I thought I'd try and sort out the economic consequences of the hurricane and of aggregate supply and demand shocks more generally. In the first graph below, there are two lines, a straight line representing the trend or natural rate of GDP and a wavy line representing actual GDP. David Altig should rightly chastise me for drawing the trend as a straight line given all he’s done to try and straighten out how to properly measure the gap and to explain how the natural rate is also a wavy line, not a straight line, but it is easier for the present purposes to draw it this way so I hope he will forgive me.
Wednesday, August 31, 2005
The latest guest post at New Economist notes concern over wild fish populations in the Pacific Northwest.
White House economic adviser Ben Bernanke discusses the economic impacts of Hurricane Katrina. So long as the shocks to the energy sector are transitory, he sees only a modest negative impact in the short-run, but looking forward, he believes reconstruction will add jobs and growth to the economy:
Hurricane Katrina to have 'modest' economic impact - White House adviser, AFX: The wider US economy should see only a "modest" impact from Hurricane Katrina although the hardest-hit regions will suffer, a White House official said "Clearly it's going to affect the Gulf Coast economy quite a bit. You've had a lot of property damage. Basic services are down," Ben Bernanke, chairman of the Council of Economic Advisers, told the CNBC network "And so economic activity in that area is going to be, really reduced and that will be enough to have a noticeable or at least some impact on the aggregate data," he said … Bernanke acknowledged a "tough situation" on gasoline but said the effects should wear off. "My guess is though that as long as we find that the energy impact is only temporary, and there is no permanent damage to the infrastructure ... the effects in the overall economy will be fairly modest," he said "As long as there is not some kind of fundamental long-lasting impact on the infrastructure, which so far I don't see much indication of, I expect it will be absorbed relatively easily the way we absorbed previous natural disasters like Hurricane Ivan (last year)."
Even the worst-affected states like Louisiana and Mississippi should see some benefits in time, Bernanke added. "Reconstruction will add jobs and growth to the economy," he said
Today’s guest post at New Economist continues the conversation started here and here on differences between the U.S. Federal Reserve and the European Central Bank's approaches to monetary policy. The post discusses how learning models have affected monetary policy differently within the Fed and the European Central Bank and offers a reason for the difference. The difference in activism betwen the two banks is also explained from this perspective.
The situation in New Orleans has, very sadly, deteriorated since this was posted here yesterday touching on a few of the short-run and longer run economic consequences of Hurricane Katrina. There has been quite a bit written about the impact of the hurricane on oil prices and the resulting economic consequences, but not as much has been written on how the disruption to the lower Mississippi transportation network will affect the supply chain and the economy. This article in the LA Times has more details on this than other accounts I have seen. The effects on the economy in both the short-run and long-run are still being assessed, and the negative impact from this disruption is a key part of that calculation.
The economists in this report predict a decline in economic growth in the short-run, but a rebound in the longer run when rebuilding and restocking begins. I will focus on the damage to the lower Mississippi transportation network and the general short and long-run effects in the remarks below. The full article also details other effects such as those on oil prices, fisheries, tourism, and so on:
The Census released poverty data yesterday and I'd like to pass along a link to a data source with over 90 key indicators of child and youth well-being, The Child Trends Data Bank. As an example of these data, here are figures showing poverty and other statistics for children from this page. The data are also available in tabular form at the source:
Tuesday, August 30, 2005
[Update: Please see the comment by Movie Guy for an extensive set of links on Katrina's aftermath.]
Tim Duy watches the Fed from the Oregon Coast:
A quick missive from the beach while my son is taking a nap in anticipation of a hard afternoon playing in the sand…
Reading the news on Katrina and the Fed minutes side by side, I can’t help but think the damage in the Gulf States only gives the Fed more license to hike rates further. This, I believe, is at odds with the opinions of almost every commentator I have seen on CNBC who seem to believe that the solution for every economic disruption is a rate cut. While I think that has been true for the entirety of the Greenspan Fed to date, I sense the story will not be the same this time.
Today’s guest post at New Economist discusses differences in monetary policy activism between the Fed and the European Central Bank. This is an important issue for monetary policy generally, and also for the choice of a next Fed chair as it provides a dimension along which candidates can be arrayed. The choice of the next chair will help to determine the degree of activism the Fed pursues in the future. The post also contains recent remarks from ECB president Jean-Claude Trichet on this topic.
The tax reform issue is about to heat up – when congress reconvenes in September tax reform will be at or near the top of the administration’s agenda and, given the outcome of Social Security reform efforts to date, we can expect this to be undertaken with an eye towards success at most any cost. Thus, Democrats have a choice to make. Should they try to block GOP proposals for tax reform or get out in front of the issue, if it’s not too late already, with a proposal of their own? Given that the status quo with respect to tax burdens, shifting income distributions, and other changes is not acceptable to Democrats, and that the GOP reform proposals are not acceptable either, serious consideration should be given to a counter tax reform proposal that embodies principles of equity Democrats wish to promote.
There’s trouble for the White House on Social Security reform, particularly with editorials such as the one below questioning the White House position on this issue. Pressure is mounting to drop their insistence on reform addressing solvency. So far, they haven’t signaled that they will:
Monday, August 29, 2005
To an econometrician or policymaker, accurate data are essential. So I am all for improving the data that we use to evaluate economic theory and to guide economic policy, and there are calls from politicians who are unhappy with what the statistics are telling us to revise the calculation of economic statistics. We’ve known about these problems for some time, and efforts have been made in the past to improve statistics, so why are these questions being raised so loudly now? If the problems had easy solutions, they would have been implemented already. I worry this is driven by politics with science as the cover (failure to revise bad statistics can also be a problem when politics intrudes in the process). I want more accurate data, but the process needs to be as free as possible from political manipulation. If we’re going to do this, let’s do it right, and let’s be sure to separate issues concerning how data are presented in summary statistics, i.e. the question of what to measure, from questions about the accuracy of those measurements, a distinction not made in the article. Many of the complaints are about what is measured rather then the accuracy of those measurements:
Measuring the Economy May Not Be as Simple as 1, 2, 3, by Jonathan Weisman, Washington Post: The Census Bureau tomorrow will release the latest statistics on poverty in the United States, the income level of an average household and the number of Americans still lacking health insurance. Don't believe the numbers. A growing chorus of experts and politicians is raising questions about the data that frame Americans' understanding of their nation's well-being. … "We're getting at best an impressionistic sense of what's going on in the economy," said Rep. Rahm Emanuel (D-Ill.), who recently introduced legislation to establish an independent commission aimed at overhauling government economic statistics. "Major policy decisions are being made based on data that is inadequate to the task."
I am fortunate to be guest posting at New Economist this week and, as I note there, I hope I can live up to the blog’s excellent standards. My first post involves how changes in government spending affect consumption, an issue beset with both theoretical and empirical uncertainties, but an important issue given recent changes in the deficit in the U.S. The vehicle for the discussion is a recent NBER paper:
As explained, there is a difference in the predictions of RBC models relative to IS/LM and modified New Keynesian models. The post at New Economist briefly reviews the theoretical models and their predictions, and then looks at the empirical evidence on government spending and consumption relationships.
I usually leave it to others to post Krugman’s columns, they are posted and discussed widely, but this column addresses issues that have been discussed here quite a bit, so I thought I’d post this one. Paul Krugman discusses Greenspan’s tendency to create stock market, housing, deficit, and other bubbles, and then wash his hands of them by warning how hard it will be to clean up the mess when they pop. He also disputes Greenspan’s claim that a housing slowdown will improve the trade balance:
Greenspan and the Bubble, by Paul Krugman, NY Times: Most of what Alan Greenspan said at last week's conference in his honor made very good sense. But his words of wisdom come too late. He's like a man who suggests leaving the barn door ajar, and then - after the horse is gone - delivers a lecture on the importance of keeping your animals properly locked up. ... I have never forgiven the Federal Reserve chairman for his role in creating today's budget deficit. In 2001 Mr. Greenspan ... gave decisive support to the Bush administration's irresponsible tax cuts, urging Congress to reduce the federal government's revenue so that it wouldn't pay off its debt too quickly. Since then, federal debt has soared. But as far as I can tell, Mr. Greenspan has never admitted that he gave Congress bad advice. He has, however, gone back to lecturing us about the evils of deficits.
Sunday, August 28, 2005
This paper by Jean-Claude Trichet, President of the European Central Bank (ECB), delivered at this year's symposium at Jackson Hole contains lots of interesting commentary about differences in monetary policy between the Fed and the ECB, and also on monetary policy more generally. So much so that it is not possible to cover it all in a single post and do the material justice. So I am going to focus on particular aspects of the paper in individual posts. Still, this post is a bit long. But there's an interesting graph as a reward...
Grand Canyon to Get Glass-Bottomed Walk, AP: ...An American Indian tribe with land along the Grand Canyon is planning to build a glass-bottomed walkway that will jut out 70 feet from the canyon's edge. The horseshoe-shaped skywalk, expected to open in January, ... with a glass bottom and sides, will be supported by steel beams and will accommodate 120 people, though it is designed to hold 72 million pounds, said Sheri Yellowhawk ..."You're basically looking 4,000 feet down. It's a whole new way to experience the Grand Canyon," Yellowhawk said. Admission will be $25...
Anyone who thought John Bolton would be timid due to difficulties during confirmation will want to rethink that position. He was sent to do a job, and he's not wasting any time shaking things up at the U.N. to do it. I didn’t know about this when I posted about The Millennium Project last night. Witness diplomacy, Bolton style:
Saturday, August 27, 2005
Here are the highlights from Greenspan’s closing remarks from the symposium sponsored by the Federal Reserve Bank of Kansas City held at Jackson Hole, Wyoming:
- He warns about impending fiscal imbalances due to the deficit, Social Security obligations, and so on, but he assumes this will be fixed, one way or the other, before disaster looms. Given this post, that is welcome (not the assumption, the warning).
- He warns against the temptation to monetize the debt – a topic that, in my opinion, has not received nearly enough attention (see here for one mention of it). It will be tempting to print money in the future to pay the debt obligations held by the foreign and domestic sectors. After all, a little anticipated inflation isn't that harmful. Is it?
- He warns about the dangers of repeating the 1970s which to me signals that inflation vigilance will be foremost in the Fed’s mind in coming months.
- He notes the housing boom will invariably cool.
- He cites the surprising correlation between CA deficit and equity extraction (see here for more on this), and he says the end of the housing boom could lead to personal saving increasing and the current account improving. Whether the adjustment will be in the form of a hard or soft-landing depends upon the degree of flexibility, his pitch for free and open markets (see his opening remarks).
- He promotes the risk management approach to monetary policy, and strongly rejects explicit inflation targeting. But he realizes this will be a topic of debate once he is gone.
- He says debates on asset price targeting will continue and that this is already part of Fed’s information set for assessing economic conditions. But he says he does not envision successful asset price targeting anytime soon, though it is a possibility for the future.
And here are his remarks in their entirety:
I have a feeling some of you are going to disagree with this:
Rubin Praises Stance Of Greenspan on Deficits, by Nell Henderson, Washington Post: Former Treasury secretary Robert E. Rubin, wading into a debate about the proper role of the Federal Reserve in national budget policy, Friday praised Alan Greenspan for actively opposing large federal budget deficits during his 18 years as Federal Reserve chairman. Rubin, who served under President Clinton… blamed President Bush's 2001 tax cuts for helping swing the budget from surplus that year to deficits since. … Bush administration officials dispute Rubin's explanation for the current budget deficits. "The greatest single cause of the fiscal surplus of the 1990s was the stock market bubble, which led to an unsustainably high level of economic activity and tax revenues," said Ben S. Bernanke, the chairman of Bush's Council of Economic Advisers. Together with the 2001 terrorist attacks and the war on terror, the collapse of the bubble was the major cause of the shift toward deficits after 2000, said Bernanke, …
Jeffrey Sachs of Columbia University, director of the United Nations Millenium Project, discusses ending extreme poverty, something he believes is possible by 2025:
Can Extreme Poverty Be Eliminated?, Jeffrey Sachs, SciAm: Almost everyone who ever lived was wretchedly poor. Famine, death from childbirth, infectious disease and countless other hazards were the norm for most of history. Humanity’s sad plight started to change with the Industrial Revolution, beginning around 1750. …. Two and a half centuries later more than five billion of the world’s 6.5 billion people can reliably meet their basic living ... One out of six inhabitants of this planet, however, still struggles daily to meet some or all of such critical requirements as adequate nutrition, uncontaminated drinking water, safe shelter and sanitation as well as access to basic health care. ... Every day more than 20,000 die of dire poverty, for want of … essential needs.
For the first time in history, global economic prosperity, brought on by continuing scientific and technological progress and the self-reinforcing accumulation of wealth, has placed the world within reach of eliminating extreme poverty altogether. This prospect will seem fanciful to some, but the dramatic economic progress made by China, India and other low-income parts of Asia over the past 25 years demonstrates that it is realistic.
Friday, August 26, 2005
Larry Kudlow at the NRO needs to do some reading. When he raises his usual objections to inflation targeting and the Taylor-type rules that implement such policies, he says:
Are any of the Fed bigwigs in Jackson Hole watching the market price-rule indicators? Do they understand the teachings of Milton Friedman and Frederich Hayek — that markets, which contain more information than economic models, are the best judges of economic “risk management”?
He seems to be unaware of that Milton Friedman now supports inflation targeting (see here too). He might also want to read up on the modern versions of Hayek which also support the Fed’s movement towards inflation targeting and transparency (he could start here, here, and here, or read this). Setting aside the over-tightening debate he refers to, which is separate, he can believe whatever out of the mainstream position he wants, but he should be a little more careful about whom he cites as supporting it. And in answer to his question, I think the Fed bigwigs understand the teachings of Milton Friedman and Friedrich Hayek very, very, well, more so than a certain columnist at the NRO.
Tim Duy shares his thoughts on how the Fed will view and respond to economic conditions in coming months:
Warning: Lengthy post as my brains empties in preparation for a week on the Oregon Coast.
The data this month have been somewhat disappointing, as noted here by David Altig, and as later seen in a weak durable goods report. On the other hand, anecdotal evidence aside, data suggest that the housing market remains healthy or too healthy as the case may be. Given the overall steady stream of positive economic news this summer, this monthly blip will not dissuade the Fed from its current policy path toward still higher rates.
Let’s begin with a word on energy. Energy prices are a double edged sword at this point. One edge is inflationary, while the other depresses demand. Given, however, that we have had little indication that the Fed has shifted its thinking on the underlying economy (in a word, solid), policymakers will keep their eyes trained on the inflation side of the sword. Indeed, the most recent run in both oil and natural gas suggest upward price pressures will continue and intensify as the leaves start to fall. And I doubt very much that the waning days of the Greenspan Era will be characterized by an easing of inflation vigilance. Chicago Fed President Michael Moskow (channeled via Mark Thoma) pretty much laid down the gauntlet on that issue:
Alan Greenspan opened the conference in Jackson Hole, Wyoming with remarks reviewing how monetary policy has changed since the Fed’s inception, and more particularly, changes over the last eighteen years. Most of his remarks are retrospective, but there are notable passages. First, Greenspan went further down the path of acknowledging that the Fed must pay attention to and respond to asset price inflation than he has in the past. He also issues a warning we have heard before, that investors may be accepting risk compensation that is too low due to the period of relative stability we have had recently, periods that have historically been followed by periods of high volatility. Here’s the relevant passage:
U.S. Sen. Chuck Grassley spoke briefly about Social Security reform during a town hall meeting Wednesday in Sigourney, Iowa. As reported in The Ottumwa Courier:
...Several senior citizens asked Grassley about Social Security. Grassley said he wants to see reform. The question is what to do. "I can't even get a consensus among [fellow] Republicans," Grassley said …
House Ways and Means Chairman Bill Thomas says they'll vote on a bill "one way or the other."
There are going to be scores and scores of articles on Greenspan, the future of the Fed, and so on, so I’ve decided to only post things that have something new to contribute to the vast amount that will be written on this. This article from Bloomberg passes that test, though it may be in part because it’s an area I’m quite interested in, how central banks should respond to asset price inflation. It discusses how most foreign central banks differ from the U.S. in their response to asset price inflation, and there is a suggestion the Fed will revisit this question once Greenspan’s term ends:
Greenspan Fans at Jackson Hole May Differ on View of Bubbles, Bloomberg: Federal Reserve Chairman Alan Greenspan's hands-off policy toward soaring stock and housing prices may be one part of his legacy that doesn't last long beyond the end of his term... Greenspan … holds that central banks should work to ease the aftermath of burst asset bubbles instead of trying to prevent them by raising interest rates. While the Federal Open Market Committee so far has supported Greenspan's view, that may change.
Explaining the Statistical Discrepancy Between GDP and GDI with Non-Defense Related Government Consumption
This is one you may want to skip. I'm not sure if anyone is following the questions about the statistical discrepancy between GDP (gross domestic product) and GDI (gross domestic income), but I have more progress to report for anyone who is.
China is attempting to bolster its stock market by selling off stock in state-owned firms. The goal is to signal that government interference in the stock market is ending, a problem that has limited investor’s willingness to participate in the market. However, the sell off is largely small and poorly managed firms. Key industries will still be owned by the state so this should not be interpreted, as noted in the article, as a signal that full-scale privatization is planned:
China to Allow More Stock Sales, by Peter S. Goodman, Washington Post: China on Wednesday freed more than 1,300 largely state-owned companies to gradually sell shares of stock now controlled by the Communist Party government, putting nearly $270 billion worth of state assets on the trading block. This unprecedented wave of privatization is aimed at lifting domestic stock markets and furthering the country's transition toward capitalism...
Thursday, August 25, 2005
This paper by Cogley and Sargent (CS) asks an important question. It’s important because it addresses model uncertainty and talk of conundrums by the Fed indicates such uncertainty exits today. Why was the Fed so slow to respond to the high inflation of the 1970s? Sims (2001)* and CS (2001) show that the Fed could have learned about the natural rate model, the model that replaced the exploitable tradeoff Phillip’s curve model, by the early 1970s but did not reduce inflation until the early 1980s. Why the delay? They take the view that that policymakers must learn about economic structure (e.g. see here for research in this area and, if you haven't seen it, there's an interview with Tom Sargent that is forthcoming in Macroeconomic Dynamics posted in the list of papers), and it is the learning process that imparts conservative tendencies into policy. The reason is simple. With model uncertainty, if one model has a disastrous outcome under a particular policy, then that policy will be avoided even when there is a high probability the model is not true. It is this mechanism that can cause the Fed to stay the course “too long” after a change in beliefs about economic structure. Letting CS speak for themselves:
This is unequivocal. Michael Moskow, president of the Chicago Fed, believes further rate increases are necessary:
Fed's Moskow Sees More Inflation Risk, Higher Rates, Bloomberg: The Federal Reserve must keep raising interest rates because the economy is growing near its full potential and inflation is at the high end of the acceptable range, Michael Moskow, president of the Chicago Fed, said in a speech. ''Core inflation is now at the upper end of the range that I feel is consistent with price stability,'' Moskow said ... ''Appropriate policy means that we continue to reduce accommodation and return to a neutral federal funds rate,'' ... Moskow didn't give an estimate of the neutral rate that would keep the economy growing without spurring inflation. … ''If we do not remove that accommodation, or raise rates, then you risk significantly higher inflation in the economy,'' he said … ''inflation this year and next is likely to come in at the high end'' of the Fed's forecast of 1.75 percent to 2 percent...
I grew up in a small town along the Sacramento River in northern California. Because of that, this report is of special interest to me:
Crisis in the delta, Editorial, LA Times: Fish life in the Sacramento-San Joaquin delta is declining at crisis levels, and state officials are at a loss to explain why, or what to do about it. The situation has potentially grave implications for an estimated 24 million Californians who get some or all of their water from the Rhode Island-size estuary south of Sacramento and east of San Francisco Bay...
Wednesday, August 24, 2005
Tim Duy takes a look at housing and finds himself agreeing with David Altig:
I have tended to shy away on the housing story, leaving it to other bloggers such as Calculated Risk. I am sympathetic to those who view it as a bubble, but have limited my comments to likely Fed reaction to such a bubble.
Today, however, I was unsettled by the combination of weak durable goods numbers, strong housing numbers, and this morning’s Wall Street Journal piece regarding global capital flows into the US housing market. Like many, I see the need for an eventual rebalancing – a shifting away from consumption and housing and toward investment – of growth in the years ahead. Consequently, I would be displeased to see that the Fed’s contractionary campaign failed to yield such a result. But if the housing sector stays strong while other sectors stagnate, the day of reckoning is pushed further into the future.
With that in mind, I wanted to get a better sense of the Fed’s impact on the housing market. To be sure, this is an exercise in “optical econometrics,” but I think the data tells an interesting story just the same. [Note: I used the Fed St. Louis Fed site as my data source.] First, a look at 30 year mortgage rates and housing starts:
Quite honestly, this picture doesn’t tell me much. Sure, the rate spike in the early 1980s corresponds to a housing downturn, and low rates today correspond to strong housing starts, but why exactly is housing in a downtrend during the late 1980’s even as rates are falling? I felt I was missing some appropriate measure of monetary policy. So I took another pass at the data, using the spread between mortgage rates and the fed funds rate:
I lagged the spread 12 months. The most visible feature in this chart is the strong correlation between the lagged spread and housing starts during the 1970s and early 80’s. That relationship, however, begins to break down in the late 1980’s. Of course, I am not surprised that the data would exhibit a structural break. After all, deregulation and financial innovations have radically altered the mortgage markets. Lower down payments, expanded uses of ARMs, declining lending standards, etc. have all played a part in altering the link between interest rates and housing starts. Has the international sector played a role? For that, I went back to a relationship I stumbled upon a year ago or so: that between the current account (as a percentage of GDP) and housing starts.
Interesting, no? The relationship between the current account and housing starts during the 1970’s and early 1980’s is likely spurious. Recessions are consistent with both weak housing and improving CA deficits. But the relationship tightens up dramatically in the second half of the 1980’s, and note that this past recession saw neither significant improvement in the CA deficit nor deterioration in housing starts. So, I don’t think this is entirely a spurious relationship, especially for the last 20 years. Something structural is likely happening.
All in all, it suggests to me that international factors – specifically, the willingness of foreign investors to place their capital into the US – have a significant place in explaining the consumption binge/CA deficit/low interest rate issue. This places me in the camp of David Altig, who had a similar take on today’s WSJ article.
Of course, the international angle only increases the difficulty of the Fed’s job – the willingness of foreign capital to flow into the US could mean the Fed will end up strangling the non-housing sectors of the economy to keep overall inflation expectations in line.
This is about explaining the statistical discrepancy in the NIPAs so many of you will want to skip it (and it's a bit long so I'll tuck it into the continuation frame). There's progress. I think.
When this report is on new home sales is combined with yesterday’s report on existing home sales, there is no indication the market will continue its torrid pace, but nothing to indicate substantial slowing either. Existing home sales were brisk, but lower than the previous month and prices remained strong. New homes showed record sales, but prices have fallen and there is a lot of regional variation. This is noisy monthly data so caution is in order, but together the reports do not indicate a significant slowing in housing, though there are indications the market is leveling off. However, as many observers have noted, the leveling of the market can indicate trouble ahead and in another report further clouding the issue, durable goods orders fell by 4.9% in July:
We don’t need no stinkin’ US style capitalism! Sweden tells Europe to hold its head high:
In defense of the welfare state, by Jonathan Power, International Herald Tribune: (Stockholm) The statistics had arrived on the Swedish prime minister's desk … It was good news. Goran Persson, now in his ninth year of office, told me that the growth rate for this year will be near 3 percent and next year more than 3 percent - enough, he said, to maintain Sweden's trajectory of the last decade, which was "above the average for the European Union" and, in particular, "as good as the Anglo-Saxons, Britain and the U.S." ... This raised the first question - how does this self-confessed socialist state do it? What is the secret for success when Swedish taxes are the highest in the world and the welfare state is the country's single largest employer? After all, when Persson came in as finance minister in 1994 the country was reeling economically, as state expenditures on the health and social sectors raced ahead of the country's ability to generate wealth.
"If you have a free economy," explained the prime minister, "a highly educated work force, a very healthy people, very high productivity and a sound environment then you can create the critical size of resources to create good growth. "That has to be joined with adequate public financing of universities, research and development. As long as we are efficient and constantly challenging ourselves we continue to be productive. "Then if we produce successful growth, the government gets the public's support for high taxes. If the quality of the public sector is good, then a prosperous people will continue to vote for funding it."
The Social Democrats have been in power for most of the last 73 years. But recently public opinion has turned away from the government, partly because of the prime minister's apparent dictatorial style and partly because of a series of scandals including his slow response to the tsunami, when hundreds of Swedes on vacation in Thailand died. ... Many have observed that Sweden cannot sustain its generous womb-to-tomb system if so many Swedes abuse the system by calling in sick and claming unnecessary disability leave. On an average day, one-fifth of the potential workforce is claiming these rights, in a country that along with France and Japan is the healthiest in the world. "I had a new report on my desk today to show that we are getting these figures down," [Persson] said. "It is now under control. We have given employers an incentive to convince their personnel to return from sick leave by offering them a tax benefit if they succeed. … At the same time, we have been scrutinizing those doctors who have been too generous in signing sick notes."
Persson … ends the conversation with two quick jabs. "Europe has a lack of confidence vis-à- vis the U.S.," he said. "The U.S. is competitive, but not as competitive as we think. We are too self-critical in Europe, even though we have a much better social system and in Sweden are just as productive. On unemployment, it is overlooked that the U.S. has approaching two million people in jail and out of the labor market."…
This post serves a dual purpose. It indexes these entries so I can reference them quickly later, but more importantly, it gives me an excuse to point you to all the good stuff by the other contributors at the Environmental Economics site:
Tuesday, August 23, 2005
Kenneth Rogoff of Harvard University and former chief economist at the International Monetary Fund shares his thoughts in The Financial Times on Greenspan’s days at the Fed. That he sees Greenspan as the Michael Jordan of central bankers gives you an idea of his view of Greenspan's tenure. He makes the point that the Greenspan Fed is not nearly as activist as many believe, and explains why there is little reason to fear the post-Greenspan Fed:
Greenspan will leave a less activist Fed, by Kenneth Rogoff, FT: As Alan Greenspan’s fifth and final term as Federal Reserve chairman comes to a close in January next year, more and more people are asking the question: “What were the secrets of his extraordinary success and can he pass them on to his successor?” This is not a small question given the Fed chairman’s legendary reputation for obfuscation. (According to Andrea Mitchell, his wife, Mr Greenspan had to propose three times before she understood him.)
There are, indeed, huge stakes for the global economy as the world’s most important financial position changes hands. ... However, if one looks at how the science of monetary policy has evolved over the past two decades, there is cause for optimism. In particular, although many people believe that monetary stabilisation policy has been more central than ever under Mr Greenspan, his greatest success may have come from making it less so. Let us get one thing straight. Alan Greenspan is the Michael Jordan/Lance Armstrong/Garry Kasparov of modern-day central bankers. … Mr Greenspan’s deft handling of the October 1987 stock market crash – only months after he took office – was bold and brilliant. He poured liquidity with abandon into a financial system that might otherwise have seized and collapsed. ... The Greenspan team executed a similar strategy in the wake of the September 11 2001 terrorist attacks…
He has been no less successful in the day to day routine of monetary policy. When Mr Greenspan came to the Fed, he took charge of a great team of economists and made them better. ... The enormous prestige and respect he has brought to the job has, in turn, been a huge tool in recruitment and retention of top talent. And yet, there is a curious disconnection between what most academics see as the limits of monetary policy and the popular conception of Mr Greenspan’s wide-sweeping power. … Doesn’t everyone now agree that activism has been the hallmark of the hyper-successful Greenspan Fed? Is the main complaint about the ECB and the Bank of Japan not that they are too passive?
In fact, theory and practice have converged more than meets the eye. Newer theories … have resuscitated an important role for monetary policy, albeit a narrower one than Keynes’ postwar followers once imagined. In addition, the Greenspan Fed is not nearly as activist as it seems. … By and large, Fed policy is aimed at maintaining a stable inflation rate, except in the face of clearly discernable big shocks. ... Some of Mr Greenspan’s most influential calls have come precisely from explaining how changing trends in productivity and globalisation were affecting the interest rates required to maintain price stability...
The salient effects of the Fed’s stabilising strategy, and similar ones followed by most other leading central banks around the world, have been stunning. The risk premium on long-term interest rates is down sharply, helping fuel sustained growth and expansion. (Let us set aside the thorny problem of the concomitant global housing bubble for another day.) … the volatility of global output growth has been falling steadily since the mid-1980s. Financial market deepening has also been a factor in lowering volatility by helping spread risk ... But financial market deepening, in turn, owes much to today’s more stable monetary policies. One only has to look at countries such as Mexico and Brazil ... to realise what lasting damage a history of exotic monetary policies can inflict. Also thanks to the Fed’s extraordinary success in stabilising inflation expectations, the US economy has been able to shrug off (so far) the recent round of oil price hikes. In the old days, the Fed would have been forced to jack up interest rates sharply to prevent a wage-price spiral.
Paradoxically, then, the Greenspan Fed has succeeded by reducing the role of monetary policy, rather than by enhancing it. Factoring in the superb staff and generally strong team in place on the federal open market committee, there is no reason to fear the post-Greenspan world…
While there are signs the housing market is slowing, existing-home sales remain robust and housing market participants, including the National Association of Realtors and the Mortgage Bankers Association, are expressing optimism. Here’s a report from The Financial Times:
US home sales dip but prices still rising, by Sheila Jones and Richard Beales, FT: US home sales fell in July from a record in June, but home prices continue to rise at double-digit rates, according to the National Association of Realtors. Total existing-home sales slipped 2.6 per cent in July to a seasonally adjusted annual rate of 7.16m from an upwardly revised record of 7.35m in June. Sales were 4.7 per cent higher than the 6.84m-unit pace in July 2004. David Lereah, NAR’s chief economist, said home sales remained in historic territory. “The level of existing-home sales in July was the third highest on record,” he said. “This is a big number any way you slice it, and housing is continuing to stimulate the overall economy.” … Mr Lereah noted that the strongest rates of price growth tended to move geographically. “In examining the hottest markets for home price appreciation, we see a rolling boom moving from one metro area to another over time, as well as a spillover effect into nearby areas with lower home prices,” he said. … Al Mansell, NAR president, said the rate of price growth reflected supply and demand. “Housing inventory levels improved in July, but they’re still quite lean by historic standards,” he said. “If the supply of homes rises, it should … take some of the pressure off of prices. Even so, we expect home price appreciation to remain above normal over the next year.”
Meanwhile, the Mortgage Bankers Association said on Tuesday it believed that suggestions of a widespread housing bubble and worries about aggressive mortgage financing products could be overdone. In a detailed analysis of the US housing market, the MBA - which represents the mortgage finance industry - concluded that there were risks, including high rates of price appreciation and a “significant share“ of speculative investment in some regional markets. It also said that relatively new financing products including interest-only mortgages were accounting for an “unusually large” proportion of the market. But the association emphasised mitigating factors, including a “healthy” economy and growing household net worth. While cautioning borrowers to approach mortgage financing with “preparedness and scrutiny“, the MBA said borrowers, lenders and investors shared a common interest in avoiding mortgage defaults and other problems. “The mortgage market is fundamentally working: lenders are innovatively creating mortgage products that meet the needs of borrowers, while taking appropriate measures to manage risk,” the MBA said.
My own view is a bit more cautious.
"The man with two watches is never quite sure what time it is.”
Does anybody really know what time it is? Does anybody really care? Most of you will want to skip this. Somehow, I became interested in explaining the statistical discrepancy. As this paper notes, it’s an important issue because the growth rates of GDP and GDI, quantities that differ by the discrepancy, can give different indications about the strength of economic growth.
Or is it the genes? In any case, monkeys like to gamble:
Gambling Monkeys Compelled by Winner's High, LiveScience.com: When given a choice between steady rewards and the chance for more, monkeys will gamble, a new study found. And they'll keep taking risks as the stakes rise and dry spells get longer. ... The male rhesus macaque monkeys were shown either of two lights on a screen. Looking at a "safe" light yielded the same fruit juice reward each time. Looking at the "risky" light meant a larger or smaller juice reward. ... The monkeys overwhelmingly preferred to gamble, even when the game was changed so that gambling yielded less juice over time. ... In test two, the researchers made the average payoff for the risky target less than for the safe target. "We found that they still preferred the risky target," Platt said. "Basically these monkeys really liked to gamble." Platt ... fiddled with the odds even more, forcing a string of losses. But something kept the monkeys going ... "It seemed very, very similar to the experience of people who are compulsive gamblers"...
This paper argues high long-term rates in the 1980’s were due to imperfect Fed credibility during the Volcker years. The first part of the paper isn't too bad, but after that it gets somewhat technical:
The Incredible Volcker Disinflation, Marvin Goodfriend and Robert King, NBER WP 11562, August 2005, (NBER, earlier free version here or here): Abstract: Using a simple modern macroeconomic model, we argue that the real effects of the Volcker disinflation in the early 1980s were mainly due to imperfect credibility, evident in volatility and stubbornness of long-term interest rates. Studying recently released transcripts of the Federal Open Market Committee, we find -- to our surprise -- that Volcker and other FOMC members also regarded long-term interest rates as key indicators of inflation expectations and of their disinflationary policy's credibility. We also consider the interplay of monetary targets, operating procedures, and credibility during the Volcker disinflation.
When I was contemplating college long ago, I was fortunate to live in a state where access to higher education was not just an idea, it was a reality. Tuition was a little bit more than $100 per semester if I remember correctly, not that much in any case, not for what I got for the money. I am grateful to the state of California and to Chico State as it was mostly known then even though its name had already changed to CSU Chico. I don't like to think about where I might have ended up without the investment the state was willing to make in me. For me, a naive kid from a small northern California town, and for kids in small and large towns all over California, it was our ticket to freedom, our ticket to choose what we wanted to do with our lives, it was my way out of the tractor store. Unfortunately, things have changed since then:
Soaring costs leave poor students struggling to make grade, by Scott Heiser, FT: … While US inflation has been contained for the past decade, the higher education sector has proved a glaring exception. The College Board … says tuition and fees rose 10.5 per cent in the 2004 academic term at four-year public (government-funded) universities, and 6 per cent at four-year private universities. Adjusted for inflation, students at four-year public institutions paid 51 per cent more in 2004 than in 1994, while those at four-year private universities paid 36 per cent more. … The rising cost of higher education in the US is raising new questions about whether universities will still be able to serve as ladders of social mobility. … US higher education is already the most expensive among advanced industrialised countries. ... Yet enrolment at US universities continues to surge, rising from 14m in 1995 to 16m last year. Indeed, the benefits have proved well worth the costs, in spite of the growing debt burdens for students. US Census Bureau data show that average lifetime earnings of college graduates are $2.1m, compared with $1.2m for high school graduates. Students from poorer families, for whom higher education has long been the best road out of poverty, are becoming especially concerned. Thomas Mortenson, a scholar with the Pell Institute, has found that … the number of bachelor degrees awarded to students from the poorest quarter of US families has stayed nearly level over the past decade, and has improved only slightly since 1970. In contrast, degrees given to students from the richest quarter of US families have risen steadily from about 40 per cent in 1970 to nearly 75 per cent today. In 2003, 74.9 per cent of the top income class attained degrees, compared with just 8.6 per cent of the bottom income class. Inequity at top schools is a particular problem …
A proposal from the Labor Department would encourage firms to automatically enroll workers in 401(k) accounts. If enacted, it’s not clear if this will undermine the perceived necessity for Social Security reform involving add-on accounts based upon the need to increase national saving, help to open the door for more general reform, or have little effect on the political debate:
Rule would encourage automatic 401(k) enrollment, by Kathy Chu, USA Today: The Department of Labor expects to propose a regulation by year's end that will encourage companies to automatically enroll their workers in 401(k) plans. … Once the regulation is proposed, the public will be able to comment on it before it becomes final. The regulation could affect millions of workers in 450,000 retirement plans. … The Labor Department says the proposed regulation should give employers who automatically enroll workers in a 401(k) plan some protection from lawsuits if the investment options chosen are "reasonable." Some companies are reluctant to use automatic enrollment for fear that employees whose investments lost money would sue. … Many companies that automatically enroll employees use conservative money-market or stable-value funds as a default. ... If employers view the Labor Department's guidance favorably, it could be seen as removing the last barrier to automatic enrollment … Automatic enrollment can be extremely effective in boosting 401(k) participation, especially among young and lower-income workers … Taking advantage of 401(k) plans is becoming increasingly important as companies drop pension plans…
This continues these two posts (here and here) trying to understand the issue raised by Brad DeLong, why GDP (gross domestic product) and GDI (gross domestic income), quantities which ought to be the same on average, differ systematically through time. This is slightly technical and involves a data issue, so you may want to skip this post and the next one.
Monday, August 22, 2005
A mid-level geek alert applies to this post as it relates to a data issue. I promised to follow up on this post looking into why the GNP/NI ratio varies systematically through time. In that post, I plotted the deficit/NI ratio and showed how closely it co-varied with GNP/NI. Here’s a graph of G/NI and GNP/NI which is an even closer fit:
This editorial expresses a common misconception, that embracing Keynesian policy rejects the ideas of Adam Smith as expressed by neoclassical economics and therefore rejects individual liberty. The editorial also says that intellectuals and politicians forget about Adam Smith, so let’s see what we can remember about Smith, Keynes, and neoclassical economists:
America benefits from the wisdom of Adam Smith, by Thomas Bray, The Detroit News: In 1971, seeking to justify the scrapping of the gold standard … Richard Nixon declared "we are all Keynesians now." He was referring to British economist John Maynard Keynes, who in the 1930s called the gold standard a "barbarous relic" ... Alas for Nixon, those policies were no more successful in the 1970s than they had been in combating the long Depression. … President Bush responded to the bursting of the economic bubble of the late 1990s in quite a different fashion ... He cut tax rates and has generally supported Federal Reserve Board Chairman Alan Greenspan's efforts to keep prices on an even keel. ... As a result, the economy has responded with two years of uninterrupted, low-inflation growth, despite the phenomenal spike in oil prices. Bush might say we are all Adam Smithians now, referring to the British economist who argued for the market system and against unbridled government intervention. Indeed, last February, no less than Alan Greenspan paid a remarkable homage to Adam Smith in a lecture in Kirkaldy, Scotland, Smith's birthplace. … Nonetheless, intellectuals and politicians forgot about Smith. They rushed to embrace Keynesian theory, whose near-mystical complexities allowed them to believe government could stimulate the economy to even higher performance. Alas, most of their imagined improvements turned out to have counterproductive long-term effects. As a result, Smith is getting a fresh hearing, as the Greenspan lecture suggests…
First, note that Bray congratulates Greenspan and Bush for their use of tax and monetary policy to manage the economy, then states how faithful this is to the ideas of Adam Smith. Sorry, but that’s not quite the laissez faire approach Smith had in mind. But my main purpose is not this particular point so let’s move along. The editorial proceeds on an incorrect premise, one that is common so it’s worth dispelling.
There is a rift over Social Security reform within the GOP. One side wants grow accounts. This group believes they can ram grow account legislation through fairly quickly and leave solvency for later. The other side, the White House is part of this group, is insisting on solvency reform in addition to privatization. It's the White House insistence on coupling solvency to privatization that is at issue. Since the only thing these accounts grow is the deficit, and since the solvency ''crisis'' has been blown far out of proportion, it's a fight over power and strategy, not substance. It will be interesting to see how they manage to blame obstructing each other on the Democrats. Perhaps that’s not an issue since Thomas is promising a vote one way or the other:
With Greenspan scheduled to step down at the end of January, there are questions, lots of them. Who will be the next Fed chair? What were Greenspan’s greatest successes and failures? What challenges will the new Chair face? In which direction, towards discretion or adherence to rules, should the Fed go in the future? Do high oil prices require a deviation from inflation targeting and the Taylor rule? Is transparency good? Will the next Chair come from academia or business? Was Greenspan too political? Did he exert too much control on the FOMC? How will the new Chair establish credibility? Why did he take such bad pictures (I empathize)? The Financial Times adds to the growing number of articles addressing such questions (see here also):
True or false: Acrocanthosaurus and Pleurocoelus tracks, as in the painted plaster footprints hanging on the classroom wall, could not have appeared in the same fossil:
Sunday, August 21, 2005
This is a propeller-spinner, so the traditional geek alert is in order. Scroll by unless you are interested in the productivity issue raised by Brad DeLong. Below this there are posts on Robert Shiller's view of the danger in the housing bubble, what the Fed should do in coming months, Greenspan's legacy, Einstein, and endangered randy songbirds.
As Brad noted, an important issue to resolve is the difference in measures of gross national product and national income, measures that ought to be the same. This issue is also covered in the NY Times as he notes in a follow-up. Brad explains why this is important and since this post will run long anyway, I will not repeat the reasoning here other than to note that it affects our view of the strength of productivity, an important issue for monetary policy. The goal here is to present evidence that narrows the scope of possible explanations (there is an update to this post here).