- Why We Need NGDP Level Targeting - David Beckworth
- Investment and Unemployment: A Reply - John Taylor
- John Taylor draws a Phillips Curve - Noahpinion
- The Arab Young and Restless - Jeffrey D. Sachs
- When Spending Cuts Raise the Deficit - Real Time Economics
- Obama Administration: GOP Cuts Would Kill 70,000 Kids - Swampland
Thursday, March 31, 2011
With the economy on “a firmer footing,” she said, U.S. corporate leaders seem inclined to continue investing in equipment and software despite such worries as turmoil in the Middle East, the Japanese earthquake and the sovereign debt crisis in Europe. “On this firmer footing, these shocks are hitting us, but it seems like we’re more resilient and able to absorb these shocks,” she said.
I am not sure that we should find this resiliency surprising, despite the seemingly perpetual fears of market participants. I believe that all US recessions, at least post-WWII, are attributable directly to domestic disturbances - monetary policy and/or domestic financial crisis - or oil price shocks. Arguably, the Asian Financial Crisis was close via the Long Term Capital Management fiasco, but no cigar, as the US economy powered ahead until the tech bubble collapse (a domestic story).
Hence, I have been hesitant to put much economic concern on Japan and Europe - the transmission mechansims appear too weak to appreciably change the US outlook. One can suggest that financial crisis in Europe will filter back through to US institutions, but I think this would have been more likely two or three years ago than now. Back then, we could credibly believe that a US financial institution could fail. Now, however, I am pretty sure the financial sector has an explicit government guarantee. Financial exigency clauses will come into play sooner than later this time around.
I am concerned about the potential for a sharp rise in energy prices to knock the wind out of consumers this year, but also recognize that the increase refelcts improving growth prospects. See spencer's note at Angry Bear on this point.
None of this is meant to imply that the US economy is without warts; nothing could be further from the truth. Only that the primary risks are internal demand and energy shocks, not other external shocks.
At CBS MoneyWatch:
I haven't given this issue enough attention:
How credit card companies want to debit you, by Dean Baker: Would you like to increase the sales tax in order to pay the banks another $12bn a year in profits? That is the issue that is being debated in Washington, these days. In case you missed it, this is because the issue is usually not discussed in these terms. The immediate issue is the fee that credit card companies are allowed to charge on debit card transactions.
We have two credit companies, Visa and MasterCard, who comprise almost the entire market. This gives them substantial bargaining power. ... Visa and MasterCard have taken advantage of their position to mark up their fees far above their costs. This is true with both their debit and their credit cards, but the issue is much simpler with a debit card. ... While ... costs are quite small, the credit companies take advantage of their bargaining power to charge debit cards fees in the range of 1-2% of the sale price. They share this money with the banks that are part of their networks.
This fee is, in effect, a sales tax. Since the credit companies generally do not allow retailers to offer cash discounts, they must mark up the sales price for all customers by enough to cover the cost of the fee. This seems especially unfair to the cash customers... Those paying in cash ... tend to be poorer than customers with debit or credit cards, which means that this is a transfer from low- and moderate-income customers to the banks.
This is where financial reform comes in. One of the provisions of the Dodd-Frank bill passed last year instructed the Federal Reserve Board to determine the actual cost of carrying through a debit card transfer and to regulate fees accordingly. The Fed determined that a fee of 10-12 cents per transaction should be sufficient to cover the industry's costs and provide a normal profit. The Fed plans to limit the amount that the credit card companies can charge retailers to this level.
This would save retailers approximately $12bn a year... The prospect of losing $12bn in annual profits has sent the industry lobbyists into high gear. They have developed a range of bad things that will happen...
The credit card industry and the banks really don't have a case here; they are just hoping that they can rely on their enormous political power to overturn this part of the financial reform bill. ... Brushing away their rationalizations, their argument here is that they want larger profits and they have political power to get them. That may turn out to be true.
More from macroblog: A disturbing trend: No growth in total business establishments
I wonder what will happen politically when, after having a huge fight over Social Security and finally "saving" the program through some ill-advised bipartisan compromise, people realize that they've given up quite a bit, but the budget picture has hardly changed at all.
The names of the banks that borrowed from the Fed during the financial crisis will be released today by court order. It's probably just a coincidence that this post on the history of the discount window and the stigma of being identified as needing to use it appeared on the new blog from the NY Fed:
Why Do Central Banks Have Discount Windows?, by João Santos and Stavros Peristiani, Liberty Blog: Though not literally a window any longer, the “discount window” refers to the facilities that central banks, acting as lender of last resort, use to provide liquidity to commercial banks. While the need for a discount window and lender of last resort has been debated, the basic rationale for their existence is that circumstances can arise, such as bank runs and panics, when even fundamentally sound banks cannot raise liquidity on short notice. ... In this post, we discuss the classical rationale for the discount window, some debate surrounding it, and the challenges that the “stigma” associated with borrowing at the discount window poses for the effectiveness of the discount window. ...
While the discount window is an important tool for central banks dealing with liquidity problems that may threaten financial stability, its effectiveness depends critically on the willingness of banks to borrow from central banks. Banks are often reluctant to borrow from central banks not only because this source of liquidity tends to be expensive but also because of the “stigma” that is associated with discount window borrowing. ...
If a bank worries that borrowing from the discount window will lead other banks to doubt its fundamental solvency, it may avoid the discount window even if the discount window provides the cheapest funds available. Instead, the bank may liquidate marketable assets or try to borrow in the interbank market at onerous terms, further straining these markets and making it even more difficult for other banks to obtain funding or sell assets. Thus, central banks typically disclose only a limited amount of information about discount window activity to avoid branding healthy (but illiquid) banks as weak. The Federal Reserve, for example, has historically published the total amount of borrowing from the discount window on a weekly basis, but not information on individual loans. By allowing banks to borrow confidentially, this policy aims to make healthy institutions more willing to use the discount window during periods of market stress. It should be emphasized that confidentiality is not meant to protect the identities of individual banks per se, but rather to make the discount window more effective in dealing with market disturbances.
Central banks have long recognized the challenges that stigma creates for the effective operation of the discount window during crisis. Donald Kohn, former Vice Chairman of the Fed, has discussed the stigma problem in past speeches. “The problem of discount window stigma is real and serious. The intense caution that banks displayed in managing their liquidity beginning in early August 2007 was partly a result of their extreme reluctance to rely on standard discount mechanisms,” Kohn noted in a 2010 speech. In fact, the need to mitigate stigma influenced the design of some of the lending facilities, such as the Term Auction Facility, created by the Fed during the financial crises.
In sum, the discount window is a vital tool to maintain the uninterrupted functioning of the banking system, but its effectiveness may be limited by the stigma associated with using it. This explains why policies that aim at dealing with the stigma of discount window borrowing are so important. Admittedly, the existence of the discount window may create some moral hazard, but of course, the Federal Reserve limits moral hazard by restricting discount window access to depository institutions that are closely regulated and supervised by federal banking authorities.
Wednesday, March 30, 2011
Since I posted this graph, I should post the follow-up from Justin Wolfers:
Taylor’s conclusion: the data on spending shares show that the most effective way to reduce unemployment is to raise investment as a share of GDP. But why begin the scatter plot in 1990? There’s no good reason. In fact, most folks typically download the entire history of available macro data. So let’s see what happens if we extend it back to, say, 1970:
Hmm… What conclusions should we draw about this relationship? And now why do you think Taylor began his sample in 1990?
Actually, we should use all the available data. The chart below goes back to 1948, when these series—in their current form—began:
Now what’s your conclusion?
Here’s Mankiw’s assessment of Taylor’s claim: There’s no doubt that the strength of the correlation is impressive.
But when you look beyond the cherry-picked sample, the correlation is a decidedly unimpressive -0.14.
Here’s my conclusion: On balance, times in which the investment share is higher, are slightly more likely to be good times. But I’m not sure why. Is it—as Taylor asserts—that high investment shares create good times? Or is it that good times encourage investment? Or is it a third factor—perhaps in good times the government doesn’t need to prime the fiscal pump, and so the investment share is higher? Or is it something else?
Be wary of economists wielding short samples.
Paul Krugman on Taylor:
What’s Behind Low Investment?, by Paul Krugman: This post by John Taylor is getting a lot of attention, because it does show a striking correlation between investment and unemployment
But when Taylor leaps from that correlation to saying that what we need for economic recovery is to “lighten up on the anti-business sentiment coming out of Washington,” I wonder what is going on in his head.
I mean, Taylor presents another graph, showing a plunge in fixed investment since 2006:
But that’s overall fixed investment. Let’s decompose it:
It’s mostly the housing bust! Yes, business investment is low — but no lower than you might expect given the depressed state of the economy. In fact, business investment is roughly the same percentage of GDP now that it was at the same stage of the much milder 2001 recession.
What the data actually say is that we had a catastrophic housing bust and consumer pullback, and that businesses have, predictably, cut back on investment in the face of excess capacity. The rest is just politically motivated mythology.
Quick post before heading to the airport.
Testimony on Last Year’s Major Health Care Legislation, CBO Director's Blog: This morning I testified before the House Energy and Commerce’s Subcommittee on Health on CBO’s analysis of the Patient Protection and Affordable Care Act (PPACA) and the health care provisions of last year’s Reconciliation Act. With the staff of the Joint Committee on Taxation (JCT), we have provided the Congress with extensive analyses of the legislation, and my written statement summarizes that work.
Effects of the Legislation on Insurance Coverage and on the Federal Budget
- Number of People with Insurance Coverage: We estimate that the legislation will increase the number of nonelderly Americans with health insurance by roughly 34 million in 2021. About 95 percent of legal nonelderly residents will have insurance coverage in that year, compared with a projected share of 82 percent in the absence of that legislation and 83 percent currently. The legislation will generate this increase through a combination of a mandate for nearly all legal residents to obtain health insurance; the creation of insurance exchanges through which certain people will receive federal subsidies; and a significant expansion of Medicaid. ...
- Net Budgetary Impact of the Legislation: PPACA and the Reconciliation Act also reduced the growth of Medicare’s payment rates for most services; imposed certain taxes on people with relatively high income; and made various other changes to the tax code, Medicare, Medicaid, and other programs. As you can see in the figure below, those provisions will reduce direct spending and increase revenues, providing an offset to the cost of the coverage provisions. According to our latest comprehensive estimate of the legislation, the net effect of changes in direct spending and revenues is a reduction in budget deficits of $210 billion over the 2012-2021period. In addition to those budgetary effects, the legislation will affect spending that is subject to future appropriation action. CBO has estimated that the Internal Revenue Service and the Department of Health and Human Services will each incur costs of between $5 billion and $10 billion over the next 10 years to implement the legislation. The laws also authorized other appropriations, most of which were for activities that were already being carried out under prior law or that had been previously authorized.
Estimated Effects of PPACA and the Health Care Provisions of the Reconciliation Act on the Federal Budget
(Billions of dollars, by fiscal year)
My written statement describes this estimate in more detail and touches on other effects that we have estimated—including the budgetary impact in the second decade and the laws’ impact on health insurance premiums and employment. ...
The special inspector general for the Troubled Asset Relief Program delivers his verdict:
Where the Bailout Went Wrong, by Neil Barofsky, Commentary, NY Times: ... Though there is no question that the country benefited by avoiding a meltdown of the financial system, this cannot be the only yardstick by which TARP’s legacy is measured. The legislation that created TARP, the Emergency Economic Stabilization Act, had far broader goals... These Main Street-oriented goals were ... a central part of the compromise with reluctant members of Congress to cast a vote that in many cases proved to be political suicide. ...
But it has done little to abide by this legislative bargain. Almost immediately,... Treasury’s plan for TARP shifted from the purchase of mortgages to the infusion of hundreds of billions of dollars into the nation’s largest financial institutions...
In the final analysis,... Treasury’s broken promises ... have turned TARP — which was instrumental in saving the financial system at a relatively modest cost to taxpayers — into a program commonly viewed as little more than a giveaway to Wall Street executives. ...
Treasury’s mismanagement of TARP and its disregard for TARP’s Main Street goals ... may have so damaged the credibility of the government as a whole that future policy makers may be politically unable to take the necessary steps to save the system the next time a crisis arises. This avoidable political reality might just be TARP’s most lasting, and unfortunate, legacy.
This is from back in October:
The false belief that free markets will always magically transform into ideal competitive markets was one of the problems that led to the financial crisis. Markets that should have been regulated due to the presence of asymmetric information, monopoly power, moral hazard, fraud, political influence, and other problems were left to regulate themselves with disastrous consequences. ...
With a financial system teetering on the edge of collapse, there was no choice but to bailout systemically important banks that were in trouble. However, the manner in which the bailout was executed has caused a public backlash. The problem is that the people who had a hand in creating the crisis, and profited so much as the housing bubble inflated, were rewarded handsomely when too-big-to-fail financial firms were bailed out. ... The understandable lack of public support for such policies will make it very difficult for Congress to act ... the next time it’s needed, and it very well could, the result could be disastrous
The crisis should have taught us that government has an essential role to play in preventing problems from occurring in the economy, and in correcting problems when they occur despite our attempts to prevent them. But, unfortunately, due to poorly executed policy, political posturing, obstructionism in Congress, and ineffective rebuttal from the administration, that’s not the lesson that has been learned.
And, back in the present, Yves Smith is incredulous about a voice from the past, Alan Greenspan, who has an op-ed warning about the dangers or financial regulation.
Running the Fed Like an Economics Department, by Tim Duy: My central complaint with Federal Reserve Chairman Ben Bernanke is his penchant for what is often described as running the Fed like a university economics department. Internally, I do not see this as a challenge, and for the Fed’s culture may be an effective management style. Externally, I see this a potential communications disaster always in the making. The recent uptick in inflation heightens my unease at this approach, and I think Ryan Avent hits the nail squarely on the head:
…An increase in inflation is only worrying to the extent that it undermines the Fed's efforts to satisfy those mandates, and the above clearly doesn't count. Yet the simple fact of increasing inflation sends writers running to speculate on and, in many cases, demand central bank action.
And central bankers often play along. You have a number of regional Fed presidents warning that they may be ready to end the latest round of asset purchases ahead of schedule. I don't know whether there's any communications strategy within the Fed—whether Ben Bernanke is tacitly approving of these comments or upset by them—but it's fairly certain that the comments themselves represent a tightening of monetary to the extent that they shape actual market expectations (and there does seem to have been some impact).
That's no way to make policy. It's a poor means of communication and a poor decision to tighten. And these poor choices are encouraged by writing that misrepresents the extent of current inflation and its consistency with Fed mandates.
It seems to me that the Fed lacks a coherent communication strategy – there is no willingness on the part of the leadership to enforce talking points. As a consequence, there is enormous pointless chatter from Fed officials that might be interesting in some sense, but provide misleading guidance about policy direction. Recent talk about scaling back the size of the large scale asset program, for instance. Almost certainly not going to happen – so why talk about it? Sadly, it appears to be an almost deliberate effort to create uncertainty among market participants at a time when the opposite is so important.
Of the frequent Fed speakers, I think Chicago Fed President Charles Evans and Atlanta Fed President Dennis Lockhart are particularly good. And not because they tend to say things that I agree with, but because they say things that I think reflects the majority view of the monetary policymakers. I suspect incoming San Francisco Fed President John Williams will fall into that same category. The so-called hawks Philadelphia Fed President Charles Plosser and Richmond Fed President Jeffrey Lockhart are interesting, but one needs to discount their tendency toward inflation/balance sheet concerns. And, I hate to say it about a Fed official, but I wouldn’t take much stock in the words of Dallas Federal Reserve President Richard Fisher. He may talk tough, but I believe he would always fall in line with the majority decision of the FOMC.
Hopefully, regular press conferences by Bernanke will foster a more consistent voice among Fed officials, or at least a guidepost by which market participants can more easily identify and dismiss the loose talk of policymakers and the fringes of policy.
Tuesday, March 29, 2011
I asked Roger Farmer if he'd like to respond to a recent post from Stephen Williamson: (it will be helpful to read Williamson's post first):
Farmer on Williamson on Farmer and Kocherlakota: Thanks to Stephen Williamson for publicizing my work and to Mark Thoma for providing a link and invitation to respond. Stephen: in addition to the paper you cited, I just finished an empirical paper on how to explain data without the Phillips Curve, two theoretical papers on why fiscal policy works in the short run (but shouldn’t be used) two papers on rational expectations with Markov switching and a piece on stochastic overlapping generations models.
The papers you mention in your blog, by Narayana and me, were both presented at a conference in Marseilles last week with not one but two Fed Presidents in attendance: Jim Bullard also gave a paper. Jim presented work that draws on the Benhabib-Schmitt-Grohé-Uribe paper on the perils of Taylor Rules. He sees a real danger of a Japan style deflation trap happening in the U.S.. Narayana gave a paper that combines a liquidity trap model of bubbles in an overlapping generations framework with a labor market based on the idea from my 2010 book, Expectations Employment and Prices. This book provides a new paradigm that drops the wage bargaining equation from a labor contracting model and replaces it with the assumption that employment is demand determined. This is the same assumption taken up by Narayana in the paper he presented in Marseilles.
The main idea is explained very nicely by one of the anonymous commentators on Stephen’s blog , who said:
“Think of it this way. With a centralized labor market, the real wage is pinned down by the intersection of labor demand and supply. With search, the labor market need not clear: the labor supply FOC is missing, and we need to add something else to close the model. One thing to add is an explicit bargaining model that effectively pins down the wage. An alternative is to say that output is demand-determined, and that the wage is the marginal product of labor at the demand determined level of output. Then firms are on their labor demand curve, but workers are not on their labor supply curve (but the beauty of search - unemployed workers will take a job at any positive wage).”
That’s exactly right. And once there are many possible labor market equilibria, there is room to close the model by bringing back the role of market psychology. That’s what I do in my work which has room for both involuntary unemployment and animal spirits; the two cornerstones of Keynes’ General Theory that are missing from the macroeconomics that emerged from Samuelson’s interpretation of Keynes.
Stephen professes not to understand the language of aggregate demand and supply. That’s not surprising given how many different ways it’s used. My own preferred interpretation is explained in a piece I wrote for the International Journal of Economic Theory in 2008.
The idea of aggregate demand and supply makes just as much sense as the notion of a microeconomic demand and supply curve as long as one works within a framework where the variables that shift one of the curves do not simultaneously shift the other. That is clearly not true in post-Lucas rational expectations models which is why the language went out of fashion. It is true in my work.
Via Greg Mankiw:
This graphic is from John Taylor, who plots it using quarterly seasonally adjusted data from 1990Q1 to 2010Q3. Investment here is fixed investment.
Of course, causality goes in both directions: Strong investment demand leads to lower unemployment, and a stronger economy, reflected in lower unemployment, encourages investment spending. As a result, the interpretation of this scatterplot can be debated. But there is no doubt that the strength of the correlation is impressive.
Haven't had a chance to write much the last few days, but here's something you can yell at me about in comments (or not):
Update: I forgot to mention that CBS MoneyWatch asked me to write about a similar topic yesterday (I tried to say something different, but there's still a bit of repetition):
J.S. at Environmental Economics is astounded at "the current Republican assault on the environment":
Republicans for Environmental Progress: An Endangered Species, by J.S.: For most of modern American history, the two major political parties in America have largely agreed on the desired long-term environmental outcomes for the country: there was a consensus among Republicans and Democrats that it was a good thing to press for cleaner air and water, less toxins in the environment, biodiversity preservation, and mitigation strategies for clean energy and, mostly recently, climate change.
The disagreements were largely centered around how to achieve these outcomes, and to some extent the pace of change and the absolute targets. Democrats by and large preferred a heavier regulatory approach (i.e. “command and control”) that set specific firm-level emissions limits, prescribed permissible technologies, and set industry-wide energy and fuel efficiency standards. Republicans tended to support more market-oriented policies, with cap and trade foremost among them.
Nowadays, the arguments are no longer over the methods to achieve environmental progress, but whether we should support such progress in the first place. This situation is unprecedented. Those who believed that divided government would lead Republicans to take a more moderate and constructive role have so far been proven wrong. It is hard to imagine the situation being much worse for America’s environmental quality, which is directly linked to the quality of life for all Americans.
The modern Republican Party has absolutely no affirmative environmental agenda whatsoever, and goes so far as to contest the entire rationale for continued environmental progress. Ironically, this extremely reactionary environmental agenda is coming at a time when the ideas that Republicans once championed are now widely accepted as the best ways to structure environmental policy. ...
I have been involved in environmental policy for almost 20 years and have never seen anything like the current Republican assault on the environment. It is truly astounding. To be clear, the Republicans leading this charge against environmental progress are in no way following conservative principles―they are doing the exact opposite. ...
There is absolutely nothing “free market” about letting polluters trash the environment for free. In fact, this fits the definition of a market failure, not a well-functioning capitalist system. What the Republicans are currently practicing is crony capitalism of the worst kind: rewarding industry at the expense of the public interest and future generations.
It is the Republican rank and file who should be the most offended by these policies. Public opinion polls consistently show that both Democrats and Republicans care deeply about the environment, and support clean energy policies and strong environmental safeguards. Unfortunately, the once proud environmental ethic of the Republican Party has been snuffed out by a small group of radical Tea Party extremists who are deeply confused both about true conservative principles and the proper role of government in society. And once moderate Republicans who supported sensible environmental policies are nowhere to be seen. Until true conservatives retake the Republican Party we will be left doing little more than damage control, and the chances of a new comprehensive affirmative environmental agenda are slim to none.
Quick PCE Notes, by Tim Duy: The February Personal Income and Outlays report revealed the drag of higher food and energy costs as a 0.3 percent gain in nominal disposable personal income was knocked back to a 0.1 percent loss in real terms. Similarly, the 0.7 percent gain in nominal spending turned into a just 0.3 percent real gain. While better than the flat reading in January, the relatively weak performance of PCE this quarter will lead analysyst to knock down Q1 growth forecasts. I try not to read too much into any one quarter, and tend to view the consumer slowdown in light of the acceleration at the end of last year. Overall, the trend in PCE growth since the middle of last year is consistent with annual gains of around 3% a year. The footing is firming, and it is sustainable, but it is still far short of what is needed to rapidly return consumption to its pre-recession trend.
Since the recession ended, real PCE gained at a rate of 0.18 percent per month:
Remember how the Republicans, when they took control of the House last fall, said it would be all about jobs?
Nearly three months have passed, but no action on jobs except for spending cuts that Goldman Sachs, Moody's, and others ... say will destroy jobs and damage the whole economy. We did, however, get a proposal that would require anyone audited by the IRS to tell if she had an abortion. So much for the Republican promise of less government intrusion into our lives.
When will we get to jobs?
Monday, March 28, 2011
I didn't see the speech. Comments?
Joe Stiglitz refused to sign the letter from former members of the CEA calling for deficit reduction:
Why I didn't sign deficit letter, by Joseph E. Stiglitz: I was asked to sign the letter from a bipartisan group of former chairmen and chairwomen of the Council of Economic Advisers that stresses the importance of deficit reduction and urges the use of the Bowles Simpson Deficit Commission’s recommendations as the basis for compromise. ... I did not sign.
I believe the Bowles Simpson recommendations represent, to too large an extent, a set of unprincipled political compromises that would lead to a weaker America — with slower growth and a more divided society.
Deficit reduction is important. But it is a means to an end — not an end in itself. We need to think about what kind of economy, and what kind of society, we want to create; and how tax and expenditure programs can help achieve those goals.
Bowles-Simpson confuses means with ends, and would take us off in directions which would likely be counterproductive. Fortunately, there are alternatives that could do more for deficit reduction, more for putting America back to work now and more for creating the kind of economy and society we should be striving for in the future.
There's quite a bit more in the link.
Jeff Sachs calls for an end to cross-country tax competition:
Stop this race to the bottom on corporate tax, by Jeffrey Sachs, Commentary, Financial Times: ...With capital globally mobile, moreover, governments are now in a race to the bottom with regard to corporate taxation and loopholes for personal taxation of high incomes. Each government aims to attract mobile capital by cutting taxes relative to others. ...
The end result is that both the US and UK are battling deficits of about 10 per cent of gross domestic product. ...We surely need to reduce the deficits but in a fair, efficient, and sustainable manner, by levying higher taxation on the rich, who are enjoying a boom in living standards and a share of the national income unprecedented in modern history.
Yet to get to the right place, countries cannot act by themselves. ... Multinational companies and their disproportionately wealthy owners are successfully playing governments against each other. The game is clear, and it is working fiercely well.
As a starting point, the Organisation for Economic Co-operation and Development countries should urgently convene a meeting of finance ministers to enunciate ... that tax and regulatory co-ordination across countries are vital to prevent a ruinous fiscal race to the bottom.
Without some sort of enforcement mechanism, I'm not sure that agreements like this will do a log of good.
What happens to people who express views that the GOP's hard right doesn't like?:
American Thought Police, by Paul Krugman, Commentary, NY Times: Recently William Cronon, a historian who teaches at the University of Wisconsin, decided to weigh in on his state’s political turmoil. He started a blog... Then he published an opinion piece in The Times, suggesting that Wisconsin’s Republican governor has turned his back on the state’s long tradition of “neighborliness, decency and mutual respect.”
So what was the G.O.P.’s response? A demand for copies of all e-mails sent to or from Mr. Cronon’s university mail account containing any of a wide range of terms, including the word “Republican” and the names of a number of Republican politicians ...
The Cronon affair, then, is one more indicator of just how reflexively vindictive, how un-American, one of our two great political parties has become.
The demand for Mr. Cronon’s correspondence has obvious parallels with the ongoing smear campaign against climate science and climate scientists, which has lately relied heavily on supposedly damaging quotations found in e-mail records. ...
Nothing in the correspondence suggested any kind of scientific impropriety... But ... this fake scandal gives an indication of what the Wisconsin G.O.P. presumably hopes to do to Mr. Cronon. ...
Now,... Mr. Cronon ... has been careful never to use his university e-mail for personal business... Beyond that, Mr. Cronon ... has a secure reputation as a towering figure in his field. ...
So we don’t need to worry about Mr. Cronon... But there’s a clear chilling effect when scholars know that they may face witch-hunts whenever they say things the G.O.P. doesn’t like.
Someone like Mr. Cronon can stand up to the pressure. But less eminent and established researchers won’t just become reluctant to act as concerned citizens, weighing in on current debates; they’ll be deterred from even doing research on topics that might get them in trouble.
What’s at stake here, in other words, is whether we’re going to have an open national discourse in which scholars feel free to go wherever the evidence takes them, and to contribute to public understanding. Republicans, in Wisconsin and elsewhere, are trying to shut that kind of discourse down. It’s up to the rest of us to see that they don’t succeed.
I wonder if this applies to market as well (not sure if this is the same):
Research shows not only the fittest survive, EurekAlert: Darwin's notion that only the fittest survive has been called into question by new research published in Nature.
A collaboration between the Universities of Exeter and Bath in the UK, with a group from San Diego State University in the US, challenges our current understanding of evolution by showing that biodiversity may evolve where previously thought impossible.
The work represents a new approach to studying evolution that may eventually lead to a better understanding of the diversity of bacteria that cause human diseases.
Conventional wisdom has it that for any given niche there should be a best species, the fittest, that will eventually dominate to exclude all others.
This is the principle of survival of the fittest. Ecologists often call this idea the `competitive exclusion principle' and it predicts that complex environments are needed to support complex, diverse populations.
Professor Robert Beardmore, from the University of Exeter, said: "Microbiologists have tested this principle by constructing very simple environments in the lab to see what happens after hundreds of generations of bacterial evolution, about 3,000 years in human terms. It had been believed that the genome of only the fittest bacteria would be left, but that wasn't their finding. The experiments generated lots of unexpected genetic diversity."
This test tube biodiversity proved controversial when first observed and had been explained away with claims that insufficient time had been allowed to pass for a clear winner to emerge.
The new research shows the experiments were not anomalies.
Professor Laurence Hurst, of the University of Bath, said: "Key to the new understanding is the realization that the amount of energy organisms squeeze out of their food depends on how much food they have. Give them abundant food and they use it inefficiently. When we combine this with the notion that organisms with different food-utilizing strategies are also affected in different ways by genetic mutations, then we discover a new principle, one in which both the fit and the unfit coexist indefinitely."
Dr Ivana Gudelj, also from the University of Exeter, said: "The fit use food well but they aren't resilient to mutations, whereas the less efficient, unfit consumers are maintained by their resilience to mutation. If there's a low mutation rate, survival of the fittest rules, but if not, lots of diversity can be maintained.
"Rather nicely, the numbers needed for the principle to work accord with those enigmatic experiments on bacteria. Their mutation rate seems to be high enough for both fit and unfit to be maintained."
Dr. David Lipson of San Diego State University, concluded: "Earlier work showed that opposing food utilization strategies could coexist in complex environments, but this is the first explanation of how trade-offs, like the one we studied between growth rate and efficiency, can lead to stable diversity in the simplest possible of environments."
Sunday, March 27, 2011
Brad DeLong wonders when the employment to population ratio will finally start increasing:
David Andolfatto continues his battle with Ron Paul supporters:
Ron Paul's Money Illusion (Sequel), by David Andolfatto: As I promised to do here, I am posting a sequel to my original column: Ron Paul's Money Illusion. ... I ... hope that the nature of my criticism will be more clearly understood.
The purpose of my original post was to critique a statement I've heard Fed critics repeat ad nauseam. The statement can be found in Paul's book End the Fed (p. 25):One only needs to reflect on the dramatic decline in the value of the dollar that has taken place since the Fed was established in 1913. The goods and services you could buy for $1.00 in 1913 now cost nearly $21.00. Another way to look at this is from the perspective of the purchasing power of the dollar itself. It has fallen to less than $0.05 of its 1913 value. We might say that the government and its banking cartel have together stolen $0.95 of every dollar as they have pursued a relentlessly inflationary policy.
I think that the first part of this statement is true, so I do not wish to dispute this fact. ... As for the final sentence in the quote above, well, I think it is just plain false. Now let me explain why...
Let me begin with the picture most popular with end-the-fed types--a graph depicting the declining purchasing power of the USD. I use postwar data without loss of generality, since most of US inflation has happened since then.
This picture plots the inverse of the price-level (as measured by the consumer price index). I have normalized the price-level to $1.00 in 1948. It falls to roughly $0.11 in 2010. This corresponds to roughly a nine-fold increase in the price-level or about a 4.6% annual rate of inflation. (Note that the rate of inflation has slowed considerably since 1980).
The picture above is used by some end-the-fed types to great effect in generating anger and fear among some members of the population. Anger via the claim that the Fed has stolen 90% of (the purchasing power) of your money; and fear through the prospect of this purchasing power approaching zero in the not-too-distant future. ...
Let me draw you another picture. This one plots the inverse of the U.S. nominal wage rate (total nominal wage income divided by aggregate hours worked).
This graph plots the purchasing power of the USD, where purchasing power is now measured in terms of labor, rather than goods. This graph shows that you need a lot more money today than you did in 1948 to purchase 1 hour of labor. Another way of saying this is that the average nominal wage rate in the U.S. has increased by a factor of 25 since 1948. ...
Let me now combine the two graphs above into one picture, with both series inverted, and with both the price-level and nominal wage rate normalized to $1.00 in 1948 (the actual nominal wage rate was $1.43).
According to these (publicly available) data, the price-level (CPI) has increased by about a factor of 10 since 1948. But the average nominal wage rate has increased by a factor of 25. (There is, of course, considerable disparity in wage rates across members of the population. But I am aware of no study that attributes significant wage or income heterogeneity to monetary policy. Of course, if readers know of any such studies, I would be grateful to have them sent to me.)
The figure above implies that the real wage (the nominal wage divided by the price-level) has increased by a factor of 2.5 since 1948. This is undoubtedly a good thing because it implies that labor (the factor we are all endowed with) can produce/purchase more goods and services. More output means an increase in our material living standards (Though again, I emphasize that this additional output is not shared equally. ...)
Now, an interesting question to ask is how the picture above might have been altered if the price-level had instead remained more or less constant. ...
I suggested, in my original post, that there is reason to believe that under an hypothetical regime of price-level stability, the nominal wage rate in the graph above would instead have ended up increasing only by a factor of 2.5 (more or less)--the factor by which real wages actually rose. This is what I meant by my claim of long-run neutrality of the price-level increase; and it is also what I meant by Ron Paul's Money Illusion (which is subtly different than claiming the superneutrality of money expansion; more on this later).
Some evidence in favor of my "long-run neutrality view" is to be found in the time-path of labor's share of income (GDP):
I see no evidence in the data here that our higher price level today has whittled the share of income accruing to labor. Moreover, I see no evidence suggesting that episodes of high or low inflation are related in any systematic way to the resources accruing to labor. (In fact, I see some evidence of a rising labor share during the high inflation decade of the 1970s.) But perhaps other data tells a different story. If so, I'd like to see the data (i.e., instead of a short email claiming that I am wrong). ...
To conclude, I think that the ... assertion that "the Fed has stolen 95 cents of every dollar" I view as absurd. There are legitimate criticisms one could level at the monetary institutions of this country, but these are not some of them. ...
Saturday, March 26, 2011
I wish I'd remembered point three when I wrote recently about the difficulty of separating cyclical and structural unemployment. I was saying, essentially, the same thing that Peter Diamnond says here (via):
Second, for the current moment, the argument about the aggregate demand side is academic, in the negative sense of the word. Current estimates I have seen of how much of the increase in unemployment from a few years ago is “structural,” rather than due to inadequate aggregate demand, still leaves enough need for aggregate demand stimulation that it is clear what direction is needed for further policies.
Third, I am skeptical of the value of attempting to separate cyclical from structural unemployment over a business cycle.... The tighter the labor market and the more valuable the filling of a vacancy, the more a firm is willing to hire a worker who is a less good match, who may need more training.... [A] worker who might be viewed as structurally unemployed, as facing serious mismatch in the current state of the economy, may be readily employable in a tight labor market. The common practice of thinking about the extent of unemployment as a sum of frictional, structural and cyclical parts misses the point.... [D]irect measures of frictional or structural unemployment... dependent on the tightness of the labor market... have limited relevance for the role of demand stimulation policies. The idea that the US economy is not adaptable and capable of dealing with the need for skills and jobs to adapt to each other is peculiar, given the long history of unemployment going up and down. When the labor market is tight and firms have trouble finding workers, they reach out to places they have not looked before and extend training in order to find workers who can fill their needs. Supporting current stimulus policies as very good for the economy is entirely compatible with taking care to avoid future inflation.
Thus, no matter how you slice it or how you define it -- and even with a very generous interpretation of the structural estimates -- there is still plenty of cyclical unemployment (or, perhaps more precisely, employment that will respond to an increase in demand) to worry about, and plenty for policy to do.
But suppose that, contrary to what the estimates are telling us, there is a large, dominant, structural component. Does that mean we sit on our hands and do nothing? Nope, Christy Romer makes a point I've made many times. Even if the problem is structural, there are still things we can do to help:
There’s this debate going on over what the source of the unemployment is: Do we not have enough aggregate demand, or is it structural? What frustrates me is the advocates of the structural theory go from saying it’s hard to turn construction workers into nurses to saying we should do nothing. If you think our problem is structural, there are things we should be doing: money for training, or helping people get out of their mortgages, or massive investment in Detroit. I don’t believe that skills are the problem here, but if that’s your point of view, there’s still a lot we can do. Saying it’s structural is not the same as saying it’s not our problem.
No matter the cause, we've dropped the ball on the unemployment problem (and have yet to pick it up). As I said last week, "We have enough money to pay for military action in Libya, but not for job creation?" But Bob Herbert's last column at the NY Times says it better:
Losing Our Way, by Bob Herbert, Commentary, NY Times: So here we are pouring shiploads of cash into yet another war, this time in Libya, while simultaneously demolishing school budgets, closing libraries, laying off teachers and police officers, and generally letting the bottom fall out of the quality of life here at home.
Welcome to America in the second decade of the 21st century. An army of long-term unemployed workers is spread across the land, the human fallout from the Great Recession and long years of misguided economic policies. Optimism is in short supply. The few jobs now being created too often pay a pittance, not nearly enough to pry open the doors to a middle-class standard of living. ...
The U.S. has not just misplaced its priorities. When the most powerful country ever to inhabit the earth finds it so easy to plunge into the horror of warfare but almost impossible to find adequate work for its people or to properly educate its young, it has lost its way entirely. ...
Millions and millions of people still unemployed, the prospects of a slow, slow recovery of employment ahead of us (along with the permanent damage that long-term unemployment brings about), and few people in Washington seem to care.
Friday, March 25, 2011
Some people think the solution to unemployment is more unemployment:
Prosperity through lower wages?, by Ezra Klein: Tim Fernholz and Jim Tankersley took the time to read a report that Speaker John Boehner’s office distributed as evidence that sharp deficit reduction can lead to rapid economic expansion. The plan, it seems, is to create a bunch of unemployed public workers who’ll create more competition for the few open jobs in the private sector and thus drive wages down for everybody:
The paper predicts that cutting the number of public employees would send highly skilled workers job hunting in the private sector, which in turn would lead to lower labor costs and increased employment. But “lowering labor costs” is economist-speak for lowering wages — does the GOP want to be in the position of advocating for lower wages for voters who work in the private sector? ...
So it's not the confidence fairy, but rather the fear fairy that is supposed to stimulate the economy? Yeah, that'll work because -- you know -- there's not enough people looking for jobs now. Yet another economic rationale invented by Republicans to support ideological preferences.
Since I posted Tiago's criticism of Robert Shiller, I should be fair and post Brad DeLong's response:
Is Adam Smith Partly an Economist, or Wholly a Moral Philosopher?, by Brad DeLong: Tiago at History of Economics Playground reacted very negatively to an AEA Annual Meeting presentation by Robert Shiller and Virginia Shiller:
Bad job « History of Economics Playground: Imagine I write a paper on Behavioral Macroeconomics making off the cuff observations about the latest financial products and how my bank manager frames that information, and noting my friends and neighbors’ flight to safety or to risk on the flimsiest of whims. Imagine I make no reference to secondary literature, or to methodology as I approach the questions. Were I then to submit this piece to general appreciation, say get Robert Shiller to referee it. How do you think he would assess my effort?
I am sure we would be fast and dirty in telling me to do something else with my time.
I have not written a paper on Behavioral Macroeconomics and have no intention of doing so. But Shiller has written a working paper, kind of on the history of economics (Cowles Foundation Discussion Paper No. 1788 – Economists as Worldly Philosophers). There is no thread to the argument, no understanding of context, and zero references to the vast body of work by historians on his subject. The working paper, I am sure, will get plenty of readers, downloads and comments. But were I ever to referee it, I would be fast and dirty in telling him to do something else with his time.
I read this as Tiago policing the subdisciplinary boundaries: nobody working in the history of economic thought has any business writing about finance or behavioral macro, and nobody working in finance or behavioral macro has any business talking about how looking at the history of economic thought informs what the future of economics should be.
So I asked:
So what is it in the working paper by Robert Shiller and Virginia Shiller that you think is wrong?
You want me to referee it? Someone missed the point of my post.
Economics appears somehow ready formed and fully bounded from the beginning. Take this: “Adam Smith was a professor, not of economics but of moral philosophy. His The Theory of Moral Sentiments, first published in 1759, was a mixture of philosophy, psychology, and economics.” — the anachronism of the statement makes me cringe.
A reference to a Baltimore Sun article to announce the emergence of economics departments? What about saying something about the importation of the German Research University or the context of the Progressive Era shaping standards of expertise and advocacy and trust in numbers.
And then the whole thesis is pants. Economists never stopped being “worldy philosophers” even if the public sphere has changed and become less accepting of certain brands of generalists — vide a forthcoming conference and special issue of History of Political Economy on Public Intellectuals in Economics (shameless self-plug).
I could go on ad nauseum. Nearly sentence by sentence.
I think this deserves some additional reflection. First, start with Tiago's:
You want me to referee it? Someone missed the point of my post.
He is talking to me. But he is wrong. I am not stupid. I did not miss the point of your post.
I do maintain that if Tiago dislikes Shiller and Shiller enough to trash the piece, he owe people who inquire an explanation of why he dislikes it--rather than a further policing of subdisciplinary boundaries. Moreover, I think that when Tiago does try to lay out his complaints about Shiller and Shiller he does not do particularly well. The first thing he complains about is Shiller and Shiller's claim that:
The right answer is "jobs now, deficits later," but it's not the answer the "serious" people in Washington are pursuing:
The Austerity Delusion, by Paul Krugman, Commentary, NY Times: Portugal’s government has just fallen in a dispute over austerity proposals. Irish bond yields have topped 10 percent for the first time. And the British government has just marked its economic forecast down and its deficit forecast up.
What do these events have in common? They’re all evidence that slashing spending in the face of high unemployment is a mistake. Austerity advocates predicted that spending cuts would bring quick dividends in the form of rising confidence, and that there would be few, if any, adverse effects on growth and jobs; but they were wrong.
It’s too bad, then, that these days you’re not considered serious in Washington unless you profess allegiance to the same doctrine that’s failing so dismally in Europe. ...
Why not slash deficits immediately? Because tax increases and cuts in government spending would depress economies further, worsening unemployment. And cutting spending in a deeply depressed economy is largely self-defeating...: any savings achieved at the front end are partly offset by lower revenue, as the economy shrinks.
So jobs now, deficits later was and is the right strategy. Unfortunately, it’s a strategy that has been abandoned...
Which brings me back to what passes for budget debate in Washington these days.
A serious fiscal plan for America would address the long-run drivers of spending, above all health care costs, and it would almost certainly include some kind of tax increase. But we’re not serious: any talk of using Medicare funds effectively is met with shrieks of “death panels,” and the official G.O.P. position — barely challenged by Democrats — appears to be that nobody should ever pay higher taxes. Instead, all the talk is about short-run spending cuts.
In short, we have a political climate in which self-styled deficit hawks want to punish the unemployed even as they oppose any action that would address our long-run budget problems. And here’s what we know from experience abroad: The confidence fairy won’t save us from the consequences of our folly.
The Triangle Shirtwaist Company Fire led to "new concepts of social responsibility and labor regulation":
Commemorating the Triangle Fire, by Laura Freschi, AidWatch: Today is the 100th anniversary of the Triangle Shirtwaist Company Fire. 146 people, mainly immigrant women, some as young as 14 years old, died when a fire broke out on the top three floors of a garment factory at the corner of Greene and Washington Place, just off Washington Square Park in New York City. ...
Ironically, the Triangle building was considered a model of modern safety standards, compared to the dark and crowded working conditions of tenement apartment sweatshops common at the time. Triangle was a “fireproof” building, with freight elevators, high ceilings and windows that allowed light onto the factory floor.
The fire that began at 4:30 pm 100 years ago today started on the 8th floor and spread quickly upwards, igniting machine oil and flammable piles of cotton scraps and shirtwaists on the factory floor. The workers rushed to escape but found the main stairs chained shut (the bosses didn’t want them taking breaks or stealing shirts and routinely searched them before they could leave the building.) While some made it out via the single freight elevator, others were pushed to their deaths in the elevator shaft. The flimsy fire escape came unmoored from the building in the heat, killing many more.
Firemen could do little to help... The women trapped on the 9th floor began to jump out the windows... Thousands of New Yorkers out for a Saturday stroll though Washington Square Park witnessed the horrible scene.
The factory owners on the top floor escaped out the roof and onto an adjacent building. They stood trial for criminal manslaughter but were acquitted; the jury wasn’t convinced that the owners knew the exit doors were locked.
Still, the consequences of the fire were far-reaching. Public outrage led to more than 30 new laws passed within two years, creating new standards for minimum wages and maximum hours, encouraging collective bargaining, and addressing all the safety failures at the Triangle Factory.
The Triangle Factory building now houses the NYU Chemistry and Biology Departments. A plaque from the International Ladies Garment Workers Union reads:
On this site, 146 workers lost their lives in the Triangle Shirtwaist company fire on March 25, 1911. Out of their martyrdom came new concepts of social responsibility and labor regulation that have helped make American working conditions the finest in the world.
The fire was a terrible tragedy. But today we can be thankful for 100 years of development and public safety regulation that prevent workplace disasters like this one in New York City.
Thursday, March 24, 2011
Republican House members propose legislation that says going on strike makes a worker's family -- kids and all -- ineligible for food stamps:
A New Plan to Stop Strikes Before They Start, by Steve Benen: Most of the union-busting schemes we've seen in recent months have come at the state level, but Zaid Jilani flags one at the federal level that hasn't generated much attention at all.
GOP Reps. Jim Jordan (OH), Tim Scott (SC), Scott Garrett (NJ), Dan Burton (IN), and Louie Gohmert (TX) have introduced H.R. 1135...
Much of the bill is based upon verifying that those who receive food stamps benefits are meeting the federal requirements for doing so. However, one section buried deep within the bill adds a startling new requirement. The bill, if passed, would actually cut off all food stamp benefits to any family where one adult member is engaging in a strike against an employer.
If this seems unusually punitive, that's because it is. The message these Republican lawmakers want to send is as straightforward as it is callous: if you go on strike, your family should have less access to food. ...
It's worth noting, of course, that's extremely unlikely the Democratic Senate and/or Democratic White House would go along with the House Republican plan to punish striking workers like this, but the fact that several prominent GOP lawmakers would even consider this worthwhile says a great deal about their priorities.
Update: I am notified via Twitter that there is a bill to remove *current* restrictions on federal, state, or local government employees that has been proposed by Democrat Joe Baca:
2/8/2011--Introduced.Worker Eligibility Fairness Act of 2011 - Amends the Food and Nutrition Act of 2008 to eliminate the provision making a federal, state, or local government employee who is dismissed for participating in a strike against the federal government, the state, or a political subdivision of the state ineligible for the Supplemental Nutrition Assistance Program (SNAP, formerly food stamps).
I was going to let this go, but since one of the members of this list sent an email promoting it, let me offer a few comments:
Unsustainable budget threatens U.S., by 10 ex-chairs of the president's Council of Economic Advisers, Politico: ... As former chairmen and chairwomen of the Council of Economic Advisers, who have served in Republican and Democratic administrations, we urge that the Bowles-Simpson report, “The Moment of Truth,” be the starting point of an active legislative process that involves intense negotiations between both parties.
There are many issues on which we don’t agree. Yet we find ourselves in remarkable unanimity about the long-run federal budget deficit: It is a severe threat that calls for serious and prompt attention. ...
It is tempting to act as if the long-run budget imbalance could be fixed by just cutting wasteful government spending or raising taxes on the wealthy. But the facts belie such easy answers. ...
To be sure, we don’t all support every proposal here. Each one of us could probably come up with a deficit reduction plan we like better. Some of us already have. Many of us might prefer one of the comprehensive alternative proposals offered in recent months.
Yet we all strongly support prompt consideration of the commission’s proposals. The unsustainable long-run budget outlook is a growing threat to our well-being. Further stalemate and inaction would be irresponsible.
We know the measures to deal with the long-run deficit are politically difficult. The only way to accomplish them is for members of both parties to accept the political risks together. That is what the Republicans and Democrats on the commission who voted for the bipartisan proposal did.
We urge Congress and the president to do the same.
Martin N. Baily
Martin S. Feldstein
R. Glenn Hubbard
Edward P. Lazear
N. Gregory Mankiw
Christina D. Romer
Harvey S. Rosen
Charles L. Schultze
Laura D. Tyson
Murray L. Weidenbaum
Reading the names on the list, and noting the staunch opposition to tax increases by some, this came to mind:
Back in 2000, the U.S. government's long-term budget was out of balance--although not by all that much. The government had, you see, made promises--very popular promises--for Medicare, Medicaid, and Social Security without proposing sufficient funding streams to pay for those promises. So back in 2000, looking forward, we had a choice: raise taxes, or "bend the curve" by cutting the growth of spending.
Instead of doing either of these, we elected George W. Bush. Two wars. A big (and ill-advised) defense buildup that is very unsuited to protecting us from Al Qaeda and company. A huge unfunded expansion of Medicare. Plans for the unfunded expansion of Social Security that came to nothing. However, instead of raising taxes George W. Bush reduced them.
This simply does not work. As Milton Friedman liked to say, to spend is to tax. If the government spends somebody will pay for it. And if you don't levy the taxes to pay for it now all that means is that the person who owes the taxes does not know it yet. ...
Taxes are going up over the next decade--barring cuts of 1/3 to Medicare, etc. They can either go up smartly or we can pretend they don't have to go up, in which case they go up stupidly. The argument for small government was lost long ago, and was lost again and anew in the past decade with Medicare Part D and the wars of George W. Bush.
The time to stand up to the budget busting was when it happened, and when members of the list had the power to affect policy, not many years later in an article at Politico. Many on the list were either part of the decision making team in the 2000s that opened the hole in the budget, or supported what the team did. I suppose it's possible to argue things were different in 2000 -- there was a wide expectation that budget surpluses would be the "problem" at that time. But if the forecasts by members of the list were so bad then -- and they were -- why should we listen now?
The long-run budget problem does need to be addressed, but the standing of some on the list to make this claim can certainly be called into question.
Chris Dillow defends progressive taxation:
The fairness of 50p, by Chris Dillow: Over in the twitterverse, a Very British Dude has asked whether I think it reasonable to confiscate by force more than half of someone’s marginal earnings. ... I’d suggest three possible answers here, which vary in force depending upon the precise type of the rich:
1. A high tax is a dividend, paid to the state in return for its investment in the things that made you rich.
Even if the state did not educate you, the chances are that it educated your colleagues and customers, whose education benefits you. The state has provided the domestic peace that has enabled the economy to grow and thus give you the chance to get rich; very few of the UK’s top earners would be so rich had they been born in sub-Saharan Africa. It has provided laws - such as patents and copyright protection - that allow artists and entrepreneurs to profit from their efforts and talent. And in various ways the state helps to sustain capitalism and hence profits and high earnings.
Why shouldn’t it demand payment for such benefits?
2. The state’s force is a form of countervailing power. Some (many?) of the rich owe their fortune to the fact that they are powerful. Most egregiously, this power consists of an ability to extract cash from the state. When the government taxes bankers or the bosses of BAe, Serco or Capita, it is merely getting its money back.
In other cases, high earnings come from a power to extract rents from either shareholders or workers... In these cases, state power corrects for private power.
3. Inequality is a form of market failing. Imagine we were all behind a veil of ignorance, not knowing what talents we’d be born with. Isn’t it plausible that, behind such a veil, people would agree to enter into insurance contracts such that if they got lucky or talented they would pay out to the unlucky and untalented? People would, surely, agree to pay out a proportion of the £1m-plus a year they would earn as Premiership footballers in order to soften the misery of being born with no marketable skills.
You can therefore regard redistributive taxation as, in effect, the sort of insurance payments that would be made, if such contracts were feasible. In this sense, the tax merely fills in for the missing market.
These arguments do not get us to a precise tax rate. But they do suggest a case for some degree of progressivity in the taxes.
And let’s be clear. A 50p tax is not massively progressive. Overall revenues are equal to just over 37% of GDP. Under a purely proportionate tax system, then, we would all pay 37% of our income. ... Expecting a tiny proportion to pay 50% (yes, for some the marginal rate is 62%, but the average rate is lower than this) strikes me as not wholly unreasonable.
Antonio Fatás reads the article by Luigi Zingales and realizes he has has seen this type of hopeful denial before:
Financial markets and professional cycling, by Antonio Fatás: Luig Zingales writes a very interesting article about some of the new scandals in financial markets (the insider-trading trial of Raj Rajaratnam). ... From the article you can see that there is a sense of disbelief about what is happening:"It is so difficult to imagine that successful executives would jeopardize their careers and reputations in this way that many of us probably hope that the accusations turn out to be without merit."This quote reminds me of a recent one by Alan Greenspan regarding the behavior of financial institutions prior to the crisis (from October 2008):"Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity – myself especially – are in a state of shocked disbelief."
Despite his disbelief, Zingales admits that there is some recent evidence that supports the idea that personal networks can be a source of excess returns in financial markets. But he remains positive when he looks at the industry as a whole:"After ten weeks of a trial like this, it will be easy for the public to conclude that all hedge funds are crooked, and that the system is rigged against the outsiders. Fortunately, this is not the case. While there are certainly some rotten apples in the hedge-fund industry, the majority of traders behave properly, and their legitimate research contributes to making the market more efficient."This debate reminds me of what has happened in the sport of professional cycling... In recent years, there have been a large number of cases of professional cyclists testing positive for performance-enhancing drugs. When the first cases came out there were two reactions:
1. Those who assumed that this was a generalized phenomenon and concluded that most cyclists were guilty.
2. Those who had the belief that this was just a few riders violating the rules but, overall, this was a clean sport. Their logic was that if doping was so generalized, how is it that we have not heard about it before?
Over the last years, we have witnessed an increasing number of scandals in this sport and ...[this] has shifted public opinion towards the belief that doping was (and might still be) a generalized practice in this sport.
I see a parallel with what we are seeing in financial markets as a result of the more recent scandals. Yes our prior is to believe that generalized corruption will be eliminated by market forces and regulation. But when we think about all the evidence that has surfaced during the last years regarding the behavior of financial institutions and those who lead them, our beliefs start shifting and at some point it is not simply a matter of questioning individuals. We start questioning the whole system, the incentives and the ways in which some become winners in this very competitive market (as competitive as the world of professional cycling).
The difference between cycling and finance is that while we can choose not to watch the next Tour de France but we cannot choose to live in a world where the behavior of financial institutions does not affect our society.
It's not structural unemployment, it's the corporate saving glut, by by Rebecca Wilder: ...I'd argue that ... the corporate saving glut is ... creating high and persistent unemployment. Some economists are wrongly referring to this as higher structural unemployment...
The chart below illustrates a simple univariate regression of the unemployment rate on the corporate saving glut. The correlation is very strong, 71%, and suggests that the structural unemployment rate is less than 5.8%. Furthermore, while the unemployment rate seems to be perpetually higher than normal (the upper-right circle), that perfectly coincides with a high corporate saving glut.
If the corporate excess saving glut just equaled zero, i.e., firms invested and saved at the same rate, the unemployment rate would be 5.8%. Now, if the corporate saving glut fell below zero to -2%, i.e., firms reinvested in the economy by way of capital investment in excess of saving, the simple model implies an unemployment rate of 4.7%.
The government doesn't need to add jobs, per se, the government needs to figure out how to get corporate America to drop the saving glut and re-invest in the economy.
Wednesday, March 23, 2011
- The (Nature of) Shock Doctrine - Paul Krugman
- Ron Paul's Money Illusion (Sequel) - MacroMania
- Predicting China's inevitable slowdown - Noahpinion
- Capital controls: A meta-analysis approach - Magud, Reinhart, Rogoff
- Recession Caused Sharp Decline in Start-Ups - Real Time Economics
- Fannie and Freddie Hiding Over $100 Billion of Losses? - naked capitalism
The editors at CBS MoneyWatch asked me to comment on this:
Williamson on the Fed, by Tim Duy: This weekend on Mark’s blog I stumbled across the link to Stephen Williamson’s piece The Fed and Inflation. Rarely does one encounter a piece with so many inconsistencies and misrepresentations that it requires an almost line by line retort. The core of Williamson’s piece begins:
While it is certainly true that there is nothing alarming on the inflation front if we look at what forecasters are predicting and the yields on TIPS, maybe we should examine some other evidence.
This sentence alone should raise red flags, as he might as well say: “The overwhelming evidence is that inflation is not a problem, but the evidence is obviously lying because it is inconsistent with my opinion.” He continues:
What's the goal here? Fed people, including Bernanke, make vague statements about a 2% inflation rate being what the Fed is shooting for. But what does that mean? Do we set the target at 2% in January and then say that we achieved our goal if the year-over-year inflation rate as of the next January falls between 1% and 3%?
I don’t find the Fed vague at all. Indeed, Federal Reserve Chairman Ben Bernanke seems quite clear. From October:
The longer-run inflation projections in the SEP indicate that FOMC participants generally judge the mandate-consistent inflation rate to be about 2 percent or a bit below. In contrast, as I noted earlier, recent readings on underlying inflation have been approximately 1 percent. Thus, in effect, inflation is running at rates that are too low relative to the levels that the Committee judges to be most consistent with the Federal Reserve's dual mandate in the longer run.
If the current inflation rate and its forecast are below the target, consider additional easing. If above, tighten. How complicated is this? The point that is arguably vague is the definition of the “longer run,” but I think it is safe to assume this is the period beyond the three year forecast horizon. More from Williamson:
If we exceed the target are we going to have a lower inflation target for a while?
Note the bias that ignores the recent period of low inflation. The question can be reversed. Since we have been under target recently, shouldn’t we be willing to accept a period of higher than target inflation?
I thought about the costs of inflation earlier, in this post, and would make the case that price level targeting might work well.
Same problem. If Williamson believes that price level targeting might work, then shouldn’t he want a period of above target inflation to return the price level to trend?
Suppose, for example, that our target price level path is 2% inflation forever. Then, intervention by the Fed which always aims to hit the target path within a relatively short period of time (say a quarter or two) should minimize the uncertainty in real interest rates over any horizon. I think real interest rate uncertainty is a key cost of variable inflation, if not the primary one. Most debt is denominated in nominal terms, default is costly, and uncertainty is costly. Just ask Paul Krugman.
Is there anyone that believes the lags in monetary policy are sufficiently short to allow the Fed to always hit an inflation target within two quarters? Anyone? We usually think of long and variable lags to monetary policy. Further on:
In the chart, you can see that headline CPI inflation is about 1% above target, core CPI inflation is about 1.5% below target, and pce deflator inflation is about on target.…Of course, what the Fed should do in this context depends on what measure of inflation it wants to focus on. The Fed, and many economists, make the case that we should focus on some core inflation measure, either core cpi, or the pce deflator with food and energy prices stripped out. The argument is either that movements in volatile prices tend to be temporary, so we should ignore them, or an appeal to New Keynesian ideas, whereby we only care about the sticky prices, which are the non-volatile ones.
No, not quite, the story is more nuanced. Policymakers focus on core inflation because it measures what Paul Krugman describes as "inflation inertia":
Aaron Carroll demolishes an op-ed by Senator Ron Johnson:
Senator Johnson’s odd dislike of the PPACA, by Aaron Carroll: It’s the one year anniversary of the PPACA, and there have been a number of op-eds praising and cursing it. The WSJ took the opportunity to print a piece by Senator Ron Johnson, on the health care his daughter Carey received at birth, and how he is so thankful that the US system was not under the PPACA at the time.
Let me start by saying I’m thrilled Carey received top-notch care and that she’s doing well. I wouldn’t have it any other way. I wish the same for all children who need it. But let’s be clear. She received that care in part because she had insurance, and getting more people insurance is the whole point of the PPACA.
The arguments Senator Johnson makes are numerous. So I want to take them one at a time. Here we go:
The procedure that saved her, and has given her a chance at a full life, was available because America has a free-market system that has advanced medicine at a phenomenal pace.
So much wrong here. First of all, maybe you can make an argument that the free market system of drugs or devices helped here. But the “free market” insurance system? Name me a single procedure developed by an insurance system. We’ve had a single payer system covering everyone over 65 for decades and there have been plenty of improvements in care for the elderly.
I don’t even want to think what might have happened if she had been born at a time and place where government defined the limits for most insurance policies and set precedents on what would be covered. Would the life-saving procedures that saved her have been deemed cost-effective by policy makers deciding where to spend increasingly scarce tax dollars?
...The definitions are setting minimums, not what should not be covered. Nothing at all prevents private insurance companies from creating policies that cover anything, as long as they cover the minimums. Senator Johnson has this completely backwards.
Compared to the U.S., breast cancer mortality is 9% higher in Canada (according to the government statistics of each country), 52% higher in Germany and 88% higher in the United Kingdom (according to studies published in Lancet Oncology). Prostate cancer mortality is 604% higher in Britain.
I’d like to see his data. Here’s what I have. First breast cancer... Here’s prostate cancer... Yes, we do better than a lot of countries in preventing mortality from those cancers. But we’re not the best, and the differences don’t appear to be nearly as large as Senator Johnson says. Moreover, he’s cherry-picking. We’re great at treating those cancers. But here’s overall mortality from cancer:
That’s a much tighter clustering of results. And again – I don’t dispute that we may do some things better here. But to given the credit to our insurance system and claim that the PPACA will change that? Where’s the proof?
Those in need of timely care from specialists are better off in the U.S. Drawing on several peer-reviewed studies, Dr. Scott Atlas of the Stanford University Medical Center notes that patients who need knee and hip replacement, cataract surgery, and radiation treatment wait months longer in the United Kingdom and Canada than in the United States.
Senator Johnson makes a classic mistake here. Who needs the most hip replacements and cataract surgeries in the US? The elderly. How do the elderly get their care financed? Medicare. What is Medicare? A single-payer system. Surely Senator Johnson is not advocating that we should give everyone Medicare because it outperforms Canada and the UK, is he?
Our health-care system has problems that must be addressed. But ObamaCare will make those problems much worse. Instead of increasing consumer choice, it narrows it.
For those who have private insurance through their employers, nothing has changed. For those with Medicare and Medicaid, nothing has changed. For many of the uninsured, they will get Medicaid or have choices in the exchange. We can quibble about some anecdotes, but those are the broad brush strokes.
Instead of encouraging innovation, it stifles creativity. Instead of expanding access to care, it will ration it. And instead of allowing competition to help bring down costs, it increases spending and puts our health-care system on a path to ruin.
Most of the companies and people doing the innovation supported the law. They haven’t made any complaints about creativity. No one is rationing as Senator Johnson suggests, regardless of the rhetoric. And while I agree that it increased spending and doesn’t contain costs enough, the PPACA does more to contain costs than any other laws passed in quite some time.
Moreover, Senator Johnson seems to be under the illusion that no government money or insurance is in the system now. Did the hospital where Carey got her miraculous surgery accept Medicaid? Did it accept Medicare? Did it have an federal funding? Was it an academic medical center? Were residents involved in her care? Did it accept NIH grants? Was the procedure or care delivered developed by people who accepted those grants?
I ask, because all of those are ways in which the federal government contributes to health care right now. And without those things, Carey – and millions of others – may have had much different outcomes. The PPACA gives more people Medicaid and gives some others federal subsidies to buy private insurance. That’s pretty much the gist of it.
We can argue about the details or the cost, but after a year since the law’s passing, it would be nice for the rhetoric to stop. It would also be nice if we could start to have a substantive debate on how to make things better instead of seeing the status quo through rose-colored glasses.
Here are 20 that come to mind:
Free trade is good.
Economics is a science.Climate change is real and it's caused by humans.
The Fed deserves a pat on the back.
Immigration is good.
Reagan and Bush were right all along.
Iraq, Afghanistan, Egypt, Libya.
Trade with China benefits low income households.
There's no need to worry about the national debt.
Healthcare is better in Europe.
Bike lanes impede the free movement of cars.
Sweatshops are better than nothing.
Nobody could have predicted the bubble.
Tax cuts are the answer to almost everything.
Gold is not the answer to anything.
We need big banks.
The rich deserve their incomes.
Spending on food and energy is 44.1% of after-tax income for households in the lowest 20 percent of the income distribution:
The Cost of Food and Energy across Consumers, by Daniel Carroll, Economic Trends, FRB Cleveland: Rising food and energy prices have been getting considerable attention recently. The latest report from the Bureau of Labor Statistics shows that ... [e]nergy rose by 2.1 percent (7.3 percent year-over-year), which is consistent with its longer trend over the past six months. Curiously, given the focus it has received, the rise in food prices has been ... modest, just ... 1.8 percent year-over-year... In fact, food at home is up only 2.7 percent from its lowest point in the past two years. ...
The importance of food and energy prices to households’ bottom lines is not evenly distributed across the income distribution... For the median household, food and energy are roughly 17 percent of both expenditures and after-tax income. Households in the top 20 percent of the income distribution spend 11.6 percent of total expenditures on food and energy, which adds up to 7.9 percent of disposable income. For the bottom 20 percent these shares rise to 20.4 percent of expenditures and a whopping 44.1 percent of after-tax income!
For those astutely wondering why food and energy expenditures are a larger fraction of total expenditures than of total income for the bottom 20 percent, there is a much higher fraction of households in this quintile which may be using savings and credit markets to consume above their annual income. Likely categories are the unemployed, business owners with temporary losses, students living on loans, and retirees drawing down their nest eggs.
Tuesday, March 22, 2011
Robert Shiller says to watch out for farmland:
Bubble Spotting. by Robert J. Shiller, Commentary, Project Syndicate: People frequently ask me ... where the next big speculative bubble is likely to be. ...
I don’t know, though I have some hunches. ... [T]oday’s commodity-price boom ... has ... a “new era” story attached to it. Increasing worries about global warming, and its effects on food prices, or about the cold and snowy winter in the northern hemisphere and its effects on heating fuel prices, are contagious stories. They are even connected to the day’s top story, the revolutions in the Middle East, which, according to some accounts, were triggered by popular discontent over high food prices – and which could themselves trigger further increases in oil prices.
But my favorite dark-horse bubble candidate for the next decade or so is farmland... Of course, farmland is much less important than other speculative assets. For example, U.S. farmland had a total value of $1.9 trillion in 2010, compared with $16.5 trillion for the US stock market and $16.6 trillion for the US housing market. ...
But, farmland ... seems to have the most contagious “new era” story right now. ... And the highly contagious global-warming story paints a scenario of food shortages and shifts in land values in different parts of the world, which might boost investor interest further. ...
The housing-price boom of the 2000’s was ... eliminated with massive increases in supply. By contrast, there has been no increase in the supply of farmland, and the stories that would support a contagion of enthusiasm for it are in place, just as they were in the 1970’s in the US, when a similar food-price scare generated the century’s only farmland bubble.
Still, we must always bear in mind the difficulty of forecasting bubbles. ...