Saturday, July 31, 2010
Does paying interest on reserves discourage lending? Are there good reasons to pay interest on reserves?:
Some Observations Regarding Interest on Reserves, by David Altig: One of the livelier discussions following Federal Reserve Chairman Ben Bernanke's testimony to Congress on monetary policy has revolved around the issue of the payment of interest on bank reserves. Here, for what it's worth, are a few reactions to questions raised by that discussion: ...
What is the opportunity cost of not lending?
...[C]ertainly the real issue about the IOR policy concerns the presumed incentive for banks to sit on excess reserves rather than putting those reserves into use by creating loans. This, from Bruce Bartlett, is fairly representative of the view that IOR is, at least in part, to blame for the slow pace of credit expansion in the United States:
"… As I pointed out in my column last week, banks have more than $1 trillion of excess reserves—money that the Fed has created that banks could lend immediately but are just sitting on. It's the economic equivalent of stuffing cash under one's mattress.
"Economists are divided on why banks are not lending, but increasingly are focusing on a Fed policy of paying interest on reserves—a policy that began, interestingly enough, on October 9, 2008, at almost exactly the moment when the financial crisis became acute."
OK, but the spread that really matters in the bank lending decision is surely the difference between the return on depositing excess reserves with the Fed versus the return on making loans. In fairness, it does appear that this spread dropped when the IOR was raised from its implicit prior setting of zero…
… but it's also pretty clear that this development largely reflects a general fall in market yields post-October 2008 as much is it does the increase in IOR rate...
And here's another thought: As of now, the IOR policy applies to all reserves, required or excess. Consider the textbook example of a bank that creates a loan. In the simple example, a bank creates a loan asset on its book by creating a checking account for a customer, which is the corresponding liability. It needs reserves to absorb this new liability, of course, so the process of creating a loan converts excess reserves into required reserves. But if the Fed pays the same rate on both required and excess reserves, the bank will have lost nothing in terms of what it collects from the Fed for its reserve deposits. In this simple case, the IOR plays no role in determining the opportunity cost of extending credit.
Of course, the funds created in making a loan may leave the originating bank. Though reserves don't leave the banking system as a whole, they may certainly flow away from an individual institution. So things may not be as nice and neat as my simple example. But at worst, that just brings the question back to the original point: Is the 25 basis point return paid by the central bank creating a significant incentive for banks to sit on reserves rather than lend them out to consumers or businesses? At least some observers are skeptical:
"Barclays Capital's Joseph Abate…noted much of the money that constitutes this giant pile of reserves is 'precautionary liquidity.' If banks didn't get interest from the Fed they would shift those funds into short-term, low-risk markets such as the repo, Treasury bill and agency discount note markets, where the funds are readily accessible in case of need. Put another way, Abate doesn't see this money getting tied up in bank loans or the other activities that would help increase credit, in turn boosting overall economic momentum."
Are there good reasons for paying interest on reserves?
Even if we concede that there is some gain from eliminating or cutting the IOR rate, what of the costs? Tim Duy, quoting the Wall Street Journal, makes note (as does Steve Williamson) of the following comment from the Chairman:
From an interview of Alan Greenspan:
Lunch with the FT: Alan Greenspan, by Alan Beattie, FT: ...He has admitted to having been “30 per cent wrong” in his time as Fed chairman, particularly in assuming that banks and financial institutions would closely monitor the creditworthiness of the people with whom they were doing business. But his present plan for preventing a recurrence of the global financial crisis still shows a predilection for the light touch: make banks hold more capital to back their lending, demand higher collateral that can be seized if financial transactions go wrong, and keep more cash on hand in case of emergencies.
In extremis, he says, banks might have to be broken up by law if they become too big to fail without bringing down the whole financial system. But he makes clear that he regards such an intervention as a last resort. He retains faith in markets and doesn’t even think that US-style finance capitalism will lose ground to the softer, more regulated model of European social democracy... It is a question of making precise technocratic adjustments. ...
His approach to everything is the same. Look at the data; calculate the probabilities; make a dispassionate calibrated decision. Just before we leave, he bemoans the calls on “poor Obama” to be seen to be caring more about the oil spill in the Gulf of Mexico. “I complained when people were saying he’s not showing enough empathy,” he says. “I said, ‘That’s not what I want to see.’ I want to see cold, cool, deliberative action. Empathy is not going to solve this problem.” ...
I don't think I want to hear Obama say "I feel your pain," but there may be a reason to combine "cold, cool, deliberative action" to solve a problem with empathy for those affected by it. Empathy shows that you understand the significance and urgency of the problem, and that you are willing to devote the resources needed to find a solution. Perhaps a Fed chair, unlike a president, can get away with cold dispassionate calculation, but a little more empathy might have served Greenspan well.
Tracking technology is becoming more sophisticated and pervasive:
The Web's New Gold Mine: Your Secrets, by Julia Angwin, WSJ: Hidden inside Ashley Hayes-Beaty's computer, a tiny file ... consists of a single code— 4c812db292272995e5416a323e79bd37—that secretly identifies her as a 26-year-old female in Nashville, Tenn. The code knows that her favorite movies include "The Princess Bride," "50 First Dates" and "10 Things I Hate About You." It knows she enjoys the "Sex and the City" series. It knows she browses entertainment news and likes to take quizzes. ... Ms. Hayes-Beaty said when told what that snippet of code reveals about her. "The profile is eerily correct." ...
One of the fastest-growing businesses on the Internet, a Wall Street Journal investigation has found, is the business of spying on Internet users. The Journal conducted a comprehensive study...• The study found that the nation's 50 top websites on average installed 64 pieces of tracking technology onto the computers of visitors, usually with no warning. A dozen sites each installed more than a hundred. The nonprofit Wikipedia installed none.• Tracking technology is getting smarter and more intrusive. Monitoring used to be limited mainly to "cookie" files that record websites people visit. But the Journal found new tools that scan in real time what people are doing on a Web page, then instantly assess location, income, shopping interests and even medical conditions. Some tools surreptitiously re-spawn themselves even after users try to delete them.• These profiles of individuals, constantly refreshed, are bought and sold on stock-market-like exchanges that have sprung up in the past 18 months.
The new technologies are transforming the Internet economy. Advertisers once primarily bought ads on specific Web pages—a car ad on a car site. Now, advertisers are paying a premium to follow people around the Internet, wherever they go, with highly specific marketing messages. ... "It is a sea change in the way the industry works," says Omar Tawakol, CEO of BlueKai. "Advertisers want to buy access to people, not Web pages." ...
The top venue for such technology, the Journal found, was ... Dictionary.com. A visit to the online dictionary site resulted in 234 files or programs being downloaded onto the Journal's test computer, 223 of which were from companies that track Web users. ...
The information that companies gather is anonymous, in the sense that Internet users are identified by a number assigned to their computer, not by a specific person's name. ...
Targeted ads command a premium. Last year, the average cost of a targeted ad was $4.12 per thousand viewers, compared with $1.98 per thousand viewers for an untargeted ad ...
Wittingly or not, people pay a price in reduced privacy for the information and services they receive online. ... Dictionary.com executives say the trade-off is fair for their users, who get free access to its dictionary and thesaurus service. "Whether it's one or 10 cookies, it doesn't have any impact on the customer experience, and we disclose we do it," says Dictionary.com spokesman Nicholas Graham. "So what's the beef?"
The problem, say some industry veterans, is that so much consumer data is now up for sale, and there are no legal limits on how that data can be used. ...
Media6Degrees Inc., whose technology was found on three sites by the Journal, is pitching banks to use its data to size up consumers based on their social connections. The idea is that the creditworthy tend to hang out with the creditworthy, and deadbeats with deadbeats. "There are applications of this technology that can be very powerful," says Tom Phillips, CEO of Media6Degrees. "Who knows how far we'd take it?"
Friday, July 30, 2010
I'm on the road, but have a few comments on the GDP report:
There are also links to other discussions of the report.
The president's "snubbing of those who made him what he is" may be costly:
Curbing Your Enthusiasm, by Paul Krugman, Commentary, NY Times: Why does the Obama administration keep looking for love in all the wrong places? Why does it go out of its way to alienate its friends, while wooing people who will never waver in their hatred?
These questions were inspired by the ongoing suspense over whether President Obama will do the obviously right thing and nominate Elizabeth Warren to lead the new consumer financial protection agency. But the Warren affair is only the latest chapter in an ongoing saga.
Mr. Obama rode into office on a vast wave of progressive enthusiasm. This enthusiasm was bound to be followed by disappointment, and not just because the president was always more centrist ... than his fervent supporters imagined. Given the facts of politics, and above all ... lock step Republican opposition, he wasn’t going to be the transformational figure some envisioned.
And Mr. Obama has delivered in important ways. Above all, he managed (with a lot of help from Nancy Pelosi) to enact a health reform... But progressive disillusionment isn’t just a matter of sky-high expectations meeting prosaic reality. Threatened filibusters didn’t force Mr. Obama to waffle on torture; to escalate in Afghanistan; to choose, with exquisitely bad timing, to loosen the rules on offshore drilling...
Then there are the appointments. Yes, the administration needed experienced hands. But did all the senior members of the economics team have to be protégés of Robert Rubin, the apostle of financial deregulation? Was it necessary to install Ken Salazar at the Interior Department over the objections of environmentalists who feared, rightly, that his ties to extractive industries would make him slow to clean up a corrupt agency? ...
What explains Mr. Obama’s consistent snubbing of those who made him what he is? Does he fear that his enemies would use any support for progressive ... ideas ... to denounce him as a left-wing extremist? Well, as you may have noticed, they don’t need such excuses...
Mr. Obama’s attempts to avoid confrontation have been counterproductive. His opponents remain filled with a passionate intensity, while his supporters, having received no respect, lack all conviction. And in a midterm election, where turnout is crucial, the “enthusiasm gap” between Republicans and Democrats could spell catastrophe for the Obama agenda.
Which brings me back to Ms. Warren.
The debate over financial reform, in which the G.O.P. has taken the side of the bad guys, should be a political winner for Democrats. Much of the reform, however, is deeply technical...
But protecting consumers, ensuring that they aren’t the victims of predatory financial practices, is something voters can relate to. And choosing a high-profile consumer advocate to lead the agency providing that protection ... is the natural move, both substantively and politically. Meanwhile, the alternative — disappointing supporters yet again by choosing some little-known technocrat — seems like an obvious error.
So why is this issue still up in the air? Yes, Republicans might ... filibuster..., but that’s a fight the administration should welcome.
O.K., I don’t really know what’s going on. But I worry that Mr. Obama is still wrapped up in his dream of transcending partisanship, while his aides dislike the idea of having to deal with strong, independent voices. And the end result of this game-playing is an administration that seems determined to alienate its friends.
Just to be clear, progressives would be foolish to sit out this election: Mr. Obama may not be the politician of their dreams, but his enemies are definitely the stuff of their nightmares. But Mr. Obama has a responsibility, too. He can’t expect strong support from people his administration keeps ignoring and insulting.
What's the Republican's strategy for getting rid of the uncertainty they (as opposed to businesses) are so worried about? This is from an interview of Paul Ryan on what the Republicans would do to help the economy:
What would Republicans do for the economy? An interview with Rep. Paul Ryan., by Ezra Klein: ...Paul Ryan: I know uncertainty is a new economic buzzword, but for good reason: If we can reduce it, we’ll unlock capital. I’d revisit some of the major issues over the last year. Health care, energy, taxes, financial regulation. I’m not saying these aren’t important issues. We need to reform the health-care system. But these are the wrong solutions. I would advance different solutions with an eye toward international competitiveness and encouraging saving and investing and encouraging certainty.
Ah, so his solution to uncertainty is to create even more uncertainty about the policies that will be in effect next year? Later in the interview he tries to get out of this box:
... let me clarify one thing:... You can say I’m offering more uncertainty by redoing these laws. I’m saying it’s the quality of these laws that’s the problem. ...
But this assertion has no substance to back it up. When he does reach for examples, he reverts to:
People are just too nervous, they don’t know what the economy will be, what the regulations will be, what the taxes will be...
So the "quality of these laws" argument it pretty hollow, especially since one of the issues we are dealing with is Republican legislation that was rigged to avoid hard choices about the deficit. That is, the low quality of the Republican legislation is causing quite a bit of uncertainty right now about whether the Bush tax cuts will be extended.
Moving along to another part of the interview discussing the tax cuts, again from Paul Ryan:
If the Obama guys said there’ll be no tax increases for two years, it would make a big difference fast. Look at the original [Christina] Romer-[Paul] Romer paper. She’d agree this is not the time to raise taxes.
Not all of the Obama people are "guys," but more to the point, what does Romer actually say? This is from a White House blog post by Christina Romer:
President Obama has made it clear that he favors extending the 2001 and 2003 tax cuts for middle-income families, but letting those for high-income earners expire as called for in current law. Recently, some have argued that extending the high-income cuts is necessary for the economy. This is simply wrong.
People have been trying to use the Romer-Romer paper incorrectly to rebut the policies she supports since the idea of stimulus was first raised by the administration. She has protested, but that doesn't stop the message machine from making the assertion anyway. On this point, back to Romer:
The view that tax cuts focused on the middle class can be important to the recovery is consistent with a wide range of research, including a paper that I wrote with David Romer before coming to government
Another gem from Paul Ryan:
These short-term stimulative things ... pump up some money in the quarter where they occur. ... These short-term stimuli ... don’t change aggregate demand
There's more, but you get the idea. Read it if you want, but the rest of the interview isn't any better. It's mostly the standard austerity line that doesn't make a whole lot of sense in our present circumstances. But it does advance the conservative ideological agenda.
Forty years later, how much has changed?:
Forty years later, grape boycott still a huge accomplishment, by Alvaro Huerta, The Berkeley Blog: Forty years ago, workers in the United States won a great victory.
On July 29, 1970, the United Farm Workers of America (UFW) ended its successful grape boycott when the growers agreed to sign the first contract with the union.
It seemed like an improbable outcome, as the battle pitted a mostly Mexican as well as Filipino immigrant workforce against powerful agricultural growers in California.
Led by the late Cesar Chavez and tireless Dolores Huerta, the UFW was founded in the early 1960s in response to the inhumane working conditions for farmworkers in California and other states...
In an effort to seek justice, dignity and respect in the rural fields of America, UFW leaders, its members and sympathizers organized and joined picket lines and marches, signed petitions, supported labor laws, lobbied elected officials, distributed educational flyers, produced documentaries, penned songs, performed plays, held teach-ins and generally supported the nationwide boycott.
The charismatic Chavez ... engaged in numerous and lengthy hunger strikes to draw attention to the cause.
As was the case with the civil rights movement, many UFW activists were beaten up and a few were killed for the simple act of supporting the right of farmworkers to organize a union and negotiate for fair labor contracts. But the rightness of their cause prevailed.
So inspirational was it that Barack Obama, when he was a candidate for president, adopted the group’s slogan: “Si, Se Puede” (“Yes, We Can”).
Now, 40 years later, farmworkers continue to toil under harsh working conditions. ...
The best way to honor this 40th anniversary of the UFW’s landmark success would be to support humane labor law reform for farmworkers and to strengthen the right to organize.
Si, Se Puede!
Thursday, July 29, 2010
- Deflation Risks - Paul Krugman
- A solution to a big commodity price puzzle (wonkish) - Greed, Green and Grains
- Liquidationism Further Refuted - Paul Krugman
- Lehman and the Importance of Liquidity Requirements - Economics of Contempt
- naked capitalism - links
- Market Talk - links
- Credit Writedowns - links
- Financial News - links
- Free Exchange - links
- Marginal Revolution - links
- Abnormal Returns - links
- Brad DeLong - links
John Stewart Mill vs. the European Central Bank, by J. Bradford DeLong, Commentary, Project Syndicate: One of the dirty secrets of economics is that there is no such thing as “economic theory.” There is simply no set of bedrock principles on which one can base calculations that illuminate real-world economic outcomes. We should bear in mind this constraint on economic knowledge as the global drive for fiscal austerity shifts into top gear.
Unlike economists, biologists, for example, know that every cell functions according to instructions for protein synthesis encoded in its DNA. Chemists begin with what the Heisenberg and Pauli principles, plus the three-dimensionality of space, tell us about stable electron configurations. Physicists start with the four fundamental forces of nature.
Economists have none of that. The “economic principles” underpinning their theories are a fraud – not fundamental truths but mere knobs that are twiddled and tuned so that the “right” conclusions come out of the analysis.
The “right” conclusions depend on which of two types of economist you are. One type chooses, for non-economic and non-scientific reasons, a political stance and a set of political allies, and twiddles and tunes his or her assumptions until they yield conclusions that fit their stance and please their allies. The other type takes the carcass of history, throws it into the pot, turns up the heat, and boils it down, hoping that the bones will yield lessons and suggest principles to guide our civilization’s voters, bureaucrats, and politicians as they slouch toward utopia. ...[continue reading]...
Should government "vilify" unhealthy products?:
The weight watchers, by Edward L. Glaeser, Commentary, Boston Globe: ...Should public policy respond to our expanding waistlines with benign neglect, traditional taxes and regulation, or sophisticated psychology?
Benign neglect is the policy preference of libertarians who argue that what we eat is our own business and that there’s a lot to like about a steak or a sundae. ...
I share the libertarian faith in personal freedom, but there are good reasons for public health-related interventions. People don’t bear the full costs of illnesses, which drain the public coffers and impose hardship on friends and relatives. ... Some anti-obesity policies can also be justified as a counterweight to the diabetes-supporting subsidies of cheap corn syrup.
The oldest, simplest, and most extreme alternative to the libertarian approach is an outright ban, which unfortunately also promotes a black market. The modern, more moderate variants of prohibition are place-specific, such as restricting the sale of junk food in schools... That intervention is easy to defend since the state has a responsibility for the well-being of children..., and public schools are already public space.
But widespread bans on soda sales are neither feasible nor desirable, which leads us to sin taxes, like those on tobacco and alcohol, that attempt to balance individual freedom with public health. ... Taxes are a relatively efficient means of limiting activities that impose costs on others, but since poorer people consume more unhealthy food,... taxing that food is regressive.
It is more difficult and expensive to prepare food that is both tasty and healthy than unhealthy tasty food (ladle on the fat, salt and sugar), which helps explain the link between poverty and obesity. ...
The political unattractiveness of taxation has led some to support subsidizing ... the magic of Madison Avenue to make people shun unhealthy products. New York City embraced these counter-consumption policies with graphic anti-smoking signs and vivid ads that make it seem as if soda drinkers are gargling down fat. ...
Encouraging exercise makes sense, but there is much less to like about public programs that vilify activities practiced by thousands of citizens. In a sense, these public announcements are just revenue-less taxes... — the fact that the higher cost is psychological rather than financial is purely accidental.... Stigmatizing the food choices of the poor is no less regressive than taxing them. ...
Soda taxes, bans on junk food in schools, and even reform of the food stamp program are all serious responses to the obesity problem. But there is plenty to dislike about public attempts to demonize different types of consumption..., we are better served by a government that keeps to taxation rather than vilification.
I think there are two things here that need to be kept separate in the arguments Glaeser is making. First, there is the use of taxes to correct for market failure due to the presence of externalities in the consumption of legal goods. If people are imposing substantial costs on others, and if taxes, regulation, and the like are ineffective corrections, then perhaps vilification should be considered as a remedy, but only as a last resort. Second, taxes are used to discourage the use of products we'd like to make illegal, but don't due to worry that an outright ban will the create problems such as black markets that are even more troublesome than the banned activity itself. Here, since we'd like to make the good illegal but don't due to practical concerns, vilification does not seem to be as objectionable as a means of discouraging the behavior.
There are instances, e.g. anti-littering campaigns, where vilification does seem to be the best approach. In part, this is because it's difficult to police and hence difficult to stop through traditional policing and penalties. But littering is illegal, so there doesn't seem to be much of an issue with demonizing this activity. The question is about vilifying legal goods, should the government do that? If it's something that is difficult to tax monetarily or to police effectively, e.g. not letting people into traffic on the freeway which slows traffic generally and causes external effects, then perhaps social vilification of the behavior is the best solution to the problem.
I'm not sure I have this right, but it's late and I'm supposed to be on vacation so I'll leave it at that. My gut instinct is against government ever demonizing anything, so I'm not fully comfortable with calling for government to start nagging people about what they choose to eat, etc. What do you think? Is vilification ever okay? If so, when?
This was controversial at the time, particularly the role of speculation: What caused the 2006-2008 commodity price boom?:
Placing the 2006/08 Commodity Price Boom into Perspective, by John Baffes: The 2006-08 commodity price boom was one of the longest and broadest of the post-WWII period. The price boom emerged in the mid-2000s after nearly three decades of low and declining commodity prices (see figure). The long-term decline in real prices had been especially marked in food and agriculture. Between 1975-76 and 2000-01, world food prices declined by 53 percent in real US-dollar terms. Such price declines raised concerns, especially with regard to the welfare of poor agricultural producers. ... Starting in the mid-2000s, however, most commodity prices reversed their downward course, eventually leading to an unprecedented commodity price boom.
Source: World Bank, Development Prospects Group
Between 2003 and 2008, nominal prices of energy and metals increased by 230 percent, those of food and precious metals doubled, and those of fertilizers increased fourfold. The boom reached its zenith in July 2008, when crude oil prices averaged US$ 133/barrel, up 94 percent from a year earlier. Rice prices doubled within just five months of 2008... The price surge led to a various heated debates on its causes and its consequences, including the role of biofuels, speculation, policy reactions, and, most importantly, whether high agricultural prices are beneficial or harmful to the poor. A paper we just published revisits the causes of the boom...
Apart from strong and sustained economic growth, the price boom was fueled by numerous factors including low past investment in extractive commodities, weak dollar, fiscal expansion and lax monetary policy in many countries, and investment fund activity. On the other hand, the combination of adverse weather conditions, the diversion of some food commodities to the production of biofuels, and government policies (including export bans and prohibitive taxes) brought global stocks of many food commodities down to levels not seen since the early 1970s, created a "perfect storm" further accelerating the price increases that eventually led to the 2008 rally. The weakening and/or reversal of these factors coupled with the financial crisis that erupted in September 2008 and the subsequent global economic downturn induced sharp price declines across most commodity sectors. Yet, the main price indices are still twice as high compared to their 2000 real levels, begging once more the question about the real factors affecting them.
The paper concludes that a stronger link between energy and non-energy commodity prices has been the dominant factor in the boom of agricultural and food prices, and is likely to be the dominant influence on developments in commodity, and especially food, markets. The analysis shows that demand by emerging economies, often cited as a key factor behind the food price surge of 2008, in fact it was much less of a factor than is often sited. The paper also argues that the effect of biofuels on food prices has not been as large as originally thought. On the other hand, the use of commodities by financial investors (the so-called ‘financialization of commodities’) may have been partly responsible for the 2007/08 spike. Finally, econometric analysis of the long-term evolution of commodity prices supports the view that price variability overwhelms price trends. This conclusion implies that suggested policy actions essentially aiming to alleviate the impacts of price spikes on developing countries through reliance on some level of buffer stocks ... risk reproducing the failure of previous collective measures designed to prevent the decline or reduce the variability of prices.
Wednesday, July 28, 2010
When I first started this blog, I had no expectations at all. I thought a few people might visit, family and acquaintances mostly, and I wasn't so sure about them, but nothing more than that. But, surprisingly to me, it slowly began gathering more and more visitors after some noteworthy help from other bloggers that brought it to people's attention. I was lucky to get that help, and entering the econoblogosphere earlier rather than later didn't hurt either.
As the number of visitors started growing, I became afraid that if I missed a day posting, the traffic growth would somehow stop, the regulars would go away, etc. I'm not sure what the fear was exactly looking back now, but being relatively risk averse I posted every day, always promising myself that once the traffic growth leveled off and things stabilized, I'd take a break. At least for a day or two.
As far as I can recall, I haven't missed a single day in the five and a third years that I've been doing this. Maybe there was a day somewhere, but I can't remember one. Mostly I don't mind, this has been the most surprising thing I've ever done and there's always something new and unexpected around the next corner, some good, some I'd rather not have to deal with, but it does pass the time. I have trouble pulling myself away from blogging rather than having to force myself to do it, but there are days now and again when posts are a bit forced and I tell myself that I really, really need a break from this. Especially, when, as lately, I find myself getting pretty cranky at small provocations (and the things I don't say...).
Traffic is still growing, though the pace has slowed, particularly since the financial crisis has eased, but the fear that somehow it would all evaporate if I miss a day or two, or whatever it was I was afraid of, is not as strong as it once was. But I still can't do it. I still can't bring myself to voluntarily miss a day (I know, I know).
However, I need to get away for a bit, at least from the usual surroundings. In part it's because I've agreed to be Associate Department Head for the next two years and that will keep me plenty busy. It's about to begin, so this is the last chance to get away before that happens.
So I am leaving Eugene today. Where am I going? I have no idea, I just decided to do this, so I am simply going to get in the car and see where I end up. The most likely direction initially is east, maybe south, but that's about all I know. I did this once before and it turned out well, so I'll just go where I feel like it each day and see what happens, starting with today.
I'll do my best to keep posting every day, but I may end up doing a lot of "echo" posts, i.e. a very short here's whatever followed by excerpts (as I do generally when time is short). I'll try to keep up on daily links. We'll see how it goes.
Making Sense of the Climate Impasse, by Jeffrey D. Sachs, Commentary, Project Syndicate: All signs suggest that the planet is still hurtling headlong toward climatic disaster. ... Yet still we fail to act.
There are several reasons for this... First, the economic challenge of controlling human-induced climate change is truly complex. Human-induced climate change stems from two principal sources of emissions...: fossil-fuel use for energy and agriculture (including deforestation...). Changing the world’s energy and agricultural systems is no small matter. ... We need a practical strategy for overhauling two economic sectors that stand at the center of the global economy and involve the entire world’s population.
The second major challenge in addressing climate change is the complexity of the science... This scientific understanding is incomplete, and there remain significant uncertainties about the precise magnitudes, timing, and dangers of climate change. The general public naturally has a hard time grappling with this complexity and uncertainty, especially since the changes in climate are occurring over a timetable of decades and centuries...a
This has given rise to a third problem in addressing climate change, which stems from a combination of the economic implications of the issue and the uncertainty that surrounds it. This is reflected in the brutal, destructive campaign against climate science by powerful vested interests and ideologues, apparently aimed at creating an atmosphere of ignorance and confusion.
The Wall Street Journal, for example,... has run an aggressive editorial campaign against climate science for decades. ... Major oil companies and other big corporate interests also are playing this game... Their general approach is to exaggerate the uncertainties of climate science and to leave the impression that climate scientists are engaged in some kind of conspiracy to frighten the public. ...
If we add up these three factors – the enormous economic challenge of reducing greenhouse gases, the complexity of climate science, and deliberate campaigns to confuse the public and discredit the science – we arrive at the fourth and over-arching problem: US politicians’ unwillingness or inability to formulate a sensible climate-change policy. ...
When Barack Obama was elected US president, there was hope for progress. Yet, while it is clear that Obama would like to move forward on the issue,... special interest groups have dominated the process, and Obama has failed to make any headway.
The Obama administration should ... try ... an alternative approach. Instead of negotiating with vested interests in the backrooms of the White House and Congress, Obama should present a coherent plan to the American people ... for phasing in ... changes over time, and demonstrate that the costs would be modest compared to the enormous benefits.
Strangely, despite being a candidate of change, Obama has not taken the approach of presenting real plans of action for change. His administration is trapped more and more in the paralyzing grip of special-interest groups. Whether this is an intended outcome, so that Obama and his party can continue to mobilize large campaign contributions, or the result of poor decision-making is difficult to determine – and may reflect a bit of both.
What is clear is that we are courting disaster as a result. Nature ... is telling us that our current economic model is dangerous and self-defeating. Unless we find some real global leadership in the next few years, we will learn that lesson in the hardest ways possible.
...Double-dip downturns are more the rule than the exception. If we focus on real GDP and define a double dip as a historical sequence in which a period long enough to be declared a recession is followed by a period of recovery, and then quickly followed by a second outright recession, the 1980-1982 period in the US is a classic example. In fact, defined more loosely as a sequence that includes periods of growth followed by periods of decline, followed by further periods of growth and decline, the 1973-1975 period in the US, with eight quarters of alternating gains and losses in real GDP, was one quadruple-dip recession.
These are not rare occurrences. Around the same time, Germany had this type of double dip and the UK a quadruple dip. In the early 1980’s, the UK, Japan, Italy, and Germany all had double dips. America’s 2001 recession was one brief, mild double dip. Within the current recession, we have already had a double dip; a dip at the beginning of 2008, then some growth, then another long, deep dip, then renewed growth. If the economy declines again – a highly plausible prospect – we would have a triple dip, although perhaps not an outright second recession. ...
Double dips, triple dips, and quadruple dips have been America’s recessionary experience since WWII. And similar episodes have been common in many other countries. ... While the baseline forecast seems to be slow global growth – in the US around 3%, about half the usual pace following deep recessions – history suggests that another decline would hardly be surprising before sustained stronger growth emerges.
Recent US data have clearly raised the probability that the economy will run out of steam and decline during the next 12 months. The key reason for increased pessimism is that the government stimulus programs that raised spending since the summer of 2009 are now coming to an end. As they have wound down, spending has declined. The government programs failed to provide the “pump-priming” role that was intended. They provided an early spark, but it looks like the spark did not catch. ...
Although annual GDP growth was 3% in the first quarter of this year, almost all of it reflected inventory accumulation – some of which, no doubt, was unwanted build-up caused by disappointing sales. When inventory accumulation is excluded, first-quarter growth of “final sales” was just 0.8% in annual terms – and 0.2% compared to the fourth quarter of 2009.
The second quarter benefited from a surge in home purchases, as individuals rushed to take advantage of the tax subsidy for home buyers that expired in April. But what will happen in the third quarter and beyond now that that program has ended? While it would be rash to forecast a double dip as the most likely outcome..., many of us are raising the odds that we attribute to such a downturn. ...
To reduce the chance of this happening, policymakers should have already put policies in place to provide additional stimulus as insurance against this outcome. But they will wait until another dip actually happens before even beginning to deliberate seriously, and by then it will be too late for policy to do much to offset the dip in the economy. Thus, even though it will be too late to get insurance once the economy is already evidently sick -- insurance that is a bargain due to low interest rates -- we have decided to go forward uninsured, and hope for the best.
I can barely remember anything about kindergarten, even the teacher's name:
The Case for $320,000 Kindergarten Teachers, by David Leonhardt, Ny Times: How much do your kindergarten teacher and classmates affect the rest of your life? ... Great teachers and early childhood programs can have a big short-term effect. But the impact tends to fade...— which raises the demoralizing question of how much of a difference schools and teachers can make.
There has always been one major caveat, however, to the research on the fade-out effect. It was based mainly on test scores, not on a broader set of measures... As Raj Chetty ... says: “We don’t really care about test scores. We care about adult outcomes.”
Early this year, Mr. Chetty and five other researchers set out to fill this void. They examined the life paths of almost 12,000 children who had been part of a well-known education experiment in Tennessee in the 1980s. The children are now about 30...
On Tuesday, Mr. Chetty presented the findings — not yet peer-reviewed — at an academic conference... Just as in other studies, the Tennessee experiment found that some teachers were able to help students learn vastly more than other teachers. And just as in other studies, the effect largely disappeared by junior high... Yet when Mr. Chetty and his colleagues took another look at the students in adulthood, they discovered that the legacy of kindergarten had re-emerged.
Students who had learned much more in kindergarten were more likely to go to college than students with otherwise similar backgrounds. Students who learned more were also less likely to become single parents. As adults, they were more likely to be saving for retirement. Perhaps most striking, they were earning more. ... Over time, the effect seems to grow, too. ...
Now happens to be a particularly good time for a study like this. With the economy still terribly weak, many people are understandably unsure about the value of education. ... But.... Education itself can make a difference. ...
Mr. Chetty and his colleagues ... estimate that a standout kindergarten teacher is worth about $320,000 a year. ... This estimate doesn’t take into account social gains, like better health and less crime. Obviously, great kindergarten teachers are not going to start making $320,000 anytime soon. Still, school administrators can do more than they’re doing. ... Given today’s budget pressures,... that’s all the more reason to focus our scarce resources on investments whose benefits won’t simply fade away.
Tuesday, July 27, 2010
Robert Wade argues that national income inequality and international payments imbalances played a significant role in the financial crisis, and if these issues are not addressed, the problems are likely to reoccur:
We Must Go beyond Microeconomic Regulation to Stabilize the Financial System, by Robert Wade: Responding to Jeff Madrick’s recent post on the US financial regulation legislation, Triple Crisis guest blogger Robert Wade argues for the need to consider “external” causes of the global financial crisis.
I agree with and admire the lucidity of Jeff Madrick’s post... But ... the focus on [microeconomic] financial regulation obscures the important role of “external” causes in contributing to financial instability (external to national financial systems), and obscures the pressing need for policy reforms to curb these external causes. I highlight two external causes: (1) national income inequality; and (2) international payments imbalances. I argue that if high income inequality and large international payments imbalances are not curbed,... microeconomic efforts to re-regulate and re-structure national financial systems will be eroded or swamped by the force of these more macroeconomic external causes.
On the role of income inequality, in the United States between 1976 and 2007 the top 1% of income recipients received almost 60% of ... real income growth. The figure is even more stunning if one takes just the 2000s: the top 1% received more than 70% of the total increase. On the other hand, through the 1990s and 2000s incomes in the bottom half of the American income distribution have stagnated.
One channel by which this soaring inequality contributed to financial instability is reasonably well known. The great bulk of the population on stagnant or near-stagnant incomes tried to increase their consumption and investment by borrowing. With easy access to credit they provided a rising demand for non-prime mortgages, car loans and the like. Their demand pushed up house prices, which enabled them to borrow against the rising value of their houses – to reach levels of debt completely unsustainable ... in the event that house prices stopped rising. ...
The other channel has received less attention, and it relates to the direct effect of the concentration of income and wealth at the very top. People at the top – high net worth individuals, investment funds, pension funds and the like – greatly increased the demand for complex financial products as they searched for ways to store their wealth. The proliferating billionaires around the world pressured organizations like Goldman Sachs and JP Morgan to supply them with complex financial securities. The investment banks generated huge fee and commission revenues by obliging, and neoliberal economic principles allowed the regulators to believe that the surging growth of complex financial instruments must be to the social benefit.
As long as this external pressure to supply complex financial securities for the super-rich to store their wealth continues, the financial system will remain prone to generate bubbles, followed by crashes. We know that modern capitalism can flourish with a much more equal distribution of income and wealth than in the United States, Britain and many other OECD countries. Reformers should use this argument to press for globally coordinated policy action to close down tax havens (to prevent tax avoidance), and to make the tax burden progressive rather than regressive, as it now tends to be, including capital gains.
The second deep external cause of financial instability is global payments imbalances. The key point is that the present system of international financial transactions ... tends to make finance the “master” and the real sector its “servant”... This relationship is a key driver of financial crises, and the key policy question is how to make the real sector the master and the financial sector its servant.
For example, Iceland (from where I write) over the 2000s had a floating exchange rate and unrestricted capital inflows. The result was something which the economics textbooks said should not happen:... huge trade deficits and at the same time the krona appreciated in value... According to the textbooks, the krona should have depreciated, so that ... the trade deficit would go down. But it did not. The government allowed free inflows of capital, and capital surged in to take advantage of Iceland’s high interest rates compared to rates in Japan, Switzerland and elsewhere (the central bank set high interest rates to try to curb the inflationary pressure caused by the money inflow). The inflow of capital pushed up the value of the krona, and the government assured the people – quite wrongly — that the high value of the krona reflected international confidence in Iceland, including in its banks.
In our present international financial system a country can be flooded with capital inflows (like Iceland), and must then let its currency appreciate or (if the exchange rate is fixed) suffer inflation; or both. Either way the trade deficit will worsen as exports fall and imports increase. Hence capital flows become the master and the trade flows become the servant, rather than the other way around. The toxic effect is to make many economies around the world vulnerable to a sudden withdrawal of capital, as happened in East Asia in 1997-98 and in Iceland, the Baltics and east and central Europe in 2008-09.
Without reforms to curb both these causes of financial instability we will likely experience further serious crises over the next decade. The sheer magnitude of the demand for complex securities in which the swelling ranks of the super-rich can store their wealth will swamp efforts to keep banks within prudential limits; as also will the sheer magnitude of cross-border capital flows (which are also a function of high income and wealth inequality at the top). ... The question is how progressive forces can exercise countervailing pressure, and what policy and structural changes they should advocate. Progressive tax reform and restrictions on capital flows in unstable times (and at least blue sky discussion of how a mechanism of coordinating exchange rate changes might be established) should be high on the agenda.
Dave Henderson has responded to my post earlier today (responding to a post of his), and I probably did overreact to the title of his initial post -- the title I chose for my post was clearly motivated by his title choice. The title was based upon what seemed to me to be a mischaracterization of my views, and that was a large part of what prompted my response (so in his description below, if annoyed=hurt feelings, he has it right). Also, the feeling that he was trying to paint me into an ideological corner led me to return the favor, but I was overly stark in my characterization.
So I appreciate this:
Robert Stavins and Richard Schmalensee are puzzled by conservative opposition to cap and trade:
The Power of Cap-and-Trade by Richard Schmalensee and Robert Stavins: Last week, the Senate abandoned its latest attempt to pass climate legislation... In the process, conservative Republicans dubbed the cap-and-trade system “cap-and-tax.’’ Regardless of what they think about climate change, however, they should resist demonizing market-based approaches to environmental protection...
In fact, market-based policies should be embraced, not condemned by Republicans (as well as Democrats). After all, these policies were innovations developed by conservatives in the Reagan, George H. W. Bush, and George W. Bush administrations (and once strongly condemned by liberals). [gives several examples, e.g. Reagan’s use of cap-and-trade system to phase out leaded gasoline, and George H. W. Bush's use of cap-and-trade system to reduce acid rain] ...
To reject this legacy and embrace the failed 1970s policies of one-size-fits-all regulatory mandates would signify unilateral surrender of principled support for markets. If some conservatives oppose energy or climate policies because of disagreement about the threat of climate change or the costs of those policies, so be it. But in the process of debating risks and costs, there should be no tarnishing of market-based policy instruments. Such a scorched-earth approach will come back to haunt when future environmental policies will not be able to use the power of the marketplace to reduce business costs. ... Market-based approaches to environmental protection – including cap-and-trade – should be lauded, not condemned, by political leaders, no matter what their party affiliation. Demonizing cap-and-trade in the short term will turn out to be a mistake with serious long-term consequences for the economy, for business, and for consumers. ...[full article with added links]...
Mike Rorty is puzzled by Megan McArdle's attack on Elizabeth Warren:
Megan McArdle’s Hack Post on Elizabeth Warren’s Scholarship, by Mike Rorty: So Megan McArdle wrote a long post attacking Elizabeth Warren as a scholar. What’s surprising is how little “there-there” there is to her critique. I would love to see nomination hearings based around how expansive of a definition to use for medical bankruptcies and watching Warren rip the face off of Senators when it comes to empirical methods. I doubt it is going to come to this, but I’ll go ahead and respond. (I’ve been waiting for part two to respond, which I assume may not show up.)
Because that isn’t what this is about. It’s about giving the impression that Warren is a weak scholar. Given that Warren is considered “the leading authority in the country on bankruptcy law,” being called a hack by McArdle, of all people, is something. Especially when we get a gem of a major screwup like this right out the door in the post: ...[continue reading]...
Jeff Frankel is puzzled by conservative opposition to extending tax cuts for those making less that $250,000 per year:
Will Republicans Really Block Tax Cuts Because They Go Only to Earners Below $250K?: President Obama proposes allowing the Bush tax cuts to expire next year — as they are scheduled to do if nothing is changed — for those earning more than $250,000, but changing the law so as to extend the tax cuts for those earning less than that amount. Republican politicians are opposing the proposal. I don’t understand what they are thinking. Their position doesn’t make sense to me, regardless whether they are thinking about short-term stimulus, long-term fiscal conservatism, good economics, or even pure politics. ...Jeff Frankel's criticism has more elements than this (and I disagree with his Social Security point), but I want to note this part of his argument:
If you were going after stimulus, and believed that only tax cuts created stimulus, the priority should be in other areas like extending the Making Work Pay provisions for low-income workers, which are also set to expire. This proposition holds regardless whether (i) your idea of stimulus is Keynesian demand expansion (the lower-income workers have a higher marginal propensity to consume), OR even if (ii) your idea of stimulus is purely enhanced incentives to work (lower income workers face overall effective marginal tax rates that are often higher than the rich face, when one factors in payroll taxes, etc.) Alec Phillips of GS US Global ECS Research points out that the amount of revenue (and stimulus) that is at stake in the expiration of Making Work Pay is greater than in the expiration of tax cuts for those over $250,000, and yet the latter question is getting all the attention and the former question is getting no attention. ...
If we want to achieve short-term fiscal stimulus from the viewpoint of good economics, then we should realize that well-chosen spending programs give far more bang-for-the-buck than most tax cuts. ... Examples of well-chosen spending programs include aid to the states (which Republican congressmen have been voting down) so that the states don’t have to lay off firemen, policemen, bus drivers and teachers. Examples of tax cuts with much less bang for the buck include not just those for the rich (e.g., the abolition of the estate tax), but even garden-variety income tax cuts, because they are largely saved. Don’t take my word for it. Martin Feldstein (whose work on taxes and incentives led to the supply side revolution, and who was the Chairman of Reagan’s Council of Economic Advisers) argues that virtually all of the income tax cut that George W. Bush passed in 2008 was saved by households rather than spent, and predictably so, and that government spending would bring more short-term stimulus. ...[read more]...
Brad DeLong is puzzled by Ross Douhat's gig as an opinion writer for the NY Times:
Why Is Ross Douthat on the New York Times's Editorial Page?, by Brad DeLong: Why oh why can't we have a better press corps?
Is there any respect--any respect--any respect at all in which the New York Times would not be a better publication if Ross Douthat were removed, and replaced by David Leonhardt?
I cannot think of any.
Here's David Leonhardt explaining why what the New York Times prints from Ross Douthat on its op-ed page is worse than tripe: ...[continue reading]...
Niall Ferguson is (or ought to be) puzzled by his own arguments:
Matthew Yglesias and Ryan McNealy: Niall Ferguson Debates Himself: I’ve been known to remark on the conservative movement’s strong adherence to Keynesian arguments as a justification for tax cuts in the wake of the mild 2001 recession, adherence that seems puzzling in light of their contrary rhetoric in the wake of the cataclysmic 2008-2009 downturn. Brad DeLong observes that one particularly hilarious example of this is historian-turned-pundit Niall Ferguson who wrote a December 12, 2003 article on the Bush administration that’s in considerable [disagreement] with his contemporary take on things. DeLong requests a Ferguson v Ferguson debate, and with assistance from Ryan McNeely I’m prepared to unveil one. 2003 Ferguson is in boldface, 2010 Ferguson is in italics: ...[continue reading]...
Paul Krugman is puzzled by the editorial process for conservatives:
When I quote someone in my column, I supply the source material, and my copy editor checks, not just to be sure that the quote is accurate, but that it’s not taken out of context. But I guess such rules don’t apply if you’re a conservative.
The economics blogosphere is getting decidedly testier lately, especially today.
What are you puzzled about?
A response to Dave Henderson:
This from a member of the Linguistics Department at UC Berkeley:
Conservatism’s Death Gusher, by George Lakoff, Berkeley Blog: The issue is death — death gushing at ten thousand pounds per square inch from a mile below the sea, tens of thousands of barrels of death a day. Not just death to eleven human beings. Death to sea birds, sea turtles, dolphins, fish, oyster beds, shrimp, beaches; death to the fishing industry, tourism, jobs; and death to a way of life based on the beauty and bounty of the Gulf.
Many, perhaps a majority, of the Gulf residents affected are conservatives, strong right-wing Republicans, following extremist Governors Bobby Jindal and Haley Barbour. What those conservatives are not saying, and may be incapable of seeing, is that conservatism itself is largely responsible for what happened, and that conservatism is a continuing disaster for conservatives who live along the Gulf. Conservatism is an ideology of death. ...
It was conservative laissez-faire free market ideology... Cost-benefit analysis only looks at monetary costs versus benefits, case by case, not at the risk of massive death of the kind that has been gushing out of the Gulf. Death, in itself, even at that scale, is not a “cost.” Only an outflow of money is a “cost.” This is what follows from conservative laissez-faire market ideology, an ideology that continues to sanction death on a Gulf scale. ...
The conservative worldview says man has dominion over nature: nature is there for human monetary profit. Profit is sanctioned over the possibility of massive death and destruction in nature. Conservatives support even more dangerous drilling off the coast of Alaska and are working to repeal the President’s moratorium on deep water drilling. Nature be damned; the oil companies have a right to make money, death or no death. ...
A great many self-identified conservatives are actually what I’ve called “biconceptuals,” who have both conservative and progressive worldviews, but on different issues. They actually share a progressive view of nature: they love the beauty and appreciate the bounty of the Gulf, as it was before the Death Gusher. They want to save the environment of the Gulf and the way of life as it was. But shift the issue to the culpability of laissez-faire markets, the absolute right to profit from nature and profit-maximizing corporate practices, and their conservative worldview is activated. They will not be able to see the causal role of conservatism itself in the Death Gusher, and in the conservative ideology of greed and death that has given us the global warming disaster we now face worldwide.
Incidentally, there are bi-conceptual Democrats who share the conservative view of the market. Their views have led to many of President Obama’s problems with Democrats in Congress.
Finally, there is what progressive Democrats see as a contradiction: conservative advocates of smaller and weaker government and critics of governmental power trying to pin the Death Gusher Disaster on Obama for not having and using enough government power to prevent or lessen the disaster — even though the government has no capacity to plug oil wells.
The contradiction is logical, from a progressive point of view, but not from a conservative point of view. The highest value in the conservative universe is to preserve, defend, and extend conservatism itself. Anything that helps, or fails to harm, Obama contradicts this highest principle, since Obama’s deepest values on the whole fundamentally contradict conservative values. Conservatives, on principle, cannot let a major opportunity to criticize Obama go by. Of course, it also helps conservatives politically.
Those who are not held captive by the conservative worldview should be able to recognize the causal role of conservatism in the Death Gusher in the Gulf. Many progressives do, but keep it to themselves.
Progressives have been much too kind to conservatives on this matter. They have largely accepted the Bad Actor Frame, criticizing BP but not the whole industry and its practices. No one should be drilling miles under the sea, where oil comes out at 10,000 pounds per square inch. No matter how much profit is involved.
Conservatism gushes death — and not only in the Gulf of Mexico.
I think there are two different ways to characterize market fundamentalism, a distinction I tried to get at in Markets are Not Magic. One is the belief that markets have desirable properties when the right conditions are in place (i.e. the conditions that ensure that markets are competitive). I think it would be fair to say that most economists hold the belief that markets function well under the proper conditions (and note that the markets described above clearly do not satisfy these conditions).
The second type of market fundamentalism is the belief that markets perform best when government is involved the least -- the less government the better -- and this includes the belief that market failures will self-correct. Markets will take care of any problems an their own, so government intervention is not required.
Almost all economists recognize that there are some market failures that must be corrected by government intervention, the disagreement is over their prevalence. Some economists see widespread and costly market failures, and that government can intervene effectively to overcome them. Thus, an active, interventionist government is required to ensure that markets are functioning correctly. More libertarian types tend to both see fewer market failures and, more importantly, believe that government is not very effective in intervening to correct problems. It's only very large, very obvious cases where government can help, and those are far and few between. Some never see them at all.
So I would characterize the problem slightly differently. It wasn't market fundamentalism per se, it was the wrong type of market fundamentalism. There was too much of the second type, and not enough of the first. That is, those who believe that markets function poorly when there are substantial deviations from ideal market conditions and that government is needed to correct these problems lost the ideological battle several decades ago to those who believe in the second type of market fundamentalism -- one that minimizes government involvement in the economy. We see this in the gulf, we see this in the financial crash, and we see it in other areas of the economy as both economic and political power has been concentrated in fewer and fewer hands. And there has been little, if any resistance from regulators charged with ensuring that markets are free from the problems that can result from such concentrations.
I want government to intervene as little as possible, but the movement in this direction that began in the 1970s has gone too far. I thought the financial crisis would change this, that public and professional opinion would move back toward a more interventionist posture, and that the problems in the gulf would reinforce the change. But the tide hasn't turned as much as I expected. Perhaps this power is entrenched to a degree where it will be a long and difficult battle to reverse it, and it was too much to expect that things would change dramatically in such a short period of time. But it's still disappointing.
Policymakers should be more concerned about the possibility of rising long-term unemployment:
Mankiw's broader point is that since we have seen nothing like this before except for the Great Depression, we should be humble and risk averse--and hence have the government stand back and wash its hands of the situation.
Paul Krugman concurs, adding a sense of urgency to the current situation:
Quite. I really don’t think people appreciate the huge dangers posed by a weak response to 9 1/2 percent unemployment, and the highest rate of long-term unemployment ever recorded…
...Right now, I’m reading Larry Ball on hysteresis in unemployment (pdf) — the tendency of high unemployment to become permanent. Ball provides compelling evidence that weak policy responses to high unemployment tend to raise the level of structural unemployment, so that inflation tends to rise at much higher unemployment rates than before. And the kind of unemployment we’re experiencing now, with many workers jobless for very long periods, is precisely the kind of unemployment likely to leave workers permanently unemployable.
And there are already indications that this is happening. Bill Dickens, one of the people has who worked on downward nominal rigidity, tells me that the Beveridge curve — the relationship between job vacancies and the unemployment rate — already seems to have shifted out dramatically. This has, in the past, been a sign of a major worsening in the NAIRU, the non-accelerating-inflation rate of unemployment.
Mankiw said something eerily familiar recently:
This recession looks very different, and much more troubling, than those in the recent past. I wonder how this dramatic change in the nature of unemployment will alter traditional macroeconomic relationships, such as Okun's Law and the Phillips curve.
Some research suggests that the long-term unemployed put less downward pressure on inflation. If that is indeed the case, then the increase in long-term unemployment may mean that we will see less deflationary pressure than we might have expected from the high rate of unemployment. In other words, the NAIRU may have risen, perhaps quite substantially. This is mostly conjecture, however. It seems likely we will see more work on this topic in the coming years.
So Mankiw recognizes the problems posed by protracted periods of economic weakness, yet in his criticism appears to push for more caution while overlooking an obvious reason why the impact of fiscal policy was insufficient to significantly alleviate the recession. It was simply too small - as economists predicted at the time. Indeed, if he is so worried about the risk of rising NAIRU, he should be pushing for policymakers to pull out all the stops.
Mankiw is not alone in seeing the challenges posed by protracted unemployment. From Federal Reserve Ben Bernanke's Congressional testimony:
Moreover, nearly half of the unemployed have been out of work for longer than six months. Long-term unemployment not only imposes exceptional near-term hardships on workers and their families, it also erodes skills and may have long-lasting effects on workers' employment and earnings prospects.
The difference between Mankiw and Bernanke is that the latter not only recognizes the problem, but could also do something about it. Not that he is inclined to. Of course, he is not alone. Philadelphia Fed President Charles Plosser was quoted today:
“Lowering the interest rates closer to zero could have very disruptive effects on the financial markets,” Plosser said. “If we bought Treasury bills we could un-anchor expectations of inflation because the public might begin to think we are going to buy up the public debt.”
Plosser repeats the credibility story, arguing that additional action as suggested by Joe Gagnon will trigger an inflationary spiral. Likewise, San Francisco Fed President Janet Yellen expressed an unwillingness to adopt a new inflation target:
Janet Yellen, President Barack Obama’s pick to be the Federal Reserve’s next vice chairman, said it would be “risky” to adopt a long-run inflation goal of 4 percent, and that supervision and regulation are “the first line of defense” against risks to the financial system.
She made the comments in written responses to questions posed by U.S. Senator Richard Shelby, a Republican from Alabama, following her July 15 hearing before the Senate Banking Committee. Yellen, president of the San Francisco Fed, is awaiting confirmation, along with Obama’s other nominees, Sarah Bloom Raskin and Peter Diamond…
...She said that while a higher long-run inflation goal would “give the Fed more maneuvering room in the future,” she agrees with Bernanke that such a move “would be a risky policy strategy.” Most policy makers regard 2 percent as a level consistent with price stability.
I would think that, despite having to endure a higher inflation target, Yellen would be eager to have more maneuvering room. After all, there is not a lot of working room for conventional policy in a liquidity trap. Yet Fed officials seem to prefer the idea that unemployment becomes a long term challenge rather than a short run cyclical issue over the risk of inflation. Like fiscal policy, monetary policy is now limited by imaginary obstacles.
It is worth noting that the long term challenge may already be upon us. David Altig puzzles over the implications of a shifting Beveridge curve, suggesting that extended unemployment benefits may have a role. He then hones in on the possibility of a skills mismatch:
Now I realize that a few anecdotes don't make facts, but I have been in more than a few conversations with businesspeople who have claimed that the productivity gains realized in the United States throughout the recession and early recovery reflect upgrades in business processes—bundled with a necessary upgrade in the skill set of the workers who will implement those processes. This dynamic suggests that the shift in required skills has been concentrated within individual industries and businesses, not across sectors or geographic areas that would be captured by our most straightforward measures of structural change.
To be honest, I hear this complaint too, but have trouble swallowing it. I believed it in the mid and late 1990's, but now? The eight million people dropped into unemployment are all unemployable? Firms are willing to lose profits than do the unthinkable, on the job training, actually invest in their employees? I also have heard the opposite story, of overeducated temporary Census workers desperate for employment, completing assignments in a fraction of the expected time, not realizing that their productivity would only be rewarded with a shorter stint of employment. And if we are experiencing all these magical productivity gains and a shortfall of workers, then wages should be rising quite smartly. But from one of the articles cited by Altig:
Here in this suburb of Cleveland, supervisors at Ben Venue Laboratories, a contract drug maker for pharmaceutical companies, have reviewed 3,600 job applications this year and found only 47 people to hire at $13 to $15 an hour, or about $31,000 a year.
You get what you pay for. To put this into perspective, the average national wage for Wal-Mart was $11.24/hour in 2009. I would hope, however, that Ben Venue Laboratories pays better benefits.
I would really appreciate a good story that explained why we should be happy about high productivity growth if real wage growth is not surging. The lack of the latter makes me question the reality of the former.
Putting my skepticism aside, if a skills mismatch is really a problem, then the solution is to ramp up activity until labor shortages raise wages and force employers to reach deeper into the barrel and in turn bring more people into the labor force to gain those missing skills. Better to do it sooner than later. If the productivity gains are real, the wage gains should not be inflationary. This was the story of the 1990s. Otherwise, policymakers sit and wait as the potential structural rigidities deepen, thereby ensuring a higher NAIRU in the future. And, driven by fear of inflation, this appears to be exactly what policymakers intend to do.
Monday, July 26, 2010
Some thoughts on why the administration did not fight very hard for more stimulus, and the cost of that decision:
I'm disappointed to see the administration, and more importantly the economy, in a position that could have been avoided.
The Economist asks:
My response is here (I talked mainly about the second half of the question). There are also responses from Daron Acemoglu, Scott Sumner, Richard Koo, Paul Seabright, Gilles Saint-Paul, and David Laibson, with more to come. [All Responses]
Why did climate change legislation fail?:
Who Cooked the Planet?, by Paul Krugman, Commentary, NY Times: Never say that the gods lack a sense of humor. I bet they’re still chuckling on Olympus over the decision to make the first half of 2010 — the year in which all hope of action to limit climate change died — the hottest such stretch on record. ...
So why didn’t climate-change legislation get through the Senate? Let’s talk first about what didn’t cause the failure, because there have been many attempts to blame the wrong people.
First of all, we didn’t fail to act because of legitimate doubts about the science. Every piece of valid evidence ... points to a continuing, and quite possibly accelerating, rise in global temperatures.
Nor is this evidence tainted by scientific misbehavior. You’ve probably heard about the accusations leveled against climate researchers —... “Climategate,” and so on. What you may not have heard, because it has received much less publicity, is that every one of these supposed scandals was eventually unmasked as a fraud concocted by opponents of climate action...
Did reasonable concerns about the economic impact of climate legislation block action? No. ... All serious estimates suggest that we could phase in limits on greenhouse gas emissions with at most a small impact on the economy’s growth rate.
So it wasn’t the science, the scientists, or the economics that killed action on climate change. What was it?
The answer is, the usual suspects: greed and cowardice.
If you want to understand opposition to climate action, follow the money. The economy as a whole wouldn’t be significantly hurt if we put a price on carbon, but certain industries — above all, the coal and oil industries — would. And those industries have mounted a huge disinformation campaign to protect their bottom lines.
Look at the scientists who question the consensus on climate change; look at the organizations pushing fake scandals; look at the think tanks claiming that any effort to limit emissions would cripple the economy. Again and again, you’ll find that they’re on the receiving end of a pipeline of funding that starts with big energy companies, like Exxon Mobil, which has spent tens of millions of dollars promoting climate-change denial, or Koch Industries, which has been sponsoring anti-environmental organizations for two decades.
Or look at the politicians who have been most vociferously opposed to climate action. Where do they get much of their campaign money? You already know the answer.
By itself, however, greed wouldn’t have triumphed. It needed the aid of cowardice — above all, the cowardice of politicians who know how big a threat global warming poses, who supported action in the past, but who deserted their posts at the crucial moment.
There are a number of such climate cowards, but let me single out one in particular: Senator John McCain.
There was a time when Mr. McCain was considered a friend of the environment. Back in 2003 he burnished his maverick image by co-sponsoring legislation that would have created a cap-and-trade system for greenhouse gas emissions. He reaffirmed support for such a system during his presidential campaign, and things might look very different now if he had continued to back climate action once his opponent was in the White House. But he didn’t — and it’s hard to see his switch as anything other than the act of a man willing to sacrifice his principles, and humanity’s future, for the sake of a few years added to his political career.
Alas, Mr. McCain wasn’t alone; and there will be no climate bill. Greed, aided by cowardice, has triumphed. And the whole world will pay the price.
It's pretty obvious why the business community is pushing the idea that uncertainty about future regulation and taxes is holding back business investment and slowing down the recovery, but the evidence doesn't support this claim:
Blame Games, by James Surowiecki: The U.S. economy is limping along. The job market is in rotten shape, and business investment is hitting historic lows. And, if you’re looking for a culprit for this dismal state of affairs, many businesspeople would be happy to point you to the White House. Companies aren’t hiring or investing, businessmen say, because ... of Barack Obama’s anti-corporate attitude and a blizzard of new regulations and proposed taxes...
There’s no doubt that Obama is unpopular in the business world. ... From an economic perspective, the important question is whether such perceptions are really what’s keeping the economy in neutral. Those who think that they are say that “uncertainty surrounding regulations and taxes,” ... is making business hold back. But uncertainty is a fact of business life, and the impact of new regulations on most companies has been overhyped: unless you’re a financial-services or health-care company, Obama’s initiatives aren’t remaking your business. In fact, Wall Street and health care are among the few industries currently adding jobs, which suggests that new regulatory burdens aren’t the cause of sluggishness. In surveys, meanwhile, fewer small businessmen cite regulation as their biggest problem today than did in the boom years of the nineteen-nineties. ...
If businesses truly were holding back on hiring new workers or building new plants in the face of real opportunities, we’d see them working their current employees and factories to the limit. But they aren’t: weekly hours worked have scarcely budged in two years, and factory usage is at just seventy per cent of capacity, which is historically quite low.
Sunday, July 25, 2010
Will this be a game changer in Afghanistan?
Instead of a series of op-eds by Christina Romer, Larry Summers, Jared Bernstein and other members of the administration making a strong, strong case for more stimulus -- particularly that devoted to job creation -- along with the president himself making the case to the nation, the appearance of key administration officials on Sunday talk shows to bolster the effort, and so on, the administration has decided to try and sell a recovery that hasn't yet taken hold.
Thus, instead of a much needed and impressive effort to move Congress to action, or at least make clear to voters who is and who isn't trying to help those struggling with the recession, here's Timothy Geithner saying it's time for the government to back off because a solid recovery is underway:
Treasury Secretary Timothy Geithner said the economy has now recovered sufficiently for government to begin to make way for private business investment.... Mr. Geithner’s comments on Sunday, which echo previous sentiments expressed by President Barack Obama, reflect a turning point in the government response to the worst economic downturn since the Great Depression, a period marked by deep federal intervention in the financial, housing, auto and other industries...
The message is that the administration is pulling back, and maybe even starting to balance the budget because good times are just around the corner:
“We need to make that transition now to a recovery led by private investment,” Mr. Geithner said Sunday on NBC’s “Meet the Press.” Mr. Geithner hit two Sunday talk shows, delivering the Obama administration’s message that the economy was recovering...
I don't understand this strategy. The election is not that far way. If unemployment continues to be a problem, and it looks like it will, saying that things are fine and recovery is just around the corner will backfire.
Update: I meant to make this point, but forgot, so I'm glad Calculated Risk noted this (and I likely would have relied on his evidence in any case):
The WSJ is quoting Treasury Secretary Timothy Geithner as saying it is time for private investment to take over from government stimulus:“We need to make that transition now to a recovery led by private investment,” Mr. Geithner said Sunday on NBC’s “Meet the Press.”
“I think the most likely thing is you’ll see an economy that gradually strengthens over the next year or two, you’ll see job growth start to come back, investments expanding ... but we’ve got a long way to go still,” Mr. Geithner said.
I discussed this last week - in most sectors of the economy there is over capacity or too much supply (housing), so there is no reason for significant new private investment.
(Also, in response to comments, maybe I should also add that, despite the poorly chosen title, I wasn't serious about the reverse psychology part.)
Update: Brad DeLong follows up.
I would put it much less politely: have Tim Geithner and Barack Obama lost their minds? The Administration's mid-session review--released last week--projects that the unemployment rate will rise in the next several months and will be at 9.3% in February 2011. It projects that Q4/Q4 real GDP growth will be 2.9% this year--and I don't see how we are going to get there with a 2.7% growth rate in the first quarter, a likely 2.0% growth rate in the second quarter, and with the tracking third-quarter growth aret at 2.9%. We would need 4.0% growth in the fourth quarter of this year. Nor do I understand where the 1.7% decline in unemployment over 2011 is supposed to come from: a simple Okun's Law coefficient of 2 would suggest that we need 2 x 1.7 + 2.6 = 6% real GDP growth to generate such a decline.
According to Mark Zandi, in the fourth quarter of this year the phase-out of the ARRA is likely to shave 0.3% off the real GDP growth rate. in 2011, the contractionary effects of the ARRA phase-out on the quarterly growth rates are likely to be -0.8%, -1.2%, -0.7%, and -0.2%.
It sure ain't morning in America. Maybe I need to go back and read Geithner's transcripts from this morning to see if the MSM is misrepresenting what he said...
I'm behind today. While I try to catch up, first, from an interview with Bruce Bartlett:
Six questions for Bruce Bartlett, The Economist: ... DiA: More generally, which party do you find more credible when discussing America's fiscal challenges?
Mr Bartlett: The Republicans don’t have any credibility whatsoever. They squandered whatever they had when they enacted a massive UNFUNDED expansion of Medicare in 2003. Yet they had the nerve to complain about Obama’s health plan, WHICH WAS FULLY PAID FOR according to the Congressional Budget Office. The word “chutzpah” is insufficient to describe how utterly indefensible the Republican position is, intellectually.
Furthermore, Republicans have a completely indefensible position on taxes. In their view, deficits cannot arise from tax cuts. No matter how much taxes are cut, no matter how low revenues go as a share of GDP, tax cuts are never a cause of deficits; they result ONLY AND EXCLUSIVELY from spending—and never from spending put in place by Republicans, such as Medicare Part D, TARP, two unfunded wars, bridges to nowhere, etc—but ONLY from Democratic efforts to stimulate growth, help the unemployed, provide health insurance for those without it, etc.
The monumental hypocrisy of the Republican Party is something amazing to behold. And their dimwitted accomplices in the tea-party movement are not much better. They know that Republicans, far more than Democrats, are responsible for our fiscal mess, but they won’t say so. And they adamantly refuse to put on the table any meaningful programme that would actually reduce spending. Judging by polls, most of them seem to think that all we have to do is cut foreign aid, which represents well less than 1% of the budget.
Consequently, I have far more hope that Democrats will do what has do be done. The Democratic Party is now the “adult” party in American politics, willing to do what has to be done for the good of the country. The same cannot be said of Republicans, who seem unwilling to do anything that would interfere with their ambition to retake power so that they can reward their lobbyist friends with more give-aways from the public purse.
Unfortunately, I don’t think Democrats have the guts or the stamina to put forward a meaningful deficit-reduction programme because they know—as I do—that it will require higher revenues. But facing big losses in the elections this fall I can’t blame them. That leaves us facing political gridlock between the sensible but cowardly party and the greedy, sociopathic party. Not a pleasant choice for those of us in the sensible, lets-do-what-we-have-to-do-for-the-good-of-the-country independent centre. ...
Next, as Brad DeLong notes, Martin Wolf "makes the case that America's future depends on the rapid destruction of the Republican Party and its replacement by an alternative opposition party to the Democrats":
The political genius of supply-side economics, by Martin Wolf: ...My reading of contemporary Republican thinking is that there is no chance of any attempt to arrest adverse long-term fiscal trends should they return to power. Moreover, since the Republicans have no interest in doing anything sensible, the Democrats will gain nothing from trying to do much either. That is the lesson Democrats have to draw from the Clinton era’s successful frugality, which merely gave George W. Bush the opportunity to make massive (irresponsible and unsustainable) tax cuts. In practice, then, nothing will be done. ...
To understand modern Republican thinking on fiscal policy, we need to go back to perhaps the most politically brilliant (albeit economically unconvincing) idea in the history of fiscal policy: “supply-side economics”. Supply-side economics liberated conservatives from any need to insist on fiscal rectitude and balanced budgets. ... It allowed them to promise lower taxes, lower deficits and, in effect, unchanged spending. Why should people not like this combination? Who does not like a free lunch?
How did supply-side economics bring these benefits? First, it allowed conservatives to ignore deficits. They could argue that, whatever the impact of the tax cuts in the short run, they would bring the budget back into balance, in the longer run. Second, the theory gave an economic justification – the argument from incentives - for lowering taxes on politically important supporters. Finally, if deficits did not, in fact, disappear, conservatives could fall back on the “starve the beast” theory: deficits would create a fiscal crisis that would force the government to cut spending and even destroy the hated welfare state.
In this way, the Republicans were transformed from a balanced-budget party to a tax-cutting party. This innovative stance proved highly politically effective...
The ... theory that cuts would pay for themselves has proved altogether wrong. ... Indeed, Greg Mankiw ... has responded to the view that broad-based tax cuts would pay for themselves, as follows: “I did not find such a claim credible, based on the available evidence. I never have, and I still don’t.” Indeed, he has referred to those who believe this as “charlatans and cranks”. ...
So, when Republicans assail the deficits under President Obama, are they to be taken seriously? ...[I]t is not deficits themselves that worry Republicans, but rather how they are caused: deficits caused by tax cuts are fine; but spending increases brought in by Democrats are diabolical, unless on the military. ...
What conclusions should outsiders draw about the likely future of US fiscal policy? First, if Republicans win the mid-terms in November, as seems likely, they are surely going to come up with huge tax cut proposals (probably well beyond extending the already unaffordable Bush-era tax cuts).
Second, the White House will probably veto these cuts, making itself even more politically unpopular.
Third, some additional fiscal stimulus is, in fact, what the US needs, in the short term, even though across-the-board tax cuts are an extremely inefficient way of providing it.
Fourth, the Republican proposals would not, alas, be short term, but dangerously long term, in their impact.
Finally, with one party indifferent to deficits, provided they are brought about by tax cuts, and the other party relatively fiscally responsible (well, everything is relative, after all), but opposed to spending cuts on core programs, US fiscal policy is paralyzed. ...
This is extraordinarily dangerous. The danger does not arise from the fiscal deficits of today, but the attitudes to fiscal policy, over the long run, of one of the two main parties. Those radical conservatives (a small minority, I hope) who want to destroy the credit of the US federal government may succeed. If so, that would be the end of the US era of global dominance. The destruction of fiscal credibility could be the outcome of the policies of the party that considers itself the most patriotic.
In sum, a great deal of trouble lies ahead, for the US and the world.
Where am I wrong, if at all?
Saturday, July 24, 2010
Michael Perelman is puzzled by the administration's attempt to blame environmentalists for the failure of climate change legislation:
Politico reports that the Obama folk blame the Greens for the failure of its energy bill because it was THEIR responsibility to lobby... So, here is the story: misinformed Greens voted for Obama for change, but the change was that it was the responsibility of the Greens to create the change.
Of course, the White House needs a strong grassroots movement to fight powerful interests, but it also has the responsibility to lead that movement rather than make deals with those whom the grass roots people oppose. ...
Here's the part of the story linked above the raised Michael's ire:
...The blame game has already begun. One exasperated administration official on Thursday lambasted the environmentalists – led by the Environmental Defense Fund – for failing to effectively lobby GOP senators. “They didn’t deliver a single Republican,” the official told Politico. “They spent like $100 million and they weren’t able to get a single Republican convert on the bill.”
But many say it was Obama who didn’t do enough to make the climate bill a big enough priority, allowing other monster big-ticket items like the economic stimulus, health care and Wall Street reform to suck up all the oxygen and leaving environmentalists grasping for straws too late in the game – well past the expiration date for other big accomplishments during the 111th Congress.
“The absence of direct, intense presidential leadership doomed this process,” said Eric Pooley... Going back to Day One, Obama never turned his campaign proposals into formal legislative text, leaving lawmakers to shoulder the load. And when Obama spoke publicly about the issue, it was only with a vague call for “comprehensive energy and climate” measures that did little to help win votes. ...
The leadership from the administration on climate change has been about as effective as its leadership on additional stimulus and job creation. At least they aren't blaming the unemployed for their failure to lobby effectively for a jobs bill. It's not possible to give the administration a passing grade for effort in either case, let alone for results.
In fairness, this is one official speaking, I don't think the administration more generally is pushing the line that the failure of climate change legislation is due to lack of effective lobbying by environmental groups. I suppose it can be argued that these groups couldn't even move the administration to effective action, but I doubt that's an argument the administration will want to make. In any case, it has more to do with the administration's misguided notion that bipartisan, centrist victories will be anything more than Pyrrhic – if they can get them at all – than it does with lack of attempts from the left to get the administration to pursue these objectives.
...a heretofore ignored consequence of rising executive compensation. Specifically, we claim that higher income inequality between executives and ordinary workers results in executives perceiving themselves as being all-powerful and this perception of power leads them to maltreat rank and file workers. We present findings from two studies - an archival study and a laboratory experiment – that show that increasing executive compensation results in executives behaving meanly toward those lower down the hierarchy.
The study conclusions are consistent with my own conjectures that there are ethical as well as economic consequences that result from dysfunctional financial markets and the dysfunctional labor markets they induce. The economic consequences include gross misallocations of financial, physical and human capital, away from activities that would promote long run economic growth and well being and to activities that will promote rising income inequality. The ethical consequences are erosion of trust and compassion, both prerequisites to fairness in rewarding contributions to long run growth and prosperity. If the above study is right, we can add frank meanness to the list of ethical consequences. ...
Causal relationships are always difficult to establish in non-experimental settings. Desai, Brief and George provide results from a small experiment that lend support to their conclusion that increased wage disparity engenders meanness or as Smith might call it "lack of sympathy" among those at the top for those at the middle and bottom of the wage pyramid. Nevertheless, it remains difficult at the societal level to determine to what extent economics shapes ethics and to what extent ethics shapes economics and economic systems.
I would be willing to bet that just as disparity between worker and CEO pay has produced "meanness," so has growing US income inequality produced similar disruption of fellow feeling in the population generally. As the "distance" between the wage rates at the top of the US income distribution and the middle and bottom of the distribution has increased, so has grown the "distance" in sympathy one for the other.
This is not an argument for income equality. There is every reason to believe that most people in the US approve of income differences based on rewards for greater productivity or other merit. I happen to share those views. However, the current disproportionate increase in the percent of national output going to the top 1% of the population, despite increasing productivity among those of us still employed and those who were employed up until 2 years ago, suggests that merit is no longer the trait that is being rewarded.
The conclusion seems self-evident. There is more at stake here than our economy. We must, as a nation, decide whether we want to continue on the path we have been on since roughly 1980. Do we want to continue to reward disproportionately a small fraction of the population that (based on recent performance) seems better at misallocating financial, physical, and human capital through speculative endeavors? Do we want to continue the trickle down of meanness? Shall we live in a society in which trust and fellow feeling are lost, replaced by mindless (not rational, not productive) winner-take-all competition that favors one group disproportionately? If the answers to these questions are all "yes," then the social fabric may already be torn beyond repair and I fear we are about to learn firsthand how empires crumble.
Why is the Fed unwilling to do more to help the economy?:
A toxic toolkit, by Greg Ip, Free Exchange: Asked Wednesday what he’d do if the economy needed more stimulus, Ben Bernanke was noncommittal: “We are going to continue to monitor the economy closely and continue to evaluate the alternatives that we have.”
Mark Thoma (here and here) is dismayed that Mr Bernanke, given the time the Fed has had to study this, doesn’t seem to know what he’ll do. Robin Harding says Mark is unfair: what Mr Bernanke does will depend on what happens, and then on developing a consensus with his colleagues.
Mr Harding is right that what the Fed would do differs depending on whether it faces a liquidity crisis or a shortfall in aggregate demand and rising threat of deflation. Yet Mr Thoma is also right that this does not exonerate Mr Bernanke. That he knows what to do in a liquidity crisis ... is of small comfort since such a crisis is not in anyone’s forecast. To echo Mr Thoma, the question is, how will you deal with the plausible forecast of inadequate demand, disturbingly high unemployment and low inflation bordering on deflation? That the Fed has a plan for when another fire breaks out on its drilling rig is fine, but where's the plan for capping the well that's already spewing oil into the ocean?
I think the reasons for Mr Bernanke’s reticence are twofold. First, he’s genuinely optimistic the economy will be okay, in part because he’s sanguine about the expiration of fiscal stimulus.
If it becomes clear ... that that optimism is misplaced, I think the Fed will swing into action quite quickly. ... Only a minority of FOMC members are opposed to more quantitative easing (QE), but because they’re so vocal, it gives the impression of more opposition than really exists. ...
The Fed is not helpless; it has two powerful tools left—but both are politically toxic. One is unsterilized foreign exchange intervention: buying foreign currencies with newly printed dollars... This would both stimulate net exports by pushing down the nominal value of the dollar, and alleviate deflation pressure by pushing up the price of tradable goods. ... But the Fed won't do this without the Treasury’s approval, which for its part doesn't want the rest of the world accusing it of exporting its deflation.
The other tool is a money-financed fiscal expansion..., buying newly issued bonds specifically to enable the federal government to spend more money would be a powerful boost to demand. But this needs the federal government to agree to a lot more fiscal stimulus and the Fed to set aside concerns about being the Treasury’s hand maiden. Neither looks likely.
Mr Bernanke described both those options as hypothetical in his famous 2002 speech on deflation. Eight years later, it’s apparent they are just that: hypothetical.
Friday, July 23, 2010
Tim Duy promised himself he'd stay away from this topic:
Anomalous Capacity Shrinkage, by Tim Duy: I am drawn to this topic like a moth to a flame.
In this week's Congressional testimony, Federal Reserve Chairman Ben Bernanke notes:
Both U.S. exports and U.S. imports have been expanding, reflecting growth in the global economy and the recovery of world trade. Stronger exports have in turn helped foster growth in the U.S. manufacturing sector.
Typical of policymakers, Bernanke ignores the negative impact of rising imports on US growth. In reality, as global trade has recovered, the external accounts have weighed on US GDP growth. Putting that aside for a second, officials are also quick to point out that the export recovery is aiding manufacturers. It is worth considering how far they can continue to push that argument given the path of manufacturing capacity this decade.
To illustrate the anomalous pattern of manufacturing capacity growth, I focus on the path of capacity for thirty months after the peak of each business cycle, scaling capacity to 100 at each peak:
Note that although the pace of capacity growth slowed since the 1940's, capacity continued to grow even during the typical post WWII recession. This pattern changes dramatically this decade, with very little capacity growth in the wake of the 2001 recession and actual capacity declines after the most recent recession. Arguably, the traditional increases were at risk in the 1990's as well, but the technology revolution intervened.
One interpretation of this data is that the failure to add capacity is actually a good thing, as a more rapid absorption of excess capacity will speed economic healing and provide the incentive to add additional capacity, providing a desperately needed boost to investment spending. Of course, this interpretation is completely at odds with history. Typical post WWII recessions experienced V-shaped recoveries even as capacity grew. Now we get jobless recoveries and no capacity expansion.
Another interpretation is that US firms have no intention of adding net new capacity, planning instead to source any excess demand from overseas. This implies that the manufacturing recovery will not be a net positive to US growth. It also implies that the trade deficit will widen further and that the challenge of global imbalances will remain unresolved. The rise of Dollar assets abroad will with either force a fall in the US dollar which would then create more incentive for export and import-competing industries or, more likely, encourage the accumulation of reserve assets among foreign central banks.
In short, I continue to worry that policymakers are ignoring the possibility that increasing reliance on external production to satisfy US demand has contributed significantly to the jobless recoveries we have seen this decade. Something is very different this decade. I think it is a mistake to write off this decade's shift in manufacturing as simply a repeat of the agricultural experience. At least agricultural output continued to rise as its relative employment importance fell. The capacity numbers are telling us the same cannot be said of manufacturing any longer. And in the past, the relative decline in manufacturing jobs was matched by a more than corresponding increase in service sector jobs. No longer the case; job growth is flat for a decade. If we intend to ignore this issue, the supposed reality of tradable services had better get a lot more traction very quickly. Otherwise, we are further solidifying a permanent underclass of citizens who require the constant support of fiscal authorities.
I wish we had a better answer to this question, it would make tax policy recommendations much easier:
Who Ultimately Pays the Corporate Income Tax?, by Uwe E. Reinhardt: I ended last week’s post by asking whether anyone knows which human beings ultimately pay the corporate income tax. An intuitively appealing answer is that the tax is levied on profits... Therefore, those who made that investment — the shareholders — absorb the tax fully in the form of a lower after-tax return on their investments.
That impression would be reinforced by the short-run, partial-equilibrium model ... that we sometimes trot out in freshman economics courses. In the partial-equilibrium model, the company’s capital stock is assumed to be fixed in the short run. Imposing or raising a tax on the profits will not change the company’s decisions...
But ... all bets are off in the longer run, when the company’s capital stock relative to the input of labor can change and when the owners of investable funds can decide whether to invest their money ... abroad or in enterprises not subject to corporate taxation. General-equilibrium models accommodating this wider view of the economy and the longer run ... show that who actually pays the corporate income tax — the owners of capital or labor — is driven by a number of factors in complicated ways that elude simple intuition. ...
The earliest formal general equilibrium model, published in 1962 by a University of Chicago economist, Arnold C. Harberger ... assumed a closed economy. In that model, the burden of the corporate income tax ultimately fell entirely on the owners of capital.
When the model was modified as an open economy in which capital in the taxed country can escape by flowing abroad to untaxed or lower-taxed countries, some or all of the burden of the corporate income tax shifted to labor. Under the assumption of perfect international capital mobility and perfect substitutability..., labor would ... bear the entire corporate income tax, because labor is the only immobile factor than cannot escape the tax.
Other modeling efforts since that time, or econometric estimates inspired by these models, have ranged between these extreme incidence models. Economists are divided on the issue. Some (including Gregory Mankiw) are persuaded that the corporate income tax ultimately falls mainly on labor... One can actually make a case for cutting the tax in the name of a more progressive income-tax structure... Other economists, including the authors of the surveys cited above..., are persuaded by the available empirical evidence ... that the burden of the corporate tax ultimately rests mainly on the owners of capital. ...
So ... why not abolish the tax altogether and instead tax human beings directly? The arguments against such a move are twofold.
First, even bringing in only 12 percent or so of total federal taxes, the corporate income tax represents the third-largest source of federal revenue and could not easily be replaced..., especially in these times of fiscal pressures.
Second, if the profits of corporations were not taxed, the corporate form of enterprise would become one more major tax shelter through which wealthy people could shield their income from taxation. That probably is the main reason why abolishing the corporate tax has never had any political traction, in the United States or abroad.
(There is quite a bit of additional detail in the original post, including links to papers summarizing what is known on this issue and a list of factors that affect the distribution of the tax between capital and labor.) Though there is uncertainty, when thinking about tax policy I would go with the view of those who are most familiar with the theory and evidence, i.e authors of the surveys, as opposed to more casual observers and assume that the burden is mainly on capital.
"Is Nothing I Ever Wrote on Ezra Klein's Journolist Worth Pulling Out of Context and Misrepresenting?"
I doubt that anyone much cares what I said, so it may be that even with the standard misrepresentations, distortions, and out of context quoting there's nothing I've written that will draw the traffic they are looking for, but I feel the same way:
Is Nothing I Ever Wrote on Ezra Klein's Journolist Worth Pulling Out of Context and Misrepresenting?: I am somewhat offended...
Just say no:
Addicted to Bush, by Paul Krugman, Commentary, NY Times: For a couple of years, it was the love that dared not speak his name. In 2008, Republican candidates hardly ever mentioned the president still sitting in the White House. ...
The truth, however, is that the only problem Republicans ever had with George W. Bush was his low approval rating. They always loved his policies and his governing style — and they want them back. In recent weeks, G.O.P. leaders have come out for a complete return to the Bush agenda, including tax breaks for the rich and financial deregulation. They’ve even resurrected the plan to cut future Social Security benefits.
But they have a problem: how can they embrace President Bush’s policies, given his record? ... What’s a Republican to do? You know the answer. There’s now a concerted effort under way to rehabilitate Mr. Bush’s image on at least three fronts: the economy, the deficit and the war.
On the economy: Last week Mitch McConnell, the Senate minority leader, declared that “there’s no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue, because of the vibrancy of these tax cuts in the economy.” ...
I guess it depends on the meaning of the word “vibrant.” The actual record of the Bush years was (i) two and half years of declining employment, followed by (ii) four and a half years of modest job growth, at a pace significantly below the eight-year average under Bill Clinton, followed by (iii) a year of economic catastrophe. In 2007, at the height of the “Bush boom,” such as it was, median household income, adjusted for inflation, was still lower than it had been in 2000.
But the Bush apologists hope that you won’t remember all that. And they also have a theory ... that President Obama, though not yet in office or even elected, caused the 2008 slump. You see, people were worried in advance about his future policies, and that’s what caused the economy to tank. Seriously.
On the deficit: Republicans are now claiming that ... the deficit is Mr. Obama’s fault. “The last year of the Bush administration,” said Mr. McConnell recently, “the deficit as a percentage of gross domestic product was 3.2 percent, well within the range ... most economists think is manageable. A year and a half later, it’s almost 10 percent.”
But that 3.2 percent figure, it turns out, is for fiscal 2008 — which wasn’t the last year of the Bush administration, because it ended in September of 2008. In other words, it ended just as the failure of Lehman Brothers — on Mr. Bush’s watch — ... caused the deficit to soar: By the first quarter of 2009 ... federal borrowing had already reached almost 9 percent of G.D.P. To some of us, this says that the economic crisis that began under Mr. Bush is responsible for the great bulk of our current deficit. But the Republican Party is having none of it.
Finally, on the war: ...Karl Rove now claims that his biggest mistake was letting Democrats get away with the “shameful” claim that the Bush administration hyped the case for invading Iraq. Let the whitewashing begin!
Again, Republicans aren’t trying to rescue George W. Bush’s reputation for sentimental reasons; they’re trying to clear the way for a return to Bush policies. And this carries a message for anyone hoping that the next time Republicans are in power, they’ll behave differently. If you believe that they’ve learned something — say, about fiscal prudence or the importance of effective regulation — you’re kidding yourself. You might as well face it: they’re addicted to Bush.
Tim Duy looks at the Fed's likely course of action:
Bernanke Post Mortem, by Tim Duy: Federal Reserve Chairman Ben Bernanke's Congressional testimony should leave little doubt about the stance of monetary policymakers. Swift reaction came from Mark Thoma, Paul Krugman, Scott Sumner, and Joe Gagnon. Simply put, an incipient second half slowdown and fears of an outright double dip are insufficient to prod additional action on the part of the Federal Reserve. Policymakers are comfortable with the idea that neither objective of the dual mandate will be met in the foreseeable future. And even should the economy deteriorate such that they are forced into additional action, the likely policy candidates are woefully insufficient to meaningfully change the path of economic activity.
For all intents and purposes, the Fed is done. To be sure, the Fed would roll out its new set of lending facilities in response to another financial crisis. But setting the possibility of crisis aside, it is not clear what data flow short of a significant drop in activity would prompt a change of heart at the Fed.
Market participants set themselves up for disappointment. The set up began back with the Washington Post article suggesting that policymakers were actively considering the next set of policy options in light of recent data. I suggested the threshold for such actions was actually quite high, but the story fed upon itself until it became rumored that Bernanke would signal an end to providing interest on reserves. As Neil Irwin and Ryan Avent pointed out, the Fed Chair was simply not going to make a major policy announcement of that sort in Congressional testimony.
Worse, Bernanke did not appear overly concerned with the incipient second half slowdown. To be sure, he acknowledged the relatively weak data flow, but incoming information has only made the outlook "somewhat weaker," implying very little real shift in the fundamental view that the recovery is self-sustaining and sufficient to consume excess capacity over time and thus provides little reason to consider new policy options. Indeed, a substantive portion of the prepared remarks were devoted to tightening mechanisms, with the notion of additional easing left to the throwaway lines:
Of course, even as the Federal Reserve continues prudent planning for the ultimate withdrawal of extraordinary monetary policy accommodation, we also recognize that the economic outlook remains unusually uncertain. We will continue to carefully assess ongoing financial and economic developments, and we remain prepared to take further policy actions as needed to foster a return to full utilization of our nation's productive potential in a context of price stability.
Participants may also have been rattled by Bernanke's seemingly nonchalant attitude regarding additional easing options. From the Q&A:
The misrepresentations from the reporters distorters pushing this (non)story based upon emails from Journolist continue (in addition to the examples below, there are other instances where the difference between the original emails and the versions posted at Daily Caller reveal the willingness to use distortions to tell a story that appears to resonate so well with potential readers of that site):
Should You Trust Tucker Carlson's Daily Caller on Anything? No, by Brad DeLong: In case you were wondering...
The Daily Caller:
DAVID ROBERTS, GRIST: It’s all I can do not to start bawling....
JOHN BLEVINS, SOUTH TEXAS COLLEGE OF LAW: It’s all I can do to hold it together.
The actual conversation on election night, which of course puts these lines in a much different and more history-conscious light:
DAVID: I've spent much of this election struggling not to contemplate what an Obama victory would mean. After the crushing disappointments of 2000 and 2004, I haven't allowed myself to feel much hope or excitement. It's been head-down, day-to-day fighting for a long, long time. Big picture stuff has been pushed out.
Yet I find that as an Obama victory seems more tangible, all that feeling is fighting its way to the surface. When I look at pictures like the one attached, it's all I can do not to start bawling. The same is true when I hear all these reports, like Rich's, about extraordinary turnout and energy in places like NC. It's true when I hear Obama's speeches. It's true when I think about the fact that people who experienced a time when blacks had separate drinking fountains are now voting for a black president....
John: David - well said. I've been experiencing the same thing -- it's all I can do to hold it together. I think the most touching moments are the interviews/accounts of elderly black people voting/volunteering/etc. Like the video below (Charles Meets Barack) -- it's just an unbelievable historical moment.
And what's truly touching is that you can really feel the weight of so many past generations who have sacrificed so much to make it possible today.
And Ezra Klein writes:
Ezra Klein - When Tucker Carlson asked to join Journolist: I hoped to let my quick accounting of the constant inaccuracies in the Daily Caller's selective quotations from Journolist stand as my last word on the matter. But Tucker Carlson's sanctimonious and evasive statement on the way his site has been covering this story deserves a response. So allow me one more post.
Tucker's note doesn't bother to mention the actual questions that have been raised: That his stories have misstated fact, misled readers, and omitted evidence that would contradict his thesis. He doesn't explain how a thread in which no journalists suggested shutting down Fox News can be headlined "Liberal journalists suggest government shut down Fox News." He doesn't tell us why an article about the open letter that originated on the list left out the fact that I subsequently banned any future letters from the list. He doesn't detail why his stories haven't mentioned that one of his own reporters was on the list -- his readers would presumably be interested to know that the Daily Caller was part of the liberal media conspiracy.
Instead, Tucker says, well, trust him. "I edited the first four stories myself," he writes, "and I can say that our reporter Jonathan Strong is as meticulous and fair as anyone I have worked with."
If this series now rests on Tucker's credibility, then let's talk about something else he doesn't mention: I tried to add him to the list. I tried to give him access to the archives. Voluntarily. Because though I believed it was important for the conversation to be off-the-record, I didn't believe there was anything to hide.
The e-mail came on May 25th. Tucker didn't ask that it be off-the-record, so I'm not breaking a confidence by publishing it. Here it is, in full:
I keep hearing about how smart the policy conversations on JournoList are, and am starting to feel like I'm missing out by not reading them. Could I join?
I realize you and I don't share the same politics, but I can promise you I have no interest in flaming anyone or even debating (I get enough of that). I'm just interested in knowing what smart progressives are saying. It strikes me that's the one thing I'm missing in my daily reading.
Please tell me what you think. If it makes you uncomfortable, ask around. I'm pretty sure we know a lot of the same people.
At the time, I didn't know Carlson was working on a story about Journolist. And I'd long thought that the membership rules that had made sense in the beginning had begun to feed conspiracy theories on the right and cramp conversation inside the list. I wrote him back about 30 minutes later.
We definitely have friends in common, and I'd have no worries about you joining. The problem is I need to have clear rules, as i don't want to be in the position of forcing fine-grained membership tests based on opaque criteria. Thus far, it's been center to left, just because that was how people wanted it at the beginning in order to feel comfortable talking freely. I've been meaning for some time to ask the list about revisiting that, so I'll take this opportunity and get back to you.
I then wrote this e-mail to Journolist:
As folks know, there are a couple of rules for J List membership. One is that you can't be working for the government. Another is that you're center to left of center, as that was something various people wanted back in the day. I've gotten a couple of recent requests from conservatives who want to be added (and who are people I think this list might benefit from), however, and so it seems worth asking people whether they'd like to see the list opened up. Back in the day, I'd probably have let this lie, but given that Journolist now leaks like a sieve, it seems worth revisiting some of the decisions made when it was meant to be a more protected space.
As I see it, the pro of this is that it could make for more fun conversations. The con of it is that it becomes hard to decide who to add and who to leave off (I don't want to have to make subjective judgments, but I'm also not going to let Michelle Malkin hop onto the list), and it also could create even more possible leaks -- and now, they'd be leaks with more of an agenda, which could be much more destructive to trust on the list.
I want to be very clear about what I was suggesting: Adding someone to the list meant giving them access to the entirety of the archives. That didn't bother me very much. Sure, you could comb through tens of thousands of e-mails and pull intemperate moments and inartful wording out of context to embarrass people, but so long as you weren't there with an eye towards malice, you'd recognize it for what it was: A wonkish, fun, political yelling match. If it had been an international media conspiracy, I'd have never considered opening it up.
The idea was voted down. People worried about opening the archives to individuals who could help their careers by ripping e-mails out of context, misrepresenting the nature of the ongoing conversation, and bringing the world an exclusive look into The Great Journolist Conspiracy, as opposed to the daily life of Journolist, which even Carlson describes as "actually pretty banal."
Apologetically, I went back to Tucker and delivered the bad news. But I still liked the idea of a broader e-mail list, and I offered to partner with him to start one. "There was interest," I told him, "in creating a separate e-mail forum with a more bipartisan flavor (such that Journolist could keep its character, but something else could provide the service we're talking about), and if that's something you want to do, I'd be glad to work on it with you."
He asked again if he could join Journolist, maybe on a read-only basis. He never responded to the idea of creating a bipartisan list. I was disappointed, but didn't think much of it.
My mistake, obviously. But if this series rests on Tucker's credibility, that's a soft foundation indeed. At every turn, he's known about evidence that substantially complicates his picture of an international media conspiracy. He knows I tried to let him in, odd behavior for someone with so much to hide and so much to lose. He knows I let one of his reporters remain a member. He knows I banned -- and enforced the ban -- on the sort of coordinated letter that served as example one of the list's conspiracy. He knows -- and never, to my knowledge, corrected -- that his reporter misrepresented the dates of Dave Weigel's posts to make it look like things he wrote at the Washington Independent were written at the Washington Post. And that's not even to mention the more prosaic deceptions of his selective choice of threads, truncated quotations, and misleading headlines.
When I e-mailed him to ask about some of these omissions, his response was admission mixed with misdirection. "I don't have nearly the grounding in this that Strong does, but according to him you often come off as a voice for moderation, and I'm pretty sure he will make that clear in a subsequent story." Ah, the old "we'll be more truthful later."
Why oh why can't we have a better press corps?
Thursday, July 22, 2010
An email from James Morley remarks:
Not sure if you saw this Congressional testimony from Robert Solow, but I thought it covered some familiar themes in a clearer and more concise way than I am currently capable of. Oh, to be that lucid at 85! Or any age for that matter.
Yes. Last time I saw him was at this conference where we appeared together on a panel discussing the causes of the crisis and the state of macroeconomics. At one point during the conference, he was citing theorems from papers he had first read decades ago, in one case relying on work in the appendix, and from more contemporary work. It was pretty impressive:
Building a Science of Economics for the Real World, Prepared Statement of Robert Solow Professor Emeritus, MIT, for the House Committee on Science and Technology Subcommittee on Investigations and Oversight, July 20, 2010: It must be unusual for this Committee, or any Congressional Committee, to hold a hearing that is directed primarily at an analytical question. In this case, the question is about macroeconomics, the study of the growth and fluctuations of the broad national aggregates – national income, employment, the price level, and others – that are basic to our country’s standard of living. How are these fundamental aggregates determined, and how should we think about them? While these are tough analytical questions, it is clear that the answers have a direct bearing on the most important issues of public policy.
It may be unusual for the Committee to focus on so abstract a question, but it is certainly natural and urgent. Here we are, still near the bottom of a deep and prolonged recession, with the immediate future uncertain, desperately short of jobs, and the approach to macroeconomics that dominates serious thinking, certainly in our elite universities and in many central banks and other influential policy circles, seems to have absolutely nothing to say about the problem. Not only does it offer no guidance or insight, it really seems to have nothing useful to say. My goal in the next few minutes is to try to explain why it has failed and is bound to fail.
Before I go on, there is something preliminary that I want to make clear. I am generally a quite traditional mainstream economist. I think that the body of economic analysis that we have piled up and teach to our students is pretty good; there is no need to overturn it in any wholesale way, and no acceptable suggestion for doing so. It goes without saying that there are important gaps in our understanding of the economy, and there are plenty of things we think we know that aren’t true. That is almost inevitable. The national – not to mention the world – economy is unbelievably complicated, and its nature is usually changing underneath us. So there is no chance that anyone will ever get it quite right, once and for all. Economic theory is always and inevitably too simple; that can not be helped. But it is all the more important to keep pointing out foolishness wherever it appears. Especially when it comes to matters as important as macroeconomics, a mainstream economist like me insists that every proposition must pass the smell test: does this really make sense? I do not think that the currently popular DSGE models pass the smell test. They take it for granted that the whole economy can be thought about as if it were a single, consistent person or dynasty carrying out a rationally designed, long-term plan, occasionally disturbed by unexpected shocks, but adapting to them in a rational, consistent way. I do not think that this picture passes the smell test. The protagonists of this idea make a claim to respectability by asserting that it is founded on what we know about microeconomic behavior, but I think that this claim is generally phony. The advocates no doubt believe what they say, but they seem to have stopped sniffing or to have lost their sense of smell altogether.
This is hard to explain, but I will try. Most economists are willing to believe that most individual "agents" – consumers investors, borrowers, lenders, workers, employers – make their decisions so as to do the best that they can for themselves, given their possibilities and their information. Clearly they do not always behave in this rational way, and systematic deviations are well worth studying. But this is not a bad first approximation in many cases. The DSGE school populates its simplified economy – remember that all economics is about simplified economies just as biology is about simplified cells – with exactly one single combination worker-owner-consumer-everything-else who plans ahead carefully and lives forever. One important consequence of this "representative agent" assumption is that there are no conflicts of interest, no incompatible expectations, no deceptions.
This all-purpose decision-maker essentially runs the economy according to its own preferences. Not directly, of course: the economy has to operate through generally well-behaved markets and prices. Under pressure from skeptics and from the need to deal with actual data, DSGE modelers have worked hard to allow for various market frictions and imperfections like rigid prices and wages, asymmetries of information, time lags, and so on. This is all to the good. But the basic story always treats the whole economy as if it were like a person, trying consciously and rationally to do the best it can on behalf of the representative agent, given its circumstances. This can not be an adequate description of a national economy, which is pretty conspicuously not pursuing a consistent goal. A thoughtful person, faced with the thought that economic policy was being pursued on this basis, might reasonably wonder what planet he or she is on.
An obvious example is that the DSGE story has no real room for unemployment of the kind we see most of the time, and especially now: unemployment that is pure waste. There are competent workers, willing to work at the prevailing wage or even a bit less, but the potential job is stymied by a market failure. The economy is unable to organize a win-win situation that is apparently there for the taking. This sort of outcome is incompatible with the notion that the economy is in rational pursuit of an intelligible goal. The only way that DSGE and related models can cope with unemployment is to make it somehow voluntary, a choice of current leisure or a desire to retain some kind of flexibility for the future or something like that. But this is exactly the sort of explanation that does not pass the smell test.
Working out a story like this is not just an intellectual game, though no doubt it is a bit of that too. To the extent that the observed economy is actually doing the best it can, given the circumstances, it is already adapting optimally to whatever expected or unexpected disturbances come along. It can not do better. It follows that conscious public policy can only make things worse. If the government has better information than the representative agent has, then all it has to do is to make that information public. If prices are imperfectly flexible, then the government can make them more flexible by attacking monopolies and weakening unions. Actually this proposition is dubious on its own.
The point I am making is that the DSGE model has nothing useful to say about anti-recession policy because it has built into its essentially implausible assumptions the "conclusion" that there is nothing for macroeconomic policy to do. I think we have just seen how untrue this is for an economy attached to a highly-leveraged, weakly-regulated financial system. But I think it was just as visibly false in earlier recessions (and in episodes of inflationary overheating) that followed quite different patterns. There are other traditions with better ways to do macroeconomics.
One can find other, more narrowly statistical, reasons for believing that the DSGE approach is not a good way to understand macroeconomic behavior, but this is not the time to go into them. An interesting question remains as to why the macroeconomics profession led itself down this particular garden path. Perhaps we can come to that later.
Feeling more insecure than you did in the past? it's not just the recession:
Americans Are Increasingly Insecure, by Conor Dougherty: The Rockefeller Foundation has released a new “Economic Security Index” that measures the effect of income loss and rising medical costs on Americans. The verdict: The recession has made Americans a lot less secure, but security was slipping long before the recent recession.
The Economic Security Index, which was developed by Yale political scientist Jacob Hacker, measures inflation-adjusted income that’s available after medical costs. It captures Americans who have had a year-over-year fall of 25% or more in income after medical costs but don’t have enough savings to offset the plunge. ...
The results: The ESI was at 12.2% in 1985 and has grown steadily ever since (with year-to-year fluctuations that track the economy). In 2007, the ESI was at 13.7% and is projected to hit 20.4% for 2009. ...
There are myriad reasons why economic security has become increasingly wobbly, but Mr. Hacker points to three main culprits. One is that men’s earnings have become a lot more unstable since the 1970s, and since many men are still breadwinners that has led to more erratic household income. Government transfer benefits have also become a lot more unstable. And while there are more dual-income families the extra income is not enough to offset growing insecurity. ...
The rising uncertainty is yet another dose of cold water for an economy still on the mend. Mr. Hacker says that it takes somewhere between 6 and 8 years for people to recovery from an income loss of 25% or greater, a shock that can crimp consumer spending and lead greater income inequality even after the economy recovers. ...
If you are a big bank that loses a big part of its income, the government comes to your rescue. But if you are an individual wiped out by health costs, tough luck for you.
More on the Fed's wait and see approach to doing more to try to help the economy recover:
Time for a Monetary Boost, by Joseph E. Gagnon: In his testimony to the Congress this week, Fed Chairman Ben Bernanke left the door open to further monetary stimulus but made it clear that such action is not imminent. ...
The Federal Reserve's own forecast shows that it will take at least three or four years for employment to return to its long-run sustainable level. This extended period of high unemployment represents a massive waste of productive labor and untold personal suffering of unemployed workers. The Fed should be aiming to get us back on track within two years. And the urgency of Fed action is all the more important because Congress has refused to provide more stimulus.
In addition, it is now apparent that deflation is a more serious risk for the US economy than inflation. The latest data show overall declines in consumer and producer prices..., core inflation has trended well below the 2-percent level that ... the Fed has adopted as its goal.
Clearly, the case for monetary stimulus is strong. But what form should it take? ... Three actions, in particular, would be helpful at this time.
First, the Fed should lower the interest rate it pays on bank reserves to zero. This is a small step, as the current rate is only 0.25 percent, but there is no reason to pay banks more than the rate paid by the closest substitute, short-term Treasury bills. Three-month Treasury bills currently yield 0.15 percent, and that rate, too, should be brought down to zero.
Second, the Fed should bring down the rates on longer-term Treasury securities by targeting the interest rate on 3-year Treasury notes at 0.25 percent and aggressively purchasing such securities whenever their yield exceeds the target. That is a 65-basis point reduction from the current rate of 0.90 percent. This step would ... reduce a wide range of private borrowing rates, encouraging business investment, supporting the housing market, and boosting exports through a weaker dollar. Moreover, pushing down yields on short- to medium-term Treasury securities is precisely the strategy for fighting deflation recommended by Ben Bernanke in 2002.
Finally, the Fed could bolster the stimulative effects of these actions by establishing a full-allotment lending facility to enable banks to borrow (with high-quality collateral) at terms of up to 24 months at a fixed interest rate of 0.25 percent.
These measures are all within the Federal Reserve's established powers. They pose essentially no risk to the Fed's balance sheet. They would reduce unemployment roughly as much as a 2-year $600 billion fiscal package and yet they would actually reduce the federal budget deficit. And they can be reversed quickly should the balance of risks shift from deflation to inflation.
Given the unsatisfactory outlook for unemployment and inflation and the lack of action by Congress, that is the right medicine for the US economy now.
As I've said before, there are reasons to worry that this won't provide enough of a boost, these policies provide incentives that may or may not be acted upon and that's why I've emphasized fiscal policy. But additional fiscal policy isn't going to happen unless there is a significant downturn in economic conditions, so this is our best hope.
[I was going to post this yesterday, but Brad's post disappeared while I was doing this, so I decided to wait. It's back now. I should have also noted that Brad's post has excerpts from David Leonhardt's Overcome by Heat and Inertia discussing the options and prospects for climate change legislation.]
Kyetrak Glacier in Tibet in 1921 and 2009
Here are two more:
West Rongbuk Glacier, Northern Slope of Mt. Everest, in 1921 and 2008
East Rongbuk Glacier, Northern Slope of Mt. Everest, in 1921 and 2008