« September 2005 |
| November 2005 »
mellow today, and journalists, among others, are squarely in his sights:
Ending the Fraudulence, by Paul Krugman, NY Times: Let me be frank: it has
been a long political nightmare. ... So is the nightmare finally coming to an
end? Yes, I think so. ... I don't share fantasies that Dick Cheney will be
forced to resign; even Karl Rove may keep his post. One way or another, the Bush
administration will stagger on... But its essential fraudulence stands
exposed... What do I mean by essential fraudulence? Basically, I mean the way an
administration with an almost unbroken record of policy failure has nonetheless
achieved political dominance through a carefully cultivated set of myths. The
record of policy failure is truly remarkable. It sometimes seems as if President
Bush and Mr. Cheney are Midases in reverse: everything they touch ... turns to
crud. Even the few apparent successes turn out to contain failures at their
core: for example, real G.D.P. may be up, but real wages are down. ... The
administration has ... built its power on myths ... Take away those myths, and
the administration has nothing left. Well, Katrina ended the leadership myth...
Pundits may try to resurrect Mr. Bush's reputation, but his cult of personality
is dead - and the inscription on the tombstone reads, "Brownie, you're doing a
heck of a job." Meanwhile, the Plame inquiry ... has ended the myth of the
administration's monopoly on patriotism... Apologists can shout all they like
that no laws were broken, ...or whatever. The fact remains that officials close
to both Mr. Cheney and Mr. Bush leaked the identity of an undercover operative
for political reasons. Whether or not that act was illegal, it was clearly
unpatriotic. And the Plame affair has also solidified the public's growing
doubts about the administration's morals. ...
But the nightmare won't be fully over until two things happen. First,
politicians will have to admit that they were misled. Second, the news media
will have to face up to their role in allowing incompetents to pose as leaders
and political apparatchiks to pose as patriots. It's a sad commentary on the
timidity of most Democrats that even now, ... it's hard to get leading figures
to admit that they were misled into supporting the Iraq war. Kudos to John Kerry
for finally saying just that last week. And as for the media: these days, there
is much harsh, justified criticism of the failure of major news organizations
... to exert due diligence on rationales for the war. But the failures that made
the long nightmare possible began much earlier, during the weeks after 9/11,
when the media eagerly helped our political leaders build up a completely false
picture of who they were. So the long nightmare won't really be over until
journalists ask themselves: what did we know, when did we know it, and why
didn't we tell the public?
I was motivated to post this shortened version of Krugman’s comments because
what he says about the media applies equally well to reporting on economics. The
press is no less guilty here of the lapses Krugman identifies and economic myths
have been among those that have flourished (link to “Better Press Corps” from
Brad Delong). Journalists need to go beyond Krugman’s three questions, “what did
we know, when did we know it, and why didn't we tell the public?” and ask
themselves how to do a better job of presenting objective analysis on economic
matters rather than the opinions of pundits from both sides. That’s a lot harder
than grabbing the usual talking heads who say the usual things, it will require
digging in and doing research, seeking out and talking to the real experts in the
field, and understanding the issues before reporting on them. But unless things change, the public will continue to be ill-served by the press.
Posted by Mark Thoma on Monday, October 31, 2005 at 12:15 AM in Economics, Politics, Press |
Just in time for Halloween, it's the attempted return of the dead proposal. What is it with the
sudden interest in Social Security?:
In the link above Bush says he was advised not to talk about Social Security,
but gosh darn it, he's going to talk about it anyway. He
the same thing in another speech a few days earlier, but adds the
claim that he no longer has trouble with that "fuzzy
An issue that I've been talking about for quite a while is one that, oh,
some said you probably shouldn't talk about. But I didn't come here not to
deal with major problems. .... And the reason I've been talking about it is
because I understand the mathematics of Social Security.
Do you think Bush will end up looking like a knight in shining armor defending Social Security's future despite the difficulties posed by a partisan congress and opposition from advisers, party members, pundits, and so on, or is this just another case of Bush ignoring good advice and forging ahead anyway?
Posted by Mark Thoma on Monday, October 31, 2005 at 12:12 AM in Economics, Politics, Social Security |
Bond markets are convinced Bernanke is a hawk:
Bond Firms Say Bernanke Will Be a Fed Inflation Hawk (Update1), Bloomberg: Wall Street's biggest bond-trading firms say Ben Bernanke will be as zealous in fighting inflation as Alan Greenspan... ''Bernanke's nomination does not change our outlook,'' said Lewis Alexander, chief economist at Citigroup in New York. ''The Fed has been hardening its rhetoric in response to emerging inflation risks. They are not ready to pause.'' ... [A]ll the dealers surveyed said the central bank will raise the target rate to 4 percent from 3.75 percent... They also said the Fed will reiterate that it will continue to lift rates at a ''measured'' pace... The Federal Open Market Committee will meet again five more times before July. None of the dealers believe policy makers will lift rates at every one of those meetings, the survey shows. ... The following are the results of the survey, conducted from Oct. 25 to Oct. 28.
Drop Dec. 31 March 30 June 30
Firm Measured? Target Target Target
ABN Amro No 4.25% 4.50% 5.00%
BNP Paribas N/A 4.25% 4.25% 4.25%
Banc of Amer No 4.25% 4.75% 4.75%
Barclays Cap No 4.25% 4.75% 4.75%
Bear Stearns No 4.25% 4.75% 5.00%
CIBC World Mkts N/A 4.00% 4.00% 4.00%
Citigroup No 4.25% 4.50% 4.50%
Countrywide No 4.25% 4.50% 4.50%
CSFB No 4.25% 4.50% 4.75%
Daiwa No 4.00% 4.25% 4.50%
Deutsche Bank No 4.25% 4.75% 4.75%
Dresdner No 4.25% 4.50% 4.50%
Goldman Sachs No 4.25% 4.75% 5.00%
HSBC No 4.00% 4.00% 4.00%
JPMorgan Chase No 4.25% 4.50% 4.50%
Lehman Brothers No 4.25% 4.75% 4.75%
Merrill Lynch No 4.25% 4.50% 4.50%
Mizuho No 4.25% 4.25% 4.25%
Morgan Stanley N/A 4.25% 4.50% 4.50%
Nomura No 4.00% 4.25% 4.50%
RBS Greenwich No 4.25% 4.75% 5.00%
UBS Securities No 4.25% 4.25% 4.25%
Posted by Mark Thoma on Monday, October 31, 2005 at 12:09 AM in Economics, Inflation, Monetary Policy |
If you are interested in the finer details of monetary policy, this speech by
Professor Hermann Remsperger, Member of the Executive Board of the Deutsche
Bundesbank, will be worth reading. The speech is concerned with two types of
uncertainty that plague policymakers, model uncertainty and data uncertainty. To
make monetary policy as robust as possible against model uncertainty, he
advocates using a variety of long-run and short-run models to guide policy and
makes particular note of short-run New Keynesian models and more traditional
long-run models as part of the analysis. This, along with policymaking by a
diverse committee provides some assurance against the probability of
catastrophic policy moves from assuming the wrong model. He also remarks on data uncertainty. Two key
components in the implementation of the Taylor rule are the output gap and the
inflation gap. The remarks focus in on the output gap and note the
difficulty in measuring this quantity and evidence of systematic bias in
estimates of the output gap. Because of this, he promotes the use of monetary aggregates as a
means of coping with both model and data uncertainty and using the deviation of
the growth rate of output from potential rather than the level of
the output gap. I will keep an open mind on using monetary aggregates, but I am
not entirely convinced. Fortunately, the bank has research planned that should help
one way or the other:
Money in an uncertain World, by Professor Hermann Remsperger, Deutsche
Bundesbank: Ladies and Gentleman, it is a pleasure for me to speak to you
this evening on the role of money in an uncertain world. ... All the different
types of uncertainty have been picked up by academic literature. ... I will
focus on two of them, one is model uncertainty and the other data uncertainty.
... I would like to convey the key
message of my talk without any further delay: The analysis of monetary
aggregates can play and should play an important role to cope with these two
Model uncertainty and money As central bankers we need models to
structure our thoughts and to estimate the impact of our decisions. However,
there is no consensus about which model is ... appropriate... As a consequence, most central banks – including the ECB – use
a wide range of models. ... I think that Ben McCallum is perfectly right in
that the preferred policy rule should be one that works ‘reasonably well in a
variety of plausible quantitative models’. By the way, this approach can also
be applied to ... whether monetary policy decisions should be made
by a committee or not: The variety of views ...
should be larger in a committee. If the committee members agree on a decision
that is acceptable for all of the different prevailing assumptions of the
transmission mechanism, this could prevent monetary policy decisions which are
optimal only in one specific model...
In order to determine ... a robust policy rule, we have to take two
decisions: The first is on the set of models which should be taken into
account. And the second is how to weigh the results these models present... As
concerns the weighting problem, some argue that minimizing the maximum loss
across models is appropriate. This would prevent extremely bad results.
However, others argue that this method may give too much weight to implausible
scenarios. ... The decision about which set of models to include in this
decision process and which models to exclude also turns out to be highly
important but difficult. The inclusion of an additional model, even if it has
a low probability, may strongly influence the resulting decisions.
Concerning the models to be regarded in the decision making process, I
think that at least one from the New-Keynesian school ... should be included.
These models are designed to capture short-run fluctuations in output and
inflation ... Depending on the exact model specification, money can play an
explicit role in the determination of output and inflation. However, it
usually plays only a passive role... Given this more or less unimportant role
for money in New-Keynesian models, some observers already see money leaving
the stage of the academic discussion on monetary policy. However, I think that
a few qualifications are essential.
First of all, I would argue that there is an implicit key role for money in
the basic New Keynesian Model. ... implementing a certain path of
the short-term interest rate is only possible if the central bank can control
the corresponding supply of base money. Second, taking New Keynesian Models
with a minor role for money on board must not mean that we should leave aside
other models with a key role for money. ... Models that capture this
long-run relationship between monetary developments and inflation ... are ... the natural
complements to models of short-run fluctuations in the toolbox of policy
Data uncertainty and money ...I now want to make some comments on the role of money against the
background of data uncertainty. One dimension of data uncertainty refers to
the problem of measuring well-defined economic aggregates. ... monetary and
financial data are far less affected by such measurement problems than data from
the real economy. Monetary data are available very quickly. And they are
available with a much smaller measurement error than other key variables.
Therefore, money may serve as an important indicator of current economic
activity. ... Measurement problems become even more severe if certain model
variables are unobservable... Important examples include the output gap and the
natural rate of interest. ... An empirical quantification of the output gap, for
instance, is often based on more or less detailed assumptions about an
underlying model structure. If ... policy ... depends crucially on such
unobservable variables, errors in assessing the size of those variables may lead
to large deviations from optimal policy. ...
Orphanides and others have shown that in the seventies and eighties,
estimates of the US output gap have been subject to large and persistent
measurement errors. On average, there has been a downward bias of this measure
of economic activity which in turn led to a monetary policy of the Fed that -
with hindsight - must be judged as too expansionary. As a consequence, the
late 1970s and the early 1980s have been characterized by high inflation rates
in the USA.
I believe that the Bundesbank managed to prevent this kind of problems. ...the Bundesbank did not assign an important role to the
level of the output gap... Instead, we focused on deviations of money growth from target, on
deviations of the inflation rate from the price norm and on deviations of the
growth rate of real output from the growth rate of potential output. This
approach is much less subject to measurement errors than one that uses the
level of the output gap. Based on our previous research on “How the Bundesbank
really conducted Monetary Policy” we have set up a new project on “Taylor Rules
vs. Growth Rate Targeting” ... This follow-up project intends to answer the question whether, and if
so why, responding to the inflation gap, to the change in the output gap and
to monetary developments instead of putting a strong weight on the level of
the output gap can be welfare improving in the presence of data uncertainty.
Posted by Mark Thoma on Monday, October 31, 2005 at 12:06 AM in Economics, Methodology, Monetary Policy |
There has been much discussion of using the yield curve as a leading indicator.
Arturo Estrella, Senior Vice President in the Research and Statistics Group at
the Federal Reserve Bank of New York, reviews the evidence on the use of the
yield curve as a leading indicator. The links are to the NY Fed site:
The Yield Curve as a Leading Indicator, by Arturo Estrella, NY Fed: A broad literature originating in the late 1980s
documents the empirical regularity that the slope of the yield curve is a
reliable predictor of future real economic activity. Today, there exists a
substantial body of evidence from which various useful stylized facts have
emerged. This catalogue of some of the salient findings takes the form of
answers to frequently asked questions. An extensive bibliography is also
included. [FAQ Available
in PDF] [Bibliography]
Frequently Asked Questions: Click on a question from the following list to go to the corresponding
What does the evidence say, in short?
and when were the relationships first identified?
long have these relationships existed, and do they still hold?
formal models needed to extract the information content in the yield curve, or
are there also rules of thumb?
What statistical models have been formulated?
Which interest rates to use: Treasuries, fed funds, Eurodollar, swap,
What maturity combinations work best?
it the level or the change in the spread that matters?
Does it matter if changes are driven by the short or the long end?
an inversion required for a signal?
Does the signal have to be persistent?
the evidence robust over time?
How do binary models that predict recessions compare with models that forecast
continuous dependent variables (e.g., real GDP, industrial production growth)?
How does the yield curve compare with other indicators?
How does the yield curve perform out of sample, and can it be supplemented
with other indicators?
How are predictions related to monetary policy?
How are predictions related to market expectations of the economy?
there causality from economic activity to the yield curve?
Should we expect the predictive power of the term spread for real activity to
Posted by Mark Thoma on Sunday, October 30, 2005 at 12:36 AM in Economics, Monetary Policy |
In an implicit agreement to share a disagreeable activity, a few of us take
turns venturing over to the NRO to see what sort of nonsense the latest round of
columns will bring. It reduces the chances of any one of our heads exploding as
it gets trapped in the infinite loops of illogical arguments and bad economics.
I figured it was my turn, and as usual
Luskin is lost in his own fog:
Or perhaps we should take note that the Times didn’t give Bernanke an
opportunity to go on the record about how he feels about having hired Krugman.
We’ll use our imagination on that one.
No need to use our imagination, Bernanke is already on the record. As Brad DeLong says,
let’s go to the tape:
Krugman came to Princeton from MIT and will teach both undergraduate and
graduate courses in economics and the Wilson School, including ECO 102,
according to economics department chair Ben Bernanke. "[Krugman] is a
wonderful scholar, a great teacher and another star to add to our firmament,"
There’s not an economics department in the world that wouldn’t jump at the opportunity to have Krugman on the
Posted by Mark Thoma on Sunday, October 30, 2005 at 12:24 AM in Economics, Politics |
Economists sitting around a table in a restaurant might think about how to
order optimally given the constraints of time and income, how to efficiently
arrange the tables to reduce costs, whether tips create the proper service
incentives, the costs and benefits of a "no substitutions" policy on the menu,
when self-serve dominates table service, or they may drift off to topics such as
froth in real estate markets. Physicists think of other things. As they sit
around the table talking over coffee, they worry about the frothy dimensions of
string theory, and how to stop wobbly tables from spilling the froth from their
coffee into their laps:
SciAm Observations: Not the Table of the Elements: People sometimes ask me, what is the value of particle physics? Why should we
pay to build these huge accelerator installations? What practical benefit comes
from it? And now I can tell them this:
have solved the wobbly table problem.
Do you always get the wobbly table at restaurants and cafes? Don't despair.
A physicist has proved that, within reasonable limits, it is always possible
to rotate the table to a position where all four legs stand solidly on the
ground. Andre Martin was moved to study the problem because he was fed up with the
wobbly tables at CERN ... in Geneva ... where he works on abstruse problems in high-energy physics.
Anyone who drinks a cup of coffee on the terrace of the CERN cafeteria ... discovers that the tables usually have only three feet resting on
the ground, so that the slightest touch spills your drink. Time after time, Martin would find himself rotating the table to look for a
stable position. "I've always been able to find one," he says. "People are
sometimes amazed that it works." More than ten years ago, Martin decided to
see if he could find some proof that a stable state always exists. He believed
that he'd found one ... in 1998, but ...
discovered that ... it wasn't completely correct. Now Martin believes he has a more watertight case, and this time he has
gone public. "I had the feeling that mathematicians were interested," he
Nobel Committee, are you listening? This could qualify for either Physics or
Peace, given all the aggravation this problem has caused.
Posted by Mark Thoma on Sunday, October 30, 2005 at 12:18 AM in Economics, Science |
Education is smart:
When Children Are Left Behind, the Economy Is, Too, by Hubert B. Herring, NY
Times: ...[W]hat if our educational shortcomings could be put in strictly
economic terms, instead of being part of a humanitarian debate? What, in
short, does it cost the nation when a child drops out of high school? ... The
answer is hundreds of billions of dollars. Looking at taxes alone, the
researchers calculated that federal and state income tax receipts would be at
least $50 billion higher each year if every high school dropout had graduated
instead. And billions more are lost, the researchers figure, to added health
costs and increased crime.
We are hiring a new Provost and I was at a meeting last week to decide on
questions to ask the candidates. The registrar, admissions director, and others
directly involved in the admissions process were at the meeting and access to
education came up as a potential question area. This brought up a general
discussion of the access issue and when you hear those on the front lines of the
admission process describe the battles they go through to maintain access to
higher education, the registrar was particularly passionate in his description
of how things have changed during his long association with universities, you
cannot help but be moved to action.
Posted by Mark Thoma on Sunday, October 30, 2005 at 12:09 AM in Economics, Taxes, Universities |
This FRBSF Economic Letter looks at oil
prices and inflation and finds that oil price shocks are often assigned too much
responsibility for the high inflation of the 1970s because the effects of faulty
monetary policy and drifting inflationary expectations are underestimated. Here
is a short version of the paper:
Oil Price Shocks and Inflation, by Bharat Trehan, Research Adviser, SF Fed:
Oil prices have risen sharply over the last year, leading to concerns that we
could see a repeat of the 1970s, when rising oil prices were accompanied by
severe recessions and surging inflation. ... This Letter ... argue[s] that oil
shocks are sometimes assigned too large a role in the run-up in inflation
during the 1970s because analysts tend to ignore the part played by inflation
expectations and by monetary policy during this period. The implication is
that the recent oil shock should not lead to as much inflation as the 1970s
would suggest. Financial markets provide confirming evidence. ... there is little evidence to suggest that markets are
expecting substantially higher inflation as a result of the run-up in oil
prices since the beginning of the year. As discussed ..., this could be
because the markets are expecting the Fed to respond vigorously to the run-up
in oil prices. But a look at the fed funds futures markets reveals that
markets are not expecting very large policy moves. ... Thus, financial market
expectations do not appear to be out of line with the statistical analysis.
Markets do not expect the recent substantial rise in oil prices to lead to a
substantial increase in inflation, and they expect this result to occur
without the kind of funds rate increases one saw in the 1970s...
Jim Hamilton is quoted making similar points. Alan Greenspan views the degree of pass through as an area of considerable uncertainty, but if this research holds up, it implies less pass through of oil shocks to core inflation than commonly assumed, and hence less need for tightening of interest rates to prevent an outbreak of inflation.
[Update: Brad DeLong comments.]
Posted by Mark Thoma on Saturday, October 29, 2005 at 01:52 AM in Economics, Inflation, Monetary Policy, Oil |
I don't get this. Is the administration trying to revive Social Security
reform? It's appeared twice in the last few days, once in a
Bush gave to The Economic Club, and also twice in responses in a
Q&A on the economy with John Snow
- both are featured prominently on the White House web site. The
Q&A is not spontaneous, the questions were emailed in advance, so
their inclusion was intentional. Of course, since they chose questions
on the economy such as "who decides which figure's picture goes on the
money" and "why did you take away the two dollar bill?," being chosen
for inclusion may not mean much. In any case, I don't see the advantage
in raising a dead proposal unless there will be an attempt to include
Social Security in tax reform proposals. But tax reform appears to be
in enough trouble already without adding the politics of Social
Security. There is one other possibility I can think of. These were
discussions of how well the administration has guided the economy and
the economic agenda for the future. Perhaps they didn't have enough to
say and threw in the parts about Social Security to fill the void. Here's a small part of the remarks on Social Security reform made by Bush in his
We ... have got to do something about Social Security and Medicare. As you
know, I brought up the -- (applause.) They told me not to talk about it when I
first got up here. (Laughter.) But I've been talking about it ever since I've
been running for President and since I've been the President because I believe
the job of a President is to confront problems and not pass them on to future
Presidents and future Congresses. (Applause.) ... I'm going to continue
to talk to the American people on this issue, and insist that Congress do the
right thing and work together to save Social Security.
And here's John Snow:
Jon, from NY, NY writes: Why am I still left thinking there never
was a social security crisis?
John Snow Well, Jon, that’s because the crisis is in the future –
the President brought Social Security to the forefront of the Washington, DC
policy agenda because there is a very serious looming crisis for the system.
... The problem you’ve heard so much about will begin as cash flows for the
program turn negative in 2017, and the trust fund itself will be exhausted in
And this one is interesting:
daniel, from westport, ct writes: Can you tell me how much of the
excess Social Security payroll taxes -- payroll taxes collected by the
government but not spent on benefits -- have been spent on government
operations in the past five fiscal years? And if Social Security is facing a
crisis, why were those funds spent on government operations?
John Snow Thanks for this terrific question, Daniel. The total
amount of Social Security surpluses that have been spent on other programs is
at $1.7 trillion today. It’s a bad habit that government has, of borrowing
money from the Social Security fund and writing itself “IOUs.” I think it’s
time to put a stop to that, don’t you? That’s why the President wants to let
younger workers put their Social Security dollars in personal accounts – the
ultimate “lock box” for their hard-earned retirement dollars. We also need to
make the program solvent. Progressive benefit growth, which would bring the
program about 70 percent of the way to solvency, is another important element
of the President’s proposed changes...
So is this an attempt at a revival? A resurrection of privatization?
Habit persistence? An attempt to capture political gain by appearing
concerned and unwilling to give up on the issue? That's my guess, that
it's an attempt to capture political gain and revive the labeling of Democrats as obstructionists.
Note: Looking back at the last attempt at Social Security reform, how do you rate?
If you are an orange state, the president visited you and gave a speech on
Posted by Mark Thoma on Saturday, October 29, 2005 at 12:39 AM in Economics, Politics, Social Security |
The Economist is worried that China's insistence on attempting to reform its
financial sector without lifting limits on foreign ownership of financial sector firms puts their
economic future at risk:
A great big banking gamble,
The Economist: It is a staggering
thought... At more than $66 billion following its initial public offering ... on October 27th, China Construction Bank (CCB) ... is the largest global flotation for four years, China's biggest and
the biggest ever for a bank. ... This is quite a
transformation for a bank that was technically insolvent less than two years ago
and ... is still a government
agency, plagued by bad debts and corruption... Beijing is encouraging
this rush to market as the most fundamental step in reforming the economy since
Deng Xiaoping opened China to the world in the late 1970s. Since then, the
country's banks have been almost wholly responsible for channelling the
population's sky-high savings into industry and investment. Given China's
failure to develop healthy stock and bond markets, bank assets have ballooned
... Sadly the banks have
been disastrous middlemen, lending on government instruction without a view to
their profits. ... That is why
overhauling its banks is so critical to securing the country's future growth.
China's political leaders have an iron commitment to bank reform—a commitment
backed with cash. ... Beijing realises ... that money alone will not do the
trick. ... it has raised accounting, prudential and regulatory standards.
... The biggest change,
though, has been the creation of a central regulator, the China Banking
Regulatory Commission (CBRC)...
The restructuring has
been helped by a benign environment. ... Strong revenue growth
and offloading bad debts on to the government has inflated bank profitability.
... CCB looks much cleaner, ...has
stronger reserves, .... Its listing prospectus says that loans to “new”
customers ... are one-third as likely to go sour as those to
older clients, suggesting regulations are working. ... Well, it would, if
that were indeed ... true... Independent estimates put bad debts at
20-25%, far exceeding official figures. ... bad loans are
rising, not falling ... If economic growth slows, a new wave of bad loans will
hit. ... Chinese banks [do not have] the
earnings power to absorb them... Two sobering conclusions
follow. The first is that even a tiny deterioration in business conditions ... would wipe out earnings at China's
banks. The second is that even if the economy remains good, the banks cannot
generate enough internal capital to support their current levels of loan growth.
... To close that gap will
take a fundamental transformation of how Chinese banks operate. The banks simply
do not understand how to price risk or spot a dodgy borrower. Neither flexible
interest rates nor loan classifications can help if credit officers cannot tell
good loans from bad. The current boom has led loan officers to believe the value
of collateral always goes up. The real battle for
bank reform will be won or lost in the branches. ... These are massive
organisations to turn around, after all. CCB alone has
14,250 branches and 304,000 employees. ...
foreign investors are supposed to bridge the gap—with money, but especially with
skills in risk management and advanced financial products. ... given limited
ownership rules, foreign banks can have only a modest influence on strategy or
operations at their Chinese partners. ... To reform its banks properly, China
must allow foreign takeovers. And its banks must be allowed to merge and fail.
... as banks in Poland and the Czech Republic
discovered, preventing foreign takeovers simply delays bank reform and means
more costly bail-outs. ... Instead, China is
gambling on going it alone. By rushing poorly reformed banks to market and
sucking in a bit of money and know-how ... from
foreign investors, it hopes to improve them sufficiently and sufficiently
rapidly before the economy runs into a headwind. The size of that gamble should
not be underestimated.
Posted by Mark Thoma on Saturday, October 29, 2005 at 12:27 AM in China, Economics, Financial System |
Former Federal Reserve Board vice chair Alice Rivlin is worried that the government policy
process is broken and will be unable to meet the challenges to come:
Former Fed Board vice chair: U.S. politics too polarized, by Peter Stevenson,
Indiana Daily Student: A polarization of issues has caused inefficiency in
American public policy, said a former vice chair of the Federal Reserve Board
of Governors. ... "I am profoundly worried,
even frightened, that our policy process will prove unequal to the task
ahead," Rivlin said. "America appears polarized into non-communicating blocks
that make us increasingly unable to engage in civil discourse" about important
issues the government has to consider. Rivlin ... said ... the two major
parties are not actually that far apart in ideology. She believes if
politicians could get past the partisanship that is so prevalent in
Washington, a lot more could be accomplished on major issues. ...
Posted by Mark Thoma on Saturday, October 29, 2005 at 12:15 AM in Economics, Policy |
Today's GDP report did not alter the market's assessment of a 98% probability that the federal funds rate will be increased by at least 25 bps at Tuesday's FOMC meeting:
CBOT Fed Watch: Based upon the October 28 market close, the CBOT
30-Day Federal Funds futures contract for the November 2005 expiration
is currently pricing in a 98 percent probability that the FOMC will
increase the target rate by at least 25 basis points from 3-3/4 percent to 4 percent at the FOMC meeting on November 1 (versus a 2 percent probability of no rate change). Summary:
October 25: 0% for No Change versus 100% for +25 bps.
October 26: 2% for No Change versus 98% for +25 bps.
October 27: 2% for No Change versus 98% for +25 bps.
October 28: 2% for No Change versus 98% for +25 bps.
October 31: 2% for No Change versus 98% for +25 bps.
November 1: FOMC decision on federal funds target rate.
[Update: No change from 10/28 to 10/31. David Altig has more.]
Posted by Mark Thoma on Saturday, October 29, 2005 at 12:10 AM in Economics, Monetary Policy |
Estimates of GDP
growth for the third quarter showed robust growth with GDP expanding at
William Polley and Kash at Angry Bear
for details and analysis. The Washington Post report is here, NY Times here. Another report,
The Employment Cost Index, also came out today and as
Bloomberg notes, wage growth continues to be stagnant:
Wages increased 2.3 percent in the third quarter from the same three months
last year, the smallest year-over-year rise since record-keeping began in
1981... Total U.S. labor costs rose 0.8
percent in the third quarter after a 0.7 percent rise in the previous three
So the economic news is not unambiguously positive from labor's perspective.
Posted by Mark Thoma on Friday, October 28, 2005 at 09:26 AM in Economics |
Greg Mankiw, a professor at Harvard and former chair of President Bush's Council of Economic Advisers, has some questions for Ben Bernanke along with his guess about how Bernanke would answer. The questions cover how hard he should push inflation targeting, how outspoken he should be and the topics he should speak about, and whether to adopt a high or low profile that emphasizes the institution over the individual. It's nice to see Mankiw's emphasis on the Fed's independence and how political statements from the Fed chair endanger that independence:
Questions for Ben Bernanke, by N. Gregory Mankiw, Commentary, WSJ: ...[S]enators and their staffs are busy compiling questions for Ben Bernanke. The most intriguing questions, however, are ... the questions that Mr. Bernanke must be contemplating quietly on this own. There should be no doubt in anyone's mind that Mr. Bernanke is superbly qualified for the job. I have known Ben for 20 years, and there is not a monetary economist alive who commands more respect among professional economists for his deep, broad intellect and rock-solid judgment. (OK, maybe Milton Friedman, but at the age of 93, he's probably not available.) ... Here are three questions he must be asking himself.
"How can I advance inflation targeting?" ...Mr. Bernanke has long advocated inflation targeting, under which a central bank sets a numerical target for the inflation rate. He will soon be in a position to put his monetary policy where his mouth is. This will not necessarily be easy. ... it is supported by many U.S. economists, but the support is not universal. Alan Greenspan has long been a skeptic. More importantly, so is Mr. Greenspan's close protégé Donald Kohn, who ... commands broad respect among the other members and the Fed staff. Some recent news reports have suggested that inflation targeting would mean a big change in policy from the Greenspan era. That is not right. Starting where we are today, a switch to inflation targeting is not so much a change in monetary policy as it is a change in the way the Fed communicates about monetary policy. ... As former Fed governor Laurence Meyer pointed out, anyone who doesn't know that Mr. Greenspan is aiming for a measured inflation rate of about 1% to 2% is just not paying attention. The evolution toward inflation targeting under Mr. Bernanke can, therefore, be very gradual. ...
"How broadly should I offer opinions?" Mr. Greenspan has not been shy, over the years, about expressing opinions on a broad range of economic issues. This proclivity has at times made some Fed staff cringe. The political independence of the Fed is among the institution's most basic values. Whenever the Fed chairman opines on a politically charged topic, he puts the Fed's independence at risk. It was created by Congress -- and it can be taken away by Congress. ... Mr. Bernanke must decide for himself how far he is willing to go. ... Here is my guess about what Mr. Bernanke will decide. He will be prepared to talk not only about monetary policy but also about issues related to financial stability, such as regulation of Fannie Mae. He will be willing to explain the views of professional economists when there is a consensus. ... But he will stay away from issues that are distant from monetary policy, controversial among economists and politically divisive. The repeal of the estate tax, for instance, is not an issue that the future Fed chairman is likely to comment on anytime soon.
"How high a profile should I adopt?" Alan Greenspan is a rock star, at least by the standards of the American Economic Association. ... Much of the general public may fail to understand how monetary policy functions, but they still know it is important -- and that Mr. Greenspan is the man. That is why the choice of his successor was anticipated so intensely. Yet the truth is that monetary policy is set not by a single person, but rather by a large committee supported by one of the most talented staffs of professional economists working in government. If the next Fed chairman accepts a lower public profile, the true nature of the Fed could be more widely appreciated -- and that would be a step in the right direction. Monetary policy is not so complex that we need an inscrutable wizard to do it well...
The most negative assessment I have ever heard about Ben Bernanke, from one of my colleagues, is that he is "a bit boring." For an economist, boring is an occupational hazard. For a central banker, however, it is just the ticket. The central bank's job is to create stability, not excitement. ...
Posted by Mark Thoma on Friday, October 28, 2005 at 02:10 AM in Economics, Monetary Policy |
With many calling for Bernanke to speak out on issues that impact monetary policy, including fiscal policy issues, what are Bernanke's views on this?
Fed Nominee Says He Will Avoid Fray Of Politics, by Nell Henderson, Washington Post: Ben S. Bernanke urged Congress ... to reduce the federal deficit, cut government spending and make ... recent tax cuts permanent. Bernanke was speaking then on behalf of the president, as his top economic adviser... But was he also expressing his own views? ... Some lawmakers and interest groups quickly invoked Bernanke's recent comments in favor of extending the tax cuts as signs of the policy prescriptions he would offer as Fed chief. But Sen. Charles E. Schumer (D-N.Y.) said such assumptions are wrong. Bernanke assured Schumer ... he was speaking to the congressional committee as chairman of Bush's Council of Economic Advisers and that he hoped to avoid such policy debates during his confirmation process and at the Fed... Bernanke ... indicated that he would prefer to limit his future public comments mainly to Fed policy... "I told him he should rethink that," Schumer said. "I would encourage him to be a positive force for deficit reduction." ... Bernanke has said in the past that the Fed has a role in budget debates when the outcomes would affect the well-being of the national economy and financial markets. The Fed "has the responsibility to be a nonpartisan adviser on general matters of macroeconomic and financial stability," Bernanke said in a June 2004 interview published by the Fed bank of Minneapolis. "So to the extent that deficits and debt are threatening macroeconomic and financial stability, the central bank is one actor that can provide advice and counsel to the fiscal policymakers."
While that sounds reassuring, the qualifier "to the extent that deficits and debt are threatening macroeconomic and financial stability" is important. At what point does Bernanke believe the debt becomes threatening? My impression is that he does not believe the current debt level crosses that threshold. If so, where is his threshold? I also do not believe the Fed chair should be a "positive force for deficit reduction" per se. Deficits and fiscal policy should be discussed by the Fed chair only to the extent that they affect monetary policy. And finally, I'm not sure Bernanke's personal views are as important as implied in the article. When he says:
"the general approach of inflation targeting is fully consistent with any set of relative social weights on inflation and unemployment; the approach can be applied equally well by "inflation hawks," "growth hawks," and anyone in between."
The use of the term "relative social weights" is an indication of his recognition that the Fed is a steward of the public, business, and banking interests, not the personal interests of Ben Bernanke. For that reason, his personal views are less important than his views of how to best represent these interests using monetary policy and the Fed chair's pulpit.
Posted by Mark Thoma on Friday, October 28, 2005 at 01:11 AM in Budget Deficit, Economics, Monetary Policy |
Paul Krugman continues the discussion of the new Fed chair nominee Ben Bernanke (see nomination, inflation fighting, transmission mechanism, transparency, inflation fighting credentials, asset bubbles, televising meetings). First, Krugman is both surprised and grateful that the administration picked someone qualified for the job:
Bernanke and the Bubble, by Paul Krugman, NY Times: ... Mr. Bernanke is actually an expert in monetary policy, as opposed to, say, Arabian horses.
And as noted here, Bernanke is not known to be partisan. Bernanke's colleagues at Princeton, and Krugman is one of them, knew very little about his politics:
Beyond that, Mr. Bernanke's partisanship, if it exists, is so low-key that his co-author on a textbook didn't know he was a registered Republican.
Should I be happy he has kept his politics to himself? What is it we don't know? Is he a very quiet raging ideologue?
The academic [work]... is apolitical. ... there's not a hint in his work of support for the right-wing supply-side doctrine. Nor is he a laissez-faire purist who believes that government governs best when it governs least. On the contrary, he's a policy activist who advocates aggressive government moves to jump-start stalled economies. For example, a few years back Mr. Bernanke called on Japan to show "Rooseveltian resolve" in fighting its long slump.
What about his allegiance to Bush? I'm worried about that. Bush appointed him as a Fed governor, as chair of the Council of Economic Advisers, and now the nomination to be Fed chair. Won't he owe Bush his allegiance?
...Mr. Bernanke has no personal ties to the Bush family. It's hard to imagine him doing something indictable to support his masters. It's even hard to imagine him doing what Mr. Greenspan did: throwing his prestige as Fed chairman behind irresponsible tax cuts.
Ben Bernanke was chair of the Princeton Economics Department when you were hired, so you know Bernanke pretty well. You've assured us he's qualified, apolitical, and independent. Sounds good. Should I stroll away confident in our economic future, or are there additional concerns?
This isn't a comment on Mr. Bernanke's qualifications, although there is one talent ... that Mr. Bernanke has yet to demonstrate ... Mr. Greenspan ... has repeatedly shown his ability to divine from fragmentary and sometimes contradictory data which way the economic wind is blowing. As an academic, Mr. Bernanke never had the occasion to make that kind of judgment. We'll just have to see whether he can develop an economic weather sense on the job.
Since I made the same point about Greenspan here, I'd have to agree. Let's hope Bernanke has this talent as well. But even if he does, you still seem concerned. Is it related to concerns about Bernanke's qualifications or abilities as Fed chair?
No, my main concern is that the economy may well face a day of reckoning soon after Mr. Bernanke takes office. And ... coping with that day of reckoning without some nasty shocks may be beyond anyone's talents. The fact is that the U.S. economy's growth over the past few years has depended on two unsustainable trends: a huge surge in house prices and a vast inflow of funds from Asia. Sooner or later, both trends will end, possibly abruptly.
But hasn't Bernanke said there is no housing bubble, and that the global savings glut explains the international trade imbalance and the dangers there aren't as large as many believe?
...Well, soothing words are expected from a Fed chairman. He must know that he may be wrong.
If he is wrong, what should he do? Does he have what it takes to handle such events?
If he is, the U.S. economy will find itself in need of the "Rooseveltian resolve" Mr. Bernanke advocated for Japan. We can safely predict that Mr. Bernanke will show that resolve. ...
It's reassuring to hear such praise for Bernanke. It sounds like monetary policy is in good hands.
But that may not be enough. When all is said and done, the Fed controls only one thing: the short-term interest rate. And it will be a long time before we have competent, public-spirited people controlling taxes, spending and other instruments of economic policy.
That's not quite as reassuring. Brad DeLong and others are concerned about that too.
Update: Brad DeLong comments on Krugman.
Posted by Mark Thoma on Friday, October 28, 2005 at 01:00 AM in Economics, Monetary Policy, Politics |
This is a picture of commodity flows down the Mississippi from 1947-2002
measured in thousands of tons shipped. This particular graph is for the
Mid-Mississippi region, but the pictures are similar for the lower and upper
Mississippi, and for other rivers I have looked at as part of this project:
In the figure, commodity flows appear to have less variability prior to
1984. This is noteworthy because since 1984, the volatility in output has been
reduced considerably, by around 50% by some estimates. Yet according to this
picture commodity flows have not realized a corresponding fall in variability,
but have increased instead. This leads to the hypothesis that volatility on the
output side has been traded for volatility on the input side. [Note: If you are
interested in explanations for the decline in GDP volatility since 1984 such as
good luck, good policy, and better technology (inventory management), a place to
and Vine (2004).]
Posted by Mark Thoma on Friday, October 28, 2005 at 12:17 AM in Economics |
My son is in college and taking economics courses. We meet for dinner once a
Me: The service in here is awful. This is making me really mad.
Son: Why? They're saving you money. Won't you just reduce the tip until you
I wanted a reason to be mad, not indifferent. I was hungry and pretty cranky, so I explained, curtly, how market failure in the food service industry made it so that reducing the tip would not fully compensate me for my losses. I was then told, in so many words:
Son: That's a dumb argument.
And it was. But don't tell him I admitted that. I did reduce the tip, and even though I didn't reduce it very much, I'd feel better now if I hadn't. I'll see if Mr. Smarty Pants can explain that.
Posted by Mark Thoma on Thursday, October 27, 2005 at 08:05 PM in Economics, Miscellaneous |
The Reserve Bank of New Zealand is raising interest rates because CPI
inflation is outside the target range. But with core inflation very likely lower than that,
perhaps within the target range,
and with falling GDP growth further easing inflationary pressures, New Economist questions the central banks
continue raising rates to 7.0%:
New Economist: RBNZ overshooting once again: New Zealand was the first
central bank to introduce inflation targeting, so you would think they'd have
got the hang of it by now. But no - even with Don Brash safely relegated to
the Opposition benches, the Reserve Bank of New Zealand still manages to get
it wrong. Today they raised the Official Cash Rate by another 25 basis points
to 7.0%, the highest in the OECD (aside from Mexico). In today's statement
Governor Bollard explained the rate hike thus:
...medium term inflation risks remain strong. Persistently buoyant
housing activity and related consumption, higher oil prices and the risk of
flow-through into inflation expectations, and a more expansionary fiscal
policy are all of concern. While there has been a noticeable slowing in
economic activity, and a particular weakening in the export sector, we have
seen ongoing momentum in domestic demand and persistently tight capacity
constraints. Hence, we remain concerned that inflation pressures are not
abating sufficiently to achieve our medium term target, prompting us to
raise the OCR today.
Bollard noted "the continuing strength of household spending, supported by
a relentless housing market and rapid growth in mortgage lending", along with
"a worsening current account deficit, now 8 per cent of GDP." For those hoping
for some respite, he warned of "the prospect of further tightening" and added:
Certainly, we see no prospect of an easing in the foreseeable future if
inflation is to be kept within the 1 per cent to 3 per cent target range on
average over the medium term.
True, annual inflation is 3.4%, breaching the central bank's target band of
1%-3%. But the pick-up in inflation in large part reflects higher oil prices.
The pace of economic growth has already slowed significantly, down from over
4% to around 2.5%, with June quarter private consumption growth the slowest in
three years. Softer domestic demand will help ease medium-term inflation
pressures. The RBNZ look like they are once again going to overshoot by raising rates
more aggressively than they need to - just as inflation is peaking and the
economy heads into sub-trend growth. Stephen Kirchner at
Institutional Economics agrees...
who worry that the Fed is on the measured path to the same mistake.
Posted by Mark Thoma on Thursday, October 27, 2005 at 12:50 AM in Economics, Monetary Policy |
Senator Grassley has some advice for the Tax Reform Panel:
Senior US Senator Foresees Opposition To Tax Panel Reform Proposals, by Mike
Godfrey, Tax-News.com: Sen Charles Grassley (R - Iowa) has warned that the
tax reform panel's recommendations on limiting mortgage and employer-provided
healthcare tax breaks would make it "very difficult" for the Senate to pass a
package of new legislation aimed at simplifying the US tax code. ... "When you
start messing with sacred things like tax deductibility of health insurance
and mortgage interest, particularly the latter, it's going to be very, very
difficult to get that as part of a reform package," he stated. Grassley
predicted that a tax reform package would be much more likely to be passed if
these two provisions were dropped from the legislation.
The outlook for the proposal given in an
the NY Times is grim:
The final report of President Bush's tax reform panel [is] due Tuesday...
Popular discontent with advance word on its recommendations is sure to spook
Congress into inaction in the coming election year, especially on proposals to
limit the mortgage-interest deduction, abolish the deduction for state and
local taxes, and reduce the write-off for employer-provided health insurance.
... That's fine with us. The panel's expected report deserves the death
sentence that awaits it...
MarketWatch is equally grim with
Dead on Arrival. There is the usual silliness from Senator DeMint:
Senators Plan Push To End
Income Tax, by Meghan Clyne, NY Sun: Disappointed by the recommendations
of President Bush's advisory panel on tax reform, Senator DeMint, a Republican
of South Carolina, will introduce legislation this week that would replace
America's tax code with a simpler, free-market alternative that would abolish
personal and corporate income taxes in favor of a flat-rate levy on retail and
business transactions. ... Under Mr. DeMint's plan, all personal income taxes
and the attendant bevy of related taxes, deductions, and exemptions, including
the estate tax and the alternative minimum tax, would be abolished. ...
Instead, individuals would pay an 8.5% federal retail sales tax on all new
goods and services. Corporate income taxes would be replaced by an 8.5%
business transfer tax charged during purchases of supplies or equipment... the
DeMint plan would harm certain sectors privileged by the current code, such as
the home mortgage industry...
Echoes of Social Security. Here we go again.
Posted by Mark Thoma on Thursday, October 27, 2005 at 12:36 AM in Budget Deficit, Economics, Income Distribution, Taxes |
If you are interested in reading president Bush's speech
today on the wonders his policies have done for the economy and his economic
growth agenda for the future, it is
Interestingly, and unfairly but I can't resist, if you selectively pull a few
words from the speech, you can get:
I encourage Congress to push the envelope when it comes to cutting
spending. See, believe it or not, up here in Washington, there's a lot of
programs that simply don't deliver results. (Laughter.) And if it doesn't
deliver results, we ought to get rid of... the war on terror...
And the reason is:
That will help us meet our priorities ... helping the people down there in Katrina.
What about helping the people down there in Rita and Wilma too?
Posted by Mark Thoma on Thursday, October 27, 2005 at 12:34 AM in Budget Deficit, Economics, Politics, Taxes |
Federal Reserve Chair Alan Greenspan discusses the
contributions of the Council of Economic Advisers and other agencies created by
the Employment Act of 1946 in a speech given today in St. Louis. This is somewhat timely given the vacancy at the CEA created by Bernanke's departure, if confirmed, to become Fed chair:
Receipt of the Truman Medal for Economic Policy, Remarks by Chairman Alan Greenspan, October 26, 2005:
...[P]art of Truman's importance derives
from the fact that several key new governmental structures were established
during his Administration. Among these were the Council of Economic Advisers
(CEA) and the Joint Economic Committee of the Congress (JEC). These
organizations were established by the Employment Act of 1946... Two ingredients seem to have been essential precursors of the Employment
Act. The first was a deep concern that the problem of peacetime unemployment
had not been solved. ...many feared that the economy
would slip back into depression. The second element was the economic
thinking of John Maynard Keynes. ... President Truman's memoirs make clear that
both of these strands ... influenced his request to the Congress for full
employment legislation in the fall of 1945. ... Early drafts of the Employment
Act enshrined ... new processes and institutions, ... the CEA, the annual
Economic Report of the President, and the JEC... The CEA consists of a
chairman and two other members, ...Over the years, the CEA has
provided objective and professional economic advice at the highest levels in
the White House. ... A hallmark of the ethos
of the CEA is the pride that its staff members take in providing objective
analysis. ... Because the CEA has retained its small size over the years,
it can be quick and nimble in ways that are difficult for some larger
agencies. Moreover, because the CEA is viewed as a neutral agency without ties to
any particular constituency, the CEA often has played an important role on
interagency committees and working groups... Along those lines, perhaps the most important role of the CEA
has been to scuttle many of the more adventuresome ideas that inevitably
bubble up through the machinery of government. ... This role of the CEA is wholly unheralded--after all, who hears about
the idea that never came to fruition--but it serves as an important check in
the policymaking process. ... Of course, as chairman of the Council during
President Ford's Administration, I was close to some of these debates and
decisions. ...I began work at the CEA in September 1974. ... I found my time
there quite rewarding, ... I will only highlight three
themes that recurred during my tenure. First, economic modeling is as much art as science.
... Economic models provide a set of useful
tools to frame future outcomes; but ... models can go off
track in myriad ways. Objective and thorough analysis, as is the norm at the CEA, is the most effective counterweight to this challenge.
Second, high-quality and timely data are crucial inputs to the process of
making economic policy. ... Finally, as hard as this can be to achieve, economic policy should take
the long view. Although pressures to use the government's tools of economic
management to achieve one or another short-term aim are always present, the
tools of government are, in fact, most appropriately used to create an
environment in which private economic activity can flourish over the longer
What's left unstated, and the hard part of the statement at the end, is
deciding what the "longer run" is, particularly in light of the
long lags before monetary policy takes full effect. Obviously, the Fed
cannot manage aggregate output hourly, daily, or even weekly. But what about
monthly output? Quarterly? Annual? When there is a recession, a short-run event
around the long-run trend the Fed, even Greenspan's Fed responds by lowering
rates. Deciding whether an event is a short-term cyclical fluctuation of little
concern to the Fed, or a medium term fluctuation that requires action is part
of the art of policymaking Greenspan discusses. This task is made harder by having imperfect models of the economy and this explains his craving
for more high-quality and timely data. Greenspan proved to be quite skilled at untangling more persistent fluctuations from more transitory ones and
this is one reason for his success as Chair of the Fed.
Posted by Mark Thoma on Thursday, October 27, 2005 at 12:24 AM in Economics, Fed Speeches, Monetary Policy, Policy, Taxes |
With the talk about increasing the transparency of the Fed
even further under Bernanke, should FOMC meetings be televised? Will Bernanke go that far? What is the
downside of doing so? Ben Bernanke answers this question in a
speech given at the American Economic
Review Association Meetings in San Diego in 2004:
Other possibilities for improved transparency may exist. Importantly, as we
think about these, we should not simply take the view that more information is
always better. Indeed, irrelevant or badly communicated information may create
more noise than signal; and some types of information provision--an extreme
example would be televising FOMC meetings--risk compromising the integrity and
quality of the policymaking process itself. Rather, the key question should be
whether the additional information will improve the public's understanding of
the Fed's objectives, economic assessments, and analytical framework, thus
allowing them to make better inferences about how monetary policy is likely to
respond to future developments in the economy.
So he is not in favor of televising meetings, a sentiment repeated here in an interview with the Minneapolis Fed. I'm not as sure as he is
that the public would be misled by listening in on the process. However, William Poole,
president of the St. Louis Fed, agrees with Bernanke. He is also worried
about misleading the public, but that is not his main worry since he believes
only those who would understand the proceeding would be interested in tuning in.
He has concerns about confidentiality issues, and he is also worried about how
behavior changes when the cameras are watching, for instance the difficulty in
talking about policy that might increase unemployment. I am not so sure. Hypotheticals can be clearly elucidated, and if the
merits of a particlar policy proposal cannot be articulated publicly in an understandable manner,
perhaps it needs to be thought through again. Wouldn't forcing people to tighten
up their arguments due to increased public scrutiny be helpful?:
Consider the possibility of televising FOMC meetings, so all can observe
the proceedings. One issue is the mismatch between the technical level of the
meeting and the knowledge of the audience. ... Monetary policy needs to be
conducted at the highest possible technical level; a general audience is more
likely to be confused than enlightened by watching an FOMC meeting live. Most
viewers would get little out of watching a discussion of technical econometric
issues ... and might well misinterpret such discussion. Perhaps we shouldn't
worry too much about this issue, as the audience for an FOMC meeting would
probably be pretty small after a few such episodes. I do not think we would
compete very successfully with daytime television! Of course, a televised FOMC
meeting ... could not include discussion of information obtained under pledge
of confidentiality. Information from individual firms does play a useful role
in policymaking, and the Fed could not obtain such information without
maintaining its confidentiality. Moreover, there is ample evidence that people
in televised meetings behave differently ... Some participants might have a
tendency to grandstand for the audience, and to avoid discussing difficult or
controversial issues. ... It is particularly difficult to analyze unpleasant
possibilities in public, such as that a particular policy action might have
the effect of increasing the risk of recession. ... During the time I’ve been
in St. Louis, my impression is that FOMC deliberations are extremely open and
that issues are thoroughly explored. I do not think that disclosing the
transcript with a five-year lag inhibits my discussion, and believe that to be
the case for most other members as well. I also believe that the transcript
provides a valuable record for scholars and I strongly support the current
system of releasing lightly edited transcripts. ... The current system of
releasing the FOMC transcript with a five-year lag works well.
I am sold on the confidentiality argument, but remain skeptical that the
public cannot digest the information properly or that the behavioral changes
televising the proceedings would have on participants are unambiguously
negative. Following the lead on the transcripts, a "lightly edited" video of
the meetings released as soon as possible after FOMC meetings could address confidentiality issues, so that objection seems manageable as well. But I suspect I will be the cheese that stands alone on this one and that most will feel the negatives of televising the proceedings outweigh the positives.
Posted by Mark Thoma on Wednesday, October 26, 2005 at 12:02 PM in Economics, Fed Speeches, Monetary Policy |
Brad Delong is battling the false perception that Ben Bernanke is soft on inflation, a point made here as well, and Brad is right. If analysts continue to spread this myth about Bernanke gleaned from a misreading of a statement about how to prevent costly disinflation, the Fed will be forced to demonstrate its commitment to price stability, and forcing the Fed to increase interest rates to establish the appropriate credentials is not desirable.
What about another concern regarding monetary policy recently, asset bubbles? Will Bernanke change the Fed's current view that managing asset prices is outside of its purview? This statement from an American Economics Review Papers and Proceedings volume from 2001 should help to clarify Bernanke's position:
Should Central Banks Respond to Movements in Asset Prices?, by Ben S. Bernanke and Mark Gertler: ...The inflation-targeting approach gives a specific answer to the question of how central bankers should respond to asset prices: Changes in asset prices should affect monetary policy only to the extent that they affect the central bank’s forecast of inflation. ... In use now for about a decade, inflation targeting has generally performed well in practice. However, so far this approach has not often been stress-tested by large swings in asset prices. [Author web page versions here and here.]
The stress testing he mentions, an indication his view on is not yet etched in stone, is now being performed and his hand will soon be on a key lever in the process, interest rates. But this doesn't explain why the Fed shouldn't respond. For more on that, here's a 2002 Fed speech from Bernanke. Once again, we see that his mind is not entirely made up on this issue, but he is persuaded by arguments that bubbles cannot be reliably identified in time to prevent them, and even if they could, monetary policy is too blunt an instrument to use if the intent is to prick individual bubbles:
Asset-Price "Bubbles" and Monetary Policy, by Ben Bernanke: ... My talk today will address a contentious issue, summarized by the following pair of questions: Can the Federal Reserve ... reliably identify "bubbles" in the prices of some classes of assets, such as equities and real estate? And, if it can, what if anything should it do about them? ... My suggested framework for Fed policy regarding asset-market instability can be summarized by the adage, Use the right tool for the job. ... The Fed ... has two broad sets of policy tools: It makes monetary policy, which today we think of primarily in terms of ... setting ... the federal funds rate. And, second, the Fed has a range of powers with respect to financial institutions, including rule-making powers, supervisory oversight, and a lender-of-last resort function ... The first part of the prescription implies that the Fed should use monetary policy to target the economy, not ... asset markets. ... [F]or the Fed to be an "arbiter of security speculation or values" is neither desirable nor feasible. ... The second part of my prescription is for the Fed to use its regulatory, supervisory, and lender-of-last-resort powers to protect and defend the financial system.
...[T]he framework just articulated is not universally accepted ... And, in my opinion, the theoretical arguments that have been made for the lean-against-the-bubble strategy are not entirely without merit. ... If we could accurately and painlessly rid asset markets of bubbles, of course we would want to do so. But ... the Fed cannot reliably identify bubbles in asset prices. ... [and] even if it could identify bubbles, monetary policy is far too blunt a tool for effective use against them. ... As a matter of logic, the fact that bubbles are difficult to identify with precision does not necessarily justify ignoring potential ones ..: Even if we can measure bubbles only imprecisely, is the optimal response of monetary policy to a perceived bubble literally zero? Shouldn't there be at least a bit of response, for "insurance" purposes? ... [But] Is it plausible that an increase of ½ percentage point in short-term interest rates, unaccompanied by any significant slowdown in the broader economy, will induce speculators to think twice about their equity investments? ... Although neither I nor anyone else knows for sure, my suspicion is that bubbles can normally be arrested only by an increase in interest rates sharp enough to materially slow the whole economy. In short, we cannot practice "safe popping," at least not with the blunt tool of monetary policy. ... One might as well try to perform brain surgery with a sledgehammer. ...
A far better approach, I believe, is to use micro-level policies to reduce the incidence of bubbles and to protect the financial system against their effects. I have already mentioned a variety of possible measures, including supervisory action to ensure capital adequacy in the banking system, stress-testing of portfolios, increased transparency in accounting and disclosure practices, improved financial literacy, greater care in the process of financial liberalization, and a willingness to play the role of lender of last resort when needed...
Things could change in the future under Bernanke as new ideas and new research on the Fed's role in managing asset price bubbles comes to light, but I don’t expect much, if any change in the Fed's hands-off policy regarding asset price management, and if there is change, it won't be immediate. One final note. I was struck in reading this speech how similar it is to very recent discussions emanating from FedSpeak on this issue, an indication of the influence Bernanke has within the Federal Reserve.
[Update: The Washington Post discusses this here.]
Posted by Mark Thoma on Wednesday, October 26, 2005 at 12:15 AM in Economics, Housing, Monetary Policy |
Robert Samuelson supports to the view that Ben Bernanke will fight inflation with the same intensity as Greenspan:
The New Fed Chief Will Protect Us From Inflation By Robet J. Samuelson, The Washington Post (WSJ version used here): We have all the telltale signs of an inflation breakout: a big jump in oil and energy prices ... a low unemployment rate ... To anyone old enough to remember, the situation seems eerily reminiscent of the 1970s, when ... inflation reached peaks of 12.3% in 1974 and 13.3% in 1979. Well, folks, it ain't gonna happen this time. Here are three reasons: (1) The Federal Reserve won't let it happen -- and the nomination of Ben Bernanke to succeed Alan Greenspan as Fed chairman won't change that. The Fed would tolerate a recession before again permitting inflation to go bonkers. (2) The U.S. economy has become vastly more competitive since the 1970s. It's harder for companies to raise prices, because they face imports or low-cost domestic rivals. (3) Productivity has also improved since the 1970s, helping companies absorb some cost increases without raising their prices...
It's true that ... recent inflation news ... has been abysmal. .... But the overwhelming cause was the explosion of energy prices, not a general rise of most prices. Economist James Hamilton of the University of California at San Diego cites this revealing fact: even if no prices outside energy had increased, the CPI would still have risen 2.7%. ... "People make a mistake when they attribute inflation (mainly) to oil prices," says Mr. Hamilton. "It was what the Federal Reserve was doing before the oil shocks that made for inflation." What the Fed was doing was following easy money and credit policies. Countless economists, left and right, have concluded that oil prices were not the principal inflation culprit. The great continuity between Messrs. Greenspan and Bernanke is that both accept this basic analysis. ... The Fed's first job ... is to restrain inflation, because almost everything else depends on it. Probably most economists now believe this, but much of the public still clings to the myth that high oil prices caused high inflation. It's apparently indestructible. The truth is that the high inflation of the 1970s was mostly self-inflicted: the consequence of bad economic ideas. What prompted the Fed to follow easy-money policies was the belief -- then dominant among economists -- that there is a stable "trade off" between inflation and unemployment. In effect, you could juice the economy, and you'd get a big drop in unemployment and a slight rise in inflation. It seemed like a good deal. But the theoretical bargain didn't work in practice. ... Under Mr. Greenspan, the Fed buttressed its credibility by raising interest rates when necessary to suppress inflation, even at the risk of a short-term recession. The last thing Mr. Bernanke wants is to squander this hard-won reputation.
Posted by Mark Thoma on Wednesday, October 26, 2005 at 12:12 AM in Economics, Monetary Policy |
China is growing fast, but its environmental problems may be growing even
faster. According to Thomas Friedman, the only solution is an integrated world
solution where large countries such as the U.S. and China cooperate to avoid
impending global environmental disaster. But the more difficult question, the
mechanism through which the cooperation will occur, is not addressed beyond the
call to bring "business, government and N.G.O.'s together to produce a more
sustainable form of development." Cooperative government environmental policy among countries
might have a chance, but it's difficult to imagine steps being taken in that direction
under current administration policy:
Living Hand to Mouth, by Thomas L. Friedman, New York Times: ...Not
only is China not a communist country anymore, but it may also now be the
world's most capitalist country in terms of raw energy. ... But can anything
stop Chinese capitalism? Yes, Chinese capitalism. Other than political
breakdown, the biggest threat to China's growth is now the environment. ...
China's leaders know this and have been taking steps to reverse deforestation
and find alternatives to the coal-powered electricity plants ... But ... the
legitimacy of the ruling Communist Party rests largely on its ability to keep
raising living standards, it can't afford a recession ... officials will
always choose raw growth. ... Tighter regulation alone won't save China's
environment, or the world's. Since logging in most natural forests was banned
here in 1998, China's appetite for imported wood has led to stripped forests
in Russia, Africa, Burma and Brazil. China outsourced its environmental
degradation. That is why you need an integrated solution. ... to produce a
more sustainable form of development - so China can create a model for itself
and others on how to do more things with less stuff and fewer emissions. That
is the economic, environmental and national security issue of our day...
Posted by Mark Thoma on Wednesday, October 26, 2005 at 12:10 AM in China, Economics, Environment |
Always Ask Questions. Always. After giving some, but not full
credit to "Always Low Prices" Wal-Mart for providing increased health care coverage to its
workers, I read:
Wal-Mart Memo Suggests Ways to Cut Employee Benefit Costs, by Steven
Greenhouse and Michael Barbaro, NY Times: An internal memo sent to
Wal-Mart's board of directors proposes numerous ways to hold down spending on
health care and other benefits while seeking to minimize damage to the
retailer's reputation. Among the recommendations are hiring more part-time
workers and discouraging unhealthy people from working at Wal-Mart. ... the
memorandum ... also recommends reducing 401(k) contributions and wooing
younger, and presumably healthier, workers by offering education benefits. The
memo voices concern that workers with seven years' seniority earn more than
workers with one year's seniority, but are no more productive. To discourage
unhealthy job applicants, [the memo] suggests that Wal-Mart arrange for "all
jobs to include some physical activity (e.g., all cashiers do some
cart-gathering)." ... The memo ... said that three top Wal-Mart officials ...
had "received the recommendations enthusiastically." ... The memo noted,
"The least healthy, least productive associates are more satisfied with their
benefits than other segments and are interested in longer careers with
Wal-Mart." ... "It will be far easier to attract and retain a healthier
work force than it will be to change behavior in an existing one," the memo
said. "These moves would also dissuade unhealthy people from coming to work at
So it appears this is about image, not worker health. Memo to self. Next time Wal-Mart does something that appears benevolent to its workers on the surface, look beneath the
surface and ask why.
Posted by Mark Thoma on Wednesday, October 26, 2005 at 12:06 AM in Economics, Health Care |
Caroline Baum discusses how financial market confidence in the Fed as an institution has changed smoothing the path for Bernanke to take the helm, Bernanke's commitment to price stability (here too by Brad Delong), whether the Fed will become more democratic under Bernanke, and whether there will be further moves towards transparency and explicit inflation targeting. Quotes from Frederic Mishkin are included:
Transparency Wins, Fed Leaks Lose, With Bernanke, Caroline Baum, Bloomberg: There were no fireworks in the financial markets yesterday, the way there were when Paul Volcker announced he was stepping down ... President George W. Bush's announcement yesterday that he was nominating former Fed governor Ben Bernanke ... to succeed Greenspan created no such jitters. Look how far we've come! Central banking has evolved ... to the point that investors understand that the institution is larger than any one person ... There will be some obvious changes at the Bernanke Fed --none of which will be quick as policy innovation moves at a glacial pace. What won't change is the central bank's commitment to price stability. "Ben has said that there is no inconsistency in the Fed's dual mandate'' of maximum sustainable economic growth and price stability, says Frederic Mishkin, professor of banking and finance at Columbia University's Graduate School of Business and a former research director at the New York Fed. Mishkin ... says there will be more "open discussion'' at the Fed ... "Ben is a listener and will build consensus,'' ... Unlike Greenspan, who resisted an explicit inflation target and ... Bernanke is likely to advance the cause and communicate clearly, Mishkin says. ...
There is something to be said for a rules-based policy as opposed to Greenspan's seat-of-the-pants approach, no matter how well one thinks it succeeded. If the central bank is precise about its goals, offering up a numerical inflation target ... takes the guesswork out of what constitutes price stability, which inflation measure expresses it best and how many exclusions (food and energy?) are legitimate. Just because a central bank has an explicit inflation target doesn't mean it has a playbook on how to achieve it. "An inflation target doesn't tell you how to set the policy instrument,'' Mishkin says, referring to the overnight federal funds rate...
In 2003, ... Bernanke advocated using forward- looking language to bring long-term rates down. His willingness to use verbal guidance ... suggests the prospective language included in the statement released following Fed meetings will remain for now. Two ... differences come to mind in contemplating how the Fed would differ under Bernanke. His focus on transparency suggests Greenspan's anointed Fed reporters may be out of luck, at least in terms of printing comments from unnamed Fed officials. It would be out of character for him to disseminate information in a way that opens the door to questions of who actually said and meant what. Second, Bernanke is apt to restrict himself to comments on monetary policy. He appeared uncomfortable enough commenting on the monthly employment report to the TV audience in his role as chairman of the President's Council of Economic Advisers. He's not likely to advocate or criticize specific fiscal policies (tax cuts, for instance) in his job as Fed chairman, other than to remind his congressional inquisitors that they need to put their house in order. In return, let's hope they stay out of his.
Yes, let's hope they do. But I do hope Bernanke will speak out when other parts of government take actions that have the potential to feedback upon and affect monetary policy.
Posted by Mark Thoma on Tuesday, October 25, 2005 at 01:02 PM in Economics, Monetary Policy |
One of Ben Bernanke's influential papers, written with Alan Blinder (quoted on Bernanke here) "The Federal Funds rate and the Channels of Monetary Policy" appeared in the American Economic Review in September 1992 (JSTOR link). There is a lot in the paper, some of it on the technical side, and I will make no attempt to cover all of the papers points or nuances. But there are interesting tables and figures in the paper that give a sense of the paper's impact and two of these are presented below.
At the time the paper is published, there is a fairly active debate among those studying monetary policy concerning how to correctly measure monetary policy shocks, a debate that continues today. The traditional measures are derived from monetary aggregates such as M1, M2, the monetary base, and reserves, but interest rates such as the T-Bill rate and the federal funds rate, and interest rate spreads such as long-short spreads and the spread between the T-bill rate and the commercial paper rate are beginning to gain favor on both theoretical and empirical grounds. This table helped to push the profession away from aggregates and towards interest rates and interest rate spreads, with this paper pushing towards the federal funds rate in particular. This table asks a simple question using a model known as a vector autoregression or VAR model to ask it. The question is how well each of the monetary aggregate and interest rate variables listed at the top of the table predict macroeconomic variables of interest listed on the left-hand side.
click for larger version
The table shows that the federal funds rate predicts the variables listed in the table better than the other variables such as M1, M2, the three month T-Bill rate, and the 10 year government bond rate, and it is more robust to the sample period than other variables on the list such as the T-Bill rate which does better prior to 1980 than after. There is one interesting line on the table. Housing starts is the only variable examined that does not appear to respond to changes in the federal funds rate.
Because of this table, and many more additional tables in the paper (which also examine interest rate spreads), and because of other papers like this one, the weight of the evidence began to shift towards the use of interest rates and away from monetary aggregates. I should add that the evidence in the paper is not just empirical, there is also a theoretical argument made for the use of interest rates rather than monetary aggregates to measure monetary policy shocks.
Another aspect of the paper is an argument that a credit channel for the transmission of monetary shocks exists. Let's start with this graph from the paper:
This graph shows how the unemployment rate and the bank balance sheet variables deposits, securities, and loans move over time in response to change in the federal funds rate. Under the standard transmission mechanism, the tightening of money reduces bank reserves and lowers bank deposits through the familiar multiple deposit contraction process. In addition, as expected, bank assets also fall which is initially reflected by the fall in securities. However, over time, securities begin to recover and bank loans, a different bank asset, begin to fall instead and after 24 months the change is reflected almost entirely in loans rather than securities.
The fall in loans corresponds fairly well to the rise in the unemployment rate. This then, to Bernanke and Blinder, gives credence to the credit view over the money view in explaining how money impacts the economy. Why? Under the money view, it is the change in deposits and the corresponding changes in interest rates from the fall in liquidity that drive the fall in output after a contraction. Under the credit view, it is the reduction in reserves causing loans to dry up that generates the negative impact on the aggregate economy. This paper argues strongly for the existence of a credit channel as an alternative means by which changes in bank reserves brought about by monetary policy can affect variables such as output and employment.
Posted by Mark Thoma on Tuesday, October 25, 2005 at 02:10 AM in Academic Papers, Economics, Monetary Policy |
I have heard and read worries that the Fed under Ben Bernanke will not be as committed to fighting inflation as the Fed under Greenspan, a worry I do not share. These quotes from a speech Bernanke gave in 2003 while he was a Fed governor called "A Perspective on Inflation Targeting" give information about Bernanke's views on how committed the Fed should be to fighting inflation (the whole speech is worth reading if you want to learn more about inflation targeting, and it gives links to related remarks by Bernanke and others on this topic). He uses the oil price shocks of the 1970s as an example and says that the inflation problems of that time were primarily the result of poor monetary policy not high oil prices, a statement of interest given the recent increase in energy prices:
However, a crucial proviso is that, in conducting stabilization policy, the central bank must also maintain a strong commitment to keeping inflation--and, hence, public expectations of inflation--firmly under control.
Although constrained discretion acknowledges the crucial role that monetary policy plays in stabilizing the real economy, this policy framework does place heavy weight on the proposition that maintenance of low and stable inflation is a key element--perhaps I should say the key element--of successful monetary policy.
I gave the Great Inflation of the 1970s in the United States as an example of what can happen when inflation expectations are not well anchored. ... Even today conventional wisdom ascribes this unexpected outcome to the oil price shocks of the 1970s. Though increases in oil prices were certainly adverse factors, poor monetary policies in the second half of the 1960s and in the 1970s both facilitated the rise in oil prices themselves and substantially exacerbated their effects on the economy. Monetary policy contributed to the oil price increases in the first place by creating an inflationary environment in which excess nominal demand existed for a wide range of goods and services. ... Without these general inflationary pressures, it is unlikely that the oil producers would have been able to make the large increases in oil prices "stick" for any length of time.
...The upshot is that the deep 1973-75 recession was caused only in part by increases in oil prices per se. An equally important source of the recession was several years of overexpansionary monetary policy that squandered the Fed's credibility regarding inflation, with the ultimate result that the economic impact of the oil producers' actions was significantly larger than it had to be. Instability in both prices and the real economy continued for the rest of the decade, until the Fed under Chairman Paul Volcker re-established the Fed's credibility with the painful disinflationary episode of 1980-82. This latter episode and its enormous costs should also be chalked up to the failure to keep inflation and inflation expectations low and stable.
Of course, as has often been pointed out, actions speak louder than words; and declarations by the central bank will have modest and diminishing value if they are not clear, coherent, and--most important--credible, in the sense of being consistently backed up by action...
And here are his misconceptions about inflation targeting from the same speech (the Bernanke and Mishkin 1997 paper he mentions is here):
Misconception #1: Inflation targeting involves mechanical, rule-like policymaking. As Rick Mishkin and I emphasized in ...Bernanke and Mishkin, 1997..., inflation targeting is a policy framework, not a rule. ... Inflation targeting provides one particular coherent framework for thinking about monetary policy choices which, importantly, lets the public in on the conversation. ... monetary policy under inflation targeting requires as much insight and judgment as under any policy framework; indeed, inflation targeting can be particularly demanding in that it requires policymakers to give careful, fact-based, and analytical explanations of their actions to the public.
Misconception #2: Inflation targeting focuses exclusively on control of inflation and ignores output and employment objectives. Several authors have made the distinction between ... "strict" inflation targeting, in which the only objective of the central bank is price stability, and "flexible" inflation targeting, which allows attention to output and employment as well. ... For quite a few years now, however, strict inflation targeting has been without significant practical relevance. In particular, I am not aware of any real-world central bank (the language of its mandate notwithstanding) that does not treat the stabilization of employment and output as an important policy objective. To use the wonderful phrase coined by Mervyn King, the Governor-designate of the inflation-targeting Bank of England, there are no "inflation nutters" heading major central banks. Moreover, virtually all (I am tempted to say "all") recent research on inflation targeting takes for granted that stabilization of output and employment is an important policy objective of the central bank...
A second, more serious, issue is the relative weight, or ranking, of inflation and ... the output gap... among the central bank's objectives. ... As an extensive academic literature shows, ... the general approach of inflation targeting is fully consistent with any set of relative social weights on inflation and unemployment; the approach can be applied equally well by "inflation hawks," "growth hawks," and anyone in between. What I find particularly appealing..., which is the heart of the inflation-targeting approach, is the possibility of using it to get better results in terms of both inflation and employment. Personally, ... I would not be interested in the inflation-targeting approach if I didn't think it was the best available technology for achieving both sets of policy objectives.
Misconception #3: Inflation targeting is inconsistent with the central bank's obligation to maintain financial stability. ...The most important single reason for the founding of the Federal Reserve was the desire of the Congress to increase the stability of American financial markets, and the Fed continues to regard ensuring financial stability as a critical responsibility... I have always taken it to be a bedrock principle that when the stability or very functioning of financial markets is threatened, ... the Federal Reserve would take a leadership role in protecting the integrity of the system...
And this may be of interest:
Given the Fed's strong performance in recent years, would there be any gains in moving further down the road toward inflation targeting? ... I believe that U.S. monetary policy would be better in the long run if the Fed chose to make its policy framework somewhat more explicit. ... To move substantially further in the direction of inflation targeting, ... the Fed would have to take two principal steps: first, to quantify (numerically, and in terms of a specific price index) what the Federal Open Market Committee means by "price stability", and second, to publish regular medium-term projections or forecasts of the economic outlook...
Posted by Mark Thoma on Tuesday, October 25, 2005 at 12:06 AM in Economics, Fed Speeches, Monetary Policy |
It's official. President Bush named Ben Bernanke of Princeton University, former Federal Reserve governor and currently chair of the president's Council of Economic advisers, to be the next Fed chair (home page with vita). I don't expect any trouble over confirmation.
Personally, I am pleased with this nomination. Here is one reason I'm encouraged:
Fed Official Moves Up and Into Politics, by Edmund L. Andrews, New York Times: ...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 do not believe Bernanke will politicize the job as much as Greenspan did. My worry is the opposite, that he will not speak forcefully enough on issues such as the budget deficit that impact monetary policy. The credibility he has on Wall Street mentioned in the article is important and I don't imagine this upsetting markets. His credibility in the academic world is at least as strong, another factor working in his favor from my perspective.
How will Bernanke differ from Greenspan? First, Bernanke is a much stronger advocate of inflation targeting than Greenspan (see his Journal of Economic Perspectives paper with Frederic Mishkin on this topic, free link from author web page). Second Bernanke is more likely to push for a publicly announced inflation target. Third, Bernanke is an advocate of Fed transparency and though large movements in this direction have already occurred, with this nomination I expect there to be even more transparency in the future. Thus, under the familiar rules versus discretion debate (here too), Bernanke is closer to the rules side than Greenspan.
Who will oppose Bernanke? The strongest statement against him is this tirade by John Tamny from the NRO. As noted in the write-up on Tamny's statement and by Brad Delong, Tamny's arguments have little validity. The piece seems to have been motivated by Bernanke's refusal to drop solvency as part of Social Security reform.
The speculation isn't over as this brings up more questions. Who will be the next chair of the CEA? Who will fill the other open seat on the Federal Reserve Board of Governors?
[Update: Link to video of Bush's announcement and Bernanke's acceptance of the nomination.]
[Update: Link to WSJ econolog. A large number of blogs talk about Bernanke. Econbrowser, William Polley, New Economist, Calculated Risk, Glittering Eye, and the trackbacks here link to most of them. Prestopundit has links as well, and casts a dissenting vote. I just know I missed someone I should have included...]
Posted by Mark Thoma on Monday, October 24, 2005 at 10:01 AM in Economics, Monetary Policy, Politics |
In criticizing Greenspan and Snow over their recent trip to Japan, Bloomberg's William Pesek Jr. revives the global excess liquidity argument and says one of Greenspan's biggest blunders is his role in creating China's asset bubble:
Greenspan Visits Scene of Fed's China Crime, William Pesek Jr., Bloomberg: To show he means business on China opening its economy, U.S. Treasury Secretary John Snow recently had a powerful prop on hand: Alan Greenspan. While the Federal Reserve chairman retains an almost godlike aura in Asia... Greenspan's presence in China last week didn't help the White House... In fact, Snow seemed to retreat from his campaign to force China to let the yuan rise. ... The trip did offer the Fed chairman a chance to visit the scene of what history may show to be one of his biggest blunders: China's asset bubble. ... It may seem a reach to blame Greenspan and the Fed for irrational exuberance in markets like Shanghai real estate. Yet globalization has globalized the Fed. While it has 12 districts in the U.S., its influence has never been greater. Think of Latin America as the 13th district, Southeast Asia the 14th, Russia the 15th, China the 16th, and so on. The Fed's policy of keeping interest rates low in the first half of this decade fueled ... a cheap capital-fueled investment boom in China. ... The trend has manifested itself in a variety of ways, including fueling a surge in the use of derivatives. ... The upshot may be untold amounts of leverage and risk in a global financial system... And for that, Greenspan's easy-money policies bear some blame. ... Greenspan probably isn't preoccupied with China's liquidity excesses. It's doubtful he'd even acknowledge a relationship between Fed polices and China's challenges, given how artfully he's sidestepped responsibility for excesses in U.S. stocks, housing and Treasury yields in recent years...
I agree this trip was no success from the administration's perspective. However, global excess liquidity caused by Fed policy is not the reason for China's asset bubble and since the premise is unacceptable, it's difficult to pin the result on Greenspan. As has been discussed thoroughly here and elsewhere, the global excess liquidity hypothesis finds very little support as a primary foundation for explaining low world interest rates. Let me first turn to Brad DeLong, then David Altig. Both Brad and David have links to further discussion on this issue. Here's Brad:
Brad Delong: Global Excess Liquidity?: I don't understand the argument that even though inflation is not accelerating, the world nevertheless suffers from "global excess liquidity" ... What happened was not a rise in savings, but a fall in investment as first the collapse of the dot-com bubble and then 9/11 increased uncertainty and diminished businesses' willingness to undertake risky investments. ... In response, the Federal Reserve (and other central banks) shifted to easy money... Are interest rates now "too low"? The usual answer is that interest rates are too low when inflation is accelerating. As long as inflation is stable, that means that the supply of goods and services is roughly equal to the demand for goods and services ... Inflation is roughly stable...
And here's David Altig:
David Altig: Global Dollar Demand And The U.S. Housing Market: ...This is ... a variation on a theme I have emphasized in the past: The "interest rate conundrum", ...[is] fundamentally driven by the desire of foreigners to send their financial capital to the United States. .... Several of my fellow bloggers -- Brad DeLong, pgl, William Polley, and Mark Thoma -- commented on an article appearing a few weeks back in The Economist, suggesting that an explanation that hinging on excess creation of liquidity. Several of these commentators were skeptical about The Economist's position. Count me in on that. Although this will seem hopelessly old-fashioned, here is the recent record on money creation in the United States ... Broad money growth in the 4-6 percent range with nominal GDP growing at a 5-6 percent annual rate just doesn't spell excess liquidity to me. ...
The article is remarkably silent, just a few words, on China's policy of fixing exchange rates. It also does not cite the usual reason for given for excessive risk taking, misperceptions of risk due to an unusually high degree of stability in financial markets in recent years. Even if the Fed had created China's asset bubble, it would only be concerned to the extent that it might feedback onto the domestic economy. There are twelve Fed districts. Period. There may be reasons to criticize Greenspan, but creating China's asset bubble is not among them.
Posted by Mark Thoma on Monday, October 24, 2005 at 01:23 AM in China, Economics, International Finance, International Trade, Monetary Policy |
Bargain value healthcare from Wal-Mart? Wal-Mart has plans to begin offering
cheaper healthcare coverage to its employees. I can't find the catch, other than
the quality of healthcare coverage under the plan being consistent with the
goods Wal-Mart sells. Still, the reviews are generally though not universally
favorable, with the most criticism directed towards coverage for older workers:
Expand Health Plan for Workers, by Michael Barbaro, NY Times: Wal-Mart ...
is introducing a cheaper health insurance plan, with monthly premiums as low as
$11, that the company hopes will greatly increase the number of its employees
who can afford coverage. ... The
new benefits, which Wal-Mart calls the Value Plan, follow years of complaints
that at ... the nation's largest employer, health insurance is out of reach for
many of its 1.2 million workers... forcing thousands of them
to turn to state-sponsored programs or forgo health coverage altogether. "We are
lowering the costs to make health insurance more affordable," said a Wal-Mart
spokesman, Dan Fogleman, ... Asked if the new insurance plan was in response to
growing criticism, he said, "It's fair to say we are listening, but more so to
our associates than anyone else." Health insurance specialists generally praised
the new plan, saying its lower premiums were likely to attract more employees
and thereby reduce the ranks of the uninsured. ... Currently, fewer than half of
Wal-Mart's workers are covered by company health insurance, compared with more
than 80 percent at Costco, its leading competitor. ...
Several health insurance specialists questioned whether the company, which is
working to burnish its public image, was trying to quickly increase the number
of workers who use its health insurance at the expense of the coverage's
quality. "Is it the greatest health care plan in the world? Probably not," said
Howard Berliner, a professor of health policy at the New School for Social
Research. "But my concern is getting people health insurance so they can get
health care when they need it. In that sense, anything that speeds that goal is
for the better." Uwe E. Reinhardt, a health economist at Princeton University,
said that by allowing workers several visits to the doctor before requiring them
to pay out of pocket, Wal-Mart had "removed a big financial barrier between
doctors and patients," adding that critics "would have trouble attacking this
But analysts cautioned that the new insurance plan would prove a better fit
for workers who are young and healthy ... A 60-year-old Wal-Mart employee ... might visit a doctor three times in a one month and then need to pay
$1,000 before the company would share the cost of care. Given that many ...
employees are paid less than $19,000 a year, the deductible "is pretty
significant," ... Tracy Sefl, a spokeswoman for Wal-Mart Watch, ... said that "a plan
that is characterized as a healthy person's plan doesn't fully address the needs
of a majority of their work force." ... Even as they commended Wal-Mart for offering a more affordable health
insurance plan, some industry watchers expressed surprise that the company
waited as long as it did to offer a more affordable option...
My hope is that this will attract high quality workers to Wal-Mart, so much so
that the increase in productivity more than compensates for the cost of the
plan giving Wal-Mart a further competitive advantage and forcing other
companies to offer their own slightly more attractive healthcare
programs. As the article notes, Costco covers 80% of its employees, but Wal-Mart
covers less than half, so Wal-Mart is playing catch up with this move. But it's
likely just that, a hope, and I'm not ready to wait for the private sector to solve this one. It hasn't so
far. As Keynes notes in another setting, "In the long-run, we are all dead." Yes, but
hopefully not from preventable causes.
Posted by Mark Thoma on Monday, October 24, 2005 at 01:20 AM in Economics, Health Care |
For those interested in the troubles facing the auto industry and the areas
of the country that are the most vulnerable, here's a map from the
Chicago Fed Blog
(where the issue is discussed further) showing the location of auto supplier plants in the US:
Click to see larger image
In addition, see
econbrowser for more on the auto industry.
Posted by Mark Thoma on Monday, October 24, 2005 at 12:52 AM in Economics, Unemployment |
Jason Scorse explains the need to update classic liberalism of the 1970s in light of 21st century
Environmental Economics: The Ideal Political Platform Part #2: ...[C]lassic liberalism/conservatism as
espoused in the 1970s by many prominent economists, notably Milton Friedman... posits that government should be limited to what government
does best, that social welfare should be provided in ways that are minimally
distorting to the economy (e.g. lump-sum payments), that the tax system should
be simple and transparent, and that individuals should be allowed to do pretty
much whatever they want to as long as their actions do not directly harm
others... But classic liberalism as espoused decades ago ... under-estimated
the environmental problems that would confront us and the need for government
intervention in these matters. Below I highlight how the essential tenets of
classic liberalism need to be augmented given the environmental realities of
the 21st century:
- Classic liberalism assumed that as information improved, private markets
would lead to the increased preservation of environmental resources and that
externalities ... would be internalized ... given a system of strong property rights. While
much improvement in the environmental arena has occurred, ... most economists
vastly under-estimated the level of coordination that is required to tackle
some of the world’s most serious environmental problems. Issues such as
global warming and the loss of biodiversity require much more government
intervention then had previously been assumed. This is not to say that this
government intervention won’t rely heavily on the workings of the market
system, but only that top-down regulation is absolutely necessary...
government should move us towards a more rational method of risk management
in areas that are prone to natural disasters. It is highly inefficient, as
well as an abrogation of government responsibility, to create incentives for
people to live in areas that are both dangerous and prone to catastrophe by
providing them with reconstruction aid every time disaster strikes. The
government has two options; either require that all people living in [risky areas] purchase private
insurance, or make it absolutely clear that people will not be compensated ... by the government if disaster strikes. Such a
policy would ... lead to dramatic shifts in the population densities in
many disaster-prone areas..., and perhaps some one-time
assistance in relocation would be required. The net effect would be to
dramatically reduce future losses of life and property and save the
government hundreds of billions in future costs. It would also force private
actors (notably insurance companies) to take into account the effects of
environmental externalities that until now have largely been ignored.
- Regarding personal health and risk, the government also must play a much
more active role...
Milton Friedman famously noted that there is no use for the Food and Drug
Administration since companies whose products lead to illness will be forced
out of the market...
What he failed to realize is that if someone gets sick it is extremely
difficult to trace the source of the illness, and without government
regulation many companies that poison consumers could in fact operate
profitably for long periods of time... it is clear that in this highly
complex and inter-connected system, where we all are exposed to thousands of
chemicals a year, many of which interact in ways that aren’t yet fully
understood, where it is hard to trace the origin of products, and where the
effects of these products often don’t manifest for years, the ... Food and Drug Administration,
the Environmental Protection Agency, and the U.S. Department of Agriculture
should all be well-funded, be decoupled from conflicts of interest with
industry, and their mandate to protect the public welfare through rational
risk assessment should be strengthened.
Posted by Mark Thoma on Sunday, October 23, 2005 at 03:47 PM in Economics, Environment, Market Failure, Policy, Regulation |
It's nice to see commentary on economic and social change in Europe
recognizing that economic reform designed to make markets more flexible does not
require sacrificing social insurance and economic security. In fact, as the
article notes, such reform may be reason to enhance economic security. Most
people writing about decreased interference in markets do not make such a
distinction and blame the social model for the economic malaise in many European
countries. This article takes exception to such claims:
Wolfgang Munchau: Why social models are irrelevant, by Wolfgang Munchau,
Financial Times: The least helpful contribution one can conceivably
make in any economic debate is to recommend that one country adopt the social
model of another. ... These days, it is difficult to find a European
think-tank that does not advocate adoption of the Scandinavian social model.
But the notion that the social model in small, consensual, wealthy and
ethnically homogenous northern European countries such as Sweden and Denmark
should serve as a model for large economies with huge wealth and income
differences and mass immigration such as Germany or Italy is surely bordering
on insanity. Yet this is precisely the debate that European Union leaders will
be having... Instead of focusing on reforms of the social model, they should
look at reforms of the EU’s economic system. The latter refers to the
regulation of markets and macroeconomic governance. The former relates to risk
insurance and social transfer systems. In the European debate, we have been
committing a big classification error by confusing these two systems. ...
Globalisation requires ... more flexible markets and a more flexible economic
policy. But more flexibility increases demand for more risk insurance and also
for more social protection. The right answer is therefore to liberalise
markets, while retaining welfare and insurance systems. Instead, Europeans
have been doing the opposite. We have scaled down our welfare systems without
opening up our markets.
There exists, of course, a relationship between social and economic
policies. Social systems can, and sometimes do, adversely affect economic
growth. But there is no evidence that Europe’s social model is the main cause
for Europe’s astonishingly poor economic performance over the last five years.
If that were the case, it would be impossible to explain why Germany, France
and Italy had higher growth rates than the US and the UK until the early
1990s. Nor would it be possible to explain Austria’s magnificent economic
performance despite its German-style social model. Instead, a far more likely
cause of Europe’s bad performance is the combination of inflexible markets and
an inflexible economic policy. This is where any intelligent economic reform
programme should start. I could think of no better area for reform than
full-scale liberalisation of Europe’s protectionist financial markets. ... The
lack of an efficient financial market has economic consequences that go beyond
the financial sector itself. First, it means that there is insufficient
venture capital for new companies... Second, it means that there is not enough
pressure for corporate restructuring; ... Third, it means that many European countries
have not developed a well-functioning housing market... There is enough
economic reform to keep us busy for several years. But instead, European
leaders are wasting time debating the Scandinavian social model...
Posted by Mark Thoma on Sunday, October 23, 2005 at 12:24 PM in Economics, Regulation, Social Security |
Much has been written here and elsewhere (here too) regarding the Bush tax cuts and the deficit. Many claim that the tax cuts didn't increase the deficit. Instead, the claim is that the tax cuts increased economic growth enough to bring about an increase in tax revenues and reduce the deficit. Let's see if Paul Krugman can help. Is there any evidence out there that can help to convince us one way or the other? Are tax cuts the answer to the deficit problem?
The Bush Tax Cuts and the Deficit, Paul Krugman, Money Talks, NY Times: ...Here are two pictures that may help show why claims that the tax cuts were good for the deficit are wrong. Chart 1 shows federal receipts as a percentage of ... G.D.P.... These receipts plunged starting in 2001, then made a partial – but only partial – recovery over the past year. It’s useful to bear in mind that estimates of the size of the Bush tax cuts put them at about 2 percent of G.D.P. The actual fall in revenue as a share of G.D.P. was much larger ... Even now, revenue is about 3 percent of G.D.P. below its peak...
So revenue as a share of GDP fell after the tax cuts? Why did that happen?
The most likely answer is that by the end of the 1990’s revenues were inflated by the stock market bubble ... When the bubble burst, revenue fell off. ... Back in 2001 ... I argued that predictions of big future surpluses, which were used to justify those [tax] cuts, were wrong – and one reason I gave was that federal revenues were inflated by the stock bubble, and would soon fall.
That explains the past, but the news stories on the deficit are about the present. What's been going on with revenues recently? Why have they been increasing?
Data from the Congressional Budget Office show that ... the revenue surge came from two places, profits taxes and “nonwithheld” income taxes. Profit taxes surged partly because profits themselves surged – this has been an economic recovery in which real wages for most workers have actually gone down, so that profits have gathered the lion’s share of the gains – but also because a temporary tax break instituted in 2002 expired. We don’t know for sure why nonwithheld income taxes surged, but the best guess is that it reflects a bounce in stock prices during 2003-4 and, probably, a bubble in housing. Both are one-time events...
I'm not convinced yet. Here's why. Suppose taxes are cut and GDP growth goes up by, say, 3%, and because of the robust growth in GDP suppose that taxes increase by 2%. Then wouldn't taxes as a percentage of GDP fall? Doesn't that undercut your argument above which relies upon the taxes as a percentage of GDP falling as a sign of falling revenues?
Well, no. ... [E]ven now real G.D.P. is considerably lower than most people thought it would be ... Chart 2 shows, for each quarter since the beginning of 2000, the average growth rate of real G.D.P. over the previous five years. At the end of the 1990’s, people thought that the economy would grow at ... more than 3 percent a year. In fact, economic growth since 2000 has averaged only about 2.5 percent... The bottom line is that there is nothing in the data to suggest that the Bush tax cuts have had a favorable effect on the budget deficit.
Then why are the claims that tax cuts reduced the deficit by increasing revenue so widespread?
The answer, of course, is that wiggle at the end of the line in Chart 1. Revenue is still low by historical standards, but it’s not as low as it was last year. And as a result, the budget deficit actually came down in fiscal 2005, albeit to a level that would have seemed shockingly high a few years ago...
But isn't that better? Shouldn't we be cheering the recent upswing in revenue?
Well, put it this way: if a student gets a D after a string of F’s, his performance has improved – but that doesn’t put him at the top of the class.
Given this and other evidence suggesting the same thing, I'm convinced.
Posted by Mark Thoma on Sunday, October 23, 2005 at 01:03 AM in Budget Deficit, Economics, Politics, Taxes |
Here's a little more relating to how access to higher education for poor and middle class students has changed in recent years (e.g. here, here, here, and here):
The Road to College Is Becoming Clogged With Limousines, by Hubert B. Herring NY
Times: This year, ... college tuition ... rose more slowly than it did in
recent years, the College Board said last week. Yet ... tuition increases again
outpaced inflation. ... Deep in the report, though,
is another stark reminder
that a private college education is increasingly a luxury...
In 1992, the cost of attending a private college amounted to 60 percent of the annual income of
the poorest quarter of the nation's families, and 33 percent for the
second-poorest quartile. By the 2003-04 school year, the cost had spiked to 83
percent of a family's budget in the poorest quarter, and for the lower middle it
had risen to 41 percent. And for the richest quarter of families - those with an
average income of $143,000? The increase was merely to 19 percent from 17
Posted by Mark Thoma on Sunday, October 23, 2005 at 12:33 AM in Economics, Universities |
Nobel prize winner Edward Prescott says that cutting taxes, Medicare benefits,
and Social Security benefits and forcing workers to invest in private
accounts will boost the economy substantially. He also believes the eventual collapse of the
Pension Benefit Guarantee Corp. will be the catalyst that changes the politics
of Social Security and allows private accounts to emerge:
Cutting taxes, Social Security benefits may boost economy, Nobel Laureate says,
by Dave Flessner, Chattanooga Times/Free Press: President Bush may still be struggling to sell
... the virtues of privatizing part of Social Security, but a Nobel-prize economist
endorsed the idea... Dr. Edward C. Prescott, an Arizona State University professor who won the
Nobel prize in economics last year, told a UTC audience that cutting taxes and
Social Security benefits could boost U.S. economic growth by up to $1 trillion.
"As the tax rate rises, GDP ... per capita falls," he said. "The evidence clearly indicates
that labor supply is highly responsive to tax rates." To pay for the lower tax rates that would stimulate more economic growth, Dr.
Prescott said Social Security and Medicare benefits should be cut. In their
place, workers should be required to invest in their own savings accounts.
Lowering taxes on income and reducing social security would boost economic
growth and leave nearly all workers better off, Dr. Prescott said. ... Dr. Prescott conceded that "change is difficult" and
"nothing is easy in politics." But Dr. Prescott predicted the eventual collapse of the Pension Benefit
Guarantee Corp., the federal agency that insures defined benefit retirement
plans. That will force many people to recognize the perils of relying upon plans
that appear to guarantee certain benefits without adequate funding or
incentives, he said. "It's just a matter of time before we recognize that,"...
Dr. Prescott said his studies indicate that Europe's effective average tax rate
of 60 percent cuts economic growth by an average 27 percent compared to the
growth of the United States with an average 40 percent effective tax rate.
Europeans retire earlier, work fewer hours and earn far less money, on average,
than their U.S. counterparts, he said. "If the U.S. increases its taxes like
Europe, then we'll be as poor as Europe," Dr. Prescott said. ... Despite the record high federal budget deficit this year, Dr. Prescott said
debt as a share of the nation's output hasn't increased and shouldn't be a
problem for the American economy.
I've made my position pretty clear on this. I am not in favor of
privatization nor among the free lunch crowd. I believe substantial market
failures exist in the provision of both retirement insurance and health
insurance and that government intervention is required to overcome these market
failures. I don't believe that further cuts in taxes and social programs are the
solution to the deficit problem, I don't think the politics will change, and I don't believe all Europeans would agree
with his welfare assessment of the U.S. and European economic systems. But since
it's a bad idea to argue with a Nobel prize winner, I think I will just say I
disagree and leave it at that.
Posted by Mark Thoma on Saturday, October 22, 2005 at 01:00 AM in Budget Deficit, Economics, Market Failure, Social Security |
Does core inflation systematically underestimate actual inflation as many believe? Here are graphs of the CPI along with the CPI less food and energy, and the PPI for finished goods along with the PPI less food and energy through September of this year (the starting dates are different in the two graphs due to data availability). Core inflation is less than actual inflation recently due to rapidly increasing energy costs, but overall it's difficult to detect a systematic bias in either direction:
[Update: These are twelve month (year-over-year) inflation rates but the graphs don't change much with other measures, e.g. averaging monthly rates.]
[Update: I added graphs showing the differences between the all item and core rates of inflation for both the CPI and the PPI as well as a two-scale graph showing the accumulated differences for the two series. If there is systematic bias, the accumulated differences should trend upward or downward. Such trending is not evident. The deviations from zero are, however, highly persistent. The graphs are in the continuation frame.]
[Update: This Economic Scene from The New York Times discusses the use of core versus headline inflation, something that has been discussed extensively on blogs, e.g. macroblog has done a lot on this (Google ''core inflation'' at macroblog).
Continue reading "Is Core Inflation a Systematically Biased Measure of Actual Inflation?" »
Posted by Mark Thoma on Saturday, October 22, 2005 at 12:52 AM in Economics, Methodology, Monetary Policy |
New Economist has some reading for Fed watchers:
New Economist: Productivity and the Fed: Why you shouldn't always trust real-time data: For those interested in the debate over monetary policy "smoothing"
and problems with real-time data, the Federal Reserve's quandary over
productivity during the 1990s is salutary. A key challenge facing the
Fed at the time was the inconsistent messages it was getting about
productivity. Incoming aggregate data initially suggested low
productivity growth, but anecdotal firm-level evidence hinted at an
acceleration. Which was right?
A new St Louis Fed Working Paper by Richard G. Anderson, and Kevin L. Kliesen examines this period in detail, including long and fascinating quotes from FOMC transcripts. The paper, Productivity Measurement and Monetary Policymaking During the 1990s, shows clearly how Greenspan refused to take the real-time data at face value:
Greenspan’s view of the nascent acceleration in productivity growth was
formed largely by both his numerous contacts in the business sector and
his abiding belief that the published aggregate data were not correctly
measuring the effects of information technological innovations that
businesses were claiming to have garnered.
With few exceptions, Greenspan views were discounted by both the
Board’s staff and his colleagues on the Federal Open Market Committee
(FOMC). But the Chairman was not dissuaded. He noted, for example, that
available data suggested that the service sector had achieved no
productivity gain in twenty years, an unlikely event. If this
measurement was wrong, how many more were incorrect? As the
discrepancies widened, in 1996 he requested that the Board’s economic
research staff conduct a project to assess the accuracy of the Bureau
of Labor Statistics’ published productivity figures.
Although that study confirmed the picture painted by the
then-current data, subsequent data revisions changed the picture. Later
published aggregate data converged to the more rapid growth suggested
by the Chairman’s anecdotal, firm-level data.
The authors conclude:
analysis highlights the difficulties in formulating monetary policy
using preliminary, incoming data. Policymakers should be - and are -
wary about placing too much faith in initial estimates because data
revisions often have significantly challenged the perceptions that
policymakers previous held in “real time.”
Recommended reading for all Fed watchers.
Posted by Mark Thoma on Friday, October 21, 2005 at 02:33 PM in Academic Papers, Economics, Monetary Policy |
The fight over water resources in the Northwest continues. Federal courts have rejected the administration's water diversion plans
giving the latest round in the battle to those in favor of diverting less water from rivers to
protect the remaining salmon runs:
champions for Northwest's salmon, by Brad Knickerbocker, The Christian Science
Monitor: ASHLAND, ORE. - Uncle Sam is getting hammered in federal courts for
failing to protect endangered salmon...
The US Ninth Circuit Court of Appeals Tuesday rejected the Bush administration's
water diversion plan for the Klamath River in California and Oregon because it
does not protect the river's coho salmon, listed as threatened under the
Endangered Species Act. Just a few days earlier, a federal judge in Portland,
Ore., said he has had it with failed attempts to recover wild salmon (not to be
confused with the hatchery fish) headed toward extinction in the vast Columbia
River Basin, an area the size of central Europe. ...US District Judge James Redden gave federal agencies
one year - not the two years they had asked for - to come up with a plan that
actually works. And he raised the specter of tearing out mammoth hydroelectric
dams in the Columbia-Snake River system ... if they don't succeed. ... If the hydropower dams were to be
breached, much less electricity would be produced, which may raise the price of
power and make it more expensive for wide segments of the economy in the West.
... Salmon need the right amount of water and the proper temperature to spawn
far upstream, and then they head out to the Pacific Ocean for several years
before returning to the place of their birth to repeat the cycle. Dams,
diversions for irrigation, logging, mining, and urban development all have made
the river trips to and from the ocean increasingly difficult. Before eight major
dams were built on the Columbia River and the Snake River (the Columbia's main
tributary), some 16 million salmon a year filled annual fish runs. Today, that
number is down to about 1 million fish, and 12 species of salmon now are listed
under the Endangered Species Act. The same is true for the Klamath River. It
once saw one of the largest salmon runs. But the number of fish there has
declined to the point where extinction is a possibility, largely because of dams
and water diversions for agriculture.
In both places, government agencies, Indian tribes, environmental groups,
university scientists, and economic interests have been battling it out for more
than a decade. Meanwhile, other important variables may be at work over the long
term that could have significant impact on salmon runs. ... The essence of the federal appeals court ruling this week - the latest in a
series of legal decisions on Pacific salmon that go back more than 30 years - is
that the US Bureau of Reclamation's 10-year plan for restoring the Klamath
salmon run is "arbitrary and capricious," failing to provide enough water for
the fish until the last two years. By that time, the court declared, it well may
be that "all the water in the world ... will not protect the coho [salmon], for
there will be none to protect." ... "We think the court really got it wrong," says Robin Rivett, a lawyer with
the Pacific Legal Foundation who represents irrigators along the
Oregon-California border. The Bush administration has pledged some $6 billion over the next decade on
salmon recovery in the Columbia Basin. But it also wants to include hatchery
fish with wild salmon for purposes of counting fish under the Endangered Species
Act, which biologists argue against because it would lead to further salmon
declines. It has reduced the amount of officially designated "critical habitat"
... The president has said he'd
never approve breaching or removing any of the eight main hydropower dams on the
Columbia and Snake Rivers.
I would be very surprised if any damns are
breached. I hope we are able to save the wild salmon runs, but I am not optimistic that
extinctions will be avoided.
Posted by Mark Thoma on Friday, October 21, 2005 at 09:51 AM in Economics, Environment |
Most posts here are on macroeconomic topics, so it's time for a microblog type post.
Hal Varian of U.C. Berkeley discusses how government policy and housing
prices interact in this Economic Scene from The New York Times. He notes that basic economics tells us that to reduce housing
prices, supply must increase or demand must fall, and the most certain way of
reducing housing prices is an increase in supply facilitated, perhaps, by
changes in public policy. He also notes how well-intended policies can end up
making the problem worse or at best have no effect at all:
Is Affordable Housing Becoming an Oxymoron?, by Hal R. Varian, Economic Scene,
NY Times: ...In the short run, the supply of housing in most areas
is more or less fixed. Hence the price of housing is determined primarily by
the demand side of the market - by how much people are willing to pay for
housing. In the last few years, we have seen historically low mortgage rates,
which feed directly into housing demand. In several locations, particularly on
the East and West Coasts, where land-use restrictions make it difficult to
increase the supply of housing, prices have been pushed up to unprecedented
levels. Whether these low mortgage rates have created a housing price bubble
has been a matter of debate. ... It is quite possible that there is some
"froth" in the market ... particularly on the coasts. But even when the froth
subsides, housing will remain quite expensive in those areas. Can anything be
Some municipalities have started subsidized housing programs...
Unfortunately, such programs just increase demand even more, pushing prices
up. ... If you really wanted to push housing prices down, you would increase
taxes on housing. ... Of course, the total cost of the housing (purchase price
plus the present value of the taxes) would be unchanged, so this really does
not solve the housing cost problem either. In California, tax policy has
played a significant role in housing price dynamics. Proposition 13, passed in
1978, limited property tax increases to 2 percent a year for owner-occupied
homes. But when the house is sold, the property tax assessment is based on the
sale price. This means the new owner typically faces a significantly higher
property tax bill than the old owner. Proposition 13 has been called a "tax on
moving." Indeed it is... It is a lot cheaper to add a bedroom to a
three-bedroom house than to buy a similar four-bedroom house... For the same
reason, empty-nesters have strong tax incentives to keep their houses... The
result is that fewer houses come on the market than would otherwise be the
case, pushing prices up even more for the limited stock of housing that is
Of course, if you intend to move out of state, these considerations are not
so relevant. In California, the best thing for empty-nesters to do is to sell
their nests and migrate to Oregon. This seems to have become a pretty common
practice... So what is the answer to high home prices? Basic economics tells
us that for housing prices to fall we have to see a reduction in demand or an
increase in the supply of housing. There is some hope on the demand side. As
interest rates rise, we should see some moderation in demand; indeed, it
appears that housing prices are flattening out in some areas. Ultimately, the
only reliable way to make housing more affordable is to increase the supply.
But a new house requires land zoned for housing. We cannot make more land, so
we either have to use the land we have more intensively or we have to build
houses farther from jobs. ... In urban California, traffic has become
increasingly congested, putting a limit on how far away from their jobs people
can live. Land use restrictions are tight in many desirable residential areas,
and political forces are aligned against relaxing these restrictions. Imagine
someone who scrimps and saves to buy his dream house in an area zoned for
one-acre lots. The last thing he wants to see is his neighbor's lot being
subdivided to build two or three new houses. ... Zoning laws and land use
restrictions are unpopular among those seeking less-costly housing since they
push up the price. But by the same token, once a searcher becomes an owner, he
often becomes a fervent supporter of such restrictions. As Pogo put it, "We
have met the enemy and he is us."
Posted by Mark Thoma on Friday, October 21, 2005 at 01:03 AM in Economics, Housing, Regulation |
Here's another speech from a Federal Reserve governor or bank president, this
time by Jeffrey Lacker, president of the Richmond Fed. By
my count, this is the eighth speech this week alone (Pianalto,
Ferguson), and there was also a speech by Greenspan. [Update: There's yet another speech by Atlanta Fed president Guynn - see the update at the end of the post.] The speech does not address the future course of monetary policy
except indirectly by indicating that natural real rate of interest may have
risen recently for reasons noted below. This implies a higher federal funds rate
is needed to remove accommodative policy. He did, as reported by Bloomberg, make these comments after the speech:
''My concern about inflation is distinctly higher now,'' Lacker told
reporters ... ''We're facing the prospect now of the possibility of the energy price
surge passing into core prices.''
''Core inflation's drifted to the upper end, on a year- over- year basis, of
a range that I find comfortable,''
''Inflation expectations have been downgraded from well-contained to
contained and I wouldn't like to see a further downgrade,''
What's new here is an extended discussion of interest policy after Greenspan, the title of the talk.
A main point of the speech is that it is wrong to view the Greenspan Fed, often
noted for its "flexibility," as following discretionary policy:
To identify discretionary policy setting in the Kydland and Prescott sense as
the hallmark of the Federal Reserve under Chairman Greenspan is to seriously
misconstrue the historical record, in my opinion.
This is important because it establishes credibility for the institution
rather than the individual and makes a smooth transition to a new chair more
likely. Another point of the speech is that even in a stable inflation
environment, monetary policy still needs to be active in responding to factors
that change the real interest rate:
Interest Rate Policy After Greenspan, by Jeffrey M. Lacker,
President, Federal Reserve Bank of Richmond: Early next year, we will
experience an event that happens rarely in the Federal Reserve — the retirement
of the Chairman of the Board of Governors. ... At the end of a policymaker’s
term in office, it is natural to look back to appraise the conduct of policy
during their tenure, and this task is considerably more pleasant when the
results have been favorable.
Continue reading "Richmond Fed President Lacker: Interest Rate Policy After Greenspan" »
Posted by Mark Thoma on Friday, October 21, 2005 at 12:31 AM in Economics, Fed Speeches, Monetary Policy |
There's something about living in Oregon that makes you passionate about these issues,
whichever side you are on:
National Parks Under Siege, Editorial, New York Times: Year after
year, Americans express greater satisfaction with the National Park Service
than with almost any other aspect of the federal government. ... there is no
incentive to revise the basic management policy that guides park
superintendents... Longtime park service employees feel much the same way. Yet
in the past two months we have seen two proposed revisions. The first, written
by Paul Hoffman, a deputy assistant secretary in the Interior Department, was
a genuinely scandalous rewriting that would have destroyed the national park
system. On Tuesday, the Interior Department released a new draft. ... But the
new draft would still undermine the national parks. This entire exercise is
unnecessary, driven by politics and ideology. The only reason for revisiting
and revising the 2001 management policy was Mr. Hoffman's belief ... that the 2001 policy is
"anti-enjoyment." This will surely come as news to the 96 percent of park
visitors who year after year express approval of their experiences. ... The
ongoing effort to revise the 2001 policy betrays a powerful sense, shared by
many top interior officials, that the national parks are resources not to be
protected but to be exploited. This new policy document ... would remove from the very heart of the park system's mission
statement: "Congress, recognizing that the enjoyment by future generations of
the national parks can be ensured only if the superb quality of park resources
and values is left unimpaired, has provided that when there is a conflict
between conserving resources and values and providing for enjoyment of them,
conservation is to be predominant." These unambiguous words contain the legal
and legislative history that has protected the parks over the years from
exactly the kind of change Mr. Hoffman has in mind... One of the most
troubling aspects of this revised policy is how it was produced. Instead of
being shaped by park service professionals ..., this is a defensive document
that was rushed forward to head off the more sweeping damage that Mr.
Hoffman's first draft threatened to do. It is a tribute to the National Park
Service veterans who worked on it that they were able to mitigate so much of
the harm, even though they ... risked their jobs to protect the parks from
political appointees in the Interior Department. ... At least two deeply worrying new directives have been
handed down. One allows the National Park Service ... another way to further the privatization of the
national parks and edge toward their commercialization. ... More alarming
still is a directive released last week that would require park personnel who
hope to advance above the middle-manager level to go through what is
essentially a political screening. What we are witnessing, in essence, is an
effort to politicize the National Park Service - to steer it away from its
long-term mission of preserving much-loved national treasures and make it echo
the same political mind-set that turned Mr. Hoffman, a former Congressional
aide to Dick Cheney and a former head of the Cody, Wyo., chamber of commerce,
into an architect of national park policy.
The parks aren't, in general, allocated according to the price mechanism. The
fees are often far below the market clearing level. We use things like lotteries
and first come first serve to allocate park enjoyment all in the name of, gasp!,
equity. Sometimes poor people get in ahead of the wealthy. Imagine that. Before
further privatization of the National Park Service occurs, we should ask whether
allocating these resources with the price mechanism, which runs the risk of
excluding people from the parks according to income, is what we want as a
Posted by Mark Thoma on Friday, October 21, 2005 at 12:03 AM in Economics, Environment, Regulation |
Given recent discussions here on education as a response to globalization, I am interested if access to higher
education has become more difficult over time for middle and low income
students. I went to two colleagues in our Department who specialize in research on
educational issues, particularly higher education, to see if they could point me
to research on higher education access by income level and how it might have
changed over time. They have done some work with internal data here that is
suggestive but does not ask this question directly. For example, we give
Dean's scholarships to anyone from Oregon with a high school GPA above a cutoff
(one of the two people I talked to is the Dean). There is quite a bit of
research on these scholarships, for example some results say that high school
students take easier courses in order to ensure the scholarship, a negative
educational outcome, and there are also results showing that the acceptance
rates for these scholarships are lower for middle income and poor students, all
else equal. This suggests that even with the scholarships, costs are
prohibitively high for lower income students and they elect not to attend (they
may still go to college, e.g. a junior college). My colleagues also gave me a
book, Refinancing the College Dream: Access, Equal Opportunity, and Justice
for Taxpayers, by Edward P. St. John in collaboration with Eric H. Asker,
John Hopkins University Press, 2003 that is a fairly recent study on these
issues. Here's a table from that book:
Table 2.2 Trends in Percentage Enrollment of 18-24 Year-Old High School
Graduates by Race/Ethnicity, Showing Opportunity Gaps, 1970-1999
Sources: NCES 2000a, 216, table 187. The numbers in the table are percentages.
The gap is the difference in attendance rates relative to whites. If you are willing to let race/ethnicity proxy for income, understanding it is an
imperfect measure (see page 25 in the text for a discussion of this), this table
indicates that poorer students do not attend at the same rate as higher income
students, on average, a problem that has not improved with time. There does
appear to be a difference in access by income. Though the numbers hint in this direction, it appears harder to make the
case, with this table anyway, that access has become more difficult over
time. I plan to do more posts based on the data in the book and elsewhere that will
give more information, at least indirectly, on this issue. One final comment. Only 43.7% of 18-24 year-olds enrolled in college in 1999. That means
more than half [a substantial portion] of our population does not have more than a high school education [Update: The original statement needed to be amended since the 43.7% figure only refers to a seven year window of data, see the clarifying comment by John H. Bishop who notes the percentage of adults with some college, not necessarily a degree, is generally in the 50-60% range]. When I talk about education as a solution to competition from globalization, this is the group I'm most worried about.
Posted by Mark Thoma on Thursday, October 20, 2005 at 05:33 PM in Economics, Universities |
Ben Bernanke gave a speech today before the Joint Economic Committee in
congress. What he says is fairly predictable, the hurricanes will have
short-term, but not long-term impacts on growth, the key to growth is tax cuts
and effective monetary policy to stabilize prices, house prices reflect strong
fundamentals, not a bubble, a slowdown in housing need not cause growth to slow
below potential. He believes the trade deficit poses a challenge and the
solution is to reign in the federal budget deficit, and for other countries to become less
reliant on export led growth and more willing to allow their currency values to
adjust. Finally, as expected, he says the solution to the budget deficit problem is to
cut spending, not raise taxes:
Economic Outlook, by Ben Bernanke, Chairman, President’s Council of Economic
Advisers: ...The economy’s resilience was put to severe test during the past
five years, even prior to Katrina. A remarkable range of shocks hit the U.S.
economy .... Yet, in the face of all these shocks, ... the American economy has
Continue reading "Ben Bernanke: The Economic Outlook" »
Posted by Mark Thoma on Thursday, October 20, 2005 at 09:47 AM in Economics |
Continuing with the series of posts on globalization (based on
Fisher), here's New York Fed president Timothy Geithner. He:
- sees substantial risks due to global imbalances, risks that are not
- is insistent that fiscal authorities need to regain control of the
budget and says "Improving our fiscal position is the most effective means
we have available to reduce our vulnerability during this prolonged period
- in equally insistent that fixed exchange rate regimes must allow more
- worries that increases in demand growth in the foreign sector needed to
offset a decline in U.S. consumption and increase in U.S. saving will have
to overcome difficult political hurdles.
- says smooth adjustment requires, in addition to improved fiscal
management, a strong and flexible financial system and open and free trade.
- says that avoiding protectionism calls for "improving educational
opportunity and achievement in this country, and perhaps also in improving
the design of the temporary assistance we provide individuals who bear the
brunt of the adjustment costs than come with greater global economic
Here's the speech:
U.S. and the Global Economy, by Timothy F. Geithner, President, New York Fed:
I want to focus my remarks today on the imbalances in the world economy and
their implications .... These imbalances... present challenges—and risks ...
The sources of these imbalances are varied and complex. ... not anticipated
and not fully understood. ... The magnitude and persistence of these
imbalances seems to be the result of the interaction of two forces. The first
involves a decline in U.S. savings relative to domestic investment, matched by
an increase in savings relative to investment in parts of the rest of the
world, principally in emerging Asia and the major oil exporters. ... The
second feature ... has been an increase in the willingness of the rest of the
world to invest its savings in the United States. ... This phenomenon is due
in part to the perceived attractiveness of relative returns in the United
States arising from the acceleration of productivity growth here, and in part
due to the dynamics associated with exchange rate regimes linked in one way or
another to the dollar. Together these forces have produced larger imbalances
... that have been sustained longer and financed more easily than conventional
wisdom would have thought possible a decade or even five years ago. ...
This ... should concern us because it is not simply the result of the
savings and investment decisions of the private sector. The fact that we are
using a substantial part of the savings we are borrowing from the rest of the
world to finance an unsustainable level of public borrowing leaves us more
vulnerable than if those savings were being used for productive private
investment. ... It should concern us because of how the imbalance has been
financed. A substantial portion of the capital inflows ... has come from
foreign central banks—which have been accumulating dollar reserves to preserve
exchange rate arrangements that are unlikely to be sustainable and are already
in the process of change... And ... these imbalances matter because at some
point they will have to reverse. Market forces will at some point induce an
adjustment. And that inevitable process of adjustment will bring with it the
risk of ... slower growth in the United States and in the rest of the world.
The magnitude of this risk is difficult to measure with any confidence. Past
episodes of external adjustment offer some reassurance, but the present
circumstances seem sufficiently different from historical precedent that
history may not be a particularly useful guide. ... The risks associated with
this adjustment process may be magnified ...[because the] average household in
the United States today has a higher level of debt to income and is somewhat
more exposed to interest rate risk than in the past. ... The adjustment
process is also complicated by the fact that the rest of the world does not
appear likely ... to be in a position to provide a sufficiently strong
offsetting source of demand growth to compensate for the necessary slowing in
U.S. domestic demand. ...
What can we do to mitigate these risks? For the United States, these
challenges put a premium on putting in place a more credible fiscal policy
framework, maintaining as strong and resilient a financial sector as possible,
and preserving an open and flexible economy. ... Improving our fiscal position
is the most effective means we have available to reduce our vulnerability
during this prolonged period of adjustment. ... And even though substantial
fiscal consolidation would not by itself bring the external imbalance down to
a more sustainable level, it would improve the prospect for a smoother
adjustment... The increase in the flexibility and resilience of the U.S.
economy over the past two decades has a lot to do with the increased openness
of the U.S. economy. ... We jeopardize future income gains if we are unable to
sustain support ... a relatively open trade policy. How effective we are in
meeting this political challenge is likely to depend significantly on how
effective we are in improving educational opportunity and achievement in this
country, and perhaps also in improving the design of the temporary assistance
we provide individuals who bear the brunt of the adjustment costs than come
with greater global economic integration. ... For global growth to be
sustained at a reasonably strong pace during this period of adjustment, the
desirable increase in U.S. savings ... would have to be complemented by
stronger domestic demand growth outside the United States, absorbing a larger
share of national savings. Exchange rate regimes, where they are currently
closely tied to the dollar, will have to become more flexible, allowing
exchange rates to adjust in response to changing fundamentals. ...
I've stated my views already, they are close to those of Geithner, so I won't
repeat them again. Besides, from previous comments, I have the sense that many
of you are tired of being told about the virtues of free trade and the
efficiency gains of structural adjustment and would prefer that economists
listen a little more and lecture a little less.
Posted by Mark Thoma on Thursday, October 20, 2005 at 12:17 AM in Economics, Fed Speeches, International Trade, Monetary Policy |
This continues the discussion on gobalization in the posts based on columns by Krugman and Samuelson. Two members of the Federal Reserve's FOMC discussed globalization today,
Dallas Fed president Richard Fisher and New York Fed president Timothy Geithner.
Let's begin with Richard Fisher whose ability to spice up a Fed speech is
quickly turning him into one of my favorites (background
on Fisher from a Houston Chronicle story), and I'll follow up with Geithner
in the next post. Fisher discusses how globalization will force governments
towards less regulation, lower taxes, and more spending on investment rather
than consumption goods, and its ability to produce cost-pull disinflation:
Globalization and Texas, by Richard W. Fisher, President, Dallas Fed: ...Speeches delivered by Federal Reserve Governors and Bank presidents are
subject to interpretation in a manner akin to the ancient art of prophecy,
which often divined the future by slicing open an animal and studying its
entrails. It is interesting to be the “slice-ee” ... Philip Coggan ... [w]riting
in the Financial Times last week, ... noted that when the great French
statesman Talleyrand died, his archrival, Prince Metternich of Austria, was
heard to muse, “I wonder what he meant by that?”...
[F]or the magic of free enterprise to work, fiscal authorities and central
bankers must provide a healthy economic environment for the private-sector
managers... in a challenging new global environment. [G]lobalization ... may
well be the key development of our era; yet, we do not understand it very
well. ... Globalization has intensified worldwide competition for investment
capital. The consequences have included pushing governments to simplify or
lower tax burdens to attract these funds... for legislatures and parliaments
to maintain the rule of law, minimize obstacles to flexibility and maximize
the ability to compete... The forces of international competition may be
heralding a period when decisionmakers responsible for fiscal policy are
forced to focus on investment rather than public-sector consumption. In ...
today’s newly competitive world, governments’ purpose ... is to build an
economic infrastructure that fosters private-sector production and growth,
rather than transferring spending from one part of society to another. In an
increasingly global economy, ... a dollar’s worth of government spending on
consumption or entitlements has a higher opportunity cost today than it did
yesterday. This will likely lead to a reconfiguring of government
decisionmaking that in the past has short-changed infrastructure, research,
education and other more productive public investments. ...
On the inflation-fighting front, globalization has been a positive factor.
... By lowering trade barriers ... we have benefited on the inflation front
... [as] competition from abroad acts as a check on price increases by our own
producers. ... To be sure, the growth of Russia, India, China and other new
economic entrants has created upside price pressures, too. ... [P]roducers have felt some
upward pressure on non-energy commodity prices driven by new sources of global
demand. Steel is a case in point—as are copper and so many other commodities.
Even so, I feel that the net effect of new entrants like China into our
markets ... has been a plus in exerting downward pressure on core
inflation. I refer to this phenomenon internally at the Dallas Fed as
“cost–pull disinflation.” As long as we keep our markets open and hold
protectionists at bay, I expect this will continue...
Posted by Mark Thoma on Thursday, October 20, 2005 at 12:12 AM in Economics, Fed Speeches, International Trade, Monetary Policy |