Sunday, June 25, 2017

W. Arthur Lewis and the Tradeoffs of Economics and Economists

From Vox EU:

W. Arthur Lewis and the tradeoffs of economics and economists, by Ravi Kanbur, VoxEU: There is nothing new under the sun. The passionate political economy discourses of today consume us entirely. But they are in fact perennials, broaching the fundamental questions of economic policy that have ruled supreme since economics gained an independence of sorts from moral philosophy 250 years ago.1 The nature of market failure, the case for government intervention on grounds of efficiency and equity, and the interplay between economic and political forces are some of the tracks on which discourses have run for generations. The life and work of W. Arthur Lewis, winner of the 1979 Nobel Prize in economics, is a testament to the tradeoffs of economics, and of economists.
Arthur Lewis was born in the British West Indies in 1915. He won a scholarship to study at the London School of Economics, graduating with first class honours in 1937.2 And yet Lewis’s path was not entirely smooth. Even at the LSE, an institution founded by Fabian socialists, he faced the racism that he also met in the streets of London. When he was considered for a temporary one year appointment at the LSE in 1938, the Director of the LSE wrote to the Board of Governors that: “The appointments committee is, as I said, quite unanimous but recognise that the appointment of a coloured man may possibly be open to some criticism. Normally, such appointments do not require confirmation of the Governors but on this occasion I said that I should before taking action submit the matter to you” (Tignor 2006: 21).3
Lewis became involved with the burgeoning decolonisation movement in Britain, and consorted with the likes of C L R James, George Padmore, Eric Williams, and Paul Robeson. The 1930s and 1940s were a period of ferment not just on the decolonisation front. Economic policy in general was under discussion and dispute. From Cambridge, John Maynard Keynes had excited a generation of students with his critiques of ‘the Treasury View’ in the face of massive and persistent unemployment. Arthur Lewis was Keynesian in macroeconomic matters, but also more interventionist in microeconomic and structural policy. This set him against Sydney Caine, an influential official in the Colonial Office, in the work of the Colonial Economic Advisory Committee, on which Lewis served. Lewis described Caine as “a religious devotee of laissez-faire, and his headship of the Economic Department at this juncture is fatal” (Mine 2006).
In 1951, Kwame Nkrumah won a sweeping victory in the elections in the British colony of the Gold Coast (soon to become the independent country of Ghana) and in 1952 Lewis was invited by Nkrumah to write a report on industrialisation (Lewis 1953).4 At this very time, Lewis was fashioning his Nobel Prize winning argument on ‘surplus labour’, which he argued was the state of affairs in the West Indies, in Egypt, and in India (Lewis 1954). In these situations, the main brake on development was inadequate investment in manufacturing, and to the extent that this investment was held back by market failures in the manufacturing sector, the government should intervene to address them.
However, Lewis’s thrust in his report was that the Gold Coast, unlike India, did not present a situation of surplus labour. Rather, it was one of labour shortages given the large amount of land available in agriculture. In this situation the way of releasing labour for manufacturing, without pushing up wages so much that investment would be choked off, was to increase agricultural productivity. In labour shortage economies, that would have been priority number one. The Gold Coast industrialisation report revealed the evolving balance of Arthur Lewis as the economist. Identify the nature of the market failure first, then design the intervention.
Arthur Lewis was present in Accra for the celebrations when the Gold Coast became Ghana on 6 March 1957.5 But he was to return in October of 1957 for a fateful stint as the government’s chief economic adviser, at the invitation of Kwame Nkrumah. His 15 months as resident adviser in Ghana were tumultuous. There were some policy areas in which he sided with the government and Nkrumah. Perhaps the most famous of these is his general agreement that the surpluses from the cocoa price boom should be collected by the government and used for development purposes rather than passed through to cocoa farmers, a view very different from positions being advanced by Bauer (1954) at that time. However, in the main Lewis clashed with Nkrumah, especially on various ‘white elephant’ projects that were being considered and approved, many of them in the name of industrialisation.
The letters of this time provide a real insight into the clash between the economist and the politician. After a series of attempts by Lewis to intervene in the drafting on the Five Year Plan, his verdict on the plan was that it made “inadequate provision for some essential services while according the highest priority to a number of second importance….Alas, the main reason for this lack of balance is that the plan contains too many schemes on which the Prime Minister is insisting for ‘political reasons’” (Tignore 2006: 167). Nkrumah’s responses to Lewis were to be expected from a man who had famously said “seek ye the political kingdom first”. In an exchange that brought to a head Lewis’s decision to leave his post as economic adviser, Nkrumah emphasised “political decisions which I consider I must take. The advice you have given me, sound though it may be, is essentially from the economic point of view, and I have told you, on many occasions, that I cannot always follow this advice as I am a politician and must gamble on the future” (Tignor 2006: 173).
How can one explain the seeming contradictions in Lewis? On the one hand was the critic of laissez-faire economic policies, whom the radical anti-colonialists expected to be on their side. On the other was the economist who acted as a check on the extreme statist interventions proposed by this same tendency in economic policy discourse, arguing against heavy state subsidy to industry on purely economic grounds, even leaving aside its propensity for corruption and use as political patronage.
As a student, Lewis must have read John Maynard Keynes’s clarion call in his essay “The End of Laissez Faire” (Keynes 1926).6 This was, seemingly, a call to abandon the tenets of 19th century economic liberalism in favour of a more interventionist credo – “let us clear from the ground the metaphysical or general principles upon which, from time to time, laissez-faire has been founded” (Keynes 1926: 287-8). This is Keynes presaging the Lewis of the 1930s and 1940s railing against Sydney Caine and his laissez-fair policies for the colonies. And yet in the same essay Keynes hints at a different world view, a more nuanced perspective on state intervention:
“We cannot therefore settle on abstract grounds, but must handle on its merits in detail what Burke termed ʹone of the finest problems in legislation, namely, to determine what the State ought to take upon itself to direct by the public wisdom, and what it ought to leave, with as little interference as possible, to individual exertion’” (p. 288-91).
How like Lewis, or rather how like the economist Lewis became in Ghana.7 I have argued elsewhere that Edmund Burke’s question is the eternal question of political economy and accounts for the cycles of thought in economics (Kanbur 2016). This is what allowed Lewis to support some industrial intervention in his first report on the Gold Coast, while at the same time asserting the primacy of agricultural development. It is what allowed him to support substantial taxation of cocoa while at the same time railing at the (economic and political) misuse of the funds so raised. That was Arthur Lewis in Ghana, but it was Arthur Lewis all along. It has also been political economy all along, and will continue to be so.
References
Aryeetey, E, and R Kanbur (eds.), The Economy of Ghana Sixty Years After Independence, Oxford: Oxford University Press.
Bauer, P (1954), West African Trade: A Study of Competition, Oligarchy, and Monopoly in a Changing Economy, Cambridge University Press.
Kanbur, R (2016), “The End of Laissez Faire, The End of History and The Structure of Scientific Revolutions”, Challenge, 59 (1), 35-46.
Kanbur, R (2017), “W. Arthur Lewis and the Roots of Ghanaian Economic Policy”, In E Aryeetey and R Kanbur (eds.) The Economy of Ghana Sixty Years After Independence, Oxford: Oxford University Press.
Keynes, J M (1926), “The End of Laissez-Faire”, in The Collected Writings of John Maynard Keynes, Volume IX, Essays in Persuasion, Royal Economic Society, Palgrave MacMillan, 1972.
Lewis, W A (1953), Report on Industrialization of the Gold Coast, Accra.
Lewis, W A (1954), “Economic Development with Unlimited Supplies of Labour”, Manchester School, 22 (2), 139-191.
Mine, Y (2006), “The Political Element in the Works of W. Arthur Lewis: The 1954 Lewis Model and African Development”, The Developing Economies, XLVI-3, 329-355.
Tignor, R L (2006), W. Arthur Lewis and the Birth of Development Economics, Princeton University Press.
Endnotes
[1] The conventional dating for this is of course the publication of Adam Smith’s Wealth of Nations in 1776.
[2] I draw liberally on the comprehensive and excellent biography by Tignor (2006).
[3] Tignor (2006: 37) also recounts the story of how, despite his by then brilliant academic qualifications, his appointment to a Chair at Liverpool was blocked for reasons of “other considerations than high academic standing.” Finally, however, he did get his Chair, the Stanley Jevons Chair at the University of Manchester in 1948.
[4] Lewis’s transmittal letter on the report, written to Minister of Commerce and Industry K A Gbedemah and dated 5th June, 1953, notes the details of the assignment: “I have the honour to transmit herewith my Report on industrialization and economic policy, which I was commissioned to write by letter No. MCI/C,16/SF.3/18 from your Ministry, dated November 29, 1952. I visited the Gold Coast from December 15th, 1952, to January 4th, 1953, and travelled extensively in the country, covering about 1,800 miles by road and by air. I had the opportunity of visiting many industrial establishments, and I discussed the subject with as many persons as possible in the time available.” (Lewis, 1953, p. i).
[5] For an assessment of Ghana’s economy in the sixty years since independence, see Aryeetey and Kanbur (2017).
[6] For an assessment of this essay in the broader context of the evolution of economic thought, see Kanbur (2016).
[7] Tignor (2006) and Kanbur (2017) further discuss Lewis’s post-Ghana life and work.

    Posted by on Sunday, June 25, 2017 at 09:14 AM in Development, Economics, Market Failure | Permalink  Comments (49) 


    Links for 06-25-17

      Posted by on Sunday, June 25, 2017 at 12:06 AM in Economics, Links | Permalink  Comments (185) 


      Friday, June 23, 2017

      Pure Class Warfare, With Extra Contempt

      Paul Krugman:

      Pure Class Warfare, With Extra Contempt: The Senate version of Trumpcare – the Better Care Reconciliation Act – is out. The substance is terrible: tens of millions of people will experience financial distress if this passes, and tens if not hundreds of thousands will die premature deaths, all for the sake of tax cuts for a handful of wealthy people. What’s even more amazing is that Republicans are making almost no effort to justify this massive upward redistribution of income. They’re doing it because they can, because they believe that the tribalism of their voters is strong enough that they will continue to support politicians who are ruining their lives.
      In this sense – and in only this sense – what we’re seeing now is a departure from previous Republican practice.
      In the past, laws that would take from the poor and working class while giving to the rich came with excuses. Tax cuts, their sponsors declared, would unleash market dynamism and make everyone more prosperous. Deregulation would increase efficiency and lower prices. It was all voodoo; the promises never came true. But at least there was some pretense of working for the common good.
      Now we have none of this. This bill does nothing to reduce health care costs. It does nothing to improve the functioning of health insurance markets – in fact, it will send them into death spirals by reducing subsidies and eliminating the individual mandate. There is nothing at all in the bill that will make health care more affordable for those currently having trouble paying for it. And it will gradually squeeze Medicaid, eventually destroying any possibility of insurance for millions. ...
      But Republican leaders believe that their voters are tribal enough, sufficiently walled off from information, that they’ll ignore the attack on their lives and keep voting R – indeed, that as they lose health care, get hit with crushing out-of-pocket bills, see their friends and neighbors face ruin, they’ll blame it on Democrats.
      I wish I were sure that this belief was false.

        Posted by on Friday, June 23, 2017 at 09:56 AM in Economics, Health Care, Politics | Permalink  Comments (154) 


        In Long Run, There’s No Such Thing as an Einstein Investor

        Robert Shiller:

        In Long Run, There’s No Such Thing as an Einstein Investor, NY Times: There are no easy answers in investing. It is tempting to replicate a successful strategy — one created by an outstanding investor, like Warren Buffett, or through in-depth statistical analysis of the wisdom of crowds — and such approaches can actually work for long periods.
        But paint-by-number portfolios won’t succeed forever. And without deep expertise, it makes little sense to veer much from a simple market portfolio — one that seeks to match the overall performance of the market, and not beat it.
        These reflections are prompted by the television series “Genius” (based on the Walter Isaacson biography “Einstein: His Life and Universe”)... The series also inspired me to reread Einstein’s own popularization of his theories, in the book “Relativity: The Special and General Theory.”...

          Posted by on Friday, June 23, 2017 at 09:56 AM in Economics | Permalink  Comments (20) 


          Links for 06-23-17

            Posted by on Friday, June 23, 2017 at 12:06 AM in Economics, Links | Permalink  Comments (175) 


            Thursday, June 22, 2017

            Fed's Labor Market Forecasts Don't Make Sense

            Tim Duy:

            Fed's Labor Market Forecasts Don't Make Sense, by Tim Duy: The Federal Reserve’s unemployment forecast doesn’t add up. It is neither consistent with the median of policy makers’ growth forecasts nor consistent with Chair Janet Yellen’s description of labor market strength. Hence, central bankers will likely find unemployment undershooting their forecast in the second half of 2017. That will keep the central bank in a hawkish mood even if lackluster inflation continues. ...Continued at Bloomberg Prophets...

              Posted by on Thursday, June 22, 2017 at 11:43 AM in Economics, Monetary Policy | Permalink  Comments (54) 


              Links for 06-22-17

                Posted by on Thursday, June 22, 2017 at 12:06 AM in Economics, Links | Permalink  Comments (196) 


                Wednesday, June 21, 2017

                Does the Fed Have a Financial Stability Mandate?

                From the Federal Reserve Bank of Richmond:

                Does the Fed Have a Financial Stability Mandate?, by Renee Haltom and John A. Weinberg, FRB Richmond: The 2007–08 financial crisis and the Fed's unprecedented response raised new questions about the Fed's role in maintaining the stability of the U.S. financial system.
                Central banks have a natural role in financial stability for several reasons. First, monetary policy affects financial conditions in ways that can contribute to either stability or instability; erratic policy or volatile inflation could be destabilizing, for instance. Second, they obtain and develop insights useful for financial stability policy through the course of their other functions. Third, financial conditions are among the broad set of factors considered by central banks in assessing the state of the economy and the appropriate stance of monetary policy.
                But for many central banks, the full scope of what they're expected to do in support of financial stability — the extent to which they have an explicit or implicit financial stability mandate — is ambiguous. This is important because a central bank's policy actions and its responses to developments in the economy and financial markets are shaped by its understanding of its mandate. So the nature of the mandate matters for economic outcomes, market expectations (the ex ante "rules of the game"), and accountability.
                One reason this issue is inherently challenging is that there is no single definition of "financial stability." Most recent discussions focus on banking crises like the 2007–08 financial crisis, which tend to feature failures of large or many financial institutions, cascading losses, and government interventions. But central banks also have played a role in other types of financial market disturbances, for example, sharp asset price declines (like the Fed's liquidity assurances after the 1987 stock market crash), sovereign debt crises (like the European Central Bank's role in the recent eurozone crisis), and currency crises (like the Fed's role in Mexico's 1994 bailout).
                This challenge is clear in the breadth of a definition for financial stability offered in the latest Purposes and Functions publication from the Board of Governors of the Federal Reserve System: "A financial system is considered stable when financial institutions — banks, savings and loans, and other financial product and service providers — and financial markets are able to provide households, communities, and businesses with the resources, services, and products they need to invest, grow, and participate in a well-functioning economy." The publication further states that a financial system ought to have the ability to do so "even in an otherwise stressed economic environment."1
                This Economic Brief takes a descriptive look at the Fed's role in financial stability, including how that role has changed over time, and raises some fundamental questions. ...

                  Posted by on Wednesday, June 21, 2017 at 03:37 PM in Economics, Monetary Policy, Regulation | Permalink  Comments (6) 


                  Rodrik: Doing (and Teaching) Economics [Video]

                  (Starts at 7:00 min. The sound is a bit buzzy.)

                    Posted by on Wednesday, June 21, 2017 at 03:21 PM in Economics, Video | Permalink  Comments (3) 


                    Links for 06-21-17

                      Posted by on Wednesday, June 21, 2017 at 12:06 AM in Economics, Links | Permalink  Comments (336) 


                      Tuesday, June 20, 2017

                      Unions in Decline: Some International Comparisons

                      Tim Taylor: 

                      Unions in Decline: Some International Comparisons: Union membership and clout has been dropping in the US economy for decades. But it's not just a US phenomenon: a similar drop is happening in many high-income countries. The OECD Employment Outlook 2017 discussed the evidence in "Chapter 4: Collective Bargaining in a Changing World of Work."
                      Here are a couple of illustrative figures. ...
                      The OECD chapter provides a more detailed discussion... But several overall patterns seem clear.
                      1) Labor union power is weaker just about everywhere.
                      2) The extent of labor union power varies considerably across countries, many of which have roughly similar income levels.  This pattern suggests that existence of unions, one way or another, may be less important for economic outcomes than the way in which those unions function. The chapter notes the importance of "peaceful and cooperative industrial relations," which can emerge--or not--from varying patterns of unionization.
                      3) In the next few decades, the big-picture question for union workers, and indeed for all workers, is how to adjust their workplace skills and tasks so that they remain valued contributors in an economy characterized by new technologies and global ties. Workers need political representation--whether in the form of unions or in some other form--that goes beyond arguing for near-term pay raises, and considers the difficult problem of how to raise the chances for sustained pay raises and secure jobs into the future.

                        Posted by on Tuesday, June 20, 2017 at 10:16 AM in Economics, Unions | Permalink  Comments (34) 


                        New Evidence for a Lower New Normal in Interest Rates

                        This is an FRBSF Economic Letter by Jens H.E. Christensen and Glenn D. Rudebusch:

                        New Evidence for a Lower New Normal in Interest Rates: The general level of U.S. interest rates has gradually fallen over the past few decades. In the 1980s and 1990s, lower inflation expectations played a key role in this decline. But more recently, actual inflation as well as survey-based measures of longer-run inflation expectations have both stabilized close to 2%. Therefore, some researchers have argued that the decline in interest rates since 2000 reflects a variety of persistent economic factors other than inflation. These longer-run real factors—such as slower productivity growth and an aging population—affect global saving and investment and can push down yields by lowering the steady-state level of the short-term inflation-adjusted interest rate (Bauer and Rudebusch 2016 and Williams 2016). This normal real rate is often called the equilibrium or natural or neutral rate of interest—or simply “r-star.”
                        However, other observers have dismissed the evidence for a new lower equilibrium real rate and downplayed the role of persistent factors. They argue that yields have been held down recently by temporary factors such as the headwinds from credit deleveraging in the aftermath of the financial crisis. So far, this ongoing debate about a possible lower new normal for interest rates has focused on estimates drawn from macroeconomic models and data. In this Economic Letter, we describe new analysis that uses financial models and data to provide an alternative perspective (see Christensen and Rudebusch 2017). This analysis uses a dynamic model of the term structure of interest rates that is estimated on prices of U.S. Treasury Inflation-Protected Securities (TIPS). The resulting finance-based measure provides new evidence that the equilibrium interest rate has gradually declined over the past two decades.
                        Macro-based estimates of the equilibrium interest rate
                        The issue of whether there has been a persistent shift in the equilibrium interest rate is quite important. For investors, this short-term real rate of return that would prevail in the absence of transitory disturbances serves as a key foundation for valuing financial assets. For policymakers and researchers, the equilibrium interest rate provides a neutral benchmark to calibrate the stance of monetary policy: Monetary policy is expansionary if the short-term real interest rate lies below the equilibrium rate and contractionary if it lies above. Therefore, determining a good estimate of the equilibrium real rate has been at the center of recent policy debates (Nechio and Rudebusch 2016 and Williams 2017).
                        Given the significance of the equilibrium interest rate, many researchers have used macroeconomic models and data to try to pin it down. As Laubach and Williams (2016, p. 57) define it, the equilibrium interest rate is based on “a ‘longer-run’ perspective, in that it refers to the level of the real interest rate expected to prevail, say, five to 10 years in the future, after the economy has emerged from any cyclical fluctuations and is expanding at its trend rate.” Laubach and Williams (2003, 2016) estimate this equilibrium interest rate using a simple macroeconomic model and data on a nominal short-term interest rate, consumer price inflation, and the output gap. Similarly, Johannsen and Mertens (2016) and Lubik and Matthes (2015) provide closely related estimates also by using macroeconomic models and data.
                        The blue line in Figure 1 summarizes the results of these three fairly similar studies. It shows the average of their three estimated equilibrium real interest rates, which smooths across specific modeling assumptions in each study. In the 1980s and 1990s, this simple macro-based summary measure remained around 2½%. This effectively constant equilibrium interest rate is consistent with the conventional wisdom of that time. It is only in the late 1990s that a decided downtrend begins, and the macro-based measure falls to almost zero by the end of the sample.

                        Figure 1
                        Estimates of the equilibrium real interest rate
                        2017-17-1.FRBSF-EL

                        However, the various macro-based approaches for identifying a new lower equilibrium interest rate have several potential shortcomings. First, these estimates depend on having the correct specification of the complete model, including the output and inflation dynamics. One difficulty in this regard is how to account for the period after the Great Recession when nominal interest rates were constrained by the zero lower bound. During that episode, the link between interest rates and other elements in the economy was altered in ways that are difficult to model. Finally, these estimates use extensively revised macroeconomic data to create historical equilibrium interest rate estimates that would not have been available in real time.
                        A new finance-based estimate of the equilibrium interest rate
                        Given the possible limitations of the macro-based estimates, we turn to financial models and data to provide a complementary estimate of the equilibrium interest rate. As detailed in Christensen and Rudebusch (2017), we use the market prices of TIPS, which have coupon and principal payments adjusted for changes in the consumer price index (CPI). These securities compensate investors for the erosion of purchasing power due to price inflation, so they provide a fairly direct reading on real interest rates. We assume that the longer-term expectations embedded in TIPS prices reflect financial market participants’ views about the steady state of the economy including the equilibrium interest rate. Unlike the macro-based estimates, one advantage of this market-based measure is that it can be obtained in real time at a high frequency—even daily. In addition, it doesn’t depend on an uncertain specification of the dynamics of output and inflation. Furthermore, because real TIPS yields are not subject to a lower bound, we avoid complications associated with zero nominal interest rates altogether.
                        Our analysis focuses on a term structure model that is based only on the prices of TIPS. This choice contrasts with previous TIPS research that has jointly modeled inflation-indexed and standard nominal U.S. Treasury yields (for example, Christensen, Lopez, and Rudebusch 2010). Such joint specifications can also be used to estimate the steady-state real rate—though earlier work has emphasized only the measurement of inflation expectations and risk. However, a joint specification requires additional modeling structure—including specifying an inflation risk premium and inflation expectations. The greater number of modeling elements—along with the requirement that this more elaborate structure remain stable over the sample—raise the risk of model misspecification, which can contaminate estimates of the equilibrium interest rate. By relying solely on TIPS yields, we avoid these complications as well as problems associated with the lower bound on nominal rates.
                        Still, the use of TIPS for measuring the steady-state short-term real interest rate poses its own empirical challenges. One difficulty is that inflation-indexed bond prices include a real term premium. In addition, despite the fairly large amount of outstanding TIPS, these securities face appreciable liquidity risk resulting in wider bid-ask spreads than nominal Treasury bonds. To estimate the equilibrium rate of interest from TIPS in the presence of liquidity and real term premiums, we use an arbitrage-free dynamic term structure model of real yields augmented with a liquidity risk factor as described in Andreasen, Christensen, and Riddell (2017). The identification of the liquidity risk factor comes from its unique loading for each individual TIPS. This loading assumes that, over time, an increasing proportion of any bond’s outstanding inventory is locked up in buy-and-hold investors’ portfolios. Given forward-looking investor behavior, this lock-up effect implies that a particular bond’s sensitivity to the market-wide liquidity factor will vary depending on how seasoned the bond is and how close to maturity it is. Our analysis uses prices of the individual TIPS rather than the more usual input of yields from fitted synthetic curves. By observing prices from a cross section of TIPS that have different age characteristics, we can identify the liquidity factor. With estimates of both the liquidity premium and real term premium, we calculate the equilibrium interest rate as the average expected real short rate over a five-year period starting five years ahead.
                        Our finance-based estimate of the natural rate of interest is shown as the green line in Figure 1. These estimates are adjusted slightly upward to account for a persistent 0.23 percentage point measurement bias in CPI inflation. The model uses data back to the late 1990s around the time when the TIPS program was launched. Fortuitously, TIPS were introduced about the same time as the macro-based estimates started to decline, so the available sample is particularly relevant for discerning shifts in the equilibrium real rate. During their shared sample, the macro- and finance-based estimates exhibit a similar general trend—starting from just above 2% in the late 1990s and ending the sample near zero. Most importantly, both methodologies imply that the equilibrium rate is currently near its historical low. The finance- and macro-based estimates of the equilibrium rate rely on different assumptions about the structure of the economy and different data sources. Thus, they have different pros and cons, so their broad agreement about the level of the equilibrium rate is mutually reinforcing.
                        There are differences between the precise trajectories over time of the two estimates. The macro-based estimate of the natural rate shows only a modest decline from the late 1990s until the financial crisis and the start of the Great Recession. Then, it drops precipitously to less than 1% and edges only slightly lower thereafter. Arguably, the timing of the macro-based path leaves open the possibility that the recession played a key role in causing the decline in the equilibrium rate. This suggests that the drop could be at least partly reversed by a cyclical boom. In contrast, the finance-based estimate falls in the early 2000s, levels off a bit above 1%, and then declines more in 2012. Therefore, the drop in the finance-based estimate does not coincide with the Great Recession, which is consistent with more secular drivers such as demographics or a productivity slowdown.
                        Finally, we should note that the model dynamics of fluctuations in the equilibrium rate are estimated to be very persistent. Thus, looking ahead, our model also suggests that the natural rate is more likely than not to remain near its current low for at least the next several years.
                        Conclusion
                        Given the historic downtrend in yields in recent decades, many researchers have investigated the factors pushing down the steady-state level of the short-term real interest rate. To complement earlier empirical work based on macroeconomic models and data, we estimate the equilibrium real rate using only prices of inflation-indexed bonds. From 1998 to the end of 2016, we estimate that the equilibrium real rate fell from just over 2% to just above zero. Accordingly, our results show that about half of the 4 percentage point decline in longer-term Treasury yields during this period represents a reduction in the natural rate of interest.
                        Jens H.E. Christensen is a research advisor in the Economic Research Department of the Federal Reserve Bank of San Francisco.
                        Glenn D. Rudebusch is senior policy advisor and executive vice president in the Economic Research Department of the Federal Reserve Bank of San Francisco.
                        References
                        Andreasen, Martin M., Jens H.E. Christensen, and Simon Riddell. 2017. “The TIPS Liquidity Premium.” FRB San Francisco Working Paper 2017-11.
                        Bauer, Michael D., and Glenn D. Rudebusch. 2016. “Why Are Long-Term Interest Rates So Low?” FRBSF Economic Letter 2016-36 (December 5).
                        Christensen, Jens H.E., Jose A. Lopez, and Glenn D. Rudebusch. 2010. “Inflation Expectations and Risk Premiums in an Arbitrage-Free Model of Nominal and Real Bond Yields.” Journal of Money, Credit, and Banking 42(6), pp. 143–178.
                        Christensen, Jens H.E., and Glenn D. Rudebusch. 2017. “A New Normal for Interest Rates? Evidence from Inflation-Indexed Debt.” FRB San Francisco Working Paper 2017-07.
                        Johannsen, Benjamin K., and Elmar Mertens. 2016. “The Expected Real Interest Rate in the Long Run: Time Series Evidence with the Effective Lower Bound.” FEDS Notes, Board of Governors of the Federal Reserve System, February 9.
                        Laubach, Thomas, and John C. Williams. 2003. “Measuring the Natural Rate of Interest.” Review of Economics and Statistics 85(4, November), pp. 1,063–1,070.
                        Laubach, Thomas, and John C. Williams. 2016. “Measuring the Natural Rate of Interest Redux.” Business Economics 51(2), pp. 57–67.
                        Lubik, Thomas, and Christian Matthes. 2015. “Calculating the Natural Rate of Interest: A Comparison of Two Alternative Approaches.” FRB Richmond Economic Brief 15-10 (October 15).
                        Nechio, Fernanda, and Glenn D. Rudebusch. 2016. “Has the Fed Fallen behind the Curve This Year?” FRBSF Economic Letter 2016-33 (November 7).
                        Williams, John C. 2016. “Monetary Policy in a Low R-star World.” FRBSF Economic Letter 2016-23 (August 15).
                        Williams, John C. 2017. “Three Questions on R-star.” FRBSF Economic Letter 2017-05 (February 21).

                        Opinions expressed in FRBSF Economic Letter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System.

                          Posted by on Tuesday, June 20, 2017 at 12:33 AM in Economics, Monetary Policy | Permalink  Comments (92) 


                          Links for 06-20-17

                            Posted by on Tuesday, June 20, 2017 at 12:06 AM in Economics, Links | Permalink  Comments (164) 


                            Monday, June 19, 2017

                            Trump’s Apprenticeships are Based upon a Problem That Doesn’t Exist

                            I have a new column:

                            Trump’s Apprenticeships are Based upon a Problem That Doesn’t Exist: Last week the Trump administration announced “a workforce training initiative focused on skill-based apprenticeship education” with a goal of creating one million apprenticeships over the next two years. The motivation behind the initiative was explained by Ivanka Trump: “The reality is that there are still Americans seeking employment despite low unemployment rates, and companies are struggling to fill vacancies for positions that require varying levels of skills and training. So the Trump administration is committed to working very closely to close the skills gap."
                            But is a “skills gap” really a problem in the US? ...

                              Posted by on Monday, June 19, 2017 at 03:06 AM in Economics, Fiscal Times, Unemployment | Permalink  Comments (112) 


                              Paul Krugman: Zombies, Vampires and Republicans

                              "The one obvious payoff to taking health care away from millions: a big tax cut for the wealthy":

                              Zombies, Vampires and Republicans, by Paul Krugman, NY Times: Zombies have long ruled the Republican Party. ... What are these zombies of which I speak? Among wonks, the term refers to policy ideas that should have been abandoned long ago in the face of evidence and experience, but just keep shambling along.
                              The right’s zombie-in-chief is the insistence that low taxes on the rich are the key to prosperity. This doctrine should have died...
                              Despite the consistent wrongness of their predictions, however, tax-cut fanatics just kept gaining influence in the G.O.P. — until the disaster in Kansas...
                              Will this banish the tax-cut zombie? Maybe — although the economists behind the Kansas debacle, who have of course learned nothing, appear to be the principal movers behind the Trump tax plan, such as it is.
                              But even as the zombies move offstage, vampire policies — so-called not so much because of their bloodsucking nature, although that too, as because they can’t survive daylight — have taken their place.
                              Consider what’s happening right now on health care.
                              Last month House Republicans rammed through one of the worst, cruelest pieces of legislation in history. ...
                              This bill is, as it should be, wildly unpopular. Nonetheless, Republican Senate leaders are now trying to ram through their own version of the A.H.C.A., one that, all reports suggest, will differ only in minor, cosmetic ways. And they’re trying to do it in total secrecy. ...
                              Clearly, the goal is to pass legislation that will have devastating effects on tens of millions of Americans without giving those expected to pass it, let alone the general public, any real chance to understand what they’re voting for. ...
                              This is unprecedented...
                              Of course..., the one obvious payoff to taking health care away from millions: a big tax cut for the wealthy. As I said, while bloodsucking isn’t the main reason to call this a vampire policy, it’s part of the picture....
                              You can blame Donald Trump for many things, including the fact that he will surely sign whatever bad bill is put in front of him. But as far as health care is concerned, he’s just an ignorant bystander...
                              So this isn’t a Trump story; it’s about the cynicism and corruption of the whole congressional G.O.P. Remember, it would take just a few conservatives with conscience — specifically, three Republican senators — to stop this outrage in its tracks. But right now, it looks as if those principled Republicans don’t exist.

                                Posted by on Monday, June 19, 2017 at 01:48 AM in Economics, Health Care, Politics | Permalink  Comments (164) 


                                Links for 06-19-17

                                  Posted by on Monday, June 19, 2017 at 12:06 AM in Economics, Links | Permalink  Comments (113) 


                                  Saturday, June 17, 2017

                                  Links for 06-17-17

                                    Posted by on Saturday, June 17, 2017 at 12:06 AM in Economics, Links | Permalink  Comments (256) 


                                    Friday, June 16, 2017

                                    Janet Yellen Is Her Own Best Successor

                                    Narayana Kocherlakota:

                                    Janet Yellen Is Her Own Best Successor: President Donald Trump has reportedly begun the process of deciding who will lead the U.S. Federal Reserve after Janet Yellen's term ends early next year. If he wants the best outcome for the economy, he can't do better than Janet Yellen. ...
                                    Yellen's policies have contributed to a surprisingly strong labor market recovery, yet also been sufficiently cautious to keep inflation below target. Some would see this as an all-around success, though the Fed's caution does have a downside: Markets appear to believe that the central bank is unwilling or unable to hit its inflation target with consistency. ... If it persists, this loss of credibility means that the Fed will have less ammunition to fight the next recession.  
                                    So could any of the other potential appointees do better? ...
                                    Warsh, Taylor, and Hubbard all reportedly see Yellen’s Fed as having been too dovish, suggesting that that they would have done less to support the economic recovery. This approach would have led to higher unemployment and lower inflation -- an inferior fulfilment of the Fed's dual mandate that marks them as worse candidates than Yellen.  It's also important to remember that Taylor and Warsh argued publicly against additional monetary stimulus in November 2010, when the unemployment rate was almost 10 percent and the inflation rate had fallen nearly to 1 percent. Their concerns about excessive inflation proved to be completely unjustified. Yellen, by contrast, supported stimulus.
                                    Yellen has a proven track record that's hard to beat. ... The president should reappoint her to the position of Fed chair.

                                      Posted by on Friday, June 16, 2017 at 09:52 AM in Economics, Monetary Policy, Politics | Permalink  Comments (134) 


                                      The Silence of the Hacks

                                      Paul Krugman:

                                      The Silence of the Hacks: The actual text of the Senate version of Trumpcare is still a secret, even from almost all the Senators who are expected to vote for it. But that’s actually a secondary issue: never mind the precise details, what’s the organizing idea? What is the bill supposed to do, and how is it supposed to do it?
                                      The answer — which I’ve been suggesting for a while — is that they have no idea, and more broadly, no ideas in general. Now Vox confirms this...
                                      Time was when even the worst legislation came with some kind of justification, when you could count on the hacks at Heritage to explain why eating children will encourage entrepreneurship, or something. ...
                                      But now we have legislation that will change the lives of millions, and they haven’t even summoned the usual suspects to explain what a great idea it is. If hypocrisy is the tribute vice pays to virtue, Republicans have decided that even that’s too much; they’re going to try to pass legislation that takes from the poor and gives to the rich without even trying to offer a justification.
                                      And they’ll try to do it by dead of night, of course.
                                      This has nothing to do with Trump, who is, as I’ve been saying, an ignorant bystander — yes, he’s betraying every promise he made, but what else is new? It’s about Congressional Republicans.
                                      Which Congressional Republicans? All of them. Remember, three senators who cared even a bit about substance, legislative process, and just plain honesty with the public, could stop this. So far, it doesn’t look as if there are those three senators.
                                      This is a level of corruption that’s hard to fathom. Yet it’s the reality of one of our two parties.

                                        Posted by on Friday, June 16, 2017 at 09:41 AM in Economics, Politics | Permalink  Comments (39) 


                                        Thursday, June 15, 2017

                                        Links for 06-15-17

                                          Posted by on Thursday, June 15, 2017 at 01:32 PM in Economics, Links | Permalink  Comments (127) 


                                          I’ve Covered Obamacare Since Day One. I’ve Never Seen Lying and Obstruction Like This.

                                          Sarah Kliff:

                                          I’ve covered Obamacare since day one. I’ve never seen lying and obstruction like this, Vox.com: Republicans do not want the country to know what is in their health care bill.
                                          This has become more evident each day, as the Senate plots out a secretive path toward Obamacare repeal — and top White House officials (including the president) consistently lie about what the House bill actually does. ...
                                          My biggest concern isn’t the hypocrisy; there is plenty of that in Washington. It’s that the process will lead to devastating results for millions of Americans who won’t know to speak up until the damage is done. So far, the few details that have leaked out paint a picture of a bill sure to cover millions fewer people and raise costs on those with preexisting conditions.
                                          The plan is expected to be far-reaching, potentially bringing lifetime limits back to employer-sponsored coverage, which could mean a death sentence for some chronically ill patients who exhaust their insurance benefits. ...

                                            Posted by on Thursday, June 15, 2017 at 01:05 PM in Economics, Health Care, Politics | Permalink  Comments (33) 


                                            Wednesday, June 14, 2017

                                            Links for 06-14-17

                                              Posted by on Wednesday, June 14, 2017 at 04:23 PM in Economics, Links | Permalink  Comments (172) 


                                              The Long-Run Effects of Immigration during the Age of Mass Migration

                                              From the NBER Digest:

                                               

                                              The Long-Run Effects of Immigration during the Age of Mass Migration, by Jay Fitzgerald:Studying immigrant flows during the period of highest immigration in U.S. history, Sandra Sequeira, Nathan Nunn, and Nancy Qian find that counties that received large influxes of immigrants experienced both short- and long-term economic benefits compared with other regions. In Migrants and the Making of America: The Short- and Long-Run Effects of Immigration during the Age of Mass Migration (NBER Working Paper No. 23289), they report that these benefits were realized without loss of social and civic cohesion and the long-term benefits persisted to the dawn of the 21st century.

                                              MigrantsU.S. counties that received larger numbers of immigrants between 1860 and 1920 had higher average incomes and lower unemployment and poverty rates in 2000.

                                              The researchers recognize that immigrants may have been drawn to locations with particular attributes, and that these attributes may also have contributed to those locations' subsequent growth. They therefore focus on differences in the dates on which counties became connected to the railway network, which made it much easier for immigrants to reach a particular location, as a source of quasi-random variation in immigrant inflows.

                                              Using census data along with historical railway maps and other source information, the researchers track county-level immigration, along with the decade-by-decade fluctuations in immigrant flows to the United States. The gradual expansion of railway networks, which connected only 20 percent of the nation in 1850 but 90 percent by 1920, together with the timing of waves of immigration, provide variation in how accessible different locations were to immigrants from 1850 to 1920.

                                              A central finding is that the economic benefits of immigration were significant and long-lasting: In 2000, average incomes were 20 percent higher in counties with median immigrant inflows relative to counties with no immigrant inflows, the proportion of people living in poverty was 3 percentage points lower, the unemployment rate was 3 percentage points lower, the urbanization rate was 31 percentage points higher, and education attainment was higher as well. The researchers do not find any cost of immigration in terms of social cohesion. Counties with more immigrant settlement during the Age of Mass Migration today have levels of social capital, civic participation, and crime that are similar to those of regions that received fewer immigrants.

                                              Measuring the short-term impacts of immigration from 1850 to 1920, the researchers find a 57 percent average increase by 1930 in manufacturing output per capita and a 39 to 58 percent increase in agricultural farm values in places that received the median number of immigrants relative to those that received none. Though some of the counties studied show a lower rate of literacy due to the influx of immigrants, many of whom did not speak English, the researchers find that illiteracy declined steadily over the years and that there was an increase in innovation activity, as measured by patents per capita, in counties with large immigrant populations.

                                              The long-run positive effects of immigration in counties connected to rail lines appear to have arisen from the persistence of the short-run benefits, particularly greater industrialization, agricultural productivity, and innovation.

                                              "Taken as a whole, our estimates provide evidence consistent with a historical narrative that is commonly told of how immigration facilitated economic growth," the researchers conclude. "Despite the unique conditions under which the largest episode of immigration in U.S. history took place, our estimates of the long-run effects of immigration may still be relevant for assessing the long-run effects of immigrants today."

                                                Posted by on Wednesday, June 14, 2017 at 09:08 AM in Economics, Immigration | Permalink  Comments (16) 


                                                Tuesday, June 13, 2017

                                                Links for 06-13-17

                                                Things have been a bit slow here lately. Sorry about that. With Trump, economic commentary has waned considerably. Guess you can only say this policy is stupid so many times. Plus, it's all hidden behind closed doors so we can't comment. Can't imagine why...

                                                  Posted by on Tuesday, June 13, 2017 at 12:02 PM in Economics, Links | Permalink  Comments (212) 


                                                  FOMC Ahead

                                                  Tim Duy:

                                                  The recent inflation data doesn't exactly support the Federal Reserve’s monetary tightening plans. Chair Janet Yellen and her colleagues will surely take note of the weakness at this week’s Federal Open Market Committee meeting, but they will downplay any such concerns as transitory. At the moment, low unemployment remains the focus. Add to that loosening financial conditions and you get a central bank that is more likely than not to stay the course on its plan to hike interest rates. [...Continued at Bloomberg Prophets...]

                                                    Posted by on Tuesday, June 13, 2017 at 11:26 AM in Economics, Monetary Policy | Permalink  Comments (52) 


                                                    Monday, June 12, 2017

                                                    Links for 06-12-17

                                                      Posted by on Monday, June 12, 2017 at 02:54 PM in Economics, Links | Permalink  Comments (118)