Luigi Zingales at ProMarket:
The Real Lesson From Brexit: ...What we have observed in Britain and ... in the U.S. with Trump is a growing mistrust of voters toward experts. In the Brexit debate it was hard to find any economist justifying a departure from the European Union. In fact, many were willing to make forecasts so pessimistic as to be accused of scaremongering. Not only did these forecasts fail to rally the vote for Remain, they probably contributed to the victory of Leave.
In the Financial Times Chris Giles lamented this phenomenon as an example of voters’ irrationality. I fear this has nothing to do with irrationality, but has everything to do with mistrust; a mistrust that, while exaggerated, has a very rational basis: the disconnect between the intellectual elite and the population at large–the very disconnect that caused pollsters, betters, and journalists to miss the mounting Brexit wave. ...
Today wealth concentration allows a few rich individuals to singlehandedly fund think tanks, which have increasingly become loudspeakers of vested interests, rather than centers of elaboration of public policy. Campaign financing and future lobbying jobs are increasingly transforming elected officers from representatives of the people to “butlers of industrial interests,” to use a famous muckraking expression.
The effects are there for all to see. Doctors are perceived to promote the medicines of the companies that sponsor their lunches...; scientists to minimize the effect of pollutants produced by companies that fund their labs; economists to defend the interests of banks that pay them hefty consulting fees. Even journalists, when they are not perceived to promote the interest of their advertisers and owners, are accused of turning a blind eye to their problems. ...
Even when there is no financial incentive distorting experts’ views, there is a cultural affinity between the experts and the economic and political elites. A combination of legacy admissions and selection based on the quality of the high school (and thus the census) the students come from has created an increasingly homogenous academic population at top colleges, detached from the vast majority of the country. Scientists, journalists, and intellectuals all belong to the same world and so inevitably look at the world from the same perspective.
All these factors together lead to a mistrust toward experts. They lead to a presidential candidate who is proud not to rely on them and receives support for this reason. They lead to political decisions, like Brexit, that might have negative consequences for the very people who voted for it. ...
Fault does not lie with the people mistrusting us. We need to rebuild that trust. It is not sufficient that most doctors, intellectuals, and journalists do a very fine job. We should have transparency rules in place to ensure that they all free from conflict of interest. We should have admission rules that favor not just ethnic diversity, but also economic and social diversity. We should have campaign financing rules that free our representatives from the yoke of vested interests.
In sum, we need to create the conditions to undermine this mistrust of experts. This is the most important lesson from Brexit.
Posted by Mark Thoma on Wednesday, June 29, 2016 at 11:57 AM in Economics |
Powell First Out Of The Gate, by Tim Duy: The first Fed speaker of the post-Brexit era delivered a decidedly dovish message. Confirming the expectations of market participants, Federal Reserve Governor Jerome Powell made clear that the Fed was in a holding pattern until the dust settles. Much of the material is similar in content to his May speech, but the shift in emphasis and nuance indicate a substantially policy path.
Powell summarizes the economic situation as:
How should we evaluate our current performance against the dual mandate? I would say that we have made substantial progress toward maximum employment, although there is still some room for improvement. We have more work to do to assure that inflation moves back up to our 2 percent goal.
Both points are important. On the first point, Powell sees evidence of labor market slack in low participation rates, high numbers of part-time workers, and low wage growth. Recent labor reports concern him:
While I would not want to make too much of two monthly observations, the strength of the labor market has been a key feature of the recovery, allowing us to look through quarterly fluctuations in GDP growth. So the possible loss of momentum in job growth is worrisome.
My guess is that they will want to see a string of 2 or 3 solid labor reports before they breathe easier. Still, by acknowledging that the economy is operating near full employment, does he open the door to concerns about inflation? No:
When I was first exposed to macroeconomics in college, more than four decades ago, the view was that inflation was strongly influenced by the amount of slack in the economy. But the relationship between slack and inflation has weakened substantially over the years.
Or, in other words, the Phillips Curve is flat. Not quite flat as a pancake, but pretty darn flat. More important:
In addition, inflation depends importantly on the inflation expectations of workers and firms. A widely shared view among economists today is that, unlike during the 1970s, expectations are no longer heavily influenced by fluctuations in inflation, but are fairly constant, or anchored. For both these reasons, inflation has become less responsive to cyclical changes in the economy.
And what is happening to inflation expectations:
We measure inflation expectations through surveys of forecasters and the general public, and also through market readings on inflation swaps and "breakevens," which represent inflation compensation as measured by the difference between the return offered by nominal Treasury securities and that offered by TIPS. Since mid-2014, these market-based measures have declined significantly to historically low levels. Some of this decline probably represents lower risk of high inflation, or an elevated liquidity preference for much more heavily traded nominal Treasury securities, rather than expectations of lower inflation. Some survey measures of inflation expectations have also trended down.
The signs are worrisome:
Given the importance of expectations for determining inflation, these developments deserve, and receive, careful attention. While inflation expectations seem to me to remain reasonably well anchored, it is essential that they remain so. The only way to assure that anchoring is to achieve actual inflation of 2 percent, and I am strongly committed to that objective.
By downplaying the importance of slack while emphasizing the importance of inflation expectations, he is neutering the primary argument of Fed hawks who insist that approaching full employment necessitates higher interest rates to stay ahead of inflationary pressures. The line about achieving actual inflation of 2 percent could be a nod toward Evans Rule 2.0. Something to keep an eye on.
The impact of Brexit and the subsequent market turmoil is straightforward:
These global risks have now shifted even further to the downside, with last week's referendum on the United Kingdom's status in the European Union. The Brexit vote has the potential to create new headwinds for economies around the world, including our own. The risks to the global outlook were somewhat elevated even prior to the referendum, and the vote has introduced new uncertainties.
And the implication for monetary policy:
It is far too early to judge the effects of the Brexit vote. As the global outlook evolves, it will be important to assess the implications for the U.S. economy, and for the stance of policy appropriate to foster continued progress toward our objectives of maximum employment and price stability.
Notice that he does not warn that rate hikes are coming! Compare to his May speech:
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.
He is wisely now mum on the timing of the next rate hike. More Fed speakers will follow him than not.
But Brexit alone is not the only factor depressing the rate outlook:
I am often asked why rates remain so low now that we are near full employment. A big part of the answer is that, at least for the time being, the appropriate level of rates is simply lower than it was before the crisis. As a result, policy is not as stimulative as it might appear to be. Estimates of the real interest rate needed to keep the economy on an even keel if it were operating at 2 percent inflation and full employment--the "neutral rate" of interest--are currently around zero. Today, the real short term interest rate is about negative 1-1/4 percent, so policy is actually only moderately stimulative. I anticipate that the neutral rate will move up over time, as some of the headwinds that have weighed on economic growth ease.
The Fed increasingly recognizes that policy is not highly accommodative simply because rates are zero. The stance of policy is relative to the real interest rate, and a lower real rate means that policy is actually only "moderately" stimulative. Translation: There is no need to hike rates soon because policy is not particularly accommodative.
Missing now is this warning from May:
There are potential concerns with such a gradual approach. It is possible that monetary policy could push resource utilization too high, and that inflation would move temporarily above target. In an era of anchored inflation expectations, undershooting the natural rate of unemployment should result in only a small and temporary increase in the inflation rate. But running the economy above its potential growth rate for an extended period could involve significant risks even if inflation does not move meaningfully above target. A long period of very low interest rates could lead to excessive risk-taking and, over time, to unsustainably high asset prices and credit growth. Macroprudential and other supervisory policies are designed to reduce both the likelihood of such an outcome and the severity of the consequences if it does occur. But it is not certain that these tools would prove adequate in a financial system in which much intermediation takes place outside the regulated banking sector. Thus, developments along these lines could ultimately present a difficult set of tradeoffs for monetary policy.
By not reiterating this risk, Powell removes an argument to raise rates even inflation remains below target, the financial stability risk. But how much of a risk is it? If the natural rate of interest is lower, than the potential for financial market instability is also lower for a given interest rate. Or, in other words, since monetary policy is not as accommodative as previously believed, the risk of financial instability is lower.
Bottom Line: Powell embraces the lower real interest rate story as a reason that monetary policy is only moderately accommodative, warns that downside risks are rising, replaces expectations of a rate hike in the imminent future with only guidance that rates will be appropriate to foster economic growth, and drops concerns about the risks of a sustained low rate environment. The key takeaway - no expectation that an imminent rate hike will be needed. Gradual to glacial to just nothing.
Posted by Mark Thoma on Wednesday, June 29, 2016 at 12:15 AM in Economics, Fed Watch, Monetary Policy |
Posted by Mark Thoma on Wednesday, June 29, 2016 at 12:06 AM in Economics, Links |
I have a new column:
Why the Public Has Stopped Paying Attention to Economist: The predictions from economists about the consequences of Brexit were widely ignored. That shouldn’t be surprising. In recent years the public has lost faith the in the economics profession.
One reason for the lack of faith is the failure to predict the Great Recession, but the public’s dismissal of macroeconomists is based upon more than the failure to foresee the dangers the housing bubble posed for the economy. It is also due to false promises about the benefits to the working class from globalization, tax cuts for the wealthy, and trade agreements – promises that were often used to support ideological and political goals or to serve special interests. ...
Posted by Mark Thoma on Tuesday, June 28, 2016 at 06:13 AM in Economics, Macroeconomics |
Jason Furman at ProMarket:
Productivity, Inequality, and Economic Rents: Productivity growth—a necessary (though not sufficient) condition for rising incomes in the long run—has slowed since 1973... At the same time, inequality in the United States is higher and, in recent decades, has risen faster than in other major advanced economies. ...
These dual trends ... have many distinct sources, but insofar as they have some causes in common, there is the potential to address these causes in ways that simultaneously improve efficiency and equity. To this end, the evidence that a rise in rents is contributing to both phenomena is important. ...
The good news is that to the degree that the “rents” interpretation is correct, it suggests that it is possible to reduce inequality and promote productivity growth without hurting efficiency by changing how rents are divided—or even that it is possible to do both while increasing efficiency by acting to reduce rents in the economy. Policies that raise the minimum wage and provide greater support for collective bargaining can help level the playing field for workers in negotiations with employers, in turn changing the way that rents are divided. Measures that would rationalize licensing requirements for employment, reduce zoning and other land-use restrictions, appropriately balance intellectual property regimes, and change the incentives that have led to the expansion of the financial sector as a share of the economy would all help curb excessive rents.
Additional measures that would reduce the scope and unequal distribution of economic rents include the promotion of competition through rulemaking and regulations, as well as the elimination of regulatory barriers to competition. ...
The bad news, however, is that rents have beneficiaries and these beneficiaries fight hard to keep and expand their rents. As a result, political reforms and other steps aimed at curbing the influence of regulatory lobbying are important for reducing the ability of people and corporations to seek rents successfully. Such actions would help ensure that economic growth in the decades ahead is robust, sustainable, and widely shared.
Posted by Mark Thoma on Tuesday, June 28, 2016 at 12:15 AM in Economics, Income Distribution, Market Failure, Productivity |
Posted by Mark Thoma on Tuesday, June 28, 2016 at 12:06 AM in Economics, Links |
Fed Once Again Overtaken By Events, by Tim Duy: With global financial markets reeling in the wake of Brexit - Britain's unforced error as a political gamble went too far - the Fed is back on the sidelines. A July hike was already out of the question before Brexit, while September was never more than tenuous, depending on the data falling in place just right. Now September has moved from tenuous to "what are you thinking?" Indeed, the debate has shifted in the opposite direction as market participants weigh the possibility of a rate cut. The Fed is probably not there yet, but internally they are probably increasingly regretting the unforced error of their own - last December's rate hike.
The primary economic challenge now is the uncertainty created by the British decision. No one knows what the ultimate end game will be, and how long it will take to get there. Indeed, given the political vacuum in the UK, it appears that pro-Leave politicians really had no plan because they never thought it would actually happen. At lest partially in consequence, any exit promises to be a long process that if recent European history is any guide will prove to be repeated games of chicken between the UK and the EU.
So uncertainty looks to dominate in the near term. And market participants hate uncertainty. The subsequent rush to safe assets - and with it a tightening of financial conditions - is evident in plunging government bond yields and a resurgent dollar. The Fed's initial response was a fairly boilerplate statement:
The Federal Reserve is carefully monitoring developments in global financial markets, in cooperation with other central banks, following the results of the U.K. referendum on membership in the European Union. The Federal Reserve is prepared to provide dollar liquidity through its existing swap lines with central banks, as necessary, to address pressures in global funding markets, which could have adverse implications for the U.S. economy.
More direct action depends on the length and depth of the financial turmoil currently underway. I think the Fed is far more primed to deliver such action than they were a year ago. And that ultimately is good news for the economy as it will minimize the domestic damage from Brexit.
The Fed began 2015 under the direction of a fairly hawkish contingent that viewed rate hikes as necessary to be ahead of the curve on inflation. Better to raise preemptively than risk a sharper pace of rate hikes in the future. In other words, it was important to remove financial accommodation as the headwinds facing the economy receded and labor markets approached full employment. As the year progressed, however, the need for less financial accommodation never became evident. Indeed, I would argue that asset markets were telling exactly the opposite, that there was far less accommodation than the Fed believed. Fed hawks were slow to realize this, and, despite the financial turmoil of last summer, forced through a rate hike in December. I think this rate hike had more to do with a perceived need to be seen as "credible" rather than based in economic necessity. I suspect doves followed through in a show of unity for Chair Janet Yellen. They should have dissented.
Markets stumbled again in the early months of 2016, and, surprisingly, Fed hawks remained undeterred. Federal Reserve Vice Governor Stanley Fischer scolded financial market participants for what he thought was an overly dovish expected rate path. And even as recently as prior to the June meeting, Fed speakers were highlighting the possibility of a June rate hike, evidently with the only goal being to force the market odds of a rate hike higher.
But I think that as of the June FOMC meeting, the hawkish contingent has been rendered effectively impotent. Simply put, had they been correct, the US economy should have been surging ahead by now, with more evident inflationary pressures. The hawks were far too early with such a prediction. It became increasingly apparent that maybe the yield curve was telling an important story they should heed. Low long-term yields were never consistent with the Fed's outlook, and, when combined with tepid activity, suggested that the Fed's long-term guide, the natural rate of interest, was much lower than anticipated.
Consequently, I suspect the Fed will be much more responsive to the signal told by the substantial drop in long-term yields that began last Friday (as I write the 10 year is hovering about 1.46%) then they may have been a year ago. The drop in yields will feed into their current anxiety about the level of the natural rate of interest, and as a consequence they will more quickly realize the need to accommodate financial markets to limit any undesirable tightening of financial conditions. I expect some or all of the following options depending on the degree of financial market and real economic distress:
1.) Forward guidance I. Fed speakers will concur with financial market participants that policy is on hold until the dust begins to settle. Optimally, they will dispense with all talk of rate hikes as it is unnecessary and unhelpful at this juncture.
2.) Forward guidance II. They will reinforce point I in the next FOMC statement. Watch for the balance of risks to reappear - it seems reasonable to believe they have shifted decidedly to the downside.
3.) Forward guidance III. This would be an opportune time for Chicago Federal Reserve President Charles Evans to push through Evans Rule 2.0. No rate hike until core inflation hits 2% year-over-year. The Fed could justify such a move as a response to the uncertainty surrounding the natural rate. Essentially, rather than using an unknown variable as a guide, use a know variable.
4.) Forward guidance IV. A lower path of dots in the next Summary of Economic projections to validate market expectations.
5.) Rate cut. Former Minneapolis Federal Reserve President Narayana Kocherlakota argues that the Fed should just move forward with a rate cut in July. I concur; I continue to believe that the Fed has the best chance of exiting the zero bound at some point in the future by utilizing more aggressive policy now. That said, I don't expect this to be the Fed's first option. Moving beyond forward guidance will require evidence that the US economy is set to slow sufficiently to push the employment and inflation mandates further out of reach.
6.) If all else fails. If some combination of 1 through 5 were to fail, the Fed will turn to more QE and/or negative rates. I think the former before the latter because it is more comfortable for them.
Bottom Line. The Fed will stand down for the moment; where they go down the road depends upon the depth and length of current disruption. I think at this point it goes without saying that if you hear a Fed speaker talking about July being on the table or confidently warning about two or three rate hikes this year, you should ignore them. Perhaps we can have that conversation later with regards to the December meeting, but certainly not now. Most Fed officials will stick to the script and downplay the possibility of a rate hike and instead focus on the Fed moves to the sidelines angle. I still think an interesting scenario is one in which the Fed needs to accept above target inflation because global financial stability will depend on a very accommodative Federal Reserve, but that hypothesis will only be tested once inflation actually hits target.
Posted by Mark Thoma on Monday, June 27, 2016 at 11:50 AM in Economics, Fed Watch, Monetary Policy |
Cecchetti & Schoenholtz:
A Primer on Helicopter Money: ... We are wary of joining the cacophony of commentators on helicopter money, but our sense is that the discussion could use a bit of structure. So, as textbook authors, we aim to provide some pedagogy. (For the record, here are links to Ben Bernanke’s excellent blog post, to a summary of Vox posts, and to Willem Buiter’s technical paper.)
To understand why helicopter money is not just another version of unconventional monetary policy, we need to describe both a bit of economic theory and some relevant operational practice. We use simple balance sheets of the central bank and the government to explain.
First, some background. In the 1960s, Milton Friedman described what he believed to be a surefire mechanism that central banks could use to generate inflation (were that desired): drop currency straight from helicopters on to the population, while promising never to remove it from circulation. The result would be higher prices (and, if you keep doing this, inflation). ...
Now, there are three problems with this thought experiment. First, transferring funds to households is what fiscal policymakers do, not central bankers. The latter issue central bank money to acquire assets. Second, except when interest rates are at the effective lower bound (ELB), monetary policymakers today control interest rates, not the monetary base (or another monetary aggregate). The monetary base is determined by the demand of individuals to hold currency and of banks to hold reserves at the central bank’s interest rate target. In practical terms, this means that the central bank cannot credibly promise to permanently increase the monetary base. Third, 21st century central banks pay interest on reserves. And they do so precisely to control the level of interest rates in the economy.
What this means is that the notion of helicopter money today is necessarily different from what Friedman had in mind. ...
Does this make any difference? Is helicopter money in this setting any different from standard QE when the Fed purchased long-term bonds in exchange for reserves in an effort to flatten the yield curve? Since the alternative is for the fiscal authorities to sell long-term bonds, the answer is no. ...
We are left with a simple conclusion. Helicopter money today is different from what Milton Friedman imagined; it is expansionary fiscal policy financed by central bank money. And, if interest rates have fallen to the ELB, it is neither more nor less powerful than any bond-financed cut in taxes or increase in government spending in combination with QE.
[There is quite a bit more detail and explanation in the full post.]
Posted by Mark Thoma on Monday, June 27, 2016 at 11:01 AM in Economics, Monetary Policy |
Roberto Astolfi of the OECD Statistics Directorate:
Did the OECD Composite Leading Indicators see it coming?: ...Professor Luis Garicano of the London School of Economics is ... the man Queen Elizabeth asked “Why did no one see it coming?”; “it” being the crisis. In retelling the story, Pr. Garicano pointed out that he welcomed the question as it provided an opportunity to cite many that did see it coming, including Messrs, Krugman and Volcker. Was the OECD among them?
At the OECD, we use a number of techniques to determine what the data are telling us is happening now and what might happen in the future. ... One ... technique used by the OECD Statistics Directorate is the system of Composite Leading Indicators (CLIs). Simply put, the CLIs combine individual indicators for a given country to anticipate when economic expansion starts entering a downturn, or when growth starts to return. A relevant question in this context therefore is:
How useful were the OECD CLIs just before the crisis? ...
Using the most recent statistical information, (in other words, including any revisions that may have been made in the interim) Gyomai and Guidetti in 2011 concluded that the “CLI was able to anticipate the downturn in the real economy at least 5 months ahead...
A more stringent approach is to review the performance of the CLI at the time of the crisis using only the statistical information that was then available... Nevertheless,... the latest results confirm ... that the statistical and methodological revisions that have occurred since the crisis have not shifted CLI turning points to earlier dates, nor have they artificially improved the CLI performance.
Overall then, the OECD CLIs proved to be a robust tool in anticipating the crisis some months before GDP reached its pre-crisis high watermark, and so, perhaps they can be added to the list of illustrious names that can be quoted the next time somebody asks ‘why did no-one see it coming’. Moreover, although, by their very nature and design, CLIs are not able to quantify the magnitude of slowdowns or upturns, and, so, could not quantify the severity of the crisis, the increasing downbeat tone of assessments that followed the first warning in September 2007 provided strong pointers.
Posted by Mark Thoma on Monday, June 27, 2016 at 11:01 AM in Economics |
Posted by Mark Thoma on Monday, June 27, 2016 at 12:06 AM in Economics, Links |
Property Rights, the Income Distribution and China: ...why has the distribution of income, in the United States and Europe, tilted towards capital and away from labor over the past few decades? There is growing evidence that this redistribution is connected with the opening of trade with China. Globalization has lifted a billion Chinese workers out of poverty and it has led to huge income gains for Americans and Europeans at the top of the income and wealth distributions. These gains have not been shared with middle class and working class people in the US and Europe. ...
It is ... possible to conceive of alternative forms of democracy that would provide greater rights to workers. Workers councils, for example, have proved to be relatively successful in Germany.
The concept of private property is contingent on rights that are defined and enforced by national governments. Those rights are constantly evolving. When the US founding fathers signed the Declaration of Independence, it was still possible to buy and sell human beings. The idea that a national government would enforce the property rights of a slave owner is, to today's sensibilities, abhorrent. It is entirely possible that a system of property rights that allows a factory owner to close down a large manufacturing plant without consulting the workers whose livelihoods depend on its continued operation, will, in another two hundred years, appear to be equally abhorrent.
[This is part of a discussion of whether intervention in financial markets necessarily leads to an upward redistribution of income.]
Posted by Mark Thoma on Sunday, June 26, 2016 at 01:38 PM in Economics, Income Distribution |
Posted by Mark Thoma on Sunday, June 26, 2016 at 12:06 AM in Economics, Links |
Brad Delong (The VoxEU column is in the post below this one):
In Which I Call for Academic Scribblers and Funct Economists to Enter into Utopian Frenzy with Respect to the Institutional Design of the Eurozone: From my perspective, this piece at Vox.eu makes many too many bows to conventional-wisdom idols with not just feet but bodies and heads of clay. Thus I cannot sign on to it.
The situation is dire. The Eurozone as currently constituted has been a macroeconomic disaster.
The forecast that the authors make is that on the current policy path "economic health will eventually be restored, unemployment will decrease, and the periphery countries will regain competitiveness" is not a real forecast. I think that this is not a real forecast: if it were a real forecast, it would have a date attached, no?
Thus the framing of needed policy changes as things needed to improve "resiliency" just in case things do not "go as forecast" substantially underplays the seriousness of the problem. Fewer readers will pick up on the "things rarely go as forecast" to understand that the forecast is not a forecast.
The first and most obvious feature of the Eurozone is that its interest rates are at the zero lower bound and its economy lacks aggregate demand. A depressed economy at the zero lower bound needs fiscal expansion. If for some reason normal fiscal expansion is feared to be unwise by some holding veto points, the economy needs helicopter drops--backed up by strong commitments by central banks to raise reserve requirements to curb the velocity of outside money should it suddenly become higher rather than lower than desirable.
The bank regulatory system needs responsibility for banks’ rescue to be transferred from national governments to the ESM now. Without that transfer, nation-level governments will continue to make the political calculation that letting supervisory and regulatory standards slide is the more attractive course. It may be true "this is the kind of political step that seems unlikely to be feasible in the near term". But that does not keep it from being needed now. The purpose of a document like this is to set out what is needed--not to reassure people by claiming that whatever is not politically possible now is not needed now.
Public debt is too high if and only if market interest rates now and forecast for the foreseeable future are about to undergo a rapid and massive jump upward. Right now g > r--which means that public debt is not too high but too low.
How governments should hedge against interest rate increases in a world where g > r is an interesting research question. The obvious route is simply to sell consols. Then, when the real consol rate is higher than the societal return on additional government expenditures, we can talk about what the target debt-to-GDP ratio should be and how to get there. But those who are unwilling to advocate the sale of consols as the obvious way to manage public debt risk have, as long as g > r, no standing to complain that public debts are too high--let alone to set out the proposition that public debt is too high as a self-evident truth.
A massively-underfunded ESM is not "the right institution to deal with [government debt] default". It is the wrong institution. It is worse than no institution at all, because it allows people to claim that there is a backstop when there is, in fact, no backstop.
The "structural reform" agenda is more-or-less orthogonal to the macroeconomic institution redesign agenda. To even hint that energy that would otherwise be devoted to macroeconomic institution design should be diverted to lobby for structural reform is in its essence a call to do less on macroeconomic institution redesign. And that strikes me as unhealthy.
Now I think that I do understand why the economists below--who are, by and large, among the best economists in the world in their wisdom and in their understanding of the European situation--have made the rhetorical choices that they have. They want to appeal to practical men, who believe they are exempt from any trace of utopian frenzy.
But if the Eurozone is to be a good thing for Europe rather than a millstone around the neck of the continent, I think that utopian frenzy is needed.
Posted by Mark Thoma on Saturday, June 25, 2016 at 10:22 AM in Economics, Politics |
Authors: Richard Baldwin, Charlie Bean, Thorsten Beck, Agnès Bénassy-Quéré, Olivier Blanchard, Peter Bofinger, Paul De Grauwe, Wouter den Haan, Barry Eichengreen, Lars Feld, Marcel Fratzscher, Francesco Giavazzi, Pierre-Olivier Gourinchas, Daniel Gros, Patrick Honohan, Sebnem Kalemli-Ozcan, Tommaso Monacelli, Elias Papaioannou, Paolo Pesenti, Christopher Pissarides, Guido Tabellini, Beatrice Weder di Mauro, Guntram Wolf, and Charles Wyplosz.
Making the Eurozone more resilient: What is needed now and what can wait?, VoxEU: The UK’s choice to leave the EU was, we believe, a historic mistake. But the choice was made; we must now turn to damage control – especially when it comes to the euro.
The Eurozone is growing, albeit slowly. If all goes as forecast, economic health will eventually be restored, unemployment will decrease, and the periphery countries will regain competitiveness.
But things rarely go as forecast – as we were so forcefully reminded last week. Brexit was the latest – but certainly not the last – shock that will challenge the monetary union.
The question is: Is the Eurozone resilient enough to withstand the bad shocks that it is likely to face in the months and years to come?
For many observers, the answer is “no”. To survive the next bad shock, they argue, Europe’s monetary union needs major reform and deeper political integration. As such deeper integration is extremely difficult in today’s political climate, pessimism is the order of the day.
We do not share this pessimism. The Eurozone’s construction has surely followed a convoluted process, but the fundamental architecture is now in place. Yes, some measures are needed to strengthen this architecture. And yes, more ambitious steps would improve resilience further, but these will have to wait for a political breakthrough.
The purpose of this essay is to identify what needs to be done soon, and what would be good to do but can probably wait. To avoid the mind-numbing details that often cloud discussions of Eurozone reform, we paint our arguments with a broad brush. (We will follow up with further documents with much greater detail on specific reform proposals.)
On banks and the financial system
Think of a good financial architecture for the Eurozone as achieving two main objectives in coping with another bad shock: 1) reducing the risk of bank defaults; and 2) containing the broader economic effects when defaults do occur.
This architecture is largely built. Both supervision and regulation are now largely centralised. Supervision is improving and stress tests are becoming more credible with each iteration. The Single Resolution Mechanism is in place and private-sector bail-in rules have been defined. The Single Resolution Fund can provide some recapitalisation funds if and when needed. If they turn out not to be enough, the European Stability Mechanism (ESM) can, within the context of a macroeconomic adjustment programme, add more. In the longer term, a euro-wide deposit insurance scheme could improve resiliency, but this will take time.
So what more needs to be done soon? Mostly to make sure that the rules in place can be enforced. Italy provides two cases in point. First, non-performing loans have steadily increased and are carried on the books at prices substantially above market prices. Second, the Italian government has proven very reluctant to apply the bail-in rules. The credibility of the rules is at stake. Either they have to be applied, or credibly modified.
What are the measures that would be good to take, but can probably wait?
Diversifying the portfolios of banks so that there are more resilient to domestic shocks would clearly be desirable. The focus has been on decreasing the proportion of domestic sovereign bonds in banks’ portfolios. This would be good, but domestic sovereign bonds represent a relatively small proportion of banks’ portfolios. Decreasing banks’ overexposure to domestic loans would also be an important step towards boosting resiliency. A different approach would be to transfer the responsibility for banks’ rescue from national governments to the ESM. But this is the kind of political step that seems unlikely to be feasible in the near term.
On public finances
Public debt is high, even if, for the time being, low interest rates imply a manageable debt service. Just as for the financial system, a resilient public finance architecture needs to: 1) reduce the risk of default; and 2) contain the adverse effects of default, if it were to occur nevertheless.
On both counts, much remains to be done.
Reducing the risk of default is best achieved through a combination of good rules and market discipline. Neither is really in place. The accumulation of rules has made them unwieldy, unenforceable, and open to too many exceptions. They can and should be simplified. In most countries, the level of expenditure – rather than the deficit – is the main problem. High expenditure makes it difficult to raise taxes and balance the budget, leading to dangerous debt dynamics. Thus, a focus on expenditure rules, linking expenditure reduction to debt levels, appears to be one of the most promising routes. Market discipline, on the other hand, will not work if the holders of the debt do not know what will happen if and when default takes place. This takes us to the second objective.
The Eurozone has put in place the right institution to deal with default, namely the ESM. Like the IMF, the ESM can, under a programme, help a country adjust. In its current form however, the ESM falls short of what is needed. First, the ESM’s ‘firepower’ is too small compared to the sort of shock-absorbing operations it may be called on to undertake in the case of a large Eurozone nation getting into debt trouble. Second, given its current decision-making procedures, markets cannot be sure that action will be taken promptly. Higher funding or higher leverage, and changes in governance such as replacing the requirement of unanimity by a more flexible one, are needed to make the ESM able to respond quickly and fully to a country in trouble. Third, the current structure is silent on who should negotiate a public debt restructuring in the extreme case where one was needed. Putting an explicit process in place should be a priority; the ESM is the natural place for it.
What other measures which would be good to have, but can probably wait?
Initiatives to address the legacy of high public debt would bolster Eurozone resiliency and thus would be very useful. However, as low interest rates are likely for some time to come, debt service is manageable, and debt forecasts show that debt-to-GDP ratios will slowly decline (absent a bad shock). Since proposals for dealing with legacy national debts would require the sort of political willpower that seems in short supply for now, such plans cannot be realistically put on the ‘do now’ menu, even if they are may be necessary in the future.
Another set of measures would implement stronger risk sharing, and transfer schemes to further reduce the impact of domestic shocks on their own economy. Proposals run from euro bonds to fiscal transfer schemes for countries subject to bad shocks. These measures would make the Eurozone more resilient and thus may be desirable. But, equally clearly, they would require more fiscal and political integration than is realistic to assume at this point. We believe that the Eurozone can probably function without tighter fiscal integration at least for some time.
We end with two sets of remarks.
Solvency and liquidity
Whether it is with respect to banks or states, the two issues facing policymakers are how to deal with solvency and liquidity problems. We have argued that, when solvency is an issue, the ESM is the right structure to address it (assuming a public debt restructuring procedure is in place). With respect to liquidity, we believe that, in addition to the liquidity facilities of the ECB, which can address sudden stops on banks, the Outright Monetary Transactions (OMT) is the right structure to address sudden stops facing states. One step that could be taken soon is a clearer articulation of how to combine the two. This would clarify the role of the ECB, and eliminate a source of criticism about the allocation of roles between the ECB and other Eurozone structures such as the ESM. The resulting clarity would make it easier for markets and investors to be assured that Europe’s monetary union could deal effectively with any future shocks.
In any country, at any point, some pro-growth structural and institutional reforms are desirable. Is there a particularly strong argument for them in the case of the Eurozone? To some extent, yes. The institutional problems of the euro are made worse by low growth, and demographic change. If the structural and institutional reforms delivered higher growth, this would be good by itself – ignoring distribution effects – and it would allow for faster improvement in bank and state balance sheets.
Those specific structural reforms which allow for faster adjustment of competitiveness, be it through faster cost adjustment or faster reallocation, would also improve the functioning of the monetary union. Implementing such reform is a slow and difficult process, but necessary nonetheless. The Eurozone will never be a well-functioning monetary union until it is much more of an economic union as well.
We have stressed that actions need to be taken soon, while others are more long term, but the long-term questions do need to be discussed without delay.
Do you support this view?
Starting next week, we will open this column to endorsement by economists. Details to be posted on Monday.
Posted by Mark Thoma on Saturday, June 25, 2016 at 10:01 AM in Economics, Politics |
A Family-Friendly Policy That’s Friendliest to Male Professors: The underrepresentation of women among the senior ranks of scholars has led dozens of universities to adopt family-friendly employment policies. But a recent study of economists finds that some of these gender-neutral policies have had an unintended consequence: They have advanced the careers of male economists, often at women’s expense. Similar patterns probably hold in other disciplines, too. ...
Three economists — Heather Antecol..., Kelly Bedard..., and Jenna Stearns ... evaluated ... gender-neutral tenure-extension policies in important new research. The policies led to a 19 percentage-point rise in the probability that a male economist would earn tenure at his first job. In contrast, women’s chances of gaining tenure fell by 22 percentage points. Before the arrival of tenure extension, a little less than 30 percent of both women and men at these institutions gained tenure at their first jobs. The decline for women is therefore very large. It suggests that the new policies made it extraordinarily rare for female economists to clear the tenure hurdle. ...
The authors ... found that men who took parental leave used the extra year to publish their research, amassing impressive publication records. But there was no parallel rise in the output of female economists. ...
Posted by Mark Thoma on Friday, June 24, 2016 at 10:02 AM in Economics, Universities |
Posted by Mark Thoma on Friday, June 24, 2016 at 09:14 AM in Economics, Links |
"Worry about Britain":
Brexit: The Morning After, by Paul Krugman, NYTimes: Well, that was pretty awesome – and I mean that in the worst way. ...
That said, I’m finding myself less horrified by Brexit than one might have expected – in fact, less than I myself expected. The economic consequences will be bad, but not, I’d argue, as bad as many are claiming. The political consequences might be much more dire; but many of the bad things I fear would probably have happened even if Remain had won.
Start with the economics. Yes, Brexit will make Britain poorer. It’s hard to put a number on the trade effects..., but it will be substantial. ...
But right now all the talk is about financial repercussions – plunging markets, recession in Britain and maybe around the world, and so on. I still don’t see it. ...
A bigger issue might be fears of very bad political consequences, both in Europe and within the UK. Which brings me to the politics.
It seems clear that the European project – the whole effort to promote peace and growing political union through economic integration – is in deep, deep trouble. Brexit is probably just the beginning, as populist/separatist/xenophobic movements gain influence across the continent. Add to this the underlying weakness of the European economy,... a prime candidate for “secular stagnation”... Lots of people are now very pessimistic about Europe’s future, and I share their worries.
But those worries wouldn’t have gone away even if Remain had won. The big mistakes were the adoption of the euro without careful thought about how a single currency would work without a unified government; the disastrous framing of the euro crisis as a morality play brought on by irresponsible southerners; the establishment of free labor mobility among culturally diverse countries with very different income levels... Brexit is mainly a symptom of those problems, and the loss of official credibility that came with them. ...
Where I think there has been real additional damage done, damage that wouldn’t have happened but for Cameron’s policy malfeasance, is within the UK itself..., it looks all too likely that the vote will both empower the worst elements in British political life and lead to the breakup of the UK itself. Prime Minister Boris looks a lot more likely than President Donald; but he may find himself Prime Minister of England – full stop.
So calm down about the short-run macroeconomics; grieve for Europe, but you should have been doing that already; worry about Britain.
Posted by Mark Thoma on Friday, June 24, 2016 at 08:48 AM in Economics, Politics |
Posted by Mark Thoma on Friday, June 24, 2016 at 12:06 AM in Economics, Links |
Making automatic stabilizers more effective for the next U.S. recession: When the next recession hits, policymakers can take steps right then and there to fight the economic downturn. The Federal Reserve can lower interest rates and the legislative and executive branches can deploy fiscal stimulus by cutting taxes or boosting spending. But another way to counteract a recession relies on steps taken before economic growth begins to turn downward, relying on so called automatic stabilizers, which trigger on when the economy worsens. Think of unemployment insurance, which laid off workers collect, or the Supplemental Nutrition Assistance Program, which is eligible for workers under a certain income threshold.
These automatic programs were designed as forms of social insurance to help people weather the shock of losing a job. But they also boast the benefit of increasing consumer spending and therefore dampening the severity of a recession...
The next U.S. recession is probably not just around the corner. But it’s never too early to start preparing. If policymakers want to give themselves (or their future colleagues) a running start, they should take a look at strengthening automatic stabilizers such unemployment insurance and consider how other types of automatic-stabilizer programs might help the broader U.S. economy when it eventually takes another tumble.
The problem is "Making Congress More Effective for the Next U.S. Recession."
Posted by Mark Thoma on Thursday, June 23, 2016 at 09:39 AM in Economics, Fiscal Policy |
Republicans sabotage government programs, then complain they don't work:
A shameless deception in Paul Ryan’s Obamacare replacement plan, by By Stephen Stromberg: ... Paul Ryan (R-Wis.) released an Obamacare replacement plan on Wednesday that, among other things, complains that the ACA leaves people out. ... Then it blames the gap on “Obamacare’s poor design and incentives.”
This is an outrageous distortion. The coverage gap ... is the direct result of anti-Obamacare hysteria in Ryan’s party.
After the ACA passed, the Supreme Court ruled that the Medicaid expansion must be optional for states. The terms were so good for state leaders — the federal government promised to pay nearly the whole cost to cover lots of vulnerable people — it seemed inconceivable that any of them would refuse to expand Medicaid... But this thinking did not account for the anti-Obamacare tantrum... Nineteen states have refused to expand Medicaid in rote Republican opposition to the ACA. ...
Republicans ... could have simply expanded Medicaid in their states... Or Republicans in Congress could have agreed to extend eligibility for marketplace subsidies downward, solving this gross and unnecessary inequity without requiring the states to do a thing. ...
Republicans chose not only to create the gap, but also to keep it in place. Their continued inaction hurts low-income people in those 19 states. And Ryan has the nerve to complain about it — even to use it as evidence that the ACA is fatally flawed. ...
Posted by Mark Thoma on Thursday, June 23, 2016 at 09:24 AM in Economics, Health Care, Politics |
Posted by Mark Thoma on Thursday, June 23, 2016 at 12:06 AM in Economics, Links |
Why the Fed has a Rate-Setting Problem, by Mark Thoms: Many people think they know how interest rates get set: The Federal Reserve does it.
But that's not quite how it works...
Posted by Mark Thoma on Wednesday, June 22, 2016 at 10:28 AM in Economics, Monetary Policy |
Statement on the 2016 Social Security Trustees Report: The 2016 Social Security Trustees Report is little changed from the 2015 Report. It shows a small decrease in the projected 75-year shortfall of 0.02 percentage points. Changes in the disability program, along with small changes in projections more than offset the increase of 0.6 percentage points due to shifting the projection period by a year. (The new projection adds 2093, a year with a large projected deficit, and loses 2015, a year with a surplus.) While reporters and politicians routinely focus on the projected shortfall, what will matter far more to the people covered by Social Security is the projected growth in real wages and their distribution. As has been pointed out, almost 40 percent of the projected shortfall in the program is attributable to the upward redistribution of income over the last four decades. This has pushed a larger share of wage income over the taxable maximum. For this reason, the finances of the program are directly affected by the distribution of income. ...
This means that workers have vastly more at stake in whether they will receive their share of wage growth over this period, than whether it is necessary to raise the Social Security tax rate at some point. ... (Of course any shortfall in Social Security could be covered through other mechanisms than increases in the payroll tax.)
This is the last Trustees report of the Obama administration. For this reason, it is worth comparing the changes with the last report of the Bush administration. The 2008 Trustees Report showed a considerably smaller projected shortfall for Social Security. It projected a shortfall of 1.70 percentage points for the years 2008–2082. This figure has increased to 2.66 percentage points in the 2016 report. Roughly half of this increase is attributable to the change in the projection period. Moving the period out eight years added approximately 0.48 percentage points to the projected shortfall. The other half of the increase in the gap was due to the Great Recession. This reduced employment and wage growth, leaving both far below the projections in the 2008 report. This is a clear warning as to the importance of the strength of the overall economy for the health of Social Security.
The positive side of the picture is that the projected shortfall in the Medicare program is now much smaller than had been projected in 2008. At that time, the Trustees projected a shortfall in the program equal to 3.54 percent of payroll. This brought the combined projected shortfall for the two programs to 5.24 percent. In the most recent report, the projected shortfall for Medicare is just 0.73 percent of payroll, bringing the combined projected shortfall to 3.39 percent of payroll.
This means that the longer term shortfall projected for these programs together is now considerably smaller than when President Obama took office. The reason for the decline in the projected Medicare shortfall is a slower projected rate of health care cost growth. This is undoubtedly attributable in part to changes implemented as a result of the Affordable Care Act (ACA). While the size of the impact of the ACA on health care cost growth can be debated, it is clear that the combined finances of these programs looks better in 2016 than when President Obama took office.
Posted by Mark Thoma on Wednesday, June 22, 2016 at 10:27 AM in Economics, Social Security |
The Myth of Austerity and Growth: ...Five years ago, it was common to hear claims that too much government borrowing would hurt growth -- an idea known as expansionary austerity. Much of the research cited by the proponents of this theory was done by scholars at the International Monetary Fund. But during the past few years, there have been quite a few questions about the IMF’s past cheerleading for belt-tightening. ...
Some pieces of research seemed to support austerity policies. Work by economists Carmen Reinhart and Kenneth Rogoff ... purported to show that countries that borrowed more grew more slowly. ... Subsequent analysis ... showed that there isn’t any evidence that high debt causes low growth.
Another paper on the austerity side ... was a 2002 study by Olivier Blanchard and Roberto Perotti. ... That pro-austerity result contradicts a lot of other papers -- see here and here, for example -- but it was very influential in part because of the prestige of Blanchard...
But in recent years, Blanchard has shifted his stance. In a 2013 paper with Daniel Leigh, he showed that the IMF had been consistently wrong in its forecasts of the effects of austerity. ...
This paper isn’t a one-shot mea culpa. ...
There are still a few pro-austerity papers out there ... but they’re increasingly swimming against the tide of evidence. ...
Posted by Mark Thoma on Wednesday, June 22, 2016 at 09:39 AM in Economics, Fiscal Policy |
Posted by Mark Thoma on Wednesday, June 22, 2016 at 12:06 AM in Economics, Links |
New report from Stephen Rose at the Urban Institute:
The Growing Size and Incomes of the Upper Middle Class: ... I found that the upper middle class has grown substantially, from 12.9 percent of the population in 1979 to 29.4 percent in 2014. Further, with the exception of the bottom 6 per cent, real growth occurred throughout the income ladder. However, that growth was unevenly distributed in that people with higher incomes had faster growth than those with lower incomes. Consequently, these findings expand the discussion of rising inequality to focus on more than just the top 1 percent. Indeed, a massive shift has occurred in the center of gravity of the economy. In 1979, the middle class controlled a bit more than 46 percent of all income s, and the upper middle class and rich controlled 30 percent. In contrast, in 2014 the rich and upper middle class controlled 63 percent of all incomes ( 52 percent for the upper middle class and 11 percent for the rich); the middle class share had shrunk to 26 percent; and the shares of the lower middle class, poor, and near - poor had declined by half.
Posted by Mark Thoma on Tuesday, June 21, 2016 at 12:52 PM in Economics, Income Distribution |
From Penn Law's RegBlog
(Not) Prosecuting Financial Crimes, by Brandon L. Garrett: It is sobering that discussions about regulatory capture now include the subject of criminal prosecutions. ... That the public is increasingly demanding greater accountability for corporate crimes is a positive development. Take the case of HSBC. The former head of compliance at HSBC announced his resignation at a July 17, 2012 hearing before the U.S. Senate’s Permanent Subcommittee on Investigations. ....
The Subcommittee’s remarkable investigation described not just a weak anti-money laundering program at the multi-national bank, but billions of dollars diverted to Mexican drug cartels, groups linked to terrorism, sanctioned regimes, and others. The scale of the violations was shocking. Prosecutors described concerted efforts to hide dirty money transactions...
The bank was not convicted of any crime..., no employees or officers were prosecuted. At the time, then-Assistant Attorney General Lanny Breuer explained: “Our goal here is not to bring HSBC down, it’s not to cause a systemic effect on the economy, it’s not for people to lose thousands of jobs.” ...Prominent cries of “too big to jail” greeted the agreement. ...
Companies cannot literally be put in jail, of course. And that is why adequately holding them accountable for crimes is so important. Responsible officers and employees can be targeted. ... Yet many companies pay no fine, and even the biggest payments are often greatly discounted. It is not the case that more companies are being prosecuted each year; on the contrary, fewer and fewer are. ...
On the topic of individual defendants: in recent years, almost two-thirds of corporate prosecutions have not been accompanied by any charges filed against employees..., and most who have been were not high-up officers of the companies, but rather were middle managers of one kind or another.
Will this change? The U.S. Department of Justice has announced a set of recent changes aimed at increasing the focus on individual investigations. Yet there has not yet been any observable change in the charging data regarding individuals. ... Perhaps more resources for corporate investigations, and a sea change in priorities, are needed to end “too big to jail” once and for all.
Posted by Mark Thoma on Tuesday, June 21, 2016 at 08:19 AM in Economics, Regulation |
Posted by Mark Thoma on Tuesday, June 21, 2016 at 12:06 AM in Economics, Links |
This is from the introduction to an interview of Alan Blinder:
Alan Blinder on Over-Regulating Financial Markets: ...Professor Alan Blinder, former Vice Chairman of the Federal Reserve (June 1994 to January 1996), has been studying the financial system for close to 30 years. In 2014 he published a paper that did not get enough attention, but that students of regulation theory may find surprising: In order to get optimal regulation in the financial world, one should seek to over-regulate.7)
The idea of cyclical regulatory equilibrium in financial markets is not new, as Blinder immediately admits. In a 2009 paper, Joshua Aizenman wrote that “prudential” under-regulation may expose economies to future financial crises, which means that over-regulation may be the correct course8). And, of course, Blinder also borrows from the “Minsky cycle”: Hyman Minsky’s idea that periods of financial stability encourage further and further risk-taking, even with borrowed money, until a phase–a “Minsky moment”–where asset values collapse.
“Financial regulations and their effectiveness tend to get weakened over time by (a) industry workarounds, (b) regulatory changes, and (c) legislative changes. The main exceptions come during and after financial crises or scandals, when public revulsion against financial excesses enables, perhaps even forces, a tightening of regulation,” Blinder writes.
Therefore, in Blinder’s view, over-regulation, when it can be achieved, is actually optimal. Or, in his words: “a simple, but not mathematically accurate, way of thinking about the optimality of over-regulation is that it gets the degree of regulation ‘right on average’ over time.” ...
Posted by Mark Thoma on Monday, June 20, 2016 at 09:30 AM in Economics, Financial System, Regulation |
The Republican house of ideological cards:
A Tale of Two Parties, by Paul Krugman, NY Times: Do you remember what happened when the Berlin Wall fell? Until that moment, nobody realized just how decadent Communism had become. It had tanks, guns, and nukes, but nobody really believed in its ideology anymore; its officials and enforcers were mere careerists, who folded at the first shock.
It seems to me that you need to think about what happened to the G.O.P. this election cycle the same way.
The Republican establishment was easily overthrown because it was already hollow at the core. ... All it took was the huffing and puffing of a loud-mouthed showman...
But as Mr. Trump is finding out, the Democratic establishment is different.
...America’s two major parties are not at all symmetric. The G.O.P. is, or was until Mr. Trump arrived, a top-down hierarchical structure enforcing a strict, ideologically pure party line. The Democrats, by contrast, are a “coalition of social groups,” from teachers’ unions to Planned Parenthood, seeking specific benefits from government action. ...
Mr. Trump is flailing. He’s tried all the tactics that worked for him in the Republican contest — insults, derisive nicknames, boasts — but none of it is sticking. Conventional wisdom said that he would be helped by a terrorist attack, but the atrocity in Orlando seems to have hurt him instead: Mrs. Clinton’s response looked presidential, his didn’t.
Worse yet from his point of view, there’s a concerted effort by Democrats — Mrs. Clinton herself, Elizabeth Warren, President Obama, and more — to make the great ridiculer look ridiculous (which he is). And it seems to be working.
Why is Mrs. Clinton holding up so well against Mr. Trump, when establishment Republicans were so hapless? Partly it’s because America as a whole, unlike the Republican base, isn’t dominated by angry white men; partly it’s because, as anyone watching the Benghazi hearing realized, Mrs. Clinton herself is a lot tougher than anyone on the other side.
But a big factor, I’d argue, is that the Democratic establishment in general is fairly robust..., the various groups making up the party’s coalition really care about and believe in their positions — they’re not just saying what the Koch brothers pay them to say.
So pay no attention to anyone claiming that Trumpism reflects either the magical powers of the candidate or some broad, bipartisan upsurge of rage against the establishment. What worked in the primary won’t work in the general election, because only one party’s establishment was already dead inside.
Posted by Mark Thoma on Monday, June 20, 2016 at 08:33 AM in Economics, Politics |
Posted by Mark Thoma on Monday, June 20, 2016 at 12:06 AM in Economics, Links |
Competition policy and inclusive growth, by Fabienne Ilzkovitz and Adriaan Dierx: Firms with greater market power can behave monopolistically, and recent research suggests that declining market competitiveness is driving income inequality. While competition authorities already measure the overall impact of their interventions by using customer savings, these measurements do not account for indirect effects of intervention. This column introduces a DSGE model to model competition policy interventions as a negative mark-up shock. Competition policy has a significant and positive impact on growth and jobs, and impacts richer and poorer households differently. Interventions have important redistributive effects that benefit the poorest in society.
Posted by Mark Thoma on Sunday, June 19, 2016 at 12:24 AM in Economics, Income Distribution, Market Failure |
The New Keynesian model is fairly pliable, and adding bells and whistles can help it to explain most of the data we see, at least after the fact. Does that mean we should be more confident in it its ability to "embody any useful principle," or less?:
... A famous example of different pictures of reality is the model introduced around AD 150 by Ptolemy (ca. 85—ca. 165) to describe the motion of the celestial bodies. ... In Ptolemy’s model the earth stood still at the center and the planets and the stars moved around it in complicated orbits involving epicycles, like wheels on wheels. ...
It was not until 1543 that an alternative model was put forward by Copernicus... Copernicus, like Aristarchus some seventeen centuries earlier, described a world in which the sun was at rest and the planets revolved around it in circular orbits. ...
So which is real, the Ptolemaic or Copernican system? Although it is not uncommon for people to say that Copernicus proved Ptolemy wrong, that is not true..., our observations of the heavens can be explained by assuming either the earth or the sun to be at rest. Despite its role in philosophical debates over the nature of our universe, the real advantage of the Copernican system is simply that the equations of motion are much simpler in the frame of reference in which the sun is at rest.
... Elegance ... is not something easily measured, but it is highly prized among scientists because laws of nature are meant to economically compress a number of particular cases into one simple formula. Elegance refers to the form of a theory, but it is closely related to a lack of adjustable elements, since a theory jammed with fudge factors is not very elegant. To paraphrase Einstein, a theory should be as simple as possible, but not simpler. Ptolemy added epicycles to the circular orbits of the heavenly bodies in order that his model might accurately describe their motion. The model could have been made more accurate by adding epicycles to the epicycles, or even epicycles to those. Though added complexity could make the model more accurate, scientists view a model that is contorted to match a specific set of observations as unsatisfying, more of a catalog of data than a theory likely to embody any useful principle. ...
[S]cientists are always impressed when new and stunning predictions prove correct. On the other hand, when a model is found lacking, a common reaction is to say the experiment was wrong. If that doesn’t prove to be the case, people still often don’t abandon the model but instead attempt to save it through modifications. Although physicists are indeed tenacious in their attempts to rescue theories they admire, the tendency to modify a theory fades to the degree that the alterations become artificial or cumbersome, and therefore “inelegant.” If the modifications needed to accommodate new observations become too baroque, it signals the need for a new model. ...
[Hawking, Stephen; Mlodinow, Leonard (2010-09-07). The Grand Design. Random House, Inc.. Kindle Edition.]
Posted by Mark Thoma on Sunday, June 19, 2016 at 12:15 AM in Economics, Macroeconomics, Methodology |
Posted by Mark Thoma on Sunday, June 19, 2016 at 12:06 AM in Economics, Links |
A Question For the Fed: There is a near-consensus at the FOMC that rates must eventually move up. But here’s my question: why, exactly? Specifically, which component of aggregate demand do we believe will continue to strengthen in a way that will require monetary tightening to avoid an overheating economy?
Here’s a look at two obvious candidates...
Nonresidential investment has basically recovered from the recession-induced slump. Residential investment is still a bit low by historical standards, but not as much as you might think if your baseline is the boom of the mid-naughties. And given the slowing growth of the working-age population — down from more than 1 percent a year to less than 0.5 — should’t we expect some reduction in home construction?
So I don’t see an obvious reason to believe that current rates are too low. Yes, they’re near zero — but that in itself doesn’t mean too low.
Like others, notably Larry Summers, I think the Fed is trying to return to a normality that is no longer normal.
Forecasting that the Unemployment Rate will stay Constant is a Bad Idea: Jim Bullard, President of the St Louis Fed, has released a new, St Louis Fed model, for thinking about the way the Fed forecasts. According to the St Louis model, we should think about 'regimes'. There are three components to regimes. 1) Is the economy in a recession: YES or NO? 2) Is the short-term real interest rate HIGH or LOW? 3) Is productivity growth HIGH or LOW?
Putting these pieces together, there are eight possible states. Recession can be YES or NO, productivity can be HIGH or LOW and the natural real interest rate (Jim calls this R Dagger) can be HIGH or LOW.
In Bullard's view the current regime is Recession: NO, Productivity growth: LOW, R Dagger: LOW
Using regime dependent forecasting, Jim thinks the best forecast of the US economy, moving forwards, is that productivity growth will stay low and the unemployment rate will stay where it is. That implies, according to Bullard, that the Fed should hold the interest rate at 63 basis points through 2018.
I have one big problem with this forecasting framework..., there is no period in the post-war period when the unemployment rate was even approximately constant. It was either increasing or it was decreasing. If we stick with the regime dependent paradigm, I would replace, [Recession = Yes or NO], with, [Unemployment = INCREASING or DECREASING].
That may seem like a semantic change. But it makes a big difference to a regime dependent forecasting model because the unemployment rate cannot keep falling forever. That suggests that, the longer we are in the [Unemployment = DECREASING] state, the higher is the probability of a regime switch into [Unemployment = INCREASING]. That suggests to me, that the risk of another recession while productivity and the natural real interest rate are low is higher than Jim Bullard thinks. ...
From an interview of Lars Svensson:
...Eugenio Cerutti: How much can countries rely on monetary policy to lead the recovery from the global financial crisis?
Lars Svensson: I think monetary policy can do more in the United States, Japan, and the euro zone. One can get policy rates further into the negative range, and one can avoid premature liftoffs. Particularly in the euro zone, monetary policy can and should do more. ... Fiscal policy could do more. There are some countries where fiscal policy is unsustainable, but in other countries, fiscal policy can definitely be more expansionary. In terms of monetary policy, there are still things that haven’t been tried, such as monetary financing of government expenditures. Monetary financing of government expenditures should definitely work in increasing nominal aggregate demand, and thereby increasing both real activity and inflation.
Posted by Mark Thoma on Saturday, June 18, 2016 at 10:30 AM in Economics, Monetary Policy |
Posted by Mark Thoma on Saturday, June 18, 2016 at 12:06 AM in Economics, Links |
Anna Malinovskaya and David Wessel at Brookings:
Did negative rates in Europe trigger massive cash hoarding?: For a long time, economists believed that negative interest rates – charging savers to keep money in the bank instead of paying them interest – were close to impossible. If confronted with negative rates, people and institutions would hoard currency, economists reasoned. After all, earning zero interest on $500 in currency is better than paying a fee to keep $500 in the bank. Recently, however, central banks in Denmark, Sweden, Switzerland, the euro zone and Japan cut their rates below zero, testing those long-standing beliefs. ... A ... a quarter of the world’s economy is now experiencing negative interest rates as central banks seek to spur economic growth.
According to the available evidence, it doesn’t appear that cash hoarding is a problem right now in the economies with negative interest rates. ...
The most obvious reason that households haven’t begun to hoard cash is that, in most countries, negative rates haven’t affected most ordinary customers—just the banks themselves. That’s in part because of the way central banks have structured negative rates and in part because of business decisions that banks have made to shield their retail customers. Another reason is that rates are only slightly negative... That may not be enough to justify the costs involved in storing large amounts of cash – buying safes, arranging insurance and so on.
Economists agree that the longer negative rates are maintained (or the longer people believe they will be maintained), and the more negative the rates go, the more likely banks are to charge small depositors a negative rate and the more likely banks and their customers are to switch to holding cash. ... If more banks follow suit and customers begin to feel the impact of negative rates, the evidence may tell a different story.
Posted by Mark Thoma on Friday, June 17, 2016 at 09:21 AM in Economics, Monetary Policy |
Should Britain stay in the European Union?:
Fear, Loathing and Brexit, by Paul Krugman, NY Times: There are still four and a half months to go before the presidential election. But there’s a vote next week that could matter as much for the world’s future...: Britain’s referendum on whether to stay in the European Union.
Unfortunately, this vote is a choice between bad and worse — and the question is which is which. ...
The straight economics is clear: Brexit would make Britain poorer. ... Britain would end up about two percent poorer than it would otherwise be, essentially forever. That’s a big hit. ...
True, some Brexit advocates claim that leaving the E.U. would free Britain ... to deregulate and unleash the magic of markets, leading to explosive growth. Sorry, but that’s ... the same free-market fantasy that has always and everywhere proved delusional.
No, the economic case is as solid as such cases ever get. Why, then, my downbeat tone about Remain? ...
The so-called European project began more than 60 years ago, and for many years it was a tremendous force for good. It didn’t only promote trade and help economic growth; it was also a bulwark of peace and democracy in a continent with a terrible history.
But today’s E.U. is the land of the euro, a major mistake... Britain had the good sense to keep its pound, but it’s not insulated from other problems of European overreach, notably the establishment of free migration without a shared government. ...
But ... the most frustrating thing about the E.U.: Nobody ever seems to acknowledge or learn from mistakes. ... I feel some sympathy with Britons who just don’t want to be tied to a system that offers so little accountability, even if leaving is economically costly.
The question, however, is whether a British vote to leave would make anything better. ... I fear that it would actually make things worse. The E.U.’s failures have produced a frightening rise in reactionary, racist nationalism — but Brexit would, all too probably, empower those forces even more...
Obviously I could be wrong about these political consequences. But ... Britain will still have the option to leave the E.U. someday if it votes Remain now, but Leave will be effectively irreversible. You have to be really, really sure that Europe is unfixable to support Brexit.
So I’d vote Remain. There would be no joy in that vote. But a choice must be made, and that’s where I’d come down.
Posted by Mark Thoma on Friday, June 17, 2016 at 08:33 AM in Economics |
Posted by Mark Thoma on Friday, June 17, 2016 at 12:06 AM in Economics, Links |
At Equitable Growth:
What’s the right minimum wage? Reframing the debate from ‘no job loss’ to a ‘minimum living wage,’ Working Paper 2016-06, by David Howell, Kea Fiedler, and Stephanie Luce: Abstract The American debate over the proper level of the statutory minimum wage has always reflected the tension between the twin goals of ensuring decent living-wage jobs with maximum job opportunity. The moral and efficiency arguments for a wage floor that can keep a worker above mere subsistence have a long history, dating back at least to Adam Smith. The U.S. federal minimum wage was established by the 1938 Fair Labor Standards Act to ensure a “minimum standard of living necessary for health, efficiency, and general well being of workers” and to do so “without substantially curtailing employment.” In recent years, the best evidence has shown that moderate increases from very low wage floors have no discernible effects on employment, which has strengthened the case for substantial increases in the minimum wage.
But the very strength of this new evidence—research designs that effectively identify employment effects at the level of individual establishments—has contributed to the adoption of a narrow No-Job-Loss (NJL) criterion: that the “right” wage floor is the one that previous research has demonstrated will pose little or no risk of future job loss, anywhere. The economist’s Pareto Criterion—a good policy is one that does no immediate harm to anyone—has replaced the earlier much broader concern with aggregate employment effects, and more generally, with overall net benefits to working families. The explicit moral and efficiency framing of the case for a living wage by earlier generations of economists, advocates, and policy makers has taken a back seat to statistical jousting over which wage floor will pose no risk of job loss (or harm) to anyone.
We think the debate over the proper level of the statutory minimum wage should be reframed from a NJL to a Minimum Living Wage (MLW) standard: the lowest wage a fulltime worker needs for a minimally decent standard of living. This paper illustrates and critiques the recent NJL framing, as well as the usefulness of one metric that has been heavily relied upon for identifying the NJL threshold—the ratio of the wage floor to the average wage (the Kaitz index). We argue that the proper framing of the debate is not over the statistical risk of the loss of some poverty-wage, high-turnover jobs, but rather over the wage floor that establishes a minimally decent standard of living from full-time work for all workers, along with complementary policies that would ensure that any costs of job loss would be more than fully remedied.
Posted by Mark Thoma on Thursday, June 16, 2016 at 01:11 PM in Economics, Income Distribution |
Peter Lindert and Jeffrey Williamson at VoxEU:
Unequal gains: American growth and inequality since 1700. VoxEU.org: When did America become the world leader in average living standards? There is little disagreement about how American incomes have grown since 1870, thanks to the pioneering work of Simon Kuznets and many others. Yet income estimates are weak and sparse for the years before 1870. In spite of that, our history textbooks imply that the road to world income leadership was paved by the institutional wisdom of the Founding Fathers and those who refined it over the two centuries that followed. While those institutions were well chosen, in a new book we show that British America had attained world leadership in living standards long before the Founding Fathers built their New Republic (Lindert and Williamson 2016). Furthermore, the road to prosperity was far bumpier than the benign textbook tales of American economic progress imply.
Was income ever distributed as unequally between the rich, middle, and poor as it is today? As we are constantly reminded, the rise in US inequality over the half century since the 1970s has been very steep. The international research team led by Atkinson et al. (2011) has charted the dramatic 20th century fall and rise of top incomes in countries around the world, including the US. However, until now evidence was not available for before WWI. Thus, there is still no history of American income inequality for the two centuries before WWI, aside from a few informed guesses. We now supply that distributional evidence back to 1774.
A new approach with new data
Armed with new evidence, we apply a different approach to the historical estimation of what Americans have produced, earned, and consumed. National income and product accounting reminds us that we should end up with the same number for GDP by assembling its value from any of three sides – the production side, the expenditure side, or the income side. All previous American estimates for the years before 1929 have proceeded on either the production or the expenditure side.
We work instead on the income side, constructing nominal (current-price) GDP from free labor earnings, property incomes, and (up to 1860) slaves’ retained earnings (that is, slave maintenance or actual consumption). Our social tables build national income aggregates from details on labor and property incomes by occupation and location for the benchmark years 1774, 1800, 1850, 1860 and 1870. No such income estimates were available for any year before 1929 until now.
Our unique approach leads to big rewards. One reward is the chance to challenge the production-side estimates using very different data and methods. As we see below, our estimates are often dramatically different. An even bigger reward is that the income approach exposes the distribution of income by socio-economic class, race, and gender, as well as by region and urban-rural location.
New findings about American income per capita leadership
America actually led Britain and all of Western Europe in purchasing power per capita during colonial times. Britain’s American colonies were already ahead by 38% in 1700 and by 52% in 1774, just before the Revolution (Figure 1). Angus Maddison’s (2001) claim that American income per capita did not catch up to that of Britain until the start of the twentieth century is off by at least two centuries.
Figure 1 Real purchasing power per capita: America versus Britain, 1700-2011
Since the 1770s, America’s big income per capita advantage over Britain has not increased. The only historical moment in which the US soared well above its colonial lead over Britain and the rest of the world came at the end of WWII. Since then, the American per capita income lead over Britain has fallen back to colonial levels.
But note the vulnerability of America’s relative income per capita to costly wars. Fighting for independence may have cut American income per capita by as much as 30% between 1774 and 1790. The causes seem clear – war damage, mortality and morbidity among young adult males, the destruction of loyalist social networks, a collapse of foreign markets for American exports, hyper-inflation, a dysfunctional financial system, and much more. Then, by 1860, the young republic had regained its big income lead, this time by as much as 46%. This was a period of rapid catching up with and overtaking of Western European per capita incomes, including that of Britain. Fast per capita income growth and even faster population growth made the America the second biggest economy in the world by 1860. However, the US lost most of that big lead (again) during the destructive Civil War decade. It gained the lead back once more by 1900, and briefly lost it (again) in the Great Depression of the 1930s.
American colonists probably had the highest fertility rates in the world, and their children probably had the highest survival rates in the world. Thus, the colonies had much higher child dependency rates, and family sizes, than did Europe – and even higher than the Third World does today. What was true of the colonies was also true of the young Republic. It follows that America’s early and big lead in income per capita was exceeded by its early lead in income per worker.
New findings about American inequality
Colonial America was the most income-egalitarian rich place on the planet. Among all Americans – slaves included – the richest 1% got only 8.5% of total income in 1774. Among free Americans, the top 1% got only 7.6%. Today, the top 1% in the US gets more than 20% of total income. Colonial America looks even more egalitarian when the comparison is by region – in New England the income Gini co-efficient was 0.37, the Middle Atlantic was 0.38, and the free South 0.34. Today the US income Gini is more than 0.5, before taxes and transfers. Colonial America was also far less unequal than Western Europe. England and Wales in 1759 had an income Gini of 0.52,and in 1802 it was 0.59. Holland in 1732 had an income Gini of 0.61, and the Netherlands in 1909 had 0.56. Also, if you agree with neo-institutionalists that economic equality fosters political equality, which fosters pro-growth policies and institutions, then America’s huge middle class is certainly consistent with the young republic’s pro-growth Hamiltonian stance from 1790 onwards. That is, the middle 40% of the distribution got fully 52.5% of total income in New England, the cradle of the revolution!
As Figure 2 shows, it did not stay that way. A long steep rise in US inequality took place between 1800 and 1860, matching the widening income gaps we have witnessed since the 1970s. The earlier rise was not dominated by a surge in the property income share, as argued by Piketty (2014). Rather, this first great rise in inequality was broadly based, with widening income gaps throughout the whole income spectrum – rising urban-rural income gaps, skill premiums, gaps between slaves and the free, North-South income gaps, earnings inequality, and even property income inequality.
Figure 2 Income inequality in America, Britain, and the Netherlands, 1732-2010
From 1870 to WWI, American inequality moved along a high plateau with no big secular changes. Rather, the big drama followed afterwards. Figure 3 documents that the income share captured by the richest 1% fell dramatically between the 1910s and the 1970s, and the share of the bottom half rose, for almost all countries supplying the necessary data. This ‘Great Leveling’ took place for several reasons. Wars and other macro-shocks destroyed private wealth (especially financial wealth) and shifted the political balance toward the left. The labor force grew more slowly and automation was less rapid, improving the incomes of the less skilled. Rising trade barriers lowered the import of labor-intensive products and the export of skill-intensive products, favoring the less skilled in the lower and middle ranks. And in the US, the financial crash of 1929-1933 was followed by a half century of tight financial regulation, which held down the incomes of those employed in the financial sector and the net returns reaped by rich investors. We stress that this correlation between high finance and inequality is not spurious. Individuals with skilled financial knowledge have been well rewarded during the two inequality booms, and heavily penalized during the one big leveling (or two, if the 1776-1789 years are included).
Figure 3 Income share received by the top 1%, four countries over two centuries
The equality gained in the US during the Great Leveling slipped away after the 1970s. The rising income gaps were partly due to policy shifts. The US lost its lead in the quantity of mass education, and its gaps in educational achievement have widened relative to other leading countries. Financial deregulation in the 1980s also contributed powerfully to the rise in the top income shares and also to crises and recessions. A regressive pattern of tax cuts allowed more wealth to be inherited rather than earned. These policy shortfalls are, of course, reversible and without any obvious loss in GDP.
American history suggests that inequality is not driven by some fundamental law of capitalist development, but rather by episodic shifts in five basic forces – demography, education policy, trade competition, financial regulation policy, and labor-saving technological change. While some of these forces are clearly exogenous, others – particularly policies regarding education, financial regulation, and inheritance taxation – offer ways to check the rise of inequality while also promoting growth.
Atkinson, A B, T Piketty, and E Saez (2011), “Top Incomes in the Long Run of History,” Journal of Economic Literature 49, 1: 3-71
Lindert, P H, and J G Williamson (2016), Unequal Gains: American Growth and Inequality since 1700, Princeton N.J., Princeton University Press
Maddison, A (2001), The World Economy: A Millennial Perspective, Paris, OECD Development Centre Studies
Piketty, T (2014), Capital in the Twenty-First Century, Cambridge Mass., Belknap Press
Posted by Mark Thoma on Thursday, June 16, 2016 at 12:15 AM in Economics, Income Distribution |
Posted by Mark Thoma on Thursday, June 16, 2016 at 12:06 AM in Economics, Links |
The Pain in Spain Is Easy To Explain: A few weeks back, the New York Times looked at the “mystery” of Spain’s high level of unemployment.
The article highlighted a real debate about the right level of job protection in Spain, and in Europe.
But the headline obviously stuck in my mind. I do not think there should be any significant debate over why Spain continues to have a very high level of unemployment.
Look at employment. It is down well over over 10 percent from its pre-crisis levels. Even with the current recovery, there are over 2.5 million fewer people at work in Spain today than in 2007 (18 million versus 20.7 million workers over age 15 using the harmonized EU data; the national data has a similar change but a slightly higher level)
And domestic demand is also down well over 10 percentage points.
No mystery. If demand in the United States was 10 percent below its 2007 level, rather than roughly 10 percent above its 2007 level, I would certainly hope that there would not be much of a debate on the source of a weak labor market.
Spain did have a rather high level of unemployment back in the 1990s. Yet when demand was strong, folks were pulled into the labor market. Joblessness fell. From 2005 on, Spain’s labor market institutions were consistent with unemployment rates of well below 10 percent.
And—unless the stories European policy makers tell themselves are off—Spain’s labor market institutions should work better today than they did prior to the crisis. It is thus hard to see changes in labor laws since 2005 can explain why there are fewer people working now than in 2005. ...
Posted by Mark Thoma on Wednesday, June 15, 2016 at 02:33 PM in Economics |