Saturday, May 28, 2016

How Bank Networks Amplify Financial Crises: Evidence from the Great Depression

On the road headed to my dad's 80th birthday party, so just a quick one for now. This is from VoxEU:

How bank networks amplify financial crises: Evidence from the Great Depression, by Kris James Mitchener and Gary Richardson: How financial networks propagate shocks and magnify recessions is of interest to both scholars and policymakers. The financial crisis of 2007-8 convinced many observers that financial networks were fragile, and while reforms are underway, much remains to be learned about how and why connections between financial firms matter for the macroeconomy. Indeed, the complexity and sheer number of linkages has made it particularly challenging to formulate empirical estimates of their role in amplifying downturns.
Economic theory suggests many channels through which networks may transmit shocks (Allen and Gale 2000, Cabellero and Simesek 2013) and empirical research has provided some evidence of contagious failures flowing through interbank markets, particularly for the recent financial crisis in the US and Europe (Puhr et al. 2012, Fricke and Lux 2012). History should have a lot to say about the role of networks in contributing to the severity of financial crises, but it is a surprisingly lightly studied aspect of earlier periods of financial turmoil – even for well-researched episodes such as the Great Depression. This lacuna exists despite the fact that financial networks of the past may be simpler in structure, thus making it somewhat easier to identify empirically how aggregate variables, such as lending, were affected when linkages were disrupted.
In a recent paper, we document how the interbank network transmitted liquidity shocks through the US banking system and how the transmission of these shocks amplified the contraction in real economic activity during the Great Depression (Mitchener and Richardson 2016). The paper contributes to the growing literature on financial networks and the real economy, illuminating both a mechanism for transmission (interbank deposits) as well as a source of amplification (balance-sheet effects). It also introduces an additional channel through which banking distress deepened the Great Depression and complements existing research on how bank distress during the Great Depression influenced the real economy.
We describe how a pyramid-like structure of interbank deposits developed in the 19th century, how the founding of the Fed altered the holdings of these deposits, and how this structure then influenced real economic activity during periods of severe distress, such as banking panics (Mitchener and Richardson 2016). The interbank network that existed on the eve of the Great Depression linked large money centre banks in New York and Chicago to tens of thousands of smaller rural banks throughout the US. The money centre banks served as correspondents holding deposits from institutions in the countryside. Interbank balances exposed correspondent banks to shocks afflicting banks in the hinterland. Interbank deposits were a liquid source of funds that could be deployed to meet sudden demands by depositors to convert claims to cash, and the removal of these deposits from correspondent banks peaked during periods that contemporary commentators described as – and that our detailed statistical analysis of bank suspensions confirms were – banking panics. Although the pyramided system of interbank deposits could handle idiosyncratic bank runs, when runs clustered in time and space (i.e. when panics occurred) the system became overwhelmed in the sense that banks higher up the pyramid were forced to adjust to these changes in liabilities by changing their assets (i.e. lending). ...
Ironically, the Federal Reserve System had been created with the purpose of preventing crises such as those that had regularly plagued the banking system in the 19th century. We help to explain why the Fed failed to fulfill this basic responsibility. ...

    Posted by on Saturday, May 28, 2016 at 10:20 AM in Economics, Financial System | Permalink  Comments (2) 


    Links for 05-28-16

      Posted by on Saturday, May 28, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (56) 


      Friday, May 27, 2016

      Impoverished Children with Access to Food Stamps become Healthier and Wealthier Adults

      At Microeconomic Insights:

      Impoverished children with access to food stamps become healthier and wealthier adults: Adults who participated in the Food Stamp Program, renamed the Supplemental Nutrition Assistance Program (SNAP) in 2008, as children are healthier and better off financially than poverty-stricken families who did not have access to the program, according to findings in joint work with Douglas Almond and Diane Schanzenbach (this paper and a companion paper Almond, et al. 2011). Children with access were more likely as adults to graduate from high school, earn more, and rely less on government welfare programs as adults than impoverished children who did not have access to SNAP. Women, in particular, are substantially more likely to self-report they are in good health and are more economically self-sufficient in adulthood. We find no additional long-term health impacts for children from more exposure to the program during middle childhood, but individuals with access to food stamps before age 5 had measurably better health outcomes in adulthood with significant impacts for those in early childhood. ...
      Policy lessons
      In terms of policy, it’s important to recognize that the benefits of SNAP not only include improved food security in the short-run, but the program also helps prevent negative, long-term, and lasting effects of deprivation during childhood, such as less education and earnings as adults, along with health problems like obesity, heart disease, or diabetes.

      Because these individuals are healthier and more financially sound, the benefits also pay out to taxpayers. Healthier Americans leads to less cost when it comes to future health care for the average taxpayer. Additionally, by increasing self-sufficiency, SNAP today can reduce the future costs of safety net programs and also increase tax revenues in the long run.

      Our findings suggest that the SNAP benefits that go to children are better thought of as an investment rather than as charity.

        Posted by on Friday, May 27, 2016 at 07:20 AM in Economics, Social Insurance | Permalink  Comments (22) 


        Paul Krugman: Trump’s Delusions of Competence

        Trump's towering ignorance about how to run the U.S. economy:

        Trump’s Delusions of Competence, by Paul Krugman, NY Times: In general, you shouldn’t pay much attention to polls at this point, especially with Republicans unifying around Donald Trump while Bernie Sanders hasn’t conceded the inevitable. Still, I was struck by several recent polls showing Mr. Trump favored over Hillary Clinton on the question of who can best manage the economy.
        This is pretty remarkable given the incoherence and wild irresponsibility of Mr. Trump’s policy pronouncements. Granted, most voters probably don’t know anything about that, in part thanks to substance-free news coverage. ...
        One of the many peculiar things about his run for the White House is that it rests heavily on his claims of being a masterful businessman, yet it’s far from clear how good he really is at the “art of the deal.” ...
        But leave questions about whether Mr. Trump is the business genius he claims to be on one side. Does business success carry with it the knowledge and instincts needed to make good economic policy? No, it doesn’t..., it’s often startlingly bad, for two reasons. One is that wealthy, powerful people sometimes don’t know what they don’t know — and who’s going to tell them? The other is that a country is nothing like a corporation, and running a national economy is nothing like running a business.
        Here’s a specific, and relevant, example of the difference. Last fall, the now-presumed Republican nominee declared: “Our wages are too high. We have to compete with other countries.” ...
        The truth is that wage cuts are the last thing America needs right now: We sell most of what we produce to ourselves, and wage cuts would hurt domestic sales by reducing purchasing power and increasing the burden of private-sector debt. Lower wages probably wouldn’t even help the fraction of the U.S. economy that competes internationally, since they would normally lead to a stronger dollar, negating any competitive advantage.
        The point, however, is that these feedback effects from wage cuts aren’t the sort of things even very smart business leaders need to take into account to run their companies. Businesses sell stuff to other people; they don’t need to worry about the effect of their cost-cutting measures on demand for their products. Managing national economic policy, on the other hand, is all about the feedback. ...
        The truth is that the idea that Donald Trump, of all people, knows how to run the U.S. economy is ludicrous. But will voters ever recognize that truth?

          Posted by on Friday, May 27, 2016 at 06:48 AM Permalink  Comments (91) 


          Links for 05-27-16

            Posted by on Friday, May 27, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (108) 


            Thursday, May 26, 2016

            Fed Watch: Powell, Data

            Tim Duy:

            Powell, Data, by Tim Duy: Federal Reserve Governor Jerome Powell kept the prospects for a near-term rate hike alive and well in a speech today:

            For the near term, my baseline expectation is that our economy will continue on its path of growth at around 2 percent. To confirm that expectation, it will be important to see a significant strengthening in growth in the second quarter after the apparent softness of the past two quarters. To support this growth narrative, I also expect the ongoing healing process in labor markets to continue, with strong job growth, further reductions in headline unemployment and other measures of slack, and increases in wage inflation. As the economy tightens, I expect that inflation will continue to move over time to the Committee's 2 percent objective.
            If incoming data continue to support those expectations, I would see it as appropriate to continue to gradually raise the federal funds rate. Depending on the incoming data and the evolving risks, another rate increase may be appropriate fairly soon.
            Will these conditions be met for Powell by the time of the next FOMC meeting in June? On one hand, the Atlanta Fed tracking estimate for Q2 is up solidly:

            Gdpnow-forecast-evolution

            That said, the tracking estimate is famously volatile and could easily collapse after the June meeting. So while a hopeful sign, I would not take it for granted yet that Q2 GDP will come in at a 3 percent pace. And given that Powell views this rebound as an "important" signal, I suspect he will want to be more certain of the Q2 results than allowable by the data available on June 14-15.
            Note also he is expecting "further reductions in headline unemployment and other measures of slack" to justify a rate hike. This echoes my recent theme that stagnating progress toward full employment should be something that stays the Fed's hand for the moment. Powell also identifies evolving risks as an important factor in the timing of the next rate hike. As I said earlier this week, I think FOMC members need to shift to a balanced risk assessment prior to hiking. They were closer in April than March on that point, but I still think will fall short in June. Or at best are balanced in June and thus can justify setting the stage for a July hike. Either way, Powell made clear that if the data holds, he would support a rate hike in the near-term.
            Powell tempers the rate hike message with a reminder that the path forward is likely to be very, very slow:
            Several factors suggest that the pace of rate increases should be gradual, including the asymmetry of risks at the zero lower bound, downside risks from weak global demand and geopolitical events, a lower long-run neutral federal funds rate, and the apparently elevated sensitivity of financial conditions to monetary policy. Uncertainty about the location of supply-side constraints provides another reason for gradualism.
            Earlier in the speech Powell, while commenting on slow productivity growth, said:
            Lower potential growth would likely translate into lower estimates of the level of interest rates necessary to sustain stable prices and full employment. Estimates of the long-run "neutral" federal funds rate have declined about 100 basis points since the end of the crisis. The real yield on the 10-year Treasury is currently close to zero, compared with around 2 percent in the mid-2000s. Some of the decline in longer-term rates is explained by lower estimates of potential growth, and some by other factors such as very low term premiums.
            I suspect that ongoing low productivity growth will lead to further reductions in the Fed's estimates of the longer run federal funds rate. I further suspect that this, combined with Powell's other concerns that limit the pace of rate hikes, means the likely medium-term path forward will be more shallow than the Fed anticipates. In other words, given current conditions, the Fed is still likely to move to the markets over the medium-term even if markets have moved somewhat toward the Fed in the near-term.
            Housing data came in strong this week, including a jump in home home sales:

            NEWSOLD

            The shift from multifamily to single family looks well underway. While I wouldn't exactly expect sales to climb back up to 1.4 million units, there is clearly room for more upside here given a long period of under-building and high demand for housing. The latter was confirmed by the strong numbers in existing home sales. See Calculated Risk for more.
            Initial unemployment claims was once again your weekly reminder that if you are looking for recession, you need to look somewhere else:

            CLAIMSa0516

            But the durable goods data was mixed, with an OK-ish headline but a weak core:

            NEWORDERDSa0516

            This weakness is consistent with soft regional ISM survey data that foreshadow a soft national ISM manufacturing number for May (to be released next week). Manufacturing data is likely to remain weak until the impacts of lower oil prices and a stronger dollar (both reversing this year) work their way through the sector, hopefully (keep your fingers crossed) by later this year.
            While I do not believe current manufacturing numbers are indicative of a US recession, I would not be eager to hike rates into manufacturing weakness either. Moreover, if I were concerned about low productivity, like Powell and other FOMC participants, I would not be eager to hike into the low business investment numbers suggested by the core durable goods figures. Tend to think that this argues against June.
            Bottom Line: Fed officials believe the data is lining up for a rate hike in the near future. Ultimately, I think they pass on June. Strategically, July offers a lot to like. They can wait for a more clear view of the 2nd quarter. They can use the June meeting and press conference to set the stage for July. They can broker a compromise between hawks and doves. The former should be happy because a strong signal in June is effectively a rate hike, the latter because it becomes an easily reversed rate hike (by skipping July if necessary) and they can bolster their case for gradualism. And a July hike will end the belief that the Fed can only hike on meetings with press conferences. My personal preference is to delay until September, but I don't run the show. All of the above assumes, of course, that data and financial conditions hold.

              Posted by on Thursday, May 26, 2016 at 01:27 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (7) 


              On Negative Effects of Vouchers

              From the Brookings Institution:

              On negative effects of vouchers, by Mark Dynarski: Executive summary Recent research on statewide voucher programs in Louisiana and Indiana has found that public school students that received vouchers to attend private schools subsequently scored lower on reading and math tests compared to similar students that remained in public schools. The magnitudes of the negative impacts were large. These studies used rigorous research designs that allow for strong causal conclusions. And they showed that the results were not explained by the particular tests that were used or the possibility that students receiving vouchers transferred out of above-average public schools.
              Another explanation is that our historical understanding of the superior performance of private schools is no longer accurate. Since the nineties, public schools have been under heavy pressure to improve test scores. Private schools were exempt from these accountability requirements. A recent study showed that public schools closed the score gap with private schools. That study did not look specifically at Louisiana and Indiana, but trends in scores on the National Assessment of Educational Progress for public school students in those states are similar to national trends.
              In education as in medicine, ‘first, do no harm’ is a powerful guiding principle. A case to use taxpayer funds to send children of low-income parents to private schools is based on an expectation that the outcome will be positive. These recent findings point in the other direction. More needs to be known about long-term outcomes from these recently implemented voucher programs to make the case that they are a good investment of public funds. As well, we need to know if private schools would up their game in a scenario in which their performance with voucher students is reported publicly and subject to both regulatory and market accountability. ...

                Posted by on Thursday, May 26, 2016 at 08:04 AM in Economics, Education | Permalink  Comments (35) 


                Study Dispels Myth about Millionaire Migration in the US

                From the American Sociological Association

                Study dispels myth about millionaire migration in the US., EurekAlert: The view that the rich are highly mobile has gained much political traction in recent years and has become a central argument in debates about whether there should be "millionaire taxes" on top-income earners. But a new study dispels the common myth about the propensity of millionaires in the United States to move from high to low tax states.
                "The most striking finding in our study is how little elites seem willing to move to exploit tax advantages across state lines," said Cristobal Young, an assistant professor of sociology at Stanford University and the lead author of the study. ...
                In any given year, Young and his fellow researchers found that roughly 500,000 individuals file tax returns reporting incomes of $1 million or more (constant 2005 dollars). From this population, only about 12,000 millionaires change their state each year. The annual millionaire migration rate is 2.4 percent, which is lower than the migration rate of the general population (2.9 percent). The highest rates of migration are seen among low-income tax filers: migration is 4.5 percent among people who earn around $10,000 a year. ...
                The study finds that family responsibilities are a key factor that limit migration among top-income earners. "Very affluent people are much more likely to be married and to have school-age children, which makes moving more difficult," Young said. ...
                While millionaire migration is extremely limited, there is a grain of truth in the worries about millionaire tax flight, the study finds. "When millionaires do migrate, they are more likely to move to a state with a lower tax rate, and that state is almost always Florida," Young said. ...
                "My guess is that if Florida established a 'millionaire tax,' elites would still find Florida appealing because of its climate and geography -- and patterns of elite migration wouldn't really change," Young said. ...
                The study also looked at the millionaire population along the borders between states with different tax rates. "In these narrow geographic regions, you would expect millionaires to cluster on the low tax side of the border, but we see very weak evidence of this," Young said.
                As for policy implications, Young said "millionaire taxes" result in minimal tax flight among millionaires and help states raise revenue to improve education, infrastructure, and public services, while reducing inequality.
                "Our research indicates that 'millionaire taxes' raise a lot of revenue and have very little downside," Young said.

                  Posted by on Thursday, May 26, 2016 at 12:24 AM in Economics, Income Distribution, Taxes | Permalink  Comments (42) 


                  Links for 05-26-16

                    Posted by on Thursday, May 26, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (139) 


                    Wednesday, May 25, 2016

                    Fed Watch: Should The Fed Tolerate 5% Unemployment?

                    Tim Duy:

                    Should The Fed Tolerate 5% Unemployment?. by Tim Duy: In recent posts I highlighted the stagnant unemployment rate. I believe the Fed is on thin ice by raising rates when unemployment is moving sideways, especially when there exists evidence of substantial underemployment (see also this FEDS note). But there is also evidence of growing wage pressures, in particular the Atlanta Fed wage measure:

                    WAGESa0516

                    Would wage growth continue to accelerate if unemployment persisted at current levels? If so, would this mean the Fed had reached a tolerable equilibrium? My answers are "possibly" to the former question, and "probably not" to the latter.
                    Another way to consider the data is via a wage Phillips curve:

                    PHIL0516

                    I suspect the black dots around 4 percent unemployment are effectively incompatible with a 2 percent inflation target given current productivity growth. The economy is currently operating at the light blue dot. My expectation is that when when conditions are sufficiently tight to raise wage growth to the 4 percent range, they will also be sufficiently tight to raise inflation to the Fed's target. It is possible that this occurs near 5 percent unemployment - essentially a vertical move from the current position.
                    But while this might be possible (wage growth might just stall out at current levels of unemployment), I hesitate to say that it was optimal. Points up and to the left - lower unemployment but the same wage growth are likely consistent with the Fed's inflation target and thus obviously preferable as they entail higher levels of employment.
                    Getting to such points, however, includes a higher possibility of overshooting the inflation target (although I would suggest that the magnitude of the overshooting would be no more excessive than the magnitude of undershooting the Fed is currently willing to tolerate). So, and this is reiterating a point from yesterday, I would say that if the Fed slows activity now, they risk settling the economy into a suboptimal outcome with lower employment and, maybe, lower inflation than their mandate. This would seem to be the policy approach of a central bank hell-bent on approaching the inflation target from below. By avoiding further rate hikes until it is clear that activity is in fact sufficient to induce further declines in the unemployment rate, the Fed will maximize its odds of meeting its mandates, but at the cost of some risk of overshooting its inflation target.
                    It seems to me then that a central bank with a symmetric inflation target would choose to refrain from further rate hikes when progress toward full employment had clearly decelerated:

                    NFPc0516

                    (or even stalled):

                    NFPf0516

                    and inflation remains below target:

                    PCE0516

                    We will soon see if the Fed agrees.

                      Posted by on Wednesday, May 25, 2016 at 12:24 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (63) 


                      Matthew Gentzkow on Newspapers and Politics

                      In case you missed this in yesterday's links (the full interview is much longer):

                      Interview with Matthew Gentzkow, by Douglas Clement. Editor, The Region: Before Matthew Gentzkow entered the field, the economics of media was largely uncharted territory. Today, media economics is flourishing thanks largely to him and his co-authors—particularly Jesse Shapiro... But Gentzkow’s expertise is not confined to media; he’s also a pioneer in methodology, empirical procedure and economic theory with landmark research on communication, social influence and marketing.
                      With unique insights, innovative technique, methodological rigor and massive databases he often creates for an express purpose, Gentzkow has answered questions about television, newspapers, product branding, competition, persuasion and politics that many scholars had asked but no one had answered convincingly.
                      Due to this work, we now know that newspaper media slant is driven mostly by the preferences of readers, not newspaper owners. And by examining browser data, he discovered that people don’t largely live in internet “echo chambers”—that is, they don’t exclusively visit sites that align with their political bent. Product brand preferences, he found, are established early in life and endure long after exposure to essentially identical, less expensive alternatives. These and dozens of other economic mysteries have yielded to his curiosity, insight and skill.
                      Gentzkow received the John Bates Clark Medal in 2014...
                      ... Newspapers and politics Region: You’ve done a great deal of research on newspapers and particularly their relationship to politics. There certainly isn’t time to get to it all. But in a key, early paper with Shapiro, you build a model in which media bias emerges because firms slant their coverage toward their audience to build a reputation for quality. I’m curious to know how that holds up empirically
                      I’d also like to ask about your findings on the role of newspaper owners in driving media slant, and what that implies for competition policy for media.
                      Gentzkow: ...One of the things we found in looking at newspapers is that their political slant or political content seems to be driven very strongly by demand from their readers, the fact that people in conservative places want to hear conservative stuff and the converse for liberals. And that slant is basically uncorrelated with anything about their owners, the ownership of the paper.
                      So if you look at two newspapers that are owned by the same company, or the same individual, they are no more similar to each other than two unconnected newspapers in those same places. For instance, the New York Times Company at one time owned a bunch of newspapers all over the country. Those newspapers did not all look like the New York Times; they looked like other newspapers in the places where they were located.
                      That speaks directly to regulation because much of the way we regulate media is by regulating media ownership. The premise of a lot of that regulation has explicitly been that having diverse viewpoints, diverse ideas and independent reporting is important for democracy. And that in order to guarantee, we need to have diverse ownership because owners are going to put their own imprint on the content of their media.
                      Region: The concern that if Rupert Murdoch, for instance, or William Hearst in an earlier era, controls newspapers, radio, et cetera, he’ll use that platform to push his political agenda.
                      Gentzkow: Right, if Murdoch takes over everything, we’re not going to like it because everything will look like Fox News.
                      Our research results push back on that and say that, at least in this particular context, ownership is not really the key driver of slant and, in fact, a lot of the driver is actually coming from consumer demand. Not only does that say that you might not need to be as worried about ownership, but it also says that the welfare implications of this are a little more complicated because now consumers are getting what they want.
                      We might think from a political, democratic point of view that it would be better if the public got different, more diverse information. But there’s going to be a welfare trade-off because we would be giving them content they would prefer less. If we want to give people diverse content that we think is good for democracy, then we have to get them to actually read, watch or consume it. And, you know, giving a bunch of people in conservative places some liberal newspaper—well, our results would suggest they’re not going to read it. So, that seems to have important implications for policy.
                      But it comes with a really important caveat. The finding that ownership doesn’t matter in terms of a newspaper’s political slant is not a universal result. It doesn’t apply everywhere. It’s a statement about newspaper markets in the United States—a highly commercialized, relatively competitive setting, and a place where the political returns to manipulating the average content of a newspaper might not be all that big.
                      It could be entirely consistent with those results that in other countries, in other contexts, it may well differ. Does Silvio Berlusconi influence the media in Italy? A lot of evidence suggests yes. Does control by the government of Russia affect the content of the media in Russia? Or even if we were to look at national cable outlets in the U.S., would we be confident that ownership doesn’t matter? I think that’s a pretty big leap; you need to be careful.
                      My own view would be that, probably more than is often assumed, the fact that Fox News has conservative content in the U.S. is related more to the fact that that’s a very profitable business strategy than to any personal political agenda of Rupert Murdoch. But our results don’t settle that question, and it’s an important question.
                      People in different places and different backgrounds can have such persistently different beliefs about even factual issues, beliefs that never seem to converge. How do people end up with such different beliefs? Why don’t they converge? The sharp empirical test that’s going to pin [this] down—that, I think, we’re still looking for.
                      Region: And your earlier paper with Shapiro in which you developed a model about newspapers and political slant: Could you tell us a bit about it and how it fares empirically?
                      Gentzkow: The theory paper that Jesse and I wrote makes the point that, first of all, there’s a mechanism by which even rational consumers, even consumers who really care about getting the truth, are nevertheless going to demand news in a way that matches what we see empirically. That is, they’re going to demand news that matches their own ideology.
                      Why is that true? Well, suppose you live in a world where you don’t know ahead of time which sources have accurate information and can be trusted, and which don’t have accurate information and can’t be trusted. In that world, a correct, rational, Bayesian inference is that if you say a bunch of stuff that I think a priori is incredibly unlikely to be true, I’m going to trust you less. And if you say stuff that sounds to me like it’s probably right, that is consistent with my prior beliefs about what’s most likely to be true, I’ll trust you more.
                      It’s obvious in the extremes. If we go into a supermarket and see a tabloid newspaper reporting that Elvis Presley was spotted in New York or that aliens came down from outer space, and you have a strong prior belief that that’s not true, then even if we’ve never seen that newspaper before, we’ll infer that it’s probably not a very accurate newspaper. It’s a totally reasonable judgment that nobody would take issue with.
                      That same kind of judgment leads to things such as, if I’m somebody who believes very strongly that global warming is a hoax or that the evidence for it is weak, and a lot of people I’ve talked to believe that global warming has been exaggerated, then if I see news outlets that are arguing otherwise, I’m going to trust them less. And if I see news outlets that are skeptical about global warming, I’m going to trust them more.
                      You can see that playing out on lots and lots of political issues. So, on net, if I’m conservative, I will sincerely believe that Fox News is a more trustworthy source of information. I’m not simply watching Fox News because, “Well, I know that it’s distorted, but it makes me feel better.” That is, I’m not watching it because it confirms my biases and makes me feel good by telling me that I’m right even though I sort of know that it’s less accurate. Rather, I’m watching it because I genuinely think it’s the most accurate source of information there is.
                      So, that’s what’s true in the world of that model but, as you asked, does that match the facts? Has that been confirmed? I think it resonates very strongly with my casual, anecdotal impression of how people feel about the media choices they make, and it resonates with a lot of survey evidence.
                      Surveys show that people who, for instance, happen to be liberal and are also consistent readers of the New York Times (including many of our friends in academia) sincerely believe that the New York Times is a trustworthy and accurate newspaper. True, it happens to agree with their political point of view, but if you ask them to bet on a factual question, they would put money on the New York Times being accurate. And surveys also show that people who are conservatives believe exactly the same thing about Fox News.
                      But that’s all anecdotal, survey-type evidence. We haven’t figured out a way to confirm it empirically, so it remains kind of an open question. We need sharper empirical tests that separate how much of the demand for like-minded information comes from this kind of mechanism versus a variety of other psychological mechanisms that we know are operating.
                      For example, there’s good evidence that we remember things better when they’re consistent with our prior point of view. There is also a sense of enjoyment at hearing confirmatory information. It’s really fun if you’re a conservative, for instance, to listen to Rush Limbaugh, and it’s really fun if you’re a liberal to listen to Jon Stewart or the “Daily Show”—people making fun of the people you disagree with is really enjoyable. So, there’s definitely that element; the pleasure of hearing somebody reinforce your beliefs is a very real thing.
                      That tendency of people to seek out like-minded information is so pervasive. You see it in absolutely every context that anyone has ever looked at; you see it for well-educated people and those who are far less-educated. You see it when the stakes are low as well as when they’re high. You see it everywhere and all the time. And some big component of that fact that it’s so robust and pervasive is related to this underlying fact that it’s also rationally what you would do if you were genuinely trying to figure out what is true.
                      There’s a broader question that is part of what first got me interested in all of this, which is, how is it that people in different places and different backgrounds can have such persistently different beliefs about even factual issues, beliefs that never seem to converge.
                      We’ve talked about liberals and conservatives in the U.S., but there are also huge differences across countries. Jesse and I looked at some Gallup data where following 9/11, 75 percent of people across nine Islamic countries believed that the World Trade Center was not destroyed by an airplane—that was hijacked by Arab terrorists. They had a variety of other explanations: The CIA did it, Mossad did it or something else. In stark contrast, basically 100 percent of people in the U.S would agree that 9/11 was a terrorist attack.
                      How do people end up with such different beliefs? Why don’t they converge? Is it all because people are deceiving themselves, or they’re biased, or they want to be told that they’re right? Maybe that’s part of it, but at the root of it, I think, is that figuring out who you can trust is a really, really hard thing. We all start out surrounded by information coming from all these different sources—from our friends, our parents, different media outlets, from the government. We need some point of reference to judge who we’re going to listen to.
                      So it seems obvious—if you’re sitting in America—that, “Well, of course, the World Trade Center was destroyed by terrorists. Every single news organization that we’ve ever seen agrees with that; every single expert we’ve ever heard from agrees with that.”
                      But if you’re sitting in Pakistan, it’s not crazy to say, “Well, those are all Western news organizations, they share the same bias, they’re part of the same conspiracy, they’re controlled by the same people. Telling me that a hundred of them say this or that isn’t so different from telling me that one of them says it. And I’ve heard from a bunch of other people and seen some videos on YouTube. There’s actually a lot of evidence on the other side, and so I’m going to make a different judgment.”
                      So that core question of trust has seemed to me for a long time to be really important, but the sharp empirical test that’s going to pin down how much is due to a particular thing— that, I think, we’re still looking for. ...

                        Posted by on Wednesday, May 25, 2016 at 12:15 AM in Economics, Media | Permalink  Comments (27) 


                        Links for 05-25-16

                          Posted by on Wednesday, May 25, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (208) 


                          Tuesday, May 24, 2016

                          Prospect Theory & Populism

                          Chris Dillow:

                          Prospect theory & populism: Does prospect theory help explain support for Brexit in the UK and for Donald Trump in the US?
                          The bit of the theory I have in mind is the prediction that people are risk-seeking when they are losing, because they gamble to get even. This explains several phenomena: ...why (pdf) stock-pickers hold onto losing shares; why losing sports teams abandon their tactics in favour of risky all-out attack and “Hail Mary” passes; and why we sometimes get rogue traders – men who try to recoup losses by making riskier trades and so lose even more.
                          The same thing might explain support for Brexit and Trump. It’s generally agreed that both causes draw support from workers and the unemployed who feel that they’ve lost out under the existing order. ...
                          Of course, voting for Brexit, Trump or other populists is risky. But prospect theory tells us that those who feel they’ve lost might want to take risks. This might be because they feel they’ve nothing to lose: the threat of higher unemployment isn’t so scary if you’re already unemployed or if you think there’s a high chance of losing your job anyway. And/or it might be because they think that change carries upside risk.
                          This mechanism is amplified by another – distrust. The elite’s warnings that Brexit and Trump are risky are true. But many poorer workers and unemployed don’t trust elites...

                            Posted by on Tuesday, May 24, 2016 at 01:11 PM in Economics, Politics | Permalink  Comments (8) 


                            Fed Watch: Curious

                            Tim Duy:

                            Curious, by Tim Duy: I find the Fed's current obsession with raising interest rates curious to say the least. The basic argument for rate hikes is that the economy, and in particular the labor market, sustained its momentum in the last two quarters better than market participants believe. Given that the economy is near or beyond full employment, the lack of excess slack will soon manifest itself in the form of inflationary pressures. Hence, to remain ahead of the inflation curve and maximize the chance that rate hikes will be gradual, they need to soon raise rates.
                            For instance, St. Louis Federal Reserve President today, from his press release:
                            “By nearly any metric, U.S. labor markets are at or beyond full employment,” Bullard said. For example, he noted that job openings per available worker are at a cyclical low, unemployment insurance claims relative to the size of the labor force are at a multi-decade low, and nonfarm payroll employment growth has been above longer-run trends. In addition, the level of a labor market conditions index created by staff at the Board of Governors continues to be well above average.
                            In a recent speech, Boston Federal Reserve President Eric Rosengren argued that employment was close to entering the danger zone:
                            However, the unemployment rate is now at 5 percent – relatively close to my estimate of full employment, 4.7 percent – and net payroll employment growth is averaging over 200,000 jobs per month over the past quarter. My concern is that given these conditions, an interest rate path at the pace embedded in the futures markets could risk an unemployment rate that falls well below the natural rate of unemployment. We are currently at an unemployment rate where such a large, rapid decline in unemployment could be risky, as an overheating economy would eventually produce inflation rising above our 2 percent goal, eventually necessitating a rapid removal of monetary policy accommodation. I would prefer that the Federal Reserve not risk making the mistake of significantly overshooting the full employment level, resulting in the need to rapidly raise interest rates – with potentially disruptive effects and an increased risk of a recession.
                            Both these claims appear to me to be hasty. I think this narrative rang true through last summer. But, by my read of the data, since then progress toward full employment has stalled. For instance:

                            UNDER0516

                            Part-time employment and long-term unemployment look to be moving sideways since the middle of last year, while progress in the U6 unemployment rate has decelerated markedly. And these shifts in momentum are occurring while at levels above those prior to the recession. Moreover, U3 unemployment is now moving sideways at a level above the Fed's estimate of full employment:

                            NFPf0516

                            I understand that this flattening is attributable to rising labor force participation. That fact, however, should not induce the Fed to tighten. Quite the opposite in fact, as it suggests that available slack is deeper than imagined and hence requires an even longer period of low rates.
                            To me then, it appears that by raising rates now the Fed is risking falling short on its employment mandate at a time when the price mandate is also challenged. And falling short on the employment mandate now suggests an economy with sufficient slack to prevent reaching that price mandate. And that is without considering neither the balance of risks to the outlook nor the possibility that escaping the zero bound requires approaching the inflation target from above rather than below. Consequently, it seems that the case for a rate hike in June should be quite weak.
                            I would think that Federal Reserve Chair Janet Yellen should also find it quite weak. But the minutes of the April FOMC meeting and recent Fedspeak indicate that a large number of monetary policymakers find the case for a rate hike quite compelling. Given her past concerns regarding underemployment, I would have expected Yellen to lean stronger in the opposite direction. But I don't know that she is in fact leaning against the logic driving a rate hike. I am hoping we learn as much via her upcoming speaking engagements.
                            But, Yellen aside, what is driving so many FOMC participants to the rate hike camp? I think they are driven in part by two ideas that I believe to be erroneous. First, they believe that tapering and ending QE was not tightening, and hence essentially they have removed no accommodation. I think tapering was tightening as it reduced expectations about the ultimate size of the Fed's balance sheet and signaled a tighter future path of monetary policy. One place to see the tighter stance of policy is the Wu-Xia shadow rate:

                            WUXIA0516

                            Second, the Fed may be too enamored with the end game, the idea of normalization itself, as reflected in the dot-plot. They have already decided that the equilibrium fed funds rate is north of 3 percent, and hence assume that the current rate is highly accommodative. They thus see a large distance that needs to be covered, and feel an urge to start sooner than later.
                            Bottom Line: I don't find it surprising that some Fed policymakers are eager to hike rates. I am surprised that such sentiments are widespread throughout FOMC participants. It does not seem consistent with my understanding of the Fed's reaction function. They seem to be dismissing the recent lack of progress in reducing underemployment. This I think also might help explain the previously wide distance between financial market participants and the policymakers. And that might perhaps be why financial market participants largely ignored the warnings that rate hikes were likely until the release of the April minutes.

                              Posted by on Tuesday, May 24, 2016 at 12:15 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (64) 


                              Links for 05-24-16

                                Posted by on Tuesday, May 24, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (153) 


                                Monday, May 23, 2016

                                Social Credit and "Neutral" Monetary Policies: A Rant on "Helicopter Money" and "Monetary Neutrality"

                                Brad DeLong:

                                Social Credit and "Neutral" Monetary Policies: A Rant on "Helicopter Money" and "Monetary Neutrality": Badly-intentioned or incompetent policymakers can mess up any system of macroeconomic regulation. And we now have two centuries of history of demand-driven business cycles in industrial and post-industrial economies to teach us that there is no perfect, automatic self-regulating way to organize the economy at the macroeconomic level.

                                Over and over again, the grifters, charlatans, and cranks ask: "Why doesn't the central bank simply adopt the rule of setting a "neutral" monetary policy? In fact, why not replace the central bank completely with an automatic system that would do the job?"

                                Over the decades many have promised easy definitions of "neutrality", along with rules-of-thumb for maintaining it. All had their day:

                                • advocates of the gold standard,
                                • believers in a stable monetary base,
                                • devotees of a constant growth rate for the (narrowly defined) supply of money;
                                • believers in a constant growth rate for broad money and credit aggregates;
                                • various "Taylor rules".

                                And the answer, of course, is that by now centuries of painful experience have taught central bankers one thing: All advocates, wittingly or unwittingly, were simply selling snake oil. All such "automatic" rules and systems have been tried and found wanting.

                                It is a fact that all such rule-based central bank policies and all such so-called automatic systems have fallen down on the job. They have failed to properly manage "the" interest rate to set aggregate demand equal to potential output and balance the supply of whatever at that moment counts as "money", in whatever the operative sense of "money" is at that moment, to the demand for it.

                                Nudging interest rates to the level at which investment equals savings at full employment is what a properly "neutral" monetary policy really is.

                                Things are complicated, most importantly, by the fact that the business-cycle patterns of one generation are never likely to apply to the next. Consider: At any moment in the past century, the macroeconomic rules-of-thumb and models of economies' business-cycle behavior that had dominated forty, thirty, even twenty years before--the ones taught then to undergraduates, assumed as the background for op-eds, and including in the talking points of politicians whose aides wanted them to sound intelligent in answer to the first question and fuzz the answer to the follow-up before ducking away. We can now see that, for fifteen years now, central banks have been well behind the curve in their failure to recognize that the business-cycle pattern of the first post-World War II generations has definitely come to an end. The models and approaches developed to understand the small size of the post-WWII generation’s cycle and its bias toward moderate inflation are wrong today--and are worse than useless because they propagate error.

                                And this should not come as a surprise. ...

                                  Posted by on Monday, May 23, 2016 at 08:57 AM in Economics, Monetary Policy | Permalink  Comments (37) 


                                  Paul Krugman: Remembrance of Booms Past

                                  "Why was the Clinton economy so good?":

                                  Remembrance of Booms Past, by Paul Krugman, NY Times: ... Last week Mrs. Clinton stirred up a flurry of comments by suggesting that Mr. Clinton would be “in charge of revitalizing the economy.” You can see why she might want to say that, since people still remember the good times that prevailed when he was in office. ...
                                  First of all, it really was a very impressive boom, and ... it’s odd that Democrats don’t talk about it more. After all,... the Clinton-era expansion surpassed the Reagan economy in every dimension. ...
                                  But why was the Clinton economy so good? ... Mostly, he had the good luck to hold office when good things were happening for reasons unrelated to politics... American business finally figured out what to do with computers... This led to a surge in productivity...
                                  The technology takeoff also helped fuel a surge in business investment, which in turn produced job creation that ... brought America truly full employment..., the force behind the rising wages of the 1990s.
                                  Oh, and yes, there was a technology bubble at the end of the decade, but that was a fairly minor part of the overall story...
                                  And it’s worth remembering that ... when Mr. Clinton raised taxes on the wealthy, Republicans uniformly predicted disaster. ... None of that happened, which didn’t stop the same people from making the same predictions when President Obama raised taxes in 2013 – a move followed by the best job growth since the 1990s. ...
                                  Mrs. Clinton is currently proposing roughly a trillion dollars in additional taxes on the top 1 percent, to pay for new programs. If she takes office ... the usual suspects will issue the usual dire warnings, but there is absolutely no reason to believe that her agenda would hurt the economy.
                                  The other big lesson from the Clinton I boom is that ... the single most important thing policy can do to help workers is aim for full employment.
                                  Unfortunately, we can’t count on another spontaneous surge in technology-driven private investment to drive job creation. But some kinds of private investment might grow rapidly if we take long-overdue steps to address climate change.
                                  And in any case, not all productive investment is private. We desperately need to repair and upgrade our infrastructure...
                                  So, will Bill Clinton play an important role if Mrs. Clinton wins? I have no idea... But it will be important to remember what went right and why on Bill’s watch.

                                    Posted by on Monday, May 23, 2016 at 06:48 AM in Economics | Permalink  Comments (55) 


                                    Why Obamacare's "Cadillac Tax" is so Contentious

                                    I have a new article at CBS MoneyWatch:

                                    Why Obamacare's "Cadillac tax" is so contentious: President Obama's signature health care law is called the Affordable Care Act... One of its provisions that aimed at chipping away health care's high costs is a tax that attempts to remove a hidden subsidy for the most expensive employer-paid health insurance plans.
                                    The highly controversial 40 percent surcharge on these plans quickly became known as the "Cadillac tax," but its implementation has been anything but quick: Congress has delayed its effective date from 2018 to 2020, given the misgivings many lawmakers have about its wisdom -- and possible effects. Indeed, it's not at all clear that the provision will ever become effective.
                                    The Republican opposition is based upon the party's overwhelming aversion to everything about Obamacare, and the Democrats' resistance arises from concerns over how the tax will affect employee benefits. Unions are also concerned that health insurance benefit increases they've bargained for in lieu of wage increases will be lost.
                                    Of course, economists have opinions on this topic as well, with a recent poll of economists finding strong support for the Cadillac tax on high-price employer-provided health plans.
                                    The tax was intended to raise revenues to help fund Obamacare and, because it provides an incentive for employers to reduce their spending on health care, function as a cost-control measure. ...

                                      Posted by on Monday, May 23, 2016 at 06:23 AM in Economics, Health Care | Permalink  Comments (51) 


                                      Links for 05-23-16

                                        Posted by on Monday, May 23, 2016 at 12:06 AM Permalink  Comments (114) 


                                        Sunday, May 22, 2016

                                        Fed Watch: This Is Not A Drill. This Is The Real Thing.

                                        Tim Duy:

                                        This Is Not A Drill. This Is The Real Thing, by Tim Duy: The June FOMC meeting is live. That message came through loud and clear in the minutes, and was subsequently confirmed by New York Federal Reserve President William Dudley. Last week, via Reuters:

                                        "We are on track to satisfy a lot of the conditions" for a rate increase, Dudley said. He added, though, that a key factor arguing for the Fed biding its time a little was the potential for market turmoil around Britain’s vote in late June about whether to leave the European Union...

                                        ..."If I am convinced that my own forecast is sort of on track, then I think a tightening in the summer, the June-July time frame is a reasonable expectation," said Dudley, a permanent voting member of the Fed's rate-setting committee.

                                        Boston Federal Reserve President Eric Rosengren, the canary in the coal mine that was long ago alerting markets that they were underestimating June, subsequently gave a strong nod to June in his interview with Sam Fleming of the Financial Times:

                                        We are still a month away from the actual meeting. We are going to get another employment rate in early June. We are going to get a second retail sales report. So I want to be sensitive to how the data comes in, but I would say that most of the conditions that were laid out in the minutes as of right now seem to be . . . on the verge of broadly being met...

                                        Clearly, the Fed will be debating a rate hike at the next FOMC meeting. Will they or won't they? To answer that question, I need to begin with my main takeaways from the minutes:

                                        1.) The Fed broadly agrees that the economic recovery remains intact. Overall there is broad agreement at the Fed that outside of manufacturing (for both domestic and external reasons), economic activity has moderated but remains near or somewhat below their estimates of potential growth and hence is sufficient to drive further improvement in labor markets. The weak first quarter numbers were largely statistical noise attributable to faulty seasonal adjustment mechanisms. Data since the April meeting generally supports this story. The economy is not falling over a cliff, recession is not likely, nothing to see here, folks.

                                        2.) A contingent, however, disagreed with the benign scenario:

                                        However, some participants were concerned that transitory factors may not fully explain the softness in consumer spending or the broad-based declines in business investment in recent months. They saw a risk that a more persistent slowdown in economic growth might be under way, which could hinder further improvement in labor market conditions.

                                        This group will want fairly strong evidence that the first quarter was an anomaly before the sign off on the next rate hike.

                                        3.) There was broad agreement of the obvious - global and financial market threats waned since the previous meeting. The Fed recognized that their hesitation to hike rates helped firm markets. It's important that they recognize that if the economy weathers a bout of financial market turbulence, it is often with the aid of easier Fed policy. Some Fed speakers appeared not to recognize this relationship earlier this year.

                                        4.) Still, the risks are either balanced or to the downside. Apparently, none of the participants saw risks weighed to the upside. While some participants believe the threats had lessened sufficiently to justify a balanced outlook:

                                        Several FOMC participants judged that the risks to the economic outlook were now roughly balanced.

                                        the view was not widely shared:

                                        However, many others indicated that they continued to see downside risks to the outlook either because of concerns that the recent slowdown in domestic spending might persist or because of remaining concerns about the global economic and financial outlook. Some participants noted that global financial markets could be sensitive to the upcoming British referendum on membership in the European Union or to unanticipated developments associated with China's management of its exchange rate.

                                        It seems reasonable that this large group will need to see further diminishment of downside risks to justify a hike in June. Brexit doesn't derail a June hike unless it looks to be negatively impacting financial markets.

                                        5.) The question of full employment deeply divides the Fed. Who wins this debate is critical to defining the policy path going forward. One group thinks the economy is not at full employment:

                                        Many participants judged that labor market conditions had reached or were quite close to those consistent with their interpretation of the Committee's objective of maximum employment. Several of them reported that businesses in their Districts had seen a pickup in wages, shortages of workers in selected occupations, or pressures to retain or train workers for hard-to-fill jobs.

                                        But others saw room for further improvement:

                                        Many other participants continued to see scope for reducing labor market slack as labor demand continued to expand.

                                        The Fed's plan had been to let the economy run hot enough for long enough to eliminate underemployment. One sizable camp within the Fed thinks this largely been accomplished. This is the group that is itching for more hikes earlier. This is a place where Federal Reserve Chair Janet Yellen should have an opinion and be willing to guide on that opinion. In the past, she has sided with the "still underemployment" camp.

                                        6.) The Fed is also split on the inflation outlook but most believe inflation is set to trend toward target. A nontrivial contingent saw downside risks to the inflation outlook due to soft inflation expectations:

                                        Several commented that the stronger labor market still appeared to be exerting little upward pressure on wage or price inflation. Moreover, several continued to see important downside risks to inflation in light of the still-low readings on market-based measures of inflation compensation and the slippage in the past couple of years in some survey measures of expected longer-run inflation.

                                        But the majority were either neutral or dismissive of the signal from expectations:

                                        However, for many other participants, the recent developments provided greater confidence that inflation would rise to 2 percent over the medium term.

                                        7.) June is on the table. I have long warned that market participants were underestimating the odds of a rate hike in June. This came across loud and clear in the minutes:

                                        Participants agreed that their ongoing assessments of the data and other incoming information, as well as the implications for the outlook, would determine the timing and pace of future adjustments to the stance of monetary policy. Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the Committee's 2 percent objective, then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June.

                                        Consider that the Fed's modus operandi is to delay an expected policy change for two meetings in the face of market turmoil. Hence given calmer financial markets, June could not be so easily dismissed. But it was not just the financial markets that stayed the Fed's hand. It was also softer Q1 data. As of April, participants had not concluded that they would see what they were looking for to justify a rate hike.

                                        Participants expressed a range of views about the likelihood that incoming information would make it appropriate to adjust the stance of policy at the time of the next meeting. Several participants were concerned that the incoming information might not provide sufficiently clear signals to determine by mid-June whether an increase in the target range for the federal funds rate would be warranted. Some participants expressed more confidence that incoming data would prove broadly consistent with economic conditions that would make an increase in the target range in June appropriate.

                                        Moreover, these are participants, not committee members. The actual voters members appeared less committed to June, saying only:

                                        Regarding the possibility of adjustments in the stance of policy at the next meeting, members generally judged it appropriate to leave their policy options open and maintain the flexibility to make this decision based on how the incoming data and developments shaped their outlook for the labor market and inflation as well as their evolving assessments of the balance of risks around that outlook.

                                        Here are my thoughts, assuming of course the data and the financial markets hold up over the next few weeks:

                                        A.) There is a rate hike likely in the near-ish future. There seems to be broad agreement that, at a minimum, the pace of activity remains sufficient to bring the Fed's goals - both maximum employment and price stability - closer into view. Close enough that most voters will soon think another rate hike is appropriate. The doves can't push it off forever.

                                        B.) The Fed will consider June, and there is likely some support among the voting members for a June hike. But ultimately, I think most will want a more complete picture of the second quarter before hiking rates. Also, the contingent that remains less convinced by the inflation outlook will press for more time. Moreover, they will also need broad agreement that the risks to the outlook are at least balanced. It would indeed be silly to plow forward with rate hikes if most members thought the risks were still weighted to the downside, even if the data were broadly consistent with the Fed's forecast. That agreement of balanced risks just might not be there by June.

                                        C.) Fed doves might, however, need to strike a compromise to hold the line on June and avoid more than one or two dissents. That compromise could be a strong signal about the July meeting via the statement, the press conference, or, most likely, both. A July hike would also serve to end the idea that the Fed can't hike rates without a press conference.

                                        D.) The reason compromise might be necessary is the possibility of a fairly stark divide between voting members. Assume Esther George, Eric Rosengren, and James Bullard will push for a rate hike in June. Furthermore, assume that Lael Brainard opposes a rate hike, and has sufficient leverage to pull Dan Tarullo and William Dudley to her side. Janet Yellen might prefer to negotiate a compromise rather than face the prospect of multiple dissents from either camp.

                                        E.) Of all the divisive points above, I think the most important is the debate over the level of full employment. The ability of the doves to slow the pace of subsequent rate hikes will hinge on their willingness to push for below NAIRU unemployment to alleviate underemployment. If the doves maintain the upper hand, the path of subsequent rate hikes will be very, very shallow. I cannot emphasize enough that this is a debate in which Janet Yellen has the opportunity to take leadership that fundamentally defines her preferred rate path going forward. Does she stick with the bottom dots?

                                        Bottom Line: This is not a drill. This meeting is the real thing - an undoubtedly lively debate that could end with a rate hike. I think we narrowly avoid a rate hike, but at the cost of moving forward the next hike to the July meeting.

                                          Posted by on Sunday, May 22, 2016 at 03:51 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (26) 


                                          Dueling Nowcasts

                                          Jim Hamilton:

                                          Dueling nowcasts: The second quarter of 2016 is now more than half over, but we won’t receive the first reading on 2016:Q2 GDP from the BEA until the end of July. A forecast of something that is happening right now is sometimes described as a “nowcast”. The Federal Reserve Banks of New York and Atlanta are providing a valuable service by publishing continuously updated nowcasts of GDP. But what should we do if they’re giving us rather different numbers?
                                          Right now the Atlanta Fed’s nowcast is calling for second-quarter real GDP growth of 2.5% at an annual rate while the New York Fed says 1.7%. ...
                                          The forecast the two approaches start the quarter with is one of the key differences between the two models. The Atlanta model begins with separate forecasts of 13 individual components of GDP, such as personal consumption expenditures on goods, PCE on services, and investment in equipment. ... By contrast, the New York model begins with a “top-down” approach, starting with a forecast of overall economic activity based on the best current assessment of overall activity.
                                          From that starting point, both models then process every major new piece of data as it comes in. Based on the historical correlation between each new measure and any variables of interest both models generate a continuously updated assessment...
                                          A lot of economic research suggests that one of the best ways to reconcile conflicting forecasts is simply to go with their average, which in this case would be 2.1%. For that matter we might want to also throw in the pre-quarter Blue Chip consensus forecast (2.3%), Wall Street Journal survey of economic forecasts (2.2%), or the Survey of Professional Forecasters (2.1%), which all give us pretty much the same number as the average of the two Fed nowcasts. ...

                                            Posted by on Sunday, May 22, 2016 at 10:21 AM in Economics | Permalink  Comments (14) 


                                            Saturday, May 21, 2016

                                            Links for 05-21-16

                                              Posted by on Saturday, May 21, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (234) 


                                              Friday, May 20, 2016

                                              Helicopter Money and Fiscal Policy

                                              Simon Wren-Lewis:

                                              Helicopter money and fiscal policy: ... We can have endless debates about whether HM is more monetary or fiscal. While attempts to distinguish between the two can sometime clarify important points (as here from Eric Lonergan) it is ultimately pointless. HM is what it is. Arguments that attempt to use definitions to then conclude that central banks should not do HM because its fiscal are equally pointless. Any HM distribution mechanism needs to be set up in agreement with governments, and existing monetary policy has fiscal consequences which governments have no control over. ...
                                              At this moment in time, even if a global recession is not about to happen, public investment should increase in the US, UK and Eurozone. There is absolutely no reason why that cannot be financed by issuing government debt. ... Indeed there would be a good case for bringing forward public investment even if monetary policy was capable of dealing with the recession on its own, because you would be investing when labour is cheap and interest rates are low. ...
                                              HM is fiscal stimulus without any immediate increase in government borrowing. It therefore avoids the constraint that Osborne and Merkel said prevented further fiscal stimulus. ... HM is not financed by increasing government debt.
                                              Many argue that these concerns about debt are manufactured, and that in reality politicians on the right pushing austerity are using these concerns as a means of achieving a smaller state: what I call here deficit deceit. HM, particularly in its democratic form, calls their bluff. If we can avoid making the recession worse by maintaining public spending, financed in part by creating money while the recession persists, how can they object to that? Politicians who wanted to use deficit deceit will not like it, but that is their problem, not ours.
                                              There is a related point in favour of HM... Independent central banks are a means of delegating macroeconomic stabilisation. Yet that delegation is crucially incomplete, because of the lower bound for nominal interest rates. While economists have generally understood that governments can in this situation come to the rescue, politicians either didn’t get the memo, or have proved that they are indeed not to be trusted with the task. HM is a much better instrument than Quantitative Easing, so why deny central banks the instrument they require to do the job they have been asked to do.

                                                Posted by on Friday, May 20, 2016 at 09:50 AM in Economics, Fiscal Policy, Monetary Policy | Permalink  Comments (108) 


                                                Paul Krugman: Obama’s War on Inequality

                                                Elections matter:

                                                Obama’s War on Inequality, by Paul Krugman, NY Times: There were two big economic policy stories this week that you may have missed... Each tells you a lot about both what President Obama has accomplished and the stakes in this year’s election. ...
                                                Donald Trump... — who has already declared that he will, in fact, slash taxes on the rich... — once again declared his intention to do away with Dodd-Frank... Just for the record, while Mr. Trump is sometimes described as a “populist,” almost every substantive policy he has announced would make the rich richer at workers’ expense.
                                                The other story was about a policy change achieved through executive action: The Obama administration issued new guidelines on overtime pay, which will benefit an estimated 12.5 million workers. ...
                                                Now, America isn’t about to become Denmark... But more has happened than you might think.
                                                Most obviously, Obamacare provides aid and subsidies mainly to lower-income working Americans, and it pays for that aid partly with higher taxes at the top. That makes it an important redistributionist policy — the biggest such policy since the 1960s.
                                                And between those extra Obamacare taxes and the expiration of the high-end Bush tax cuts... the average federal tax rate on the top 1 percent has risen quite a lot. In fact, it’s roughly back to what it was in 1979, pre-Ronald Reagan, something nobody seems to know. ...
                                                Dodd-Frank actually has put a substantial crimp in the ability of Wall Street to make money hand over fist. It doesn’t go far enough, but it’s significant enough to have bankers howling, which is a good sign.
                                                And while the move on overtime comes late in the game, it’s a pretty big deal, and could be the beginning of much broader action.
                                                Again, nothing Mr. Obama has done will put more than a modest dent in American inequality. But his actions aren’t trivial, either.
                                                And even these medium-size steps put the lie to the pessimism and fatalism one hears all too often on this subject. No, America isn’t an oligarchy in which both parties reliably serve the interests of the economic elite. Money talks on both sides of the aisle, but the influence of big donors hasn’t prevented the current president from doing a substantial amount to narrow income gaps — and he would have done much more if he’d faced less opposition in Congress.
                                                And in this as in so much else, it matters hugely whom the nation chooses as his successor.

                                                  Posted by on Friday, May 20, 2016 at 07:13 AM in Economics, Income Distribution, Politics | Permalink  Comments (138) 


                                                  Links for 05-20-16

                                                    Posted by on Friday, May 20, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (124) 


                                                    Thursday, May 19, 2016

                                                    Wage Growth by Type of Job

                                                    6a00d8341c834f53ef01bb0902c0e7970d-800wi

                                                    More here.

                                                      Posted by on Thursday, May 19, 2016 at 10:50 AM Permalink  Comments (24) 


                                                      Ancient Device for Determining Taxes Discovered in Egypt

                                                      The Egyptians used countercyclical fiscal policy:

                                                      Ancient Device for Determining Taxes Discovered in Egypt, National Geographic: American and Egyptian archaeologists have discovered a rare structure called a nilometer in the ruins of the ancient city of Thmuis in Egypt’s Delta region. Likely constructed during the third century B.C., the nilometer was used for roughly a thousand years to calculate the water level of the river during the annual flooding of the Nile. Fewer than two dozen of the devices are known to exist. ...
                                                      Before the completion of the Aswan High Dam in 1970, the Nile flooded the surrounding plains each year in late July or August. As the waters receded in September and October, they left behind a blanket of fertile silt that was essential for growing crops such as barley and wheat.
                                                      But the volume of the yearly flood varied widely. If the inundation was inadequate, only a small area of cropland would be covered with the life-giving silt, often resulting in famine. If the water level was too high, it would sweep away houses and structures built on the plain and ruin the crops. ...
                                                      “During the time of the pharaohs, the nilometer was used to compute the levy of taxes, and this was also likely the case during the Hellenistic period,” says Robert Littman, an archaeologist at the University of Hawaii. “If the water level indicated there would be a strong harvest, taxes would be higher.” ...

                                                        Posted by on Thursday, May 19, 2016 at 12:24 AM in Economics | Permalink  Comments (10) 


                                                        Fed Watch: Minutes Say June Is On The Table

                                                        Tim Duy:

                                                        Minutes Say June Is On The Table, by Tim Duy: There is quite a bit of material in the minutes of the April 2016 FOMC meeting to work with, more than I have time for tonight.

                                                        The central message of the minutes was that financial market participants were too complacent in their expectations that the Fed would stand pat in June. The Fed clearly made no such decision in April. Instead, meeting participants hotly debated the likelihood that a rate hike would be appropriate in June:

                                                        Participants agreed that their ongoing assessments of the data and other incoming information, as well as the implications for the outlook, would determine the timing and pace of future adjustments to the stance of monetary policy. Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the Committee's 2 percent objective, then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June.

                                                        Most participants, but not necessarily most voting members, thought a June hike would be appropriate if the economy firms as anticipated. Still, it was not clear to participants that the economy would evolve as expected:

                                                        Participants expressed a range of views about the likelihood that incoming information would make it appropriate to adjust the stance of policy at the time of the next meeting. Several participants were concerned that the incoming information might not provide sufficiently clear signals to determine by mid-June whether an increase in the target range for the federal funds rate would be warranted.

                                                        This has been essentially my position - that the Fed would not have sufficient data on Q2 at the time of the June meeting to justify a rate hike. Other were more optimistic:

                                                        Some participants expressed more confidence that incoming data would prove broadly consistent with economic conditions that would make an increase in the target range in June appropriate.

                                                        Note that "several" is greater than "some." Those same "some" were also likely those that expressed this concern:

                                                        Some participants were concerned that market participants may not have properly assessed the likelihood of an increase in the target range at the June meeting, and they emphasized the importance of communicating clearly over the intermeeting period how the Committee intends to respond to economic and financial developments.

                                                        This should have come as no surprise. Policymakers have repeatedly said as much in recent weeks. Too many participants in April felt June was a real possibility if the data cooperated - and it largely has cooperated - to so easily dismiss the possibility of a June hike.

                                                        Committee members were a bit more circumspect with respect to action in June:

                                                        Regarding the possibility of adjustments in the stance of policy at the next meeting, members generally judged it appropriate to leave their policy options open and maintain the flexibility to make this decision based on how the incoming data and developments shaped their outlook for the labor market and inflation as well as their evolving assessments of the balance of risks around that outlook. It was noted that communications could help the public understand how the Committee might respond to incoming data and developments over the upcoming intermeeting period. Some members expressed concern that the likelihood implied by market pricing that the Committee would increase the target range for the federal funds rate at the June meeting might be unduly low.

                                                        But it is clearly under consideration.

                                                        My initial reaction to the minutes was to call the June meeting a toss-up. Via Sam Fleming at the FT:

                                                        Hazards are still lurking overseas, and the minutes made it clear they are weighing on the inflation prospects in the minds of a number of policymakers. Tim Duy, a close Fed watcher who is a professor at the University of Oregon, still puts the odds of a move in June at just 50-50.

                                                        On further thought, I should have said toward 50-50. I don't like saying 50-50, because that just means you can't make a decision. And re-reading the minutes, I think the odds given the current data are less than 50% but more than 30%. Ultimately, the decision will depend on the willingness of the committee to move with only a partial view of Q2. I think that ultimately the partial view will not be sufficient.

                                                        Instead, I see a strong possibility that sufficiently good data makes a July hike probable. I had been thinking they would pass on July due to the lack of press conference, favoring September instead. But a strong signal about July might represent the compromise position between those members ready to hike and those that want a more complete picture of Q2 before acting. The press conference could then be used to clear the way for July. And it would have the added bonus of ending the idea that the Fed can only hike rates at a meeting with a press conference.

                                                        One final note. Consider this paragraph:

                                                        Labor market conditions strengthened further in recent months. Increases in nonfarm payroll employment averaged almost 210,000 per month over the first three months of 2016. Although the unemployment rate changed little over that period, the labor force participation rate moved up and the pool of potential workers, which includes the unemployed as well as those who would like a job but are not actively looking, continued to shrink. Many participants judged that labor market conditions had reached or were quite close to those consistent with their interpretation of the Committee's objective of maximum employment. Several of them reported that businesses in their Districts had seen a pickup in wages, shortages of workers in selected occupations, or pressures to retain or train workers for hard-to-fill jobs. Many other participants continued to see scope for reducing labor market slack as labor demand continued to expand. In that regard, a number of participants indicated that the recent rise in the participation rate was a positive development, suggesting that a tighter labor market could potentially draw more individuals back into the workforce on a sustained basis without adding to inflationary pressures and thus increase the productive capacity of the economy. It was also noted that businesses might satisfy increases in labor demand in part by converting involuntary part-time jobs to full-time positions.

                                                        There are two clear views here: One group feels the economy is near full employment, while another sees room for further improvement. The former group will want more hikes sooner, the latter fewer hikes later. Federal Reserve Chair Janet Yellen should be taking a side in this critical debate and thus driving the direction of policy. Watch for her to provide guidance on this and inflation when she speaks on June 6.

                                                        Bottom Line: June is a live meeting. Really. Many Fed officials think the US economy has proven sufficiently resilient to resume hiking rates and would like to retain the option for 3 gradual hikes this year. That leaves June in play. Ultimately, I think they pass on June, but harmony is maintained only by placing a bullseye on July. Meeting participants will be positioning themselves ahead of the meeting. A divided Fed leaves Yellen with a new challenge. Will she lead the FOMC, or will it lead her?

                                                          Posted by on Thursday, May 19, 2016 at 12:15 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (17) 


                                                          Links for 05-19-16

                                                            Posted by on Thursday, May 19, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (168) 


                                                            Wednesday, May 18, 2016

                                                            Comments

                                                            There appears to be a comment problem of some sort. I have to board a plane in a few minutes -- will try to resolve it as soon as I can.

                                                            Update: Hoping it's fixed.

                                                              Posted by on Wednesday, May 18, 2016 at 07:12 AM in Economics, Weblogs | Permalink  Comments (9) 


                                                              Worlds of Inequality

                                                              Travel day -- will post more later if and when I can.

                                                              This is a review of Branko Milanovic's "Global Inequality: A New Approach for the Age of Globalization" by Miles Corak:

                                                              Worlds of Inequality, The American Prospect: This book begins by posing a question: “Who has gained from globalization?” Many thoughtful Americans have the confidence to answer in a sentence. The gains have been captured by the top 1 percent. And the book ends with another question: “Will inequality disappear as globalization continues?” Many might be just as quick to answer: Of course not, the rich will get richer! But life is not so simple. Between these two questions Branko Milanovic offers us not just a plethora of facts about income inequality that will surely make his readers think twice. More importantly, he shows us the power of bringing the facts into focus by putting a new lens over these pressing issues—a global perspective. ...
                                                              The most striking fact that motivates his book is a graph that the Twittersphere has already termed “the elephant curve.” This is the one-sentence, or rather one-picture, answer to the first question: “The gains from globalization are not evenly distributed.” ...
                                                              Clearly evident are the rise of a global middle class, in some important measure reflecting the great march out of poverty in China, and the equally amazing rise in the incomes of the top 1 percent globally. The winners of globalization were many people who three decades ago were dirt-poor, and though a big percentage increase in a very low income still amounts to a rather low income by the standards of the average person in the rich countries, it is a major movement in the right direction. But the great winners of globalization were also a relatively few people in the already-rich countries, a global plutocracy who also experienced income gains of over 50 percent, but from a much higher starting point. Both of these changes are without precedent in the history of humanity.

                                                              But the elephant curve also shows that even though some have gained, others have not seen their prospects improve at all—indeed, probably leading lives of more insecurity and more worry, not just about their prospects but also the prospects of their children. The big losers in these global income sweepstakes have been middle- and lower-income people of the rich countries...

                                                                Posted by on Wednesday, May 18, 2016 at 06:08 AM in Economics, Income Distribution | Permalink  Comments (3) 


                                                                Links for 05-18-16

                                                                  Posted by on Wednesday, May 18, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (147) 


                                                                  Tuesday, May 17, 2016

                                                                  Fed Watch: Fed Officials Come Looking For A Fight

                                                                  Tim Duy:

                                                                  Fed Officials Come Looking For A Fight, by Tim Duy: Incoming data continues to support the narrative that the US economy is not, I repeat, not, slipping into recession. Instead, the US economy is most likely continuing to chug along around 2 percent year over year. Not exciting, but not a disaster by any means. Indeed, for Fed officials thinking the rate of potential growth is hovering around 1.75 percent, it is enough to keep upward pressure on labor markets, pushing to economy further toward full employment.
                                                                  And if you think you want to hit the inflation target from below, then you need to hit the employment target from above. Which means a non-trivial contingent of the Fed does not want to leave June off the table. That is a message that came thorough loud and clear today.
                                                                  Industrial production surprised on the upside, gaining 0.7 percent. Still down on a year over year basis, but it is worth repeating that the weakness is narrowly concentrated:

                                                                  IP0516

                                                                  In a recession, the weakness is broadly concentrated. Hence the softness in manufacturing is still best described as a sector specific shock, not an economy-wide shock.
                                                                  Housing starts for April were also above expectations. The upward grind since 2011:

                                                                  PermitsA0516

                                                                  Notably, the housing market is transitioning from multifamily to single family construction:

                                                                  PermitsB0516

                                                                  Plenty of room to run in that direction, providing underlying support for the US economy. See Calculated Risk for more.
                                                                  Inflation rose on the back of higher gas prices. Headline CPI gained 0.4 percent, although core rose a more modest 0.2 percent. Core CPI inflation is hovering just above 2 percent:

                                                                  CPI0516

                                                                  Fed hawks will be nervous that rising gas prices will quickly filter through to core inflation; doves will remind them that the Fed's target is PCE inflation, which remains well below 2 percent.
                                                                  Fedspeak was decidedly hawkish today, with both Atlanta Federal Reserve President Dennis Lockhart and San Fransisco Federal Reserve President John Williams insisting that market participants are wrong to assume the Fed will pass on the June meeting. Via Greg Robb at MarketWatch:
                                                                  Atlanta Fed President Dennis Lockhart and San Francisco Fed President John Williams, in a joint appearance at a lunch sponsored by the news site Politico, said that the decision on whether to raise rates at the June 14-15 meeting depends on the data.
                                                                  June “certainly could be a meeting at which action could be taken,” Lockhart said.
                                                                  “I think it is a little early at second-quarter data to draw a conclusion, so I am at this stage inconclusive about how I am going to be thinking about June, but I wouldn’t take it off the table,” Lockhart said.
                                                                  He said he assumes there will be two to three rate hikes this year...
                                                                  ...Williams said he agreed with Lockhart and said he thought the economy was “doing great.”
                                                                  “I think the incoming data have actually been quite good and reassuring in terms of policy decisions, so, in my view, June is a live meeting,” Williams said.
                                                                  He added that there will a lot more data reported before the meeting.
                                                                  In an interview with the Wall Street Journal prior to the Politico lunch, Williams said raising rates two or this times this year “makes sense.”
                                                                  Separately, Dallas Federal Reserve President Robert Kaplan argued for a rate hike in June or July. Via Ann Saphir at Reuters:
                                                                  "Whether that’s June or July, I can’t say right now," Kaplan told reporters after a speech. He said would prefer to pause after that first 2016 rate hike to assess conditions, and while he would "hope" to continue to normalize rates thereafter, the pace of rate hikes will depend on incoming economic data.
                                                                  None of these three are voters. Still, there is a message here - many FOMC participants want to go into the June meeting with a reasonable chance that they will hike rates. They don't want the outcome of this meeting to be a foregone conclusion. Two other thoughts:
                                                                  1.) The more hawkish Fedspeak could be foreshadowing that the minutes of the April FOMC meeting will have a hawkish tilt.
                                                                  2.) Kaplan puts July on the table. I had been thinking that July was off the table due to the lack of a press conference. That said, I should be open to the possibility that they use the June press conference to clear the way for July.
                                                                  Market participants raised the probability of a June rate hike to 15% today. Still probably less than the probability assigned by the median FOMC participant. Meanwhile, the yield curve flattened further - signaling that the Fed needs to move very cautiously. At the moment, the Fed doesn't have much room before they invert the yield curve. In my opinion, the bond market continues to signal that Fed's expectation of normalizing short rates in the 3.5 - 4.0 percent range are wildly - and dangerously - optimistic.
                                                                  Bottom Line: Today's Fed speakers came looking for a fight with financial market participants. They don't like the low odds assigned to the June meeting. I don't think June is a go; the data isn't quite there yet. But odds are greater than 15%, in my opinion.

                                                                    Posted by on Tuesday, May 17, 2016 at 03:42 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (7) 


                                                                    Economic Models Must Account for Power Relationships

                                                                     I have a new column:

                                                                    Economic Models Must Account for Who Has the Power'': Nobel Prize winning economist Joseph Stiglitz recently highlighted two schools of thought on how income is distributed to different groups of people in the economy. Which school is correct has important implications for our understanding of the forces that have caused the rise in inequality, and for the policies needed to reverse this trend. It also relates to another controversy that has flamed up recently, how economics should be taught in principles of economics courses. ...

                                                                      Posted by on Tuesday, May 17, 2016 at 06:09 AM in Economics, Market Failure | Permalink  Comments (22) 


                                                                      A General Theory of Austerity

                                                                      Simon Wren-Lewis:

                                                                      A General Theory of Austerity: ...I have just completed a working paper... It has the title of this post: in part an allusion to Keynes who had been here before, but also because its scope is ambitious. The first part of the paper tries to explain why austerity is nearly always unnecessary, and the second part tries to understand why the austerity mistake happened.
                                                                      I start by making a distinction which helps a great deal. It is between fiscal consolidation, which is a policy decision, and austerity, which is an outcome where that fiscal consolidation leads to an increase in aggregate unemployment. If you understand why monetary policy can normally stop fiscal consolidation leading to austerity, but cannot when interest rates are stuck near zero, then you are a long way to understanding why austerity was a mistake. Fiscal consolidation in 2010 was around 3 years too early. A section of the paper is devoted to showing that the idea that markets prevented such a delay in consolidation is a complete myth. ...
                                                                      None of this theory is at all new: hence the allusion to Keynes in the title. That makes the question of why policy makers made the mistake all the more pertinent. One set of arguments point to an unfortunate conjunction of events: austerity as an accident if you like. Basically Greece happened at a time when German orthodoxy was dominant. I argue that this explanation cannot play more than a minor role: mainly because it does not explain what happened in the US and UK, but also because it requires us to believe that macroeconomics in Germany is very special and that it had the power to completely dominate policy makers not only in Germany but the rest of the Eurozone.
                                                                      The set of arguments that I think have more force, and which make up the general theory of the title, reflect political opportunism on the political right which is dominated by a ‘small state’ ideology. It is opportunism because it chose to ignore the (long understood) macroeconomics, and instead appeal to arguments based on equating governments to households, at a time when many households were in the process of reducing debt or saving more. But this explanation raises another question in turn: how was the economics known since Keynes lost to simplistic household analogies. ....
                                                                      If my analysis is right, it means that we cannot be complacent that when the next liquidity trap recession hits the austerity mistake will not be made again. Indeed it may be even more likely to happen, as austerity has in many cases been successful in reducing the size of the state. My paper does not explore how to avoid future austerity, but it hopefully lays the groundwork for that discussion.

                                                                        Posted by on Tuesday, May 17, 2016 at 06:03 AM in Economics, Fiscal Policy, Monetary Policy, Politics | Permalink  Comments (8) 


                                                                        Links for 05-17-16

                                                                          Posted by on Tuesday, May 17, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (99) 


                                                                          Monday, May 16, 2016

                                                                          Paul Krugman: It Takes a Policy

                                                                           This is far more important than tax cuts for the rich:

                                                                          It Takes a Policy, by Paul Krugman, NY Times: U.S. politicians love to pose as defenders of family values. Unfortunately, this pose is often, perhaps usually, one of remarkable hypocrisy. ... Judged by what we actually do..., America is unique among advanced countries in its utter indifference to the lives of its youngest citizens.
                                                                          For example, almost all advanced countries provide paid leave from work for new parents. We don’t. Our public expenditure on child care and early education, as a share of income, is near the bottom in international rankings...
                                                                          But can our neglect of children be ended?
                                                                          In January, both Democratic candidates declared their support for a program that would provide 12 weeks of paid leave to care for newborns and other family members. And last week, while the news media was focused on Donald Trump’s imaginary friend, I mean imaginary spokesman, Hillary Clinton announced an ambitious plan to improve both the affordability and quality of U.S. child care.
                                                                          This was an important announcement .. that could well be the centerpiece of a Clinton administration.

                                                                          O.K., we don’t have all the details yet, but the outline seems pretty clear. On the affordability front, Mrs. Clinton would use subsidies and tax credits to limit family spending on child care — which can be more than a third of income — to a maximum of 10 percent. Meanwhile, there would be aid to states and communities that raise child-care workers’ pay, and a variety of other measures... All of this would still leave America less generous than many other countries, but it would be a big step toward international norms

                                                                          Is this doable? Yes. Is it desirable? Very much so. ... Our threadbare system of public support for child care and early education costs 0.4 percent of the G.D.P.; France’s famously generous system costs 1.2 percent of the G.D.P. So we could move a long way up the scale with a fairly modest investment.
                                                                          And it would indeed be an investment...
                                                                          So can we stop talking, just for a moment, about who won the news cycle or came up with the most effective insult, and talk about policy substance here?
                                                                          The state of child care in America is cruel and shameful — and even more shameful because we could make things much better without radical change or huge spending. And one candidate has a reasonable, feasible plan to do something about this shame, while the other couldn’t care less.

                                                                            Posted by on Monday, May 16, 2016 at 06:57 AM in Economics | Permalink  Comments (98) 


                                                                            Fed Watch: Fed Not As Convinced About June As Markets

                                                                            Tim Duy:

                                                                            Fed Not As Convinced About June As Markets, by Tim Duy: Market participants place less than 10 percent chance of a rate hike in June. In contrast, San Francisco Federal Reserve President John Williams continues hold out hope for a third. Via Reuters:
                                                                            Two to three rate increases this year "definitely still makes sense," he said...
                                                                            Williams, a centrist whose views are generally in line with those of Fed Chair Janet Yellen, said he has not yet conferred with his staff economists over whether the next rate increase would be best made in June, July or September...
                                                                            ...With most gauges of the labor market suggesting the United States is at or nearly at full employment, he said, and inflation set to rise to the Fed's 2 percent target in two years, "things are definitely looking good."
                                                                            Delaying rate hikes for months, he said, "would force our hands a little bit to move much more quickly in 2017."
                                                                            Williams follows on the heels of Kansas City Federal Reserve President Esther George and Boston Federal Reserve President Eric Rosengren. The former clearly wants a rate hike, the latter, like Williams, not convinced that June is off the table. Williams adds the possibility that market participants are in for a rude awakening come June:
                                                                            "Hopefully, if the markets understand our strategy, understand the data the way we do, then they won’t be too surprised by what we do," Williams said. "I definitely don’t think we need to go into a meeting with the markets convinced that we are going to raise rates in order for us to raise rates."
                                                                            I think the Fed increasingly believes the data is lining up in their favor. Friday's retail sales report likely went a long-way toward dispelling any lingering concerns they might have over the strength of the consumer. The tenor of that data has picked up markedly in the last few months:

                                                                            RETAILa0516

                                                                            Note that one should not read much into the problems of department store retailers like Macy's. They are simply playing a losing game:

                                                                            RETAIL0516

                                                                            This among other data, is pulling upward the Atlanta Fed's estimates of Q2 growth:

                                                                            GDPNow0516

                                                                            Here though I would urge caution - this estimate can come down as quickly as it went up. If the Fed were confident that growth was in fact 2.8% in Q2, then they would move in June. But the reality is they are not likely to have sufficient data to justify that degree of confidence. That leaves me concluding that June is still not likely to happen.
                                                                            But given the direction of the data, the improvement in financial markets, and the predisposition of a significant number of policymakers to raise early to raise slow, I would not be surprised that market participants revise their expectations that June is a sure thing. Remember that if we assume July and October are off the table (lack of press conferences and/or proximity to election), then retaining the option to hike three times requires a hard look at June. I think that will lead to a much more extensive discussion of a rate hike at the June meeting than many market participants appear to expect.
                                                                            In the meantime, despite an improving Q2 outlook and healthier financial markets, the yield curve flattened further:

                                                                            Spread0516

                                                                            The 10-2 spread was just 95bp at the end of last week. Now, before anyway panics and screams that this implies slow growth, it is worth remembering that the spread was consistently below 100bp in the last half of the 1990s. And that was not exactly a slow growth period.
                                                                            So why is the curve flattening? My story is this: The yield curve flattens whenever the Fed is in a tightening cycle. And the Fed most assuredly remains in a tightening cycle. They have not backed off their fundamental story that rates are headed higher. They see normalized interest rates on the short end as well above the current yield on the long-end. This seems entirely inconsistent with signals from the bond market and the global zero interest rate environment. In my opinion, the Fed continues to send signal that they intend to error on the side of excessively tight monetary policy.
                                                                            That is the message of the dot plot. There is absolutely no reason the Fed needs to take stand on the level of short-term interest rates three years hence. They don't know any better than anyone else. So why pretend otherwise? Why not do as William's suggests and trust the markets to reach the right conclusion? In my opinion, the Fed's insistence on signaling an interest rate well above anything consistent with long-run rates isn't just bad policy. It is just plain stupid policy.
                                                                            To expect the curve to steepen at this juncture, I think at a minimum you need the Fed to more aggressively commit to approaching the inflation target from above. You need to overshoot. That I think would be essentially an easing at this point. Chicago Federal Reserve President Charles Evans is already there. I think that Federal Reserve Chair Janet Yellen is getting there, but can't say it.
                                                                            And even then, I don't know that approaching the target from above is enough. The dominance of the dollar in international finance means the Fed has a preeminent role in fostering global financial stability. A 2 percent US inflation target may not be consistent with global financial stability. And if not consistent with global financial stability, then not with US financial stability and thus not solid US economic performance. Which means if the Fed is the world's central bank, they need to adopt an inflation target consistent with maintaining global growth. That might be higher than 2 percent. And they aren't going down that road without a long and nasty fight.
                                                                            Bottom Line: I don't think the data lines up to support a June rate hike. But I don't think the case will be as clear-cut as signaled by the low odds financial market participants place on a hike.

                                                                              Posted by on Monday, May 16, 2016 at 03:00 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (31) 


                                                                              Links for 05-15-16

                                                                                Posted by on Monday, May 16, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (86) 


                                                                                Saturday, May 14, 2016

                                                                                Why “Make America Denmark Again” Will Not Happen

                                                                                Branko Milanovic:

                                                                                Why “Make America Denmark Again” will not happen: The rise of inequality in rich countries is way over-explained. Because income inequality (evaluated at the level of households or individuals) is such a complex variable, the outcome of a vast number of technological, political,  demographic and behavioral factors and its neat decomposition into these various factors is impossible, we shall always have a plethora of potential explanations. This way a point nicety raised in a recent post by Chico Ferreira from the World Bank.
                                                                                But not all explanations are equally powerful or make sense. A couple of days ago at a conference at Northwestern University, I listened to the explanation proposed by Gerald Davis from University of Michigan. Davis argued ... that the rise of US inequality coincides with the decline of large companies that used to employ hundreds of thousands or even millions of workers and by their substitution by much smaller companies. ... His argument is that large hierarchical structures have to engage in some evening out of salaries (internal redistribution) in order to keep cooperation, needed for the success of the enterprise, going.
                                                                                I think that the deconcentration of which Davis  writes is only a proximate cause of the rise in inequality. The “deep cause” was technological change, combined in an inextricable way (as I argue in my “Global inequality”) with globalization. What happened, I think , was that advances in technology such as stock management (just-in-time), ability of speedy “bespoke” production, and crucially advances in telecommunications made “broken up” (devolved) production more efficient. The concentration of workers in one place that, at the origin of the Industrial Revolution, was made indispensable by the importance of the energy sources available at discrete physical points, could now be reversed. We could go back to a type of production that predates the Industrial Revolution, a kind of a modernized “putting out” system.
                                                                                In doing so companies were helped by globalization because the area over which the putting out system can now extend was the globe itself, not only villages 10 miles in perimeter from Manchester.  ...
                                                                                My view is indeed one that may be called “technological determinism”, but that determinism is playing itself out on an ever expanding field made possible by globalization.  In other words, technological determinism is itself a function of globalization ... and technological determinism in turns helps globalization. So the two go together. Moreover even things that seem to be policy-related (say, decline of trade unions) may in many instances be driven by the combination of new technology and globalization.
                                                                                It is for that reason that I am skeptical that “the happy days of the 1960s” will ever come back. This is the idea that  I somewhat jokingly called “Make America Denmark  Again”. That world made sense with the technology and the policy as it was in the 1960s but not today. The world of large-scale manufacturing, homogeneous working class, trade unions, capital controls and a quasi-closed economy (US exports and imports combined were less than 10 percent of American GDP in the 1960s; they are more than 30 percent today) is over. When we think of how to address inequality today we should move from the ideas that worked half-a-century ago.

                                                                                  Posted by on Saturday, May 14, 2016 at 02:13 PM Permalink  Comments (145)