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Globalization’s Government, by Jeffrey D. Sachs, Commentary, Project Syndicate: ...Economic globalization has, of course, produced some large benefits for the world, including the rapid spread of advanced technologies... It has also reduced poverty sharply in many emerging economies – indeed, for this reason alone, the world economy needs to remain open and interconnected.
Yet globalization has also created major problems that need to be addressed. First, it has increased the scope for tax evasion... Moreover, globalization has created losers as well as winners. In high-income countries, notably the US, Europe, and Japan, the biggest losers are workers who lack the education to compete effectively with low-paid workers in developing countries. ... Globalization has also fueled contagion. The 2008 financial crisis started on Wall Street, but quickly spread to the entire world... Climate change, infectious diseases, terrorism, and other ills that can easily cross borders demand a similar global response.
What globalization requires, therefore, are smart government policies. Governments should promote high-quality education, to ensure that young people are prepared to face global competition. They should raise productivity by building modern infrastructure and promoting science and technology. And governments should cooperate globally to regulate those parts of the economy – notably finance and the environment – in which problems in one country can spill over to other parts of the world. ...
The world’s most successful economies today are not in Asia, but in Scandinavia. By using high taxes to finance a high level of government services, these countries have balanced high prosperity with social justice and environmental sustainability. This is the key to well-being in today’s globalized economy. Perhaps more parts of the world – and especially the world’s young people – are beginning to recognize this new reality.
Posted by Mark Thoma on Friday, September 30, 2011 at 05:04 PM in Economics, International Trade |
Mark Muro of Brookings defends the DOE loan guarantee program:
Why the U.S. Should Not Abandon Its Clean Energy Lending Programs, by Mark Muro, Brookings: With the bankruptcy of the California solar-gear manufacturer Solyndra, the Department of Energy (DOE)’s loan program has been excoriated for wasting tax payer money under suspicious circumstances. ...
To be sure, there are problems here, but ... these attacks fundamentally misunderstands the nature of an imperfect but invaluable clean energy finance program. Such misunderstanding is unfortunate; it undercuts support for exactly the kind of prudent, targeted approach the United States should be using to scale up important new industries by deploying the nation’s sophisticated financial markets in ways that minimize taxpayer risk and maximize economic impact.
The reality is the DOE’s loan guarantee program will likely result in minimal costs and large gains for taxpayers—just like many other federal lending efforts.
Begin with the “costs.” The costs to the taxpayer of the Solyndra collapse are going to be far smaller than a reader of the Post or even the sympathetic New York Times editorial page may believe. [explains why] ...
The bottom line: The loan programs have been solid initiatives that have created jobs in a recession, generated $4 to $8 of private lending for every $1 of public investment, begun to scale up important clean energy technologies, and begun the work of financing the long-term restructuring of the U.S. economy.
There is a broader justification for programs like the DOE’s Loan Guarantee Program. These programs are a proven, targeted, low-cost way of addressing critical market failures—like externalities from pollution, asymmetric information—through the use of market-oriented financial tools. Consider this: The U.S. government runs some 70 loan guarantee programs and 63 lending programs that catalyze the financing of everything from transportation infrastructure and rural housing to science parks. More than $3 trillion of taxpayer money is at risk in these programs—$3 trillion some might deem a scandalous form of government intrusion into markets for education, housing, agriculture, exports, and entrepreneurship. Yet it’s hard to find evidence the guarantees waste taxpayer dollars. Indeed, OMB estimates that, on balance, these programs will return $46 billion to taxpayers in 2011.
As to the future, one thing is sure: the nation should not walk away from the promise of loan guarantees like the DOE’s. If anything, we should expand their use and complement them with other deployment finance mechanisms. ...
Today’s American right doesn’t believe in externalities, or correcting market failures; it believes that there are no market failures, that capitalism unregulated is always right. Faced with evidence that market prices are in fact wrong, they simply attack the science.
What this tells us is that we are not actually having a debate about economics. Our free-market advocates aren’t actually operating from a model of how the economy works; they’re operating from some combination of knee-jerk defense of the haves against the rest and mystical faith that self-interest always leads to the common good.
On the "mystical faith that self-interest always leads to the common good," it doesn't. From a previous post:
To listen to some commentators is to believe that markets are the solution to all of our problems. Health care not working? Bring in the private sector. Need to rebuild a war-torn country? Send in the private contractors. Emergency relief after earthquakes, hurricanes, and tornadoes? Wal-Mart with a contract is the answer.
Whatever the problem, the private sector - markets and their magic - beats government every time. Or so we are told. But this is misplaced faith in markets. There is nothing special about markets per se - they can perform very badly in some circumstances. It is competitive markets that are magic, though even then we have to remember that markets have no concern whatsoever with equity, only efficiency, and sometimes equity can be an overriding concern.
In order to work their magical efficiency, markets need very special conditions to be present. There must be full information available to all participants. Product quality, locations and prices of alternative suppliers, every relevant piece of information must be known. Not quite sure if the wine is good or not? That's an information problem. Not sure if the used car has problems? Don't know where any gas stations are except the ones beside the freeway in a strange town? No way to monitor the quality of the building built in Iraq with U.S. aid? No way to be sure if consultants are worth the amount they are being paid? Information problems are common and they can cause substantial departures from the perfectly competitive, ideal outcome.
There also must be numerous buyers and sellers, enough so that no single buyer or seller's decisions can affect the market price. For example, if a firm can affect the market price by threatening to limit supply, the market does not satisfy this condition. If, as some claim, CEOs are in such short supply that they can individually negotiate their compensation, then the market is not producing an efficient outcome. Whenever there are a small number of participants on either side of the market - suppliers or demanders - this is potentially problematic.
In order for markets to work their magic, the product must be homogeneous. That is, the product or input to production sold by all firms in the market must be perfectly substitutable so that as far as the buyer is concerned, one is as good as the other. If some buyers favor one brand over another, if CEOs are perceived to have different and unique talents, this condition does not hold. In many cases the variety may be worth the inefficiency, not many of us would want just one style and color of shirt to be available in stores, but the inefficiency is there nonetheless.
In order for markets to work their magic there must be free entry and exit. Most people understand free entry, but free exit is sometimes less evident, so let me try to give an example. Starting a blog on Blogger or TypePad is easy. Entry is a snap and you can be up and running in no time at all. It's easy to join the competition and start supplying posts. But suppose that later you decide you want to switch to, say, TypePad from Blogger (or the other way around). That is not so easy. There is no way, at least no simple and convenient way, to export all of your old posts from Blogger and import them into TypePad, a significant barrier to exit if a large number of posts must be moved. Whenever barriers exist in markets that prevent free movement into and out of the marketplace or between firms within a market (on either side - there are sometimes barriers to purchasing as well), markets will underperform.
The list goes on and on. In order for markets to work their magic, there can be no externalities, no public goods, no false market signals, no moral hazard, no principle agent problems, and, importantly, property rights must be well-defined (and I probably missed a few). In general, the incentives that the market provides must be consistent with perfect competition, or nearly so in practical applications. When the incentives present in the marketplace are inconsistent with a competitive outcome, there is no reason to expect the private sector to be efficient.
Markets don't work just because we get out of the way. When government contracts are moved to the private sector without ensuring the proper incentives are in place, there will be problems - waste, inefficiency, higher prices than needed, etc. There is nothing special about markets that guarantees that managers or owners of companies will have an incentive to use public funds in a way that maximizes the public rather than their own personal interests. It is only when market incentives direct choices to coincide with the public interest that the two sets of interests are aligned.
If there is no competition, or insufficient competition in the provision of government services by private sector firms, there is no reason to expect the market to deliver an efficient outcome, an outcome free of waste and inefficiency. Why would we think that giving a private sector firm a monopoly in the provision of a public service would yield an efficient outcome? If the projects are of sufficient scale, or require specialized knowledge so that only one or a few private sector firms are large enough or specialized enough to do the job, why would we expect an ideal outcome just because the private sector is involved? If cronyism limits the participants in the marketplace, why would we expect an outcome that maximizes the public interest?
There is nothing inherent in markets that guarantees a desirable outcome. A market can be a monopoly, a market can be perfectly competitive, a market can be lots of things. Markets with bad incentives produce bad outcomes, markets with good incentives do better.
I believe in markets as much as anyone. But the expression free markets is often misinterpreted to mean that unregulated markets are all that is required for markets to work their wonders and achieve efficient outcomes. But unregulated is not enough, there are many, many other conditions that must be present. Deregulation or privatization may even move the outcome further from the ideal competitive benchmark rather than closer to it, it depends upon the characteristics of the market in question.
For government goods and services, when incentives consistent with a competitive outcome are present, we should get government out of the way and privatize, and there are lots of circumstances where this will be appropriate. There is no reason at all for the government to produce its own pencils and pens, buying them from the private sector is more efficient so long as the bids are competitive.
When competitive conditions are not met but can be regulated, the regulations should be put in place and the private sector left to do its thing (e.g. mandating that sellers disclose problems with a house to prevent asymmetric information or mandating that government funded projects be subject to competitive bidding and monitoring to ensure contract terms are met). There's no reason for government to do anything except ensure that the incentives to motivate competitive behavior are in place and enforced.
But rampant privatization based upon some misguided notion that markets are always best, privatization that does not proceed by first ensuring that market incentives are consistent with the public interest, doesn't do us any good. There are lots of free market advocates out there and I am with them so long as we understand that free does not mean the absence of government intervention, regulation, or oversight, even libertarians agree that governments must intervene to ensure basics like private property rights. Free means that the conditions for perfect competition are approximated as much as possible and sometimes that means the presence - rather than the absence - of government is required.
Posted by Mark Thoma on Friday, September 30, 2011 at 09:36 AM
"Republican assertions about what ails the economy are pure fantasy":
Phony Fear Factor, by Paul Krugman, Commentary, NY Times: ...Listen to just about any speech by a Republican presidential hopeful, and you’ll hear assertions that the Obama administration is responsible for weak job growth. How so? The answer, repeated again and again, is that businesses are afraid to expand and create jobs because they fear costly regulations and higher taxes. Nor are politicians the only people saying this. Conservative economists repeat the claim in op-ed articles, and Federal Reserve officials repeat it to justify their opposition to even modest efforts to aid the economy.
The first thing you need to know, then, is that there’s no evidence supporting this claim and a lot of evidence showing that it’s false ... as a new paper by Lawrence Mishel of the Economic Policy Institute documents at length...
So Republican assertions about what ails the economy are pure fantasy, at odds with all the evidence. Should we be surprised?
At one level, of course not. Politicians who always cater to wealthy business interests say that economic recovery requires catering to wealthy business interests. Who could have imagined it?
Yet it seems to me that there is something different about the current state of economic discussion. Political parties have often coalesced around dubious economic ideas — remember the Laffer curve? — but I can’t think of a time when a party’s economic doctrine has been so completely divorced from reality. And I’m also struck by the extent to which Republican-leaning economists — who have to know better — have been willing to lend their credibility to the party’s official delusions.
Partly, no doubt, this reflects the party’s broader slide into its own insular intellectual universe. Large segments of the G.O.P. reject climate science and even the theory of evolution, so why expect evidence to matter for the party’s economic views?
And it also, of course, reflects the political need of the right to make everything bad in America President Obama’s fault. Never mind the fact that the housing bubble, the debt explosion and the financial crisis took place on the watch of a conservative, free-market-praising president; it’s that Democrat in the White House now who gets the blame.
But good politics can be very bad policy. The truth is that we’re in this mess because we had too little regulation, not too much. And now one of our two major parties is determined to double down on the mistakes that caused the disaster.
Posted by Mark Thoma on Friday, September 30, 2011 at 12:33 AM in Economics |
Posted by Mark Thoma on Friday, September 30, 2011 at 12:06 AM in Economics, Links |
The Moral Question, by Robert Reich: We dodged another shut-down bullet, but only until November 18. That’s when the next temporary bill to keep the government going runs out. House Republicans want more budget cuts as their price for another stopgap spending bill.
Among other items, Republicans are demanding major cuts in a nutrition program for low-income women and children. The appropriation bill the House passed June 16 would deny benefits to more than 700,000 eligible low-income women and young children next year.
What kind of country are we living in? ... We’re in the worst economy since the Great Depression – with lower-income families and kids are bearing the worst of it – and what are Republicans doing? Cutting programs Americans desperately need to get through it.
Medicaid is also under assault. Congressional Republicans want to reduce the federal contribution to Medicaid by $771 billion over next decade and shift more costs to states and low-income Americans.
It gets worse. Most federal programs to help children and lower-income families are in the so-called “non-defense discretionary” category of the federal budget. The congressional super-committee charged with coming up with $1.5 trillion of cuts ... will almost certainly take a big whack at this category because it’s the easiest to cut. Unlike entitlements, these programs depend on yearly appropriations. ...
It gets even worse. Drastic cuts are already underway at the state and local levels. ... So far this year, 23 states have reduced education spending. ... Local family services are being cut or terminated. Tens of thousands of social workers have been laid off. Cities and counties are reducing or eliminating their contributions to Head Start...
All this would be bad enough if the economy were functioning normally. For these cuts to happen now is morally indefensible.
Yet Republicans won’t consider increasing taxes on the rich to pay for what’s needed – even though the wealthiest members of our society are richer than ever, taking home a bigger slice of total income and wealth than in seventy-five years, and paying the lowest tax rates in three decades. ...
When Republicans recently charged the President with promoting “class warfare,” he answered it was “just math.” But it’s more than math. It’s a matter of morality. Republicans have posed the deepest moral question of any society: whether we’re all in it together. Their answer is we’re not.
President Obama should proclaim, loudly and clearly, we are.
Posted by Mark Thoma on Thursday, September 29, 2011 at 08:19 PM in Budget Deficit, Economics, Fiscal Policy, Social Insurance |
Federal Reserve Bank of Philadelphia President Charles Plosser voted against Operation Twist -- the recent attempt for the Fed to help the economy -- because:
“The actions taken in August and September tend to undermine the Fed’s credibility by giving the impression that we think such policies can have a major impact on the speed of the recovery. It is my assessment that they will not,” ... “We should not take certain actions simply because we can.”
“If we act as if the Fed has the ability to solve all our economic problems, the credibility of the institution is undermined,” Plosser said. “The loss of that credibility and confidence could be costly to the economy because it will make it much harder for the Fed to implement effective monetary policy in the future,” he said.
He certainly isn't acting like "the Fed has the ability to solve all our economic problems," (and two other Fed officials dissented along with him). In addition, the Fed officials who voted for this action have been careful to say this won't, in fact, solve all of our problems. They've said it can help modestly, and given the state of the economy even modest help is vary valuable, but they have not implied this will suddenly and magically fix our problems. So I really don't see how this action undermines credibility. Fed officials have been clear this is no magic bullet, but they think it could help some and things are so bad -- and the threat of inflation so low -- that they feel compelled to try.
But from Plosser's point of view, the Fed can't do much at all at this point, and the fear of inflation down the road trumps concerns about unemployment now. Plus, the Fed can't do anything about unemployment anyway:
“I am skeptical that this will do much to spur businesses to hire or consumers to spend, given the ongoing structural adjustments occurring in the economy and the uncertainties posed by the fiscal challenges both here and abroad,” Plosser said. Meanwhile, “we should be cautious and vigilant that our previous accommodative policies do not translate into a steady rise in inflation over the medium term even while the unemployment rate remains elevated.”
He is saying that unemployment is largely structural ("given the ongoing structural adjustments") even though it's clear that a large part of it is cyclical, and that uncertainty over fiscal policy is holding the economy back even though bond yields show no sign of this whatsoever. Thus, in his view the structural problems combined with uncertainty are holding back employment, and there's nothing the Fed can do about it.
Is he worried about inflation in the near term? No:
with many commodity prices now leveling off or falling, and inflation expectations relatively stable, inflation will moderate in the near-term
And why should we trust his forecasts in any case? He keeps seeing green shoots that aren't there:
“I was expecting GDP growth in 2011 to be 3% to 3.5%. Now, I expect GDP growth to be less than 2% in 2011, but to gradually accelerate to around 3% in 2012.” He added “I do not believe the current data signal that we are on the precipice of a so-called double-dip recession.”
So he keeps expecting growth that never comes, and uses those expectations along with the excuse that it's structural/uncertainty forestall policy action. What if his forecast for 3% growth in 2012 is as wrong as his previous forecast, and what if there is a double-dip? What if the unemployment problem is largely cyclical like most analysts say? What if, as many have concluded, uncertainty is not the problem? Is he really so certain about his forecasts and views about what's holding the economy back given his track record? With near term inflation falling, why not at least try to do more? Why should inflation risk trump the risk of continued sluggish growth (which in and of itself alleviates inflation concerns if it happens)? Is somewhat higher inflation down the road -- if it even happens -- really more worrisome than a period of elevated unemployment?
And why should this action produce inflation in any case? Operation Twist doesn't change the size of the Fed's balance sheet, it changes the average duration of the assets the Fed holds. If the balance sheet doesn't expand how, exactly, does that create inflation pressure to any significant degree? If there's no inflation pressure, what is the real concern? It appears to be the credibility argument and the fact that unemployment can't be helped -- it's structural/uncertainty -- but as noted above the structural/uncertainty claim is easy to rebut, and the concerns over credibility ring hollow. So he might at least consider the possibility that he has this wrong.
For me, one of the most frustrating thing about policy over the last several years is the continued insistence from some Fed officials that good times are just around the corner so any action they take will be inflationary. They have been wrong again and again, yet the optimism about future growth -- green shoots -- remains. Like Paul Krugman, I have been warning about a slow recovery since at least 2008, and warning about seeing green shoots that aren't there for almost as long, and it's disappointing to see policymakers continue to use the promise of good times just ahead -- especially policymakers who have been wrong again and again -- along with the easily refuted claim that the problem is all uncertainty and structural issues as an excuse to stand against doing more to try to help the unemployed (however modestly).
Posted by Mark Thoma on Thursday, September 29, 2011 at 11:07 AM in Economics, Monetary Policy, Unemployment |
Brad DeLong explains how to get A Free Lunch for America.
Posted by Mark Thoma on Thursday, September 29, 2011 at 09:36 AM in Economics, Fiscal Policy, Unemployment |
This is part of a much, much longer interview of Daron Acemoglu:
Interview with Daron Acemoglu, by Douglas Clement, The Region, FRB Minneapolis: ... Job Markets Region: You’ve done a great deal of research on labor market imperfections, looking at search frictions and asymmetric information, as well as important work on directed job search, matching efficiency and the impact of unemployment insurance. What’s your sense of the impact those factors are having on the current U.S. job market?
Acemoglu: I pondered exactly that question over the last few years. Who hasn’t, I suppose? [Laughs.] And I guess I have a two-layered answer. I tend to think that there are serious structural problems with the U.S. labor market that will keep the economy down more and more over the next decade. They’re related to the fact that our workforce, especially the male half, hasn’t really made an adjustment to the new technologies and types of skills that are required.
Labor market imperfections play a role in that, in the sense that I think most people are not sufficiently informed about the sort of skills that they will require. ... U.S. workers who don’t have college degrees are not going to be able to get good-paying manufacturing jobs. ...
Region: Some contend that labor market factors like these have raised the structural rate of unemployment.
Acemoglu: Right, yes. I was just getting to that idea in fact. I would probably agree with the statement that these factors have raised the structural rate. But I don’t agree—and I think it’s hard to agree—with the statement that what we are seeing right now in the U.S. labor market is just structural unemployment. It seems quite clear that the sudden increase in and the composition of joblessness points out that this unemployment experience is really related to the downturn in economic activity. I think it also highlights that at some level, despite decades of very productive work, we economists haven’t really made as much progress in understanding cyclical unemployment as we thought.
At some level, this wasn’t so much of an embarrassment for us because the United States previously had relatively low unemployment, so most labor economists in the United States didn’t really worry about unemployment, and most macroeconomists worried much more about employment than unemployment. Even when search models have been successful in thinking about some conceptual issues, I don’t think they have been really that useful for thinking about why is it that we have these long periods of unemployment?
I think we probably need sort of a paradigm shift there, to combine some of the elements of the search model, perhaps, with some other ingredients in order to understand these things. ...
"Top Inequality" & Political Processes
Region: Earlier this year, at the American Economic Association meeting, you said that top inequality (the top 99th percentile) and the financial crisis itself might be due to “the peculiar political processes that have been under way in the United States over the last 25 years.”
Can you elaborate on what you meant?
Acemoglu: Yes, sure. I think it’s useful to put that into perspective, because that was commenting on a well-known thesis, that’s become even better known over the last year or so, proposed by Raghu Rajan at the University of Chicago. And Raghu is a leading financial economist and has written many insightful pieces, including a wonderful book called Fault Lines. ...
I sympathize with 80 percent of the book greatly. But the 20 percent that has perhaps received the most attention, including by Raghu himself, I think, in his presentations, is about this new thesis ... that the root of the crisis was a regulatory response to the rising inequality experienced in the United States. I think this 20 percent is less compelling.
And the story goes like this: Inequality has been rising in the United States, and I think by that he was referring not to the top 1 percent inequality, but inequality between the bottom quarter and top quarter, or middle and the top quarter. It’s been rising for exogenous reasons, for reasons unrelated to finance or to banking regulations and so on. This rise in inequality generated demand for appeasing the bottom of the distribution, and the political process responded by giving them cake instead of bread, so to speak—by giving them housing. And it did so by encouraging the GSEs [government-sponsored enterprises such as Fannie Mae and Freddie Mac] to give lower-income people unsustainably cheap credit or subprime lending and mortgages.
Region: Creating the “ownership society.”
Acemoglu: Exactly: the “ownership society.” And the house of cards that was created came tumbling down. That would be my summary of the 20 percent of Raghu’s book that he emphasizes a lot and is the part that I disagree with.
So when I made that comment about top inequality and the crisis being due to the political process, it followed other remarks I made to explain why, in my opinion, this thesis doesn’t hold water.
Why not? First, I think evidence that the demand for redistribution from the bottom was strongest in the 2000s is nonexistent. If anything, it was stronger in the 1980s, which was a time when the bottom of the income distribution was falling and, in fact, there was a stronger labor movement to demand such changes. If you look at the 2000s, the bottom of the income distribution is doing well, actually, for the reasons that we just talked about. In fact, the middle is not doing all that badly either in the 2000s, relative to what was going on before. So the 2000s seem to be a particularly peculiar time for people to make those demands.
Second, I actually see no evidence, qualitative or quantitative, that even if people at the bottom did make such demands, the political system would respond to it. Over time, the U.S. political system seems to have become much less responsive to what’s being demanded by the bottom.
And third, I didn’t see any evidence that GSEs really played such an important role in this whole thing. They were relatively late arrivals into the subprime scene, which the private sector had fought very hard to carve out away from the GSEs and had successfully done so. Then the GSEs came in because they thought this was a profitable opportunity.
Region: So the demand timing was wrong, the political response wasn’t really there and the institutional details weren’t quite right either.
Acemoglu: Yes, the details of the institutional process just don’t seem to work out. Now, for all of this, we don’t have conclusive evidence, but existing evidence doesn’t seem to support the thesis.
And at the end, I said that if there was going to be any link between inequality and the financial crisis, I would have put it another way, which is that the financial crisis and the inequality of the top 1 percent, which has a heavy overrepresentation from the financial sector, has been an outcome of the political processes that have removed all of the regulations in finance, and so created the platform for 40 percent of U.S. corporate profits to be in the financial sector—which is just an amazing number. That is where financial sector profits stood at the time.
Region: Really, 40 percent? Wow.
Acemoglu: Exactly, wow. ... They were amazingly overrepresented in the top 0.1 percent of the income distribution. And the thing is that this was underpinned by a political process, in the sense that it was an outcome of this lack of regulation and the way that we have allowed the laws to be changed for things such as subprime, and the relationship between investment banking and regular banking. And those things also played a major role, obviously, in the run-up to the financial crisis.
So it could well be that a political process that responded not to the bottom of the income distribution, but to the lobbying, financial and expertise power of the very top of the income distribution might have been responsible for these two processes. ...
Posted by Mark Thoma on Thursday, September 29, 2011 at 12:24 AM in Economics |
Posted by Mark Thoma on Wednesday, September 28, 2011 at 10:08 PM in Economics, Links |
A few quick and somewhat scattered comments on Bernanke's speech today:
Ben Bernanke and the Washington Consensus
Posted by Mark Thoma on Wednesday, September 28, 2011 at 06:30 PM in Economics, Fed Speeches, Monetary Policy |
Laurence Kotlikoff misrepresents the views of Paul Krugman and Jamie Galbraith:
Five Prescriptions to Heal Economy’s Ills, by Laurence Kotlikoff, Bloomberg: Desperate times call for creative measures. We’re in desperate times, but we’ve had little creative thinking from the Obama administration on how to fix the economy. ... I see five things policy makers can do to get the economy going. ...
4. Get prices and wages unstuck.
Some prices and wages are set too high, thereby damping demand for output and for the workers needed to produce it. This is the standard sticky wage and price explanation for our economic malaise offered by Keynesian economists such as Paul Krugman and James Galbraith. I think there are fewer markets suffering from this problem than Krugman and Galbraith do, but there are enough such markets to make the case for government intervention. Indeed, the president should put these economists in charge of identifying the markets suffering from this problem and helping their participants set market-clearing prices and wages.
One example is the market for construction workers. A 1931 law called the Davis-Bacon Act effectively requires contractors using federal money to pay union wages. If the act were suspended or repealed, federal spending on much-needed infrastructure projects could create a lot more jobs.
In comments, Jamie Galbraith corrects the record:
...I have never written, argued or believed that unemployment can be cured by cutting wages. Nor does that position have anything to do with Keynes, who wrote The General Theory to debunk this view. Keynes favored stable money wages, writing: "it is fortunate that the workers, though unconsciously, are instinctively more reasonable economists than the classical school, inasmuch as they resist reductions of money wages..."
It seems likely that Professor Kotlikoff has never read Keynes either.
Here's Paul Krugman's dismissal of this idea: Wages and recovery.
Posted by Mark Thoma on Wednesday, September 28, 2011 at 12:15 AM in Economics, Unemployment |
Opinions and Rumors, by Tim Duy: Federal Reserve President Richard Fisher today attempted to defend his ongoing policy dissent. He gives plenty of material to work with, beginning with his version of research ahead of an FOMC meeting:
Before every FOMC meeting, I survey a select group of 30 or so private business and banking operators, imparting no information about monetary policy but listening carefully to their perspectives on developments in the economy as seen at the ground level. For weeks leading up to the meeting, there was speculation in the financial markets and in the press that an Operation Twist was being contemplated. I received an earful of opinions on these rumors.
A big red flag right away. He claims to listen to survey contacts on the state of the economy, but does he tell us what they said about the economy? No, of course not. Instead, he emphasizes that he heard a lot of opinions about rumors. Pay very close attention to what Fisher is saying. He is saying he does not attempt to make policy on the basis of economic fact. He believes policy should be made on the basis of random speculation. I guess it is too much work to look beyond that random speculation. He continues:
What I gleaned from those conversations was as follows:
Embarking on an Operation Twist would provide an even greater incentive for the average citizen with savings to further hoard those savings for fear that the FOMC would be signaling the economy is in worse shape than they thought.
The economy is in worst shape than the FOMC believed just months ago. Is it Fisher’s contention that the Fed’s best policy is to attempt to hide this fact? Apparently so – good luck establishing a credible monetary policy when the stated intent is to lie about the actual state of the economy.
They might view an Operation Twist as setting the stage for a new round of monetary accommodation―a QE3, if you will. Such a program was considered redundant by business operators given their surplus of undeployed cash holdings and bankers’ already plentiful excess reserves.
Actually, apparently market participants came to exactly the opposite conclusion and, realizing the path to QE3 was longer than initially believed, bid down long-term inflation expectations. More:
In addition, such a program might frighten consumers by further driving down the yields they earn on their savings and/or lead to long-term inflation that would erode the value of those savings;
I don’t know how you drive yields down any further, as the average savings account is paying nearly zero percent. And the second sentence doesn’t follow from the first – if rates are near zero, it is only because the environment is decidedly non-inflationary. See the point above. Again, the lack of significant action on the part of the Federal Reserve is dragging down inflation expectations and real interest rates. Only in Fisher’s fantasy land is the opposite happening. More objections:
The earning power of banks, both large and small, would come under additional pressure by suppressing the spread between what they can earn by lending at longer-term tenors and what they pay on the shorter-term deposits they take in;
I think this point gets overplayed. The prime-lending rate has been locked up at 3.25% since the beginning of 2009. The spread between the prime lending rate and short-term deposit rates:
Sure enough spread between the two has hovered around 300bp since 1990, holding true to the rule of thumb that the prime rate is 300bp plus the fed funds rate. Another example - the 24 month personal loan rate was 12.41% in 2006 when 1 month CD rates were 5%. Now the same loan rate is 11.47%, for a much wider spread. Same story with credit card rates, which have only come down a fraction of the amount of short rates. All of which makes me doubt this concern that Fed policy is deterring lending activity by crushing yields on Treasury debt (although I can see where it erodes the earnings on any Treasury debt held by the banking sector). Indeed, the opposite is occurring. Lending activity is on the rise for at least one segment of the market:
Apparently someone is lending money, although admittedly the consumer market is more challenging. If anything, the necessity of the banking community to earn a spread places a lower limit on lending rates, which explains the 3.25% prime rate which in turn would limit the uptake of loans (and justifies the use of higher inflation expectations to bring down real rates).
The ability to lend, however, is not only determined by the rate spread, but also by the demand from credit-worthy borrowers – and that demand has been sorely lacking as households deleverage. See also this note from the Wall Street Journal suggesting Operation Twist was a subsidy for banks. A final point is that looking through FDIC reports, the net interest margin has hovered within 25bp of 3.5% for the last decade. In 2Q11 it was 3.61% and in 2Q05 it was 3.49%. True enough, a few basis point lower spread is meaningful. But what is more important at this point is to see even higher loan growth to profit on that margin. And that is what the Fed is trying to induce. If the Fed allows the economy to slow and loan demand to falter, a slightly higher margin might not be sufficient to prop up earnings, not to mention the impact of additional loan-loss provisions that would come into play. In short, lots of dynamics on this issue. More from Fisher:
Pension funds would have to reassess their potential returns, with the consequence that public and private direct-benefit plans would have to set aside greater reserves that might otherwise have gone to investments stimulating job creation
Yes, low interest rates place an additional burden on pension funds, just as low rates squeeze the returns for savers. But is it the Fed driving rates lower, or is the Fed just following the economy. I think it is more the latter than the former. If the Fed was actually pursuing an aggressive monetary policy, the economy would firm and long rates rise. The problem is that, contrary to the belief at Constitution Ave., the Fed's commitment to supporting economic activity is only half-hearted. And does Fisher really believe everything would be better if the Fed hiked rates by 200bp? Would pension funds really be better off if we knocked 25% off of equity valuations? More:
Expanding the holdings of the Fed’s book of longer-term debt would likely compound the complexity of future policy decisions. Perversely, the stronger the economy, the greater the losses the Fed would incur as interest rates rise in response and the prices of those longer-term holdings depreciate. The political incentive to hold rates down might then become stronger precisely when we want to initiate tighter monetary policy. This concern, of course, would be a good news/bad news issue: The good news is that it would stem from a stronger economy; the bad is that might hurt our maneuverability and, in doing so, might undermine confidence in the Fed to conduct policy independently.
This concern over the Fed’s balance sheet is way overblown. First, San Francisco Federal Reserve economist Glenn Rudebusch addressed this issue earlier this year, concluding that:
Such interest rate risk appears modest, especially relative to the Fed's policy objectives of full employment and price stability
Second, then Governor Ben Bernanke already dismissed this concern in 2003, and noted very clearly it would be a mistake to allow such concerns to prevent the central bank from acting. The Fed should simply reach an agreement with Treasury to take this concern off the table entirely, otherwise Fisher and his ilk will just continue to use it as an excuse to justify inaction. And, quite frankly, rather than basing policy on "opinions on these rumors," wouldn't a real policymaker attempt to explain why such opinions are unfounded? He continues:
One other factor gave me pause and that was, and remains, the moral hazard of being too accommodative. For years, I have been arguing that monetary policy cannot solve the problem of substandard economic performance unless it is complemented by fiscal policy and regulatory reform that encourages the private sector to put to work the affordable and abundant liquidity we are able to create as the nation’s monetary authority.
The argument here is that the Fed is enabling a dysfunctional fiscal process by attempting to aid the economy. In other words, according to Fisher, the Fed needs to let the economy collapse to prove a point about fiscal policy. That sounds great around the coffee table, but in reality, such wanton disregard for economic welfare only promises to leave behind a mountain of collateral damage.
Finally, Fisher channels former Federal Reserve Chairman Paul Volker:
Paul Volcker, who has the scars on his back from his Herculean effort to rein in inflation in the 1980s, wrote of this in the New York Times on Sept. 18. He reminded us that once unleashed, inflation combines with stagnation to make stagflation, the most painful of all combinations for the poor, for workers, for job seekers, for bond and stock holders and for businesses trying to navigate the economy.
I addressed this last week. Ultimately, for all his antics, this is what Fisher is about - hard money. He might claim that:
…while I remain on constant watch for signs of inflationary impulses, I believe the most urgent issue is job creation and the reduction of the scourge of unemployment.
but in reality he sees nothing but economic apocalypse in 3% inflation. He cannot wrap his mind around one simple fact – the 1970’s began with 2.5% unemployment. We are currently facing unemployment above 9%. Apples and oranges. But Fisher is simply too intellectually lazy to attempt to differentiate between apples and oranges. For him, policy begins and ends with a single idea: Hard money is just morally good. And he will base policy on any "opinions on these rumors" that sound like they support his ideological conviction.
Posted by Mark Thoma on Wednesday, September 28, 2011 at 12:06 AM in Economics, Fed Watch, Monetary Policy |
Posted by Mark Thoma on Wednesday, September 28, 2011 at 12:01 AM in Economics, Links |
The importance of economic history, by Kevin O’Rourke: Paul Krugman is upset about some pretty fanciful accounts of what supposedly happened during the Great Depression, and I don’t blame him. He also wonders whether economics is a progressive science (I am using the word ’science’ in its German sense). Well, one of the things that philosophers of science have argued about in the past is whether, when you have a paradigm shift, you end up losing knowledge, and it’s pretty clear what has happened in this instance. ... [F]or example, I have been reliably informed that a well-known department stopped teaching its undergraduates IS-LM just before the crisis hit in 2008. And the result is that you had people seriously peddling the line that austerity would be expansionary in the wake of the biggest downturn since the 1930s — and these claims were influential in Europe, it seems clear, in the fateful spring and summer of 2010.
One lesson is that it is one thing to play counter-intuitive intellectual parlour games in order to get tenure at a fancy university, but another thing entirely to say something about the real world. For that you need a little common sense.
Another lesson is that economists need at least some training in economic history. No-one with the slightest feeling for historical reality could believe that the Great Depression was due to supply side forces, for example. I observe that Krugman, along with such luminaries as Maurice Obstfeld and Ken Rogoff, did his graduate work in MIT, and I surmise (without having any inside knowledge on the matter) that all three were exposed to Charlie Kindleberger and Peter Temin. They are all distinguished theorists, but also have a historical sensitivity, and this makes them better economists — if your definition of a good economist includes the ability to say sensible things about our very messy real world.
One of the most important things that a bit of history gives you is a sense of the importance of context. A model will work very well in some technological or institutional contexts, but not in others. For example, the Reverend Malthus devised a model that did a pretty decent job of describing the world up to the point that he started writing, but which soon became essentially irrelevant in the century that followed, at least in the richer countries of the world. (He had an economist’s sense of timing.) Sometimes the world is well-described by Keynesian models, and sometimes it is not. And so on.
If the only thing that economic history did was protect us from one-size-fits-all merchants, it would still be worth the price of admission.
[I'd have to agree with his points about the use of models, and about the value of economic history.]
Posted by Mark Thoma on Tuesday, September 27, 2011 at 06:48 PM in Economics, Macroeconomics, Methodology |
I worry about this too, i.e. that the more progressive Social Security becomes (and hence the more income redistribution that is part of the system), the less political support it will have:
Should Social Security Be Progressive?, by James Kwak: ...Should Social Security be more progressive than it already is? The most common ways liberals want to make it more progressive are (a) eliminating the cap on taxable earnings altogether and (b) reducing benefits for high earners. For part of my brain the automatic answer is “yes,” but I think there is a reasonable argument for leaving things roughly the way they are.
First, there’s a straight-up political argument. Social Security is popular because people feel like they earn their benefits. If people thought it was a covert redistribution program, then the high earners would definitely be against it, and most of the middle class probably would be too because of the American allergy to welfare. In fact, there are certainly people who think it is “pure welfare”, like the author of the post I criticized last time around. But it isn’t..., the retirement program on its own is only modestly progressive. The really progressive parts of the program are disability insurance and survivors’ benefits. The fact is that there isn’t that much redistribution based solely on income level; most of the “redistribution” is based on disability or having your spouse die young, which feels more like insurance than welfare. It turns out that most Americans’ instincts are right: Social Security isn’t a welfare program. ...
Now some people ... say that Social Security should be more progressive. But I’m not so sure. Conceptually speaking, I think of Social Security as contributory pension system run by the federal government along with an insurance component to protect people against various risks—disability, early death of your working spouse, bad luck that prevents you from saving enough for retirement, living too long, etc. ... I think of this governmental function as different from the welfare function—the one that ensures that everyone person has the basic means of subsistence. (Wait, we don’t have that in this country? Well, we should.) And that’s precisely what the founders of Social Security thought; they saw it as an alternative to noncontributory old-age assistance programs, which is what the conservatives preferred. ...
So to me, it makes the most sense to have (a) a contributory pension/insurance scheme that compensates participants for losses (e.g., disability) but is not mainly about redistribution; (b) a real welfare system for the poor; and (c) a progressive tax system to fund the rest of the government. And I worry that if you make (a) too much like (b) or (c) it will become unpopular and die a slow death. But I’m open to being convinced otherwise.
I view Social Security fundamentally as a social insurance program, not welfare, and as noted above I think that's important for its political support. But if it comes down to a choice between raising the income cap or cutting benefits for middle and lower class households, I favor raising the cap. (I favor this over means testing benefits -- if we stop sending checks to part of the population, that will erode support much faster than increasing the income cap. Most people would hardly notice an increase in the cap, but they'd notice if the checks stopped. And I certainly favor this option over raising the retirement age.)
Posted by Mark Thoma on Tuesday, September 27, 2011 at 10:08 AM in Economics, Politics, Social Insurance |
I have a new column on the need for Federal Reserve independence:
How the GOP Assault on the Fed Could Backfire
I expect disagreement on this one. The emphasis is on the long-run, but I wish I would have had the space to talk more about the short-run, i.e. that the Fed could be more aggressive in the short-run and allow inflation to rise temporarily without abandoning its commitment to long-run price stability. That's implied by the statement that "I don’t think the voice of the unemployed is adequately represented in monetary policy decisions," but it may not be clear. I also wish I would have had the space to talk about why a return to the gold standard -- which is behind some of the attacks on the Fed -- is a bad idea.
Posted by Mark Thoma on Tuesday, September 27, 2011 at 08:46 AM in Economics, Fiscal Times, Monetary Policy |
The Bernanke of 2003, by Tim Duy: Ryan Avent reminds us of a depressing point:
...Ben Bernanke seems to have forgotten everything he once knew about the crises in the 1930s and in Japan in the 1990s. America is sinking back toward recession while the global economy nears a cliff, and the Fed—by its own acknowledgment—has plenty of heavy ammunition sitting untouched on the shelf.
I recently had reason to re-read then Federal Reserve Governor Ben Bernanke's 2003 speech on Japanese monetary policy, and realized again that he eliminated virtually every objection to doing more. Concerned about a temporary inflation increase beyond the target rate? Not an problem, according to Bernanke:
A concern that one might have about price-level targeting, as opposed to more conventional inflation targeting, is that it requires a short-term inflation rate that is higher than the long-term inflation objective. Is there not some danger of inflation overshooting, so that a deflation problem is replaced with an inflation problem? No doubt this concern has some basis, and ultimately one has to make a judgment. However, on the other side of the scale, I would put the following points: first, the benefits to the real economy of a more rapid restoration of the pre-deflation price level and second, the fact that the publicly announced price-level targets would help the Bank of Japan manage public expectations and to draw the distinction between a one-time price-level correction and the BOJ's longer-run inflation objective. If this distinction can be made, the effect of the reflation program on inflation expectations and long-term nominal interest rates should be smaller than if all reflation is interpreted as a permanent increase in inflation.
Fearing the possible capital loss on the Fed's balance sheet should interest rates need to rise quickly? Bernanke offers a solution:
In short, one could make an economic case that the balance sheet of the central bank should be of marginal relevance at best to the determination of monetary policy. Rather than engage in what would probably be a heated and unproductive debate over the issue, however, I would propose instead that the Japanese government just fix the problem, thereby eliminating this concern from the BOJ's list of worries. There are many essentially costless ways to fix it. I am intrigued by a simple proposal that I understand has been suggested by the Japanese Business Federation, the Nippon Keidanren. Under this proposal the Ministry of Finance would convert the fixed interest rates of the Japanese government bonds held by the Bank of Japan into floating interest rates. This "bond conversion"--actually, a fixed-floating interest rate swap--would protect the capital position of the Bank of Japan from increases in long-term interest rates and remove much of the balance sheet risk associated with open-market operations in government securities. Moreover, the budgetary implications of this proposal would be essentially zero, since any increase in interest payments to the BOJ by the MOF arising from the bond conversion would be offset by an almost equal increase in the BOJ's payouts to the national treasury
Is the debt an impediment to additional fiscal policy? We can fix that, too:
In addition to making policymakers more reluctant to use expansionary fiscal policies in the first place, Japan's large national debt may dilute the effect of fiscal policies in those instances when they are used. For example, people may be more inclined to save rather than spend tax cuts when they know that the cuts increase future government interest costs and thus raise future tax payments for themselves or their children...If, as a result, they react to increases in government spending by reducing their own expenditure, the net stimulative effect of fiscal actions will be reduced. In short, to strengthen the effects of fiscal policy, it would be helpful to break the link between expansionary fiscal actions today and increases in the taxes that people expect to pay tomorrow.
My thesis here is that cooperation between the monetary and fiscal authorities in Japan could help solve the problems that each policymaker faces on its own. Consider for example a tax cut for households and businesses that is explicitly coupled with incremental BOJ purchases of government debt--so that the tax cut is in effect financed by money creation. Moreover, assume that the Bank of Japan has made a commitment, by announcing a price-level target, to reflate the economy, so that much or all of the increase in the money stock is viewed as permanent.
The supposed impediments to additional policy, according to Bernanke himself, are illusionary. Simply ghost stories to scare the public into thinking there are no more policy options. So why the delay? It all comes back to deflation:
In that spirit, my remarks today will be focused on opportunities for monetary policy innovation in Japan, including specifically the possibility of more-active monetary-fiscal cooperation to end deflation.
In Bernanke's view, only obvious evidence of deflation justifies the use of aggressive policy. And with downward nominal wage rigidities, the US outcome may very well be one of persistent low inflation, not outright deflation like Japan:
If average hourly wages for all employees are locked up on the downside at 1.75% y-o-y growth, I suspect outright, sustained deflation will not be likely. And without deflation, aggressive policy is unlikely. And without aggressive policy, a rapid rebound to trend is out of the question.
Bottom Line: It has got to get a lot worse before policymakers will pull out all the stops to try to make it better.
Posted by Mark Thoma on Tuesday, September 27, 2011 at 12:24 AM
Posted by Mark Thoma on Monday, September 26, 2011 at 10:01 PM in Economics, Links |
There are quite a few reactions to the interview of Robert Lucas in the WSJ, e.g. see Noah Smith, Karl Smith, and Paul Krugman. Antonio Fatas picks up the European angle:
Macroeconomics: Evidence or Ideology: The Wall Street Journal had a weekend interview with Robert Lucas... He is asked about the economic situation in the US and Europe. When asked about the US he talks about the cost of uncertainty about future taxes. When he is asked about Europe, he talks about the cost of high taxes. From the interview:
For the best explanation of what happened in Europe and Japan, he points to research by fellow Nobelist Ed Prescott. In Europe, governments typically commandeer 50% of GDP. The burden to pay for all this largess falls on workers in the form of high marginal tax rates, and in particular on married women who might otherwise think of going to work as second earners in their households. "The welfare state is so expensive, it just breaks the link between work effort and what you get out of it, your living standard," says Mr. Lucas. "And it's really hurting them."
No doubt that (theoretically) high taxes could discourage effort but is this statement empirically relevant? Below is a chart of marginal tax rates (as estimated by the OECD) and the female employment to population ratio for the age range (25-54) for 2010. I have chosen that particular employment to population ratio because it matches the statement in the quote above (the chart looks similar if we look at a different age range or male participation rates).
Do we see more or less effort in countries with high tax rates? Not obvious. In fact, in the sample I have selected there seems to be a positive correlation, not a negative one. Countries with strong welfare state, high taxes (both average and marginal) show higher level of efforts as measured by employment to population ratios. The US appears as a country with low taxes but also low levels of effort.
The chart above is, of course, not the final answer to the question of how taxes affect labor market outcomes but at least it gives as good argument to dispute the claim that all European problems are about high taxes.
Posted by Mark Thoma on Monday, September 26, 2011 at 02:52 PM
Beware the Wrong Lessons from Poverty and Income Data, by Jeff Madrick: ...The poverty data released by the Census Bureau last week may well be the straw that broke the camel’s back — the camel being those deliberately blind people who can’t seem to acknowledge that most Americans are doing poorly. Average Americans should not be the ones who have to shoulder the burden of balancing the budget, even if it needed balancing soon.
The poverty rate is now as high as it was during the war on poverty of the 1960s — about 15 percent. The Census also revealed that median household income went nowhere under George W. Bush and is now down to its lowest level since 1997, essentially before the Clinton boom.
Even more deplorable, the young in America have been hit hardest. Economists at Northeastern University have been showing for years how low wages are for those in their twenties, if they can find a job at all. Now they calculate that 37 percent of young families with children live in poverty — more than one in three. It was one in five when Bush came to office.
But the reason I am writing this is ... that the elderly have taken a far smaller hit than the rest. Is this going to be the new argument for reducing Social Security and Medicare benefits?
The truth is much the opposite: These findings are an argument for a stronger safety net. The reason the elderly are not doing as poorly is precisely because of Social Security, Medicare, and Medicaid. ...
So let’s not use these data to claim justification for cutting back social programs for the elderly. They show that the safety net is doing what it is supposed to do, which is to protect people from the ravages of a damaged economy. What we should be doing is expanding the safety net and getting the economy to start producing good old-fashioned American-style wage gains again. Can we afford new social programs for the young? Of course we can. We are among the lowest taxed of rich nations. ...
The argument that the elderly don't need Social Security is like arguing the bars on the windows are not needed because nobody's ever broken in.
Posted by Mark Thoma on Monday, September 26, 2011 at 10:08 AM in Economics, Social Insurance |
The end of the road for the euro?:
Euro Zone Death Trip, by Paul Krugman, Commentary, NY Times: Is it possible to be both terrified and bored? That’s how I feel about the negotiations now under way over how to respond to Europe’s economic crisis...
On one side, Europe’s situation is really, really scary: with countries that account for a third of the euro area’s economy now under speculative attack, the single currency’s very existence is being threatened — and a euro collapse could inflict vast damage on the world.
On the other side, European policy makers seem set to deliver more of the same. They’ll probably find a way to provide more credit to countries in trouble, which may or may not stave off imminent disaster. But they don’t seem at all ready to acknowledge a crucial fact — namely, that without more expansionary fiscal and monetary policies in Europe’s stronger economies, all of their rescue attempts will fail.
The story so far: The introduction of the euro in 1999 led to a vast boom in lending to Europe’s peripheral economies, because investors believed (wrongly) that the shared currency made Greek or Spanish debt just as safe as German debt. ... But when the lending boom abruptly ended, the result was both an economic and a fiscal crisis. ...
So now what? Europe’s answer has been to demand harsh fiscal austerity,... meanwhile providing stopgap financing until private-investor confidence returns. Can this strategy work?
Not for Greece... Probably not for Ireland and Portugal... But given a favorable external environment — specifically, a strong overall European economy with moderate inflation — Spain ... and ... Italy ... could possibly pull it off.
Unfortunately, European policy makers seem determined to deny those debtors the environment they need. ... And I see no sign at all that European policy elites are ready to rethink their hard-money-and-austerity dogma.
Part of the problem may be that those policy elites have a selective historical memory. They love to talk about the German inflation of the early 1920s — a story that, as it happens, has no bearing on our current situation. Yet they almost never talk about a much more relevant example: the policies of Heinrich Brüning, Germany’s chancellor from 1930 to 1932, whose insistence on balancing budgets and preserving the gold standard made the Great Depression even worse in Germany than in the rest of Europe — setting the stage for you-know-what.
Now, I don’t expect anything that bad to happen in 21st-century Europe. But there is a very wide gap between what the euro needs to survive and what European leaders are willing to do, or even talk about doing. And given that gap, it’s hard to find reasons for optimism.
Posted by Mark Thoma on Monday, September 26, 2011 at 12:24 AM in Economics, International Finance |
Posted by Mark Thoma on Sunday, September 25, 2011 at 10:01 PM in Economics, Links |
Frames, by Jared Bernstein: As I’ve stressed in the past, I don’t put a whole lot of weight on the importance of how issues are framed. It’s important, for sure, but underlying power dynamics are what matters most, and history is littered with carefully, compellingly framed arguments that lost because one side had deeper pockets and greater access than the other. ...
In this regard, the most salient difference in this context between today versus the days of FDR is not just the rhetoric or framing. It’s the underlying faith in American institutions, most notably government.
Greenberg’s point is that absent that faith, a positive frame, even if it’s based in fact (we really do have the right ideas re economic security and they really don’t) will fail to resonate.
This means progressives have some heavy lifting to do. Our work must be to re-establish faith in the institution of government…the belief that this institution is a force for good in your lives and can be more so. And that has to come from explanation, evidence, and effective implementation of government programs.
It also underscores the importance of the current fight for fairness: if people continue to believe that government has devolved into an ATM for the wealthy, an enforcer of the inequality-inducing policy agenda, and a bailer-outer of the rich and the reckless, no frame will be smart enough to convince them otherwise.
It's not just framing. People believe that government policy has tilted toward the wealthy in recent years for good reason, and I agree that it will take more than framing to turn that around. People need to believe that government is working for them -- that their interests matter in the political process. The future of the working class has become more and more uncertain in recent years, and government has not stepped up with the help that is needed. The interests of the wealthy have been addressed, but when, the average person wonders, will government care about me?
Posted by Mark Thoma on Sunday, September 25, 2011 at 10:35 AM in Economics, Politics |
Posted by Mark Thoma on Saturday, September 24, 2011 at 10:01 PM in Economics, Links |
Christina Romer takes on several arguments against Obama's job creation proposal, e.g. that worry about the deficit is standing in the way:
A Plan on Jobs Deserves a Hearing, by Christina Romer, Commentary, NY Times: ... People are concerned about the deficit, and this concern is holding back the recovery. Fiscal austerity, not more stimulus, is the answer.
This argument makes me crazy. There’s simply no evidence that concern about the current deficit is a significant factor limiting consumer spending or business investment. And government borrowing rates are at record lows, suggesting that financial markets are not worried about the deficit, either.
Moreover, as I discussed in a previous column, the best evidence shows that fiscal austerity depresses growth and raises unemployment in the near term. That’s the experience of countries like Greece, Portugal and Britain... Cut the current deficit and you will raise unemployment, not lower it.
Like many other countries, the United States has two terrible problems: a devastating lack of jobs right now and an unsustainable budget deficit over the longer run. The right question is not whether we can reduce unemployment by lowering the deficit (we can’t), but whether we can make progress on both problems.
With 14 million Americans unemployed and no prospect of rapid recovery on the horizon, we really have no choice: we must take additional measures to create jobs. ... Just as important, policy makers should be discussing how to make meaningful progress on the long-run deficit at the same time. We need a credible plan that phases in aggressive deficit reduction as the economy recovers.
The president has started a discussion about job creation. His proposal deserves a full debate based on facts, evidence and careful analysis.
One thing -- I wouldn't say that long-run deficit reduction is "Just as important" as job creation. Job creation is the more important concern right now.
Posted by Mark Thoma on Saturday, September 24, 2011 at 04:32 PM in Budget Deficit, Economics, Unemployment |
Marshall and Keynes brought about "a genuine revolution in human thinking":
...Alfred Marshall, the man most responsible for Keynes’s career choice, was also the one most responsible for the new way of thinking. To paraphrase a great American economist, Paul Samuelson: before Marshall, economics was about what you couldn’t change. The new economics was about what you could.
Consider the dismal science when Marshall took it up. There was no cheering up Karl Marx... The British founders of political economy were scarcely less glum. John Stuart Mill ... doubted whether democratic reforms or technological progress could have much effect on how the average Briton lived. ...
The new,... social science that Marshall pioneered and Keynes and others innovated was a genuine revolution in human thinking...
It seems to me that the current crisis is, to a large extent, reversing the economics of hope. When workers look forward today, what do they see? Technical progress that will make them better off -- change that will elevate their standard of living -- or do they see a future where they'll be lucky to keep the job, benefits, and wage rates they currently enjoy (if they have a job at all)? Much of the rhetoric from the right -- from opposition to government trying to help to the age old worry that the rate of technological progress is slowing -- has been about "what you couldn't change," and pessimism about the future is as high as I can ever remember.
I refuse to give up. It's distribution, not production that has failed us over the last 30 or 40 years. We produce far more than we ever have, and we will continue to increase our ability to squeeze more and more out of the resources we have. We have the ability to produce enough stuff. But the distribution of the things we produce has been tilted toward the top. Instead of wages rising with productivity as our textbooks say they should, wages have stagnated and the rewards have gone elsewhere. Thus, while the pessimism of the past was about production not being able to keep up with population -- many classical economists looked forward to a long-run outcome of a dismal, stationary state with most people struggling at subsistence wages -- the pessimism of the present is driven largely by a failure of distribution. The haves get more and more, and the have nots get less and less even though overall output is rising. And to make it worse, those in power have successfuly promoted the idea that intervening to ensure that workers get to keep the share of output they've earned will harm our long-run growth prospects.
Pessimism about breaking through the wealth and power structures that stand in the way of change is understandable, as is the desire of the winners in our increasingly two-tiered society to keep the focus on growth rather than distribution. However, this outcome is not pre-ordained, it is not etched in stone, it's something we can fix without sacrificing our long-run growth prospects. But only if we refuse to buy into the narrative that the "it can't be changed so suck it up and deal with it" crowd is peddling.
Posted by Mark Thoma on Saturday, September 24, 2011 at 10:08 AM in Economics, Income Distribution, Productivity |
Posted by Mark Thoma on Friday, September 23, 2011 at 10:10 PM in Economics, Links |
The Great Debt Scare, by Robert J. Shiller, Commentary, Project Syndicate: It might not seem that Europe’s sovereign-debt crisis and growing concern about the United States’ debt position should shake basic economic confidence. But they apparently have. And loss of confidence, by discouraging consumption and investment, can be a self-fulfilling prophecy, causing the economic weakness that is feared. ...
The ... Thomson-Reuters University of Michigan Surveys of Consumers ... has included a remarkable question about the reasonably long-term future, five years hence...:
“Looking ahead, which would you say is more likely – that in the country as a whole we’ll have continuous good times during the next five years or so, or that we will have periods of widespread unemployment or depression, or what?” ...
Those answers plunged into depression territory between July and August, [the period when US political leaders worried everyone that they would be unable to raise the federal government’s debt ceiling and prevent the US from defaulting,] and the index of optimism based on answers to this question is at its lowest level since the oil-crisis-induced “great recession” of the early 1980’s. It stood at 135, its highest-ever level, in 2000, at the very peak of the millennium stock market bubble. By May 2011, it had fallen to 88. By September, just four months later, it was down to 48. ...
The timing and substance of these consumer-survey results suggest that our fundamental outlook about the economy ... is closely bound up with stories of excessive borrowing, loss of governmental and personal responsibility, and a sense that matters are beyond control. That kind of loss of confidence may well last for years.
That said, the economic outlook ... may hinge on ... our finding some way to replace one narrative – currently a tale of out-of-control debt – with a more inspiring story.
How did this narrative arise? Paul Krugman:
It took bad thinking and bad policy by many players to get us into the state we’re in; rarely in the course of human events have so many worked so hard to do so much damage. But if I had to identify the players who really let us down the most, I think I’d point to European institutions that lent totally spurious intellectual credibility to the Pain Caucus.
And the actions of politicians in the US (along with the economists providing cover for them) didn't help one bit. The debt fear was, for some in the GOP, a deliberate strategy in the ideological war against social insurance programs such as Social Security and Medicare, and against government intervention in the economy more generally. By creating debt fear, and by blocking all tax increases, cuts in these programs would be more likely. The false promise that austerity would produce good times was part of the ideological game.
We can pay our bills -- ability to pay is not at issue, and we can do it without harming the econmy in the short-run -- it's the ability of Congress to reach the necessary agreements in light of the GOP's intransigence that is in question.
Posted by Mark Thoma on Friday, September 23, 2011 at 11:43 AM in Economics |
Why I am not very worried about inflation just now, by Greg Mankiw:
Click on graphic to enlarge.
Several people have asked me in recent days if the Fed's aggressive attempts to get the economy going will lead to galloping inflation to go along with our weak economic growth. It is possible that this might occur down the road, of course, but I don't see it happening just now. The slack labor market has kept growth in nominal wages low, and labor represents a large fraction of a typical firm's costs. A persistent inflation problem is unlikely to develop until labor costs start rising significantly. Notice in the graph above that the period of stagflation during the 1970s is well apparent in the nominal wage data. The same thing is not happening now. This is one reason I think the Fed is on the right track worrying more about the weak economy than about inflationary threats.
Posted by Mark Thoma on Friday, September 23, 2011 at 11:34 AM in Economics, Inflation, Monetary Policy |
Who are the real victims of class warfare?:
The Social Contract, by Paul Krugman, Commentary, NY Times: This week President Obama said the obvious: that wealthy Americans, many of whom pay remarkably little in taxes, should bear part of the cost of reducing the long-run budget deficit. And Republicans like Representative Paul Ryan responded with shrieks of “class warfare.”
It was, of course, nothing of the sort. On the contrary, it’s people like Mr. Ryan, who want to exempt the very rich from bearing any of the burden of making our finances sustainable, who are waging class war.
As background, it helps to know what has been happening to incomes over the past three decades. Detailed estimates from the Congressional Budget Office — which only go up to 2005, but the basic picture surely hasn’t changed — show that between 1979 and 2005 the inflation-adjusted income of families in the middle of the income distribution rose 21 percent. That’s growth, but it’s slow, especially compared with the 100 percent rise in median income over a generation after World War II.
Meanwhile, over the same period, the income of the very rich, the top 100th of 1 percent of the income distribution, rose by 480 percent. No, that isn’t a misprint. In 2005 dollars, the average annual income of that group rose from $4.2 million to $24.3 million.
So do the wealthy look to you like the victims of class warfare? ...
Elizabeth Warren, the financial reformer who is now running for the United States Senate in Massachusetts, recently made some eloquent remarks... “There is nobody in this country who got rich on his own. Nobody,” she declared, pointing out that the rich can only get rich thanks to the “social contract” that provides a decent, functioning society in which they can prosper.
Which brings us back to those cries of “class warfare.”
Republicans claim to be deeply worried by budget deficits. Indeed, Mr. Ryan has called the deficit an “existential threat” to America. Yet they are insisting that the wealthy — who presumably have as much of a stake as everyone else in the nation’s future — should not be called upon to play any role in warding off that existential threat.
Well, that amounts to a demand that a small number of very lucky people be exempted from the social contract that applies to everyone else. And that, in case you’re wondering, is what real class warfare looks like.
Posted by Mark Thoma on Friday, September 23, 2011 at 12:33 AM in Economics, Taxes |
Posted by Mark Thoma on Friday, September 23, 2011 at 12:24 AM in Economics, Taxes, Video |
Already Thinking About November, by Tim Duy: The ink is barely dry on the Fed's policy shift this week, but the debate is already shifting to the next move. Jon Hilsenrath at the Wall Street Journal offers this assessment:
Since lecturing Japanese officials in the late 1990s and early 2000s about how they should deal with their nation's economic malaise, Mr. Bernanke has made clear his mindset about post-bubble economics: Keep experimenting as long as the economy is stumbling and inflation is muted.
I think Hilsenrath is correct - as long as the economy continues to stumble along, the Fed will continue to tinker with policy. The likely policy paths:
Other options have been discussed. Among them, officials are deep in talks about whether the Fed should shift communications strategy to be clearer about what it would take to get them to raise rates. More clarity might quell any lingering fears in financial markets that the bank might prematurely tighten monetary policy. The Fed also could buy more securities, lower a 0.25% rate it pays banks on their cash deposits at the central bank or consider other unconventional measures.
I would like some more clarity on the "other" measures, but that aside, the usual suspects. I tend to think it will be a challenge to shift the communications strategy given the willingness of Fed policymakers to publicly challenge the stance of monetary policy. Moreover, the stated preferences of policymakers to keep their options open seems incompatible with a firm policy commitment. In any event, should we be looking for more at the November meeting? One former Fed staffer says no:
Nathan Sheets, who retired as director of the Federal Reserve‘s international affairs group this summer, said he believes the central bank will pause for a while after taking unconventional steps in August and September to bring down long-term interest rates as it assesses the impact of its actions.
“I wouldn’t expect at its November meeting the Fed is going to roll out some additional package,” he said in an interview.
Sheets sees the Federal Reserve's past two policy moves as aggressive:
Mr. Sheets, who is now the top international economist at Citigroup Inc., said he believed the combination of the actions the Fed took in August and this week were substantial. Both moves provide substantial stimulus to the economy by pushing long-term interest rates down sharply and there is good reason to see how those impacts play out, he said.
He said he was puzzled by the stock market’s sell-off in response to the latest move, which he saw as more aggressive than he expected.
As I noted earlier today, the plunging ten-year TIPS breakevens are a clear no confidence vote for monetary policy. And quite frankly, not surprising. The Fed downgraded their assessment, highlighting the substantial risks to an already subpar outcome, and produced what was generally expected - mostly a shift in asset mix that no one believes is anywhere near enough to serve as a counterweight to the severe strains bearing down on the economy. Moreover, the ongoing dissentions and half-measures only further reinforce the notion that the Fed may not be done, but they are not going to pull out all the stops. At least not until it is too late.
As for November, nothing can be ruled out. If you believe there is a high probability Europe implodes between now and then, then you should also believe the odds are high the Fed will act. Aside from financial crisis, all will depend on the flow of data. If the data falls broadly in-line with the Fed's expectation of firming activity in the second half, then they could try to take a pass at the next meeting. But if the forward looking indicators deteriorate, and bring down inflation expectations as well, the Fed will be pressed into service.
Regarding the flow of data/news, note that FedEx has downgraded its outlook:
Providing fresh evidence of weakening global trade, FedEx Corp. said Thursday it is cutting capacity and trimmed its full-year earnings forecast amid weaker demand, mainly due to slowing sales of consumer electronics made in Asia.
The news comes as a slide in Asian air cargo traffic that started in July has shown no immediate signs of abating. The slowdown extends to the makers of perishable foods, high-end apparel and automotive and industrial parts that fill the holds of planes flown by FedEx and rivals such as United Parcel Service Inc. and Cathay Pacific Airways Ltd.
"The consumer just doesn't have an appetite" for spending more, Chief Executive Fred Smith said during a post-earnings conference call. As a result, he added, "we don't anticipate a significant peak [shipping season] this year."
The half-empty cargo holds of the planes that connect manufacturing centers to their end customers provide a stark example of the weak demand outlook facing the global economy, led by a sharp about-face in Asia's once-humming workshops.
This follows along with expectations of a weak holiday shopping season:
Christmas is already shaping up to be a struggle for the nation's retailers.
It isn't even fall yet, but the first forecasts of the all-important year-end period are out, and they're pointing to more muted gains than last year. Shoppers are expected to make fewer trips to stores and, when they do show up, to head straight for bargains they've researched in advance.
Meanwhile, initial unemployment claims show no indication the pain in the labor market will soon ease. Overall, the incoming news might not point to recession, but it sure feels a lot like the post-2001 recession slowdown that send payroll growth into negative territory. Of course, the answer to that turned out to be the housing bubble, and we sure aren't doing that again anytime soon.
Bottom Line: The Fed likely wants to take a break. The US economic data and the fast moving situation in Europe, however, are likely to put the Fed back into play sooner than later.
Posted by Mark Thoma on Friday, September 23, 2011 at 12:15 AM
Posted by Mark Thoma on Thursday, September 22, 2011 at 10:22 PM in Economics, Links |
Working on the Wrong Margins, by Tim Duy: Brad DeLongs offers some tepid support of yesterday's FOMC outcome.
At the moment ten-year Treasury bonds are selling at a present-value discount of20 14%, and thirty-year Treasury bonds are selling at a present-value discount of 45%. Guess that half of these discounts are expectations of interest rate changes and half are rewards for risk bearing. Then if the Fed buys half 10-year and half 30-year bonds it takes risk currently valued at $60 billion off of the private sector's balance sheet. A ten-year corporate investment project of about $150 billion carries $60 billion worth of risk with it, so if this works and if the risk-bearing capacity freed-up by this version of quantitative easing is then deployed elsewhere, we will have an extra $150 billion of business investment over the year or so it takes to roll out this program and for it to have its effect.
Still, the outcome is too little:
$150 billion is, as Christina Romer likes to say "not chopped liver"--not even in a $15 trillion economy. But it is about 1/10 of our current problem--maybe less when you reflect that our current-problem is a multi-year problem.
I am skeptical that taking on longer-term US debt really draws off much if any risk-bearing capacity off the public's balance sheet, thereby freeing up capacity for additional business investment. I am even more skeptical that even if such risk were reduced, firms would take advantage. There is plenty of cash already on corporate balance sheets, but little incentive to put it to work in an economic environment characterized by slow and uncertain patterns of growth.
I think market participants are also skeptical that this is even a marginally effective policy - note that as of last week, the ten-year TIPS breakeven was just a notch under 2%. As of right now, the breakeven has plunged to 1.72%. Not exactly a ringing endorsement of the Fed's actions. Indeed, quite the opposite - the Fed's relative inaction is intensifying disinflationary expectations.
Simply put, it sure looks like the Fed is playing around at the wrong margins. Barry Ritholtz summarizes:
There is no calvary coming to the rescue.
Will the calvary eventually come? It will not be long before we are right back where we were last fall - a 1.5% ten-year breakeven, pushing the Fed toward another round of quantitative easing. But will the Fed have the stomach to bring it out in meaningful quantities to compensate for operating on the weak margins of monetary policy? They need to stop thinking on the order of hundreds of billions and start thinking on the order of trillions. And they need to be willing to allow inflation to rise above 2% to be most effective. It seems, however, that this is too big a package to expect from the Fed.
Bottom Line: We need policy that decisively lifts the economy off the zero bound. Policies that work through traditional avenues, primarily the credit channel, have been ineffective. Surely effective would be a cooperation between fiscal and monetary authorities - print the money and spend it. We are faced with increasing expectations if disinflation coupled with fears to spend more because of the size of the deficit. There should be more than ample room for policy coordination, and that policymakers are not more aggressive at this point is bewildering. Inaction on the part of the Administration and the Federal Reserve is endangering both of them politically. The former is risking the White House, the latter is only adding fuel to the fire of right-wing criticism by engaging in half-measures with minimal, difficult to quantify results. Caught in the middle is the American people, staring at the possibilty of another lost decade.
Posted by Mark Thoma on Thursday, September 22, 2011 at 02:07 PM in Economics, Fed Watch, Monetary Policy |
Luigi Zingales is discouraged:
The Unexamined Crisis, by Luigi Zingales, Commentary, Project Syndicate: Three years have now passed since the collapse of Lehman Brothers, which triggered the start of the most acute phase of the 2007-2008 financial crisis. Is the financial world a safer place today? ... To be sure, America has the 2,000-page Dodd Frank Act... Unfortunately, few of those pages address any problem suspected to have caused the financial crisis.
Bond investors’ heavy reliance on credit-rating agencies, which tend to be laxer with powerful issuers, has not been fixed. The shadow banking sector’s dependence on the official banking sector’s liquidity and guarantees, and thus ultimately on the government, has not even been touched. And limits on financial institutions’ leverage will change only in the next decade. The list of shortcomings goes on and on. ...
The Financial Crisis Inquiry Commission, chaired by Phil Angelides, did produce a report on the crisis... Unfortunately, the Commission – composed mostly of elected officials, rather than experts – wasted its time in political squabbles. ... After all,... the Commission’s focus was on supporting or discrediting (depending on the commissioner’s political party) the Dodd/Frank legislation, rather than on establishing the truth.
It was a great opportunity lost. With its subpoena power, the Angelides Commission could have collected and made available to researchers the data needed to answer many crucial questions about the crisis. Did companies that compensated their traders (and not just their CEOs) more highly take more risk? Was financial institutions’ assumption of excessive risk the result of incompetence or stupidity, or was it a rational response to the implicit guarantee offered by the government? Did the market see the spread of lax lending standards and price the relevant pools of loans accordingly, or was it fooled? Who were the ultimate buyers of these toxic products, and why did they buy them? How important a role was played by fraud?
These are the questions that needed to be answered. Unfortunately, they are likely to remain unanswered...
I shouldn't be surprised that the banks are winning the battle against regulation, but I have to admit I expected a better, tougher, more on point response than what we have seen to date.
Posted by Mark Thoma on Thursday, September 22, 2011 at 12:42 PM in Economics, Financial System, Regulation |
Are House Democrats finally figuring out who their friends are?:
Boehner, Cantor In Big Trouble After Big CR Defeat, by Stan Collender: House Democrats last night didn't do what they have done so many times before since the 2010 election: they didn't provide the House leadership with the votes it needed to pass a budget bill.
A combination (you can't really refer to it as a "coalition" because they weren't working together) of tea party Republicans and Democrats voted against the leadership-supported continuing resolution and it went down 195 to 230 with 48 Republicans voting no.
This may have been the worst defeat and biggest rebuke ever for House Speaker John Boehner (R-OH) and Majority Leader Eric Cantor (R-VA). A number of House members told me after the vote that both leaders had worked the vote hard but couldn't convince enough (some thought "any" was more correct) to vote for the legislation. Two members even told me that Boehner had gone to the congressional leadership equivalent of DEFCON 1 by moving way beyond twisting arms to threatening GOP members with losing their committee assignments -- almost the ultimate congressional punishment -- if they didn't vote for the bill. Even that didn't work. ...
[N]o matter how they try to spin it today as being the Democrats' fault, this in fact was a huge slap in the face of the GOP leadership by the tea party. It's not the first time the tea partiers have voted against the GOP leadership, but it is the most visible and painful.
The big question now is the one we've been wondering about for some time in analogous budget situations: Where do Boehner and Cantor go from here? ...
The problem ... is that ... moving toward the tea party may not guarantee that the bill passes. On the other hand, moving in the other direction on this one bill very likely will cause the tea party to split permanently with the two House leaders. The tea partiers have been leery of both Boehner and Cantor since the start of the year. In fact, a tea party supporter is running against Boehner in the GOP primary and the Virginia tea party has been threatening to challenge Cantor since before the 2010 election. Working with House Democrats at this point might get the bill passed but might also make it all but impossible for the GOP leadership to lead in 2012, that is, in the months heading into an election where anger about Congress is already at an all-time high.
Steve Benen explains further:
House Republican leaders had a plan and were fairly confident it would work. Last week, the Senate easily passed emergency disaster funding and urged the House to follow suit. This week, House GOP leaders decided to respond by thumbing their noses at the Senate, including disaster aid in a larger spending bill, offsetting the costs by slashing a clean-energy program, and would tell the Senate to pass the bill or they’d shutdown the government.
All they had to do was pass the larger measure, called a “continuing resolution” (CR), which would keep the government running, and would set the stage for another showdown. Boehner, Cantor, and company thought they had the votes. They didn’t. ... It wasn’t especially close...
At this point, House Republican leaders have a decision to make. They can:
1. Give up on holding disaster aid hostage, put the Senate’s FEMA bill in the CR, and pass it. The bill would then sail through the Senate and avoid a shutdown, but it would further weaken Boehner’s leadership.
2. Abandon the deal Boehner struck with Democrats last month, cut more spending, and pick up votes from the far-right flank. The Senate would reject this immediately, making a shutdown almost unavoidable. The Speaker’s word would become useless, but the right would be happy.
3. Find some different offsets to pay for disaster relief, which some Dems may find acceptable.
4. Remove disaster aid from the CR altogether, and take the issue up as a separate legislative debate.
A decision will have to be made fairly quickly — the deadline is a week from tomorrow, and Congress is supposed to be out next week.
We could hope that they'd put people before politics, but as the unemployed can tell us, that's not going to happen.
Posted by Mark Thoma on Thursday, September 22, 2011 at 09:09 AM in Economics, Politics |
Posted by Mark Thoma on Thursday, September 22, 2011 at 07:47 AM in Economics, Monetary Policy |
FOMC Reaction – The Extended Version, by Tim Duy: Earlier I posted my quick reaction to the FOMC statement. Now it is time for some extended comments. First off, the Fed sees increasing risks of disappointing news in the months ahead. The August sentence:
Moreover, downside risks to the economic outlook have increased.
was changed to:
Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets.
The downside risks are now “significant,” and we can thank the Europeans for that. I already commented on the twist operation – I tend to think it is too little to have much impact, largely just changing the composition of already safe assets. There was a reaction at the long end of the curve, with the 30 year yield down nearly 20bp. I am sure the Fed is pleased with that; the stock market, however, did not view it as much of a silver bullet, and sold off 2.5%.
What I didn’t have a chance to digest earlier was this:
To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.
That the debt overhang in mortgage markets is weighing on the recovery is not much of a secret. The Fed views that overhang as hampering the effectiveness of monetary policy, and rightfully so. By keeping assets in the mortgage markets, the Fed is hoping to encourage even lower rates and, by extension, a greater pace of refinancing. Worth a try, to be sure. I don’t know that this addresses the critical impediments to refinancing – underwater mortgages and tighter underwriting conditions. Yes, if we allow the loan to value ratio of federally insured mortgages to increase, then we can get some traction. And the Fed’s move may be in anticipation of such action – I am hoping this is so.
Increased opportunities to refinance, however, may not have as much of an immediate impact as would normally be the case. It depends on the ratio of households that refinance into another 30-year mortgage, reducing their payments by extending the payoff date at a lower interest rates versus those that refinance into a 15-year mortgage and reduce their current consumption to save more.
For what it is worth, here is what I am doing. With my children now in kindergarten and first grade, we finally experienced a drop in child-care expenses. The drop just happens to be almost exactly what I need to refinance into a 15-year mortgage. Better to pay down debt than allow my standard of living to ratchet up. And, quite frankly, paying down debt at a more rapid pace is pretty much the best safe investment right now. Holding cash in the bank yields nothing, paying down the mortgage debt at least earns around 4-5% depending on your mortgage, tax-free. That said, in the long-run, by holding rates low, the Fed is contributing to balance sheet restructuring. I just tend to think the process would be quicker and more effective via wage inflation.
The Fed reiterated their expectation that rates will hold near zero through 2013, and once again committed to additional action should it be necessary. Of course, arguably it is already necessary. Still, it is the marker that keeps hopes of another round of quantitative easing alive.
Ezra Klein argues the Fed struck a blow for independence today, coming in slightly above expectations and effectively ignoring the thinly-veiled Republican threat. Yes, kudos to Federal Reserve Chairman Ben Bernanke on that point. Stan Collender nails this one – the Republicans have effectively put an end to fiscal stimulus, and now hope to derail monetary stimulus as well. I think the Republican leadership is doing themselves a disservice with this line of attack. Quite frankly, the remaining monetary tools are very weak, and the willingness of the Federal Reserve to ramp them up to levels that might be effective is very low. In effect, the Republicans are needlessly taking a hard line position on this one. The Fed isn’t going to come to the rescue. The numbers are simply too big – remember Goldman Sach’s $10 trillion figure for the Fed’s portfolio if they wanted to deliver the correct level of policy accommodation in 2009? Something like that is not even on the outer edges of the radar screen.
Bottom Line: I think Fed official believe they are being bold; I see them as continuing to ease policy in 25bp increments. Expect that to continue. Assuming the economy fails to regain momentum, the Fed will follow up with additional action – QE3 will be the next stop. Ignore the dissents; they are background noise. Don’t expect miracles; expect small moves, the equivalent of 15bp here, 25bp there. The real leverage could potentially come from fiscal policy leveraging the easy monetary policy. Print the money and spend it. Open up the refinancing channel. Overall, make the objective of national economic policy simply be to decisively move us off the zero bound. Not deficits, not the dual mandate, just commit to pulling us off the bottom.
Posted by Mark Thoma on Thursday, September 22, 2011 at 12:15 AM in Economics, Fed Watch, Monetary Policy |
Posted by Mark Thoma on Wednesday, September 21, 2011 at 10:10 PM in Economics, Links |
Here's the FOMC statement. The big news is the attempt to lower long-term interest rates by shifting $400 billion of the Fed's portfolio from short-term to long-term assets (i.e. what has been described as a "twist"):
Press Release, Release Date: September 21, 2011: Information received since the Federal Open Market Committee met in August indicates that economic growth remains slow. Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated. Household spending has been increasing at only a modest pace in recent months despite some recovery in sales of motor vehicles as supply-chain disruptions eased. Investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect some pickup in the pace of recovery over coming quarters but anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.
To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Committee will maintain its existing policy of rolling over maturing Treasury securities at auction.
The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.
The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action were Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who did not support additional policy accommodation at this time.
On the run, so very quick reaction:
1. This shifts the duration of the balance sheet, but it does not change its size. I would have preferred balance sheet expansion, i.e. QE3, as that would have a much better chance of helping the economy. But the inflation hawks on the committee will not tolerate further expansion in the balance sheet due to worries about inflation.
2. It's not big enough.
3. Even if it causes rates to fall, will consumers and businesses respond?
That is, this might help some, but not enough to solve our employment crisis -- not by any means. Thus, this does not alleviate the need for Congress to implement serious job creation programs as soon as possible.
The unemployment crisis needs to be attacked vigorously, and we need aggressive action from both monetary and fiscal policymakers. But neither the Fed nor Congress has the will to do more than half-hearted measures at this point, and even that might be too much for Congress.
I wish the people making these decisions had to face what households struggling to find a job endure daily -- the world policymakers see from their insulated shell is very different from the world of the unemployed. Maybe then they'd finally get it and, more importantly, do what needs to be done.
Update: Tim Duy reacts to the decision.
Update: Via Daniel Indiviglio:
...But the other action announced by the Fed shouldn't be overlooked. Previously, it was reinvesting its maturing mortgage securities in new Treasuries. By instead targeting agency mortgage securities, it will more directly push down mortgage interest rates. The size of this effort is not provided, in large part because its size will depend on external factors.
As prepayments from mortgage refinancing increase, so will the amount of money the Fed will reinvest. And with mortgage rates heading towards historical lows due to this campaign, you should expect to the Fed provided lots of principal with which to reinvest. It wouldn't be surprising to see $40 to $45 billion per month in reinvested in agency mortgage securities through this effort. That's about the amount of monthly maturing principal reinvestment from mortgage securities we saw last year as rates were dropping. So this effort could actually outweigh Operation Twist.
Posted by Mark Thoma on Wednesday, September 21, 2011 at 11:43 AM in Economics, Monetary Policy |
Paul Krugman outlines the tricks that are used to obscure the distribution of the tax burden:
The Distributional Effect of Tax Cuts — A Brief Note, by Paul Krugman: With taxes on the wealthy on the political radar, we’re going to drowning in a vast wave of double-talk and smothered by vast amounts of fuzzy math. Still, one has to try. So, a couple of notes.
One is that you have to beware of the old trick of saying “taxes”, then slipping into “income taxes”. Most Americans pay more payroll than income taxes, but the reverse is true at high incomes. So focusing only on income taxes makes it seem as if the rich pay much more of the burden than they really do.
Another, more subtle trick involves comparing percentage changes in taxes as opposed to tax changes as a percentage of income.
The starting point is that federal taxes are indeed progressive on average (although there are billionaires who pay a lower rate than their secretaries). And this in turn means that you have to be careful about the question when evaluating a change in taxes.
Suppose that it’s 1979, and individual A is a member of the working poor, paying 12 percent of his income in taxes — basically payroll tax and not much else. Meanwhile, individual B is very wealthy, and pays 40 percent of his income in taxes — as the very wealthy did on average 30 years ago.
Now suppose that 30 years of conservative governance lead to a fall of a quarter in both individuals’ average tax rates; A’s rate falls from 12 to 9, B’s from 40 to 30. Would it make sense to say that they have gained equally from tax cuts?
Clearly not. A’s after-tax income has risen from 88 to 91 percent of pretax income, a gain of 3.4 percent. B’s after-tax income has risen from 60 to 70 percent of pretax income, a gain of 16.7 percent. The distribution of after-tax income has become substantially less equal. And that’s the calculation I was doing here.
Now, right-wingers come back and say that this is what has to happen when you cut taxes. No, it doesn’t. And anyway, cutting taxes is itself a choice — and they’re a choice that then leads to demands that we cut programs for the poor and middle class to close the deficit those tax cuts created.
The point is that yes, tax policy these past 30 years has been very much tilted toward benefiting the rich.
Another trick is to say that taxing the rich won't raise much revenue, certainly not enough to close the debt gap, with the implication of why bother at all if it won't fix the problem? But while it's true that raising taxes on the wealthy isn't enough by itself, it can still make a hefty contribution:
Is There Enough Income at the Top to Make a Difference to the Deficit?, by Kash Mansori: In response to Obama's proposal (pdf) to let the Bush tax cuts expire for high-income households as one of the ways to close the budget deficit in future years, I've heard and seen a number of commenters assert that there simply aren't enough people at high levels of income for that particular idea to make much difference to the federal budget deficit. Are they right?...
[I]f the US is only willing to raise taxes on the very top of the income distribution, the US's medium-term budget problems cannot be solved through additional revenue alone. However, tax increases that are limited to just the very top of the income distribution, while not sufficient by themselves, would actually probably get us about one-third of the way toward fixing the US's medium-term deficit problems. So while not a cure, it would make a significant dent in the problem.
And if the wealthy don't pay their share, guess who will, one way or the other?
Posted by Mark Thoma on Wednesday, September 21, 2011 at 09:45 AM in Economics, Income Distribution, Taxes |
Should we trust Ron Suskind's book describing the making of a economic policy in the Obama administration?:
Suskind Audiotape Backs Up Anita Dunn in Her Claim To Be Quoted Out of Context: ...Anita Dunn to Valerie Jarrett:
If it weren't for the president, this place would be in court for a hostile workplace, because it actually fit all of the classic legal requirements for a genuinely hostile workplace to women...
"This place would be in court for a hostile workplace," Dunn is quoted as saying in Suskind's book. "Because it actually fit all of the classic legal requirements for a genuinely hostile workplace to women."
Naughty, naughty, Ron. That's not how you quote. ...
Ron Suskind on the Meaning of "Direct Quote", Underbelly: Here's an excerpt from Terry Gross' interview with Ron Suskind, lifted from the NPR website:
Gross: Just a question about the technique you use in telling the story, there's a lot of dialogue in the book. When something is in quotes, does that mean that it actually came from a transcript, a recording, or that's something that somebody directly told you?
Suskind: Yes, it's something someone directly told me, and the fact is almost all the quotes in the book are things that were directly told to me, and others in the room affirm. Yeah, that's pretty much exactly it. That's pretty much what I remember, too. And that's the way this reporting goes.
...But read it again slowly. What Terry is asking is "when you use quotation remarks, are you repeating the exact words that the quoted person said?" (as in, for example, the text I lifted above). Suskind answers an entirely different question. He's saying somebody directly told me that the quoted person said it (and I, Suskind, have independent confirmation). In other words, when she asks: is the stuff in quotation marks an actual quotation, his answer is "no."
I'll give Suskind this much. The ship has probably left the harbor on this one. We're probably a dozen years--maybe more--away from the point where a "direct quote" was a "direct quote." We've got to the point where "direct quote" means "at least two pieces of hearsay." I suppose this is not the end of the world. ... But we also need a word for "direct quote" in the old fashioned sense, and at the moment, we don't seem to have one.
Suskind goes on to say:
I have more than 200 sources here, more than 700 hours of interviews. I've been doing this, Terry, for 25 years. What's in the book is solid as a brick, and ultimately the White House will have to deal with it, whether internally or externally, in some way because this is really the history of this period.
Translated: I'm a player. They're going to have to take me seriously. And the fact that I put quotation marks around things that are not quotations--hey, as the fella in the blog said, "that train has left the station."
Posted by Mark Thoma on Wednesday, September 21, 2011 at 12:42 AM in Economics |
This letter from Senators McConnell, Boehner, Kyl, and Cantor crosses a line that shouldn't be crossed:
Dear Chairman Bernanke,
It is our understanding that the Board Members of the Federal Reserve will meet later this week to consider additional monetary stimulus proposals. We write to express our reservations about any such measures. Respectfully, we submit that the board should resist further extraordinary intervention in the U.S. economy, particularly without a clear articulation of the goals of such a policy, direction for success, ample data proving a case for economic action and quantifiable benefits to the American people.
It is not clear that the recent round of quantitative easing undertaken by the Federal Reserve has facilitated economic growth or reduced the unemployment rate. ...
We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy. ...
Sen. Mitch McConnell, Rep. John Boehner, Sen. Jon Kyl, Rep. Eric Cantor
I think speaking out individually is fine, e.g. a member of Congress stating his or her views on monetary policy in a speech is not a problem. That's part of the public dialogue.
But an official letter from members of the House and Senate to the Fed is more official, and more threatening to the Fed's independence than a speech from an individual member of Congress. Robert Reich explains the objections:
The Republican’s Latest Ploy to Keep the Economy Lousy through Election Day, by Robert Reich: ...To say it’s unusual for a political party to try to influence the Fed is an understatement.
When I was Secretary of Labor in the Clinton Administration, it was considered a serious breach of etiquette — not to say potentially economically disastrous — even to comment publicly about the Fed. Everyone understood how important it is to shield the nation’s central bank from politics.
If global investors suspect the Fed is responding to political pressure of any kind, investors will lose trust in the nation’s monetary policies. Even if the pressure is to tighten the money supply and keep interest rates high, it’s still politics. And once politics intrudes, lenders of all stripes worry that it will continue to intrude in all sorts of ways. The inevitable result: Lenders charge more for lending us money.
The letter puts Bernanke and his colleagues in a huge bind. If they decide against another round of so-called “quantitative easing” to lower long-term rates and boost the economy, they may look like they’re caving to congressional Republicans. If they decide to go ahead notwithstanding, they’re bucking the Republicans and siding with Democrats. Either way, they’re open to the charge they’re playing politics.
Congressional Republicans evidently don’t care. They want Obama out, whatever the cost. Besides, they’ve never met a government institution they don’t mind trashing.
There's more to it than higher interest rates. History tells us that politicizing monetary policy is a bad idea -- giving control of the money supply to politicians generally leads to high inflation -- and for this reason most countries have a monetary authority with some degree of independence. Thus, the GOP's politicization the Fed in the name of preventing inflation is puzzling (unless of course, inflation hawkery is cover for another agenda).
Posted by Mark Thoma on Wednesday, September 21, 2011 at 12:33 AM in Economics, Monetary Policy |
Posted by Mark Thoma on Tuesday, September 20, 2011 at 10:11 PM in Economics, Links |
For a few days, we were actually talking about a job creation program instead of debt reduction. However, Obama's speech yesterday seems to have turned the conversation back to the debt. In his speech he did talk about how to pay for job creation, but his plans for over $3 trillion in debt reduction (on top of the cuts that were already in place as part of the deficit ceiling negotiations) is the message that stuck in the media. Job creation is no longer at the forefront of the conversation, and unless Obama is willing to lead on this issue, that won't change.
Posted by Mark Thoma on Tuesday, September 20, 2011 at 10:08 AM in Budget Deficit, Economics, Unemployment |
Via Brad DeLong:
From Ron Suskind's Confidence Men: ...
Posted by Mark Thoma on Tuesday, September 20, 2011 at 12:33 AM in Economics, Fiscal Policy, Politics |
Not the 1970s, by Tim Duy: Today former Federal Reserve Chairman Paul Volker pulled out the specter of the 1970’s to rail against those suggesting room for a higher inflation target, holding special contempt for the obviously insidious President of the Chicago Federal Reserve Charles Evans:
So now we are beginning to hear murmurings about the possible invigorating effects of “just a little inflation.” Perhaps 4 or 5 percent a year would be just the thing to deal with the overhang of debt and encourage the “animal spirits” of business, or so the argument goes.
It’s not yet a full-throated chorus. But remarkably, at least one member of the Fed’s policy making committee recently departed from the price-stability script.
Not so remarkably given that this idea has been making the rounds for some time – Olivier Blanchard suggested a 4% inflation target early last year, and Greg Mankiw wrote this in early 2009:
Having the central bank embrace inflation would shock economists and Fed watchers who view price stability as the foremost goal of monetary policy. But there are worse things than inflation. And guess what? We have them today. A little more inflation might be preferable to rising unemployment or a series of fiscal measures that pile on debt bequeathed to future generations.
Of course, Volker’s amazement that someone might suggest a higher inflation target is a consequence of his conviction that the 1970’s was the worst economic decade ever:
…Economic circumstances and the limitations on orthodox policies are indeed frustrating. After all, if 1 or 2 percent inflation is O.K. and has not raised inflationary expectations — as the Fed and most central banks believe — why not 3 or 4 or even more? Let’s try to get business to jump the gun and invest now in the expectation of higher prices later, and raise housing prices (presumably commodities and gold, too) and maybe wages will follow. If the dollar is weakened, that’s a good thing; it might even help close the trade deficit. And of course, as soon as the economy expands sufficiently, we will promptly return to price stability…
…Some mathematical models spawned in academic seminars might support this scenario. But all of our economic history says it won’t work that way. I thought we learned that lesson in the 1970s. That’s when the word stagflation was invented to describe a truly ugly combination of rising inflation and stunted growth…
…It is precisely the common experience with this inflation dynamic that has led central banks around the world to place prime importance on price stability. They do so not at the expense of a strong productive economy. They do it because experience confirms that price stability — and the expectation of that stability — is a key element in keeping interest rates low and sustaining a strong, expanding, fully employed economy.
Note the conviction that high inflation is not compatible with strong growth. Now take a quick look at some of the economic outcomes of periods beginning with 1970 and 2000:
I don't want to romanticize the 1970s. I think we all recognize that the 2.5% unemployment rate at the end of the 1960’s was below the natural rate and thus incompatible with low inflation. The subsequent decade of economic mismanagement did permit both inflation and unemployment to rise, although certainly some of the latter can be attributed to the unusually low unemployment at the beginning of the decade. That said, the above numbers stack up pretty impressively compared to the 2000s. Arguably in recent years productivity did accelerate, at least temporarily, but didn’t appear to translate into better job or wage growth. But overall, I am thinking the inflationary 1970s look pretty good right now relative to the price stability of the last decade.
Of course, in the background, the unexpected inflation of the 1970s drove a redistribution of wealth, and it is this that is probably Volker’s real complaint. My first undergraduate economics professor told a story of how all the student loans he took out in the late 60s and early 70s evaporated in real terms a decade later. Perhaps Volker would have preferred that he had been weighed down by those debts instead - a situation not unlike today, were the debt overhang is a weight on household spending.
What is even more sad is that Volker fails to recognize why some argue for higher inflation:
My point is not that we are on the edge today of serious inflation, which is unlikely if the Fed remains vigilant. Rather, the danger is that if, in desperation, we turn to deliberately seeking inflation to solve real problems — our economic imbalances, sluggish productivity, and excessive leverage — we would soon find that a little inflation doesn’t work. Then the instinct will be to do a little more — a seemingly temporary and “reasonable” 4 percent becomes 5, and then 6 and so on.
I don’t think I have heard anyone who believes that inflation is a cure to sluggish productivity. Indeed, see above – during the recession productivity was anything but sluggish. No one thinks that higher inflation will spark higher productivity, only that higher inflation can be a tool to lift the economy from the lower bound allowing output to rise to the productivity-enhance level of potential output. Excessive leverage is a real problem, and in fact one that can be addressed via inflation. A commenter on an earlier piece notes that even what I perceive as lower levels of inflation could quickly erode the debt overhang, albeit not as quickly as I might like. How a central banker cannot recognize that unanticipated inflation erodes real debt loads is simply unfathomable.
And Volker uses the general term “economic imbalances,” but offers no explanation to what he is referring. Arguably, the major economic imbalance is the foreign central bank-induced trade deficit, which has contributed to a global imbalance in patterns of production and consumption. Recall that he appears to recognize the role of the dollar in any rebalancing:
If the dollar is weakened, that’s a good thing; it might even help close the trade deficit.
But seems to lose sight of this later:
At a time when foreign countries own trillions of our dollars, when we are dependent on borrowing still more abroad, and when the whole world counts on the dollar’s maintaining its purchasing power, taking on the risks of deliberately promoting inflation would be simply irresponsible.
I thought the purpose of the Federal Reserve was to promote the economic interest of the United States – that is its primary responsibility. And how can any economic imbalances be resolved if we remain dependent on borrowing from abroad? Wouldn’t we be better off discouraging those capital flows and allowing for export and import-competing industries to expand? And wouldn’t the rest of the world be better off if the US helped ease their inflationary pressures by providing additional goods and services to the global economy rather than attempting to absorb the excessive production of other nations? (And if you believe that those capital inflows represent confidence in the US economy, I have a bridge to sell you. Take out the purchases by foreign central banks and see what happens.)
Bottom Line: The constant comparisons to the 1970s are increasingly tiresome. At the end of the day, in the 1970s we were not in a liquidity trap. Today we are. The world is simply different. And we need policymakers that recognize that difference, not dinosaurs who refuse to do anything but live in a narrow view of their youth.
Posted by Mark Thoma on Tuesday, September 20, 2011 at 12:15 AM in Economics, Fed Watch, Monetary Policy |
Posted by Mark Thoma on Monday, September 19, 2011 at 10:10 PM in Economics, Links |
On average, wages fell between 2000 and 2010 (except for the 3% of the population with advanced degrees):
Only Advanced-Degree Holders See Wage Gains, by David Wessel: Why do polls show Americans are so cranky these days? Well, maybe it has something to do with their paychecks.
A lot of them aren’t keeping up with inflation, as modest as ... inflation has been. In fact, new Census Bureau data show that if you divide the population by education, on average wages have risen only for those with graduate degrees over the past 10 years. ...
Here (thanks to economist Matthew Slaughter of Dartmouth...) are changes in U.S. workers wages as reported in the latest Census Bureau report, adjusted for inflation using the CPI-U-RS measure recommended by the Bureau of Labor Statistics:
Posted by Mark Thoma on Monday, September 19, 2011 at 03:24 PM in Economics, Income Distribution |
I posted a reaction to Obama's debt reduction plan at MoneyWatch:
Obama's Debt Reduction Plan: Will Political Fights Over Tax Increases for the Wealthy Harm the Economy?
I'm worried that the economy and the jobless will end up paying the price of the political battle over tax increases for the wealthy.
Posted by Mark Thoma on Monday, September 19, 2011 at 10:08 AM in Budget Deficit, Economics, Politics |