Thursday, August 21, 2014

Inflation, Fear of Inflation, and Public Debt

Posting the video mysteriously causes formatting problems for the blog, so took it down, replaced with link to video:

Chris Sims: Inflation, Fear of Inflation, and Public Debt

    Posted by on Thursday, August 21, 2014 at 01:18 AM in Budget Deficit, Economics, Inflation, Video | Permalink  Comments (1)


    Links for 8-21-14

      Posted by on Thursday, August 21, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (4)


      Wednesday, August 20, 2014

      Understanding Social Mobility

        Posted by on Wednesday, August 20, 2014 at 08:41 AM in Economics, Income Distribution | Permalink  Comments (11)


        'What Does the Fed Have to do with Social Security? Plenty'

        Dean Baker:

        What does the Fed have to do with Social Security? Plenty: Most of the people who closely follow the Federal Reserve Board’s decisions on monetary policy are investors trying to get a jump on any moves that will affect financial markets. Very few of the people involved in the debate over the future of Social Security pay much attention to the Fed. That’s unfortunate because the connections are much more direct than is generally recognized. ...

          Posted by on Wednesday, August 20, 2014 at 04:46 AM in Economics, Monetary Policy, Social Security | Permalink  Comments (55)


          Have Blog, Will Travel

          I am here today:

          5th Lindau Meeting on Economic Sciences
          19-23 August 2014, Lindau, Germany
          Lindau Meeting of the Laureates of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel
          The 5th Lindau Meeting on Economic Sciences will provide an open exchange of economic expertise and inspire cross-cultural and inter-generational encounters among economists from all over the world. From 19 to 23 August, the participating 18 Nobel Laureates and 460 young scientists will have plenty of opportunity for an intensive exchange of ideas.
          The meeting will open on 20 August with a keynote address by the German Chancellor Angela Merkel, and will also feature “a panoramic view on the situation and prospects in Latin America” by Mario Vargas Llosa, the 2010 Nobel Laureate in Literature. The scientific programme will address central fields of the discipline, ranging from econometrics, game theory, and neo-classical growth theory to mechanism design and systemic risk measurement. The overarching question “How useful is economics – how is economics useful?” will also be subject of the meeting’s closing panel debate on Mainau Island on Saturday, 23 August.
          Programme
          The scientific programme of the 5th Lindau Meeting on Economic Sciences will comprise lectures and panel discussions (accessible for all registered meeting participants and guests), as well as discussion sessions and master classes (both accessible only for participating Nobel Laureates and young scientists).
          A detailed version of the programme including all lecture titles of the participating laureates with links to their abstracts is available in the Lindau Mediatheque. Please find a PDF version of the printed programme here. To get an overview of the meeting schedule you can also download the programme structure.
          Participating Laureates
          18 Laureates will attend the 5th Lindau Meeting on Economic Sciences. Among 17 economists there will also be Mario Vargas Llosa, Nobel Laureate in Literature in 2010, participating in the meeting. Please find further information on the Laureates' profiles including their CVs in the Lindau Mediatheque.
          Robert Aumann
          Peter DiamondLars Peter Hansen
          Finn Kydland
          Eric Maskin
          Daniel McFadden
          Robert C. Merton
          James Mirrlees
          Roger Myerson
          Edmund Phelps
          Edward Prescott
          Alvin Roth 
          Reinhard Selten
          William Sharpe
          Christopher Sims
          Vernon Smith
          Joseph Stiglitz
          Mario Vargas Llosa

          Today's Program:

          Wednesday, 20 August
          8.30 Plenary Lecture Inselhalle Lars Peter Hansen Uncertainty and Valuation
           09.00 Plenary Lecture Inselhalle Alvin E. Roth Repugnant Markets and Prohibited Transactions
          09.30 Plenary Lecture Inselhalle Edmund S. Phelps Bringing Dynamism, Homegrown Innovation and Human Flourishing into Economics
          10.00 Coffee Break
          10.30 Plenary Lecture Inselhalle Christopher A. Sims Inflation, Fear of Inflation, and Public Debt
          11.00 Plenary Lecture Inselhalle Vernon L. Smith Rethinking Market Experiments in the Shadow of Recessions: The Good and the Sometimes Ugly; Propositions on Recessions
          14.00 Opening Ceremony Inselhalle Opening Ceremony
          Angela Merkel Chancellor of the Federal Republic of Germany Master of Ceremony
          16.00 Discussion Lars Peter Hansen Discussion with young scientists
          16.00 Discussion Edmund S. Phelps Discussion with young scientists
          16.00 Alvin E. Roth Discussion with young scientists
          16.00 Discussion Christopher A. Sims Discussion with young scientists
           16.00 Discussion Vernon L. Smith Discussion with young scientists
          17.30 Break
          20.00 Social Function Inselhalle Get-Together

            Posted by on Wednesday, August 20, 2014 at 04:23 AM in Conferences, Economics, Travel | Permalink  Comments (1)


            Links for 8-20-14

              Posted by on Wednesday, August 20, 2014 at 03:33 AM in Economics, Links | Permalink  Comments (63)


              Tuesday, August 19, 2014

              'Very Confused About Cyclical Recovery'

              Brad DeLong tries to make sense of the labor market:

              Over at Equitable Growth: In Which I Make Myself Very Confused About Cyclical Recovery: Will somebody please tell me that I have made a gross arithmetic error in what is below, and can be much more optimistic? ...
              I really do not understand the triumphalism of the very sharp Steve Braun et al. from the CEA...
              So the labor market is, they say, 5/6 of the way back to normal--the current unemployment rate of 6.2% is 3.8%-points down from the peak of 10.0%, and has only 0.8%-point left to go before it hits a pre-crisis NAIRU of 5.4%. When it does, we will attain a "cyclically normal" labor market with a participation rate at 63.4%, 0.5%-points higher than today's 62.9%, and an associated employment-to-population ratio of 60.0%.
              By that metric, we have done 3/4 of the work of cyclical recovery: from a 5.5%-point gap between employment and participation at the trough to a 3.9%-point gap now and a 3.4%-point gap at NAIRU. We will have made 1.7%-points back from the trough on the employment-to-population ratio when cyclical recovery is complete. The permanent damage to employment from the Great Recession Lesser Depression appears to be less than 0.9%-points of participation because there are also ongoing "cohort effects unrelated to aging" that reduce participation.
              Let me stress that this is not senior and not-so-senior White House officials under pressure from political operatives putting as positive a spin on things as they can without actually losing their... No: what I mean to say is this: this is what the CEA's Steven Braun, John Coglianese, Jason Furman, Betsey Stevenson, and Jim Stock actually believe is true about the world--that the labor market is recovering successfully and strongly from the disaster of 2008-9.
              But I look at 25-54. The employment rate is down from 79.9% in 2007 to 76.6% in July 2014--3.3%-points less, compared to 4.0%-point a fall from 63% to 59% over the entire population. The participation rate is down from 80.8% in July 2014 compared to 83.1% for 2007--2.3%-points, compared to the 3.1%-point fall from 66.0% to 62.9% over the entire population.
              A normal NAIRU spread would put the 25-54 employment-to-population ratio at 78.7%, 2.5%-points below the 81.2% cyclically-adjusted 25-54 participation ratio. When cyclical recovery is complete, we would then expect to make back 3.7%-points back from the trough on the 25-54 employment-to-population ratio. So far we have made back only 1.0%-point.
              So which is it? Has hysteresis done 1.8%-points of damage to 25-54 employment or 0.9%-points to total employment? Have we done 3/4 of the work of recovery relative to the proper labor force-trend share benchmark? Or have we done only 1/3 of the work of recovery?
              The 25-54 data and the economy-wide aging trend-adjusted data used by the CEA appear to be telling us very different things both about the cyclical state of the labor market and about the damage done by hysteresis. How to reconcile? Which is right?

                Posted by on Tuesday, August 19, 2014 at 01:42 PM in Economics, Unemployment | Permalink  Comments (78)


                'Irrational Exuberance Meets Secular Stagnation'

                Antonio Fatás:

                Irrational exuberance meets secular stagnation: Robert Shiller warns us in the New York Times about the potential risks of high stock market valuations in the US. According to Shiller "the United States stock market looks very expensive right now". Brad DeLong and Dean Baker disagree with Shiller and argue that stock prices might look higher than historical averages but this could be ok given other changes in the economic environment. ... But there are ... reasons why the historical average might not be relevant...

                  Posted by on Tuesday, August 19, 2014 at 01:42 PM in Economics, Financial System | Permalink  Comments (4)


                  The Agent-Based Method

                  Rajiv Sethi:

                  The Agent-Based Method: It's nice to see some attention being paid to agent-based computational models on economics blogs, but Chris House has managed to misrepresent the methodology so completely that his post is likely to do more harm than good. 

                  In comparing the agent-based method to the more standard dynamic stochastic general equilibrium (DSGE) approach, House begins as follows:

                  Probably the most important distinguishing feature is that, in an ABM, the interactions are governed by rules of behavior that the modeler simply encodes directly into the system individuals who populate the environment.

                  So far so good, although I would not have used the qualifier "simply", since encoded rules can be highly complex. For instance, an ABM that seeks to describe the trading process in an asset market may have multiple participant types (liquidity, information, and high-frequency traders for instance) and some of these may be using extremely sophisticated strategies.

                  How does this approach compare with DSGE models? House argues that the key difference lies in assumptions about rationality and self-interest:

                  People who write down DSGE models don’t do that. Instead, they make assumptions on what people want. They also place assumptions on the constraints people face. Based on the combination of goals and constraints, the behavior is derived. The reason that economists set up their theories this way – by making assumptions about goals and then drawing conclusions about behavior – is that they are following in the central tradition of all of economics, namely that allocations and decisions and choices are guided by self-interest. This goes all the way back to Adam Smith and it’s the organizing philosophy of all economics. Decisions and actions in such an environment are all made with an eye towards achieving some goal or some objective. For consumers this is typically utility maximization – a purely subjective assessment of well-being.  For firms, the objective is typically profit maximization. This is exactly where rationality enters into economics. Rationality means that the “agents” that inhabit an economic system make choices based on their own preferences.

                  This, to say the least, is grossly misleading. The rules encoded in an ABM could easily specify what individuals want and then proceed from there. For instance, we could start from the premise that our high-frequency traders want to maximize profits. They can only do this by submitting orders of various types, the consequences of which will depend on the orders placed by others. Each agent can have a highly sophisticated strategy that maps historical data, including the current order book, into new orders. The strategy can be sensitive to beliefs about the stream of income that will be derived from ownership of the asset over a given horizon, and may also be sensitive to beliefs about the strategies in use by others. Agents can be as sophisticated and forward-looking in their pursuit of self-interest in an ABM as you care to make them; they can even be set up to make choices based on solutions to dynamic programming problems, provided that these are based on private beliefs about the future that change endogenously over time. 

                  What you cannot have in an ABM is the assumption that, from the outset, individual plans are mutually consistent. That is, you cannot simply assume that the economy is tracing out an equilibrium path. The agent-based approach is at heart a model of disequilibrium dynamics, in which the mutual consistency of plans, if it arises at all, has to do so endogenously through a clearly specified adjustment process. This is the key difference between the ABM and DSGE approaches, and it's right there in the acronym of the latter.

                  A typical (though not universal) feature of agent-based models is an evolutionary process, that allows successful strategies to proliferate over time at the expense of less successful ones. Since success itself is frequency dependent---the payoffs to a strategy depend on the prevailing distribution of strategies in the population---we have strong feedback between behavior and environment. Returning to the example of trading, an arbitrage-based strategy may be highly profitable when rare but much less so when prevalent. This rich feedback between environment and behavior, with the distribution of strategies determining the environment faced by each, and the payoffs to each strategy determining changes in their composition, is a fundamental feature of agent-based models. In failing to understand this, House makes claims that are close to being the opposite of the truth: 

                  Ironically, eliminating rational behavior also eliminates an important source of feedback – namely the feedback from the environment to behavior.  This type of two-way feedback is prevalent in economics and it’s why equilibria of economic models are often the solutions to fixed-point mappings. Agents make choices based on the features of the economy.  The features of the economy in turn depend on the choices of the agents. This gives us a circularity which needs to be resolved in standard models. This circularity is cut in the ABMs however since the choice functions do not depend on the environment. This is somewhat ironic since many of the critics of economics stress such feedback loops as important mechanisms.

                  It is absolutely true that dynamics in agent-based models do not require the computation of fixed points, but this is a strength rather than a weakness, and has nothing to do with the absence of feedback effects. These effects arise dynamically in calendar time, not through some mystical process by which coordination is instantaneously achieved and continuously maintained. 

                  It's worth thinking about how the learning literature in macroeconomics, dating back to Marcet and Sargent and substantially advanced by Evans and Honkapohja fits into this schema. Such learning models drop the assumption that beliefs continuously satisfy mutual consistency, and therefore take a small step towards the ABM approach. But it really is a small step, since a great deal of coordination continues to be assumed. For instance, in the canonical learning model, there is a parameter about which learning occurs, and the system is self-referential in that beliefs about the parameter determine its realized value. This allows for the possibility that individuals may hold incorrect beliefs, but limits quite severely---and more importantly, exogenously---the structure of such errors. This is done for understandable reasons of tractability, and allows for analytical solutions and convergence results to be obtained. But there is way too much coordination in beliefs across individuals assumed for this to be considered part of the ABM family.

                  The title of House's post asks (in response to an earlier piece by Mark Buchanan) whether agent-based models really are the future of the discipline. I have argued previously that they are enormously promising, but face one major methodological obstacle that needs to be overcome. This is the problem of quality control: unlike papers in empirical fields (where causal identification is paramount) or in theory (where robustness is key) there is no set of criteria, widely agreed upon, that can allow a referee to determine whether a given set of simulation results provides a deep and generalizable insight into the workings of the economy. One of the most celebrated agent-based models in economics---the Schelling segregation model---is also among the very earliest. Effective and acclaimed recent exemplars are in short supply, though there is certainly research effort at the highest levels pointed in this direction. The claim that such models can displace the equilibrium approach entirely is much too grandiose, but they should be able to find ample space alongside more orthodox approaches in time. 

                  ---

                  The example of interacting trading strategies in this post wasn't pulled out of thin air; market ecology has been a recurrent theme on this blog. In ongoing work with Yeon-Koo Che and Jinwoo Kim, I am exploring the interaction of trading strategies in asset markets, with the goal of addressing some questions about the impact on volatility and welfare of high-frequency trading. We have found the agent-based approach very useful in thinking about these questions, and I'll present some preliminary results at a session on the methodology at the Rethinking Economics conference in New York next month. The event is free and open to the public but seating is limited and registration required. 

                    Posted by on Tuesday, August 19, 2014 at 06:26 AM in Environment, Macroeconomics, Methodology | Permalink  Comments (15)


                    Links for 8-19-14

                      Posted by on Tuesday, August 19, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (66)


                      Monday, August 18, 2014

                      'Understanding the Decline in the Labor Force Participation'

                      [Long, long travel day today, so just a few quick ones before hitting the road.]

                      Steven Braun, John Coglianese, Jason Furman, Betsey Stevenson, and Jim Stock:

                      Understanding the decline in the labour force participation rate in the United States, by Steven Braun, John Coglianese, Jason Furman, Betsey Stevenson, and Jim Stock, Vox EU: The labour force participation rate in the US has fallen dramatically since 2007. This column traces this decline to three main factors: the ageing of the population, cyclical effects from the Great Recession, and an unexplained portion, which might be due to pre-existing trends unrelated to the first two. Of these three, the ageing of the population plays the largest role since it is responsible for half of the decline. Taken together, these factors suggest a roughly stable participation rate in the short-term, followed by a longer-term decline as the baby boomers continue to age. However, policy can play a meaningful role in mitigating this trend. ...

                        Posted by on Monday, August 18, 2014 at 05:03 AM in Economics, Unemployment | Permalink  Comments (76)


                        'Balanced-Budget Fundamentalism'

                        Simon Wren-Lewis:

                        Balanced-budget fundamentalism: Europeans, and particularly the European elite, find popular attitudes to science among many across the Atlantic both amusing and distressing. In Europe we do not have regular attempts to replace evolution with ‘intelligent design’ on school curriculums. Climate change denial is not mainstream politics in Europe as it is in the US (with the possible exception of the UK). Yet Europe, and particularly its governing elite, seems gripped by a belief that is as unscientific and more immediately dangerous. It is a belief that fiscal policy should be tightened in a liquidity trap. In the UK economic growth is currently strong, but that cannot disguise the fact that this has been the slowest recovery from a recession for centuries. Austerity may not be the main cause of that, but it certainly played its part. Yet the government that undertook this austerity, instead of trying to distract attention from its mistake, is planning to do it all over again. Either this is a serious intention, or a ruse to help win an election, but either way it suggests events have not dulled its faith in this doctrine. ...

                          Posted by on Monday, August 18, 2014 at 05:03 AM in Economics, Fiscal Policy | Permalink  Comments (21)


                          'To RMB or not to RMB? Lessons from Currency History'

                          Cecchetti & Schoenholtz:

                          To RMB or not to RMB? Lessons from Currency History: China is the world’s largest trader and (on a purchasing power parity basis) is about to surpass the United States as the world’s largest economy (see chart). China already accounts for about 10% of global trade in goods and services, and over 15% of global economic activity. ...
                          So, as China takes its place as the biggest economy on the globe, will its currency, the renminbi (RMB), become the most widely used international currency as well? Will the RMB supplant the U.S. dollar as the leading reserve currency held by central bankers and others, or as the safe-haven currency in financial crises? ...

                            Posted by on Monday, August 18, 2014 at 05:03 AM in Economics, International Finance | Permalink  Comments (2)


                            Paul Krugman: Why We Fight

                            Why do wars still exist?

                            Why We Fight, y Paul Krugman, Commentary, NY Times: A century has passed since the start of World War I, which many people at the time declared was “the war to end all wars.” Unfortunately, wars just kept happening. And with the headlines from Ukraine getting scarier by the day, this seems like a good time to ask why.
                            Once upon a time wars were fought for fun and profit; when Rome overran Asia Minor or Spain conquered Peru, it was all about the gold and silver. And that kind of thing still happens. ...
                            If you’re a modern, wealthy nation, however, war — even easy, victorious war — doesn’t pay. And this has been true for a long time. ... Modern nations can’t enrich themselves by waging war. Yet wars keep happening. Why?
                            One answer is that leaders may not understand the arithmetic.... It’s only a guess, but it seems likely that Vladimir Putin thought that he could overthrow Ukraine’s government, or at least seize a large chunk of its territory, on the cheap — a bit of deniable aid to the rebels, and it would fall into his lap.
                            And for that matter, remember when the Bush administration predicted that overthrowing Saddam and installing a new government would cost only $50 billion or $60 billion?
                            The larger problem, however, is that governments all too often gain politically from war, even if the war in question makes no sense in terms of national interests. ...
                            And the fact is that nations almost always rally around their leaders in times of war, no matter how foolish the war... Argentina’s junta briefly became extremely popular during the Falklands War. For a time, the “war on terror” took President George W. Bush’s approval to dizzying heights, and Iraq probably won him the 2004 election. True to form, Mr. Putin’s approval ratings have soared since the Ukraine crisis began. ...
                            Most immediately, we have to worry about escalation in Ukraine. All-out war would be hugely against Russia’s interests — but Mr. Putin may feel that letting the rebellion collapse would be an unacceptable loss of face.
                            And if authoritarian regimes without deep legitimacy are tempted to rattle sabers when they can no longer deliver good performance, think about the incentives China’s rulers will face if and when that nation’s economic miracle comes to an end — something many economists believe will happen soon.
                            Starting a war is a very bad idea. But it keeps happening anyway.

                              Posted by on Monday, August 18, 2014 at 12:24 AM in Economics, Politics | Permalink  Comments (83)


                              Links for 8-18-14

                                Posted by on Monday, August 18, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (34)


                                Sunday, August 17, 2014

                                'The Treasury and the Fed are at Loggerheads'

                                Roger Farmer:

                                ...How successful was operation twist at changing the maturity structure of Treasury securities held by the public? ...I break down Treasuries held by the public as a fraction of total debt outstanding. This ... shows that although the Fed switched its holdings from yields of three months to two years to yields in the two to ten year range (Figure 3) this operation was swamped, after November of 2008, by Treasury operations that increased the supply of maturities in the two to ten year range (Figure 4).  The end result was that the public ended up holding more of these two to ten year bonds in 2010 than before the recession hit.
                                Could we have a little coordination here guys?

                                  Posted by on Sunday, August 17, 2014 at 04:35 PM in Economics, Fiscal Policy, Monetary Policy | Permalink  Comments (9)


                                  Links for 8-17-14

                                    Posted by on Sunday, August 17, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (122)


                                    Saturday, August 16, 2014

                                    'The Skills Gap is Most Evident in Retail Trade and Restaurants'

                                    About that skills gap -- this is from Dean Baker:

                                    The Skills Gap is Most Evident in Retail Trade and Restaurants: Floyd Norris has an interesting column comparing the numbers of job openings, hirings, and quits from 2007 with the most recent three months in 2014. The most striking part of the story is that reporting openings are up by 2.1 percent from 2007, while hirings are still down by 7.5 percent. 
                                    While Norris doesn't make this point, some readers may see this disparity as evidence of a skills gap, where workers simply don't have the skills for the jobs that are available. If this is really a skills gap story then it seems that it is showing up most sharply in the retail and restaurant sectors. (Data are available here.) Job openings in the retail sector are up by 14.6 percent from their 2007 level, but hires are down by 0.7 percent. Job opening in the leisure and hospitality sector are up by 17.0 percent, while hiring is down by 7.4 percent.
                                    If the disparity between patterns in job openings and hires is really evidence that workers lack the skills for available jobs then perhaps we need to train more people to be clerks at convenience stores and to wait tables.

                                      Posted by on Saturday, August 16, 2014 at 08:04 AM in Economics, Unemployment | Permalink  Comments (52)


                                      Monopoly Power

                                      Tim Harford:

                                      Monopoly is a bureaucrat’s friend but a democrat’s foe: ...Large companies are all around us. ... Monopolists can sometimes use their scale and cash flow to produce real innovations – the glory years of Bell Labs come to mind. But the ferocious cut and thrust of smaller competitors seems a more reliable way to produce many of the everyday innovations that matter.
                                      That cut and thrust is no longer so cutting or thrusting as once it was. ... That means higher prices and less innovation, but perhaps the game is broader still..., large companies enjoy power as lobbyists. When they are monopolists, the incentive to lobby increases because the gains from convenient new rules and laws accrue solely to them. Monopolies are no friend of a healthy democracy. ...
                                      No policy can guarantee innovation, financial stability, sharper focus on social problems, healthier democracies, higher quality and lower prices. But assertive competition policy would improve our odds, whether through helping consumers to make empowered choices, splitting up large corporations or blocking megamergers. Such structural approaches are more effective than looking over the shoulders of giant corporations and nagging them; they should be a trusted tool of government rather than a last resort.
                                      As human freedoms go, the freedom to take your custom elsewhere is not a grand or noble one – but neither is it one that we should abandon without a fight.

                                        Posted by on Saturday, August 16, 2014 at 08:04 AM in Economics, Market Failure | Permalink  Comments (11)


                                        Links for 8-16-14

                                          Posted by on Saturday, August 16, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (61)


                                          Friday, August 15, 2014

                                          'The Supply-Side Case for Government Redistribution'

                                          Alan Blinder on the inequality Laffer curve (that some of us were writing about in early 2011):

                                          The Supply-Side Case for Government Redistribution, by Alan S. Blinder, Commentary, WSJ: ...Why is high and rising inequality a problem? ... In thinking about the effects of inequality on growth, we should look more at the supply side than the demand side. That's ironic. The clarion call of "supply-side economics" since the 1970s has been to cut taxes on the rich on the hope (not supported by much evidence) that benefits would "trickle down"... But nowadays the best supply-side policies may be those aimed at reducing income inequality. Consider:
                                          Children who grow up poor get inferior K-12 education, and most likely don't go to college. They don't develop their talents as fully as middle- and upper-class kids do. Children who grow up undernourished do not reach their full physical or mental potential... Children who don't have enough access to health care grow up to be less healthy and productive adults. These ... ill-effects of poverty ... aren't limited to poor countries...
                                          The strongest arguments against rampant inequality may nonetheless be political, not economic. ...Americans aren't really created equal. ... Sadly, with our political system so dominated by money, "equal political rights" is a cruel deception. ...
                                          So even if you don't buy the ethical argument for redistribution, and even if you thought 1979 levels of income inequality were just fine, there are good reasons to reconsider the case in 2014. Inequality has risen so much in the past 35 years that it may now be retarding economic growth on the supply side while leaving us with the finest government money can buy.

                                            Posted by on Friday, August 15, 2014 at 08:38 AM in Economics, Income Distribution | Permalink  Comments (32)


                                            'Persistently Below-Target Inflation Rate is a Signal That the U.S. Economy is Not Taking Advantage of all of its Available Resources'

                                            Narayana Kocherlakota, President of the Minneapolis Fed:

                                            ..I’m a member of the Federal Open Market Committee—the FOMC—and, as a monetary policymaker, my discussion will be framed by the goals of monetary policy. Congress has charged the FOMC with making monetary policy so as to promote price stability and maximum employment. I’ll discuss the state of the macroeconomy in terms of these goals.
                                            Let me start with price stability. The FOMC has translated the price stability objective into an inflation rate goal of 2 percent per year. This inflation rate target refers to the personal consumption expenditures, or PCE, price index. ... That rate currently stands at 1.6 percent, which is below the FOMC’s target of 2 percent. In fact, the inflation rate has averaged 1.6 percent since the start of the recession six and a half years ago, and inflation is expected to remain low for some time. For example, the minutes from the June FOMC meeting reveal that the Federal Reserve Board staff outlook is for inflation to remain below 2 percent over the next few years.
                                            In a similar vein, earlier this year, the Congressional Budget Office (CBO) predicted that inflation will not reach 2 percent until 2018—more than 10 years after the beginning of the Great Recession. I agree with this forecast. This means that the FOMC is still a long way from meeting its targeted goal of price stability.
                                            The second FOMC goal is to promote maximum employment. What, then, is the state of U.S. labor markets? The latest unemployment rate was 6.2 percent for July. This number is representative of the significant improvement in labor market conditions that we’ve seen since October 2009, when the unemployment rate was 10 percent. And I expect this number to fall further through the course of this year, to around 5.7 percent. However, this progress in the decline of the unemployment rate masks continued weakness in labor markets.
                                            There are many ways to see this continued weakness. I’ll mention two that I see as especially significant. First, the fraction of people aged 25 to 54—our prime-aged potential workers—who actually have a job is still at a disturbingly low rate. Second, a historically high percentage of workers would like a full-time job, but can only find part-time work. Bottom line: I see labor markets as remaining some way from meeting the FOMC’s goal of full employment.
                                            So I’ve told you that inflation rates will remain low for a number of years and that labor markets are still weak. It is important, I think, to understand the connection between these two phenomena. As I have discussed in greater detail in recent speeches, a persistently below-target inflation rate is a signal that the U.S. economy is not taking advantage of all of its available resources. If demand were sufficiently high to generate 2 percent inflation, the underutilized resources would be put to work. And the most important of those resources is the American people. There are many people in this country who want to work more hours, and our society is deprived of their production. ...

                                              Posted by on Friday, August 15, 2014 at 08:38 AM in Economics, Fed Speeches, Inflation, Monetary Policy, Unemployment | Permalink  Comments (19)


                                              Paul Krugman: The Forever Slump

                                              The risks from tightening policy too soon are much greater than the risks from leaving policy in place too long:

                                              The Forever Slump, by Paul Krugman, Commentary, NY Times: It’s hard to believe, but almost six years have passed since the fall of Lehman Brothers ushered in the worst economic crisis since the 1930s. ... Recovery is far from complete, and the wrong policies could still turn economic weakness into a more or less permanent depression.
                                              In fact, that’s what seems to be happening in Europe as we speak. And the rest of us should learn from Europe’s experience. ...
                                              European officials eagerly embraced now-discredited doctrines that allegedly justified fiscal austerity even in depressed economies (although America has de facto done a lot of austerity, too, thanks to the sequester and cuts at the state and local level). And the European Central Bank, or E.C.B., not only failed to match the Fed’s asset purchases, it actually raised interest rates back in 2011 to head off the imaginary risk of inflation.
                                              The E.C.B. reversed course when Europe slid back into recession, and, as I’ve already mentioned, under Mario Draghi’s leadership, it did a lot to alleviate the European debt crisis. But this wasn’t enough. ...
                                              And now growth has stalled, while inflation has fallen far below the E.C.B.’s target of 2 percent, and prices are actually falling in debtor nations. It’s really a dismal picture. ... Europe will arguably be lucky if all it experiences is one lost decade.
                                              The good news is that things don’t look that dire in America, where job creation seems finally to have picked up and the threat of deflation has receded, at least for now. But all it would take is a few bad shocks and/or policy missteps to send us down the same path.
                                              The good news is that Janet Yellen, the Fed chairwoman, understands the danger; she has made it clear that she would rather take the chance of a temporary rise in the inflation rate than risk hitting the brakes too soon, the way the E.C.B. did in 2011. The bad news is that she and her colleagues are under a lot of pressure to do the wrong thing from [those] who seem to have learned nothing from being wrong year after year, and are still agitating for higher rates.
                                              There’s an old joke about the man who decides to cheer up, because things could be worse — and sure enough, things get worse. That’s more or less what happened to Europe, and we shouldn’t let it happen here.

                                                Posted by on Friday, August 15, 2014 at 12:24 AM in Budget Deficit, Economics, Fiscal Policy, Inflation, Monetary Policy | Permalink  Comments (42)


                                                Links for 8-15-14

                                                  Posted by on Friday, August 15, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (55)


                                                  Thursday, August 14, 2014

                                                  'A Clear Connection Between the Rise in Incomes at the Very Top and Lower Real Wages for Everyone Else'

                                                  Simon Wren-Lewis:

                                                  ...In the US the share of the 1% has increased from about 8% at the end of the 70s to nearly 20% today. If that has had no impact on aggregate GDP but is just a pure redistribution, this means that the average incomes of the 99% are 15% lower as a result. The equivalent 1% numbers for the UK are 6% and 13% (although as the graph shows, that 13% looks like a temporary downward blip from something above 15%), implying a 7.5% decline in the average income of the remaining 99%.
                                                  So there is a clear connection between the rise in incomes at the very top and lower real wages for everyone else. Arguments that try and suggest that any particular CEO’s pay increase does no one any harm may be appealing to a common pool type of logic, and are just as fallacious as arguments that some tax break does not leave anyone else worse off. It is an indication of the scale of the rise in incomes of the 1% over the last few decades that this has had a significant effect on the incomes of the remaining 99%.   

                                                    Posted by on Thursday, August 14, 2014 at 08:25 AM in Economics, Income Distribution | Permalink  Comments (84)


                                                    'Data Mining Can be a Productive Activity'

                                                    Jennifer Castle and David Hendry on data mining

                                                    ‘Data mining’ with more variables than observations: While ‘fool’s gold’ (iron pyrites) can be found by mining, most mining is a productive activity. Similarly, when properly conducted, so-called ‘data mining’ is no exception –despite many claims to the contrary. Early criticisms, such as the review of Tinbergen (1940) by Friedman (1940) for selecting his equations “because they yield high coefficients of correlation”, and by Lovell (1983) and Denton (1985) of data mining based on choosing ‘best fitting’ regressions, were clearly correct. It is also possible to undertake what Gilbert (1986) called ‘strong data mining’, whereby an investigator tries hundreds of empirical estimations, and reports the one she or he ‘prefers’ – even when such results are contradicted by others that were found. As Leamer (1983) expressed the matter: “The econometric art as it is practiced at the computer terminal involves fitting many, perhaps thousands, of statistical models. One or several that the researcher finds pleasing are selected for reporting purposes”. That an activity can be done badly does not entail that all approaches are bad, as stressed by Hoover and Perez (1999), Campos and Ericsson (1999), and Spanos (2000) – driving with your eyes closed is a bad idea, but most car journeys are safe.
                                                    Why is ‘data mining’ needed?
                                                    Econometric models need to handle many complexities if they are to have any hope of approximating the real world. There are many potentially relevant variables, dynamics, outliers, shifts, and non-linearities that characterise the data generating process. All of these must be modelled jointly to build a coherent empirical economic model, necessitating some form of data mining – see the approach described in Castle et al. (2011) and extensively analysed in Hendry and Doornik (2014).
                                                    Any omitted substantive feature will result in erroneous conclusions, as other aspects of the model attempt to proxy the missing information. At first sight, allowing for all these aspects jointly seems intractable, especially with more candidate variables (denoted N) than observations (T denotes the sample size). But help is at hand with the power of a computer. ...[gives technical details]...
                                                    Conclusions
                                                    Appropriately conducted, data mining can be a productive activity even with more candidate variables than observations. Omitting substantively relevant effects leads to mis-specified models, distorting inference, which large initial specifications should mitigate. Automatic model selection algorithms like Autometrics offer a viable approach to tackling more candidate variables than observations, controlling spurious significance.

                                                      Posted by on Thursday, August 14, 2014 at 08:25 AM in Econometrics, Economics | Permalink  Comments (3)


                                                      'Education Alone Is Not the Answer to Income Inequality'

                                                      Robert Kuttner:

                                                      Education Alone Is Not the Answer to Income Inequality and Slow Recovery: Our economy is now five years into an economic recovery, yet the wages of most Americans are flat. ... The top one percent has made off with nearly all of the economy’s gains since 2000.  
                                                      Is there nothing that can be done to improve this picture?
                                                      To hear a lot of economists tell the story, the remedy is mostly education. It’s true that better-educated people command higher earnings. But...
                                                      If everyone in America got a PhD, the job market would not be transformed. Mainly, we’d have a lot of frustrated, over-educated people.
                                                      The current period of widening inequality, after all, is one during which more and more Americans have been going to college. Conversely, the era of broadly distributed prosperity in the three decades after World War II was a time when many in the blue-collar middle class hadn’t graduated from high school.
                                                      I’m not disparaging education—it’s good for both the economy and the society to have a well-educated population. But the sources of equality and prosperity mainly lie elsewhere. ...

                                                        Posted by on Thursday, August 14, 2014 at 08:25 AM in Economics, Income Distribution | Permalink  Comments (21)


                                                        'The Gold Standard and Price Inflation'

                                                        David Andolfatto of the St. Louis Fed:

                                                        The Gold Standard and Price Inflation: Why doesn’t the U.S. return to the gold standard so that the Fed can’t “create money out of thin air”?
                                                        The phrase “create money out of thin air” refers to the Fed’s ability to create money at virtually zero resource cost. It is frequently asserted that such an ability necessarily leads to “too much” price inflation. Under a gold standard, the temptation to overinflate is allegedly absent, that is, gold cannot be “created out of thin air.” It would follow that a return to a gold standard would be the only way to guarantee price-level stability.
                                                        Unfortunately, a gold standard is not a guarantee of price stability. It is simply a promise made “out of thin air” to keep the supply of money anchored to the supply of gold. To consider how tenuous such a promise can be, consider the following example. On April 5, 1933, President Franklin D. Roosevelt ordered all gold coins and certificates of denominations in excess of $100 turned in for other money by May 1 at a set price of $20.67 per ounce. Two months later, a joint resolution of Congress abrogated the gold clauses in many public and private obligations that required the debtor to repay the creditor in gold dollars of the same weight and fineness as those borrowed. In 1934, the government price of gold was increased to $35 per ounce, effectively increasing the dollar value of gold on the Federal Reserve’s balance sheet by almost 70 percent. This action allowed the Federal Reserve to increase the money supply by a corresponding amount and, subsequently, led to significant price inflation.
                                                        This historical example demonstrates that the gold standard is no guarantee of price stability. Moreover, the fact that price inflation in the U.S. has remained low and stable over the past 30 years demonstrates that the gold standard is not necessary for price stability. Price stability evidently depends less on whether money is “created out of thin air” and more on the credibility of the monetary authority to manage the economy’s money supply in a responsible manner.

                                                          Posted by on Thursday, August 14, 2014 at 08:25 AM in Economics, Inflation, Monetary Policy | Permalink  Comments (28)


                                                          Links for 8-14-14

                                                            Posted by on Thursday, August 14, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (31)


                                                            Wednesday, August 13, 2014

                                                            'Cutting Jobless Benefits Did Not Boost Employment'

                                                            It's okay to help people:

                                                            EPI and AEI Agree: Cutting Jobless Benefits Did Not Boost Employment, by Joshua Smith, EPI: Perhaps Hell has not frozen over, but it appears that someone down there may have leaned on the thermostat. That’s right, the Economic Policy Institute and the American Enterprise Institute are in lock-step agreement on an important fiscal policy matter.
                                                            During the Great Recession and its aftermath, the federal government acted to help victims of the severe downturn by funding programs that extended unemployment benefits—to up to 99 weeks in some cases, up from the standard 26 weeks. As the economic recovery continued, weak as it was for many in the working class, many lawmakers on the right began to believe that these extended benefits were a drag on employment—the theory being that government checks reduced the incentive for recipients to find a job, and that cutting off this lifeline would compel unemployed workers to look harder for work and perhaps take jobs they may not have accepted if the benefits had continued. Relying on this premise, Congress allowed the federally-funded Emergency Unemployment Compensation program to lapse last December.
                                                            Now, more than seven months later, data are available to test this idea. Coming from perspectives that diverge greatly along the ideological spectrum, scholars at both AEI and EPI have come to the conclusion that this “bootstraps” theory is incorrect—curtailing jobless benefits did not boost employment. ...

                                                              Posted by on Wednesday, August 13, 2014 at 07:47 AM in Economics, Social Insurance, Unemployment | Permalink  Comments (40)


                                                              'Unemployment Fluctuations are Mainly Driven by Aggregate Demand Shocks'

                                                              Do the facts have a Keynesian bias?:

                                                              Using product- and labour-market tightness to understand unemployment, by Pascal Michaillat and Emmanuel Saez, Vox EU: For the five years from December 2008 to November 2013, the US unemployment rate remained above 7%, peaking at 10% in October 2009. This period of high unemployment is not well understood. Macroeconomists have proposed a number of explanations for the extent and persistence of unemployment during the period, including:

                                                              • High mismatch caused by major shocks to the financial and housing sectors,
                                                              • Low search effort from unemployed workers triggered by long extensions of unemployment insurance benefits, and
                                                              • Low aggregate demand caused by a sudden need to repay debts or pessimism, but no consensus has been reached.

                                                              In our opinion this lack of consensus is due to a gap in macroeconomic theory: we do not have a model that is rich enough to account for the many factors driving unemployment – including aggregate demand – and simple enough to lend itself to pencil-and-paper analysis. ...

                                                              In Michaillat and Saez (2014), we develop a new model of unemployment fluctuations to inspect the mechanisms behind unemployment fluctuations. The model can be seen as an equilibrium version of the Barro-Grossman model. It retains the architecture of the Barro-Grossman model but replaces the disequilibrium framework on the product and labour markets with an equilibrium matching framework. ...

                                                              Through the lens of our simple model, the empirical evidence suggests that price and real wage are somewhat rigid, and that unemployment fluctuations are mainly driven by aggregate demand shocks.

                                                                Posted by on Wednesday, August 13, 2014 at 07:47 AM in Economics, Macroeconomics, Methodology, Unemployment | Permalink  Comments (29)


                                                                Fed Watch: Heading Into Jackson Hole

                                                                Tim Duy:

                                                                Heading Into Jackson Hole, by Tim Duy: The Kansas City Federal Reserve's annual Jackson Hole conference is next week, and all eyes are looking for signs that Fed Chair Janet Yellen will continue to chart a dovish path for monetary policy well into next year. Indeed, the conference title itself - "Re-Evaluating Labor Market Dynamics" - points in that direction, as it emphasizes a topic that is near and dear to Yellen's heart. My expectation is that no hawkish surprises emerge next week. Despite continued improvement in labor markets, Yellen will push the Fed to hold back on aggressively tightening monetary policy. And with inflation still below target, wage growth constrained, and inflation expectations locked down, she holds all the leverage to make that happen.
                                                                Today we received the June JOLTS report, a lagging, previously second-tier report elevated to mythic status by Yellen's interest in the data. The report revealed another gain in job openings, leading to further speculation that labor slack is quickly diminishing:

                                                                JOLTS081214

                                                                Anecdotally, firms are squealing that they can't find qualified workers. Empirically, though, they aren't willing to raise wages. Neil Irwin of the New York Times reports on the trucking industry as a microcosm of the US economy:
                                                                Yet the idea that there is a huge shortage of truck drivers flies in the face of a jobless rate of more than 6 percent, not to mention Economics 101. The most basic of economic theories would suggest that when supply isn’t enough to meet demand, it’s because the price — in this case, truckers’ wages — is too low. Raise wages, and an ample supply of workers should follow.
                                                                But corporate America has become so parsimonious about paying workers outside the executive suite that meaningful wage increases may seem an unacceptable affront. In this environment, it may be easier to say “There is a shortage of skilled workers” than “We aren’t paying our workers enough,” even if, in economic terms, those come down to the same thing.
                                                                The numbers are revealing: Even as trucking companies and their trade association bemoan the driver shortage, truckers — or as the Bureau of Labor Statistics calls them, heavy and tractor-trailer truck drivers — were paid 6 percent less, on average, in 2013 than a decade earlier, adjusted for inflation. It takes a peculiar form of logic to cut pay steadily and then be shocked that fewer people want to do the job.
                                                                A "peculiar form of logic" indeed, but one that appears endemic to US employers nonetheless. Meanwhile, from Business Insider:
                                                                Profit margins are still getting wider.
                                                                "With earnings growth (6.7%) rising at a faster rate than revenue growth (3.1%) in Q2 and in future quarters, companies have continued to discuss cost-cutting initiatives to maintain earnings growth rates and profit margins," said FactSet's John Butters on Friday.
                                                                This comes at a time when profit margins are already at historic highs.
                                                                Ever since the financial crisis, sales growth has been weak. However, corporations have been able to deliver robust earnings growth by fattening profit margins. Much of this has been done by laying off workers and squeezing more productivity out of those on the payroll.
                                                                Margins serve as a line of defense against inflation. In fact, I would imagine that Yellen's ideal world is one in which margins are compressing because stable inflation expectations prevent firms from raising prices while tight labor markets force wage growth higher. A Goldilocks scenario from the Fed's perspective. This is also the scenario that is most likely to foster the tension in the FOMC as Fed's hawks argue for immaculate inflation while doves battle back about actual inflation. In any event, until wage growth actually accelerates, the likelihood of any meaningful, self-sustaining inflation dynamic remains very, very low.
                                                                Separately, a second justification for a moderate pace of tightening emerges. Via Reuters:
                                                                Approaching a historic turn in U.S. monetary policy, Janet Yellen has staked her tenure as chair of the Federal Reserve on a simple principle: she'd rather fight inflation than another economic downturn.
                                                                Interviews with current and former Fed officials indicate that Yellen and core decision-makers at the U.S. central bank are determined not to raise interest rates too early and risk hurting the fragile U.S. economy...
                                                                ...The nightmare scenario she wants to avoid is hiking rates only to see financial markets and the economy take such a hit that she has to backtrack. Until the Fed has gotten rates up from the current level near zero to more normal levels, it would have little room to respond if the economy threatened to head into another recession.
                                                                Gasp! Is the reality of the zero bound finally sinking in at the Fed? The basic argument is that the Fed needs to at least risk overshooting to pull interest rates into a zone that allows for normalized monetary policy during the next recession. And given that the Fed knows how to effectively tame inflation while stimulating the economy at the zero bound in more challenging, the costs of overshooting are less than the costs of undershooting.
                                                                (Note that I suspect overshooting in this context is the 2.25-2.5% range, but that still provides more leeway than a 2.25% cap.)
                                                                In addition, Yellen can point out that since the disinflation of the early 90's, the Fed has not faced an inflation problem, but instead has struggled with three recessions. This on the surface suggests that monetary policy has erred in being too tight on average.
                                                                Bottom Line: Anything other than a dovish message coming from the Jackson Hole conference will be a surprise. Tight labor markets alone will not justify an aggressive pace of tightening. An aggressive pace requires that those tight labor markets manifest themselves into higher wage growth and higher inflation. Yellen seems content to normalize slowly until she sees the white in the eyes of inflation.

                                                                  Posted by on Wednesday, August 13, 2014 at 12:24 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (12)


                                                                  Links for 8-13-14

                                                                    Posted by on Wednesday, August 13, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (94)


                                                                    Tuesday, August 12, 2014

                                                                    Why Do Macroeconomists Disagree?

                                                                    I have a new column:

                                                                    Why Do Macroeconomists Disagree?, by Mark Thoma, The Fiscal Times: On August 9, 2007, the French Bank BNP Paribus halted redemptions to three investment funds active in US mortgage markets due to severe liquidity problems, an event that many mark as the beginning of the financial crisis. Now, just over seven years later, economists still can’t agree on what caused the crisis, why it was so severe, and why the recovery has been so slow. We can’t even agree on the extent to which modern macroeconomic models failed, or if they failed at all.
                                                                    The lack of a consensus within the profession on the economics of the Great Recession, one of the most significant economic events in recent memory, provides a window into the state of macroeconomics as a science. ...

                                                                      Posted by on Tuesday, August 12, 2014 at 09:26 AM in Economics, Fiscal Times, Macroeconomics, Methodology | Permalink  Comments (23)


                                                                      Immigration Helps Domestic Workers

                                                                      Me, at MoneyWatch:

                                                                      Yes, immigration does help domestic workers: The contentious debate over immigration in both the U.S. and Europe is largely based on the worry that immigration hurts domestic workers, particularly low-skilled workers. But is this actually true? Could this concern over immigration be misplaced? Could it be that immigrants actually help native workers? ...

                                                                        Posted by on Tuesday, August 12, 2014 at 07:47 AM in Economics, Immigration, MoneyWatch | Permalink  Comments (54)


                                                                        BLS: Jobs Openings Iincrease

                                                                        Bill McBride at Calculated Risk:

                                                                        BLS: Jobs Openings increased to 4.7 million in June, Highest since 2001: From the BLS: Job Openings and Labor Turnover Summary

                                                                        There were 4.7 million job openings on the last business day of June, little changed from 4.6 million in May, the U.S. Bureau of Labor Statistics reported today. ...
                                                                        ...
                                                                        Quits are generally voluntary separations initiated by the employee. Therefore, the quits rate can serve as a measure of workers’ willingness or ability to leave jobs. ... The number of quits (not seasonally adjusted) increased over the 12 months ending in June for total nonfarm and total private. The number of quits was little changed for government.

                                                                        ... Jobs openings increased in June to 4.671 million from 4.577 million in May. This is the highest level since February 2001. The number of job openings ... are up 18% year-over-year compared to June 2013. Quits are up 15% year-over-year. These are voluntary separations. ...

                                                                        It is a good sign that job openings are over 4 million for the fifth consecutive month, and that quits are increasing.

                                                                          Posted by on Tuesday, August 12, 2014 at 07:38 AM in Economics, Unemployment | Permalink  Comments (2)


                                                                          Links for 8-12-14

                                                                            Posted by on Tuesday, August 12, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (76)


                                                                            Monday, August 11, 2014

                                                                            'On Macroeconomic Forecasting'

                                                                            Simon Wren-Lewis:

                                                                            ...The rather boring truth is that it is entirely predictable that forecasters will miss major recessions, just as it is equally predictable that each time this happens we get hundreds of articles written asking what has gone wrong with macro forecasting. The answer is always the same - nothing. Macroeconomic model based forecasts are always bad, but probably no worse than intelligent guesses.

                                                                            More here.

                                                                              Posted by on Monday, August 11, 2014 at 01:08 PM in Econometrics, Economics, Macroeconomics | Permalink  Comments (17)


                                                                              'Celebrating Greenspan's Legacy of Failure'

                                                                              Barry Ritholtz:

                                                                              Celebrating Greenspan's Legacy of Failure: On this day in 1987, Alan Greenspan became chairman of the Federal Reserve Board. This anniversary allows us to take a quick look at what followed over the next two decades. As it turned out, it was one of the most interesting and, to be blunt, weirdest tenures ever for a Fed chairman.
                                                                              This was largely because of the strange ways Greenspan's infatuation with the philosophy of Ayn Rand manifested themselves. He was a free marketer who loved to intervene in the markets, a chief bank regulator who seemingly failed to understand even the most basic premise of bank regulations. ...
                                                                              The contradictions between Greenspan's philosophy and his actions led to many key events over his career. The ones that stand out the most in my mind are as follows...

                                                                              Barry concludes with:

                                                                              It's worth noting that, Greenspan’s intellectual hero, Rand, also turned her back on her own philosophy, living off of Social Security and other government aid before she died of cancer in 1982.
                                                                              In the end, a central banker cannot be both concerned with asset prices yet comfortable with collapsing bubbles. These are inherently contradictory beliefs. That is why Greenspan’s tenure was both disastrous and fascinating.

                                                                                Posted by on Monday, August 11, 2014 at 08:23 AM in Economics, Monetary Policy | Permalink  Comments (19)


                                                                                'How Much is our Distant Future Worth?'

                                                                                Cecchetti & Schoenholtz

                                                                                How much is our distant future worth?: ...One new report estimates that – on the current path – perhaps $500 billion of U.S. coastal properties will be below sea level by 2100. ... We have plenty of other longer-run worries, too; like surviving a future asteroid hit (an event like the Tunguska blast of 1908 – perhaps 1,000 times more powerful than the Hiroshima bomb – probably occurs every 1,200 years) or managing radioactive waste (which can be toxic for tens of thousands or even millions of years).
                                                                                How much should we care about such big threats that are potentially far off in time? How much ought we spend now to avoid a $1 worth of damage hundreds of years in the future? ... [explains how long-term discount rates are calculated] ...
                                                                                Economists have tried several (more sophisticated) ways to measure very long-term discount rates... One well-known report, which applied a relatively low discount rate of 1.4%, called for rapid, large reductions in carbon emissions to limit future losses associated with climate change. A different analysis based on a relatively high 4.3% discount rate called for a carbon tax only about one-tenth the level implied by the low-discount rate analysis. Why? The low discount rate puts a great deal more weight on losses that are predicted to occur hundreds of years in the future.
                                                                                Of course, it’s not just about discount rates. It’s about the scale of future losses, too. If policy actions today can prevent a calamity that threatens life on earth, then most people (including us) might judge the appropriate discount rate to be quite low because we would not weight the value of future lives any lower than their own. And there’s at least one powerful reason to suspect that ... today’s governments don’t weight those future lives sufficiently: our distant descendants don’t vote.

                                                                                  Posted by on Monday, August 11, 2014 at 08:23 AM in Economics, Environment | Permalink  Comments (19)


                                                                                  'Inflation in the Great Recession and New Keynesian Models'

                                                                                  From the NY Fed's Liberty Street Economics:

                                                                                  Inflation in the Great Recession and New Keynesian Models, by Marco Del Negro, Marc Giannoni, Raiden Hasegawa, and Frank Schorfheide: Since the financial crisis of 2007-08 and the Great Recession, many commentators have been baffled by the “missing deflation” in the face of a large and persistent amount of slack in the economy. Some prominent academics have argued that existing models cannot properly account for the evolution of inflation during and following the crisis. For example, in his American Economic Association presidential address, Robert E. Hall called for a fundamental reconsideration of Phillips curve models and their modern incarnation—so-called dynamic stochastic general equilibrium (DSGE) models—in which inflation depends on a measure of slack in economic activity. The argument is that such theories should have predicted more and more disinflation as long as the unemployment rate remained above a natural rate of, say, 6 percent. Since inflation declined somewhat in 2009, and then remained positive, Hall concludes that such theories based on a concept of slack must be wrong.        
                                                                                  In an NBER working paper and a New York Fed staff report (forthcoming in the American Economic Journal: Macroeconomics), we use a standard New Keynesian DSGE model with financial frictions to explain the behavior of output and inflation since the crisis. This model was estimated using data up to 2008. We find that following the increase in financial stress in 2008, the model successfully predicts not only the sharp contraction in economic activity, but also only a modest decline in inflation. ...

                                                                                    Posted by on Monday, August 11, 2014 at 08:23 AM in Economics, Inflation, Macroeconomics, Methodology | Permalink  Comments (3)


                                                                                    Paul Krugman: Phosphorus and Freedom

                                                                                    Markets are not always magic:

                                                                                    Phosphorus and Freedom, by Paul Krugman, Commentary, NY Times: In the latest Times Magazine, Robert Draper profiled youngish libertarians ... and asked whether we might be heading for a “libertarian moment.” Well, probably not. Polling suggests that young Americans tend, if anything, to be more supportive of the case for a bigger government than their elders. But I’d like to ask a different question: Is libertarian economics at all realistic?
                                                                                    The answer is no. And the reason can be summed up in one word: phosphorus.
                                                                                    As you’ve probably heard,... Toledo recently warned its residents not to drink the water. Why? Contamination from toxic algae blooms in Lake Erie, largely caused by the runoff of phosphorus from farms.
                                                                                    When I read about that, it rang a bell. Last week many Republican heavy hitters spoke at a conference sponsored by the blog Red State... A few years back ... Erick Erickson, the blog’s founder ... suggested that oppressive government regulation had reached the point where citizens might want to “march down to their state legislator’s house, pull him outside, and beat him to a bloody pulp.” And the source of his rage? A ban on phosphates in dishwasher detergent. After all, why would government officials want to do such a thing? ...
                                                                                    Smart libertarians have always realized that there are problems free markets alone can’t solve — but their alternatives to government tend to be implausible. ...
                                                                                    More commonly, self-proclaimed libertarians deal with the problem of market failure both by pretending that it doesn’t happen and by imagining government as much worse than it really is. ...
                                                                                    Libertarians also ... don’t want to believe that there are problems whose solution requires government action, so they tend to assume that others similarly engage in motivated reasoning to serve their political agenda... Paul Ryan ... doesn’t just think we’re living out the plot of “Atlas Shrugged”; he asserts that all the fuss over climate change is just “an excuse to grow government.”
                                                                                    As I said at the beginning, you shouldn’t believe talk of a rising libertarian tide..., real power on the right still rests with the traditional alliance between plutocrats and preachers. But libertarian visions of an unregulated economy do play a significant role in political debate, so it’s important to understand that these visions are mirages. Of course some government interventions are unnecessary and unwise. But the idea that we have a vastly bigger and more intrusive government than we need is a foolish fantasy.

                                                                                      Posted by on Monday, August 11, 2014 at 12:24 AM in Economics, Market Failure | Permalink  Comments (111)


                                                                                      Links for 8-11-14

                                                                                        Posted by on Monday, August 11, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (72)


                                                                                        Sunday, August 10, 2014

                                                                                        'The US Manufacturing Base is Surprisingly Strong'

                                                                                        According to this research, "the preponderance of net job loss in the US manufacturing sector comes within companies that stay at home and do not invest abroad":

                                                                                        The US manufacturing base is surprisingly strong, by Theodore H. Moran and Lindsay Oldenski, Vox EU: Introduction Recently, a number of studies, descriptive employment statistics, and statements by US politicians have raised concerns about the strength of US manufacturing. For example, in a January 2014 Journal of Economic Perspectives article, Martin Baily and Barry Bosworth expressed concern about the recent absolute decline in US manufacturing employment, as well as the long-recognised decreasing share of manufacturing within overall US employment. They also argued that productivity growth in manufacturing can be attributed solely to the unusual performance of computer production rather than to the accomplishments of the manufacturing sector more broadly. US Senator Bernie Sanders of Vermont states on his website that “The manufacturing sector in Vermont and throughout the United States has eroded significantly in recent years and must be rebuilt to expand the middle class”. President Barack Obama has based his corporate tax reform proposals on the view that US manufacturing firms must be discouraged from “shipping jobs overseas” (State of the Union 2013).

                                                                                        To be sure, the evidence is indisputable that manufacturing employment has been steadily declining as a share of total US employment, and the absolute number of US manufacturing jobs has plummeted by almost 30% just since 2000. But the perennial focus on employment masks important signs of the growing strength of the US manufacturing base. In a recent Peterson Institute for International Economics (PIIE) policy brief (Moran and Oldenski 2014), we analyse the most detailed and up-to-date data on the state of US manufacturing.

                                                                                        • Our research shows that the overall size of the US industrial base – real value-added in manufacturing – has been growing rapidly for more than four decades, and is on track to surpass the all-time 2006-7 high before the end of 2014.
                                                                                        • In contrast to other researchers, we show that US manufacturing growth is broad-based and includes subsectors such as transportation equipment, medical equipment, machinery, semiconductors, communications equipment, and motor vehicles, as well as computers and electronics.
                                                                                        • Moreover, contrary to widespread hand-wringing about weakening competitive performance on the part of US firms and workers, productivity in the manufacturing sector has been growing, both absolutely and relative to other sectors of the US economy.

                                                                                        At the same time, the most recent data show that the productivity growth in US manufacturing is also strong in comparison to other countries.

                                                                                        • Finally, our research shows clearly that increased offshoring of manufacturing operations by US multinationals is associated with increases in the size and strength of their manufacturing activities in the US.

                                                                                        Indeed, the preponderance of net job loss in the US manufacturing sector comes within companies that stay at home and do not invest abroad. Of particular note is the large feedback to US R&D and other high-skilled services from outward investment on the part of US manufacturing multinationals. ...

                                                                                        Conclusions A careful look at the most recent and detailed data shows that despite falling employment, the US manufacturing base is growing larger, more productive, and more competitive. The results of our empirical analysis show that the expansion of operations abroad by US manufacturing multinationals leads to particularly strong increases in economic activity – including creation of greater numbers of high-paying manufacturing jobs – by those same firms in the US domestic economy. The policy implications are clear – any measures that the US might take to hinder or dis-incentivise outward expansion by US firms would lead to less robust economic activity – and fewer good US jobs at home, not more.

                                                                                          Posted by on Sunday, August 10, 2014 at 08:55 AM in Economics, International Trade | Permalink  Comments (59)


                                                                                          Links for 8-10-14

                                                                                            Posted by on Sunday, August 10, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (79)


                                                                                            Saturday, August 09, 2014

                                                                                            Shareholder vs. Stakeholder Capitalism

                                                                                            Quiet day in blogland. Here's something to kick around for those of you who are so inclined:

                                                                                            Shareholder vs. Stakeholder Capitalism: ...We may be witnessing the beginning of a return to a form of capitalism that was taken for granted in America sixty years ago. ...

                                                                                            Are we witnessing the reemergence of "Stakeholder Capitalism"? I'm doubtful.

                                                                                              Posted by on Saturday, August 9, 2014 at 11:04 AM in Economics | Permalink  Comments (53)


                                                                                              Links for 8-09-14

                                                                                                Posted by on Saturday, August 9, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (70)


                                                                                                Friday, August 08, 2014

                                                                                                'Getting There?'

                                                                                                David Altig (Research Director at the Atlanta Fed):

                                                                                                Getting There?, by David Altig, Macroblog: To say that last week was somewhat eventful on the macroeconomic data front is probably an exercise in understatement. Relevant numbers on GDP growth (past and present), employment and unemployment, and consumer price inflation came in quick succession.
                                                                                                These data provide some of the context for our local Federal Open Market Committee participant’s comments this week (for example, in the Wall Street Journal’s Real Time Economics blog, with similar remarks made in an interview on CNBC’s Closing Bell). From that Real Time Economics blog post:
                                                                                                Although the economy is clearly growing at a respectable rate, Federal Reserve Bank of Atlanta President Dennis Lockhart said Wednesday it is premature to start planning an early exit from the central bank’s ultra-easy policy stance.
                                                                                                “I’m not ruling out” the idea the Fed may need to raise short-term interest rates earlier than many now expect, Mr. Lockhart said in an interview with The Wall Street Journal. But, at the same time, “I’m a little bit cautious” about the policy outlook, and still expect that when the first interest rate hike comes, it will likely happen somewhere in the second half of next year.
                                                                                                “I remain one who is looking for further validation that we are on a track that is going to make the path to our mandate objectives pretty irreversible,” Mr. Lockhart said. “It’s premature, even with the good numbers that have come in...to draw the conclusion that we are clearly on that positive path,” he said.
                                                                                                Why so “cautious”? Here’s the Atlanta Fed staff’s take on the state of things, starting with GDP:
                                                                                                With the annual benchmark revision in hand, 2013 looks like the real deal, the year that the early bet on an acceleration of growth to the 3 percent range finally panned out. Notably, fiscal drag (following the late-2012 budget deal), which had been our go-to explanation of why GDP appeared to have fallen short of expectations once again, looks much less consequential on revision.
                                                                                                Is 2014 on track for a repeat (or, more specifically, comparable performance looking through the collection of special factors that weighed on the first quarter)? The second-quarter bounce of real GDP growth to near 4 percent seems encouraging, but we are not yet overly impressed. Final sales—a number that looks through the temporary contribution of changes in inventories—clocked in at a less-than-eye-popping 2.3 percent annual rate.
                                                                                                Furthermore, given the significant surprise in the first-quarter final GDP report when the medical-expenditure-soaked Quarterly Services Survey was finally folded in, we’re inclined to be pretty careful about over-interpreting the second quarter this early. It’s way too early for a victory dance.
                                                                                                Regarding labor markets, here is our favorite type of snapshot, courtesy of the Atlanta Fed’s Labor Market Spider Chart:

                                                                                                Atlanta Fed Labor Market Spider Chart

                                                                                                There is a lot to like in that picture. Leading indicators, payroll employment, vacancies posted by employers, and small business confidence are fully recovered relative to their levels at the end of the Great Recession.
                                                                                                On the less positive side, the numbers of people who are marginally attached or who are working part-time while desiring full-time hours remain elevated, and the overall job-finding rate is still well below prerecession levels. Even so, these indicators are noticeably better than they were at this time last year.
                                                                                                That year-over-year improvement is an important observation: the period from mid-2012 to mid-2013 showed little progress in the broader measures of labor-market performance that we place in the resource “utilization” category. During the past year, these broad measures have improved at the same relative pace as the standard unemployment statistic.
                                                                                                We have been contending for some time that part-time for economic reasons (PTER) is an important factor in understanding ongoing sluggishness in wage growth, and we are not yet seeing anything much in the way of meaningful wage pressures:

                                                                                                Total Private Earnings, year/year % change, sa

                                                                                                There was, to be sure, a second-quarter spike in the employment cost index (ECI) measure of labor compensation growth, but that increase followed a sharp dip in the first quarter. Maybe the most recent ECI reading is telling us something that hourly earnings are not, but that still seems like a big maybe. Outside of some specific sectors and occupations (in manufacturing, for example), there is not much evidence of accelerating wage pressure in either the data or in anecdotes we get from our District contacts. We continue to believe that wage growth is most consistent with the view that that labor market slack persists, and underlying inflationary pressures (from wage costs, at least) are at bay.
                                                                                                Clearly, it’s dubious to claim that wages help much in the way of making forward predictions on inflation (as shown, for example, in work from the Chicago Fed, confirming earlier research from our colleagues at the Cleveland Fed). And in any event, we are inclined to agree that the inflation outlook has, in fact, firmed up. At this time last year, it was hard to argue that the inflation trend was moving in the direction of the Committee’s objective (let alone that it was not actually declining).
                                                                                                But here again, a declaration that the risks have clearly shifted in the direction of overshooting the FOMC’s inflation goals seems wildly premature. Transitory factors have clearly elevated recent statistics. The year-over-year inflation rate is still only 1.5 percent, and by most cuts of the data, the trend still looks as close to that level as to 2 percent.

                                                                                                'Trends' in the June Core PCE

                                                                                                We do expect measured inflation trends to continue to move in the direction of 2 percent, but sustained performance toward that objective is still more conjecture than fact. (By the way, if you are bothered by the appeal to a measure of core personal consumption expenditures in that chart above, I direct you to this piece.)
                                                                                                All of this is by way of explaining why we here in Atlanta are “a little bit cautious” about joining any chorus singing from the we’re-moving-on-up songbook. Paraphrasing from President Lockhart’s comments this week, the first steps to policy normalization don’t have to wait until the year-over-year inflation rate is consistently at 2 percent, or until all of the slack in the labor market is eliminated. But it is probably prudent to be fairly convinced that progress to those ends is unlikely to be reversed.
                                                                                                We may be getting there. We’re just not quite there yet.

                                                                                                  Posted by on Friday, August 8, 2014 at 11:39 AM in Economics, Monetary Policy | Permalink  Comments (21)


                                                                                                  'On Reaganolatry'

                                                                                                  "It just isn't so":

                                                                                                  On Reaganolatry, by Paul Krugman: The truly vile attack on Rick Perlstein’s new book has been revealing in a number of ways. ...
                                                                                                  And why this determination to quash Perlstein? It’s all about Reaganolatry, the right’s need to see the man as perfect. ... Everyone on the right knows that Reagan presided over job creation on a scale never seen before or since; but it just isn’t so. In fact, if you look at monthly rates of job creation for the past six administrations, it’s actually startling:

                                                                                                  080814krugman1-blog480

                                                                                                  You may have known that Clinton was a better “job creator” than Reagan, but did you know that over the course of the Carter administration — January 1977 to January 1981 — the economy actually added jobs faster than it did under Reagan? Maybe you want to claim that the 1981-82 recession was Carter’s fault (although actually it was the Fed’s doing), so that you start counting from almost two years into Reagan’s term; but in that case why not give Obama the same courtesy? The general point is that the supposed awesomeness of Reagan’s economic record just doesn’t pop out of the data.
                                                                                                  But don’t expect the Reaganlators to acknowledge that. Their whole sense of identity is bound up with their faith.

                                                                                                    Posted by on Friday, August 8, 2014 at 11:39 AM in Economics, Politics, Unemployment | Permalink  Comments (29)


                                                                                                    'Making Sense of Friedrich A. von Hayek'

                                                                                                    Another one from today's links. This is by Brad DeLong:

                                                                                                    Making Sense of Friedrich A. von Hayek: Focus/The Honest Broker for the Week of August 9, 201, by Brad DeLong: One way to conceptualize it all is to think of it as the shape of a river:
                                                                                                    The first current is the Adam Smith current, which makes the classical liberal bid: Smith claims that the system of natural liberty; with government restricted to the rule of law, infrastructure, defense, and education; is the best of all social arrangements.
                                                                                                    This first current is then joined by the Karl Polanyi current: Polanyi says that, empirically, at least in the Industrial Age, the system of natural liberty fails to produce a good-enough society. The system of natural liberty turns land, labor, and finance into commodities. The market then moves them about the board in its typically disruptive fashion: “all that is solid melts into air”, or perhaps “established and inherited social orders are steamed away”. But land, finance, and labor–these three are not real commodities. They are, rather, “fictitious commodities”, for nobody wants their ability to earn a living, or to live where they grew up, or to start a business to be subject to the disruptive wheel of market fortuna.
                                                                                                    The social disruption produced by allowing the prices of these “fictitious commodities” to be set by market forces is too great to be sustained. Politics will not allow it. And so a good society needs to regulate: A good society needs to regulate the market for land so that people are not thrown off of what they have good reason to regard as theirs even if they lack the proper pieces of paper. A good society needs to regulate the market for finance in order to maintain full employment and price stability. A good society needs to regulate the market for labor to ensure that everyone has the opportunity to work at a living wage.
                                                                                                    Thus we must move forward from classical liberalism to social democracy.
                                                                                                    That is Karl Polanyi’s argument. And it is convincing. Classical liberalism supports and justifies economies that produce a great deal of unnecessary human misery: that seems very, very clear indeed by the time of the Great Depression. As John Maynard Keynes wrote in his 1926 essay, “The End of Laissez Faire”, nineteenth and early twentieth-century history teach one big lesson...

                                                                                                    There's quite a bit more after that, including a discussion of "three other channels in the delta besides Polanyi-style social democracy: call them Leninism, Keynesianism, and Hayekism."

                                                                                                      Posted by on Friday, August 8, 2014 at 08:44 AM in Economics | Permalink  Comments (64)