- The myth of Europe’s Little Ice Age - Vox EU
- When Your Occupation Is Poverty - Mike Cassidy
- Employment and the Minimum Wage - Econbrowser
- Politicians or Technocrats: Who Splits the Cake? - Carola Binder
- Unreal Keynesians - Paul Krugman
- Privatization Memories - Paul Krugman
- Mild Winters and Crank Economics - Paul Krugman
- The bond-stock conundrum - Moneyness
- More choice can be confusing - Cass Sunstein
- The introduction of air conditioning and interstate mobility? - Tyler Cowen
- Do Air Conditioners Explain the Rise of the South? - Marginal Revolution
Sunday, March 29, 2015
Saturday, March 28, 2015
Unreal Keynesians: Brad DeLong points me to Lars Syll declaring that I am not a “real Keynesian”, because I use equilibrium models and don’t emphasize the instability of expectations. ...
I don’t care whether Hicksian IS-LM is Keynesian in the sense that Keynes himself would have approved of it, and neither should you. What you should ask is whether that approach has proved useful — and whether the critics have something better to offer.
And as I have often argued, these past 6 or 7 years have in fact been a triumph for IS-LM. Those of us using IS-LM made predictions about the quiescence of interest rates and inflation that were ridiculed by many on the right, but have been completely borne out in practice. We also predicted much bigger adverse effects from austerity than usual because of the zero lower bound, and that has also come true. ...
- Hidden Healthcare Horrors - Paul Krugman
- John Maynard Keynes on the Trade Cycle - Brad DeLong
- How long commutes worsen inequality - Mark Thoma
- Deflation: the modern policy bogeyman - Gillian Tett
- Normalizing Monetary Policy: Prospects and Perspectives - Janet Yellen
- Neither Grexit, nor Grexident. Euro and 'drachma' in parallel? - Reuters
- The myth of Europe’s Little Ice Age - Vox EU
- Invest in Vice or Virtue? - Tim Taylor
- Piketty's Three Big Mistakes - Noah Smith
- The Estate Tax Isn’t Destroying Family Farms - David Cay Johnston
- Protecting the public from policy entrepreneurs - mainly macro
- How important is broadband competition? For some, very - Digitopoly
- Microeconomic origins of macroeconomic tail risks - Vox EU
- Uncertainty and morality in a dynamic economics - Fresh economic thinking
- The Importance of the Nonbank Financial Sector - Stanley Fischer
Friday, March 27, 2015
How Idealism, Expressed in Concrete Steps, Can Fight Climate Change: Idealism combined with an intriguing application of economic theory may accomplish what international conferences have not: solve the seemingly intractable problem of global warming.
Despite periodic flurries of optimism, diplomacy has been largely disappointing. ... From an economic standpoint, international efforts until now have foundered on a fundamental “free rider problem.” ... Why not just take a “free ride” and let others do the hard work? ...
But there are other ways to look at this... In a new book, “Climate Shock: The Economic Consequences of a Hotter Planet” (Princeton 2015), Gernot Wagner of the Environmental Defense Fund and Martin L. Weitzman, a Harvard economist, question that assumption. In a proposal that they call the “Copenhagen Theory of Change,” they say that we should be asking people to volunteer to save our climate by taking many small, individual actions. ...
The world is a diverse and complicated place, however. In order to combat global warming, social movements aren’t enough. We also need a concrete framework on a global scale.
In his presidential address before the American Economic Association in Boston in January, William D. Nordhaus of Yale proposed what he calls “climate clubs”..., a group of countries that agree to create incentives for people to reduce carbon emissions, while also erecting tariff barriers on imports from countries that are not members of the club. ...
To actually solve the extremely challenging problem of climate change, we may want to rely on both theories...
Microfoundations from Acemogl, Oxdaglar, and Tahbaz-salehi:
Microeconomic origins of macroeconomic tail risks, by Daron Acemoglu, Asuman Ozdaglar, and Alireza Tahbaz-Salehi: Understanding large economic downturns is one of macroeconomics’ central goals. This column argues that imbalances in input-output linkages can interact with firm-level shocks to produce output fluctuations that are much larger than the underlying shocks. The result can be large cycles arising from small, firm-level shocks. It is thus important to study the determinants of large economic downturns separately. Macroeconomic tail risks may vary significantly even across economies that exhibit otherwise identical behavior for moderate deviations.
Most empirical studies in macroeconomics approximate the deviations of aggregate economic variables (such as the GDP) from their trends with a normal distribution. Besides analytical convenience, such an approximation has been relatively successful in capturing some of the more salient features of the behavior of aggregate variables in the US and other OECD countries.
Macroeconomic tail risks
A number of recent studies (see Fagiolo et al. 2008), however, have documented that the distributions of GDP growth rate in the US and many OECD countries do not follow the normal, or bell-shaped distribution. Large negative or positive growth rates are more common than the normal distribution would suggest. That is to say, the distributions exhibit significantly heavier ‘tails’ relative to that of the normal distribution. Using the normal distribution thus severely underpredicts the frequency of large economic downturns.
This divergence can be seen clearly in Figure 1. Panel (a) depicts the quantile-quantile plot of post-war US GDP growth rate (1947:QI to 2013:QIII) versus the normal distribution after removing the top and bottom 5% of data points. The close correspondence between this dataset and the normal distribution, shown as the dashed red line, suggests that once large deviations are excluded, the normal distribution is indeed a good candidate for approximating GDP fluctuations. Panel (b) shows the same quantile-quantile plot for the entire US post-war sample. It is easy to notice that this graph exhibits sizeable and systematic deviations from the normal line at both ends. Together, these plots suggest that even though the normal distribution does a fairly good job in approximating the nature of fluctuations during most of the sample, it severely underestimates the most consequential fact about business cycle fluctuations, namely, the frequency of large economic contractions.
Figure 1. The quantile-quantile plots of the post-war US GDP growth rate (1947:QI to 2013:QIII) vs. the standard normal distribution (dashed red line)
In recent work (Acemoglu et al. 2014), we have argued that input-output linkages between different firms and sectors within the economy can play a first-order role in determining the depth and frequency of large economic downturns. Building on an earlier framework by Acemoglu et al. (2012), we show that if all firms take roughly symmetric roles as input-suppliers to one another (in what we call a ‘balanced’ economy), not only GDP fluctuations are normally distributed, but also large economic downturns are extremely unlikely. In other words, absent any amplification mechanisms or aggregate shocks, microeconomic firm-level shocks cannot result in macroeconomic tail risks. More interestingly, this result holds regardless of how these firm-level microeconomic shocks are distributed.
Our subsequent analyses, however, establish that the irrelevance of microeconomic shocks for generating macroeconomic tail risks would no longer hold if the economy is ‘unbalanced’, in the sense that some firms play a much more important role as input-suppliers than others. More specifically, we argue that:
The propagation of microeconomic shocks through input-output linkages can significantly increase the likelihood of large economic downturns.
The implications of our theoretical results can be summarized as follows:
First, the frequency of large GDP contractions is highly sensitive to the nature of microeconomic shocks.
In particular, in an unbalanced economy, micro shocks with slightly thicker tails can lead to a significant increase in the likelihood of large economic downturns. This suggests that unbalanced input-output linkages can lead to the build-up of tail risks in the economy.
Second, depending on the distribution of microeconomic shocks, the economy may exhibit significant macroeconomic tail risks even though aggregate fluctuations away from the tails can be well-approximated by a normal distribution.
This outcome is consistent with the pattern of US post-war GDP fluctuations documented in Figure 1.
This observation underscores the importance of studying the determinants of large recessions, as such macroeconomic tail risks may vary significantly even across economies that exhibit otherwise identical behaviour for moderate deviations.
Finally, there is a trade-off between the normality of micro-level shocks and imbalances in the input-output linkages.
An economy with unbalanced input-output linkages subject to normal microeconomic shocks exhibits deep recessions as frequently as a balanced economy subject to heavy-tailed shocks.
Solving the ‘small shocks, large cycles puzzle’
In this sense, our results provide a novel solution to what Bernanke et al. (1996) refer to as the ‘small shocks, large cycles puzzle’ by arguing that the interaction between the underlying input-output structure of the economy and the shape of the distribution of microeconomic shocks is of first-order importance in determining the nature of aggregate fluctuations.
Understanding the underlying causes of large economic downturns such as the Great Depression has been one of the central questions in macroeconomics. Our results suggest that the frequency and depth of such downturns may depend on the interaction between microeconomic firm-level shocks and the nature of input-output linkages across different firms. This is due to the fact that the propagation of shocks over input-output linkages can lead to the concentration of tail risks in the economy. This observation highlights the importance of separately studying the determinants of large economic downturns, as such macroeconomic tail risks may vary significantly even across economies that exhibit otherwise identical behaviour for moderate deviations.
Acemoglu, D, V M Carvalho, A Ozdaglar, and Al Tahbaz-Salehi (2012), “The network origins of aggregate fluctuations”, Econometrica, 80, 1977–2016.
Acemoglu, D, A Ozdaglar, and A Tahbaz-Salehi (2014), “Microeconomic origins of macroeconomic tail risks”, NBER Working Paper No. 20865.
Bernanke, B, M Gertler, and S Gilchrist (1996), “The financial accelerator and the flight to quality”, The Review of Economics and Statistics, 78, 1–15.
Fagiolo, G, M Napoletano, and A Roventini (2008), “Are output growth-rate distributions fat-tailed? Some evidence from OECD countries”, Journal of Applied Econometrics, 23, 639–669.
Conservatives have GNDS (good news derangement syndrome):
Mornings in Blue America, by Paul Krugman, Commentary, NY Times: ...remember how Obamacare was supposed to be a gigantic job killer? Well, in the first year of the Affordable Care Act..., the U.S. economy .,, added 3.3 million jobs — the biggest gain since the 1990s. ...
But recent job growth ... has big political implications — implications so disturbing to many on the right that they are in frantic denial, claiming that the recovery is somehow bogus. Why can’t they handle the good news? The answer actually comes on three levels: Obama Derangement Syndrome, or O.D.S.; Reaganolatry; and the confidence con.
Not much need be said about O.D.S. It is, by now, a fixed idea on the right that this president is both evil and incompetent, that everything touched by the atheist Islamic Marxist Kenyan Democrat — mostly that last item — must go terribly wrong. When good news arrives about the budget, or the economy, or Obamacare ... it must be denied.
At a deeper level, modern conservative ideology utterly depends on the proposition that conservatives, and only they, possess the secret key to prosperity. As a result, you often have politicians on the right making claims like this one, from Senator Rand Paul: “When is the last time in our country we created millions of jobs? It was under Ronald Reagan.”
Actually, if creating “millions of jobs” means adding two million or more jobs in a given year, we’ve done that ... eight times under Bill Clinton, twice under George W. Bush, and three times, so far, under Barack Obama. ...
Which brings us to the last point: the confidence con.
One enduring puzzle of political economy is why business interests so often oppose policies to fight unemployment. After all, boosting the economy with expansionary monetary and fiscal policy is good for profits...
As a number of observers have pointed out, however, for big businesses to admit that government policies can create jobs would be to devalue one of their favorite political arguments — the claim that to achieve prosperity politicians must preserve business confidence, among other things, by refraining from any criticism of what businesspeople do. ...
So, as I said at the beginning, the fact that we’re now seeing mornings in blue America — solid job growth both at the national level and in states that have defied the right’s tax-cutting, deregulatory orthodoxy — is a big problem for conservatives. Although they would never admit it, events have proved their most cherished beliefs wrong.
- Antarctic ice shelves rapidly thinning - EurekAlert!
- As the G.O.P. Promises to Address Inequality, Follow the Money - John Cassidy
- International Migration: the Last Frontier of Globalization - Dallas Fed
- Monetary policy in New Keynesian models is Gesellianc - Nick Rowe
- What Meerkat v Periscope battle means for live mobile streaming - Digitopoly
- George Will on Free Trade and the Price of a Starbucks Latte - PGL
- Wikileaks Releases Trans-Pacific Partnership Investment Chapter - Ken Thomas
- Pompeii on SF Bay? - Econbrowser
- A New Structure for U. S. Federal Debt - John Cochrane
- Interview: Prof. Larry Ball - Acemaxx-Analytics
- Dreaming of 'Normal' Monetary Policy - Clive Crook
- Rollercoasters and rules - mainly macro
Thursday, March 26, 2015
Very long travel day today, so just a few quick posts before heading to the airport. Will post more as I can.
I've made this point several times myself, i.e. that social insurance can promote entrepreneurship, but it's worth making again:
Welfare Makes America More Entrepreneurial: ... Pundits and researchers often note the negative correlation between government spending and entrepreneurship, both within the U.S. and internationally, and conclude that growth requires trimming social welfare programs. Jim Manzi of the National Review, for example, a thoughtful commenter on economic policy, wrote last year that, “we must accept some amount of social dislocation in return for innovation.” But correlations can be misleading. A series of more recent studies challenge the view that larger or more activist government necessarily threatens entrepreneurship. In fact, that may get the relationship precisely backwards.
Entrepreneurs are actually more likely than other Americans to receive public benefits, after accounting for income, as Harvard Business School’s Gareth Olds has documented. And in many cases, expanding benefit programs helps spur new business creation. ...
Take food stamps. ... It seems that expanding the availability of food stamps increased business formation by making it less risky for entrepreneurs to strike out on their own. Simply knowing that they could fall back on food stamps if their venture failed was enough to make them more likely to take risks.
Food stamps are not an isolated case. ...
The mechanism in each case is the same: publicly funded insurance lowers the risk of starting a business, since entrepreneurs needn’t fear financial ruin. ...
Why do developing countries pursue destabilizing, procyclical fiscal policy? This is from Guillermo Vuletin and Leopoldo Avellan at Brookings:
Fiscal policy procyclicality and output forecast errors: Bad luck or bad decisions?: It is well-known that government spending has historically been procyclical in the developing world (Tornell and Lane, 1999; Kaminsky, Reinhart, and Vegh, 2004; Frankel, Vegh, and Vuletin, 2013). Thus, government spending in these regions typically increases during periods of expansion and decreases during periods of recession. Unfortunately, this procyclical fiscal behavior reinforces output fluctuations, exacerbating booms and aggravating busts. Traditional explanations for this undesirable behavior have mostly revolved around the explicit or implicit notion that fiscal procyclicality is the deliberate result of political economy distortions and weak institutions (e.g., policymakers' short-sightedness and political pressure to spend when resources are available in good times, leaving few resources to spend in bad times).
Since the global financial crisis and, more recently, the sudden severe drop in commodity prices, important and frequent revisions in output growth forecasts around the world have become a new norm. This trend, in turn, has triggered heated debates in both policy and academic circles and the media about how governments should handle these frequent reassessments.
As a consequence of this debate, two strands of the fiscal procyclicality literature related to output forecast errors have been increasingly gaining support. While different in origin and nature, both strands put the emphasis (or even blame) on output forecast errors in determining fiscal procyclicality. These strands include:
1. Over-optimism in output forecasts (Frankel, 2011a; Frankel, 2011b; Frankel and Schreger, 2013). ...
2. Real-time data and misinformation literature (Forni and Momigliano, 2004; Golinelli and Momigliano, 2006 and 2008; Bernoth, Hughes Hallett, and Lewis, 2008; Cimadomo, 2012; Croushore and van Norden, 2013). ...
A recent paper by Avellan and Vuletin (2015) takes issue with these views and shows that, in fact, traditional political economy arguments and weak institutions help explain how governments handle unanticipated output fluctuations. ...
Gloomy European Economist, Francesco Saraceno:
The Confidence Witch: ...The confidence fairy seems to have turned into a confidence witch. One more victim of the crisis. But this one will not be missed.
It is not shameful to change opinion. Rather the contrary, it is a sign of intellectual courage. Two years ago, the IMF famously surprised commentators worldwide with a rather substantial U-turn on the impact of austerity. Revised calculations on the size of multipliers led them to acknowledge that they had underestimated the impact of austerity on economic activity.
Even at that time it started with a technical paper. But significantly, that paper was coauthored by Olivier Blanchard, IMF Chief Economist. It then served as the basis for a progress report on Greece, in June 2013, that de facto disavowed the first bailout program arguing that austerity had proven to be self-defeating.
Let us just hope that in the ECB new building communication between the research department and the top guys is more effective than in the old one…
- The Confidence Witch - Gloomy European Economist
- On the Stupidity of Anti-Monetarist Economics - Brad DeLong
- Choosing the Right Policy in Real Time - Liberty Street Economics
- Correlating Social Mobility and Economic Outcomes - Vox EU
- The Rise of Mortgages: Too Much House? - Tim Taylor
- Why do central banks use New Keynesian models? - mainly macro
- I don't think these are "very good points" - Environmental Economics
- Questions for Mark Thoma - askblog
- Interview with Masaaki Shirakawa - Cecchetti & Schoenholtz
- Alienation: the non-issue - Stumbling and Mumbling
- Cancer drug prices rise with no end in sight - Vox EU
- Mechanisms, experiments, and policies - Understanding Society
- Update on Job Polarization - Oregon Office of Economic Analysis
- The ECB save the Eurozone without spending a single euro - Vox EU
- Eurobounce - Paul Krugman
Wednesday, March 25, 2015
Larry Ball tells the Fed to be very patient when it comes to satisfying its mandate to pursue full employment:
Fed Should Push Unemployment Well Below 5%, Paper Says: The Federal Reserve should hold short-term interest rates near zero long enough to drive unemployment well below 5%, even if it means letting inflation exceed the central bank’s 2% target. That’s according to Laurence Ball, economics professor and monetary policy expert at Johns Hopkins University...
Mr. Ball says the Fed could create more jobs by letting the unemployment rate fall lower. It should seek to push the rate “well below 5%, at least temporarily,” he writes. That could help bring some discouraged workers to reenter the labor market, as well as help the long-term unemployed find work and involuntary part-time workers find full-time jobs, he said.
“A likely side effect would be a temporary rise in inflation above the Fed’s target, but that outcome is acceptable,” writes Mr. Ball... U.S. inflation has been undershooting the Fed’s target for nearly three years.
Mr. Ball’s view is not shared by many Fed officials...
Audit the Fed?:
The "Audit" the Fed Crowd, by David Andolfatto: Alex Pollock says that It's High Time to "Audit" the Federal Reserve. ...just the other day, Senator Rand Paul, a leader in "Audit-the-Fed" movement (a significant step down from his father's "End-the-Fed" movement) was making statements like this one:“[An] audit of the Fed will finally allow the American people to know exactly how their money is being spent by Washington.”
Of course, the Fed does not control how money is being spent by Washington. The Fed prints money to buy government securities. It sometimes extends loans against high-grade collateral. Everything you want to know about these purchases and loans is publicly available. ...
Let's be honest here. There is nothing new to discover in further auditing. This movement is motivated by what they perceive to be bad monetary policy. It doesn't even make sense to say we want to "audit" the Fed's policy because the policy is already transparent (which is what permits critics to label it "bad").
There is, of course, nothing wrong with critiquing Fed policy. Indeed, there are many economists working inside the Fed that critique various aspects of Fed policy all the time. And, as we all know, members of the FOMC can hold very different opinions ("hawks" and "doves"). Thoughtful critiques of policy should be welcomed. Policymakers and researchers at the Fed do welcome them.
Moreover, I'm all for full accountability. The Fed should be accountable to the American people--it is, after all, a creation of the American people through their representatives in Congress. But as I have said, the issue here is not about accountability. It is about a group of individuals who want to see their preferred monetary policy adopted. That's fair enough. I just ask that they be honest about their motives. It has nothing to do with audits or accountability.
Paul Krugman continues the discussion on the use of the Keynesian model:
Anti-Keynesian Delusions: I forgot to congratulate Mark Thoma on his tenth blogoversary, so let me do that now. ...
Today Mark includes a link to one of his own columns, a characteristically polite and cool-headed response to the latest salvo from David K. Levine. Brad DeLong has also weighed in, less politely.
I’d like to weigh in with a more general piece of impoliteness, and note a strong empirical regularity in this whole area. Namely, whenever someone steps up to declare that Keynesian economics is logically and empirically flawed, has been proved wrong and refuted, you know what comes next: a series of logical and empirical howlers — crude errors of reasoning, assertions of fact that can be checked and rejected in a minute or two.
Levine doesn’t disappoint. ...
He goes on to explain in detail.
Update: Brad DeLong also comments.
- Economics has an Africa problem? - Chris Blattman
- Liberals, Conservatives, and Jobs - Paul Krugman
- House Budget Committee Plan Cuts Pell Grants - CBPP
- Debunking the Myth of the Job-Stealing Immigrant - NYTimes.com
- A Rant Against the Use of the Word “Bubble” - Brad DeLong
- Currency politics: Understanding the euro - Econbrowser
- Energy Prices and Long-Term Inflation Expectations? - FRB Cleveland
- Hiring Qualified Workers: Is it Really That Hard? -The Conference Board
- The pricing paradox: when diamonds aren’t on tap - Tim Harford
- The Trouble With Tenure - Mike the Mad Biologist
- Discord about econ discourse - longandvariable
- Grading Teachers by the Test - NYTimes.com
- Banning cash - Stumbling and Mumbling
- Zero UK Inflation - mainly macro
- Jumps and diffusions - John Cochrane
- The Entrenchment of Abnormal Dynamics - Brad DeLong
- Dirty Energy Taxes And Clean Energy Innovation - Adam Ozimek
- Competition and R&D: Evidence from biopharma - Vox EU
- Affirmative action for conservatives? - Noahpinion
- Greece, Fruit Juice and Bras - BBC
- Poll Results - IGM Forum
Tuesday, March 24, 2015
I have a new column:
Macro Wars: The Attack of the Anti-Keynesians, by Mark Thoma: The ongoing war between the Keynesians and the anti-Keynesians appears to be heating up again. The catalyst for this round of fighting is The Keynesian Illusion by David K. Levine, which elicited responses such as this and this from Brad DeLong and Nick Rowe.
The debate is about the source of economic fluctuations and the government’s ability to counteract them with monetary and fiscal policy. One of the issues is the use of “old fashioned” Keynesian models – models that have supposedly been rejected by macroeconomists in favor of modern macroeconomic models – to explain and understand the Great Recession and to make monetary and fiscal policy recommendations. As Levine says, “Robert Lucas, Edward Prescott, and Thomas Sargent … rejected Keynesianism because it doesn't work… As it happens we have developed much better theories…”
I believe the use of “old-fashioned” Keynesian models to analyze the Great Recession can be defended. ...
The Assumptions Behind the Federal Reserve’s Choice of 2% per Year Were Erroneous: Focus: ...The decision by the Federal Reserve in the mid-1990s to settle on a 2% per year target inflation rate depended on three facts — or, rather, on three things that were presumed to be facts back in the mid-1990s:
- That the long run Phillips curve was vertical even with an inflation rate averaging 2% per year, so that there was no production or employment cost of such a target.
- That the safe real interest rate would be positive and significant, so that a 2% per year inflation target would not entail disturbingly low levels of nominal interest rates that might lead to instabilities in velocity.
- That shocks to the economy would be small, so that the Federal Reserve would never seek to compensate with an interest-rate reduction in the range of 5% or more.
We now know that all three of these were and are false.
The easiest way to fix this problem would be to revise the Federal Reserve Act — perhaps to add “healthy rate of nominal wage growth” to the list of Federal Reserve monetary policy objectives.
David Hayes and James Stock:
The Real Cost of Coal, NY Times: Congress long ago established a basic principle governing the extraction of coal from public lands by private companies: American taxpayers should be paid fair value for it. They own the coal, after all.... Studies by the Government Accountability Office, the Interior Department’s inspector general and nonprofit research groups have all concluded that taxpayers are being shortchanged.
This is no small matter. In 2013, approximately 40 percent of all domestic coal came from federal lands. ... Headwaters Economics estimates that various reforms to the royalty valuation system would have generated $900 million to $5.6 billion more overall between 2008 and 2012.
This failure by the government to collect fair value for taxpayer coal is made more troubling by the climate-change implications of burning this fossil fuel. ... The price for taxpayer-owned coal should reflect, in some measure, the added costs associated with the impacts of greenhouse gas emissions. ...
Industry is sure to oppose this, even though coal is the planet’s most carbon-intensive energy source. Others will argue that an across-the-board carbon tax is a more efficient way to account for climate impacts. With no near-term prospects for such legislation, however, the Interior Department should set a royalty that provides fair value to taxpayers by addressing the climate costs of burning coal. ...
- Mortgaging the Future? - FRBSF
- The "Audit" the Fed Crowd - MacroMania
- Internet Media and the Fall of GigaOm - Brad DeLong
- Charlatans, Cranks, and Cooling - Paul Krugman
- Raise Fed Rates Now? - Gloomy European Economist
- A Simple Guide to "Secular Stagnation" - Cecchetti & Schoenholtz
- The Loneliness of the Not-Crazy Conservative - Paul Krugman
- Monetary Policy Lessons and the Way Ahead - Stanley Fischer
- US university degrees: High cost, high reward - Vox EU
- Why are unions so focused on fighting trade deals? - Brookings
- Combining Models for Forecasting and Policy Analysis - Liberty Street
- Tax Credit Certificates to End the Greek Euro-Stalemate - EconoMonitor
- Buyer's liquidity vs seller's liquidity - Nick Rowe
- Temporary Assistance for Needy Families - NBER
- Insincere apologies - Stumbling and Mumbling
- The decline in community banks - Mark Thoma
- Will More of the Same Last? - Bloomberg View
- Where Now For Greece And The Eurozone? - Social Europe
Monday, March 23, 2015
'Congressional Budget Plans Get Two-Thirds of Cuts From Programs for People With Low or Moderate Incomes'
The true goal of Republican's "deficit fetishism":
Congressional Budget Plans Get Two-Thirds of Cuts From Programs for People With Low or Moderate Incomes, by Richard Kogan and Isaac Shapiro, CBPP: The budgets adopted on March 19 by the House Budget Committee and the Senate Budget Committee each cut more than $3 trillion over ten years (2016-2025) from programs that serve people of limited means. These deep reductions amount to 69 percent of the cuts to non-defense spending in both the House and Senate plans.
Each budget plan derives more than two-thirds of its non-defense budget cuts from programs for people with low or modest incomes even though these programs constitute less than one-quarter of federal program costs. Moreover, spending on these programs is already scheduled to decline as a share of the economy between now and 2025.
The bipartisan deficit reduction plan that Alan Simpson and Erskine Bowles (co-chairs of the National Commission on Federal Policy) issued in 2010 adhered to the basic principle that deficit reduction should not increase poverty or widen inequality. The new Congressional plans chart a radically different course, imposing their most severe cuts on people on the lower rungs of the economic ladder. ...
This Snookered Isle, by Paul Krugman, Commentary, NY Times: The 2016 election is still 19 mind-numbing, soul-killing months away. There is, however, another important election in just six weeks, as Britain goes to the polls. And many of the same issues are on the table.
Unfortunately, economic discourse in Britain is dominated by a misleading fixation on budget deficits. Worse, this bogus narrative has infected supposedly objective reporting; media organizations routinely present as fact propositions that are contentious if not just plain wrong.
Needless to say, Britain isn’t the only place where things like this happen. A few years ago, at the height of our own deficit fetishism, the American news media showed some of the same vices. ... Reporters would drop all pretense of neutrality and cheer on proposals for entitlement cuts.
In the United States, however, we seem to have gotten past that. Britain hasn’t.
The narrative I’m talking about goes like this: In the years before the financial crisis, the British government borrowed irresponsibly... As a result, by 2010 Britain was at imminent risk of a Greek-style crisis; austerity policies, slashing spending in particular, were essential. And this turn to austerity is vindicated by Britain’s low borrowing costs, coupled with the fact that the economy, after several rough years, is now growing quite quickly.
Simon Wren-Lewis of Oxford University has dubbed this narrative “mediamacro.” As his coinage suggests, this is what you hear all the time on TV and read in British newspapers, presented not as the view of one side of the political debate but as simple fact.
Yet none of it is true. ...
Given all this, you might wonder how mediamacro gained such a hold on British discourse. Don’t blame economists. ... This media orthodoxy has become entrenched despite, not because of, what serious economists had to say.
Still, you can say the same of Bowles-Simpsonism in the United States... It was all about posturing, about influential people believing that pontificating about the need to make sacrifices — or, actually, for other people to make sacrifices — is how you sound wise and serious. ...
As I said, in the United States we have mainly gotten past that, for a variety of reasons — among them, I suspect, the rise of analytical journalism, in places like The Times’s The Upshot. But Britain hasn’t; an election that should be about real problems will, all too likely, be dominated by mediamacro fantasies.
I don't think Robert Stavins is happy about a story challenging his credibility and reputation:
When Reasonable Policy Discussions Become Unreasonable Personal Attacks: Recently I was reminded of the controversy that erupted late in 2014 about remarks made by the distinguished health economist, Jonathan Gruber... Professor Gruber, one of the country’s leading experts on health policy, had played an important role in the construction of the Obama administration’s Patient Protection and Affordable Care Act, subsequently derided by its political opponents as “Obamacare.”
A brief but intense political controversy and media feeding-frenzy erupted when videos surfaced in which Professor Gruber – largely in a series of academic seminars and conferences – explained how the Act was crafted and marketed in ways that would make it easier to develop political support. For example, he noted that insurance companies were taxed instead of patients, fundamentally the same thing economically, but vastly more palatable politically. He went on to note that this was possible because of “the lack of economic understanding of the American voter.” His key point was that the program’s “lack of transparency is a huge political advantage.” Is that a controversial or even unique observation?
A Truism of Political Economy
Any economist who has worked on the development or analysis of public policy – in areas ranging from health care policy to environmental policy to financial regulation – recognizes the truth of the key insight Gruber was communicating to his audiences. It is inevitably in the interests of the advocates of a policy to make the policy’s benefits transparent and to make its costs vague, even unobservable; just as it is in the interests of the opponents of a policy to make that policy’s benefits obscure and its costs as clear as the light of day.
The specific construction of hundreds of public policies are explained by this truism. ...
So, the central lesson Professor Gruber was offering is hardly controversial... He doesn’t need me to defend him, but he was unfairly demonized, simply because people disagreed with him politically regarding the merits of the public policy he had helped develop and support.
Unfortunately, I was reminded of this recently when I found myself subject to attempted demonization, because someone did not agree with a policy I supported. What happened to me is trivial compared with what Professor Gruber has gone through, but it prompts me to write about it today. ...
A young and – I’m sure – well-intentioned climate activist and journalist, writing in the Huffington Post, implied that my assessment in the New York Times of the Washington political debates regarding Keystone XL and my support for Harvard’s divestment policy, are because “Stavins has done consulting work for Chevron, Exelon, Duke Energy and the Western States Petroleum Association.”
The author of the Huffington Post piece selected those three companies and one trade association from a list of 92 “Outside Activities” that I voluntarily provide as a means of public disclosure. The author chose not to note that the vast majority of my outside engagements are with universities, think tanks, environmental advocacy NGOs, foundations, the U.S. Environmental Protection Agency, other federal agencies and departments, international organizations, and environment ministries around the world (not to mention a set of Major League Baseball teams, but that’s another story altogether). ...
It is nothing less than absurd – and, frankly, quite insulting – for someone to suggest that my views on divestment and my New York Times quote on the politics of Keystone XL are somehow due to my having worked with an oil company, a trade association, and two electric utilities. This was an unfortunate move to question my credibility and damage my reputation in a misguided attempt to demonize me, rather than engage in reasonable discussion and debate. Unfortunately, most of those who have read the activist/journalist’s original commentary and have possibly repeated his claims to others will not see the response you have just read.
This is surely nothing compared with what Professor Gruber has gone through, but it has certainly increased my empathy for him, as well as my admiration.
- Fed moves the markets - Econbrowser
- Mid-Atlantic Currencies - Paul Krugman
- A politician’s age and policy - Vox EU
- Currency wars rebound on the Fed - Gavyn Davies
- Asymmetric home bias and the transfer problem - Nick Rowe
- Why College Isn’t (and Shouldn’t Have to be) for everyone - Robert Reich
- Central Banks Without Rules Like Doctors Without Checklists - John Taylor
Sunday, March 22, 2015
Thomas Piketty on a theme I've been hammering lately, student debt is too damn high!:
Student Loan Debt Is the Enemy of Meritocracy in the US: ...the amount of household debt and even more recently of student debt in the U.S. is something that is really troublesome and it reflects the very large rise in tuition in the U.S. a very large inequality in access to education. I think if we really want to promote more equal opportunity and redistribute chances in access to education we should do something about student debt. And it's not possible to have such a large group of the population entering the labor force with such a big debt behind them. This exemplifies a particular problem with inequality in the United States, which is very high inequality and access to higher education. So in other countries in the developed world you don't have such massive student debt because you have more public support to higher education. I think the plan that was proposed earlier this year in 2015 by President Obama to increase public funding to public universities and community college is exactly justified.
This is really the key for higher growth in the future and also for a more equitable growth..., you have the official discourse about meritocracy, equal opportunity and mobility, and then you have the reality. And the gap between the two can be quite troublesome. So this is like you have a problem like this and there's a lot of hypocrisy about meritocracy in every country, not only in the U.S., but there is evidence suggesting that this has become particularly extreme in the United States. ... So this is a situation that is very troublesome and should rank very highly in the policy agenda in the future in the U.S.
Controlling the past: In his novel 1984 George Orwell wrote: “Who controls the past controls the future: who controls the present controls the past.” We are not quite in this Orwellian world yet, which means attempts to rewrite history can at least be contested. A few days ago the UK Prime Minister in Brussels said this:
“When I first came here as prime minister five years ago, Britain and Greece were virtually in the same boat, we had similar sized budget deficits. The reason we are in a different position is we took long-term difficult decisions and we had all of the hard work and effort of the British people. I am determined we do not go backwards.”
In other words if only those lazy Greeks had taken the difficult decisions that the UK took, they too could be like the UK today.
This is such as travesty of the truth, as well as a huge insult to the Greek people, that it is difficult to know where to begin. ...
The real travesty ... is in the implication that somehow Greece failed to take the ‘difficult decisions’ that the UK took. ‘Difficult decisions’ is code for austerity. A good measure of austerity is the underlying primary balance. According to the OECD, the UK underlying primary balance was -7% in 2009, and it fell to -3.5% in 2014: a fiscal contraction worth 3.5% of GDP. In Greece it was -12.1% in 2009, and was turned into a surplus of 7.6% by 2014: a fiscal contraction worth 19.7% of GDP! So Greece had far more austerity, which is of course why Greek GDP has fallen by 25% over the same period. A far more accurate statement would be that the UK started taking the same ‘difficult decisions’ as Greece took, albeit in a much milder form, but realized the folly of this and stopped. Greece did not get that choice. And I have not even mentioned the small matter of being in or out of a currency union. ...
Saturday, March 21, 2015
From Vox EU:
The new authoritarianism, by Sergei Guriev, Daniel Treisman, Vox EU: The changing dictatorships Dictatorships are not what they used to be. The totalitarian tyrants of the past – such as Hitler, Stalin, Mao, or Pol Pot – employed terror, indoctrination, and isolation to monopolize power. Although less ideological, many 20th-century military regimes also relied on mass violence to intimidate dissidents. Pinochet’s agents, for instance, are thought to have tortured and killed tens of thousands of Chileans (Roht-Arriaza 2005).
However, in recent decades new types of authoritarianism have emerged that seem better adapted to a world of open borders, global media, and knowledge-based economies. From the Peru of Alberto Fujimori to the Hungary of Viktor Orban, illiberal regimes have managed to consolidate power without fencing off their countries or resorting to mass murder. Some bloody military regimes and totalitarian states remain – such as Syria and North Korea – but the balance has shifted.
The new autocracies often simulate democracy, holding elections that the incumbents almost always win, bribing and censoring the private press rather than abolishing it, and replacing comprehensive political ideologies with an amorphous resentment of the West (Gandhi 2008, Levitsky and Way 2010). Their leaders often enjoy genuine popularity – at least after eliminating any plausible rivals. State propaganda aims not to ‘engineer human souls’ but to boost the dictator’s ratings. Political opponents are harassed and defamed, charged with fabricated crimes, and encouraged to emigrate, rather than being murdered en masse.
Dictatorships and information
In a recent paper, we argue that the distinctive feature of such new dictatorships is a preoccupation with information (Guriev and Treisman 2015). Although they do use violence at times, they maintain power less by terrorizing victims than by manipulating beliefs. Of course, surveillance and propaganda were important to the old-style dictatorships, too. But violence came first. “Words are fine things, but muskets are even better,” Mussolini quipped. Compare that to the confession of Fujimori’s security chief, Vladimir Montesinos: “The addiction to information is like an addiction to drugs”. Killing members of the elite struck Montesinos as foolish: “Remember why Pinochet had his problems. We will not be so clumsy” (McMillan and Zoido 2004).
We study the logic of a dictatorship in which the leader survives by manipulating information. Our key assumption is that citizens care about effective government and economic prosperity; first and foremost, they want to select a competent rather than incompetent ruler. However, the general public does not know the competence of the ruler; only the dictator himself and members of an ‘informed elite’ observe this directly. Ordinary citizens make what inferences they can, based on their living standards – which depend in part on the leader’s competence – and on messages sent by the state and independent media. The latter carry reports on the leader’s quality sent by the informed elite. If a sufficient number of citizens come to believe their ruler is incompetent, they revolt and overthrow him.
The challenge for an incompetent dictator is, then, to fool the public into thinking he is competent. He chooses from among a repertoire of tools – propaganda, repression of protests, co-optation of the elite, and censorship of their messages. All such tools cost money, which must come from taxing the citizens, depressing their living standards, and indirectly lowering their estimate of the dictator’s competence. Hence the trade-off.
Certain findings emerge from the logic of this game.
- First, we show how modern autocracies can survive while employing relatively little violence against the public.
Repression is not necessary if mass beliefs can be manipulated sufficiently. Dictators win a confidence game rather than an armed combat. Indeed, since in our model repression is only used if equilibria based on non-violent methods no longer exist, violence can signal to opposition forces that the regime is vulnerable.
- Second, since members of the informed elite must coordinate among themselves on whether to sell out to the regime, two alternative equilibria often exist under identical circumstances – one based on a co-opted elite, the other based on a censored private media.
Since both bribing the elite and censoring the media are ways of preventing the sending of embarrassing messages, they serve as substitutes. Propaganda, by contrast, complements all the other tools.
Propaganda and a leader’s competency
Why does anyone believe such propaganda? Given the dictator’s obvious incentive to lie, this is a perennial puzzle of authoritarian regimes. We offer an answer. We think of propaganda as consisting of claims by the ruler that he is competent. Of course, genuinely competent rulers also make such claims. However, backing them up with convincing evidence is costlier for the incompetent dictators – who have to manufacture such evidence – than for their competent counterparts, who can simply reveal their true characteristics. Since faking the evidence is costly, incompetent dictators sometimes choose to spend their resources on other things. It follows that the public, observing credible claims that the ruler is competent, rationally increases its estimate that he really is.
Moreover, if incompetent dictators survive, they may over time acquire a reputation for competence, as a result of Bayesian updating by the citizens. Such reputations can withstand temporary economic downturns if these are not too large. This helps to explain why some clearly inept authoritarian leaders nevertheless hold on to power – and even popularity – for extended periods (cf. Hugo Chavez). While a major economic crisis results in their overthrow, more gradual deteriorations may fail to tarnish their reputations significantly.
A final implication is that regimes that focus on censorship and propaganda may boost relative spending on these as the economy crashes. As Turkey’s growth rate fell from 7.8% in 2010 to 0.8% in 2012, the number of journalists in jail increased from four to 49. Declines in press freedom were also witnessed after the Global Crisis in countries such as Hungary and Russia. Conversely, although this may be changing now, in both Singapore and China during the recent decades of rapid growth, the regime’s information control strategy shifted from one of more overt intimidation to one that often used economic incentives and legal penalties to encourage self-censorship (Esarey 2005, Rodan 1998).
The kind of information-based dictatorship we identify is more compatible with a modernized setting than with the rural underpinnings of totalitarianism in Asia or the traditional societies in which monarchs retain legitimacy. Yet, modernization ultimately undermines the informational equilibria on which such dictators rely. As education and information spread to broader segments of the population, it becomes harder to control how this informed elite communicates with the masses. This may be a key mechanism explaining the long-noted tendency for richer countries to open up politically.
Esarey, A (2005), “Cornering the market: state strategies for controlling China's commercial media”, Asian Perspective 29(4): 37-83.
Gandhi, J (2008), Political Institutions under Dictatorship, New York: Cambridge University Press.
Guriev, S and D Treisman (2015), “How Modern Dictators Survive: Cooptation, Censorship, Propaganda, and Repression”, CEPR Discussion Paper, DP10454.
Levitsky, S, and L A Way (2010), Competitive authoritarianism: hybrid regimes after the cold war, New York: Cambridge University Press.
McMillan, J, and P Zoido (2004), “How to subvert democracy: Montesinos in Peru”, Journal of Economic Perspectives 18(4): 69-92.
Rodan, G (1998), “The Internet and political control in Singapore”, Political Science Quarterly 113(1): 63-89.
Roht-Arriaza, N (2005), The Pinochet Effect: Transnational Justice in the Age of Human Rights, Philadelphia: University of Pennsylvania Press.
- The Age of Frozen Certainties - Paul Krugman
- Publicly shaming delinquent taxpayers - Vox EU
- Currency politics, debt politics - Econbrowser
- Sticky wages both sides of the Atlantic - mainly macro
- The Systematic Component of Monetary Policy in SVARs - FRB
- Digging into Capital and Labor Income Shares - Tim Taylor
- Why Is British Economic Discourse So Bad? - Paul Krugman
- One of the Pitfalls of School Choice - Mike the Mad Biologist
- The Costs of Deflation - John Cochrane
- The productivity policy paradox - Chris Dillow
Friday, March 20, 2015
We’re Frighteningly in the Dark About Student Debt, NY Times: ...The ... United States government ... has a portfolio of roughly $1 trillion in student loans, many of which appear to be troubled. The Education Department, which oversees the portfolio, is ... neither analyzing the portfolio adequately nor allowing other agencies to do so.
These loans are no trivial matter... Student loans are now the second-largest source of consumer debt in the United States, surpassed only by home mortgages. In a major reversal, they now constitute a larger portion of household debt than credit cards or car loans. ...
The frightening reality, however, is that we are remarkably ignorant about student debt..., we can’t quantify the risks that student debt places on individual households and the economy as a whole. ...
Over at the Federal Reserve and consumer bureau, as well as outside the government, highly trained analysts are eager for data. A sensible solution would be for the Education Department to put it in their hands and let them get to work.
An additional longer-term solution is to move the loan program out of the Education Department entirely — either into an existing agency that has the statistical expertise or a new student-loan authority. ...
An even better solution would be to stop saddling students with so much debt.
Why do Republicans use "magic asterisks" in their budget proposals?:
Trillion Dollar Fraudsters, by Paul Krugman, Commentary, NY Times: By now it’s a Republican Party tradition: Every year the party produces a budget that allegedly slashes deficits, but which turns out to contain a trillion-dollar “magic asterisk” — a line that promises huge spending cuts and/or revenue increases, but without explaining where the money is supposed to come from.
But the just-released budgets from the House and Senate majorities break new ground. Each contains not one but two trillion-dollar magic asterisks: one on spending, one on revenue. And that’s actually an understatement. If either budget were to become law, it would leave the federal government several trillion dollars deeper in debt than claimed, and that’s just in the first decade. ...
The modern G.O.P.’s raw fiscal dishonesty is something new in American politics... And the question we should ask is why.
One answer you sometimes hear is that what Republicans really believe is that tax cuts for the rich would generate a huge boom and a surge in revenue, but they’re afraid that the public won’t find such claims credible. So magic asterisks are really stand-ins for their belief in the magic of supply-side economics, a belief that remains intact even though proponents in that doctrine have been wrong about everything for decades.
But I’m partial to a more cynical explanation. Think about what these budgets would do if you ignore the mysterious trillions in unspecified spending cuts and revenue enhancements. What you’re left with is huge transfers of income from the poor and the working class, who would see severe benefit cuts, to the rich, who would see big tax cuts. And the simplest way to understand these budgets is surely to suppose that they are intended to do what they would, in fact, actually do: make the rich richer and ordinary families poorer.
But this is, of course, not a policy direction the public would support... So the budgets must be sold as courageous efforts to eliminate deficits and pay down debt — which means that they must include trillions in imaginary, unexplained savings.
Does this mean that all those politicians declaiming about the evils of budget deficits and their determination to end the scourge of debt were never sincere? Yes, it does.
Look, I know that it’s hard to keep up the outrage after so many years of fiscal fraudulence. But please try. We’re looking at an enormous, destructive con job, and you should be very, very angry.
- Marshallian Cross Diagrams and Uses before Marshall - Economic Quarterly
- If Economists Were Right, You Would Have a Raise by Now - Brad DeLong
- Piketty responds to his critics - Interpreter
- Altering brain chemistry makes us more sensitive to inequality - EurekAlert
- Deciphering the fall and rise in the net capital share - Brookings
- China's Consumption Transition - Tim Taylor
- A Strong Dollar Forces the Fed To Rethink Its Next Move - The New Yorker
- Does the Fed Have the Legal Authority... - Miles Kimball
- Fantasy macroeconomics - mainly macro
- On believing Osborne - Stumbling and Mumbling
- Labour and finance in the aftermath of the Great Recession - Vox EU
- Facts About Women and the Minimum Wage - Department of Labor
- ‘The Age of Cryptocurrency,’ by Vigna and Casey - NYTimes.com
- Interview with Guillermo Ortiz - Cecchetti & Schoenholtz
Thursday, March 19, 2015
In case you missed this post by Dietz Vollrath when it was in the daily links:
Great Britain and Laissez Not-so-Faire Economics: I recently finished State, Economy, and the Great Divergence by Peer Vries. It’s a comparison of the activities of the state in Great Britain and China in the period running up to and including the Industrial Revolution, roughly 1650-1850.
Vries critiques the standard view on the role of the state and the divergence between these two places, encapsulating that view in the following:
In the Smithian interpretation of British economic history, that fits in quite neatly with the Whig interpretation of Britains overall history, the primacy of Britain and its industrialization are by and large regarded as the culmination of a long process in which Britains economy increasingly became characterized by free and fair competition and in which government increasingly tended to behave according to Smithian logics.
For those who endorse them, the predicament of imperial China, that it did not industrialize, has always been quite easy to explain. They only need to refer to the fact that China was characterized by some kind of oriental despotism. This notion has a long pedigree whose beginnings can be traced back at least to Marco Polo.
The alternative that Vries proposes is that China is far more “Smithian” than Great Britain in this period, in the sense that it operated a very hands-off government that mainly served to provide some subsistence insurance to its population, while Great Britain had a relatively large, intrusive, and active government managing its economy and actively interfering in the process of industrialization. ...
Vries then spends a good portion of the rest of the book laying out the evidence on government expenditures, taxes, employment, and transfer payments to support the idea that Great Britain had a much more intrusive state than China in this period. ...
Drawing on the excellent War, Wine, and Taxes by John Nye, Vries also talks about the attitude of Britain towards free trade... Compared to Britain, China was much closer to a free trade nation, declining to interfere or promote imports or exports actively. ...
Mercantilism, as practiced throughout this period in Great Britain, was not simply a fascination with collecting gold. The British government actively looked to strengthen manufacturing (of imported raw materials) and used military and naval power to open markets with that purpose in mind. To do this it taxed heavily, borrowed heavily, and spent heavily.
What to make of this? There is no necessary link between strict laissez-faire policies and growth. The first industrial nation in the world was anything but laissez-faire, and it intervened far more deeply into its economy than China, which functioned in some sense as the idealized “night watchman” state of Adam Smith. There is little to no evidence that government “just getting out of the way” leads to development. The interventions Great Britain did make certainly resulted in massive monopoly rents to small groups of people at times. So let’s not go overboard in the other direction and conclude that massive state interventions are necessary or optimal. But it is valuable knowing just how un-laissez-faire Britain was during this period.
Why did Britain take off even with all this government interference? Vries doesn’t say this explicitly, but I think his answer is partly that large-scale industrialization has big fixed costs. I want two things before I undertake big fixed investments: a large market and low risk. The British government used the high taxes to fund a military that could ensure large markets around the world, and could ensure that those markets remained open so I could earn enough to pay off my fixed cost. That military (directly or by proxy) could also actively ensure that other markets did not develop competitive industries, again ensuring that I could earn enough to make the fixed costs worth it. Without the market size and low risk, maybe British capitalists are not willing to create the large-scale industries that drove the IR. In that sense, the large size of government was necessary to the industrialization of Britain.
From a (much longer) interview of Larry Summers and Edmund Phelps:
... Q: What do you feel is the relationship between capitalism and conflicts (such as the Arab Spring)?
[Prof. Larry H. Summers] It’s very tempting to suggest that terrorism is caused by poverty. I hate terrorism, and I hate poverty, but my reading of the evidence suggests that they are less closely tied together than many suppose.
Those on the planes on 9/11 were highly educated and had cosmopolitan, international experiences. Most of the studies of terrorism find that it has more to do with disillusionment on the part of those who do not feel themselves fully part of progress at moments when rapid progress is underway- rather than it coming from people who are simply frustrated at being poor. The phrase, “revolution of rising expectations…” is often historically apt.
Europe was flourishing in an economic sense, in June 1914, and it was at war by August of that year. There are plenty of good arguments for economic growth, and for markets, but I think it’s somewhat naïve immediate and direct linkages with terrorism!
As my Harvard colleague Steven Pinker has emphasized, deaths due to violence have been on a long-term downward trend for thousands of years, hundreds of years, and for the last several decades. While the causes are complex, the greater sense of human enlightenment, empathy and connection that is present in the modern world, have to be an important part of the story – and that is surely related to what capitalism has brought.
... Q: What is the future of economics as a discipline?
[Edmund Phelps] Economics is in a tremendous crisis... especially since it doesn't know it's in a crisis.
This may sound funny... but it didn't damage me (personally). I spent most of my career trying to put people back into economics! The day I won the Nobel prize, I was asked at a press-conference to encapsulate my life's research in one sentence. I said, "...in my work, I've tried to put the people back into economic theory..." Some of my earliest work looks at a farmer considering new seeds and fertilizers... contemplating whether or not he can take the risk of trying any of these new things.... and whether he should adopt them. The answer depends on his educational background.... his willingness to bear some uncertainty... and so forth. Later on, when I was working on unemployment and inflation- I asked myself... What would I do if I was a company? I realized I would be worried about what other companies were doing about their wages! In the process of increasing their wages, to the extent that they are, I must increase mine too in anticipation. I then introduced wage-expectations and price-expectations which were not talked about before. Later on, around 2000- I started talking about the visions of entrepreneurs... those are real life people who have visions! People who from any walk of life can have an idea.... A truly modern economy is all about ideas and people!
Economics has contributed to the march away from these principles by reducing economies to 'stochastic steady-state models' in which prices are the entire interest. Prices, in these models, 'vibrate' in some way. I find this incredible.... This thinking began seeping into the financial sector so then the banks started importing French mathematicians to work out how to price various assets as if anyone could possibly know what these assets are worth? We live in an uncertain world... not just a vibrating one! Economics will (and should) always have a scientific side... but it has to remember that no piece of evidence is ever decisive on its own... we have to understand that our subject is human creativity. That will be a very different kind of science from what we have had before. There hardly is any science of creativity yet- yet alone a science of individual or societal creativity which understands the interactions of people- that's the next giant-step.
- Modern and Postmodern Recessions - Paul Krugman
- Home Prices Decline at Record Pace in China - NYTimes.com
- What are the macroeconomic effects of asset purchases? - Vox EU
- Great Britain and Laissez Not-so-Faire Economics - Growth Economics
- Measuring health care - MIT News
- The Rent Hypothesis - Evan Soltas
- The Intangible Corporation - Justin Fox
- Short Term Implications of the House Budget - Econbrowser
- Definitely off the gold standard - Edge of the American West
- 'John and Maynard’s Excellent Adventure' - Brad DeLong
- Grexit, from Threat to Promise - EconoSpeak
- Randomness is Lumpy: Pareidolia - Tim Taylor
- Hawk, Doves, and Canaries - Moneyness
- Eurozone QE: features and bugs - longandvariable
Wednesday, March 18, 2015
Yellen Strikes a Dovish Tone, by Tim Duy: The FOMC concluded its two-day meeting today, and the results were largely as I had anticipated. The Fed took note of the recent data, downgrading the pace of activity from "solid" to "moderated." They continue to expect inflation weakness to be transitory. The risks to the outlook are balanced. And "patient" was dropped; April is still off the table for a rate hike, but data dependence rules from that point on.
Growth, inflation and unemployment forecasts all came down. Especially important was the decrease in longer-run unemployment projections. The Fed's estimates of NAIRU are falling, something almost impossible to avoid given the stickiness of wage growth in the face of falling unemployment. The forecast changes yielded a downward revision to the Fed's interest rate projections. In addition, the strong dollar was clearly on the Fed's mind. Federal Reserve Chair Janet Yellen often referred to the dollar and its impact on growth in the press conference, much more than I expected. I think they are probably happy the dollar took a hit today. On net, I think this from last week stood up well:
...assuming the Federal Reserve takes sufficient note of the rising dollar, and its impact on inflation, by lowering the expected path of short term interest rates. And perhaps this is exactly what is revealed in next week's Summary of Economic Projections. Look for the possibility next week that the Fed is both hawkish - by opening the door for a June hike - and dovish - by lowering the median rate projections in the dot plot.
Note that the Fed is capitulating here. The distance between the bond market and the Fed rate expectations has been something of a conundrum for policymakers. But it is now clear the bond market is not moving toward the Fed; the Fed is moving toward the bond market. Going forward, they still believe that their rate forecast is accommodative. Based on the new estimate of NAIRU and New York Federal Reserve President William Dudley's recent estimate of the equilibrium rate, they are correct:
But if you assume a lower equilibrium interest rate, the Fed's rate forecast has more downside to it if they wish to remain accommodative:
For what it's worth, this is what San Fransisco Federal Reserve President John Williams' research suggests about the current equilibrium rate:
Is June really on the table? Regarding the timing of the first rate hike, the FOMC had this to say:
The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
Yellen was pushed to quantify "reasonably confident" during the press conference, but she declined to give a mechanical answer. Actual inflation, the path of the labor market, wage growth, and measures of inflation expectations were all fair game in the assessment. She did say wage growth was not a precondition for rate hike. I tend to think that unemployment dropping to 5% or an acceleration in wage growth is sufficient to prompt the first rate hike, either of which could still happen by the time of the June meeting. That said, at this point, the inflation and growth data point to a later lift-off, and weighting the expectations for a rate hike at a later date seems appropriate at this juncture.
Bottom Line: Yellen does it again - she moves the Fed both closer to and further from the first rate hike of this cycle. By moving toward the markets on the path of rate hikes, the Fed acknowledges that they are eager to let this recovery run on. Moreover, they proved that they are in fact data dependent by moving policy in the direction of the data. Overall, Yellen has managed the transition away from what the Fed came to see as excessive forward guidance just about as well as could be expected.
The Fed has lost its patience (i.e. it dropped the word patience from its forward guidance even as it increases its estimate of the amount of slack in the economy by lowering its estimate of the natural rate of unemployment -- that gives it more reason to remain patient -- though the statement does say "This change in the forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range"):
Press Release, Release Date: March 18, 2015, For immediate release, FOMC: Information received since the Federal Open Market Committee met in January suggests that economic growth has moderated somewhat. Labor market conditions have improved further, with strong job gains and a lower unemployment rate. A range of labor market indicators suggests that underutilization of labor resources continues to diminish. Household spending is rising moderately; declines in energy prices have boosted household purchasing power. Business fixed investment is advancing, while the recovery in the housing sector remains slow and export growth has weakened. Inflation has declined further below the Committee's longer-run objective, largely reflecting declines in energy prices. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of energy price declines and other factors dissipate. The Committee continues to monitor inflation developments closely.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Consistent with its previous statement, the Committee judges that an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. This change in the forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Jeffrey M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams.
Simon Wren-Lewis (he says this is "For macroeconomists"):
Is the Walrasian Auctioneer microfounded?: I found this broadside against Keynesian economics by David K. Levine interesting. It is clear at the end that he is child of the New Classical revolution. Before this revolution he was far from ignorant of Keynesian ideas. He adds: “Knowledge of Keynesianism and Keynesian models is even deeper for the great Nobel Prize winners who pioneered modern macroeconomics - a macroeconomics with people who buy and sell things, who save and invest - Robert Lucas, Edward Prescott, and Thomas Sargent among others. They also grew up with Keynesian theory as orthodoxy - more so than I. And we rejected Keynesianism because it doesn't work not because of some aesthetic sense that the theory is insufficiently elegant.”
The idea is familiar: New Classical economists do things properly, by founding their analysis in the microeconomics of individual production, savings and investment decisions.  It is no surprise therefore that many of today’s exponents of this tradition view their endeavour as a natural extension of the Walrasian General Equilibrium approach associated with Arrow, Debreu and McKenzie. But there is one agent in that tradition that is as far from microfoundations as you can get: the Walrasian auctioneer. It is this auctioneer, and not people, who typically sets prices. ...
Now your basic New Keynesian model contains a huge number of things that remain unrealistic or are just absent. However I have always found it extraordinary that some New Classical economists declare such models as lacking firm microfoundations, when these models at least try to make up for one area where RBC models lack any microfoundations at all, which is price setting. A clear case of the pot calling the kettle black! I have never understood why New Keynesians can be so defensive about their modelling of price setting. Their response every time should be ‘well at least it’s better than assuming an intertemporal auctioneer’. ...
As to the last sentence in the quote from Levine above, I have talked before about the assertion that Keynesian economics did not work, and the implication that RBC models work better. He does not talk about central banks, or monetary policy. If he had, he would have to explain why most of the people working for them seem to believe that New Keynesian type models are helpful in their job of managing the economy. Perhaps these things are not mentioned because it is so much easier to stay living in the 1980s, in those glorious days (for some) when it appeared as if Keynesian economics had been defeated for good.
Another article about robots:
Estimating the impact of robots on productivity and employment, by Guy Michaels and Georg Graetz, Vox EU: Robots' capacity for autonomous movement and their ability to perform an expanding set of tasks have captured writers' imaginations for almost a century. Recently robots have emerged from the pages of science fiction novels into the real world, and discussions of their possible economic effects have become ubiquitous (see e.g. The Economist 2014, Brynjolfsson and McAfee 2014). But a serious problem inhibits these discussions – there has so far been no systematic empirical analysis of the effects that robots are already having.
In recent work we begin to remedy this problem (Graetz and Michaels 2015). We compile a new dataset spanning 14 industries (mainly manufacturing industries, but also agriculture and utilities) in 17 developed countries (including European countries, Australia, South Korea, and the US). Uniquely, our dataset includes a measure of the use of industrial robots employed in each industry, in each of these countries, and how it has changed from 1993-2007. We obtain information on other economic performance indicators from the EUKLEMS database (Timmer et al. 2007).
We find that industrial robots increase labor productivity, total factor productivity, and wages. At the same time, while industrial robots had no significant effect on total hours worked, there is some evidence that they reduced the employment of low skilled workers, and to a lesser extent also middle skilled workers. ...
Our findings on the aggregate impact of robots are interesting given recent concerns in the macroeconomic literature that productivity gains from technology in general may have slowed down. Gordon (2012, 2014) expresses a particularly pessimistic view, and there are broader worries about secular macroeconomic stagnation (Summers 2014, Krugman 2014), although others remain more optimistic (Brynjolfsson and McAfee 2014). We expect that the beneficial effects of robots will extend into the future as new robot capabilities are developed, and service robots come of age. Our findings do come with a note of caution: there is some evidence of diminishing marginal returns to robot use, or congestion effects, so robots are not a panacea for growth.
Although we do not find evidence of a negative impact of robots on aggregate employment, we see a more nuanced picture when we break down employment (and the wage bill) by skill groups. Robots appear to reduce the hours and the wage bill shares of low-skilled workers, and to a lesser extent also of middle skilled workers. They have no significant effect on the employment of high-skilled workers. This pattern differs from the effect that recent work has found for ICT, which seems to benefit high-skilled workers at the expense of middle-skilled workers (Autor 2014, Michaels et al. 2014).
In further results, we find that industrial robots increased total factor productivity and wages. At the same time, we find no significant effect of these robots on the labor share.
In summary, we find that industrial robots made significant contributions to labor productivity and aggregate growth, and also increased wages and total factor productivity. While fears that robots destroy jobs at a large scale have not materialized, we find some evidence that robots reduced low- and middle-skilled workers’ employment.
I was at this conference as well. This paper was very well received (it has been difficult to find evidence that news generates business cycles, in part because it's been difficult to find a "clean" shock):
Arezki, Ramey, and Sheng on news shocks: I attended the NBER EFG (economic fluctuations and growth) meeting a few weeks ago, and saw a very nice paper by Rabah Arezki, Valerie Ramey, and Liugang Sheng, "News Shocks in Open Economies: Evidence from Giant Oil Discoveries" (There were a lot of nice papers, but this one is more bloggable.)
They look at what happens to economies that discover they have a lot of oil. ... An oil discovery is a well identified "news shock."
Standard productivity shocks are a bit nebulous, and alter two things at once: they give greater productivity and hence incentive to work today and also news about more income in the future.
An oil discovery is well publicized. It incentivizes a small investment in oil drilling, but mostly is pure news of an income flow in the future. It does not affect overall labor productivity or other changes to preferences or technology.
Rabah,Valerie, and Liugang then construct a straightforward macro model of such an event. ...[describes model and results]...
Valerie, presenting the paper, was a bit discouraged. This "news shock" doesn't generate a pattern that looks like standard recessions, because GDP and employment go in the opposite direction.
I am much more encouraged. Here are macroeconomies behaving exactly as they should, in response to a shock where for once we really know what the shock is. And in response to a shock with a nice dynamic pattern, which we also really understand.
My comment was something to the effect of "this paper is much more important than you think. You match the dynamic response of economies to this large and very well identified shock with a standard, transparent and intuitive neoclassical model. Here's a list of some of the ingredients you didn't need: Sticky prices, sticky wages, money, monetary policy, (i.e. interest rates that respond via a policy rule to output and inflation or zero bounds that stop them from doing so), home bias, segmented financial markets, credit constraints, liquidity constraints, hand-to-mouth consumers, financial intermediation, liquidity spirals, fire sales, leverage, sudden stops, hot money, collateral constraints, incomplete markets, idiosyncratic risks, strange preferences including habits, nonexpected utility, ambiguity aversion, and so forth, behavioral biases, nonexpected utility, or rare disasters. If those ingredients are really there, they ought to matter for explaining the response to your shocks too. After all, there is only one economic structure, which is hit by many shocks. So your paper calls into question just how many of those ingredients are really there at all."
Thomas Phillipon, whose previous paper had a pretty masterful collection of a lot of those ingredients, quickly pointed out my overstatement. One needs not need every ingredient to understand every shock. Constraint variables are inequalities. A positive news shock may not cause credit constraints etc. to bind, while a negative shock may reveal them.
Good point. And really, the proof is in the pudding. If those ingredients are not necessary, then I should produce a model without them that produces events like 2008. But we've been debating the ingredients and shock necessary to explain 1932 for 82 years, so that approach, though correct, might take a while.
In the meantime, we can still cheer successful simple models and well identified shocks on the few occasions that they appear and fit data so nicely. Note to graduate students, this paper is a really nice example to follow for its integration of clear theory and excellent empirical work.
- Sources of Slow Recovery - Paul Krugman
- Self-Justifying Swedes - Paul Krugman
- Sleepless Over Seattle - Evan Soltas
- No, Don’t ‘Audit the Fed’ - Ernie Patrikis - WSJ
- Patching Up the Social Safety Net - NYTimes.com
- Safety Net Lifted 39 Million Americans out of Poverty - CBPP
- Exchange Rates and Balance Sheet Effects - Paul Krugman
- Radical macro lessons from the Great Recession - mainly macro
- A Trade Deal Liberals Can Live With - Noah Smith
- Ethics as culture - Understanding Society
- Data Movement Mushrooms - Tim Taylor
- Man v machine (again) - Tim Harford
- Media deference - Stumbling and Mumbling
- Spanish Company Tops Corporate Welfare List - David Cay Johnston
- Designing Private Cities, Open to All - NYTimes.com
- BoJ inflation promise comes unstuck - FT.com
- Some Implications of the Dollar’s Rise - Econbrowser
- One professor's crusade against in-class texting - Stephen Ziliak
Tuesday, March 17, 2015
Kathleen Geier on "The rigged economics of race in America, in five studies":
Inequality in Black and White: For the past few years, Americans have been engaged in two big public conversations about inequality. One is about economic insecurity (stagnant wages, wealth concentration, Occupy Wall Street). The other is about racial inequality (incarceration rates, police brutality, disenfranchisement). Often, these two discussions are kept separate, but they are closely intertwined.
The economic trends that have battered Americans have been exceptionally hard on African Americans, making them perhaps the truest face of economic inequality. Much of the progress in the workplace and in schools that African Americans have made since the 1964 Civil Rights Act has now ground to a halt, or worse. Blacks are nearly three times as likely to be poor as whites and more than twice as likely to be unemployed. Compared to whites with the same qualifications, blacks remain less likely to be hired and more likely to earn lower wages, to be charged higher prices for consumer goods, to be excluded from housing in white neighborhoods, and to be denied mortgages or steered into the subprime mortgage market. Racial disparities in household wealth haven’t just persisted; they’ve increased. What’s more, the reasons for these divergences aren’t always outwardly apparent or easy to understand. ...
Some of you may be interested in this:
Causal Inference in Social Science An elementary introduction, by Hal R. Varian, Google, Inc, Jan 2015, Revised: March 7, 2015: Abstract This is a short and very elementary introduction to causal inference in social science applications targeted to machine learners. I illustrate the techniques described with examples chosen from the economics and marketing literature.
I get tired of saying that tax cuts don't pay for themselves, so I'll turn it over to Josh Barro:
Tax Cuts Still Don’t Pay for Themselves: Last week, I wrote about the new tax plan from Senator Marco Rubio and Senator Mike Lee... It calls for big tax credits for middle-income families with children, corporate tax cuts and complete elimination of the capital gains tax — and as a result would cost trillions of dollars in revenue over a decade.
Or would it? The Tax Foundation released a report last week arguing the Rubio-Lee plan would generate so much business investment that, within a decade, federal tax receipts would be higher than if taxes hadn’t been cut at all. ...
I discussed the Tax Foundation report with 10 public finance economists ranging across the ideological spectrum, all of whom said its estimates of the economic effects of tax cuts were too aggressive. “This would not pass muster as an undergraduate’s model at a top university,” said Laurence Kotlikoff, a Boston University professor whom the Tax Foundation specifically encouraged me to call. ...
[T]he House adopted a rule in January that requires “dynamic scoring” of tax bills... In principle, dynamic scoring is fine. Tax policy really does affect the economy... But as the Tax Foundation report shows, dynamic scoring can be misused: You can get essentially any answer you want ... by changing the assumptions...
The crucial thing to watch, in the guts of future C.B.O. reports that rely on dynamic scoring, will be whether the new dynamic assumptions are more reasonable than zero — or whether, like the Tax Foundation assumptions, they take us farther away from accuracy, and make unsupportable promises of tax cuts paying for themselves.
- Why Oh Why Cannot We Have Better Economists? - Brad DeLong
- St. Augustine and Secular Stagnation - Paul Krugman
- Confidence, aggregate demand, and the business cycle - Vox EU
- The State of the Art in Causal Inference - Andrew Gelman
- The “iEverything” and the Redistributional... - Robert Reich
- The cloudy future of peer-to-peer lending - Cecchetti & Schoenholtz
- The Impact of Financial Crises in Advanced Countries - Romer and Romer
- David Levine's accidental Monetarism - Nick Rowe
- Duffie and Stein on Libor - John Cochrane
- Genetic Origins of Economic Development - Growth Economics
- Marking-Beliefs-to-Market Should Be a Collective Endeavor... - Brad DeLong
- Negative rates and financial intermediation - Jérémie Cohen-Setton
- A quick remark on the Apple Watch Edition (the $10k one) - Digitopoly
- Happy Anniversary Chair Yellen! - Center for Financial Economics
- Surprise monetary tightening expands shadow banking - Vox EU
- Zero Interest Rates - Brad DeLong
- Can Draghi Do it Alone? - Biagio Bossone
Monday, March 16, 2015
Survival of the 'socially fit':
Wealth and power may have played a stronger role than 'survival of the fittest': ... In a study led by scientists from Arizona State University, the University of Cambridge, University of Tartu and Estonian Biocentre, and published March 13 in an online issue of the journal Genome Research, researchers discovered a dramatic decline in genetic diversity in male lineages four to eight thousand years ago -- likely the result of the accumulation of material wealth, while in contrast, female genetic diversity was on the rise. This male-specific decline occurred during the mid- to late-Neolithic period.
Melissa Wilson Sayres, a leading author and assistant professor with ASU's School of Life Sciences, said, "Instead of 'survival of the fittest' in biological sense, the accumulation of wealth and power may have increased the reproductive success of a limited number of 'socially fit' males and their sons." ...
What was Netanyahu's real purpose?:
Israel’s Gilded Age, by Paul Krugman, Commentary, NY Times: Why did Prime Minister Benjamin Netanyahu of Israel feel the need to wag the dog in Washington? For that was, of course, what he was doing in his anti-Iran speech to Congress. If you’re seriously trying to affect American foreign policy, you don’t insult the president and so obviously align yourself with his political opposition. No, the real purpose of that speech was to distract the Israeli electorate with saber-rattling bombast, to shift its attention away from the economic discontent that, polls suggest, may well boot Mr. Netanyahu from office in Tuesday’s election.
But wait: Why are Israelis discontented? After all, Israel’s economy has performed well by the usual measures. ...
Israel has experienced a dramatic widening of income disparities. Key measures of inequality have soared; Israel is now right up there with America as one of the most unequal societies in the advanced world. And Israel’s experience shows that this matters, that extreme inequality has a corrosive effect on social and political life. ...
Still, why is Israeli inequality a political issue? Because it didn’t have to be this extreme.
You might think that Israeli inequality is a natural outcome of a high-tech economy that generates strong demand for skilled labor — or, perhaps, reflects the importance of minority populations with low incomes, namely Arabs and ultrareligious Jews. It turns out, however, that those high poverty rates largely reflect policy choices: Israel does less to lift people out of poverty than any other advanced country — yes, even less than the United States.
Meanwhile, Israel’s oligarchs owe their position not to innovation and entrepreneurship but to their families’ success in gaining control of businesses that the government privatized in the 1980s — and they arguably retain that position partly by having undue influence over government policy, combined with control of major banks.
In short, the political economy of the promised land is now characterized by harshness at the bottom and at least soft corruption at the top. And many Israelis see Mr. Netanyahu as part of the problem. He’s an advocate of free-market policies; he has a Chris Christie-like penchant for living large at taxpayers’ expense, while clumsily pretending otherwise.
So Mr. Netanyahu tried to change the subject from internal inequality to external threats, a tactic those who remember the Bush years should find completely familiar. We’ll find out on Tuesday whether he succeeded.
The End of "Patient" and Questions for Yellen, by Tim Duy: FOMC meeting with week, with a subsequent press conference with Fed Chair Janet Yellen. Remember to clear your calendar for this Wednesday. It is widely expected that the Fed will drop the word “patient” from its statement. Too many FOMC participants want the opportunity to debate a rate hike in June, and thus “patient” needs to go. The Fed will not want this to imply that a rate hike is guaranteed at the June meeting, so look for language emphasizing the data-dependent nature of future policy. This will also be stressed in the press conference.
Of interest too will be the Fed’s assessment of economic conditions since the last FOMC meeting. On net, the data has been lackluster – expect for the employment data, of course. The latter, however, is of the highest importance to the Fed. I anticipate that they will view the rest of the data as largely noise against the steadily improving pace of underlying activity as indicated by employment data. That said, I would expect some mention of recent softness in the opening paragraph of the statement.
I don’t think the Fed will alter its general conviction that low readings on inflation are largely temporary. They may even cite improvement in market-based measures of inflation compensation to suggest they were right not to panic at the last FOMC meeting. I am also watching for how they describe the international environment. I would not expect explicit mention of the dollar, but maybe we will see a coded reference. Note that in her recent testimony, Yellen said:
But core PCE inflation has also slowed since last summer, in part reflecting declines in the prices of many imported items and perhaps also some pass-through of lower energy costs into core consumer prices.
Stronger dollar means lower prices of imported items.
The press conference will be the highlight of the meeting. Presumably, Yellen will continue to build the case for a rate hike. Since the foundation of that case rests on the improvement in labor markets and the subsequent impact on inflationary pressures, it is reasonable to ask:
On a scale of zero to ten, with ten being most confident, how confident is the Committee that inflation will rise toward target on the basis on low – and expected lower - unemployment?
Considering that low wage growth suggests it is too early to abandon Yellen’s previous conviction that unemployment is not the best measure of labor market tightness, we should consider:
Is faster wage growth a precondition to raising interest rates?
I expect the answer would be “no, wages are a lagging indicator.” The Federal Reserve seems to believe that policy will still remain very accommodative even after the first rate hike. We should ask for a metric to quantify the level of accommodation:
What is the current equilibrium level of interest rates? Where do you see the equilibrium level of interest rates in one year?
A related question regards the interpretation of the yield curve:
Do you consider low interest long-term interest rates to be indicative of loose monetary conditions, or a signal that the Federal Reserve needs to temper its expectations of the likely path of interest rates as indicated in the “dot plot”?
Relatedly, differential monetary policy is supporting capital inflows, depressing US interest rates and strengthening the dollar. This dynamic ignited a debate of what it means for the economy and how the Fed should or should not respond. Thus:
The dollar is appreciating at the fastest rate in many years. Is the appreciating dollar a drag on the US economy, or is any negative impact offset by the positive demand impact of looser monetary policy abroad? How much will the dollar need to appreciate before it impacts the direction of monetary policy?
Given that the Fed seems determined to raise interest rates, we should probably be considering some form of the following as a standard question:
Consider the next six months. Which is greater - the risk of moving too quickly to normalize policy, or the risk of delay? Please explain, with specific reference to both risks.
Finally, a couple of communications questions. First, the Fed is signaling that they do not intend to raise rates on a preset, clearly communicated path like the last hike cycle. Hence, we should not expect “patient” to be replaced with “measured.” But it seems like the FOMC is too contentious to expect them to shift from no hike one meeting to 25bp the next, then back to none – or maybe 50bp. So, let’s ask Yellen to explain the plan:
There appears to be an effort on the part of the FOMC to convince financial markets that rate hikes, when they begin, will not be on a pre-set path. Given the need for consensus building on the FOMC, how can you credibly commit to renegotiate the direction of monetary policy at each FOMC meeting? How do you communicate the likely direction of monetary policy between meetings?
Finally, as we move closer to policy normalization, the Fed should be rethinking the “dot plot,” which was initially conceived to show the Fed was committed to a sustained period of low rates. Given that the dot-plot appears to be fairly hawkish relative to market expectations, it may not be an appropriate signal in a period of rising interest rates. Time for a change? But is the Fed considering a change, and when will we see it? This leads me to:
Cleveland Federal Reserve President Loretta Mester has suggested revising the Summary of Economic Projections to explicitly link the forecasts of individual participants with their “dots” in the interest rate projections. Do you agree that this would be helpful in describing participants’ reaction functions? When will this or any other revisions to the Summary of Economic Projections be considered?
Bottom Line: By dropping "patient" the Fed will be taking another step toward the first rate hike of this cycle. But how long do we need to wait until that first hike? That depends on the data, and we will be listening for signals as to how, or how not, the Fed is being impacted by recent data aside from the positive readings on the labor market.
- Health-Care Deductibles Climbing Out of Reach - WSJ
- The U.S. Needs Two More Federal Reserve Banks - WSJ
- The Power of the Swing Voter - Leisure of the Theory Class
- How MIT Transformed Economics - Economic Principals
- Fed Will Bark Before It Bites - WSJ
- U.S. oil supply update - Econbrowser
- Social blah blah blah - Frances Woolley
- The self-centred bias - Stumbling and Mumbling
- Implications of private debt for euro exit - Vox EU
- The Federal Reserve is ready for ‘lift off’ on interest rates - FT.com
- The Right Path but the Wrong Direction - Letting the Data Speak
- Improving skilled performance - Understanding Society
Sunday, March 15, 2015
In case this was missed when it was in the daily links. This is from Tim Taylor:
When a Summer Job Could Pay the Tuition: When I was graduating from high school in 1978, a number of my friends went to the hometown University of Minnesota. At the time, it was possible to pay tuition and a substantial share of living expenses with the earnings from a full-time job in the summer and a part-time job during the school year. Given the trends in costs of higher education and the path of the minimum wage since then, this is no longer true.
Here's an illustration of the point with the University of Minnesota, with its current enrollment of about 41,000 undergraduates,as an example. (The figure is taken from a presentation by David Ernst, who among his other responsibilities is Executive Director of the Open Textbook Network, which provides links to about 170 free and open-license textbooks in a variety of subjects.)
Just to put this in perspective, say that a full-time student works 40 hours per week for 12 weeks of summer vacation, and then 10 hours per week for 30 weeks during the school year--while taking a break during vacations and finals. That schedule would total 780 hours per year. Back in the late 1970s, even being paid the minimum wage, this work schedule easily covered tuition. By the early 1990s, it no longer covered tuition. According to the OECD, the average annual hours worked by a US worker was 1,788 in 2013. At the minimum wage, that's now just enough to cover tuition--although it doesn't leave much space for being a full-time student.