Fed’s tendency to hesitate and take small steps when bold action is needed, but better representation would certainly give more weight to the public’s desire for the Fed to do its utmost to bring an end to the many problems that households face when the economy is operating at subpar levels.
Posted by Mark Thoma on Thursday, February 2, 2012 at 02:07 PM in Economics, Fiscal Times, Monetary Policy
Larry Mishel reacts to a recent commentary in the Washington Post on income inequality that "belittles the need to tax the rich more":
On Wilson’s muddled defense of the top 1%, by Larry Mishel: Last week, the Washington Post published an essay by James Q. Wilson that’s bound to generate controversy. While Wilson acknowledges rising income inequality, his analysis of the factors driving the trend is seriously flawed. Furthermore, he belittles the need to tax the rich more in order to help the poor or to address overall inequality.
Wilson rightly acknowledges the growth of income inequality and correctly notes:
“The mere existence of income inequality tells us little about what, if anything, should be done about it. First, we must answer some key questions. Who constitutes the prosperous and the poor? Why has inequality increased?”
It is after this point that his argument goes off track. While there is much to comment on, I will only address a few issues, starting with Wilson’s explanation of rising inequality. ...[continue reading]...
Posted by Mark Thoma on Thursday, February 2, 2012 at 10:29 AM in Economics, Income Distribution, Politics
Tax increases will be needed to close the budget gap:
Will Tax Increases to Close the Deficit Harm Economic Growth?, by Mark Thoma, CBS News: Politicians want you to believe tax increases will kill the economy. They won't.
COMMENTARY The CBO's latest Budget and Economic Outlook showing the magnitude of the long-run budget problem we face is another reminder that the considerable long-run deficit problem we face cannot be solved by program cuts alone -- the cuts required would be too deep to be acceptable -- an increase in revenues is needed.
If that's true, why are politicians, particularly those on the right, taking such a strong stance against tax increases of any kind? Taking a hard line on tax increases and insisting on program cuts is an attempt to make as much of the adjustment as possible accord with their ideological preference for smaller government. But politicians understand that enhanced revenue will be part of the final package even if their political posturing suggests otherwise.
But there is another reason for this posturing against tax increases beyond the hope for a smaller government. The resistance to tax increases is also over who will end up paying the increased revenue. Will it be tax increases for the wealthy, closing deductions such as mortgage interest, tax increases for the middle class, etc.? Who, exactly, will foot the bill?
This is evident in the testimony of Doug Elmendorf before Congress today explaining the CBO's findings. From the Atlantic:
...it's no surprise that Doug Elmendorf's appearance before Congress today was dominated by political grandstanding, as members asked extremely loaded questions designed to get Doug Elmendorf to say that we should close the hole by either raising taxes or cutting spending. Elmendorf ably ducked these attempts to lead him, but you could see him steeling himself every time a new congressman took their turn.
As this issue heats up, you will hear again and again that tax increases, particularly on the wealthy, will depress economic growth. However, as I detailed in a previous article, there's very little evidence that tax changes of the magnitudes and types being considered will have a significant impact on economic activity:
Economic theory helps us to determine which types of taxes are best in terms of efficiency, but the equity of taxes -- who pays them and whether it's fair -- also matters. Questions of equity must be resolved in the political arena, economics cannot help here, and equity is one of the factors that determines whether a tax is feasible. If allowing the Bush tax cuts to expire for the wealthy is the only acceptably equitable way to raise taxes in this political environment, then there is little evidence that this will be harmful. The cost of allowing these tax cuts to expire is low, and there is much to be gained in terms of reducing our long-term budget problem.
There are ways to produce negative effects from tax increases, and there are ways to harm growth through program cuts as well, I don't mean to imply otherwise. But despite the concerted attempts to make people think their jobs are on the line if certain types of tax increases, e.g. for the wealthy, are put into place, given the plans on the table this is fundamentally a political issue about the size of government and how to pay for it equitably rather than an issue about avoiding economic harm. In fact, if avoiding harm to individual households in one form or another is an important objective alongside deficit reduction, as I think it should be, we should worry just as much about program cuts as tax increases.
Posted by Mark Thoma on Thursday, February 2, 2012 at 09:49 AM in Economics, MoneyWatch, Politics, Taxes
Richard Green follows up on his post Good news and bad news on race and housing highlighting the Glaeser and Vigdor result that all-white neighborhoods are a thing of the past:
Rolf Pendall: Racial Segregation is Still a Reality, by Richard Green: Rolf responds to Glaeser and Vigdor:
The Manhattan Institute for Policy Research’s website made a triumphal proclamation this week that we have reached “the end of the segregated century.” The New York Times dutifully spread the news, leading with the headline “Segregation Curtailed in U.S. Cities, Study Finds.” The story beneath the spin, however, shows that segregation isn’t just a phenomenon to look back on regretfully during African American History Month (which begins today). Segregation lives on in far too many American cities.
In 1970, two years had elapsed since Congress enacted the end of private-sector apartheid with the Fair Housing Act; only a few years before that, President Kennedy had ordered the desegregation of public housing. Why should we wonder that segregation levels have declined since then? Shouldn’t the real story be that in the nation’s second-largest metropolitan area, Chicago, over 70 percent of African Americans would have to move to a predominantly non-black neighborhood (or the same proportion of whites would have to move to mostly non-white areas) to achieve an even racial distribution? Chicago isn’t the only metropolitan area in this position: Detroit, Cleveland, and St. Louis also surpass 70 on this segregation index. New York, Baltimore, and Philadelphia—that is, a continuous band of urbanization stretching from just north of Washington, DC, to the middle of Connecticut with well over 25 million inhabitants—stand between 60 and 65. The heart of the northeast corridor still lives in a segregated century, as does the fringe of the Great Lakes. Even “less segregated” metropolitan areas still have levels of racial segregation far higher than the Fair Housing Act promised.
Rolf underscores an uncomfortable point--that Northern cities have more black-white segregation than Southern cities. The largest city in my home state of Wisconsin, Milwaukee, is the most segregated large city in the country.
Posted by Mark Thoma on Thursday, February 2, 2012 at 12:52 AM in Economics
Posted by Mark Thoma on Thursday, February 2, 2012 at 12:06 AM in Economics, Links
Ken Rogoff on the need for government to intervene and overcome important market failures:
Coronary Capitalism, by Kenneth Rogoff, Commentary, Project Syndicate: A systematic and broad failure of regulation is the elephant in the room when it comes to reforming today’s Western capitalism. ... But is the problem unique to the financial industry...?
Consider the food industry... Obesity rates are soaring around the entire world... Of course,... there are numerous other examples, across a wide variety of goods and services, where one could find similar issues. Here, though, I want to focus on the food industry’s link to broader problems with contemporary capitalism...
True, market forces have spurred innovation, which has continually driven down the price of processed food, even as the price of plain old fruits and vegetables has gone up. That is a fair point, but it overlooks the huge market failure here.
Consumers are provided with precious little information through schools, libraries, or health campaigns; instead, they are swamped with disinformation through advertising. Conditions for children are particularly alarming..., children are co-opted by channels paid for by advertisements...
If our only problems were the food industry causing physical heart attacks and the financial industry facilitating their economic equivalent, that would be bad enough. But the pathological regulatory-political-economic dynamic that characterizes these industries is far broader. We need to develop new and much better institutions to protect society’s long-run interests.
Of course, the balance between consumer sovereignty and paternalism is always delicate. But we could certainly begin to strike a healthier balance than the one we have by giving the public far better information across a range of platforms, so that people could begin to make more informed consumption choices and political decisions.
I appreciate the sentiment, I've been a long-time advocate of more aggressive intervention to solve market failure problems myself, but was less excited about the particular example. Then, by chance, one of the next things I read was this:
Societal control of sugar essential to ease public health burden, EurekAlert: Sugar should be controlled like alcohol and tobacco to protect public health, according to a team of UCSF researchers, who maintain in a new report that sugar is fueling a global obesity pandemic, contributing to 35 million deaths annually worldwide from non-communicable diseases like diabetes, heart disease and cancer.
Non-communicable diseases now pose a greater health burden worldwide than infectious diseases... In the United States, 75 percent of health care dollars are spent treating these diseases and their associated disabilities.
In the Feb. 2 issue of Nature, Robert Lustig MD, Laura Schmidt PhD, MSW, MPH, and Claire Brindis, DPH, colleagues at the University of California, San Francisco (UCSF), argue that sugar ... is far from just "empty calories" that make people fat. At the levels consumed by most Americans, sugar changes metabolism, raises blood pressure, critically alters the signaling of hormones and causes significant damage to the liver – the least understood of sugar's damages. These health hazards largely mirror the effects of drinking too much alcohol, which ... is the distillation of sugar.
Worldwide consumption of sugar has tripled during the past 50 years and is viewed as a key cause of the obesity epidemic. But obesity ... may just be a marker for the damage caused by the toxic effects of too much sugar. This would help explain why 40 percent of people with metabolic syndrome—the key metabolic changes that lead to diabetes, heart disease and cancer—are not clinically obese.
"As long as the public thinks that sugar is just 'empty calories,' we have no chance in solving this," said Lustig, a professor of pediatrics,... and director of the Weight Assessment for Teen and Child Health (WATCH) Program at UCSF.
"There are good calories and bad calories...," Lustig said. "But sugar is toxic beyond its calories."
Limiting the consumption of sugar has challenges beyond educating people about its potential toxicity. "We recognize that there are cultural and celebratory aspects of sugar," said Brindis, director of UCSF's Philip R. Lee Institute for Health Policy Studies. "Changing these patterns is very complicated"
According to Brindis, effective interventions can't rely solely on individual change, but instead on environmental and community-wide solutions, similar to what has occurred with alcohol and tobacco, that increase the likelihood of success.
The authors argue for society to shift away from high sugar consumption, the public must be better informed about the emerging science on sugar.
"There is an enormous gap between what we know from science and what we practice in reality," said Schmidt, professor of health policy at UCSF...
Many of the interventions that have reduced alcohol and tobacco consumption can be models for addressing the sugar problem, such as levying special sales taxes, controlling access, and tightening licensing requirements on vending machines and snack bars that sell high sugar products in schools and workplaces.
"We're not talking prohibition," Schmidt said. "We're not advocating a major imposition of the government into people's lives. We're talking about gentle ways to make sugar consumption slightly less convenient, thereby moving people away from the concentrated dose. What we want is to actually increase people's choices by making foods that aren't loaded with sugar comparatively easier and cheaper to get."
Some of this was news to me (e.g. "significant liver damage"), so maybe there's more to the market failure in the food industry due to informational asymmetries claim than I thought.
Posted by Mark Thoma on Wednesday, February 1, 2012 at 11:47 AM in Economics, Market Failure, Regulation
This seems worth tossing out for discussion (I agree with some of this, but I don't see the world through the same eyes as Phelps and Ammous):
Blaming Capitalism for Corporatism, by Edmund S. Phelps and Saifedean Ammous, Commentary, Project Syndicate: The future of capitalism is again a question. ...
The term “capitalism” used to mean an economic system in which capital was privately owned and traded... This system of individual freedom and individual responsibility gave little scope for government... Corporations could exist only as long as free individuals willingly purchased their goods – and would go out of business quickly otherwise. ...
Now the capitalist system has been corrupted. The managerial state has assumed responsibility for looking after everything from the incomes of the middle class to the profitability of large corporations to industrial advancement. This system, however, is not capitalism, but rather an economic order that harks back to Bismarck in the late nineteenth century and Mussolini in the twentieth: corporatism.
In various ways, corporatism chokes off the dynamism that makes for engaging work, faster economic growth, and greater opportunity and inclusiveness. It maintains lethargic, wasteful, unproductive, and well-connected firms at the expense of dynamic newcomers and outsiders, and favors declared goals such as industrialization, economic development, and national greatness over individuals’ economic freedom and responsibility. Today, airlines, auto manufacturers, agricultural companies, media, investment banks, hedge funds, and much more has at some point been deemed too important to weather the free market on its own, receiving a helping hand from government in the name of the “public good.”
The costs of corporatism are visible all around us: dysfunctional corporations that survive despite their gross inability to serve their customers; sclerotic economies with slow output growth, a dearth of engaging work, scant opportunities for young people; governments bankrupted by their efforts to palliate these problems; and increasing concentration of wealth in the hands of those connected enough to be on the right side of the corporatist deal.
This shift of power from owners and innovators to state officials is the antithesis of capitalism. Yet this system’s apologists and beneficiaries have the temerity to blame all these failures on “reckless capitalism” and “lack of regulation,” which they argue necessitates more oversight and regulation, which in reality means more corporatism and state favoritism.
It seems unlikely that so disastrous a system is sustainable. ... If politicians cannot repeal corporatism, it will bury itself in debt and default, and a capitalist system could re-emerge from the discredited corporatist rubble. ...
Posted by Mark Thoma on Wednesday, February 1, 2012 at 12:28 AM in Economics, Income Distribution, Politics
Lane Kenworthy:
... Is it possible, then, for a country to have high income inequality but also low inequality of opportunity? John Quiggin is skeptical. He suggests the UK experience has debunked this “third way” notion. I’m not so sure. Imagine a rich nation with America’s income inequality and Nordic public services: affordable high-quality early education, K-12 schooling with late tracking and equal funding, and widespread access to good-quality universities. And perhaps also comprehensive prenatal care. Would its opportunity (mobility) structure look more like America’s or more like Sweden’s?
But, some will respond, you can’t get those services if income inequality is high. The rich will block the heavy taxation needed to fund them. Maybe. But income inequality has been rising in Sweden. In fact, in the late 1990s and mid 2000s the top 1%’s share of income (including capital gains) in Sweden was about the same as in the 1970s United States (see figure 7 in this paper by Atkinson, Piketty, and Saez). So far this hasn’t undermined Swedish taxation, though it’s probably too soon to draw any firm conclusions.
Suppose income inequality continues to rise in Sweden but its public services hold up. Will Sweden’s intergenerational mobility a few decades from now look like ours does today? I’d predict no. I suspect opportunity-enhancing programs can overcome a good bit of the harm done by income inequality.
That’s not to say we shouldn’t also try to reduce income inequality. I think we should. The point is that if we want to reduce inequality of opportunity, reducing income inequality isn’t the only way, and perhaps not even the best way, to do it.
More here.
Posted by Mark Thoma on Wednesday, February 1, 2012 at 12:22 AM in Economics, Income Distribution
Posted by Mark Thoma on Wednesday, February 1, 2012 at 12:06 AM in Economics, Links
Antonio Fatás is less than impressed with the European Union's new treaty:
New treaty, same old flaws, by Antonio Fatás: The European Union member states (with the exception of the UK and the Czech Republic) agreed yesterday to a new Treaty on "Stability, Coordination and Governance". The text of the agreement can be found in the web site of the European Council. My first reaction after reading the document was that I must have made a mistake and clicked on the wrong (old) document. It is very difficult to see the differences with the current economic policy framework. And, unfortunately, all the flaws of the previous system are still there.
Here is my list of concerns about the agreement.
1. Wrong title. The agreement is mostly about fiscal sustainability not about stability, coordination and governance. ...
2. Numerical limits at the center of the fiscal policy framework. The agreement relies again on strict numerical limits to enforce fiscal discipline. So far this has not worked and it is difficult to imagine why it would work going forward. ...
3. Not enough stress on good years. The main failure of fiscal policy in European countries in the last decade has been not to generate large enough surpluses in good years. By focusing so much on the deficit limit of 0.5% we simply ignore that the real issue is on how to generate those surpluses and we put all the emphasis on the bad economic years where getting things right is so much harder. We have not learned much from the last 10 years.
4. Limited focus on governance. Despite the fact that the word governance appears in the title of the agreement, there is very little change in terms of governance and enforcement. The agreement will be enforced by the governments of the member countries. These are the same actors that can potentially be the sinners. ... The agreement talks about automatic fines. Fines that are paid to whom? To the potential group of offenders? Do we really believe that if we had had in place an automatic fine imposed on Greece for having violated the deficit limit we would not be in a crisis today?
Providing an economic policy framework to manage the Euro area is not an easy task and I am glad that I was not part of the negotiations that have taken place over the last days. But the agreement shows that we have learned very little from the previous experience. We insist on maintaining a system that does not work and that only provides a distraction to other economic policy issues that, if we try hard enough, we might be able to solve.
Posted by Mark Thoma on Tuesday, January 31, 2012 at 08:20 PM in Economics
A new column is live:
The Path to a More Secure Economic Future
It's a response to president Obama's plan to increase economic growth and job opportunities through a revival of manufacturing in the U.S.
Posted by Mark Thoma on Tuesday, January 31, 2012 at 01:11 PM in Economics, Social Insurance
Tim Duy:
I Don't See How This Can Continue, by Tim Duy: The European unemployment numbers are out. The story from the Financial Times:
Unemployment in the 17 euro countries climbed to 10.4 per cent in December, with the November rate revised upwards to the same rate, setting a fresh record since the introduction of the single currency in 1999. So-called “peripheral” members such as Spain and Greece recorded the highest rates, of 22.9 per cent and 19.2 per cent respectively.
By contrast, national data from Germany, the eurozone’s bulwark, showed joblessness declined in January to 6.7 per cent, the lowest level since reunification in 1991.
And a picture is worth a thousand words:
Perhaps France and Italy can hang on while relative wage deflation increases competitiveness with Germany, but conditions in the periphery look downright dire. And note that years of austerity have done little to help Greece and Ireland. I don't see the same medicine working in Spain or Portugal either. It is no wonder that Greece is looking for very substantial reductions in its debt, and it seems inevitable that Portugal will come to the same conclusion sooner or later. The great disparity in unemployment rates is another factor that leaves me pessimistic on the ultimate outcome of the Euro experiment. We need real fiscal transfers, and soon. More carrot with stick.
For now, however, market participants are focused on the salutary effects of the ECB's LRTO (not to mention expectations for another round of QE from the Fed). Have these efforts eased conditions enough to allow for a Portuguese restructuring or even Greece's exit from the Euro? Or have market participants and European policymakers been drawn into a dangerous path of complacency? Thinking aloud, do current market conditions embolden German politicians to think they can finally cut Greece loose with little or no consequences to the rest of Europe? Would this indeed be the case? I have trouble believing in the "orderly exit" story, but perhaps the can has been kicked far enough down the road that it can happen.
Posted by Mark Thoma on Tuesday, January 31, 2012 at 01:08 PM in Economics, Fed Watch, International Finance
Via Richard Green:
Good news and bad news on race and housing, Richard Green: Ed Glaeser and Jake Vigdor find that all-white neighborhoods are a thing of the past. They find:
-
The most standard segregation measure shows that American cities are now more integrated than they’ve been since 1910. Segregation rose dramatically with black migration to cities in the mid-twentieth century. On average, this rise has been entirely erased by integration since the 1960s.
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All-white neighborhoods are effectively extinct. A half-century ago, one-fifth of America’s urban neighborhoods had exactly zero black residents. Today, African-American residents can be found in 199 out of every 200 neighborhoods nationwide. The remaining neighborhoods are mostly in remote rural areas or in cities with very little black population.
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Gentrification and immigration have made a dent in segregation. While these phenomena are clearly important in some areas, the rise of black suburbanization explains much more of the decline in segregation.
-
Ghetto neighborhoods persist, but most are in decline. For every diversifying ghetto neighborhood, many more house a dwindling population of black residents.
That said, Andy Reschovsky sends me to the most recent US Census Homeownership and Vacancy Report, which shows the ration of black to white ownership rates fell from .643 in 2006 to .617 in 2011; for hispanics, the fall was from .651 to .632.
Posted by Mark Thoma on Tuesday, January 31, 2012 at 11:07 AM in Economics, Housing
Joe Gagnon says the "best way to discourage currency manipulation is to tax it heavily":
Should The U.S. Take A Harder Stance On China's Currency?, by Joe Gagnon, Planet Money: ...Ben Bernanke recently said that Chinese currency manipulation "is blocking what might be a more normal recovery process." In fact, the problem goes beyond China to include many other emerging economies and even a few advanced economies. ... The evidence suggests that currency manipulators jointly have increased their trade balances by about $1 trillion relative to where they would have been in the absence of manipulation. Europe and the United States have suffered the corresponding decline in trade balances. ...
Based on estimates of the International Monetary Fund, the $1 trillion boost to European and US net exports from the ending of currency manipulation would return these economies to nearly full employment.
The best way to discourage currency manipulation is to tax it heavily. The taxes should apply to all purchases of European and US assets, including bank deposits, by governments that engage in currency manipulation. Unlike trade sanctions, such taxation is allowed under international law, and it also does not cause the economic distortions that trade sanctions cause. As I outlined recently with my colleague Gary Hufbauer, anti-money-laundering procedures now in place can prevent currency manipulators from hiding their investments through third parties.
One consequence of a reduction in currency manipulation would be a sharp drop in the values of the dollar and the euro in terms of the currencies of the manipulators. It is this exchange rate adjustment that would boost US and European exports, thereby generating jobs. ...
Posted by Mark Thoma on Tuesday, January 31, 2012 at 12:42 AM in China, Economics, International Finance, International Trade
From the NBER:
Gains and Gaps: Changing Inequality in U.S. College Entry and Completion, by Martha J. Bailey, Susan M. Dynarski, NBER Working Paper No. 17633, December 2011: [open link] We describe changes over time in inequality in postsecondary education using nearly seventy years of data... We find growing gaps between children from high- and low-income families in college entry, persistence, and graduation. Rates of college completion increased by only four percentage points for low-income cohorts born around 1980 relative to cohorts born in the early 1960s, but by 18 percentage points for corresponding cohorts who grew up in high-income families. Among men, inequality in educational attainment has increased slightly since the early 1980s. But among women, inequality in educational attainment has risen sharply, driven by increases in the education of the daughters of high-income parents. Sex differences in educational attainment, which were small or nonexistent thirty years ago, are now substantial, with women outpacing men in every demographic group. The female advantage in educational attainment is largest in the top quartile of the income distribution. These sex differences present a formidable challenge to standard explanations for rising inequality in educational attainment.
There's a more extended summary of the results in the conclusion to the paper.
Posted by Mark Thoma on Tuesday, January 31, 2012 at 12:34 AM in Academic Papers, Economics, Universities
Posted by Mark Thoma on Tuesday, January 31, 2012 at 12:06 AM in Economics, Links
What's responsible for the slow recovery of employment in recent recessions? :
The analyses discussed here suggest that weak labor demand is the primary explanation for prolonged unemployment duration observed in the recent recession and recovery. The weak recovery of employment is similar to the jobless recoveries that followed the 1990–91 and 2001 recessions. This suggests that the labor market has changed in ways that prevent the cyclical bounceback in the labor market that followed past recessions. The shift towards jobless recoveries probably reflects a reduction in temporary layoffs during cyclical downturns. Stricter market incentives to control costs in the face of stiff domestic and international competition may also be factors. In addition, anecdotal evidence suggests that recent employer reluctance to hire reflects an unusual degree of uncertainty about future growth in product demand and labor costs. These special factors are not readily addressed through conventional monetary or fiscal policies. But such policies may be able to offset the central obstacle of weak aggregate demand.
More here.
Posted by Mark Thoma on Monday, January 30, 2012 at 01:01 PM in Economics, Fiscal Policy, Unemployment
Brad DeLong:
Neville Chamberlain was Right, by J. Bradford DeLong, Commentary, Project Syndicate: Neville Chamberlain is remembered today as the British prime minister who, as an avatar of appeasement of Nazi Germany in the late 1930’s, helped to usher Europe into World War II. But, earlier in that fateful decade, relatively soon after the start of the Great Depression, the British economy was rapidly returning to its previous level of output, thanks to Chancellor of the Exchequer Neville Chamberlain’s reliance on fiscal stimulus to restore the price level to its pre-depression trajectory.
Compare that approach to the expansion-through-austerity policy being pursued nowadays by British Prime Minister David Cameron’s government (with Chancellor of the Exchequer George Osborne leading the cheering squad). The country’s real GDP has flat-lined, and the odds are high that British real GDP is headed down again.
Indeed, in less than a year, if current forecasts are correct, Britain’s Cameron-Osborne Depression will not merely be the worst depression in Britain since the Great Depression, but probably the worst depression in Britain…ever. ...[continue reading]...
Posted by Mark Thoma on Monday, January 30, 2012 at 10:09 AM in Economics
It's weird to get email from Stephen Williamson calling me names. Not much else, just name calling.
How childish is this guy?
Posted by Mark Thoma on Monday, January 30, 2012 at 09:20 AM in Economics
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