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Thursday, June 30, 2005

BusinessWeek Has No Point To Miss

I would like to thank Christopher Farrell and Michael Mandel of BusinessWeek Online for their thought provoking post and column, but the significance of the distinction between hairshirts and growth proponents in advancing our understanding of economic ideas that is clear to the two of you  is still unclear to me...

[Update:  PGL at Angry Bear offers his comments.]

[Update:  Once again, thanks to Michael Mandel for provoking thought.  There are some very good books on what constitutes a valid school of economic thought and when recogonition of such schools advances our understanding of important economic principles.  Arbitrary slices don’t cut it.]

    Posted by on Thursday, June 30, 2005 at 02:17 PM in Economics, Macroeconomics, Press | Permalink  TrackBack (1)  Comments (2)


    Fed Watch: Not Ready to Say “Uncle”

    Tim Duy's Fed Watch continues:  Today’s policy statement should leave little doubt that Greenspan & Co. intend to continue raising rates.  Indeed, I was somewhat surprised to see a statement that, in my view, hardened the Fed’s more optimistic outlook for economic activity.  From the May statement:

    Recent data suggest that the solid pace of spending growth has slowed somewhat, partly in response to the earlier increases in energy prices.  Labor market conditions, however, apparently continue to improve gradually. Pressures on inflation have picked up in recent months and pricing power is more evident. Longer-term inflation expectations remain well contained.

    But from today’s statement:

    Although energy prices have risen further, the expansion remains firm and labor market conditions continue to improve gradually.  Pressures on inflation have stayed elevated, but longer-term inflation expectations remain well contained.

    The failure to characterize spending growth as slowing is, I believe, the notable shift in the policy outlook.  Of course, with the upward revision in Q1 GDP growth, there exists a solid argument for the shift.

    I did anticipate maintaining the terms “accommodative” and “measured” which signal that they are not prepared to stop raising rates.  I thought, however, that the FOMC would acknowledge the downside risks (weak manufacturing surveys and underlying durable goods numbers, for example), and I was off base here (in contrast to William Polley’s comments to my last post).  In short:  The thinking in the FOMC remains more optimistic on growth compared to the view of many market participants.  FOMC members do not believe they have entered the ninth inning.  The FOMC intends to continue raising rates, and likely do not have an end target in mind. 

    [Note:  Additional discussions are at Angry Bear here and here, and at The Big Picture.]

      Posted by on Thursday, June 30, 2005 at 12:41 PM in Economics, Fed Watch, Monetary Policy | Permalink  TrackBack (0)  Comments (0)


      New Environmental Economics Blog

      I want to let you know about a new blog called Environmental Economics. There are currently seventeen contributors, a number that is growing. I've contributed a few things on government policy, e.g. I just posted Senators Call for an Investigation of Altered Climate Report, but that's not why I'm sending you there.  There are posts on a variety of topics on environmental issues even though the blog is fairly new, so take a look!

        Posted by on Thursday, June 30, 2005 at 09:00 AM in Economics, Environment | Permalink  TrackBack (0)  Comments (3)


        GOP: Doing Nothing is Not an Option

        According to a new USA Today/CNN/Gallup poll, approval of the president’s handling of Social Security reached new lows, and approval of both congressional parties is also declining.  However, in a significant development, despite the increasing disapproval house Republicans announced they will vote on a proposal for personal accounts by fall:

        Approval of president's Social Security efforts dips, By Richard Wolf, USA Today:  Americans disapprove of the way President Bush is handling Social Security by a ratio of more than 2-to-1, a new low … Opposition to Bush is greatest among seniors, women, and people with lesser incomes and levels of education. Democrats disapprove by … more than 20-to-1, but Republicans back Bush's performance on the issue by a 2-to-1 ratio. … Seven in 10 Americans say Bush has not been clear or specific enough ... Nearly eight in 10 say the same thing about Republicans in Congress. More than eight in 10 say Democrats haven't been clear.

        House GOP Pledges Fall Vote on Soc. Sec, By David Espo, AP:  … Republican leaders announced Wednesday the House would vote by fall on legislation to establish individual accounts under Social Security. … As drafted, the House GOP plan omits steps to extend the program's solvency, despite Bush's insistence that changes are needed. … One lawmaker said GOP leaders had ultimately decided that doing nothing was not a realistic option. …

        My uncle, who drinks a bit, once told me that when his time comes they’ll have to beat his liver to death with a stick.  That’s how I feel about private accounts.

          Posted by on Thursday, June 30, 2005 at 12:33 AM in Economics, Politics, Social Security | Permalink  TrackBack (0)  Comments (7)


          Wednesday, June 29, 2005

          WSJ Commentary: Monetary Policy Does Not Affect Core Inflation

          The Wall Street Journal can do better than this.  This article by Alan Reynolds of Cato claims that monetary policy has no effect on prices and inflation, a claim that is just plain dumb:

          The Fed's Crude Policy, By Alan Reynolds, The Wall Street Journal (subscription):  … It is commonly assumed that the Fed "leans against" inflation -- raising interest rates when inflation accelerates and lowering rates when inflation slows. Yet the graph nearby (free) proves it is difficult to discover any coherent relationship between the funds rate and the "core" deflator for personal consumption expenditures (PCE), or any other measure of inflation not distorted by energy prices. … The only way to link the fed-funds rate to inflation is to assume the Fed suffered from "energy illusion" -- focusing on fluctuating energy prices rather than the impressive stability of other consumer prices. Perhaps the best way to show this is to look at the consumer price index with and without energy, so there can be no doubt that food prices (which are also excluded from core inflation) were irrelevant…

          Here’s the problem with this "analysis."  Suppose that monetary policy perfectly controlled inflation.  What would a graph of inflation over time look like (note that the author only shows a few years in the graph)?  It would be a flat line with no variation from its target value whatsoever, and it would be uncorrelated with any other variable.  The fact that there is no correlation between inflation and the ff rate would be an indication of the success of the policy, not that inflation and monetary policy are unrelated.  Looking at such raw correlations tells us nothing at all about causal relationships.  This is a very well known fallacy in the literature surrounding monetary policy and anyone who purports to write as an expert on monetary policy ought to be aware of this.

          As for the other part of the argument, there are sound theoretical reasons for looking at core inflation rather than total inflation that I won’t detail here.  But suppose that core inflation is the target of monetary policy.  Then core inflation would flat line but total inflation would not, and a measure of inflation including energy prices could show a correlation with the ff rate as claimed in the article.

          But the conclusion is exactly the opposite of what the author claims.  Finding a correlation between the ff rate and inflation including energy prices means, if policy is successful, that policy does not target energy prices, not that it does.

          Monetary policy does not affect prices and inflation?  This does not belong in the Wall Street Journal.

            Posted by on Wednesday, June 29, 2005 at 09:37 AM in Economics, Monetary Policy, Press | Permalink  TrackBack (1)  Comments (8)


            Tuesday, June 28, 2005

            What We Don’t Know Can’t Hurt My Lobbyists

            Yet another example of attempts to manipulate inconvenient scientific evidence:

            Salmon: Protect the evidence, Seattle Post-Intelligencer:  Sen. Larry Craig ... The Idaho Republican … is trying to eliminate scientific evidence of what is happening to fish in the Columbia River system.  A Senate appropriations bill includes report language intended to kill … collecting data on the survival of salmon in the Columbia and Snake rivers. ... Craig and others are angry about recent federal court rulings protecting endangered fish. … Craig also has raised the idea of using the appropriations process to undo the court decisions, an extremely bad idea both in principle and practice. Congress must preserve the … integrity of the courts. The Senate should not try to undo the … science needed to protect threatened creatures and the environment …

            This needs to stop.

              Posted by on Tuesday, June 28, 2005 at 08:53 PM in Environment, Politics, Regulation, Science | Permalink  TrackBack (0)  Comments (4)


              We Can't be Trusted With Your Money

              In one lockbox proposal after another the Republicans are announcing to the world again and again 'we can't be trusted with your money.'  Even Bush says Social Security will be bankrupt because “we take your money and we spend it.”  Lock the cookies away before I eat them! 

              There's a better solution to a congress that can't control itself.

                Posted by on Tuesday, June 28, 2005 at 07:08 PM in Economics, Social Security | Permalink  TrackBack (0)  Comments (8)


                The School of “Hairshirt” Economics

                Christopher Farrell of BusinessWeek Online creates some new (and confusing) schools of economic thought - the hairshirts and the Growth proponents:

                Alan Greenspan, Wizard or Villian (sic)?, By Christopher Farrell, BusinessWeek Online:  Remember when Federal Reserve Board Chairman Alan Greenspan held sway over the American economy -- and imagination? … No more. Greenspan-bashing is now a popular sport ... One reason is that the 10-year economic expansion came to an end with the dot-com bust and subsequent recession. Another is that Greenspan's standing as the Monetary Maestro was overhyped during ... the 1990s. And the third is that his fallibility as a central banker was overemphasized during the difficult economy of the early 2000s. Indeed, the chairman has never recovered his lost luster.

                No mention of his support for the 2001 tax cuts?

                Still, Greenspan's most vehement critics go a lot further than this. They're convinced he has made a fundamental error as a monetary economist. Call it the hairshirt economists vs. the cheerleaders for growth-is-good. The hairshirts believe that for the health of the economy to be restored, the inevitable bust that follows a boom must be at least as great as the boom. Growth proponents -- and there's none greater than Greenspan -- believe that it's better to limit the fallout of a bust and get the economy growing again as quickly as possible.

                Hairshirt economists?  What school is that?  Though he makes reference to Schumpeter's evolutionary view of cycles (recesssions are good because they weed out the inefficient firms and workers) later it becomes evident he means classical economists, so why not just say that?  And the Growth proponents – most of us would call them Keynesians.  More on this shortly, but there are two fundamental confusions here.  The first is to call the monetarists interventionists.  The second is to confuse short-run stabilization policy with policies to promote long-run growth.

                … To the hairshirts' way of thinking, the great mistake Greenspan made was … to drive rates to a 45-year low to limit the damage from the recession. The Fed then nurtured the recovery by keeping money policy loose …  The result: today's "low saving rates, the housing bubble, high debt loads, and a runaway current account deficit," writes Stephen Roach, chief economist at Morgan Stanley … The critics say Greenspan has transformed the economy into a giant bubble ... The longer he delays the day of reckoning, the worse the fallout will be when the bubble pops.  That's a severe indictment -- but not necessarily a valid one. A problem with the anti-Greenspan mindset is that hairshirt economics was largely discredited during the Great Depression. The most infamous proponent … was Andrew Mellon, President Herbert Hoover's Treasury Secretary. He called for letting the Depression run its course without government interference …

                In case you missed it, that’s an endorsement of Keynesian economics and a claim that the Great depression invalidated classical economic policy (the monetarist, hands-off, laissez faire position), as he now notes

                … Mainstream economists of all schools, from Keynesianism to monetarism, turned away from hairshirt economics after the Great Depression. They realized that the government could play a positive role in counteracting contractionary forces in the economy. …

                This is really confused.  How did Keynesians turn away from hairshirtism after the Great Depression?  Keynesian economics didn’t even exist prior to the depression.  What he’s trying to say is that the forced interventionist experiment caused by World War II was credited with ending the Great Depression leading to an endorsement of Keynesian economics over the classical hands-off position.  And it’s just wrong to say that monetarists advocated government intervention.  There was this long discussion, called the Keynesian-Monetary debate, on this issue.

                … Case in point: The chairmanan (sic) came under heavy criticism during the 1990s for not "taking the punchbowl away" ... The fear among most economists was that inflation would take off as the economy heated up. But Greenspan gambled … The bet paid off handsomely.  American productivity has been running at an average annual rate of 3% since 1995, about double the pace of the previous two decades. Productivity is what economists really care about, because its growth rate is the foundation of higher living standards.  … Indeed, most economists systematically overestimate the limits to growth …

                This is another fundamental misunderstanding.  There are two distinct sets of economic policies, one set is about stabilizing the economy around the natural rate, whatever it might be, the other is about making economic growth as strong as possible.  Long-run economic growth depends upon real,  not monetary factors in almost all mainstream economic models.  Monetary policy is designed to stabilize the economy around the natural rate, but it does not change the natural rate itself.  Technology, growth in human and physical capital, growth in the labor force, etc. are the sources of growth.  Monetary policy is not a large factor.  It affects growth in the short-run, but not the long-run.

                … Perhaps there is a bubble in the housing market. … But a record 70% of American households now own their own homes. And growth is also persuading business leaders to invest … Greenspan is no economic wizard … He has made his share of mistakes ... But what should be defended is the economics of growth. Remember, not all price increases are bubbles, booms are better than busts, and growth is not only good -- it's vital.

                So, Greenspan is a monetarist interventionist Growth proponent following Keynesian short-run policies to promote long-run growth. 

                Hare-brained hairshirt economics.

                [PGL at Angry Bear comments here.]

                  Posted by on Tuesday, June 28, 2005 at 03:42 PM in Economics, Monetary Policy, Press | Permalink  TrackBack (1)  Comments (12)


                  No Change in The CBOT's Fed Funds Rate Target Probabilities

                  No surprises in the Chicago Board of Trade’s calculation of the probabilities of changes in the FOMC's federal funds target rate, as indicated by the CBOT 30-Day Federal Funds futures contract, just posting for the record:

                  CBOT Fed Watch - June 29 Market Close - Based upon the June 29 market close, the CBOT 30-Day Federal Funds futures contract for the July 2005 expiration is currently pricing in a 100 percent probability that the FOMC will increase the target rate by at least 25 basis points from 3 percent to 3 1/4 percent at the FOMC meeting on June 30.

                  In addition, the CBOT 30-Day Federal Funds futures contract is pricing in a 4 percent probability of a further 25-basis point increase in the target rate to 3-1/2 percent (versus a 96 percent probability of just a 25-basis point rate increase).

                  June 23:  96% for +25 bps versus 4% for +50 bps.
                  June 24:  96% for +25 bps versus 4% for +50 bps
                  June 27:  96% for +25 bps versus 4% for +50 bps
                  June 28:  96% for +25 bps versus 4% for +50 bps.
                  June 29:  96% for +25 bps versus 4% for +50 bps

                  June 30: FOMC decision on federal funds target rate.

                  Thus, according to the CBOT 30-Day Federal Funds futures contract, there is a 100% chance the target rate will increase .25% to 3.25%, and a 4% chance it will increase an additional .25% to 3.50%.

                  [Update:  June 29 - No change.]

                    Posted by on Tuesday, June 28, 2005 at 03:33 PM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (0)


                    Monday, June 27, 2005

                    Fed Watch: Ready to Pull the Trigger, Again

                    Tim Duy brings us his latest Fed Watch:

                    It appears that a 25bp rate hike is in the cards this week – a widely accepted view on the outcome of the two-day Fed meeting, as revealed in the market for fed funds futures via macroblog.  So the interesting question is "What comes next?"  I believe that the Fed remains not quite ready to signal the end to rate increases, as they tend to view US growth as fundamentally solid.  Consequently, I also expect them to retain language describing policy as "accommodative." That said, the Fed will likely tone down its assessment of the economy to acknowledge the lackluster flow of data from since their last meeting.  The tone of the data also calls for retention of the measured pace language.

                    It is notable that Fedspeak, with the exception of Dallas Fed President Richard Fisher’s errant comments, has tended to be supportive of further rate hikes.  For example, Mark Thoma referenced John Berry’s piece last week regarding interviews with Minneapolis Fed President Gary Stern and Richmond Fed President Jeffrey Lacker, neither of whom sounded ready to shift from the Fed’s path of measured rate increases.  Two week’s ago, Kansas City Fed President Thomas Hoenig indicated that the neutral range for the Fed Funds rates is 3.5-4.5%.  Of course, this is not terribly surprising; I have trouble imagining a central banker describing the current situation of near zero real short term rates as anything other than accommodative.

                    Last but most importantly, Fed Chairman Alan Greenspan’s testimony on June 9 gives no indication that he is ready to dramatically alter his take on economic activity.  Note that Greenspan’s comments came after the disappointing ISM and employment reports.  A few choice quotes:

                    "The most recent data support the view that the soft readings on the economy observed in the early spring were not presaging a more-serious slowdown in the pace of activity. Consumer spending firmed again, and indicators of business investment became somewhat more upbeat."

                    "The alternating bouts of rising and falling oil prices have doubtless been a significant contributor to the periods of deceleration and acceleration of U.S. economic activity over the past year."

                    "Despite the uneven character of the expansion over the past year, the U.S. economy has done well, on net, by most measures."

                    "Accordingly, the Federal Open Market Committee in its May meeting reaffirmed that it ... believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability."

                    Has much changed since Greenpan’s comments?  Manufacturing activity has been mixed, with industrial production up and headline durable goods orders both up, the latter on the back of fresh Boeing orders, but nondefence, noaircraft capital goods down.  The housing market continues to hold, with new sales up. Inflation figures were tame, as measured by the PPI and the CPILeading indicators were down, as were retail sales.  And anecdotal evidence, as measure by the Beige Book, is consistent with these data snippets.

                    Reports from all twelve Federal Reserve Districts indicate that business activity continued to expand from mid-April through May. Most Districts--including New York, Richmond, Atlanta, Chicago, Minnesota, Kansas City, and San Francisco--characterized the pace of expansion as moderate, solid, or well-sustained. However, Philadelphia noted that the pace of growth had eased in May while Boston and Cleveland observed some unevenness across sectors.

                    Reports on retail sales in April and May were mixed.

                    Reports on residential real estate markets remained quite positive overall, although some slowing in activity was noted in a few markets.

                    Labor market conditions continued to improve in most Districts, and several reports cited difficulty finding specific types of workers.

                    Most Districts reported that manufacturing activity continued to expand, although several Districts noted that production had slowed or leveled off.

                    Overall, I would describe the incoming data as lackluster, and I believe the FOMC will as well.  Nothing spectacular, nothing disastrous.  Most notable is the rise in oil prices to record highs since the last FOMC meeting, an event that will likely cut both ways for the FOMC.  Higher oil will likely cause a slowdown in the pace of activity (as noted by Greenspan above and macroblog here), but also implies incipient inflationary pressures.

                    So what’s the bottom line?  Stay the course, remain confident about overall economic activity, but acknowledge the risks to the outlook.  Or, in other words, hike rates and reduce accommodation at a moderate pace.  Overall, I think the Fed will try to impart the feeling that while they are aware of the downside risks to the outlook, markets should expect additional rate hikes later this year.

                    [Note: Sorry for my absence from Mark’s blog – I tend to ease back for a few weeks after the school year comes to the close. Plus, it is a good opportunity to spend some time with our littlest economist at home.]

                      Posted by on Monday, June 27, 2005 at 04:09 PM in Economics, Fed Watch, Monetary Policy | Permalink  TrackBack (0)  Comments (4)


                      More Social Security Nonsense from the NRO

                      Here's the latest nonsense from the NRO on Social Security reform:

                      Bad Democratic Trinity - There are three Democratic plans for Social Security — and all are bankrupt, NRO: … Democrats have offered three positions on this issue, each as appetizing as a bowl of chilled spinach: The first and most popular Democratic plan could be dubbed: "Don't do something. Just stand there." Almost every Democrat seems content to delay indefinitely any Social Security reform …

                      Doing nothing is preferable to doing something stupid (see the DeMint proposal). His discussion of the Wexler proposal shows what happens if a Democrat tries to seriously engage and participate. Any Democratic proposal has no hope of passage or support, only ridicule, so the choice is solely to oppose or support the GOP proposals. Given what’s on the table, opposition to reform is more than appropriate.

                      The second Democratic approach resembles a Freudian slip from Senator Jon Corzine (D., N. J.) … Corzine disagreed, telling journalists: "U.S. Treasury securities have the ability to be paid under any circumstances based on the ability of the government to print money." Corzine's press secretary denied that this was an actual proposal…

                      This guy confuses an explanation of why the government will not default on its bonds (it’s a promise to pay dollars and dollars can always be printed) with a proposal for Social Security reform. This isn’t a proposal for Social Security reform and it’s as stupid as the DeMint plan to call it one.

                      The third Democratic position, call it "Pay Till It Hurts," comes from Rep. Robert Wexler (D., Fla.). … Too bad his plan is a tax hike. …

                      This, along with the fact that there really isn’t a solvency crisis despite what you’ve been told by the administration, is why the Democrats are not participating. It’s telling that in a column about the lack of Democratic proposals the one proposal out there is excoriated. He finishes with:

                      So, what Democrats recommend on Social Security is zippo, a debauched dollar, or a huge tax hike. …

                      And what the GOP offers is misleading rhetoric leading to stupid plans for reform, then blaming Democrats for their own failures. Gridlock is much preferable to anything I’ve seen from the GOP so far.

                        Posted by on Monday, June 27, 2005 at 12:40 PM in Economics, Social Security | Permalink  TrackBack (0)  Comments (4)


                        Sunday, June 26, 2005

                        The Plot Against Social Security

                        This is a link to an adapted excerpt from Michael A. Hiltzik's new book, The Plot Against Social Security: How the Bush Plan Is Endangering Our Financial Future  appearing in the Los Angeles Times. This article makes it very clear that the campaign to reform Social Security is driven by ideology, not economics.  The article itself is fairly lengthy and, of course, the book is even longer. Here are a few passages worth highlighting, but read the whole thing and pay attention to the line at the end about a $100 million war chest:

                        Undoing the New Deal, by Michael A. Hiltzik, Los Angeles Times: … If there were any doubts that Bush's campaign against Social Security was not fiscal or economic but strictly ideological, Wehner's memo dispelled them in a stroke. But his words weren't meant for the public eye (although they were promptly leaked to the press). In its public language, the Bush campaign for Social Security reform has steered clear of the elemental ideological conflict, sticking instead to the language of economics. The magic of privatization, as President Bush would repeat often over the next few months, would save Social Security from impending bankruptcy; never was heard a single word about the goal of ensuring victory for the conservative movement in "the battle of ideas." … On Social Security privatization, Cato is the center of the universe. For 25 years the rightist think tank has been a relentless promoter of private accounts and the fount of hundreds of white papers, book-length studies and op-eds driving the battle plan. … Michael Tanner, the chairman of its Social Security task force … left no room for doubt that Cato … saw the issue in terms of ideology, not economics—as a classic battle to promote libertarian ideals hostile to the very principle of social insurance. "In the end, this isn't a debate about the system's solvency in 2018 or 2042," he told me, mentioning the years in which, according to Social Security doomsayers, the system's fiscal health would start to ebb, then collapse. "It's about whether you think the government should be in control of your retirement or people should take ownership and responsibility. That's why the debate is so intense—why would anyone get so excited about transition costs? This is about whether we redefine a relationship between individuals and government that we've had since 1935. …

                        When members of Congress returned to Washington in March 2005 from a mid-term break in their home districts, the Republicans seemed shaken. … In the weeks and months that followed, more polls suggested that on the issue of Social Security, public doubts were rising, if not about President Bush's courage and honesty, then at least about his wisdom. … And yet he stuck to his guns. "I'm going to continue traveling our country talking about Social Security reform," he told a news conference on June 2. What he didn't mention was that the war chest, $100 million strong, was still available for deployment. He sounded as though the fight had not yet begun. And it was entirely possible that he was right.

                        This battle isn't over.

                          Posted by on Sunday, June 26, 2005 at 10:14 PM in Economics, Politics, Social Security | Permalink  TrackBack (0)  Comments (11)


                          The Use of Real-Time versus Revised Data in Monetary Policy Research

                          This is wonkish, and it's long. It's lonkish. It explains the use of real-time versus revised data in monetary policy research.

                          In the analysis of monetary policy there has been reference to the use of real-time data (e.g. see here and here). Because this is an important issue in the theoretical and empirical analysis of monetary policy, I thought I would explain what this issue is and why it matters.

                          The difference in the two types of data is easily explained. At the time policymakers decide policy, for example at the upcoming FOMC meeting this week, the data they will have available is real-time data. However, after the meeting, there will be substantial revisions in some of the key series used to guide policy. For example, as in this recent release from the BEA (5/26/05 ), 1st quarter GDP growth was revised upward from 3.1% to 3.5% a fairly large increase. Revised data are considered more accurate reflections of the economy, so in the past these data were almost always used in empirical investigations.

                          But that does not mean that revised data best reflect what policymakers use when choosing a course for monetary policy. Real-time data may be much better suited to analyzing policy decisions. To me, there are two arguments here. First, real-time data is what’s actually available in terms of hard numbers and that speaks towards its use. But there are many more signals about the economy than are reflected in a few summary statistics and perhaps the revised data better reflect what policymakers actually know as the contemplate future policy. It would be nice if it didn’t matter, but it does. There are test of important theoretical results that change depending upon which type of data are used.

                          A good place to start on these issues is Boivin (NBER May, 2005, this link is to a free April version), and there is more to this paper than just an analysis of what type of data to use, but that’s the focus of this post. I’ll present a summary of Boivin's paper later, but let’s go back to one of the seminal papers on the use of real-time data by Orphanides (AER 2001, JMCB 2003, these are free versions, not links to the actual published journal papers) who has led the charge on this issue.

                          Here’s the important issue. In the Taylor rule, there is a coefficient on the deviation of inflation from its target value. If this coefficient is greater than one, then the economy is stable and well-behaved according to popular theoretical models of the U.S. economy. However, if the coefficient is less than one, then the economy can potentially be less stable (I hope my colleagues will forgive me for using imprecise language here and not attempting an in depth discussion of indeterminacy, sunspots, and so on, and for not elucidating the two separate theoretical reasons for the change after 1980 noted by Clarida, et. al.).

                          An important paper by Clarida, Gali, and Gertler (QJE 2000) produces empirical evidence showing that prior to 1980 the coefficient on inflation in the Taylor rule was less than one, i.e. in the range of indeterminacy, but after 1980 it was greater than one, in the stable range. As Clarida, Gali, and Gertler note “…the economy exhibits greater stability under the post-1979 rule than under a rule that closely approximates monetary policy pre-1979.” Thus, according to these estimates, a substantial change in monetary policy occurred around 1980 that caused the economy to become much more stable.

                          This is where real-time data come in. Orphanides (2001, 2003) weighed in with a ‘wait just minute’ paper. He showed that if you use real-time rather than revised data, the differences pre and post-1980 are not so stark. In fact, he finds that the coefficient on inflation is greater than one in both time periods implying that monetary policy had followed a rule that produced a stable outcome for the economy in both time periods.

                          That brings us to a more recent word on this issue, and a good place to begin tracking back, Boivin (NBER 2005). Here’s his summary of the results:

                          Despite the large amount of empirical research on monetary policy rules, there is surprisingly little consensus on the nature or even the existence of changes in the conduct of U.S. monetary policy. Three issues appear central to this disagreement: 1) the specific type of changes in the policy coefficients, 2) the treatment of heteroskedasticity, and 3) the real-time nature of the data used. This paper addresses these issues in the context of forward-looking Taylor rules with drifting coefficients. The estimation is based on real-time data and accounts for the presence of heteroskedasticity in the policy shock. The findings suggest important but gradual changes in the rule coefficients, not adequately captured by the usual split-sample estimation. In contrast to Orphanides (2002, 2003), I find that the Fed's response to the real-time forecast of inflation was weak in the second half of the 1970's, perhaps not satisfying Taylor's principle as suggested by Clarida, Galìì and Gertler (2000). However, the response to inflation was strong before 1973 and gradually regained strength from the early 1980's onward. Moreover, as in Orphanides (2003), the Fed's response to real activity fell substantially and lastingly during the 1970's.

                          So, using real-time data it is not so clear that the Fed followed a stable rule prior to 1980 after all. What is the answer? Was the coefficient on inflation in the Taylor rule greater of less than one prior to 1980? What other results change when real-time data are used?  This is an active area of research. I'll have to let you know...

                            Posted by on Sunday, June 26, 2005 at 07:20 PM in Academic Papers, Economics, Macroeconomics, Methodology, Monetary Policy | Permalink  TrackBack (0)  Comments (0)


                            Sunday Reading

                            Some opinions. It seems evident that the tone is changing and finally, though I hope this isn’t simply a case of seeing through wishful eyes, it appears that harder questions are being asked of this administration:

                            For the birds. I wonder if stories two and three are related?

                            Why we teach those boring classes on statistics and probability:

                            Attack of the robo lobsters

                            Machines really do mimic life:

                            Home prices, Oil Prices, Saving, China, and the Fed:

                            You guessed it. Social Security:

                            Serious story:

                            And, on the environmental front:

                            They probably should have let this guy finish his bong hit:

                            And finally, since it's time for summer reruns to begin, I thought I'd start the season off with an animation from Lee A. Arnold on Social Security.  If you missed it the first time around, take a look:

                              Posted by on Sunday, June 26, 2005 at 12:06 AM in Economics, Iraq and Afghanistan, Monetary Policy, Politics, Reading, Regulation, Social Security, Technology | Permalink  TrackBack (0)  Comments (2)


                              Saturday, June 25, 2005

                              The Wind Blows Both Ways in Washington

                              Here's a nice piece by Jared Bernstein of the Economic Policy Institute appearing in The American Prospect.  Your left-side will feel better.

                                Posted by on Saturday, June 25, 2005 at 03:34 PM in Economics, Politics, Social Security | Permalink  TrackBack (0)  Comments (1)


                                Does the Increase in the Price of Gold Signal Inflationary Expectations are Rising?

                                You might find this interesting.  Speculators are dumping dollars and moving into real assets such as gold and a few analysts are predicting the price to nearly double over the next few years.  Possible reasons?  Higher inflationary expectations, flight out of real estate funds due to fears the peak is near, and flight out of hedge funds.  Another factor, according to this article,  appears to be Middle Eastern nations increasingly holding real assets such as gold in their portfolios rather than dollar denominated paper assets to avoid currency risk:

                                Gold rush may mean inflation bust - The metal's recent jump worldwide and high oil prices signal serious inflation pressures ahead, by Katie Benner, CNN/Money:  Gold rising along with the dollar -- and with oil jumping to record highs near $60 a barrel -- may signal serious inflation woes ahead. … A handful of precious metals insiders … predicted that the price of spot gold will hit $850 an ounce in the next few years from its current level near $440.  The last time it got anywhere near that high was in the late 1970s when out-of-control inflation, unrest in the Middle East and an oil crisis pushed the precious metal from $150 to $810 a troy ounce.  Gold is currently trading 30 percent above its 10-year moving average … and gained five percent this month … While economists debate whether high oil prices will spark inflation or will slow economic growth by acting as a tax on consumers and businesses, the gold and bond markets have come down on the side of inflation.  "The recent run in gold has moved in conjunction with rising crude prices," David Meger, senior metals analyst at Alaron Trading, said in a recent note.  ...  "Middle East nations are getting more petrol dollars as (oil) prices rise, and they're not putting it back into paper assets," said Charles de Vaulx, manager of the First Eagle Gold Fund. "They're trying to protect the value of their profits -- just like in the 1970s -- so they're buying gold," he … despite the fact that some market analysts … say the metal has become overbought in the short term.  … When inflation grips a market, the value of dollar-denominated assets is eroded. So a shift to gold represents … a broader shunning of financial assets in favor of hard assets as a hedge against perceived currency risks. …  At the moment, however, gold and the dollar are both rising. But metals traders argue that the price of gold is still an accurate indicator of inflation risks, because the dollar's rise doesn't reflect true strength, only relative value compared to an equally troubled currency.  "Confidence in the euro as an alternative to the dollar has fallen apart," said Frank Holmes, chairman and chief investment officer as U.S. Global Funds. … Few analysts believe the metal will trade between $600 and $800 over the next few years, mostly because they assume rising oil prices will slow demand for fuel and eventually bring crude prices down.  But consulting firms like Alaron Trading are still bullish on gold, particularly because they see weakness in a variety of paper assets. …"We're seeing both real estate and hedge fund become more uncertain now, and if it's going to happen, we'll see the investment demand for gold," de Vaulx said.

                                I don’t believe we will see significant inflation – the Fed will not let that happen – so I would not place as much emphasis as this article does on inflation fears as an explanation for the flight into gold.  But feel free to disagree ...

                                  Posted by on Saturday, June 25, 2005 at 02:32 PM in Economics, Inflation, Oil, Unemployment | Permalink  TrackBack (0)  Comments (15)


                                  'Holey' Flag Burning Amendment!

                                  I am marking this day on my calendar. I agree with Cato:

                                  Flag Desecration Amendment Undermines American Principles
                                   
                                  The House of Representatives approved a constitutional amendment Wednesday to prohibit desecration of the American flag. Roger Pilon, director of Cato's Center for Constitutional Studies, testified before the House on a similar amendment in 1999. "This amendment, as it tries to shield us from offensive behavior, gives rise to even greater offense. By offending our very principles, it undermines its essential purpose, making us all less free."

                                  As nTrain notes here, "The greatest culprit of actual flag burning, it seems, are the Boy Scouts."

                                    Posted by on Saturday, June 25, 2005 at 12:41 PM in Politics | Permalink  TrackBack (0)  Comments (1)


                                    Real and Nominal Oil Prices Since 1970

                                    The Wall Street Journal has a nice graph of real and nominal oil prices since 1970 highlighted with important historical events.  Click here to take a look.

                                      Posted by on Saturday, June 25, 2005 at 11:54 AM in Economics, Oil | Permalink  TrackBack (0)  Comments (3)


                                      Friday, June 24, 2005

                                      Bush's Pie in the Sky

                                      More news of how this administration manipulates anything and everything for short-run political advantage:

                                      Bush's Star Wars fantasy, The New York Times: A Pentagon panel of outside rocketry experts was too polite to use the phrase "pie in the sky," but they might as well have in excoriating the rush to deploy an unworkable antimissile system in time for President George W. Bush's 2004 re-election campaign. Although clearly bedeviled by test failures and unproven components, the first antimissile stations in this fantastic $130 billion-plus windfall for the defense industry were officially deployed on the West Coast last autumn - just in time to cover Bush's vow in 2000 to have the system up in four years. Predictably, the re-election was soon followed by more embarrassing test failures … According to a Washington Post report on the classified study, the experts concluded that the rush to deployment only compounded long-running technical problems. The badly flawed system remains unable to detect or destroy an incoming missile despite the continuing billions spent on complex problems with booster rocket, radar and satellite systems. … the Pentagon … has pronounced the program in a state of "evolutionary acquisition." This means the parts were designed and contracted out first in hopes of actually making them work later … the Pentagon, in rushing to deliver on the president's promise, suspended normal accountability standards for this offspring of the military industry's old Star Wars grail. Dozens of retired admirals and generals have urged the president to shift money to the more imminent threat of low-tech terrorism at America's vulnerable ports, borders and nuclear weapon depots. This advice has been ignored…

                                        Posted by on Friday, June 24, 2005 at 09:28 PM in Politics, Science | Permalink  TrackBack (0)  Comments (1)


                                        Lifting the Veil on Social Security Reform

                                        I’ve done my share of critical pieces on the press. So when the press reports useful information, I should highlight that as well. It appears that the press sees through the GOP's latest proposal on Social Security reform and is willing to lift the veil on the underlying strategy. They report that the reform plan is nothing but a political trick that will increase the deficit indefinitely:

                                        GOP Sounded the Alarm But Didn't Respond to It - Thomas Bill Does Not Address Social Security Solvency, By Mike Allen and Jonathan Weisman, Washington Post: For six months, Republicans have traveled the country as fiscal Paul Reveres, sounding the alarm about the coming collapse of Social Security. … But when House leaders finally rolled out their Social Security plan this week, it did nothing to address the problem that lawmakers and the president have convinced the public is looming as baby boomers retire. … House Ways and Means Committee Chairman Bill Thomas (R-Calif.) said … he decided to release the personal accounts plan now because he was "tired of reading all these stories about how nothing was happening and that it was dead in the water." "This was to show you we're not dead," he said in a brief interview. "We're not moribund. We're not disheartened or whatever. …."

                                        When House Republicans announced their plan Wednesday, they offered only a single sheet consisting of a dozen sentences and no dollar figures. An analysis of a similar plan conducted by the nonpartisan actuary of the Social Security Administration concluded that it would worsen the nation's fiscal picture. That plan, which was introduced in the Senate, would require the transfer of nearly $1 trillion in general tax funds to the Social Security system to avoid accelerating the date when the Social Security system will become insolvent. "The total debt held by the public is increased indefinitely," Chief Actuary Stephen C. Goss wrote. …

                                        Democrats said they view the new House plan as a political trick to try to portray them as obstructionist when they raised objections, and interviews with Republican lawmakers suggested there may be some truth to that. "If the Republicans take this to a vote and the Democrats try to stop us, I think we end up the winners," said Jim DeMint (R-S.C.), who introduced the plan in the Senate yesterday. "It'll help convince Americans in 2006 that we need a few more Republicans." … Robert Greenstein, executive director of the liberal Center on Budget and Policy Priorities, said the GOP plan's purpose "is not to restore solvency, but to serve as a foot in the door for more extensive private accounts in the future." Republicans indicated they hope the plan will pressure Democrats to negotiate, ... But Democrats immediately denounced the plan, and not one signed on to it. …

                                        I believe the public is a whole lot smarter than those behind this reform proposal and the spin surrounding it give them credit for.

                                        Update:  A Boston Globe editorial "Social Security scam" is more direct in its appraisal of the proposal.]

                                          Posted by on Friday, June 24, 2005 at 08:19 PM in Economics, Politics, Social Security | Permalink  TrackBack (0)  Comments (4)


                                          The CBOT's Fed Funds Rate Target Probabilities

                                          Following up on David Altig’s post at macroblog, here is the Chicago Board of Trade’s calculation of the probabilities of changes in the FOMC's federal funds target rate, as indicated by the CBOT 30-Day Federal Funds futures contract:

                                          CBOT Fed Watch - June 24 Market Close - Based upon the June 24 market close, the CBOT 30-Day Federal Funds futures contract for the July 2005 expiration is currently pricing in a 100 percent probability that the FOMC will increase the target rate by at least 25 basis points from 3 percent to 3 1/4 percent at the FOMC meeting on June 30.

                                          In addition, the CBOT 30-Day Federal Funds futures contract is pricing in a 4 percent probability of a further 25-basis point increase in the target rate to 3-1/2 percent (versus a 96 percent probability of just a 25-basis point rate increase).

                                          June 23:  96% for +25 bps versus 4% for +50 bps.
                                          June 24:  96% for +25 bps versus 4% for +50 bps.

                                          June 30: FOMC decision on federal funds target rate.

                                          Thus, according to the CBOT 30-Day Federal Funds futures contract, there is a 100% chance the target rate will increase .25% to 3.25%, and a 4% chance it will increase an additional .25% to 3.50%.

                                          [Update 6/27/04:  The probabilities are unchanged June 27:  96% for +25 bps versus 4% for +50bps.]

                                            Posted by on Friday, June 24, 2005 at 07:26 PM in Economics, Monetary Policy | Permalink  TrackBack (1)  Comments (1)


                                            Why Do So Many Households Hold So Few Interest-Bearing Assets?

                                            I'm not sure this post will inspire as many comments as the post below it, but increasing national saving is an important issue both generally and in the Social Security reform debate, so I thought I'd present some empirical evidence on how the accumulation of financial assets by households changes as households become more informed about financial markets. A paper by Casey Mulligan (University of Chicago) and Xavier Sala-i-Martin (Columbia University) appearing in the Journal of Political Economy, Vol. 108, No. 5. (Oct., 2000), pp. 961-991 (JSTOR stable URL – subsc.) reports that according to the Survey of Consumer Finances, 59% of U.S. households hold no interest-bearing financial assets over and above employer held pension funds and IRAs. Why do so many households hold so few assets? The authors argue that the transactions and learning costs of entering financial markets are sufficiently high so as to more than offset the expected earnings for most households. They also suggest that people with retirement fund assets such as employer held pensions and IRAs have lower transactions and learning costs because their exposure to retirement assets may bring additional understanding of how such markets function. They find that “(a) the elasticity of money demand is very small when interest rate is small, (b) the probability that any individual holds any amount of interest-bearing assets is positively related to the level of financial assets, and (c) the cost of adopting financial technologies is negatively related to participation in a pension program.”

                                            I want to focus a bit more on (c) which tells us that participation in a pension program increases the likelihood of holding financial assets at all income levels. The Social Security debate is often centered around the idea of an ownership society for lower and middle income class workers so the focus will be on households with low amounts of financial wealth. A new econometrics textbook that will be out this fall uses data from the study to investigate this issue. The example in the book asks “How likely is an individual with $1,000 in total assets to hold any of it as interest-bearing assets if he or she has no retirement accounts?." At an asset level of $1,000 the probability (from probit estimates) that an individual will hold any of the $1,000 in interest bearing assets is 12%. However, when an individual already has a pension plan of some type, the probability of holding additional financial assets rises to 18%. Also, note that these percentages pertain to a particular asset level, $1,000, and according to result (b) the percentages increase as the asset level increases.

                                            This is evidence that one of the barriers to entering financial asset markets is the cost of learning how they operate. This may also explain why discussions of add-on accounts have noted much higher participation rates with opt-out as opposed to opt-in programs. There is a much larger incentive to learn what you need to know to protect the principal or liquidate the assets than there is to put the assets into a retirement account. That is, if the investments are automatic or if particular funds, etc. must be chosen there is an incentive to make sure the principal is protected and to learn the rules under which the principal can be drawn down if needed. In the process needed knowledge is obtained. When the system is opt-in, the expected return is not sufficient to trigger the learning needed as a prerequisite to participation in financial markets.

                                            Let me be clear. I believe the solvency issue has been oversold and we do not need to radically alter the Social Security program. This is in no way a call for private accounts to solve some imagined hyped-up problem. But decreasing the barriers to participation by lower and middle income households in financial markets is an important goal and this tells us something important about how to do that. As I watch colleagues fret over the very few retirement options available to them (me too), and these are Ph.D. economists, and as intelligent friends ask questions about annuities (like what the heck are they?), etc., it seems to me that these barriers are substantial.

                                            I do not know if it is lack of knowledge of the types of financial assets, their risk-return characteristics, knowing where to go to purchase assets at the lowest fee, and so on that constitutes the biggest barrier to participation. But the change in participation rates from 12% to 18% in the numbers above at relatively low asset levels from simply having a pension account no matter how passive the participation suggests there are potential gains to be made through better education. Less than full information among participants is a known market failure, especially when information is asymmetric (why do annuities come to mind again?). My casual observation, and more to the point empirical results, suggest lack of information is a substantial problem. If we can identify and overcome areas where lack of knowledge is a barrier to participation, perhaps we can increase participation in financial markets at all income levels, particularly among low to middle class households.

                                            What is the most important informational barrier? Is it as simple as knowing where to go to buy an asset like a T-Bill, corporate bond, or index fund? Or is it a lot more than that?

                                              Posted by on Friday, June 24, 2005 at 02:34 AM in Academic Papers, Economics, Macroeconomics, Reading, Saving, Social Security | Permalink  TrackBack (0)  Comments (24)


                                              Thursday, June 23, 2005

                                              Redirect

                                              Hello.  I have moved from Economist's View to this site (6/23/05).  Please update your links. Thanks!

                                                Posted by on Thursday, June 23, 2005 at 11:59 PM in Weblogs | Permalink  TrackBack (0)  Comments (10)


                                                We'll Need DeMint to Pay for This Proposal

                                                I’ve done quite a bit of writing about Social Security at this site so it might surprise you to learn that I almost never go to SocialSecurityChoice.org. The reason is simple. On the few occasions I have ventured there, what I see posted irks me greatly, and then I feel compelled to rebut the misleading post du jour. Today, at the behest of PGL at Angry Bear I ventured over there. And just like the times I’ve visited in the past, I can’t help but rebut the top post by Andrew Roth. It concerns the DeMint Social Security reform proposal:

                                                The DeMint Proposal - Stop the Raid on Social Security Act, by Andrew Roth:

                                                How It Works:

                                                  1. Saves the surplus in voluntary personal accounts – the only true lockbox
                                                  2. Invests funds in government bonds initially
                                                  3. Stops the raid on the surplus – no more secret spending
                                                  4. Provides 100% current benefits
                                                  5. No payroll tax increases

                                                What It Accomplishes:

                                                   * First step toward permanent solution
                                                   * Ends Congress’ free lunch – forces government to recognize future obligations
                                                   * Makes immediate down payment on long-term reform

                                                Just The Facts:

                                                   * Prevents Congress from raiding over $792 billion between 2006 and 2016
                                                   * Rebates 2.2% of taxable earnings in 2006, allowing medium-earners ($35,000/year) to save over $770
                                                   * Invests in government bonds initially; offers other options later
                                                   * Combines account and traditional benefits to meet current promises
                                                   * Reduces Social Security’s long-term liabilities by $2.4 trillion

                                                My post yesterday on Samuelson began with “Where do I start?” Those words echo again as I read this. So I’ll follow the advice of the always intelligent Mary Poppins and start at the beginning.

                                                How it works

                                                1. The claim that personal accounts are a lockbox is misleading. I explain the reason in this post: Luskin is Wrong: Personal Accounts Do Not Protect Benefits. The post says "This is the standard lockbox argument for private accounts. Having had the solvency foundation crumble, this is their last resort, that the lockbox will prevent the government from spending your money. But it doesn’t, and closer inspection undermines this argument as well. Let’s take a numerical example..."
                                                2. The personal accounts are to be invested in government bonds. Are these bonds the worthless promise Bush has been talking about? Why aren’t they proposing investing in private bonds? With government bonds, personal accounts are still financing the rest of government. In addition to the points in 1, what kind of lockbox is that?
                                                3. What secret spending? Isn’t it public? Is congress spending money and not telling us? The real issue here is accountability and trust and what Roth's post tells us is that the GOP has neither – hence the call for a “lockbox” that isn’t.
                                                4. 100% current benefits? There is no free lunch. Period. Quoting from this report on the proposal: “Another GOP staffer familiar with Tuesday's scheduled event said the participants will acknowledge that redirecting surplus Social Security funds will create budget problems elsewhere.” Something somewhere will have to be cut or taxes will need to be raised.
                                                5. No payroll tax increase? That’s fine, I’m in agreement with that. But how will this be paid for? Will benefits be cut or will taxes be raised? Those are the choices. Which will it be? As the WP article notes: “The strategy is controversial because it would create new budget problems. Either the diverted money would have to be replaced with new taxes, or Congress would have to slash programs now funded by Social Security's excess payroll taxes.”

                                                Then the post goes on to claims about how they end the free lunch and so on. I see no reason to continue. Unless one of you has a question about something at SocialSecurityChoice.Org in the future, I don’t see much point in going back. Friends don't let friends read propoganda.

                                                  Posted by on Thursday, June 23, 2005 at 03:02 PM in Economics, Social Security | Permalink  TrackBack (3)  Comments (27)


                                                  Did Monetary Policy Change Permanently in 1979?

                                                  [Note: This is a nice non-technical discussion of monetary policy, but the post is somewhat long. If you are more interested in Social Security and other issues, scroll right on by ...]

                                                  There has been quite a bit of discussion concerning the merits, implementation, and effectiveness of inflation targeting lately at this site. I’ve been watching for something readable but still technically sound on this topic to pass along and I recalled this piece by Benjamin Friedman, first presented at the Federal Reserve Bank of St. Louis conference on “Reflections on Monetary Policy 25 Years After October 1979,” St. Louis, October 7-8, 2004. Before discussing the paper, let me point those of you who are advocates of inflation targeting and those of you who have reservations about inflation targeting to two readable papers on this issue:

                                                  • Friedman, Benjamin M. 2004. "Why the Federal Reserve Should Not Adopt Inflation Targeting." International Finance, 7 (March), 129-136. [copy here]   
                                                  • Mishkin, Frederic S. 2004. "Why the Fed Should Adopt Inflation Targeting." International Finance, 7 (March), 117-127. [copy here]   

                                                  The question Friedman is addressing in this paper is how policy to today is related, if at all, to changes in monetary policy implemented during the Volcker years in response to the October 1979 experience. There are three areas of focus, a change in policy objectives such as placing more weight on inflation and less on output, a change in the policy instrument such as a change from an interest rate target to targeting a monetary aggregate, and a change in focus from monetary aggregates such as M1 and M2 to measures of reserves or the monetary base. The paper also talks about why the Fed might be too hesitant to adjust interest rates in response to economic conditions as reflected in measures such as inflation and unemployment, another recent topic of discussion, and how this results in a lagged interest rate term in the Taylor rule (this is called smoothing). Finally, commitment to rules versus discretion in monetary policy is also discussed. For those who are interested in this topic, I think this is worth reading:

                                                  What Remains from the Volcker Experiment?, Benjamin M. Friedman, NBER Working Paper No. 11346, May 2005 (sub.): [also available free here]:… [T]here remains a widespread sense that the world of monetary policymaking in the United States has been somehow different since 1979. What exactly is different, and in what respects those differences stem from the innovations introduced in 1979, are questions well worth addressing. … [T]he broad public discussion of the Federal Reserve’s new approach in 1979 primarily emphasized the elevation of quantitative money growth targets … from the irregular and mostly peripheral role … to center stage. ... The Open Market Committee had chosen to place primary emphasis on the narrow M1 aggregate, but … Evidence since then shows that by the mid 1980s M1 had disappeared altogether as an observable influence on policymaking, and the same happened to the broader M2 measure by the early 1990s … [T]he main point here is simply that the reliance on money growth targets that was key to at least the public presentation of the new monetary policy regime in 1979 has now entirely disappeared.

                                                  The same is true for … an open market operating procedure based on the quantity of either nonborrowed or borrowed reserves. … The only way in which some version of a reserves-based operating procedure could have survived … would have been if policymakers thought the relationship between reserves growth and economic activity was more reliable than the relationship between interest rate growth and economic activity. Few economists have been prepared to make that case. As a result, the Federal Reserve has gone back to carrying out monetary policy by fixing a short-term interest rate – in the modern context the overnight federal funds rate – just as it did for decades prior to 1979.

                                                  That leaves … the Volcker experiment represent[ing] a new, presumably greater weighting attached to achieving “price stability” … has that greater weighting survived? The post-1979 record of price inflation in the United States surely creates some prima facie presumption to this effect. … Does this … represent a genuine change in the weighting placed on inflation … Or is there some other explanation, independent of the Volcker experiment? One point worth making explicitly is that … there is no evidence that the increased tolerance for interest rate fluctuations that the Federal Reserve exhibited during the Volcker period has survived. One of the most frequently offered criticisms of monetary policy operating procedures based on fixing short-term nominal interest rates is that central banks have traditionally proved too hesitant to adjust the interest rates they set, and when they do move interest rates they have tended to do so too slowly. The usual explanation is that, in addition to their objectives for such macroeconomic variables as price inflation and the growth of output and employment, central banks also take seriously their responsibility to maintain stable and well functioning financial markets … For this reason, now-conventional expressions of operating rules for monetary policy, like the “Taylor rule,” normally include a lagged interest rate along with measures of inflation and output (or employment) relative to the desired benchmark.

                                                  Part of what distinguished the Volcker experiment was the unusually wide … fluctuations of short-term interest rates that occurred under the Federal Reserve’s quantity-based operating procedures. … in recent … no such fluctuations have been allowed to occur. Might the Federal Reserve again permit them if doing so seemed necessary to rein in incipient inflation? Perhaps so, but on the evidence there is no ground for claiming that this aspect of the 1979 experiment has survived either. …

                                                  The United States experienced little inflation in the 1950s, and not much in the 1960s either. Hence the historical evidence is also consistent with the view that the 1970s were exceptional, rather than that the experience since 1979 has differed from what went before as a whole. Even the idea that the Volcker experiment represented a return to the greater policy weight on price stability vis-a-vis real outcomes that had motivated the Federal Reserve before the 1970s, and that this renewed commitment to price stability has lasted ever since, would make the events of 1979 a major and lasting contribution to U.S. monetary policymaking. But … other explanations are also possible. … Resolving the merits of … other potential interpretations of the historical record … is surely a worthwhile object of empirical research. … Finally, one further aspect of what 1979 may or may not have been about bears attention. Perhaps what was important about the changes … was not the specifics of money growth targets and reserves-based operating procedures but rather … in the traditional language of this subject, to impose “rules” where there had been “discretion.” … But to the extent that it was a form of rule … it too clearly failed to survive. Federal Reserve policymaking in recent years has epitomized what “discretion” in monetary policy has always been about. Precisely for this reason, advocates of rules over discretion today continue to seek some way of moving Federal Reserve policymaking in that direction. The proposal of this kind that has attracted the most interest currently is “inflation targeting.” Whether adopting inflation targeting would be a good or bad step for U.S. monetary policy is a separate issue. But one reason the issue is even on the agenda today is that the movement in this direction that the experiment of October 1979 represented did not last either.

                                                    Posted by on Thursday, June 23, 2005 at 02:34 AM in Academic Papers, Economics, Monetary Policy, Reading | Permalink  TrackBack (0)  Comments (2)


                                                    It Ain't Over 'til It's Over

                                                    If you can’t get enough to read on Social Security reform, and that’s hard to imagine if you drop by here with any regularity, here are six stories on the GOP plan for Social Security (WP, NY Times, CNN, MSNBC, AP, Reuters). They are fairly similar in terms of notable points, so here’s the story from the Washington Post. This proposal is nothing new, it diverts money into private accounts and reduces traditional benefits. A proposal that has private accounts for only ten years, changes solvency estimates by only two years, has a maximum payout per person of $588, has clawback and administrative expenses large enough to cause negative returns by some estimates, reduces benefits by the earnings on the private accounts, and does not address the large budgetary consequences it brings about cannot possibly be a serious proposal. This is an attempt to open the door and build momentum towards something, anything, with the hope of reshaping and redirecting it once it begins to move forward. Republican strategies and justifications shift with the wind, but for now generating movement, or the appearance of pushing towards movement, and pressure on Democrats to compromise is the game. As the shells begin to move around quicker and quicker in coming weeks, do your best to keep you eye on the ball:

                                                    House GOP Offers Plan For Social Security - Bush's Private Accounts Would Be Scaled Back, By Mike Allen and Jonathan Weisman, Washington Post: … House Republican leaders yesterday embraced a new approach to Social Security restructuring that would add individual investment accounts to the program, but on a much smaller scale than the Bush administration favors. The new accounts would be financed by the Social Security surplus … Republicans hope the new proposal will shift the debate away from future benefit cuts … to ending what they call the "raid" on the current Social Security surplus. But the plan, unlike Bush's, would do nothing to remedy the New Deal-era program's long-term fiscal problems. An aide to House Speaker J. Dennis Hastert (R-Ill.) called the bill "a great start," and House Majority Whip Roy Blunt (R-Mo.) called it "an excellent first step." … Rep. Eric I. Cantor (R-Va.) … called it "a breakthrough day," and Sen. John E. Sununu (R-N.H.) said the announcement was a victory ... But Democrats were vociferous in their condemnation, and some Republicans in the Senate remained doubtful. … Although the new plan is considerably less broad than Bush's approach, it would still fundamentally change the way the Social Security system operates. This year, Social Security will bring in $69 billion more in taxes than the system pays in benefits. Congress will borrow that money to fund other programs and then send $69 billion worth of Treasury bonds to the Social Security Administration. Those bonds would be cashed to finance benefits once the system slipped into deficit. Under the new proposal, those bonds would go to private investment accounts that would be opened for workers unless they chose not to participate. …. The balance of the accounts, plus interest, would eventually be subtracted from a retiree's traditional Social Security benefit. The system, as proposed, would operate only as long as Social Security ran a cash surplus -- or just more than a decade. ... A nearly identical bill will be introduced in the Senate today. Republican strategists said the new plan is a way to pressure Democrats to negotiate, and to portray movement. … But critics say there is not enough money to make the plan viable. About 130 million Americans who pay into Social Security and are under 55 would be entitled to personal accounts. Excluding interest owed on borrowed Social Security funds, the cash surplus from Social Security taxes this year will leave enough for an average of $434 available for each account. The Social Security Administration projects that, at its height in 2008, the cash surplus will reach $97 billion, … leaving an average of $588 each. But that cash surplus would decline rapidly to zero after a decade. By 2016, all that would remain is $40 per account. "You'd launch a proposal without any means of perpetuating the funding," said Robert L. Bixby, executive director of the Concord Coalition, a budget watchdog group. House Republicans said the plan would extend solvency from 2041 to 2043 … If the size of the accounts would be small, the cost to the government would not, said Jason Furman, an economist at the liberal Center on Budget and Policy Priorities. The proposal would add $600 billion to the federal debt over the next decade, assuming that two-thirds of eligible workers take accounts. The plan would not cut benefits, and the cost to taxpayers of administering minuscule accounts could be huge. Furman said the plan would push the program to insolvency two years faster than doing nothing, because of administrative costs and the amount that was inherited. "This is the worst of all worlds," he said. "It has all the problems of any private accounts proposal with none of the benefits for solvency."

                                                      Posted by on Thursday, June 23, 2005 at 02:25 AM in Economics, Social Security | Permalink  TrackBack (0)  Comments (4)


                                                      Wednesday, June 22, 2005

                                                      Time to Toss Samuelson

                                                      Where do I start?  I will agree with Samuelson on one point.  One of us does not understand macroeconomics:

                                                      Time to Toss the Textbooks, by Robert J. Samuelson, Washington Post: … Our ideas for explaining trends in output, employment and living standards -- what we call "macroeconomics" -- are in a state of disarray. … Let me give you three examples. We once thought we understood consumer spending, the economy's mainstay. For decades, disposable income and consumption spending advanced in lock step. Americans spent a bit more than 90 percent of their after-tax income and saved about 8 to 10 percent. … But since 1990, consumer spending has changed. It has consistently outpaced income growth. … The main cause is the "wealth effect." In the 1990s higher stock prices caused Americans to spend more; now higher home values … are doing the same. So consumer spending increasingly depends on "asset markets" -- stocks and homes -- and not just income…

                                                      So he says we don’t understand consumer spending and then he explains it. All he did was make consumption a function of wealth, something we’ve been doing since the 1950’s. We might wonder why wealth changes, e.g. what explains changes in housing markets, equity markets, and so on, but nobody is surprised that increases in wealth increase consumption. Let’s move on to Samuelson’s second point of misunderstanding:

                                                      … Economics textbooks once described the U.S. economy as mainly self-contained. ... Globalization has shattered this model. More industries face foreign competition or depend on foreign markets. ... Savings and investment have also gone global. … All this alters the U.S. economy. One theory of low American interest rates is that foreign money flows have pushed rates down. …

                                                      I hate to be the one to break it to him, but we’ve been adding terms like net exports to our models for a long time. Even principles books now routinely cover this, something that wasn’t true twenty or more years ago. I'd guess that's somewhere around the age of the textbook he references when he writes his comumns. If I thought it would help, I'd send him a new one. Next:

                                                      We can't determine "full employment.'' Economists call full employment the "natural rate of unemployment" -- the lowest rate consistent with stable inflation. Go lower and tight labor markets trigger a wage-price spiral. Unfortunately, we don't know what full employment is. The Congressional Budget Office now puts it at 5.2 percent. But past estimates have been too high and too low, because the "natural rate" … constantly changes. It's influenced by population changes (younger workers have higher unemployment rates) and government policies, among other things. …

                                                      So what’s the point? Because it’s hard to estimate exactly (even though he presumes to list the important factors that ought to go into a model of the natural rate) we shouldn’t even try? That instead we should operate with no information at all about the target level of output? And worse, he hasn’t identified a theoretical failing; this is a problem of measurement. We can’t measure the ex-ante real interest rate exactly either (because it depends upon expectations), but that doesn’t imply theory is wrong. Not at all. Another quote as we continue:

                                                      Although I could extend this list, the message would remain: Change has outpaced comprehension.

                                                      Yes, change in macroeconomics certainly has outpaced his comprehension.  He asks:

                                                      Should we be worried?

                                                      If he reflects the best and brightest in our press corps, we should be very worried.

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                                                        Posted by on Wednesday, June 22, 2005 at 03:06 AM in Economics, Macroeconomics, Press | Permalink  TrackBack (3)  Comments (9)


                                                        Is the Administration Dropping Private Accounts or Not? Yes and No.

                                                        There are several different articles on Social Security reform describing Republican Senator Bob Bennett’s proposal that excludes personal accounts and Bush’s head nod in his direction. CNN has both the AP and Reuter’s versions, and both Yahoo and BusinessWeek Online have another AP report. The position of the administration is a bit puzzling at first glance as it both embraces a proposal without personal accounts and simultaneously declares that personal accounts are a necessary part of any viable solution. Here’s the AP report from CNN. It amazes me that this report does not even mention that Bennett’s plan would cut benefits (Why oh why can't we have ...):

                                                        GOP senator to propose plan sans private accounts, AP: President Bush encouraged a Republican senator … to offer Social Security legislation that would not include private investment accounts … "He indicated that I should go forward and do that," Bennett said. … "This in no way should be interpreted to mean that the president is backing off of personal accounts," White House spokesman Trent Duffy said. "He is not." … Bennett said some Democrats have told him privately that they would support such a bill ... He said he is looking for Democrats to co-sponsor the bill, but he didn't have any to announce Tuesday. "We've had a lot of interest," he said. "We have a lot of hope that we can use this bill to break the logjam ..."

                                                        Rueters also carried the story and covers most of the same ground as the AP report. Importantly, the Reuters report adds that Bennett’s plan would cut benefits:

                                                        Bush may be flexible on accounts, Reuters: … Duffy said the White House understood that Bennett's plan would incorporate Bush's proposal to slow the growth of benefits for middle- and upper-income workers by linking them to prices rather than wages. On Tuesday afternoon, Bennett told CNN's Ed Henry that his proposal would maintain the scheduled growth in benefits for the bottom 30 percent of earners. …

                                                        Finally, another AP report (at Yahoo and BusinessWeek Online) notes a plan to divert the Social Security surplus into personal accounts (this plan is discussed here). It also discusses Bennett’s plan but does not add anything beyond the two reports discussed already.

                                                        So what’s going on here? Why is Bush supporting legislation that doesn’t include personal accounts while simultaneously saying he is not backing off of personal accounts? He realizes that any proposal including personal accounts is a non-starter. So, in order to get the ball rolling he has to allow the initial proposal to drop personal accounts. For now, the goal is to build momentum towards change. Once that is underway and a proposal appears that has a chance (if that is even possible at this point), he can try and tack personal accounts onto it later as it passes through the legislative process.

                                                        If a proposal without personal accounts goes through, then he can claim he saved the system from catastrophe and declare victory. If a proposal without personal accounts gets stalled, he can say he gave the Democrats what they wanted and they still stood in the way sticking them with the obstructionist label. Given the polls concerning the number of people who believe reform is needed, this is a viable strategy. And if somehow a proposal emerges and momentum for change builds to the point where compromise that incorporates personal accounts is embraced by Democrats, then he will most certainly declare victory. So long as he can get something rolling that appears to embrace compromise, the politics turn in his direction.

                                                        The Democrats need to tread carefully.  It’s still possible to snatch defeat out of the jaws of victory.

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                                                          Posted by on Wednesday, June 22, 2005 at 02:34 AM in Economics, Social Security | Permalink  TrackBack (0)  Comments (1)


                                                          AFL-CIO on Verge of Splintering as Unionization Falls to Pre-New Deal Levels

                                                          This is too bad. There’s been quite a bit of focus on issues such as the federal funds rate lately, but this is much more important for labor than the federal funds rate going up or down by some fraction of a percentage point:

                                                          Disunity at big labor, By Robert Kuttner,   Boston Globe: The AFL-CIO seems on the verge of splintering. Five of the most dynamic unions are threatening to leave the labor federation over differences of organizing strategies and financing. The timing is ominous. Earnings of ordinary workers are lagging inflation. Jobs, whether skilled or unskilled, are insecure, as are health and pension benefits. The future, except for a fortunate elite, seems to be outsourcing, downsizing, and Wal-Mart. Polls show that nearly half of America's workers want a union-- a right protected by the 1935 Wagner Act. But workers face ferocious, often illegal resistance by America's corporations aided by a friendly Bush administration. Rather than permit free collective-bargaining elections, most corporations harass and fire pro-union workers and treat small penalties as costs of doing business. Against this background, the unionized share of private-sector employment has dwindled to 8 percent of the workforce, or pre-New Deal levels. … [L]abor must organize or die. Wal-Mart, with its meager wages and dismal benefits, stands in mockery of everything that organized labor represents. But it will take the power of a united labor movement to make any headway against Wal-Mart and other low-wage employers…

                                                            Posted by on Wednesday, June 22, 2005 at 01:17 AM in Economics, Unemployment | Permalink  TrackBack (0)  Comments (1)


                                                            Tuesday, June 21, 2005

                                                            Nursing Social Security Reform Back to Health?

                                                            An interesting tidbit from U.S. News & World Report:

                                                            White House Watch: Too many presidential battles, too few chits, by Kenneth T. Walsh, USNews.com: Some administration officials are now saying that President Bush doesn't have enough political chits to pull off a victory on Social Security, given his other battles with Congress, which include the nomination of John Bolton as ambassador to the United Nations, his federal court appointees, tax overhaul, energy legislation, and the Central American Free Trade Agreement. The officials, who agree with key congressional leadership aides, believe that Bush should instead put Social Security on the back burner, make reform "a goal," and turn up the heat on the other issues. The White House, however, is not ready to back down on revamping Social Security, despite grim assessments of its chances. A key aide says that Bush will soon begin personally lobbying for the package with critical members of Congress–as he is already doing for CAFTA.

                                                            Despite the appearances of a  white flag on this issue by some members of congress, it appears the White House wants to press ahead with the battle. As much as I’d like to say otherwise, it’s too early to declare personal accounts and Social Security reform dead (see here for what Rep. Bill Thomas is up to). My theory is that Bush checked with Frist and was told that his legislative patient still has life despite appearances, diagnoses, and evidence to the contrary, and Bush is not ready to give up faith and pull the plug on this one just yet.

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                                                              Posted by on Tuesday, June 21, 2005 at 12:42 AM in Economics, Social Security, Taxes | Permalink  TrackBack (0)  Comments (0)


                                                              Fed Presidents Expect Continued Tightening

                                                              Bloomberg’s John M. Berry reports that two Fed presidents, Gary Stern of Minneapolis and Jeffrey Lacker of Richmond, expect continued tightening in the face of robust growth:

                                                              The Fed Will Make Several More Rate Increases: John M. Berry, Bloomberg: Federal Reserve officials see U.S. economic growth continuing at around a 3.5 percent pace into 2006 with inflation pressures strong enough to merit several more increases in the Fed's target for the overnight lending rate. Gary Stern, president of the Minneapolis Federal Reserve Bank, summed up the thinking of many of his Fed colleagues when he said in a June 20 interview with a Japanese newspaper (Nihon Keizai), “Right now there's no reason to stop tightening credit.” … inflation pressures -- while still “contained,” in the view of Fed Chairman Alan Greenspan and other officials -- are still strong enough to be worrisome. Companies appear to have regained some of their power to pass cost increases on to their customers through higher … And oil prices have kept rising, rather than receding as many Fed officials had anticipated. … “I have been happy that the pass-through to core has been less than we feared, and that the expectations embedded in the yield curve have subsided noticeably,” Jeffrey Lacker, president of the Richmond Federal Reserve Bank, told reporters on June 20 after a speech to a bankers group in Hot Springs. Virginia. Nevertheless, like Stern, Lacker said, “I think a moderate pace of continued tightening is a sensible outlook at this point and that it is too soon to say when we are going to stop.” … As this year wears on, Fed officials will be watching all the data, as they always do… Economist Robert V. DiClemente of Citigroup … His own best guess as to where the Fed will pause in raising rates: 4 percent.

                                                              I’m not so sure about the prediction of a 4% target given the moderate inflation and sputtering employment recently and it’s far too soon to say in any case. For example, today it was reported by CNN Money that:

                                                              Leading indicators down in May, CNN Money: A key gauge on the future direction of the economy dropped 0.5 percent last month, resuming a slide that began in January after a standstill in April, a private research group said Monday. The New York-based Conference Board said its index of leading indicators fell to 114.1 in May. It revised April's index upward to an unchanged reading from a previously reported 0.2 percent decline. Only one of the 10 indicators in the index -- stock prices -- increased in May.

                                                              At least one knowledgeable observer, James Hamilton, says of the 4% target “I hope that the market guess of a 4% fed funds rate is wrong, and think it probably will be. The Fed couldn't be that stupid, could it?” We shall see.

                                                              Update: Barry Ritholtz at The Big Picture notes some interesting comments by PIMCO's Bill Gross who sees the Fed pausing at 3.5% by August, and then potentially cutting rates thereafter.]

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                                                                Posted by on Tuesday, June 21, 2005 at 12:33 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (0)


                                                                Administration Waters Down Climate Statements

                                                                More meddling in science from the administration, this time it’s global warming:

                                                                Document: US wants climate statement 'watered down', by Tom Regan, csmonitor.com: … the British newspaper, the Observer reports a draft statement about global warming, prepared for the upcoming G-8 summit in Scotland, was leaked to the British and US media last week. (The New York Times reported the document came from a European official close to the talks). The draft statement shows that the Bush administration is engaged in an "extraordinary effort" to "undermine completely the science of climate change … [Read full article].

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                                                                  Posted by on Tuesday, June 21, 2005 at 12:15 AM in Environment, Science | Permalink  TrackBack (0)  Comments (0)


                                                                  Monday, June 20, 2005

                                                                  Inflation Targeting and the Taylor Rule

                                                                  The Taylor rule and inflation targeting are important elements of recent discussions of interest rate rules and the goals of monetary policy.   For those of you unfamiliar with these terms, the Taylor rule is discussed momentarily. Inflation targeting is described by Ben Bernanke and Frederic Mishkin:

                                                                  Ben S. Bernanke; Frederic S. Mishkin, The Journal of Economic Perspectives, Vol. 11, No. 2. (Spring, 1997), pp. 97-116 (JSTOR link): … This approach is characterized … by the announcement of official target ranges for the inflation rate at one or more horizons, and by the explicit acknowledgment that low and stable inflation is the overriding goal of monetary policy. Other important features of inflation targeting include increased communication with the public about the plans and objectives of the monetary policymakers, and, in many cases, increased accountability of the central bank for attaining those objectives…

                                                                  Let’s start with what I believe is a source of miscommunication in discussions of monetary policy goals. In the traditional Phillips curve formulation of the policy problem there is a tradeoff between inflation and unemployment in the short-run. Thus, an interest rate rule that has the federal funds rate as a function of the deviations of inflation and output from their target values must choose weights, b and 1-b, in the Taylor rule:

                                                                  ff = a + b(y-y*) + (1-b)(p-p*) + v

                                                                  where ff is the federal funds rate, y is output, p is inflation (not the price level), b is between 0 and 1, and * indicates the target value. The term v picks up the monetary shock. The politics of this is often expressed as Democrats and the lower income workers being more concerned with output and unemployment and thus wanting a high value of b, and those concerned with inflation, generally identified as the wealthy and the right, wanting a high value for 1-b.

                                                                  But there is another view of this model that avoids these politics because it does not involve choosing one goal over the other. If we start with a general equilibrium model with wage and price stickiness, the type of model presented here, and we ask what type of policy rule (appropriately linearized) maximizes household welfare, the answer looks a lot like a traditional Taylor rule. And, surprisingly, the optimal federal funds rate rule, the one that maximizes welfare (i.e. stabilizes the welfare relevant concept of the output gap), puts a large weight on the deviation of inflation from target relative to the weight on the deviation of output from its target. That is why the goal of output and employment stability expressed as maximizing household welfare, and the economic security that comes with it, is consistent with the a policy rule that places a lot of weight on inflation.

                                                                  There are many other issues regarding the Taylor rule. The Taylor rule presented above is far too simple to serve as an adequate representation of the kinds of policy rules used in theoretical and econometric investigations, and I plan to cover some of this in future posts. Some of the issues I’d like to address are interest rate smoothing (adding lagged interest rate values to the Taylor rule, see Woodford, ch. 6), how to measure real activity and core inflation to set policy, whether to use actual deviations or expected future deviations in the policy rule, whether to use real-time or revised data, and other issues.

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                                                                    Posted by on Monday, June 20, 2005 at 12:42 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (2)


                                                                    Social Security Reform and Market Manipulation

                                                                    One of the reasons given in 2001 for the creation of private accounts is expressed by Alan Greenspan when he calls for a zero debt target in his testimony before the Committee on the Budget, U.S. Senate. He argues that there will be a growing budget surplus and that the government should divest itself of the surplus through the creation of private accounts (e.g. see here). The reason is that it would be difficult to shield the government’s investment decisions from political pressure. He states “Thus, over time, having the federal government hold significant amounts of private assets would risk sub-optimal performance by our capital markets, diminished economic efficiency, and lower overall standards of living than would be achieved otherwise.” This argument has come full circle and is now being used as a reason to oppose private accounts:

                                                                    Social Security reform: A way to manipulate the market, by Kerry Lynch, CS Monitor: One of the biggest potential dangers of the White House plan to create a private investment option as part of Social Security is the incentive it would create for the government to interfere with the markets. Under the type of program favored by the White House … a worker could channel a portion of his or her payroll tax into a personal investment account similar to an IRA or 401(k) plan. The investment options probably would be limited to a small group of index funds … And therein lies the rub. Who would decide which funds are approved? Government officials would - and they'd do it by limiting investment options to a few index funds. It's not hard to envision special interests pressuring Congress or the White House to require the Social Security investment funds to exclude certain stocks- or to use inclusion of certain stocks as leverage to force companies to change their ways. … Also politicians would have an even stronger incentive than they have now to use US fiscal and monetary policy to create a perpetual bull market … And even the most sincere effort to limit political interference would, itself, require Washington to interfere in the market. Because limiting investment options to a few index funds would in effect channel hundreds of billions of dollars into a few thousand, or even a few hundred, companies, thereby excluding thousands of others. … For proof, look no further than legislation introduced recently by House Government Reform Committee chairman Thomas M. Davis III (R) of Virginia and colleagues Chris Van Hollen Jr. (D) of Maryland, and Jon C. Porter (R) of Nevada. With backing from the National Association of Real Estate Investment Trusts, the legislation would require the Federal Retirement Thrift Investment Board (which oversees the federal employees' savings funds) to include a real estate investment (REIT) trust fund among the five investment options available to federal employees. The issue isn't whether REITs - which have recently outperformed the S&P 500 Index - are sound investment vehicles. The issue is political meddling. …

                                                                    This argument can be used to support either position. Suppose there is a surplus in the Social Security account (and there is, but it’s being used for other purposes like funding the 2001 tax cuts). If the government maintains the assets, it must invest them in the private market raising the fears Greenspan expressed in 2001. But if the private sector invests the assets through personal accounts, the government must still be involved in narrowing the set of investment choices raising the fears expressed above. And since private accounts may require a more limited set of choices than if the government invests the money itself using professional managers, it is not clear that private accounts would result in less government involvement in the private sector. The government will be involved to a large degree in any case, and the use of the word “private” in this debate is misleading for that reason, but that is the subject for another post…

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                                                                      Posted by on Monday, June 20, 2005 at 12:33 AM in Economics, Social Security | Permalink  TrackBack (0)  Comments (0)


                                                                      Sunday, June 19, 2005

                                                                      Time to Call a Plumber

                                                                      Yes, you’ve convinced a lot of people there’s a problem: 

                                                                      Poll Finds Broad Pessimism on Social Security Payments, NY Times: A majority of Americans are … pessimistic that Social Security will pay the benefits they expect … the … debate over Social Security's long-term solvency … has left its mark … Fifty-one percent of respondents said they did not think Social Security would have the money to pay the benefits they expect when they retire; 70 percent of those under 45 felt that way…

                                                                      But just as many do not want you to try and fix it:

                                                                      Poll Shows Dwindling Approval of Bush and Congress, NY Times: ...Two-thirds said they were uneasy about Mr. Bush's ability to make sound decisions on Social Security. Only 25 percent said they approved of the way Mr. Bush was handling Social Security ... Moreover, 45 percent said that the more they hear about Mr. Bush's Social Security plan, the less they like it ... The sharpest drop in Congressional approval in recent months occurred among Republicans ...

                                                                      Rather than call a professional, who would tell you the problem can be fixed rather easily if you know what you are doing, you are going to try and fix it yourself. All that’s needed is to blow a great big hole in the budget and to borrow a whole bunch more money. Here’s the latest gem of desperation:

                                                                      GOP Senators to Propose New Tack On Social Security, Washington Post: Key Republican lawmakers, scrambling to keep President Bush's Social Security proposals afloat, plan next week to embrace ... funding personal retirement accounts with surplus revenue that now pays for other government programs. The strategy is controversial because it would create new budget problems. Either the diverted money would have to be replaced with new taxes, or Congress would have to slash programs now funded by Social Security's excess payroll taxes. Republicans said yesterday that they will address those concerns later. … Sen. Rick Santorum (Pa.), [and] ... Sen. Lindsey O. Graham (S.C.) … will join Sen. Jim DeMint (R-S.C.) …

                                                                      The essence of this proposal is nothing new. It diverts money flowing into Social Security to private accounts. It’s the same old pig dressed up in a different outfit.

                                                                      Here’s something new. More stories about Social Security!   

                                                                      And in another surprise, stories on housing:

                                                                        Two-faced cats on the lookout for animals on the loose:

                                                                                 From animals to meaty stories about vegetarians:

                                                                      Outsourcing, trade, consumer confidence, and oil.  If we threw in immigration it would be pique Lou Dobbs:

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                                                                        Posted by on Sunday, June 19, 2005 at 01:17 AM in Economics, Reading, Social Security | Permalink  TrackBack (0)  Comments (1)


                                                                        Saturday, June 18, 2005

                                                                        Input Substitution and Grade Inflation

                                                                        I have a colleague whose father, a highly respected historian, taught for many, many years at a university we have all heard of. I have also been working on a report concerning grade inflation at the University of Oregon (we have it, are average in terms of severity, and input substitution appears to play a role) and he thought I might be interested in seeing his father’s grade book. This is a principles level history course taught in 1949. After showing the grade book, I’ll calculate some statistics and give you an idea how this compares to grade distributions today. I'll also present some statistics for the U.S. overall since the mid 1960's and some preliminary results from the study I'm doing.

                                                                        When my colleague showed this to one of his students, the response was an incredulous "Whoa, dude, this is for a history class?":

                                                                        How does this compare to today? The mean grade for this distribution is a 2.22, between a C and a C+ (ignoring + and -, the numbers are A-13, B-45, C-54, D-19, and F-9; there are 140 students). Here are some statistics for the U.S. for comparison (these are from www.gradeinflation.com which presents additional statistics as well as links to the source data for each school):

                                                                        There are two episodes that account for most grade inflation. The first is from the 1960s through the early 1970s. This is usually explained by the draft rules for the Vietnam War. The second episode begins around 1990 and is harder to explain. High school GPAs rise during the same time period (entering students at the UO had a high school GPA of 3.30 in 1992, 3.31 in 1996, 3.37 in 2000, and 3.47 in 2004 while SAT scores remained relatively flat, though they did increase modestly in math).

                                                                        My study finds an interesting correlation in the data. During the time grades were increasing, budgets were also tightening inducing a substitution towards younger and less permanent faculty. I broke down grade inflation by instructor rank and found it is much higher among assistant professors, adjuncts, TAs, instructors, etc. than for associate or full professors. These are instructors who are usually hired year-to-year or need to demonstrate teaching effectiveness for the job market, so they have an incentive to inflate evaluations as much as possible, and high grades are one means of manipulating student course evaluations. I used a market basket approach much like with CPI inflation where the basket was a set of courses highly influential in the average students GPA to try and separate "real" from "nominal" changes in grades over time. Changes in course composition, student composition, faculty composition, and institutional rules were all examined, and changes in faculty composition associated with tighter budgets was an important factor. But that does not explain all of the inflation that I observed in our data and I am looking into this further over the summer.

                                                                        Update: Here's one measure across faculty rank, %A (other measures also show this). We have three levels of courses, level 1 is principles and level 3 is upper division. Here are the numbers:

                                                                        Full professors (%A in Levels 1, 2, 3) 26% 31% 35% Assistant professors (%A in Levels 1, 2, 3) 30% 45% 42% Adjunct professors (%A in Levels 1, 2, 3) 38% 50% 42%

                                                                        For comparison, the grade distribution from 1949 given above has a %A of 9% for a level 1 class (13/140).

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                                                                          Posted by on Saturday, June 18, 2005 at 12:42 AM in Universities, University of Oregon | Permalink  TrackBack (0)  Comments (0)


                                                                          Friday, June 17, 2005

                                                                          The New York Times on Bernanke

                                                                          I haven't had a chance to read this closely yet, and won't until much later today, so I thought I'd pass it along. It's an article in the New York Times about Bernanke.  Let me know what you think of it:

                                                                          Fed Official Moves Up and Into Politics, by Edmund L. Andrews, New York Times: For years, some of his closest friends did not know that Ben S. Bernanke was a Republican. It is not that Mr. Bernanke has been shy about his views. As an economist at Princeton, he broke new ground on the causes of the Depression. And as a governor on the Federal Reserve Board since 2002, he spoke bluntly about weakness in the job market, the dangers of deflation, the impact of higher oil prices and the need for the Fed to reduce uncertainty by being more open. "If monetary policy is like driving a car," he mused last December, "then the car is one that has an unreliable speedometer, a foggy windshield and a tendency to respond unpredictably." But now Mr. Bernanke (pronounced ber-NANK-ee) is moving directly into the political arena, taking over next week as chairman of President Bush's Council of Economic Advisers. He is also on the short list of potential candidates to succeed Alan Greenspan as chairman of the Federal Reserve. The two jobs are related, if only because Mr. Bush will be looking to name a new Fed chairman that he knows well and trusts. Two other possible candidates to succeed Mr. Greenspan, who has been atop the Fed for nearly 18 years, are also former council chairmen: Martin Feldstein, who served under President Reagan; and R. Glenn Hubbard, who worked for President Bush from 2001 to 2003. Mr. Bernanke built a sterling reputation while at Princeton, and has won widespread praise for his cogent analyses while at the Fed. But he has studiously avoided partisan political issues, at least in public. He has said little about issues at the top of Mr. Bush's agenda, like Social Security and tax cuts, and his economic writing betrays few hints of political ideology. "If you read anything he's written, you can't figure out which political party he's associated with," said Mark L. Gertler, a professor of economics at New York University who has written more than a dozen papers with Mr. Bernanke. Mr. Gertler, who said he did not know his close friend's political affiliation until relatively recently, added: "He's not ideological. I could imagine Ben working with economists in the Clinton administration." Alan S. Blinder, a longtime colleague at Princeton who has advised numerous Democratic presidential candidates, also said he had worked alongside Mr. Bernanke for years without having any sense of his political views. "We wrote articles together and sat at the same lunch table thousands of times before I knew he was a Republican," Mr. Blinder recalled. "We never talked politics." Mr. Bernanke enjoys enormous credibility among economists in academia as well as on Wall Street - an advantage for him that may also pay off for Mr. Bush."I think Wall Street would be more comfortable with Bernanke as Fed chairman, if only because he isn't viewed as being ideological," said William C. Dudley, chief United States economist at Goldman, Sachs. The disadvantage is that Mr. Bernanke may not be able to build up close ties in the White House, where Mr. Bush's inner circle places high priority on personal loyalty and passionate support for the White House's policy goals. Mr. Bernanke declined to be interviewed until he starts his new job. The Senate approved his nomination in a unanimous voice vote on Wednesday and he is expected to start early next week. But administration officials and people who know him said Mr. Bernanke was eager to switch from the Fed to the White House. Ben Shalom Bernanke, 51, established his academic prowess early in life. The son of a pharmacist in Dillon, S.C., he won the state spelling bee in sixth grade, only to falter in the national championship on the word "edelweiss." In high school, he taught himself calculus because his school did not offer it. He earned the highest SAT scores of any student in South Carolina the year he applied to college. He went on to study economic history at Harvard University and then earn a doctorate in economics at Massachusetts Institute of Technology. "I always thought I would be an academic lifer," Mr. Bernanke recalled in a speech to the American Economic Association in January, adding that his biggest complaint about the Fed was the need to wear a suit to work. Following on the work of Milton Friedman and Anna Schwartz, who blamed the Depression of the 1930's on misguided Fed policy, Mr. Bernanke forged his academic reputation by arguing that the problems had been made worse because the United States and many other countries clung to the gold standard. The key to economic recovery, he wrote, came when Franklin D. Roosevelt let the dollar float and then reset its value at a much lower level in relation to gold. The "gold standard orthodoxy," Mr. Bernanke remarked in a speech last year, led to "disastrous consequences" and highlighted the dangers of adhering to rigid but untested economic ideas. As a professor at Princeton, Mr. Bernanke became a tireless advocate of "inflation targeting," which calls for a central bank to publicly establish a target for inflation - perhaps no more than 2 percent - and to set monetary policy with that target in mind. Mr. Bernanke, along with many other economists, contends that setting public targets would be a major step toward greater openness at the Federal Reserve and would make it much easier for investors to anticipate policy. It is an idea that Mr. Greenspan adamantly opposes, on the ground that it would reduce the flexibility of the Fed and be difficult to carry out in practice. But even though Mr. Bernanke openly disagreed with Mr. Greenspan, the dispute does not appear to have hampered his relations with the Fed chairman. Indeed, analysts believe Mr. Bernanke has played a significant role in making the central bank more transparent. In a major departure in 2003, the Fed began giving investors what amounted to advance guidance by declaring that it would keep interest rates low for a "considerable period." Over time, it gradually changed its guidance and has been telling investors for the last year that it would raise rates at a "pace that is likely to be measured." Though Mr. Greenspan clearly supported the advance guidance, the practice fit neatly with Mr. Bernanke's thesis that the Fed needed to communicate more clearly with the public. In moving to the White House, Mr. Bernanke appears ready to make a major career change. He recently informed Princeton, where he has been on a leave of absence, that he will officially resign his professorship at the end of this summer. That is a departure from his three most recent predecessors - Harvey S. Rosen, N. Gregory Mankiw and Mr. Hubbard - who all returned to their academic posts. Mr. Bernanke also bought a house on Capitol Hill and adopted the Washington Nationals as his hometown baseball team. His wife, Anna, is teaching Spanish at the National Cathedral School here. People who know Mr. Bernanke say he is entirely comfortable in supporting President Bush's economic policies. He has expressed little worry about the current budget deficit, which is expected to be about $350 billion this year, and he has supported Mr. Bush's call to overhaul Social Security. But that may not be enough. Lawrence B. Lindsey, director of the Mr. Bush's National Economic Council in the first term, infuriated White House officials by publicly suggesting before the war in Iraq started that it could cost $100 billion to $200 billion. He was immediately silenced, and later forced to resign. Since then, the cost of the war has exceeded his estimate. Mr. Mankiw never veered from White House policy, but came under heavy attack when he described the "outsourcing" of jobs to other countries as a form of trade that would ultimately benefit the United States. The comment was consistent with Mr. Bush's perspective, but Mr. Mankiw was forced to apologize publicly to House Republicans anyway for his politically incorrect views. As he moves to the White House, Mr. Bernanke's most valuable political preparation may have been earned serving on the school board in Montgomery Township, N.J., where he fought to win support for the construction of new schools. Mr. Bernanke recently described that experience as "six grueling years during which my fellow board members and I were trashed alternately by angry parents and angry taxpayers." In the end, Mr. Bernanke and his side won the day. The last school under debate at that time was recently completed.

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                                                                            Posted by on Friday, June 17, 2005 at 01:18 PM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (0)


                                                                            Bush Delays Tax Reform Deadline

                                                                            While the focus has been on Social Security and other issues, a committee has been quietly at work for the last five months getting ready for the next big push, tax reform. Today, president Bush extended the deadline for the committee to present their recommendations even though the committee said they were on schedule. The reason for the delay is not completely clear to me. One interpretation is that they are clearing the battleground of all but a few issues, Social Security being one of them, to make one last stand for personal accounts. The white flag you might have seen waving yesterday was not flying on the White House flag pole. Are personal accounts dead? It looks like it. But so long as Bush is in the White House, and perhaps beyond that, I will keep a wary eye out for the return of personal accounts. The second interpretation is that personal accounts are dead (though politics may dictate playing it otherwise) and the delay is to avoid a push for a new initiative directly on the heels of failed Social Security reform. One thing is clear. The time will come when tax reform is the focus of the administration’s effort:

                                                                            Bush extends tax reform deadline, by Krysten Crawford, CNN Money: …President Bush has extended until the end of September a deadline for a panel to submit recommendations for reforming the federal income tax code. The President's Advisory Panel on Federal Tax Reform, which has spent the last five months holding public hearings on the tax system, was originally due to release a proposal by July 31. Bush signed an order Thursday extending the deadline to Sept. 30. Taylor Griffin, a Treasury Department spokesman, said the panel was on track to meet its earlier deadline, but said Treasury and White House officials felt that this summer's legislative plate was already full. He cited a number of top priorities, including Social Security, a new anti-terrorism bill, judicial nominations, and the budget. … Bush, making good on a campaign promise last year, appointed the nine-member panel in January. … The call for a substantial overhaul of the income tax system enjoys widespread support. … While there's consensus about the need for a fix, there's considerable disagreement on the appropriate remedy. Among the leading suggestions: abolishing the income tax code altogether in favor of a national retail sales tax or some other system that taxes consumer spending instead of incomes. Critics say such a system would be unworkable because it inherently subjects lower-income taxpayers to a higher tax burden given they spend a larger proportion of their incomes than the wealthy do…

                                                                            Time to start getting ready ...

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                                                                              Posted by on Friday, June 17, 2005 at 01:08 AM in Economics, Social Security, Taxes | Permalink  TrackBack (0)  Comments (0)


                                                                              Kansas City Fed’s Hoenig Defines Neutral Fed Funds Rate, Says Ignore Yield Curve

                                                                              Kansas City Federal Reserve Band President Thomas Hoenig said that his preference is for the Fed to move the federal funds rate to a neutral range, 3.5% - 4.5%, sooner rather than later given the strength in output growth. However, he notes this prescription is data dependent and if future data indicate slower growth, then the pace of rate increases should slow as well. He also says he doesn’t have an explanation for a flattening yield curve, but implies that isn't a problem because the yield curve is not a focus of policy:

                                                                              Hoenig Sees Neutral Rate ‘Sooner Rather Than Later’, Bloomberg: Federal Reserve Bank of Kansas City President Thomas Hoenig said the benchmark U.S. interest rate may need to rise to a neutral level "sooner rather than later," depending on the pace of U.S. economic growth. Economists estimate the neutral interest rate, which neither spurs nor restrains the economy, is 3.5 percent to 4.5 percent, Hoenig said in a speech to bankers today in Wichita, Kansas. "That's the range that we have to shoot for," said Hoenig, adding that his remarks aren't intended to forecast where rates actually will end up. "… we would want to be in that range sooner rather than later." … How quickly the Fed's benchmark rate reaches neutral, and whether it does so at all, are "unpredictable because we are, in fact, data dependent," Hoenig said. … "If there was, in fact, a slower growth rate by whatever amount, then you might judge it necessary to go more slowly." The U.S. economy is operating at a "strong, healthy pace," Hoenig said. "There has been an increase in the levels of inflation and if we continue to grow at a strong pace, that may become more of a data series we want to watch carefully." Hoenig said he does not know why the yield curve, a pictorial representation of yields on Treasury securities across the maturity spectrum, is flattening. "I wouldn't want to manage that yield curve as a policy maker. That would be foolhardy," he said.

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                                                                                Posted by on Friday, June 17, 2005 at 12:42 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (0)


                                                                                Flocking to Danger

                                                                                Problem 1 (15 points):  Use supply and demand curves to explain why people rush to the beach when there is a tsunami warning:

                                                                                Still a tsunami of work to do, The Oregonian: Tuesday night's tsunami warning spotlighted some admirable emergency planning by Northwest coastal communities, but also some glaring weaknesses in the region's readiness to respond. Too many people tried to evacuate by car, creating potentially lethal traffic blockages along the Oregon coast … Other people foolishly flocked to dangerous viewpoints, well within tsunami inundation zones, hoping to see the anticipated wall of water … law enforcement agencies did an excellent job of clearing people from popular Oregon beaches. And many communities … staged well-coordinated evacuations of residents and tourists from inundation zones. … Unfortunately, some coastal communities sounded no sirens and organized no evacuations. … Tuesday's drama demonstrated that tsunami defense involves much more than erecting sirens. Oregonians and their neighbors all along the West Coast have work to do before the next tsunami warning brings the real thing.

                                                                                Magnitude 9 earthquakes occur off the Oregon coast every 300-500 years. The last was a little over 300 years ago and occurred on January 27, 1700 at 9:00 p.m. (See here for an interesting discussion of how this tsunami was so precisely documented and what to expect if one hits again. See  here for what to do.)   The clock is ticking.

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                                                                                  Posted by on Friday, June 17, 2005 at 12:15 AM in Oregon | Permalink  TrackBack (0)  Comments (0)


                                                                                  Thursday, June 16, 2005

                                                                                  The Dynamic Adjustment to Monetary Shocks

                                                                                  In an email concerning my discussion on Econolog regarding lags in monetary policy I was asked about the relationship between changes in the federal funds rate and subsequent changes in the inflation rate. A paper in the February 2005 issue of the Journal of Political Economy by Lawrence J. Christiano and Martin Eichenbaum of Northwestern University, the NBER, and Federal Reserve Bank of Chicago, and Charles L. Evans of the Federal Reserve Bank of Chicago entitled “Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy” provides evidence on this issue:

                                                                                  Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy, JPE [subscription link only]: This paper seeks to understand the observed inertial behavior of inflation and persistence in aggregate quantities. To this end, we formulate and estimate a dynamic, general equilibrium model that incorporates staggered wage and price contracts … the model does a very good job of accounting quantitatively for the estimated response of the U.S. economy to a policy shock. … Specifically, the model generates an inertial response in inflation and a persistent, hump-shaped response in output after a policy shock. In addition, the model generates hump-shaped responses in investment, consumption, employment, profits, and productivity, as well as a small response in the real wage. Also, the interest rate and the money growth rate move persistently in opposite directions after a monetary policy shock. A key finding of the analysis is that stickiness in nominal wages is crucial for the model's performance. Stickiness in prices plays a relatively small role.

                                                                                  Here’s Figure 1 from the paper displaying how output, inflation, and other variables respond after a shock to the federal funds rate:

                                                                                  Model- and VAR-based impulse responses. Solid lines are benchmark model impulse responses; solid lines with plus signs are VAR-based impulse responses. Grey areas are 95 percent confidence intervals about VAR-based estimates. Units on the horizontal axis are quarters. An asterisk indicates the period of policy shock. The vertical axis units are deviations from the unshocked path. Inflation, money growth, and the interest rate are given in annualized percentage points (APR); other variables are given in percentages.

                                                                                  For those of you who aren't used to reading graphs like these the exercise is fairly simple. Start with an economy at equilibrium, then hit it with a single shock, in this case a federal funds rate shock, and see how the economy responds. The diagrams show two models, one is an estimated model (called a VAR model in the diagram) with a very flexible form that allows it to match actual data fairly well. The other is a simulated theoretical model called the benchmark theoretical version (benchmark because other version are investigated with varying degrees of price and wage stickiness, different policy rules, and different assumptions regarding price setting behavior). We are mostly interested in the VAR results for this discussion, but what the diagram shows is that the benchmark theoretical model does a fairly good job of matching actual patterns in U.S. data.

                                                                                  Let’s now turn to the question about lags in the response of inflation to changes in the federal funds rate. Here’s their summary of the results:

                                                                                  The results suggest that after an expansionary monetary policy shock,

                                                                                  1. output, consumption, and investment respond in a hump-shaped fashion, peaking after about one and a half years and returning to preshock levels after about three years;
                                                                                  2. inflation responds in a hump-shaped fashion, peaking after about two years;
                                                                                  3. the interest rate falls for roughly one year;
                                                                                  4. real profits, real wages, and labor productivity rise; and
                                                                                  5. the growth rate of money rises immediately.

                                                                                  To me, it’s always surprising how long the effects of a monetary shock last; the peak effect on inflation takes two years to unfold and the effect on output peaks after a year and a half. Let me add one more note. In his spare time, when he’s not blogging, David Altig also looks into these issues (from the citations in the paper):

                                                                                  Altig, David, Lawrence J. Christiano, Martin Eichenbaum, and Jesper Linde. 2003. "The Role of Monetary Policy in the Propagation of Technology Shocks." Manuscript, Northwestern Univ.

                                                                                  An updated version of the paper is available as a Cleveland Fed Working Paper "Firm-Specific Capital, Nominal Rigidities, and the Business Cycle"

                                                                                  Update:  In the comments, CR asks a good question:

                                                                                  But what is a "monetary policy shock"? It would seem that rate increases at a 'measured pace' would almost not qualify. Sure the accumulated changes would matter to the economy, but ...

                                                                                  I was thinking of Prof. Hamilton's argument that the high price of oil hasn't impacted the economy as much as some would expect because of the gradual nature of the demand driven price increase as opposed to a rapid rise in prices due to a supply shock.

                                                                                  How did the author's define a monetary shock? Just some thoughts ...

                                                                                  I should have made this clear. The monetary policy rule is ff = g(I) + shock where I is the information set available when the ff is set (e.g. a Taylor rule would have deviations of output and inflation from their target values in g(I)). The shock cannot be predicted given the information available. The stabilization question asks which type of feedback rule g(I) minimizes the variation of output around its optimal value in the presence of monetary and other shocks that hit the economy. Is inflation targeting the best? If so, what type of targeting rule? Should we use expected future output and inflation, today's values, yesterday's values, what's the best policy model? Should a lagged value of the ff rate be included (this is called smoothing)? How should variables such as inflation and output be measured? Should we look at core inflation, the CPI, etc., and should asset prices be included in our index? In looking at these questions is it better to use “real-time” or revised data? How important is the smoothing term in providing stability? The Christiano, Eichenbaum, and Evans paper looks at how well various versions of the benchmark model match U.S. data so that we will know what types of models to use in assessing what an optimal policy rule might look like. Other research simulates models under a variety of policy rules in an attempt to settle some of these questions.

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                                                                                    Posted by on Thursday, June 16, 2005 at 02:34 AM in Academic Papers, Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (1)


                                                                                    Stalemate, Checkmate, or Escape and Play On?

                                                                                    The White House is debating how to proceed from here given the growing likelihood that personal accounts will not reach a floor vote. Can they declare victory if the legislation does not include personal accounts, or should they keep battling for personal accounts to the end to appease a core constituency? Can they possibly get legislation with personal accounts even now? If no legislation is passed, can a political price be extracted from Democrats by labeling them as obstructionists to needed reform? In the story that follows, Democrats respond by declaring that Bush’s Social Security plan is dead:

                                                                                    Exit strategy on Social Security sought - GOP leaders cite impasse over private accounts, by Jonathan Weisman and Jim VandeHei, Washington Post: With the Senate Finance Committee at an impasse on Social Security and House leaders anxious about moving forward ... Senate GOP leaders, in discussions with White House Deputy Chief of Staff Karl Rove and political officials, have made it clear they are stuck in a deep rut and suggested it is time for an exit strategy, according to a senior Senate Republican official and Finance Committee aides. … White House officials at the highest levels recognize the problem … but to pull back from private accounts now would undermine Bush's congressional allies -- such as Sen. Rick Santorum (R-Pa.) -- with no guarantee that a compromise could be reached without the accounts. … White House aides have been locked in a debate over whether it would be a victory if Bush settled for a Social Security deal without private accounts. … But Rove, among others, has told Republicans that it would be unwise, both from a political and policy standpoint, to reduce benefits without offering people the potential of better returns through personal accounts … the White House believes a deal is possible if Grassley gets a bill -- no matter what it says -- to the Senate floor with a promise of a floor vote on private accounts. … A growing number of key Republicans are pessimistic. Graham said he has come to the conclusion that Democrats will not pay a political price, at least anytime soon, for killing the Bush plan without offering their own. … Democrats are unapologetic. Rep. Rahm Emanuel (D-Ill.), … said "They never wanted our votes on a prescription-drug bill. They didn't want our votes on taxes, and now they want it on Social Security?" he said. "Go ahead. Have your party-line vote. We'll see how it turns out."

                                                                                    While Republicans were debating, Democrats were declaring that personal accounts have no chance of moving forward:

                                                                                    Bush Social Security plan dead, Democrats say, Reuters: Democrats say President Bush's plan to restructure Social Security is dead but vow to keep attacking it until he publicly drops the individual investment account idea. "I think it's dead," said Sen. Debbie Stabenow a Michigan Democrat, echoing comments by other Democrats ... "I think it's clear the votes are not there to be able to move that forward." But with Bush showing no signs of giving up, private account opponents say they need to stay on the offensive. … Democrats say they will not negotiate with Republicans on the underlying issue of shoring up Social Security's finances until private accounts are off the table. …

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                                                                                      Posted by on Thursday, June 16, 2005 at 01:17 AM in Economics, Social Security | Permalink  TrackBack (0)  Comments (0)


                                                                                      Wednesday, June 15, 2005

                                                                                      The "Boy Crisis" in College Education

                                                                                      What do you think about this?  Is there a “boy crisis” in college education?

                                                                                      Missing: Males on College Campuses, By Wendy McElroy,Fox: Some researchers call them the "Lost Boys." They are the students you don't see on college campuses … From 1992 to 2000, the ratio of enrolled males to females fell from 82 to 78 boys for every 100 girls. The NCES projects that in 2007 the ratio will be 75 males for every 100 females ... In short, your son is statistically more likely than your daughter to work a blue collar job. … Jacqueline King — author of the influential study "Gender Equity in Higher Education: Are Male Students at a Disadvantage?" … found that 68 percent of college enrollees from low-income families were female; only 31 percent were male. Yet King insists there is no "boy crisis" in education … "women make up a disproportionate share of low-income students" who go on to college. … "male low-income students have some ability in this strong economy to make a decent living with just a high-school diploma." In particular, she points to the construction industry.

                                                                                      King may be correct. The fact that low-income boys gravitate toward manual labor may account for some of the educational gender disparity. What is striking, however, is her apparent dismissal of that disparity as important. … Imagine the gender ratio being reversed, with 78 girls for every 100 boys entering college. Imagine a generation of poor girls being relegated to low social status labor while tax funding assists poor boys. It is difficult to believe King would be similarly unconcerned. Nevertheless, merely by acknowledging the situation, King shows far more balance than prominent voices, like the American Association of University Women, which still maintains there is a "girl crisis." Fortunately, researchers like Judith Kleinfeld of the University of Alaska see that boys are in distress. Kleinfeld — author of "The Myth That Schools Shortchange Girls" — states, "In my own college classes, I see a sea change in the behavior of young men. In the 1980s, the young men talked in my classes about the same as young women. I know because each semester I measured male and female talk. Now so many young men are disengaged that the more articulate, ambitious women dominate the classroom ....and my office hours." … Among those who acknowledge the "boy crisis," explanations vary and may all be true. Some point to the "feminization" of education over the last decade, which occurred largely in response to a perceived need to encourage girls. … Others point to explicitly anti-male attitudes — that is, political correctness — within education. … "'Modern' textbooks and recommended literature often go to extremes to remove male role models as lead characters and examples." Kleinfeld points speculatively to the impact of increased divorce and fatherless homes on the self-image of boys who lack a positive male role-model. Approximately 40 percent of American children now live in homes without their own biological father. …

                                                                                      Perhaps I’ve been socialized to think otherwise, but I’m not fully convinced. But I hadn’t realized the 3/4 male-female ratio nor the large difference at lower income levels.

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                                                                                        Posted by on Wednesday, June 15, 2005 at 02:16 AM in Universities | Permalink  TrackBack (0)  Comments (2)


                                                                                        Greenspan Comments on the Rich-Poor Gap

                                                                                        The rich-poor gap is getting more and more attention. Even Greenspan felt compelled to comment. His solution to the widening income gap is a long-run strategy, better education, rather than shorter-run strategies such as reversing the tax-cuts for the highest income groups that he endorsed in 2001. Since the tax-cuts contributed to the widening of the rich-poor gap, why not reverse the tax-cuts to address the problem in the short-run and use the proceeds to improve educational opportunities?:

                                                                                        Rich-poor gap gaining attention, By Peter Grier, The Christian Science Monitor: The income gap between the rich and the rest of the US population has become so wide, and is growing so fast, that it might eventually threaten the stability of democratic capitalism itself. Is that a liberal's talking point? Sure. But it's also a line from the recent public testimony of a champion of the free market: Federal Reserve Chairman Alan Greenspan. America's powerful central banker hasn't suddenly lurched to the left of Democratic National Committee chief Howard Dean. His solution is better education today to create a flexible workforce for tomorrow - not confiscation of plutocrats' yachts. But the fact that Mr. Greenspan speaks about this topic at all may show how much the growing concentration of national wealth at the top, combined with the uncertainties of increased globalization… So are liberals overjoyed by these words from a man who is the high priest of capitalism? Not really, or at least not entirely. … On the other hand, some conservatives label the whole inequality debate a myth. The media's recent focus on the subject stems from its liberal bias and clever press management by Democrats, they say.

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                                                                                          Posted by on Wednesday, June 15, 2005 at 01:53 AM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (1)


                                                                                          Loopholes in the Social Safety Net

                                                                                          The amount that firms contribute to unemployment compensation depends upon the risk of unemployment for a typical worker. However, firms have been able to manipulate these risk ratings and avoid paying their full share of the premiums:

                                                                                          Unemployment Taxes Evaded - Companies Exploit Loopholes in Law, House Panel Says, By Albert B. Crenshaw,   Washington Post: Unscrupulous employers are continuing to evade millions of dollars in state unemployment taxes despite passage two years ago of a new federal law meant to tighten the rules … Companies eager to cut unemployment insurance costs have found new loopholes following closure of the old … The issue ... gained attention two years ago when state and federal officials learned that business consultants were marketing strategies … to cut taxes … required … under state unemployment tax acts (SUTA). These taxes … finance state trust funds that pay benefits to workers who lose their jobs … The SUTA Dumping Prevention Act of 2004 required that experience ratings be transferred when employees move from one business to another owned or controlled by the same employer, but companies are finding ways around the law … The Bush administration has proposed several amendments, including measures allowing states to use a portion of their collections to fund enforcement activities and to pay private collection services … However, Richard McHugh of the National Employment Law Project, an advocacy group, said it appears to him that "the administration's concerns are mostly about overpayments to workers," rather than employers evading taxes…

                                                                                            Posted by on Wednesday, June 15, 2005 at 01:44 AM in Economics, Income Distribution, Taxes | Permalink  TrackBack (0)  Comments (0)


                                                                                            Tuesday, June 14, 2005

                                                                                            Econoblog: What should the Fed do? What will the Fed do?

                                                                                            I did a Wall Street Journal Econoblog with Barry Ritholtz of The Big Picture today.  The question we discuss about is:

                                                                                            In two weeks, the Federal Reserve Board will hold its two-day June meeting and will be considering what could be the ninth increase to the central bank's target for the federal-funds rate -- the rate charged on overnight loans between banks and the key to the rates charged on a variety of consumer and business loans.

                                                                                            Led by Chairman Alan Greenspan, policy makers have raised the rate from 1% last June to the current 3%, in hopes that a slow and steady increase can prevent slowing productivity growth and increased business pricing power from spiraling into inflation.

                                                                                            What will the members of the board do when they get together in June and at the four remaining meetings this year, and what should they do? Bloggers Mark Thoma, of the University of Oregon, and Barry Ritholtz, of Maxim Group, consider the possibilities.

                                                                                            Here’s the link to Econoblog.

                                                                                            The position I take supports inflation targeting and continued rate increases through the next two meetings unless the data change dramatically. I support inflation targeting because I believe it is the best means available to stabilize the economy over the entire cycle. It is always hard to repay the debt when times are good; similarly it is always politically difficult to raise rates during a recovery and the Fed is often accused of shaving the peak off the boom.

                                                                                            But isn’t that the point of stabilization policy, to stabilize about the natural rate from both sides? To shave the peaks and fill in the valleys? My goal is stable employment over the cycle. I don’t believe that monetary policy has much to do with the long-run natural rate of output or unemployment, so problems concerning long-run issues are left to policies addressing economic growth. I do believe monetary policy has a role to play in reducing economic risk through stabilization. But I suspect I disagree with a lot of you about the best means of accomplishing that. I believe inflation targeting helps to remove price distortions thereby improving resource flows. This in turn stabilizes output and employment. If somebody can convince me that another operating procedure will work better than inflation targeting, and my mind is entirely open on this, please do.

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                                                                                              Delayed Blogging Today

                                                                                              Not much blogging until later today.  I  have an interesting project underway with Barry Ritholtz -- we will post it when it's complete.

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                                                                                                Posted by on Tuesday, June 14, 2005 at 06:08 AM in Weblogs | Permalink  TrackBack (0)  Comments (0)


                                                                                                Open-Source Models in Economics

                                                                                                From Wikipedia, which seemed appropriate for this post, a definition and an English lesson:

                                                                                                Open source denotes that the origins of a product are publicly accessible in part or in whole. When used as an adjective, the term is hyphenated: "Apache is open-source software." When used as a noun, there is no hyphen: "Netscape released its Navigator source code as open source."

                                                                                                Will the same model work in economics? On the sidebar of this site there is a section entitled “Open-Source” models (I added the hyphen this evening). There are four models there, one by Mark Thoma (me), one by Alex Tabarrok, and two from Brad DeLong. The models are on a variety of topics, in different stages of development, and have both classroom and research orientations.

                                                                                                Open-source models are working in computer science and they are becoming more and more popular. Listen to Microsoft:

                                                                                                The Redmond, Wash.-based software giant acknowledged Linux is a growing challenge to its business … "To the extent open source software products gain increasing market acceptance, sales of our products may decline, which could result in a reduction in our revenue and operating margins."

                                                                                                How do open-source models work?  OpenSource.org addresses this question:

                                                                                                The basic idea behind open source is very simple: When programmers can read, redistribute, and modify the source code for a piece of software, the software evolves. People improve it, people adapt it, people fix bugs. And this can happen at a speed that, if one is used to the slow pace of conventional software development, seems astonishing. We in the open source community have learned that this rapid evolutionary process produces better software than the traditional closed model, in which only a very few programmers can see the source and everybody else must blindly use an opaque block of bits. … Open source software is an idea whose time has finally come … so … please send us URLs of articles and papers on commercial trials of the open source model, on open source software including such packages as Linux and Apache, and related topics.

                                                                                                This will follow as open a process as possible:

                                                                                                1. Download one of the models to use freely for teaching, research, etc.
                                                                                                2. If you improve the model technically, improve the exposition, etc., please email it back to me. I will add your name as a contributor and post it in the open-source section. Older versions will remain posted as well.
                                                                                                3. If you have a paper you would like to post in the open-source models section, email it to me and I will gladly add it to the list.

                                                                                                Even this list of “rules” is open-source, so feel free to suggest amendments…

                                                                                                Most of us have papers we never quite finished for one reason or another, or useful models built for classroom or other applications. If you have such a model, please send it along to share with others.

                                                                                                Finally, please note that these models are, hopefully, useful, but they are works in progress and not finished products. They may have bugs. They may need bells and whistles. They may need to be taken in a new direction. They may need things only you can provide. In any case, your participation is welcomed and encouraged.

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                                                                                                  Posted by on Tuesday, June 14, 2005 at 12:06 AM in Economics, Technology | Permalink  TrackBack (0)  Comments (0)


                                                                                                  Monday, June 13, 2005

                                                                                                  Something is Missing From the Social Security Debate

                                                                                                  This is a call to change the dialogue on the Social Security debate from private/personal accounts, add-on versus carve-out, progressive indexing, longevity indexing, to the more fundamental question of economic security. How might we best provide economic security? This article makes an argument for personal accounts as a means to increased economic security. There are good points in this article about how to increase incentives for asset ownership among lower income households and how that will increase economic security if it can be accomplished. However, I do not believe that economic realities allow lower income individuals to voluntarily save even with the best of incentives. For example, the article makes the point that means testing social programs gives lower income individuals an incentive to divest rather than accumulate assets in order to qualify for assistance programs. The implication is that removing means testing involving asset levels would remove “… a disincentive to engage in the types of activities that can help a family move up and out of poverty - namely savings and asset-building.” I agree it would remove the incentive. I doubt that making eligibility for social programs independent of stock market and other assets would result in a substantial number of low-income individuals saving their way out of poverty.

                                                                                                  I also disagree with the claim that that “Individual accounts, whether they are added on to Social Security or carved out from it, are a means to an end.” It does matter from a security standpoint whether the accounts are added-on or carved-out. Risking the icing on the cake is different than risking the cake itself.

                                                                                                  It is also disappointing that the author makes no mention of how social insurance programs pool risk and how this compares to private accounts, a substantial omission in an article purporting to focus on economic security (the word insurance appears only once in passing in the entire article). In light of that, let me change the author’s first sentence: “Something is missing from the ongoing debate over Social Security's future and, oddly enough, it appears to be …” [an understanding of how social insurance works]:

                                                                                                  Security is missing from the Social Security debate, by Reid Cramer, Christian Science Monitor: Something is missing from the ongoing debate over Social Security's future and, oddly enough, it appears to be security. While news coverage has overwhelmingly focused on … private accounts and benefit cuts, an opportunity is being lost to consider the prevailing social objectives that should guide policy prescriptions. … Individual accounts, whether they are added on to Social Security or carved out from it, are a means to an end. The real issue is how the public expects its government to deliver security.

                                                                                                  To answer this question we should step back from the Social Security program and consider the concept of social security in its broadest sense - because, how we think of security will influence our policy choices for ensuring it. At its core, most Americans equate security with a protection from hardship, whether it is brought on by poverty, job loss, illness, age, or war. While we tend to associate consumption with income and think of it in immediate terms, security … is … a function of both income and assets. Assets are a major component of security because they are a storehouse for value that can be strategically employed in times of need or productively invested to generate future returns. ... Perhaps more fundamentally, there are positive behavioral effects to holding assets that directly enhance security, including increased economic well-being, household stability, physical health, and educational attainment. … assets are associated with an increased orientation toward the future, an important component of security. The body of evidence that links asset holding with positive outcomes is growing ... On the other hand, savings by the poor are discouraged. Antipoverty policy efforts have historically focused on facilitating short-term consumption, and many federal programs continue to impose asset limits as a way of means-testing. The unintended consequence is that it creates a disincentive to engage in the types of activities that can help a family move up and out of poverty - namely savings and asset-building. This dual policy structure is both unfair and counterproductive. Developing more inclusive asset building policies is a prerequisite to offering each American the opportunity to increase their security. An accounts-based system could be part of the solution … creating access to asset-building opportunities is an essential element of security…

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                                                                                                    Posted by on Monday, June 13, 2005 at 03:06 AM in Economics, Social Security | Permalink  TrackBack (0)  Comments (0)


                                                                                                    Is This Harvard Report of Continued Strength in Housing Markets Good News?

                                                                                                    According to this report from Harvard, the housing bubble, if it’s a bubble, is in no danger of popping anytime soon. Is that good news? It depends on whether you are a have or a have-not. It’s good news for existing homeowners, but bad news for renters, potential first-time buyers, and commuters:

                                                                                                    No Slowdown in Housing Market Seen, Report Says, By Kirstin Downey, Washington Post: … Harvard University economists see little reason for homeowner gloom: U.S. home prices have been climbing for 13 years, with the rise in 2004 the largest annual jump since 1979, according to a new report from the university's Joint Center for Housing Studies. … In a report to be released today … the Harvard economists say the market continues to be fueled by easy credit, low interest rates, affluent baby boomers buying second homes and the continued growth of immigration. Moreover, thanks to an expanding economy, regulatory constraints and a limited supply of land for development, they see no sign of a slowdown. "The muscularity and potency of this market continues to amaze," said Nicolas P. Retsinas, the center's director and a former assistant secretary for housing at the Housing and Urban Development Department. … But some Americans have been left out of the party ... Renters face a diminishing supply of apartments because rental-housing construction fell to a 10-year low in 2004 and affordable units that are being demolished to make way for high-end condominiums …. Many renters can't afford the new units being constructed. About half of renters now face "severe cost burdens," the report said. However, there are fewer renters because homeownership has risen to a record high of 69 percent of households, as renters took advantage of lower interest rates … The price increases in the purchase market have caused particular anguish for would-be first-time homeowners, particularly those living in high-priced markets such as Southern California, New York, Washington and Florida coasts. In 33 of the nation's 110 metropolitan areas, median home prices now are about four times median incomes. Land constraints in many of those cities make it likely that the regions will have "permanently higher prices," the report said. "There's increasing distance between the housing haves and have-nots," Retsinas said. … Where house prices are higher, commutes are growing longer. About 20 percent of Boston area households live 40 miles out of the central business district, as do about 10 percent in Las Vegas, New York, Portland, San Francisco and Washington. Consequently, traffic congestion is worsening. About 3.1 million workers commute an hour or more a day, often from a house in a suburb to another distant suburb, making it more difficult for people to carpool…

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                                                                                                      Posted by on Monday, June 13, 2005 at 02:16 AM in Economics | Permalink  TrackBack (0)  Comments (0)