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Wednesday, February 29, 2012

DeLong: A Larger National Debt Would be a National Blessing.

Brad DeLong:

The Usual Suspect, by J. Bradford DeLong, Commentary, Project Syndicate: Across the Euro-Atlantic world, recovery from the recession of 2008-2009 remains sluggish and halting, turning what was readily curable cyclical unemployment into structural unemployment. And ... a brief hiccup in the process of capital accumulation has turned into a prolonged investment shortfall, which means a lower capital stock and a lower level of real GDP ... possibly for decades.
One legacy of Western Europe’s experience in the 1980’s is a rule of thumb: each year that lower labor-force attachment and reduced capital stock ... depresses production $100 billion below normal implies that productive potential ... in future years will be $10 billion below what would otherwise have been forecast.
The fiscal implications of this are striking. Suppose that the United States or the Western European core economies boost their government purchases for next year by $100 billion. Suppose further that their central banks ... are ... unwilling to stymie elected governments’ policies by offsetting their efforts... In that case,... we can expect roughly $150 billion of extra GDP. That boost, in turn, generates $50 billion of extra tax revenue, implying a net addition to the national debt of only $50 billion. ...
Now this is, to say the least, a highly unusual situation. Normally, the multipliers ... are much less than 1.5... But the situation today is not usual at all. Today the global economy is, as Ricardo Cabellero ... stresses, still desperately short of safe assets. Investors worldwide are willing to pay extraordinarily high prices for, and accept extraordinarily low interest rates on, core-economy debt, for they value as an extraordinary benefit having a safe asset that they can use as collateral.
Right now, investors’ preference for safety makes financing additional government debt abnormally cheap... Given the need to mobilize idle resources in the short run in order to maintain productive potential in the long run, a larger national debt would be, as Alexander Hamilton, the first US treasury secretary, put it, a national blessing.

No disagreement here.

    Posted by on Wednesday, February 29, 2012 at 11:00 AM in Budget Deficit, Economics, Fiscal Policy | Permalink  Comments (59)


    Has the Fed Learned Its Lesson?

    I have been pretty critical of the Fed throughout the crisis. I still don't think policy is aggressive enough, and the Fed has been behind the developments in the economy due to its propensity to see green shoots that aren't actually there. But at least it's leaning in the right direction:

    Has the Fed Learned Its Lesson?, Mark, Thoma, CBS News: COMMENTARY Federal Reserve Chairman Ben Bernanke seems to have learned an important lesson. In his appearance before House Committee on Financial Services, Chairman Bernanke said the monetary policy committee does "not anticipate further substantial declines in the unemployment rate over the course of this year. Looking beyond this year, FOMC participants expect the unemployment rate to continue to edge down only slowly toward levels consistent with the Committee's statutory mandate." In addition, "participants agreed that strains in global financial markets posed significant downside risks to the economic outlook." There were other cautionary statements as well.

    That is quite a change from Bernanke's pronouncement that the Fed was seeing "green shoots" in the economy back in 2009, and similar optimistic statements about the prospects for recovery many times after that. Time and again, however, the green shoots withered and policy ended up in catch up mode rather than out in front of the economy as it ought to be. Policymakers were consistently behind.

    I don't think either monetary or fiscal policymakers have been aggressive enough throughout the crisis, and I have also worried that policymakers in Congress and at the Fed would withdraw support for the economy too soon and harm the recovery. There's little chance that policy will march the aggressiveness I believe is called for, especially this late in the game, and I'm still very worried about Congress turning to budget balancing before the economy is ready to handle it. Premature austerity could damage our recovery prospects.

    But I'm becoming less concerned that the Fed will withdraw support too soon. It has committed to keeping interest rates low through the end of 2014, an extension of an earlier commitment through mid 2013. However, the commitment has wiggle room, and there are voices on the Fed who are calling for interest rate increases now. But as Chairman Bernanke made clear today, the Fed as a whole remains cautious and monetary policymakers as a whole are not ready to conclude our troubles are over. I think that's exactly the right stance to take -- hope for the best, but prepare for the worst. In the past the Fed let its hopes interfere with its preparation, but this time does indeed appear to be different.

      Posted by on Wednesday, February 29, 2012 at 10:02 AM in Economics, Monetary Policy | Permalink  Comments (20)


      "A Pact with the Devil."

      Did welfare reform work?:

      Welfare Reform Worked, by Ron Haskins and Peter H. Schuck, Brookings: The primary election campaign has intensified a justified concern about inequality in America: People at the top are rising much faster than everyone else. Even low-income Americans consider relatively high levels of inequality acceptable if they have a decent opportunity to improve their condition. But because they may work fewer hours and at stagnant wages, their gains are very limited.
      Among the poor, surprisingly, never-married mothers have gained the most in recent decades. Their story shows the best way to reduce poverty and inequality: by encouraging individuals to work more and by supplementing their earnings with tax credits, child-care subsidies and other benefits for low-income working parents.

      Until the mid-1990s, never-married mothers seldom worked outside the home, had poverty rates of over 60% and were at least five times more likely than married-couple families to be poor. Then in 1996, congressional Republicans and President Clinton collaborated on a welfare reform law requiring adults on welfare, including never-married mothers, to work.

      When Clinton signed the law, many of his strongest political supporters reviled him for entering into "a pact with the devil." They predicted that poor women and their children deprived of welfare would die in the streets. Any employment gains, they insisted, would vanish in the first economic downturn.
      The data refute these dire predictions....

      See here for another view (scroll down to the section "TANF’s Overall Record Belies Claims of Welfare Reform’s Success").

        Posted by on Wednesday, February 29, 2012 at 12:39 AM in Economics, Social Insurance | Permalink  Comments (71)


        Fed Watch: Opportunistic Disinflation?

        Tim Duy:

        Opportunistic Disinflation?, by Tim Duy: Ryan Avent responding to Brad DeLong's interpretation of the most recent FOMC statement, comes down easy on the Fed:

        ...a strict reading of the Fed statement suggests that the central bank is planning to keep rates low because the economy is likely to remain weak. In that case, the rate forecast wouldn't be expected to raise inflation and wouldn't be stimulative. I shy away from the strict interpretation of the statement, because it would make no sense to add the language in the first place if that's what the Fed were actually saying. Perhaps too charitably, I lean toward a view that the Fed is trying to raise inflation expectations without spooking its critics, internal and external.

        Fair enough, I see that. But what has been nagging at the back of my mind is the decline in TIPS measured inflation expectations since the recession:

        Infexp

        Of course, these are not perfect measures of inflation expectations, but they still tell an interesting story. Consider that in 2006 and 2007, the average five and ten year inflation expectations were 2.38% and 2.41%, respectively. Since 2010, the averages are 1.80% and 2.14%. A reasonably sharp 58bp decline at the five year horizon, and a smaller 27bp decline at the ten year horizon. So, at first blush, if the Fed is trying to raise inflation expectations to the pre-recession rates, they have not been particularly successful, especially in the near term.

        The interesting question, however, is does the Fed want to return inflation expectations to the pre-recession rates? The transfer from TIPS inflation expectations to Fed policy is not perfectly smooth. TIPS returns depend on the CPI; the Fed targets the PCE price index. So instead of focusing on the level of TIPS inflation expectations, consider the roughly 30bp decline in the ten-year horizon. Presumably, the longer-run fits better with the Fed's objectives. And we know the target is 2%, courtesy of the explicit policy statement released at the last FOMC meeting.

        Now consider the pre-recession headline PCE price index trend. What should be the beginning of sample? Honestly, I don't know. But for convenience, let's consider the period from 2000:1 through 2007:12, which should be long enough to form reasonable inflation expectations, and extrapolate that trend forward:

        Pce

        The PCE price index is currently tracking below that trend, which would seem to open the door to more aggressive policy. But that trend represents inflation running at 2.3%, about 30bp above the Fed's target. Now fast forward 12 months and consider the trend since 2008:12:

        Pce2

        That trend line represents a rate of inflation of just a bit above 2%, right in line with the Fed's target. And 30bp less than the pre-recession trend. Or about the same as the 30bp decline in the ten-year TIPS inflation expectation.

        You see where I am going with this. The Fed was facing something higher than 2% inflation prior to the recession. Now they are looking at 2% inflation, which is also now the official target. It seems to me they might have used the recession to bring down the path of prices and along with it inflation expectations - something that might surprise the Fed's critics from both sides of the aisle.

          Posted by on Wednesday, February 29, 2012 at 12:24 AM Permalink  Comments (38)


          Links for 2012-02-29

            Posted by on Wednesday, February 29, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (56)


            Tuesday, February 28, 2012

            "What a Difference a Decade Makes on Income Inequality"

            Steve Benen:

            What a difference a decade makes on income inequality, by Steve Benen: For much of the Obama era, issues such as income inequality have been deemed largely off limits by the right. ... But it wasn't too terribly long ago that Republicans felt this was at least a problem worth considering. Our pal James Carter flagged a fascinating item from 2002, written by one of the Republican presidential candidates for an academic journal.

            [T]oday, growing disparity between the rich and poor is one of the critical social dilemmas we face in the 21st century. I believe that the growing wealth gap is one of the key reasons for this increasing disparity.

            Despite a strong economy through the 1990s, the gap between the rich and the poor expanded. Among Americans who reach age seventy, the top ten percent own more wealth than the bottom ninety percent. How do we address this inequity? [...]

            Initiatives that encourage individual wealth creation are imperative to closing the gap between the rich and the poor. I believe the government can play a role in helping many Americans who struggle to enter the economic mainstream.

            ...The author was then-Sen. Rick Santorum, in a piece for the Notre Dame Journal of Law, Ethics, & Public Policy.

            It's only fair to note that Santorum's preferred prescription was not at all progressive. The Republican's focus was on addressing inequality by expanding "wealth creation" -- we would see more income mobility, for example, if working families had their own retirement investment accounts, replacing Social Security.

            ... In 2002, leading Republicans -- Santorum was the third highest-ranking GOP senator at the time -- were entirely comfortable noting the "growing disparity between the rich and poor," exploring solutions to close the gap, and even envisioning a role for government action.

            Santorum's piece 10 years ago wasn't seen as scandalous; it was seen as routine. It's only now that the Republican mainstream sees the need to narrow the public conversation, declaring some topics verboten. Indeed, if President Obama were to declare today that the "growing disparity between the rich and poor is one of the critical social dilemmas we face in the 21st century," nearly all of the leading GOP voices would be quick to condemn such talk as inherently "divisive," promoting "envy," and fomenting class conflict.

            What a difference a decade makes.

              Posted by on Tuesday, February 28, 2012 at 11:43 AM in Economics, Income Distribution, Politics | Permalink  Comments (82)


              "How to Bring Jobs to People Who Need Them Most"

              We must do a better job of protecting workers and their families from the short-run and long-run consequences of globalization and technological change:

              How to Bring Jobs to People Who Need Them Most, by Mark Thoma: Is manufacturing special? Should the US do more to preserve its manufacturing base? President Obama brought these questions to the forefront with his recent proposal to use tax breaks and other encouragements to revive the manufacturing sector. Some people such as former Clinton economic advisor Laura Tyson argue that “manufacturing matters.” But others such as her UC Berkeley colleague and former Obama advisor Christina Romer argue against such special treatment.
              Who is right? In the past, I have given a lukewarm endorsement to the president’s proposal. I believe manufacturing is one of the more promising avenues for the future economic growth, but I’m wary of picking winners. I’d prefer that we create the conditions for winners to emerge instead of putting too much emphasis on any one area.
              But perhaps a more targeted approach is justified after all. Recent research by David Autor, David Dorn, and Gordon Hanson highlights the large detrimental effects that the loss of manufacturing jobs has had on some communities. ...[continue reading]...

              (Apologies that it is split into two pages, it's not my choice -- single page, bare bones, no comments, print version here.)

                Posted by on Tuesday, February 28, 2012 at 12:33 AM in Economics, Policy, Unemployment | Permalink  Comments (113)


                "Economics and Its Military Patrons"

                This is from an interview of Judy Klein on, among other things, the origins of economic models:

                 ...I was surprised by the very material origins of models we use in economics and by how limits on computational resources molded modeling strategies. Friedman’s and Cagan’s macroeconomic adaptive expectations model as well as the exponentially weighted moving averages that Box and Jenkins generalized in their time series analysis originated in attempts during WWII to model information flows between gunner and analog computer in the lead computing gun sights of B-17 bombers. Rational expectations was a product of the digital computer age, including Richard Bellman’s development of dynamic programming to solve the Air Force problem in the late 1940’s of how to allocate scare nuclear bombs to competing targets in a potential multistage strike on the Soviet Union.
                I was surprised to learn that so much of what was cutting edge when I was in graduate school at the London School of Economics in the early 1970s had its origins in war, including adaptive expectations, the simplex method, and mathematical programming generally.
                I was also struck by the irony that a decade-long government planning contract employing Carnegie Institute of Technology economics professors and graduate students underwrote the modeling strategies for the Nobel-prize winning demonstration that the rationality of consumers renders government intervention to increase employment unnecessary and harmful.

                  Posted by on Tuesday, February 28, 2012 at 12:24 AM in Economics, Methodology | Permalink  Comments (13)


                  "Putting a Value on State Parks"

                  Return on investment:

                  Each year, more than 700 million visits are made to America’s 6,600 state parks. ... Using conventional economic approaches to estimate the value of recreation time combined with relatively conservative assumptions, the estimated an annual contribution of the state park system is around $14 billion. That value is considerably larger than the annual operation and management costs of state parks.

                  That's "about $62 per person annually, on average." More here.

                    Posted by on Tuesday, February 28, 2012 at 12:15 AM in Economics | Permalink  Comments (9)


                    Links for 2012-02-28

                      Posted by on Tuesday, February 28, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (46)


                      Monday, February 27, 2012

                      "How Much Do Taxes Matter?"

                      James Kwak reports on new research from Romer and Romer. The bottom line is that we can raise taxes on the wealthy without worrying that they will react by reducing work effort to any significant degree:

                      How Much Do Taxes Matter?, by James Kwak: Christina and David Romer’s new paper, “The Incentive Effects of Marginal Tax Rates: Evidence from the Interwar Era,” is available as an NBER working paper (if you are so lucky). Given the current debates about taxes, the paper is likely to garner some attention. ...

                      Their headline finding is that “The estimated impact of a rise in the after-tax share is consistently positive, small, and precisely estimated” pp. 15–16). They find an elasticity of taxable income with respect to changes in the after-tax income share of 0.19.

                      Advocates of lower tax rates are sure to seize on this as evidence that higher tax rates depress incentives to work. But that’s hardly what the paper says. First of all, the Romers’ elasticity estimate is lower than earlier empirical estimates that are largely based on the postwar period. To put this in perspective, an elasticity of 0.19 implies that tax revenues would be maximized with a tax rate of 84 percent; that is, you could raise taxes up to 84 percent before people’s reduced incentives to make money would compensate for the higher tax rates.

                      Second, remember that this is a study of the super-rich: not the top 1%, but the top 0.05%. These are the people whom one would expect to have the highest income elasticity, precisely because they don’t need the marginal dollar. Elasticities tend to be lower for ordinary people because they need to cover their expenses.

                      Finally,... taxable income ... can change both because people are earning less income and because they are engaging in tax strategies to reduce their taxable income. ...[R]ecent U.S. history shows that when you raise taxes on the rich, they don’t stop trying to make money: they just pay their lawyers and accountants more to avoid paying taxes. The solution to that is a simpler tax code with fewer exclusions and deductions.

                      The claim by some that we cannot raise taxes on the wealthy because they will just find a way to avoid them never struck me as very compelling. It's simply a matter of getting the rules right, and then doing what's necessary to enforce them.

                        Posted by on Monday, February 27, 2012 at 01:35 PM in Budget Deficit, Economics, Taxes | Permalink  Comments (66)


                        Paul Krugman: What Ails Europe?

                        Paul Krugman writing from Lisbon:

                        What Ails Europe?, by Paul Krugman, Commentary, NY Times: Things are terrible here, as unemployment soars past 13 percent. Things are even worse in Greece, Ireland, and arguably in Spain, and Europe as a whole appears to be sliding back into recession.
                        Why has Europe become the sick man of the world economy? ... Read ... about Europe ... and you’ll probably encounter one of two stories, which I think of as the Republican narrative and the German narrative. Neither story fits the facts.
                        The Republican story — it’s one of the central themes of Mitt Romney’s campaign — is that Europe is in trouble because it has done too much to help the poor and unlucky, that we’re watching the death throes of the welfare state. ...
                        Did I mention that Sweden, which still has a very generous welfare state, is currently a star performer...? But let’s do this systematically. Look at the 15 European nations currently using the euro..., and rank them by the percentage of G.D.P. they spent on social programs before the crisis. Do the troubled Gipsi nations (Greece, Ireland, Portugal, Spain, Italy) stand out for having unusually large welfare states? No,... only Italy was in the top five, and even so its welfare state was smaller than Germany’s.
                        So excessively large welfare states didn’t cause the troubles.
                        Next up, the German story, which is that it’s all about fiscal irresponsibility. This story seems to fit Greece, but nobody else. ...
                        So what does ail Europe? The truth is that the story is mostly monetary. By introducing a single currency without the institutions needed to make that currency work, Europe effectively reinvented the defects of the gold standard — defects that played a major role in causing and perpetuating the Great Depression. ...
                        If the peripheral nations still had their own currencies, they could and would use devaluation to quickly restore competitiveness. But they don’t, which means that they are in for a long period of mass unemployment and slow, grinding deflation. Their debt crises are mainly a byproduct of this sad prospect, because depressed economies lead to budget deficits and deflation magnifies the burden of debt.
                        Now, understanding the nature of Europe’s troubles ... makes a huge difference, because false stories about Europe are being used to push policies that would be cruel, destructive, or both. The next time you hear people invoking the European example to demand that we destroy our social safety net or slash spending in the face of a deeply depressed economy, here’s what you need to know: they have no idea what they’re talking about.

                          Posted by on Monday, February 27, 2012 at 12:34 AM in Economics, International Finance | Permalink  Comments (98)


                          Fed Watch: Oil Prices - It's What Everyone is Talking About

                          Tim Duy:

                          Oil Prices - It's What Everyone is Talking About, by Tim Duy: Via Ryan Avent, Matt Yyglesias opines on the link between oil prices and monetary policy:

                          But it looks to me as if a demand-side oil issue is really just the same old issue of the trade deficit and the international balance of payments and not the second coming of a 1970s-style oil price shock. Perhaps it's a monetary policy issue. We send dollars abroad in exchange for oil, but then the dollars get sent back in exchange for bonds. That ought to lower interest rates and induce investment in the United States, but nominal interest rates are already at zero so the loop is cut. Even so, higher gas prices should push the price level up which pushes real interest rates down which induces investment in the United States. The chain will only be broken here if the Fed decides to ignore its own self-guidance and target headline inflation instead of core inflation.

                          There is a lot going on in these few sentences, but I am going to focus on the last two lines. As a point of clarification, the Fed does not target core inflation. Refer to the Fed's freshly printed statement on long-run goals and strategy:

                          The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate.

                          That's headline inflation, not core inflation. Of course, there is a near-term focus on core inflation, but not as a target, but as a guide to the path of headline inflation. Monetary policymakers should be wary about overreacting to movements in headline inflation if they are not evident in core inflation.

                          Consider also that the Fed is setting inflation expectations at 2 percent. Technically, expected, not current, inflation should be a determinant of investment spending. Which means that a spike in headline inflation should not stimulate investment spending via this channel assuming inflation expectations remain anchored. And, at this point, inflation expectations appear anchored:

                          Infexp

                          Still below what we saw last spring. To be sure, we could see inflation expectations edge up, but anything significant would draw the attention of the Federal Reserve. I think they are pretty serious about that 2 percent target. In other words, I would be cautious about reading too much into a drop in ex-post real interest rates due to a rise in energy costs.

                          Note that this is a criticism of Fed policy at the zero bound, that by locking in inflation expectations at 2 percent they have effectively placed their most powerful remaining policy tool off-limits.

                          I could imagine that higher-gas prices induce additional investment via some other mechanism, such as increased purchases of energy efficient machinery, etc. But this would not necessarily be a sufficient offset to other, negative impacts of higher energy prices.

                          In any event, we are all struggling to extract a signal from the data - is this primarily a "good" shock that indicates improving global activity, or a "bad" shock due to a supply constriction? Arguably, both factors are at play - see Jim Hamilton here. Putting aside the possibility of a bad shock for the moment (I think we all agree that a supply disruption stemming from a conflict with Iran would be fairly negative, especially for Europe), I tend to see the challenge in terms similar to this from Reuters:

                          Looking past the near-term uncertainty surrounding Iran, Andrew Sentance, a former member of the Bank of England's Monetary Policy Committee, said high and fluctuating prices for energy were part of a "new normal" economic climate in which Asia is the main engine of global growth.

                          Periodic bursts of inflation would add to the volatility of what was likely to be disappointing growth in the West for quite some time, according to Sentance, a senior economic adviser to PricewaterhouseCoopers, an accounting and advisory firm.

                          "This strong growth in Asia and other emerging markets is putting considerable pressure on markets for energy and other commodities and that is one of the reasons why we are finding growth so difficult to achieve," he told a conference organized by the Institute of Economic Affairs, a free-market think tank in London.

                          "That's not just a short-term phenomenon. It's a secular issue that's going to persist through the middle of this decade," he said.

                          Even if higher oil prices are a symptom of improving global growth (a "good" shock) and do not trigger a US recession, they will certainly place some additional strain on US household budgets, which will in turn depress growth relative to what it would have been in the absence of the higher oil prices (consider instead the relatively low and stable prices of oil during much of the US boom during the 1990s). In effect, we could be running up against a global bottleneck that places something of a speed-limit on US (and global) growth.

                          Addendum:

                          As to the international finance story Yglesias tells, I think this does come back to a monetary policy story, but I think the direction might be backwards. I am still working this one out:

                          Yglesias is telling a story of recycling petro-dollars. In order to finance a given level of trade deficit, the dollar outflow must be recycled back into the US economy as a dollar inflow that supports some type of domestic absorption. I shy away from using the term "investment" strictly as it could support government spending or even consumption spending (think of households borrowing against home equity to buy a boat). If foreigners don't not want to recycle their dollars back into the US economy via financial inflows, the value of the dollar falls to stimulate exports and deter imports, thus improving the external deficit.

                          Now, to Yglesias' point, we may have something of an interesting situation whereby foreign investors find themselves holding dollar assets as cash or near-cash equivalents (low yielding Treasuries). And unless the federal government utilizes that potential via expanded borrowing (note that in the private sector, savings exceeds investment already), little additional demand is supported. Now it is interesting that foreign investors would prefer to hold relatively low-yielding assets rather than using their dollars to purchase US goods and services, but such is the outcome of so many dollars being held for central banks around the world.

                          As Yglesias' says, the "loop" is cut, but not necessarily because of the zero bound, but by the global demand for dollars, which arguably is the cause of the zero bound. Which then does brings us back to Yglesias' point that this is a monetary policy issue - policymakers could more actively drive down the value of the dollar by raising inflation expectations, thus making it increasingly unattractive for foreigners to hold cash or cash equivalents, and force the funds into either demand for US goods and services or investment goods. Certainly, however, policymakers would view this as a risky strategy, and thus have not gone down this road.

                            Posted by on Monday, February 27, 2012 at 12:24 AM in Economics, Fed Watch, Monetary Policy, Oil | Permalink  Comments (22)


                            Links for 2012-02-27

                              Posted by on Monday, February 27, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (22)


                              Sunday, February 26, 2012

                              "Make Them Identify Emotionally"

                              Via digby:

                              Tribal solidarity, by digby: This post by Chris Mooney about his new book called The Republican Brain: The Science of Why They Deny Scienceand Reality is an interesting insight into something that baffles all of us:

                              I can still remember when I first realized how naïve I was in thinking—hoping—that laying out the “facts” would suffice to change politicized minds, and especially Republican ones. It was a typically wonkish, liberal revelation: One based on statistics and data. Only this time, the data were showing, rather awkwardly, that people ignore data and evidence—and often, knowledge and education only make the problem worse.
                              Someone had sent me a 2008 Pew report documenting the intense partisan divide in the U.S. over the reality of global warming. It’s a divide that, maddeningly for scientists, has shown a paradoxical tendency to widen even as the basic facts about global warming have become more firmly established.

                              Buried in the Pew report was a little chart showing the relationship between one’s political party affiliation, one’s acceptance that humans are causing global warming, and one’s level of education. And here’s the mind-blowing surprise: For Republicans, having a college degree didn’t appear to make one any more open to what scientists have to say. On the contrary, better-educated Republicans were more skeptical of modern climate science than their less educated brethren. Only 19 percent of college-educated Republicans agreed that the planet is warming due to human actions, versus 31 percent of non-college-educated Republicans.

                              For Democrats and Independents, the opposite was the case. More education correlated with being more accepting of climate science—among Democrats, dramatically so. The difference in acceptance between more and less educated Democrats was 23 percentage points.

                              This was my first encounter with what I now like to call the “smart idiots” effect: The fact that politically sophisticated or knowledgeable people are often more biased, and less persuadable, than the ignorant. It’s a reality that generates endless frustration for many scientists—and indeed, for many well-educated, reasonable people...

                              ...Ultimately, this is about tribalism, feeling part of a group, being validated by it and thinking and behaving in ways that preserve your place in it. We all do it to some extent...

                              The simple rule is this: if you want to persuade liberals of something, bring out the charts and spreadsheets. If you want to persuade conservatives of something, make them identify emotionally with what you want them to believe. ...

                              I agree with the "make them identify emotionally" part for conservatives. For example, this is telling:

                              Last week, 2012 GOP presidential hopeful Mitt Romney released a tax plan that, in addition to giving the richest 0.1 percent of Americans a $240,000 tax cut, would blow a $10.7 trillion hole in the deficit. Romney insists that his tax cuts would be paid for by limiting deductions for the rich, but many analysts have pointed out that his numbers simply can’t add up.

                              Today on ABC’s This Week, former Gov. Jennifer Granholm (D-MI) noted that Romney’s tax plan would exacerbate income inequality while causing the deficit to explode. Former Gov. John Engler (R-MI) responded by dismissing the numbers, saying that “voters aren’t analysts”:

                              Granholm: Every analysts who’s looked at, for example, Mitt Romney’s tax plan, says it exacerbates income disparities. Even the deficit, between $2 trillion and $6 trillion he adds to the deficit.

                              Engler: Voters aren’t analysts. Voters are emotional, and it’s about leadership. And they know what they’ve got. If they like that, they can vote to keep it.

                              So, for Republicans it appears to be more about signaling by taking extreme positions than truth telling. What I'm less sure about is the claim that the way to convince liberals is to "bring out the charts and spreadsheets." Perhaps, but I think emotional appeal is important here as well. What do you think?

                                Posted by on Sunday, February 26, 2012 at 12:18 PM in Economics, Politics | Permalink  Comments (99)


                                Daniel Davies: Too Big To Fail: The First 5000 Years

                                Daniel Davies on the history and purpose of debt contracts (this is from a series of posts at Crooked Timber discussing David Graeber's new book Debt: The First 5,000 Years):

                                Too Big To Fail: The First 5000 Years, by Daniel Davies: One of the many fascinating pieces of information that David Graeber tosses off like shrapnel in Debt is that the first recorded appearance of the word “freedom” in a political document is in a Sumerian proclamation of a debt amnesty or jubilee.

                                What interested me, however, from the point of view of a professional banker, is that the document in question provided only for the discharge of personal debts of the Sumerians; commercial debts of merchants were not discharged. ... The point I am trying to make here is that as well as being the first mention of the word “freedom”, this proclamation marks the first recorded instance of a regulator-sanctioned selective default. ... So from the start to the beginning of the story of debt, it has always mattered whether or not you were on the right side of what the relevant regulator wanted to accomplish. ...

                                I think this because commercial debts between merchants are a really important part of the story here. Not only are they, in simple numeric terms, a much bigger part of the picture than debts between individuals in social groups, or even tax obligations between subjects and rulers, the fact that trade credits between merchants have generally, even in conditions when other kinds of debt relation were being repudiated, tended to be preserved and honored, gives us a few clues toward an alternative story of debt over the last 5000 years.

                                The Babylonian merchants weren’t included in the debt amnesty, of course, because to have upset their trading accounts would have done serious damage to the commercial basis of Babylonian society – to put it frankly, they were too big to fail. ...

                                So it is noticeable that the concept of “too big to fail” has grown up hand in hand with the concept of the debt relation for the entire traceable history of debt. Although the parallel track of debt as obligation, religion and morality has certainly been there, and is described expertly in the book, from day one it has been recognized among merchants and men of commerce that the point of the debt relation is to serve the organization and arrangement of commercial need.

                                To my mind, this fact rather colors one of the central theses of Debt – the idea that debt has from its origins been entwined with slavery, military tribute and imperialism. I’d advance the suggestion that of course the first people to start codifying the debt relation were the first emperors and rulers; they were the first people who ever came across the problem of organizing a productive economy larger than a small village or subsistence farming community. The fact that debt has its origins in the creation of tax-collecting, military societies seems to me to be equivalent to the fact that NASA invented Teflon – they had to do it, in order to solve the problems put in front of them. ...

                                I’ve repeated myself to a boring extent in the past on the subject of the science of economics being basically a branch of control engineering (“economic cybernetics”, as the Russians called it) which went rogue in the 19th century and got caught up in a whole load of moral and political philosophy that didn’t belong there. Debt as per Graeber’s book is an example of this – the debt contract is basically a tool of industrial organization that escaped from the laboratory and ran wild. But I think he underestimates the extent to which there have always been domesticating influences on the concept, and the extent to which the debt relation has always been, correctly, the subject of revision and reappraisal, with the basic underlying question being that of economics rather than anthropology – “How do we best organize the decision making process with regard to production, consumption, and exchange?”

                                Having said that, there are some situations where Graeber’s analysis seems completely accurate. Countries don’t have bankruptcy codes governing them, and so in the sphere of international debt negotiations, one can see all the pernicious aspects of the “folk-economics” version of the debt contract that Graeber describes. Looking at the relationship between the European Union and Greece, or even Ireland, one can see that the debt relation is being specifically shaped into a tool for exercising power... IMF programs seem to be typically designed to fail, to put the client country into the position of a defaulting debtor and entirely reliant on the mercy of its creditors. So ... the book ... is very useful in looking at debt-relations outside the commercial codes that govern most of the world’s actually existing debts, and it’s a very salutary reminder of what happens when people forget that debt ... really only ought to be ... the legal system’s best guess at what kind of arrangements would best serve the general purposes of commerce. It is, as Graeber intimates, when the debt relation takes on an independent life of its own that the problems all start.

                                [More here.]

                                  Posted by on Sunday, February 26, 2012 at 10:50 AM in Economics, Financial System | Permalink  Comments (28)


                                  Links for 2012-02-26

                                    Posted by on Sunday, February 26, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (32)


                                    Saturday, February 25, 2012

                                    "The Party of Higher Debts"

                                    James Kwak:

                                    Party of Higher Debts, by James Kwak: The Committee for a Responsible Budget recently released an analysis of the budgetary proposals of the four remaining Republican presidential candidates... CFRB compares the candidates’ plans to a “realistic” baseline that assumes the Bush tax cuts are made permanent and the automatic sequesters required by the Budget Control Act of 2011 are waived... Relative to that extremely pessimistic baseline, Santorum and Gingrich still want huge increases to the national debt; only Paul’s proposals would reduce it. Romney’s proposals would have little impact, but that was before his latest attempt to pander to the base: an across-the-board, 20 percent reduction in income tax rates.
                                    How is this possible, since all of them have promised to cut spending? Huge tax cuts, on top of the Bush tax cuts. Romney, as mentioned above, would reduce all rates by 20 percent, repeal the AMT, and repeal the estate tax. Santorum would cut taxes by $6 trillion over the next decade. Gingrich would cut taxes by $7 trillion. Paul, the responsible one, would only cut taxes by $5 trillion.
                                    This is pure crazy talk. I’m not sure what is more remarkable: that the candidates would compete for the affections of the Tea Party (a supposed anti-debt group) by planning to increase the national debt; that they think that they can pose as deficit hawks while planning to increase the national debt; or that they are getting away with it.
                                    How did this happen? It’s probably no surprise to you, but over the past thirty years the Republican Party has become not the party of balanced budgets, but the party of tax cuts... The only surprising thing is how long they’ve been able to wave the flag of fiscal responsibility.
                                    Not that I’m a fan of the Committee for a Responsible Federal Budget. The CRFB is another of those “centrist” groups or panels (like Bowles-Simpson, like Domenici-Rivlin, like the Gang of Six) that is using deficits as an excuse to cut taxes... In fact, compared to current law, they all support large tax cuts, mainly for the rich.
                                    I can understand why you might want tax reform. I can also understand why you might want lower tax rates for the rich. (You might be rich, for one.) I don’t understand how you can use the national debt as an excuse for tax cuts. If you care about the national debt, you should want to let the Bush tax cuts expire and then close loopholes without lowering rates.

                                    The answer, I think, is that complaints about deficits and tax cuts are both a means to the same end, and it isn't deficit reduction, it's smaller government. Tax cuts create a deficit while rewarding key constituents at the same time (all the while arguing that the tax cuts create middle class jobs through trickle down effects that never seem to actually appear), and then the subsequent complaints and worries over the deficit lead to spending cuts. People say the Bush tax cuts didn't work -- I say it myself -- and that's true if you are talking about the impact of the cuts on economic growth and employment. It's hard to find evidence of strong effects on these variables. But it has created huge pressure to cut spending -- the government is being starved of the revenue it needs to support some programs -- and even if by some miracle the Bush tax cuts end Republicans will have accomplished the goal of shifting the conversation in a way that even has Democrats supporting changes to social insurance programs.

                                      Posted by on Saturday, February 25, 2012 at 11:17 AM in Budget Deficit, Economics, Politics | Permalink  Comments (73)


                                      Links for 2012-02-25

                                        Posted by on Saturday, February 25, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (30)


                                        Friday, February 24, 2012

                                        Autor, Dorn, and Hanson: When (and Where) Work Disappears

                                        The loss of manufacturing jobs to overseas producers has large negative impacts on workers and their communities. I'm with David Autor, one of the authors of the study described below, when he says "policymakers need new responses to the loss of manufacturing jobs: 'I’m not anti-trade, but it is important to realize that there are reasons why people worry about this issue.' ... Trade may raise GDP, but it does make some people worse off. Almost all of us share in the gains. We could readily assist the minority of citizens who bear a disproportionate share of the costs and still be better off in the aggregate":

                                        When (and where) work disappears, MIT News: ...A new study co-authored by MIT economist David Autor shows that the rapid rise in low-wage manufacturing industries overseas has ... had a significant impact on the United States. The disappearance of U.S. manufacturing jobs frequently leaves former manufacturing workers unemployed for years, if not permanently, while creating a drag on local economies and raising the amount of taxpayer-borne social insurance necessary to keep workers and their families afloat.
                                        Geographically, the research shows, foreign competition has hurt many U.S. metropolitan areas — not necessarily the ones built around heavy manufacturing in the industrial Midwest, but many areas in the South, the West and the Northeast, which once had abundant manual-labor manufacturing jobs, often involving the production of clothing, footwear, luggage, furniture and other household consumer items. Many of these jobs were held by workers without college degrees, who have since found it hard to gain new employment.
                                        “The effects are very concentrated and very visible locally,” says Autor... “People drop out of the labor force, and the data strongly suggest that it takes some people a long time to get back on their feet, if they do at all.” Moreover, Autor notes, when a large manufacturer closes its doors, “it does not simply affect an industry, but affects a whole locality.” ...
                                        The findings highlight the complex effects of globalization on the United States. “Trade tends to create diffuse beneficiaries and a concentration of losers,” Autor says. “All of us get slightly cheaper goods, and we’re each a couple hundred dollars a year richer for that.” But those losing jobs, he notes, are “a lot worse off.” For this reason, Autor adds, policymakers need new responses to the loss of manufacturing jobs: “I’m not anti-trade, but it is important to realize that there are reasons why people worry about this issue.” ...
                                        Double trouble: businesses, consumers both spend less when industry leaves
                                        In the paper, Autor, Dorn (of the Center for Monetary and Fiscal Studies in Madrid, Spain) and Hanson (of the University of California at San Diego) specifically study the effects of rising manufacturing competition from China, looking at the years 1990 to 2007. ...
                                        The types of manufacturing for export that grew most rapidly in China during that time included the production of textiles, clothes, shoes, leather goods, rubber products — and one notable high-tech area, computer assembly. Most of these production activities involve soft materials and hands-on finishing work. “These are labor-intensive, low-value-added [forms of] production,” Autor says. “Certainly the Chinese are moving up the value chain, but basically China has been most active in low-end goods.”
                                        In conducting the study, the researchers found more pronounced economic problems in cities most vulnerable to the rise of low-wage Chinese manufacturing; these include San Jose, Calif.; Providence, R.I.; Manchester, N.H.; and a raft of urban areas below the Mason-Dixon line — the leading example being Raleigh, N.C. “The areas that are most exposed to China trade are not the Rust Belt industries,” Autor says. “They are places like the South, where manufacturing was rising, not falling, through the 1980s.” ...
                                        And as the study shows, when businesses shut down, it hurts the local economy because of two related but distinct “spillover effects,” as economists say: The shuttered businesses no longer need goods and services from local non-manufacturing firms, and their former workers have less money to spend locally as well. ... “People like to think that workers flow freely across sectors, but in reality, they don’t,” Autor says. ...
                                        New policies for a new era?
                                        In Autor’s view, the findings mean the United States needs to improve its policy response to the problem of disappearing jobs. “We do not have a good set of policies at present for helping workers adjust to trade or, for that matter, to any kind of technological change,” he says.
                                        For one thing, Autor says, “We could have much better adjustment assistance — programs that are less fragmented, and less stingy.” The federal government’s Trade Adjustment Assistance (TAA) program provides temporary benefits to Americans who have lost jobs as a result of foreign trade. But as Autor, Dorn and Hanson estimate in the paper, in areas affected by new Chinese manufacturing, the increase in disability payments is a whopping 30 times as great as the increase in TAA benefits.
                                        Therefore, Autor thinks, well-designed job-training programs would help the government’s assistance efforts become “directed toward helping people reintegrate into the labor market and acquire skills, rather than helping them exit the labor market.”
                                        Still, it will likely take more research to get a better idea of what the post-employment experience is like for most people. ...
                                        “Trade may raise GDP,” Autor says, “but it does make some people worse off. Almost all of us share in the gains. We could readily assist the minority of citizens who bear a disproportionate share of the costs and still be better off in the aggregate.”

                                          Posted by on Friday, February 24, 2012 at 09:36 AM in Economics, International Trade, Unemployment | Permalink  Comments (44)


                                          Paul Krugman: Romney’s Economic Closet

                                          What can we learn from the fact that Mitt Romney is "running a campaign of almost pathological dishonesty"? That he can't be trusted:

                                          Romney’s Economic Closet, by Paul Krugman, Commentary, NY Times: According to Michael Kinsley, a gaffe is when a politician accidently tells the truth. That’s certainly what happened to Mitt Romney on Tuesday... Speaking in Michigan, Mr. Romney was asked about deficit reduction, and he absent-mindedly said something completely reasonable: “If you just cut,... as you cut spending you’ll slow down the economy.” A-ha. So he believes that cutting government spending hurts growth, other things equal.
                                          The right’s ideology police were, predictably, aghast... And a Romney spokesman tried to walk back the remark... But... Almost surely, he is, in fact, a closet Keynesian.
                                          How do we know this? Well,... while his grasp of world affairs does sometimes seem shaky, he has to be aware of the havoc austerity policies are wreaking in Greece, Ireland and elsewhere.
                                          Beyond that, we know who he turns to for economic advice; heading the list are Glenn Hubbard ... and N. Gregory Mankiw... While both men are loyal Republican spear-carriers ... both also have long track records as professional economists. And what these track records suggest is that neither of them believes any of the propositions that have become litmus tests for would-be G.O.P. presidential candidates. ...
                                          Given his advisers, then, it seems safe to assume that what Mr. Romney blurted out Tuesday reflected his real economic beliefs — as opposed to ... what the Republican base wants to hear. And therein lies the reason Mr. Romney acts the way he does, why he is running a campaign of almost pathological dishonesty. ...
                                          What this diagnosis implies, of course, is that the many people on the right who don’t trust Mr. Romney ... are correct in their suspicions. He’s playing a role, and it’s anyone’s guess what lies beneath the mask.
                                          So should those who don’t share the right’s faith be comforted by the evidence that Mr. Romney doesn’t believe anything he’s saying? Should we, in particular, assume that, once elected, he would actually follow sensible economic policies? Alas, no.
                                          For the cynicism and lack of moral courage that have been so evident in the campaign wouldn’t suddenly vanish... If he doesn’t dare disagree with economic nonsense now, why imagine that he would become willing to challenge that nonsense later? And bear in mind that if elected, he would be watched like a hawk for signs of apostasy by the very people he’s trying so desperately to appease right now.
                                          The truth is that Mr. Romney is so deeply committed to insincerity that neither side can trust him to do what it considers to be the right thing.

                                            Posted by on Friday, February 24, 2012 at 02:35 AM Permalink  Comments (124)


                                            The Increase in Household Debt Prior to the Crisis is Not a Moral Issue

                                            Via Mike Konczal at Rortybomb, Josh Mason explains the findings of his research with Arjun Jayadev on the dynamics of household debt. Importantly, this research knocks a hole in the story that it was lack of self control -- the decline of the morals of the middle class -- that caused the increase in household debt prior to the financial crisis (the original article also has the mathematics and empirical tables explaining and documenting the results):

                                            Guest Post by JW Mason: The Dynamics of Household Debt: [Mike here. ... Josh Mason ... and Arjun Jayadev, former Roosevelt Institute fellow and economist at Umass-Boston, have an interesting new paper out on the growth of household debt over the past 30 years. I asked them if they would write a summary of this research..., and Josh was willing...]
                                            It’s a well-known fact that household debt has exploded in recent decades, rising from 50 percent of GDP in 1980 to over 100 percent on the eve of the Great Recession. It’s also well-known that household borrowing has increased sharply over this period. ... In fact, though,... while the first one is certainly true, the second is not.
                                            How can debt have increased if borrowing hasn’t? Though this seems counterintuitive, the answer is simple. We’re not interested in debt per se, but in leverage, defined as the ratio of a sector’s or unit’s debt to its income (or net worth). This ratio can go up because the numerator rises, or because the denominator falls. Household leverage increased sharply, for instance, in 1930 and 1931 (see Figure 1) but people weren’t were consuming more in the Depression; leverage rose because incomes and prices were falling faster than households could pay down debt. Similarly, changes in interest rates can change the debt burden without any shift in household consumption...
                                            But strangely, despite the example of the Depression (and Irving Fisher’s famous diagnosis of rising debt burdens caused by falling prices and incomes (Fisher 1933)), no one has systematically examined what fraction of changes in private debt can be attributed to changes in interest, growth, inflation and new borrowing. In a new paper, Arjun Jayadev and I attempt to fill this gap, applying the standard decomposition of public sector debt changes to household debt in the United States for the period 1929-2011. (Mason and Jayadev, 2012.) Our findings challenge the conventional narrative about rising household debt.
                                            What we find is that the entire increase in household leverage after 1980 can be attributed to the non-borrowing... — what we call Fisher dynamics. If interest rates, growth and inflation over 1981-2011 had remained at their average levels of the previous 30 years, then the exact same spending decisions by households would have resulted in a debt-to-income ratio in 2010 below that of 1980, as shown in Figure 2. The 1980s, in particular, were a kind of slow-motion debt-deflation, or debt-disinflation; the entire growth in debt relative to earlier periods (17 percent of household income, compared with just 3 percent in the 1970s) is due to the slower growth in nominal income as a result of falling inflation. In other words, there is no reason to think that aggregate household borrowing behavior changed after 1980; indeed households reduced their borrowing in the face of higher interest rates just as one would expect rational agents to. The problem is that they didn’t, or couldn’t, reduce borrowing fast enough to make up for the fact that after the Volcker disinflation, leverage was no longer being eroded by rising prices. In this respect, the rise in debt-income ratios in the 1980s is parallel to that of 1929-1931. ...
                                            Think of it this way: If you borrow money and your income in dollars rises by 10 percent a year (3 percent real growth, say, and 7 percent inflation) then you will find it much easier to pay off the debt when it comes due. But if you borrow the same amount and your dollar income turns out to rise at only 4 percent a year (the same real growth but only 1 percent inflation) then the payment, when it comes due, will be a larger fraction of your income. That, not increased household spending, is why debt ratios rose in the 1980s.
                                            Neither the 1980s nor the 1990s saw an increase in new household borrowing — on the contrary, the household sector in the aggregate showed a primary surplus in these decades, in contrast with the primary deficits of the postwar decades. So both the conservative theory explaining increased household borrowing in terms of shorter time horizons and a general lack of self-control, and the liberal theory explaining it in terms of efforts by those further down the income ladder to maintain consumption standards in the face of a falling share of income, need some rethinking. Given the increased availability of credit and rising inequality, some households may well have chosen to increase spending relative to income, and those lower down the income ladder presumably did rely on borrowing to maintain consumption standards in the face of stagnant wages. But for the household sector in the aggregate, until 2000, there is no increased household borrowing to explain. ...
                                            An important point to note ...[is] that in the period of the housing bubble — 2000 to 2006 — the conventional story is right: during this period, the household sector did run very large primary deficits (averaging 3.3 percent of income), which explain the bulk of increased leverage over this period. But not all of it: even in this period, about a third of the increase in debt was due to ... mechanical effects... And in the following four years, households reduced consumption relative to income by nearly as much as they increased it in the bubble years. But these large primary surpluses barely offset the large gap between interest and (very low) growth and inflation over these four years. In the absence of the headwind created by adverse debt dynamics, the increase in household leverage in the bubble would have been effectively reversed by 2011.
                                            We draw two main conclusions. First, as a historical matter, you cannot understand the changes in private sector leverage over the 20th century without explicitly accounting for debt dynamics. The tendency to treat changes in debt ratios as necessarily the result in changes in borrowing behavior obscures the most important factors in the evolution of leverage. Second, going forward, it seems unlikely that households can sustain large enough primary deficits to reduce or even stabilize leverage. ... As a practical matter, it seems clear that, just as the rise in leverage was not the result of more borrowing, any reduction in leverage will not come about through less borrowing. To substantially reduce household debt will require some combination of financial repression to hold interest rates below growth rates for an extended period, and larger-scale and more systematic debt write-downs. ...

                                              Posted by on Friday, February 24, 2012 at 12:27 AM in Economics, Financial System | Permalink  Comments (87)


                                              Links for 2012-02-24

                                                Posted by on Friday, February 24, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (25)


                                                Thursday, February 23, 2012

                                                What's Wrong With This Picture?

                                                State local
                                                [via]

                                                  Posted by on Thursday, February 23, 2012 at 12:23 AM in Economics, Fiscal Policy, Unemployment | Permalink  Comments (98)


                                                  Reich: The GOP’s Big Investors

                                                  Democracy?:

                                                  The GOP’s Big Investors. by Robert Reich: Have you heard of William Dore, Foster Friess, Sheldon Adelson, Harold Simmons, Peter Thiel, or Bruce Kovner? If not, let me introduce them to you. They’re running for the Republican nomination for president.
                                                  I know, I know. You think Rick Santorum, Newt Gingrich, Ron Paul, and Mitt Romney are running. They are – but only because the people listed in the first paragraph have given them huge sums of money to do so. In a sense, Santorum, Gingrich, Paul, and Romney are the fronts. ...

                                                  According to January’s Federal Election Commission report, William Dore and Foster Friess supplied more than three-fourths of the $2.1 million raked in by Rick Santorum’s super PAC in January. ... Sheldon Adelson and his wife Miriam provided $10 million of the $11 million that went into Gingrich’s super PAC in January. ... Peter Thiel ... provided $1.7 million of the $2.4 million raised by Ron Paul’s super PAC in January. Mitt Romney’s super PAC raised $6.6 million last month – almost all from just forty donors. ...

                                                  Bottom line: Whoever emerges as the GOP standard-bearer will be deeply indebted to a handful of people, each of whom will expect a good return on their investment. And this is just the beginning. We haven’t even come to the general election. ...

                                                  Before 2010, federal campaign law and Federal Election Commission regulations limited to $5,000 per year the amount an individual could give to a PAC... This individual contribution limit that was declared unconstitutional... Now, the limits are gone. And this comes precisely at a time when an almost unprecedented share of the nation’s income and wealth is accumulating at the top.
                                                  Never before in the history of our Republic have so few spent so much to influence the votes of so many.

                                                    Posted by on Thursday, February 23, 2012 at 12:21 AM in Economics, Politics | Permalink  Comments (37)


                                                    Strategic Forecasting at the Fed

                                                    Minimizing the forecast error, i.e. providing the best possible forecast of future variables such as output, inflation and employment, does not appear to be the main goal of some members of the Fed's monetary policy committee. Instead, the forecasts appear to be set strategically in an attempt to influence policy decisions:

                                                    Federal Open Market Committee forecasts: Guesses or guidance?, by Peter Tillmann, Vox EU: On 25 January 2012, the Federal Open Market Committee (FOMC), the decision-making body of the US Federal Reserve, took yet another step towards higher transparency of US monetary policy. Besides publishing the usual set of macroeconomic forecasts, the FOMC for the first time also published the interest-rate projections formulated by its members...
                                                    A week later ... Richard W Fisher, president of the Federal Reserve Bank of Dallas ... argued that “at best, the economic forecasts and interest-rate projections of the FOMC are ultimately pure guesses”. Furthermore, he said that “forecasts issued by the FOMC are tactical judgments of the moment, made within a broader strategic context”...
                                                    Given the enormous attention Fed watchers pay to every piece of information officially endorsed by the Fed, the interpretation of the economic projections is a highly topical question. If projections were just “guesses”, the ability to guide market expectations would eventually suffer.
                                                    FOMC vs private-sector forecasts ...Gavin and Mandal (2003) ... show that the FOMC’s real growth forecasts are at least as good as those provided by the private sector. The inflation forecasts were more accurate than private-sector forecasts. In light of these findings, Fisher’s (2012) first conjecture seems less convincing.
                                                    But what about Fisher’s (2012) other claim..., are motives other than achieving maximum forecast accuracy reflected in FOMC projections? One interpretation is that members pursue strategic motives to have an additional leverage on policy decisions of the committee. ... McCracken (2010) argues that “... an inflation hawk has an incentive to forecast very high inflation regardless of whether that outcome is the most likely, and an inflation dove has a similar set of incentives to forecast lower inflation.”
                                                    Strategic forecasting: Voting vs non-voting members’ forecasts ...While all regional presidents take an active part in the policy deliberation, the formal voting right rotates across Federal Reserve districts. ... While only a subgroup of members votes on interest-rate policy, all FOMC members regularly submit forecasts for important macroeconomic variables. The incentives to pursue strategic motives are stronger for members without a direct say on policy. ...
                                                    I show that non-voters systematically over-predict inflation relative to the consensus forecast if they favor tighter policy and under-predict inflation if they prefer looser policy. These findings are consistent with non-voting members following strategic motives in forecasting ... to influence policy.
                                                    This line of research is extended in my research with Jan-Christoph Rülke... We test whether these forecasts exhibit herding behavior, a pattern often found in private-sector forecasts. While growth and unemployment forecasts do not show herding behavior, the inflation forecasts exhibit strong evidence of anti-herding, i.e. FOMC members intentionally scatter their forecasts around the consensus. Interestingly, anti-herding is more important for non-voting members than for voters. Put differently, non-voting members submit forecasts that are systematically further away from the forecast consensus. ...
                                                    Are FOMC forecasts special? Taken together, there is indeed evidence suggesting that motives other than forecast accuracy play a role in the forecasting process. Is this a case for concern? Probably not. It ... is well known that professional forecasts are affected by factors other than accuracy (see Lamont 2002 and Pons-Novell 2003). The available empirical evidence suggests that FOMC members are prone to similar incentives. While individual forecasts might be affected by those factors, the distribution of views among committee members can still be a valuable source of information...

                                                      Posted by on Thursday, February 23, 2012 at 12:20 AM in Economics, Monetary Policy | Permalink  Comments (2)


                                                      Links for 2012-02-23

                                                        Posted by on Thursday, February 23, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (19)


                                                        Wednesday, February 22, 2012

                                                        Should Researchers Hide Results from the Public?

                                                        One of the reasons I started this blog almost was to try to correct the distortion of economic ideas by people masquerading as economists in pursuit of political goals. Ideas were presented in a misleading, distorted, or incomplete way in an attempt to sway the broader public toward a particular political agenda (tax cuts paying for themselves and Social Security were particular sore spots).

                                                        Economics is not the only discipline with this problem as the debates over issues such as global warming illustrate well, but I didn't realize some people think the answer to this problem is to shield research from the public. This is from a discussion of the way in which ideas about quantum physics are used to mislead the public:

                                                        For some scientists, the unfortunate distortion and misappropriation of scientific ideas that often accompanies their integration into popular culture is an unacceptable price to pay.

                                                        But I think this is the right response:

                                                        I share their irritation, but my strongly held view is that science is too important not to be part of popular culture. Our civilization was built on the foundations of reason and rational thinking embodied in the scientific method, and our future depends on the widespread acceptance of science as THE ONLY WAY WE HAVE to meet many, if not all, of the great challenges we face. Is the climate warming and, if so, what is the cause? Is it safe to vaccinate children against disease? These are scientific questions, in that they can be answered by the analysis of data, and therefore the answers are independent of the opinion, faith or political persuasion of the individual. ...
                                                        The key words in the above paragraph are “widespread acceptance”. In democratic societies, progress is made through persuasion, and science has a most persuasive story to tell. ...

                                                        The problem that economists have, particularly macroeconomists, is that data rarely settle the issue. This is something I wrote on this about a year ago:

                                                        Why can’t economists tell us what happens when government spending goes up or down, taxes change, or the Fed changes monetary policy? The stumbling block is that economics is fundamentally a non-experimental science, particularly in the realm of macroeconomics. Unlike disciplines such as physics, we can't go into the laboratory and rerun the economy again and again under different conditions to measure, say, the average effect of monetary and fiscal policy. We only have one realization of the macroeconomy to use to answer important policy questions, and that limits the precision of the answers we can give. In addition, because the data are historical rather than experimental, we cannot look at the relationships among a set of variables in isolation while holding all the other variables constant as you might do in a lab and this also reduces the precision of our estimates.
                                                        Because we only have a single realization of history rather than laboratory data to investigate economic issues, macroeconomic theorists have full knowledge of past data as they build their models. It would be a waste of time to build a model that doesn't fit this one realization of the macroeconomy, and fit it well, and that is precisely what has been done. Unfortunately, there are two models that fit the data, and the two models have vastly different implications for monetary and fiscal policy. ... [This leads to passionate debates about which model is best.]
                                                        But even if we had perfect models and perfect data, there would still be uncertainties and disagreements over the proper course of policy. Economists are hindered by the fact that people and institutions change over time in a way that the laws of physics do not. Thus, even if we had the ability to do controlled and careful experiments, there is no guarantee that what we learn would remain valid in the future.
                                                        Suppose that we somehow overcome every one of these problems. Even then, disagreements about economic policy would persist in the political arena. Even with full knowledge about how, say, a change in government spending financed by a tax increase will affect the economy now and in the future, ideological differences across individuals will lead to different views on the net social value of these policies. Those on the left tend to value the benefits higher, and place less weight on the costs than those on the right and this leads to fundamental, insoluble differences over the course of economic policy. Paul Ryan will never see eye to eye with Obama.
                                                        Progress in economics may someday narrow the partisan divide over economic policy, but even perfect knowledge about the economy won’t eliminate the ideological differences that are the source of so much passion in our political discourse.

                                                        So it is not at all clear to me that the strong divides in economics can be settled with the data. It is certainly problematic with the data we have -- it's just not able to discriminate well between competing models, and as noted above even perfect data wouldn't settle all the isues. It's not completely hopeless:

                                                        ...the ability to choose one model over the other is not quite as hopeless as I’ve implied. New data and recent events like the Great Recession push these models into unchartered territory and provide a way to assess which model provides better predictions. However, because of our reliance on historical data this is a slow process – we have to wait for data to accumulate – and there’s no guarantee that once we are finally able to pit one model against the other we will be able to crown a winner. Both models could fail...

                                                        I think the Great recession has, for example, provided evidence that the NK model provides a better explanation of events than its competitors, but it is far from a satisfactory construction and it would be hard to call its forecasting and explanatory abilities a success.

                                                          Posted by on Wednesday, February 22, 2012 at 12:57 PM in Economics, Methodology | Permalink  Comments (45)


                                                          Obama's Proposed Corporate Tax Cut Won't Do Much to Stimulate the Economy

                                                          I have a few comments on the president's proposal for corporate tax reform (which relies, in part, upon Jared Bernstein's post):

                                                          Obama's Proposed Corporate Tax Cut Won't Do Much to Stimulate the Economy

                                                          The bottom line is that it is mainly a redistribution of the tax burden rather than a net cut in taxes, and I don't think it will have a large impact on the economy.

                                                           

                                                            Posted by on Wednesday, February 22, 2012 at 09:59 AM in Economics, Fiscal Policy, Taxes | Permalink  Comments (24)


                                                            Summers, Romer, and the Stimulus Package

                                                            More on the evolution of the stimulus package:

                                                            The Memo that Larry Summers Didn’t Want Obama to See, by Noam Scheiber: ...Last month,... Ryan Lizza wrote a much-discussed piece in The New Yorker... The piece ... described the stimulus options that Obama’s team—including Larry Summers ... and Christy Romer ... sent him. The options ranged from about $550 billion to just under $900 billion.
                                                            Intriguingly, Lizza also noted that Romer “was frustrated that she wasn’t allowed to present an even larger option,” suggesting that ... the memo he obtained ... was far from the whole story. ...
                                                            I can fill in ... the narrative—an earlier version of the same memo that includes Romer’s larger option. (A source provided the memo...) In this version of the memo, Romer calculated that it would take an eye-popping $1.7-to-$1.8 trillion to fill the entire hole in the economy...
                                                            By clicking on the graphic..., you can examine ... Romer’s version of the memo alongside the final version... What’s striking is that ... the paragraph in which Romer makes the case for $1.7-to-$1.8 trillion has simply vanished.
                                                            What happened? When Romer showed Summers her $1.7-to-$1.8 trillion figure..., he dismissed it as impractical. So Romer spent the next day or two coming up with a reasonable compromise: $1.2 trillion..., along with two more limited options: about $600 billion and about $850 billion.
                                                            At first, Summers gave her every indication that all three figures would appear in the memo... But less than twenty-four hours before the memo needed to be in Obama’s hands, Summers informed her that he was inclined to strike the $1.2 trillion figure. Though Summers ... believed more stimulus was ... better, he also felt that a $1.2 trillion proposal, to say nothing of $1.8 trillion, would be dead on arrival in Congress. Moreover,... Summers worried that urging more than this amount would stamp him and Romer as oblivious... “People will think we don’t get it.”
                                                            Romer was uneasy with this. She felt that $1.2 trillion was itself a pragmatic middle ground. She also believed the president-elect should deeply grasp all the trade-offs he faced... She protested, but ... Summers held firm. ... The final version of the memo ... framed the debate around two basic choices—roughly $600 billion and roughly $850 billion...
                                                            Neither the memo nor the meeting would have given Obama reason to suspect this amount was arguably $1 trillion too small. ... Though Obama was never going to propose a $1.8 trillion stimulus, and Congress certainly wasn’t going to pass one, the president may well have felt a greater sense of urgency had he better understood how far he was from the ideal.

                                                            With respect to Summer's "People will think we don’t get it" excuse for not even presenting the higher figure, it seems to me their job was to make people get it -- to make them understand why the larger figure was on the list of options.

                                                              Posted by on Wednesday, February 22, 2012 at 12:36 AM in Economics, Fiscal Policy, Politics | Permalink  Comments (65)


                                                              Whorfian Economics: The Interaction of Language and Economic Decisions

                                                              Does the way in which the language we speak describes the future have an impact our intertemporal choices? Apparently so:

                                                              Whorfian Economics, by Keith Chen: Mark and Geoffrey were kind enough not only to write thoughtful columns on a recent working paper of mine here and here, but to invite me to write a guest post explaining the work. In the spirit of a non-linguist who’s pleased to be discovering this blog, I wanted to use Mark and Geoffrey’s insightful posts as a springboard to explain my work.
                                                              In a nutshell: I find a strong correlation between how a language treats future-time reference (FTR), and the choices that speakers of those languages make when thinking about the future. Specifically, in large data sets that survey families across hundreds of countries, I find a strong and robust negative correlation between the obligatory marking of FTR in the language a family speaks, and a whole host of forward-looking behaviors, like saving, exercising, and refraining from smoking.
                                                              [...For those readers unfamiliar with this typological distinction, English is considered a strong-FTR language because of observation that unlike most Germanic languages, English generally requires speakers to grammatically mark future events, primarily with either the de-andative construction “be going to” or the de-volative construction “will”. It is this generally tendency toward obligatory grammatical marking of future time that characterizes the strong vs. weak FTR distinction. ...]
                                                              These correlations hold both across countries and within countries, even when comparing effectively identical families born and living in the same country. While the data I analyze don’t allow me to completely understand what role language plays in these relationships, they suggest that there is something really remarkable to be explained about the interaction of language and economic decision making. These correlations are so strong and survive such an aggressive set of controls, that the chances they arise by random lies somewhere between one in 10,000 and one in 10^32.
                                                              Starting with Mark’s post: Mark illustrates beautifully an idea that is really the central concern of all work done in modern econometrics: it can often be difficult to tell the difference between strong correlations produced by causal relationships, and correlations which arise through non-causal factors. Since questions of the connection between language and behavior have historically generated considerable controversy, it seems important to think hard about what exactly these correlations actually suggest. Towards this, I’ll discuss briefly why my analysis suggests that a non-causal story is unlikely, and that a language’s structure is causing its speakers to behave differently. ...
                                                              In short, I believe the data suggest a strong and robust relationship between linguistic and economic data, a relationship that bears explaining. Where this leaves us is what I think is an exciting place: one where Economists have a lot to learn from Linguists.

                                                              Much, much more here, including a discussion of potential weak points in the results.

                                                                Posted by on Wednesday, February 22, 2012 at 12:16 AM in Economics | Permalink  Comments (48)


                                                                Links for 2012-02-22

                                                                  Posted by on Wednesday, February 22, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (37)


                                                                  Tuesday, February 21, 2012

                                                                  "This Really Isn’t Credible"

                                                                  Teaching day, so a quick one on Greece -- the reviews are in:

                                                                  Greece, by Paul Krugman:

                                                                  We must do something. This is something. Therefore we must do it.

                                                                  Yes, Minister.

                                                                  What can I say? As Felix Salmon says, this really isn’t credible. The problem with all previous rounds here has been that austerity policies depress the economy to such an extent that it wipes out most of the topline fiscal gains: revenue fall, so does GDP, so the projected debt/GDP ratio gets, if anything, worse.

                                                                  Now we have another round of austerity — which is assumed not to do too much damage to growth. The triumph of hope over experience.

                                                                  OK, nobody here is an idiot (although see my next post). What’s happening is that nobody is prepared to take the plunge into either of the paths that might eventually lead out of this: sustained aid (not loans) to Greece, or departure from the euro, leading eventually to higher competitiveness and faster growth. Both options would be politically catastrophic, which means that they can’t be taken until there is literally no alternative.

                                                                  So Greece will be strung along some more.

                                                                    Posted by on Tuesday, February 21, 2012 at 10:47 AM in Economics, Financial System, International Finance | Permalink  Comments (65)


                                                                    "Political Constraints in the Aftermath of Financial Crises"

                                                                    Political constraints limit the options for rescuing the financial sector after a meltdown:

                                                                    Political constraints in the aftermath of financial crises, by Atif Mian, Amir Sufi, and Francesco Trebbi, Vox EU: Financial crises of all colors (banking, currency, inflation, or debt crises) leave deep marks on an economy. ... What exactly occurs in the aftermath of financial crises that makes recovering from such shocks so hard? This column argues that the answer may lie mostly with the politics, not the economics.

                                                                    Let us start with some stylized facts. One thing that happens with some regularity, but seems not to have been systematically documented, is an association of financial crises with ...  increases in income inequality...

                                                                    Although the relationship between higher inequality and persistent contractions is not conceptually straightforward, the evidence is consistent with the view of a financial crisis damaging certain constituencies in society more than others.

                                                                    As an example we can look at ... the disparity of how the value of real estate assets, mostly held by middle- and low-income indebted households, is still far from having recovered to pre-crisis levels, while financial assets, mostly held by the wealthy, have already bounced back. Some may be hit harder than others in a financial crisis, and this is a consequential phenomenon. ...

                                                                    Individuals differentially affected will probably support different policy responses to the crisis. Agreement on unified reactions to the negative financial shock may become harder to achieve or nonexistent. This may stall potentially beneficial macro-financial reform, which could speed up the recovery. ...

                                                                    A systematic analysis of ‘politics after the crisis’ fits this logic. ... Voters become more ideologically polarized... Government coalitions become weaker... Opposition coalitions become larger. Party fragmentation increases across the board. ...

                                                                    As one would expect,... after the crisis hits, the moderate middle sinks and the extremes rise. This is reminiscent of the rise of the Tea Party on the right and of Occupy Wall Street on the left in the post-Great Recession US. ...

                                                                    Political gridlock and lack of reform are natural outcomes of polarization. Gridlock delays reform and possibly makes recovery slower (explaining the long recessions and sluggish recoveries). ... Crises are occasionally thought of as critical junctures where macroeconomic reform unlocks by shattering entrenched conditions (Drazen and Easterly 2001). The opposite seems true.

                                                                    The list of potential negative implication does not stop here though.

                                                                    1. Gridlock brings selective intervention. In the aftermath of a financial crisis, any type of reform, including bailouts, faces a higher bar for passage. Unfortunately, if a reform overcomes political gridlock, it may well be not because of efficiency or merit, but because of strong political organization by its constituency... Is it surprising that concentrated special interests (such as large US banks...) got a sizeable bailout through TARP, while diffused special interests (such as mortgage debtors) did not? This selective intervention may then feed back into further increasing economic and political polarization.
                                                                    2. Gridlock brings political uncertainty. Markets for sovereign debt do not seem particularly appreciative of governments engaging in stalemate or political bickering at the time a country needs decisive intervention the most. Recent credit rating downgrades of US or European debt fit this interpretation. ...
                                                                    3. In the same way that financial crises appear to polarize constituencies at the national level, it is not hard to envision polarization at the international level playing an important role. ...

                                                                    In conclusion, to those of us interested in efficient policy response in the aftermath of financial crises, understanding the logic of political constraints may be useful. The chances are that a country will not achieve reform precisely when it needs it the most. Any model of post-crisis macro intervention that leaves this political feature aside forgoes an important dimension. ...

                                                                    We didn't have until after the fact to learn this lesson. At the time, many of us were urging the administration to consider the distributional consequences of the financial bailout -- who was helped and who wasn't -- and to adjust policy accordingly (e.g. the banks could have been saved without rewarding financial executives who had a hand in creating the problems). But the administration was afraid that if it took the steps required to do this, i.e. if it nationalized the banks temporarily, removed the management, put the good assets in one pile, the junk in another, and then sold the good assets back to the private sector, Republicans would have been upset. They might have called the administration socialists, criticized the bailout, something like that, you know --like they did anyway.

                                                                    The administration argues it had little choice about how to conduct the bailout due to legal restrictions that prevented it from taking over shadow banks in the same way it could traditional banks, and there was an urgent need of an intervention of some sort. Nevertheless, there were other options it could have pursued even within the structure the administration adopted, e.g. more aggressive clawback on profits resulting from the bailout through warrants and other means. In any case, I just wish more had been done for the households that were struggling every bit as much as the banks. A lot more.

                                                                      Posted by on Tuesday, February 21, 2012 at 01:22 AM in Economics, Financial System, Monetary Policy | Permalink  Comments (26)


                                                                      "It’s Obvious Where Profits Have Come From"

                                                                      Menzie Chinn says "there is substantial space for rising wages":

                                                                      Competitiveness, and the Bush Tax Cuts and Deficits, by Menzie Chinn: The Administration released the annual Economic Report of the President on Friday. Many topics were covered, but here I’ll remark upon a few issues, motivated by several graphs.
                                                                      First is price markup over unit labor cost. The interesting trend since 2001 has been the rise in this variable.

                                                                      Mu-b
                                                                      Source: Economic Report of the President, 2012.

                                                                      From this graph, one would be hard pressed to find American business in terrible shape. Productivity has increased, labor compensation growth has been modest, so that it’s obvious where profits have come from. This also means (to me) that there is substantial space for rising wages to be absorbed without a commensurate wage-price spiral. ...

                                                                      [Menzie also discusses several other aspects of the report.]

                                                                      Update: Karl Smith comments on the same graph.

                                                                        Posted by on Tuesday, February 21, 2012 at 12:22 AM in Economics, Income Distribution | Permalink  Comments (37)


                                                                        Links for 2012-02-21

                                                                          Posted by on Tuesday, February 21, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (53)


                                                                          Monday, February 20, 2012

                                                                          Shifting the Center of the Political Debate

                                                                          I want to follow up on Paul Krugman's post about the shifting Overton window in the UK toward the political right (think of the Overton window as a view into the center of a debate). As Krugman would be the first to tell you, it's not just in the UK. For example, consider the current discussion over the president's proposed budget, a budget that is touted as "broadly consistent with the bipartisan deficit reduction proposals put forward by the Bowles-Simpson Commission."

                                                                          I thought the recommendations for balancing the budget that came out of the Bowles-Simpson committee gave far too much to the GOP - the solutions that were proposed were much further to the right of the political spectrum than I would have preferred. My recollection is that people such as Paul Krugman and Dean Baker were critical as well (and recall that there was no official report because four Democrats and three Republicans on the seventeen member committee could not agree to the recommendations on the table -- instead we got an unofficial report from the committee chairs, Bowles and Simpson).

                                                                          However, Republicans have shifted the debate so far to the right that Bowles-Simpson is now being portrayed by the administration and others as a model of balance, reason, and compromise that both sides ought to embrace.

                                                                          Now it is true that the administration is backing off on one proposal in Bowles Simpson that generated much of the opposition from the left, one to raise the Social Security retirement age and cut Social Security benefits in other ways:

                                                                          Treasury Secretary Timothy Geithner on Thursday explained why President Obama never fully embraced the 2010 report of his fiscal commission, headed by former Sen. Alan Simpson (R-Wyo.) and Erskine Bowles.

                                                                          Geithner, under heavy fire from the Senate Budget Committee, said the Obama administration “did not feel” it could embrace it because the cuts to defense were too deep and the reforms to Social Security relied too much on benefit cuts.

                                                                          I don't like the position on defense cuts, at all, but at least the administration has committed to protecting Social Security. That's a step in the right direction (assuming it won't be put on the table as a bargaining chip for other policies -- I'm not ready to relax about the administration's plans for Social Security just yet).

                                                                          But the point of this post is to note how far the debate -- the Overton window -- has shifted to the right. Suddenly, Bowles-Simpson is held up as the ideal, something to strive for -- as though achieving it would be a great success -- yet from my perspective it is, as noted above, far to the political right. With the Social Security and other changes, it is, perhaps, the minimum acceptable policy for progressives, but it is not an ideal to strive for as it is currently being portrayed.

                                                                          This is Jenni LeCompte of Treasury:

                                                                          Difference on Deficit Reduction is not about “How Much?” but “Who Pays?”, by Jenni LeCompte, Treasury Notes: The Budget released by the President this week uses a balanced approach to achieve more than $4 trillion in deficit reduction over the next 10 years. This level of savings and the manner in which they are accomplished are broadly consistent with the bipartisan deficit reduction proposals put forward by the Bowles-Simpson Commission and the Senate’s bipartisan “Gang of Six.” Using this balanced approach, the President’s Budget reduces deficits from about 9 percent of GDP in 2011 to below 3 percent by 2018, and stabilizes the debt as a share of the economy by the middle of the decade.
                                                                          In general, there is little disagreement on the magnitude of savings that are needed over the next decade to put us on a sustainable fiscal course. Rather, the main difference between the President and Republicans are related to the composition of these savings.
                                                                          As Secretary Geithner made clear in testimony on the Budget this week, the greatest impediment to bipartisan progress on reducing deficits is the unwillingness by Republicans in Congress to take a balanced approach. Instead, they have sought to achieve budget savings solely through cuts to critical programs like Medicare and Medicaid, without asking the most fortunate citizens to contribute anything more than they do today. This position is at odds with both of the bipartisan efforts cited above. Though often invoked by Republicans in Congress as a model for reform, the Bowles-Simpson Commission recommendations included about $2 trillion in additional revenues over 10 years, which is $2 trillion more than Republicans have been willing to support. ...
                                                                          Rather than address our fiscal challenges largely on the back of middle class families and seniors, the President’s plan calls on the richest two percent of Americans – those who have seen their incomes grow more than the rest – to make a contribution to our deficit reduction efforts. At the same time, the Budget carefully slows growth of spending in Medicaid and Medicare through both the Affordable Care Act and additional proposals in the Budget that save about $360 billion in mandatory health spending, while preserving these vital programs. It saves more than $270 billion in so-called “other mandatory” spending implementing a number of policies consistent with the Bowles-Simpson Commission’s recommendations. ...
                                                                          Notwithstanding the many misleading claims that were made about the President’s Budget over the past week, the fact is that if the President’s Budget were enacted today, it would boost growth and job creation in the short term, reduce our deficits and stabilize our debt by the middle of the decade, and put us in a strong position to pursue long-term reforms. As Secretary Geithner said this week, “This plan will not solve all the nation’s challenges, but it will put us in a much stronger position to deal with those challenges.”

                                                                          When he chooses engage, the president is doing a bit better in battling Republicans. I wish he'd engage on more fronts, but lately there has been progress. However, it seems to me that all the president has done is stop the rightward drift in the center of the conversation. That's something, but it is not enough. What I want is a president who can begin pushing the Overton window back in the other direction, and it's not clear that Obama is up to this task (either politically or ideologically).

                                                                            Posted by on Monday, February 20, 2012 at 10:05 AM in Economics, Politics | Permalink  Comments (43)


                                                                            Paul Krugman: Pain Without Gain

                                                                            Reducing aggregate demand when spending is already falling makes things worse, not better:

                                                                            Pain Without Gain, by Paul Krugman, Commentary, NY Times: Last week the European Commission confirmed what everyone suspected: the economies it surveys are shrinking... It’s not an official recession yet, but the only real question is how deep the downturn will be.
                                                                            And this downturn is hitting nations that have never recovered from the last recession. ... Worse yet, European leaders — and quite a few influential players here — are still wedded to the economic doctrine responsible for this disaster. ...
                                                                            Specifically, in early 2010 austerity economics ... became all the rage in European capitals. The doctrine asserted that the direct negative effects of spending cuts on employment would be offset by changes in “confidence,” that savage spending cuts would lead to a surge in consumer and business spending, while nations failing to make such cuts would see capital flight and soaring interest rates. ...
                                                                            Now the results are in... The confidence fairy has failed to show up: none of the countries slashing spending have seen the predicted private-sector surge. Instead, the depressing effects of fiscal austerity have been reinforced by falling private spending.
                                                                            Furthermore,... austerity’s star pupils, countries that, like Portugal and Ireland,... still face sky-high borrowing costs. Why? Because spending cuts have deeply depressed their economies, undermining their tax bases to such an extent that the ratio of debt to GDP ... is getting worse rather than better.
                                                                            Meanwhile, countries that didn’t jump on the austerity train — most notably, Japan and the United States — continue to have very low borrowing costs, defying the dire predictions of fiscal hawks. ... Yet as far as I can tell, austerity is still considered responsible and necessary despite its catastrophic failure in practice.
                                                                            The point is that we could actually do a lot to help our economies simply by reversing the destructive austerity of the last two years. That’s true even in America, which has avoided full-fledged austerity at the federal level but has seen big spending and employment cuts at the state and local level...: all the federal government needs to do to give the economy a big boost is provide aid to lower-level governments, allowing these governments to rehire the hundreds of thousands of schoolteachers they have laid off and restart the building and maintenance projects they have canceled.
                                                                            Look, I understand why influential people are reluctant to admit that policy ideas they thought reflected deep wisdom actually amounted to utter, destructive folly. But it’s time to put delusional beliefs about the virtues of austerity in a depressed economy behind us.

                                                                              Posted by on Monday, February 20, 2012 at 12:43 AM in Budget Deficit, Economics, Fiscal Policy | Permalink  Comments (102)


                                                                              Links for 2012-02-20

                                                                                Posted by on Monday, February 20, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (25)


                                                                                Sunday, February 19, 2012

                                                                                What's To Be Done?

                                                                                Duncan Black:

                                                                                What's To Be Done About The Lower Classes, by Duncan Black: I was thinking about BoBo's latest Charles Murray inspired claim that that what the lesser humans among us need is some "bourgeois paternalism." Apparently they're behaving badly, in ways which hurt BoBo's aesthetic sensibilities, and Upper Class Daddy is going to have to bring out the rod. Because what poor people - and their kids - need is leadership and discipline from the proper sort of people. Like BoBo.

                                                                                Mostly these people need decent schools, affordable simple health care, and, yes, a bit more money without working 3 jobs. A stern lecture from Daddy BoBo probably won't do much for them.

                                                                                  Posted by on Sunday, February 19, 2012 at 04:31 PM in Economics, Social Insurance | Permalink  Comments (30)


                                                                                  NBER Research Summary: Offshoring, International Trade, and American Workers

                                                                                  Here's a description of recent academic work on offshoring and US workers:

                                                                                  Offshoring, International Trade, and American Workers, by Ann Harrison and Margaret McMillan, NBER Reporter 2011 Number 4: Research Summary: In 1982, only one out of four employees of U.S. multinationals was located offshore, and over 90 percent of those employees were in industrial countries. By 2007, the share of offshore employment had reached 44 percent, and the majority of those jobs were in low-income countries. These trends in offshoring are mirrored in the statistics on international trade: over the past two decades imports from low-wage countries have more than doubled.1
                                                                                  Over this same time period, U.S. employment in the manufacturing sector fell sharply and income inequality increased. ... Our research is motivated by these parallel developments and seeks to understand the implications for American workers.
                                                                                  Are U.S. Based Multinationals Exporting Jobs?
                                                                                  This question has always been of interest to policymakers and is arguably more important now than ever before. Accordingly, there is no shortage of academic research on this topic.2 The problem is that the answer to the question seems to change depending on the study. ... Our research examines this seemingly contradictory evidence in an attempt to bring closure to this debate. ...
                                                                                  Interpreting the Results on Multinational Employment Abroad
                                                                                  Our results indicate that whether the offshoring of jobs by U.S. multinationals leads to a decline in U.S. based employment depends on both the location of the investment abroad and the motive for the investment. In general, the expansion of employment in low-income countries has been associated with a contraction in employment in the United States... However, when American workers and workers in low-income countries perform different tasks, the expansion of multinational employment abroad can lead to increases in domestic employment. Taken together, these results go a long way toward explaining why previous researchers have found seemingly contradictory results. ...
                                                                                  Economy-wide Trends in Employment, Wages and Inequality
                                                                                  Using data from the CPS, we show that between 1982 and 2002, total manufacturing employment fell from 22 to 17 million, with rapid declines at the beginning of the 1980s and in recent years. However, the effects were uneven across different types of workers. For workers without a college degree, there were significant declines in manufacturing employment over the entire period. The opposite was true for workers with a college degree. Within manufacturing, the labor force has become increasingly well educated, as college graduates replace workers with high school degrees.
                                                                                  Wage trends mirror the shifts in employment. While wages fell for the least educated workers, they increased for workers with at least some years of college. The biggest wage gains were for manufacturing workers with an advanced degree. The decline in wages for high school dropouts and the steep wage increases at the upper end of the income distribution indicate a sharp increase in wage inequality.
                                                                                  Are Trade and Offshoring Responsible for Growing Wage Inequality?
                                                                                  ... We focus on ... the movement of workers across sectors and occupations. To the extent that trade leads workers to switch industries (for example from manufacturing to services) or occupations (for example from machine tool operator to burger flipper), studies that focus on the impact of trade liberalization on within-sector inequality miss an important part of the story.
                                                                                  ... We begin by showing that trade and offshoring are associated with a contraction in the manufacturing workforce. Then,... we demonstrate that workers who switch industries within manufacturing experience almost no decline in wages. However, when workers relocate to the service sector, they experience a significant wage loss. The negative wage impact is particularly large among displaced workers who also switch occupations. ... These effects are most pronounced for workers who perform routine tasks. This downward pressure on wages because of import competition and offshoring has been overlooked since it operates between and not within sectors. ...
                                                                                  Implications for American Workers
                                                                                  The trends in offshoring and international trade that we have described are likely to accelerate. China currently employs around 120 million people in the manufacturing sector and, although some reports indicate that wages are rising in China, those wages are still only a tiny fraction of wages in the United States. Moreover, China is expanding its manufacturing base to low-wage countries across the globe through a series of overseas economic zones11 . The implication for American workers is that in order to regain ground, they will need to find jobs outside of manufacturing where wages are comparable to those in manufacturing.
                                                                                  This is a tall order. ... This state of affairs has led some economists, including one of us, to reconsider the role of industrial policy. ...

                                                                                    Posted by on Sunday, February 19, 2012 at 12:25 AM in Economics, Income Distribution, International Trade, Unemployment | Permalink  Comments (33)


                                                                                    Links for 2012-02-19

                                                                                      Posted by on Sunday, February 19, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (34)


                                                                                      Saturday, February 18, 2012

                                                                                      Potential Output: Measuring the Gap

                                                                                      There's been quite a bit of discussion recently about the output gap. I want to make a simple point in this post, how the gap is measured can have a big impact on the estimate of the state of the economy, and hence on the need for policy. Below, three different gap measures are presented, one that measures a large gap and hence implies the need for a large stimulus, one that measures a "medium size" gap, and one where the gap is absent altogether. In fact, according to this model we have already exceeded the full employment level of output.

                                                                                      In the first model, the trend is assumed to be linear, i.e. Ytrend = b0 + b1*t. Recall that the gap is measured as (Y - Ytrend), i.e. as the distance between the red and blue lines in the following diagram showing the estimated trend for GDP (click on figures for larger versions):

                                                                                      Continue reading "Potential Output: Measuring the Gap" »

                                                                                        Posted by on Saturday, February 18, 2012 at 06:36 PM in Economics, Fiscal Policy, Methodology, Monetary Policy | Permalink  Comments (22)


                                                                                        "Heartening News About What Economists Think"

                                                                                        Brad DeLong is heartened by the response of economists to the question "Because of the American Recovery and Reinvestment Act of 2009, the U.S. unemployment rate was lower at the end of 2010 than it would have been without the stimulus bill":

                                                                                        Effects of the 2009 Recovery Act: Heartening News About What Economists Think--Although Caroline Hoxby and Ed Lazear Do Go All-in for Team Republican..., by Brad DeLong: The University of Chicago's IGM Forum:

                                                                                        Poll Results | IGM Forum: Question A: Because of the American Recovery and Reinvestment Act of 2009, the U.S. unemployment rate was lower at the end of 2010 than it would have been without the stimulus bill.

                                                                                        At the time, back at the start of 2009, arguments that the Recovery Act would not push the unemployment rate down over the two years after its enactment took one of three lines:

                                                                                        1. Unemployment is really not cyclical but structural, so whatever boost to spending it might generate would show up in higher prices and wages as businesses trying to satisfy demand bid against each other for a fixed pool of non-zero-marginal-product workers.
                                                                                        2. Government purchases must be financed by issuing government debt, and debt issues would push up interest rates and so would discourage private investment spending.
                                                                                        3. Government purchases must be financed by issuing government debt, and the future taxes needed to amortize the extra debt would frighten businesses and investors, so we would see equity prices tank as this fear would discourage private investment.

                                                                                        None of those things happened. And that is why the Chicago panel agrees 80%-4% with the statement that the Recovery Act the unemployment rate in 2010 below what it would otherwise have been.

                                                                                        And in this context it is worth noting that the two members who want to go on record agreeing with the Republican Party line and disagreeing with the statement appear to do so very carefully... Caroline Hoxby and Ed Lazear, both of Stanford [disagree]. Note that Hoxby appears to be evaluating a different statement--that the ARRA was worth doing--rather than the question asked--that the ARRA reduced the unemployment rate in 2010 below what it would otherwise have been. ...

                                                                                        And note that Lazear's comments--"the estimates [of the Recovery Act's effects] are varied and the highest are based on ex-ante models, not experience-based data. The upper bound estimate is low"--appear to justify the position that he is uncertain about the truth of the statement, not that he disagrees with the statement.

                                                                                        From one perspective, this is quite heartening: 183 years after John Stuart Mill and Jean-Baptiste Say agreed that Say's Law applies in the long run but not in the short business-cycle run, 4 years after what John Quiggin calls its zombie-like rising from the grave, the claim that increases in government purchases must by the metaphysical necessity of the case--no matter what happens to asset or commodity prices--crowd out an equal and opposite amount of private spending appears to be dead.

                                                                                        And staked.

                                                                                        Again.

                                                                                        To Be Continued...

                                                                                        I don't know that we've learned one important lesson about the use of fiscal policy to attenuate the effects of a downturn. For the most part, even economists who supported fiscal policy as an option insisted that we try monetary policy first and give it a chance to work. Monetary policy alone, we were told, would likely get the job done. And in the unlikely case that it didn't, we could then turn to fiscal policy for help.

                                                                                        That was the wrong advice (and I get annoyed when people who insisted that we wait pat themselves on the back over their support of things like infrastructure spending). By the time we realized that monetary policy would help, but wouldn't be enough to turn things around by itself, it was very late in the game to be applying fiscal policy. Fiscal policy still had an impact, but had it been put in place much earlier -- before problems had a chance to worsen and gel making them harder to overcome -- it would have been much more successful.

                                                                                        When this happens again, we need to to use both monetary and fiscal policy tools to full effect instead of trying one policy, realizing it's not enough, and then turning to the other. But it's not at all clear we've learned this lesson (and, to refine it a bit, we need to get help to state and local governments immediately -- the failure to effectively backfill the budget problems at the state and local level was a big mistake).

                                                                                        Let me emphasize that I'm not saying fiscal policy did not work -- see the following from Jeff Frankel -- only that it could have been much more effective if we hadn't waited so long to put the policies into place:

                                                                                        ... The full force of the fiscal stimulus package began to go into effect in the second quarter of 2009, with the NBER officially designating the end of the recession as having come in June of that year. Real GDP growth turned positive in the third quarter, but slowed again in late 2010 and early 2011, which coincides with the beginning of the withdrawal of the Obama administration’s fiscal stimulus.
                                                                                        Other economic indicators, such as interest-rate spreads and the rate of job loss, also turned around in early 2009. ... Again, such data do not demonstrate that Obama’s policies yielded an immediate payoff. In addition to the lags in policies’ effects, many other factors influence the economy every month, making it difficult to disentangle the true causes underlying particular outcomes.
                                                                                        Given that difficulty, the right way to assess whether the fiscal stimulus enacted in January 2009 had a positive impact is to start with common sense. When the government spends $800 billion on such things as highway construction, salaries for teachers and policemen who were about to be laid off, and so on, it has an effect. Workers who otherwise would not have a job now have one, and may spend some of their income on goods and services produced by other people, creating a multiplier effect.
                                                                                        Those who claim that this spending does not boost income and employment (or that it causes harm) apparently believe that as soon as a teacher is laid off, a new job is created somewhere else in the economy, or even that the same teacher finds a new job right away. Neither can be true, not with unemployment so high and the average spell of unemployment much longer than usual. ...
                                                                                        Economists’ more sophisticated forecasting models also show that the fiscal stimulus had an important positive effect... Allowing for a wide range of uncertainty, the CBO estimates that the stimulus added 1.5-3.5% to GDP by the fourth quarter, relative to where it otherwise would have been. The boost to 2010 GDP, when the peak effect of the stimulus kicked in, was roughly twice as great.
                                                                                        Of course, econometric models do not much interest most of the public. A turnaround needs to be visible to the naked eye to impress voters. Given this, one can only wonder why basic charts, such as the 2008-2009 “V” shape in growth and employment, have not been used – and reused – to make the case.

                                                                                          Posted by on Saturday, February 18, 2012 at 11:34 AM in Economics, Fiscal Policy, Monetary Policy | Permalink  Comments (26)


                                                                                          Christina Romer on Learning from the Great Depression

                                                                                          This from a (much longer) Five Books interview with Christina Romer:

                                                                                          Let’s talk about the role of fiscal policy, from the perspective of Lester Chandler’s America’s Greatest Depression. Please tell us about the book.
                                                                                          This book gives a great description of what went on during the Great Depression. It is especially strong in describing the policy response. It was published in 1970, but is still the book I go to when I want to know about the actions that were taken in the New Deal [economic programs]. It gives you a sense of all the things that were done in the 1930s.
                                                                                          One of the things you learn from Chandler is that President Roosevelt was trying everything. Back in the 1930s policymakers didn't know as much about what monetary and fiscal policy could do. So they tried all sorts of things – housing policy, agricultural policy, various credit policies, even allowing industries to collude to raise prices. Now, many of these policies were not very successful. And the ones that were successful often were not pushed far enough.
                                                                                          This is especially the case with fiscal policy. Chandler’s book reminds us of something that is often forgotten, that the fiscal response to the Great Depression just wasn’t very big. In fact, under President Hoover it actually went the wrong direction. When the deficit rose because tax revenues fell due to high unemployment, Hoover’s answer was a big tax increase – that was the Revenue Act of 1932. This misguided deliberate fiscal contraction was another reason why the economy kept going down and the Depression was as terrible as it was.
                                                                                          Even under Roosevelt the fiscal expansion was modest. When we think about the New Deal, we tend to remember things like the WPA [Works Progress Administration relief program], which built dams and bridges, and the Civilian Conservation Corps, which constructed so many buildings in our national parks. These programs left enduring legacies, and so we often think of the fiscal policy response of the New Deal as being big and aggressive. But what Chandler points out, building on a classic paper by E Cary Brown, is that the fiscal response to the Great Depression was actually quite small – not nearly as large as the American Recovery and Reinvestment Act of 2009. Even when Roosevelt increased the Federal deficit in the mid-1930s, a move to budget surpluses by state and local governments meant that the net fiscal stimulus was much smaller.
                                                                                          Brown’s famous conclusion, repeated in Chandler’s book, is: “Fiscal policy, then, seems to have been an unsuccessful recovery device in the ’thirties – not because it did not work, but because it was not tried.”

                                                                                          The same is true this time around. When declines at the state and local level are factored in, the net stimulus was near the breakeven point. That doesn't mean the stimulus did nothing -- the state and local declines would have happened in any case so offsetting the state and local declines with federal spending was important and preserved many job -- but maintaining rather than gaining ground is harder to sell as a policy success. [Update: I should have also noted Paul Krugman's Reversing Local Austerity.]

                                                                                            Posted by on Saturday, February 18, 2012 at 12:21 AM in Economics, Fiscal Policy | Permalink  Comments (41)


                                                                                            Links for 2012-02-18

                                                                                              Posted by on Saturday, February 18, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (23)


                                                                                              Friday, February 17, 2012

                                                                                              Are Budget Problems Due to Rising Health Care Costs as Scary as We've Been Led to Believe?

                                                                                              Not too long ago, I sent the following email to several people I thought might have the answer:

                                                                                              Something that's been bugging me -- I don't know much about how they estimated future health care cost increases, but since that is largely behind the budget problems -- and hence the source of the ability to use the deficit for ideological purposes -- is there any reason to try and question these numbers? Do we really know what these will be 30 or 40 years from now?

                                                                                              I didn't get an answer.

                                                                                              We can't forecast very well beyond a 3 to 6 month horizon, yet we are relying upon projections for decades in the future as the basis for cutting social programs now. The CBO, for example, uses a 70 year projection for revenues and outlays, and that is the basis of a lot of the worry over the long-term budget picture. But, did we have any idea at all 70 years ago -- in 1942 -- what health care costs would be today?

                                                                                              Jeff Sachs takes up this issue:

                                                                                              Entitlements Hysteria, by Jeff Sachs: One of the unshakable myths of the punditariat is that the federal government is going bankrupt because of entitlements spending, especially spending on Medicare and Medicaid. Each day we hear the drumbeat saying that either we cut entitlements now or we are finished as a nation. This is a stampede of unreason, contradicted by the facts. ...
                                                                                              So what is the source of the hysteria? Some of it is simply propaganda, by those with the political agenda to gut the country's social safety net.
                                                                                              But there is something else. Confusion! The punditocracy is repeating the results of forecasts that indeed suggest calamity, but calamity in the late 21st century, not now. These long-term forecasts are arbitrary but have been repeated as an immutable fact by those who don't read the fine print. The most frequently quoted forecast is that of the Congressional Budget Office.
                                                                                              The CBO's long-term forecast assumes that health care costs will continue to rise steeply during the next 70 years, though at a diminishing rate. If healthcare costs continue to soar for decades to come, then yes, lo-and-behold, the government would eventually go broke. ...
                                                                                              Yet somehow I'm not ready to panic about the health care costs as of 2085. Mechanical extrapolations that assume that health care costs will rise much faster than GNP between 2011 and 2085 are utterly unconvincing. Why should healthcare costs continue to rise so far and fast when healthcare costs are already vastly over-priced now compared with what other countries pay for the same services? Why should we assume failure decade after decade to use the new information technologies to lower the costs of health-care delivery and administration?
                                                                                              In fact, the recent trends are mildly favorable. As J. D. Keinke of the American Enterprise Institute writes today in the Wall Street Journal, the idea of runaway health spending is a "myth" because "new data show that health spending over the past several years has been normalizing toward the rate of general inflation, rather than growing higher and higher, as had been the case almost continuously since the 1970s." ...
                                                                                              Even if we don't get all the way down to the lower costs that we should have, there is no reason to assume that health care costs will continue to soar year in and year out for another seven decades.
                                                                                              Let's therefore fight the right-wing hysteria demanding immediate and harsh cuts in Medicaid and other health outlays. We do not need to cut off the lifeline of the poor and elderly. We simply need to keep up the pressure against the healthcare lobbies, and resist the panic of the punditariat.

                                                                                                Posted by on Friday, February 17, 2012 at 09:42 AM in Budget Deficit, Economics, Health Care, Social Insurance | Permalink  Comments (87)


                                                                                                Paul Krugman: Moochers Against Welfare

                                                                                                The idea that members of "the idle poor" are taking government benefits they don't deserve and in the process endangering the benefits of those who do deserve them is a convenient fiction for those who are ideologically committed to reducing the size of government:

                                                                                                Moochers Against Welfare, by Paul Krugman, Commentary, NY Times: First, Atlas shrugged. Then he scratched his head in puzzlement.
                                                                                                Modern Republicans are very, very conservative; you might even (if you were Mitt Romney) say, severely conservative. ... And what these severe conservatives hate, above all, is reliance on government programs. Rick Santorum declares that President Obama is getting America hooked on “the narcotic of dependency.” Mr. Romney warns that government programs “foster passivity and sloth.” Representative Paul Ryan ... requires that staffers read Ayn Rand’s “Atlas Shrugged,” in which heroic capitalists struggle against the “moochers” trying to steal their totally deserved wealth, a struggle the heroes win by withdrawing their productive effort and giving interminable speeches.
                                                                                                Many readers of The Times were, therefore, surprised to learn, from an excellent article published last weekend, that the regions of America most hooked on Mr. Santorum’s narcotic — the regions in which government programs account for the largest share of personal income — are precisely the regions electing those severe conservatives. Wasn’t Red America supposed to be the land of traditional values, where people don’t eat Thai food and don’t rely on handouts? ...
                                                                                                Now, there’s no mystery about red-state reliance on government programs. These states are relatively poor... But why do regions that rely on the safety net elect politicians who want to tear it down? ...
                                                                                                Cornell University’s Suzanne Mettler points out that many beneficiaries of government programs seem confused about their own place in the system. She tells us that 44 percent of Social Security recipients, 43 percent of those receiving unemployment benefits, and 40 percent of those on Medicare say that they “have not used a government program.”
                                                                                                Presumably, then, voters imagine that pledges to slash government spending mean cutting programs for the idle poor, not things they themselves count on. And this is a confusion politicians deliberately encourage. For example, when Mr. Romney responded to the new Obama budget, he condemned Mr. Obama for not taking on entitlement spending — and, in the very next breath, attacked him for cutting Medicare.
                                                                                                The truth, of course, is that the vast bulk of entitlement spending goes to the elderly, the disabled, and working families, so any significant cuts would have to fall largely on people who believe that they don’t use any government program.
                                                                                                The message I take from all this is that pundits who describe America as a fundamentally conservative country are wrong. Yes, voters sent some severe conservatives to Washington. But those voters would be both shocked and angry if such politicians actually imposed their small-government agenda.

                                                                                                  Posted by on Friday, February 17, 2012 at 12:41 AM in Economics, Social Insurance | Permalink  Comments (119)


                                                                                                  Fed Watch: Will They Or Won't They?

                                                                                                  Tim Duy:

                                                                                                  Will They Or Won't They?, by Time Duy: Calculated Risk reads this passage in a recent speech by San Francisco Federal Reserve President John Williams:

                                                                                                  This is a situation in which there’s no conflict between maximum employment and price stability. With regard to both of the Fed’s mandates, it’s vital that we keep the monetary policy throttle wide open.

                                                                                                  and concludes:

                                                                                                  QE3 is coming.

                                                                                                  Dallas Federal Reserve President Richard Fisher states:

                                                                                                  “In my view, it’s not going to happen,” he said. “It’s a fantasy. Wall Street keeps dangling QE3 out there [but] I just don’t see it happening.”

                                                                                                  I guess we are going to see who knows more about monetary policy - CR or Fisher. My instinct tells me CR, but Fisher seems just a little too certain to dismiss entirely. Reviewing the most recent minutes, one find to the now oft-repeated line:

                                                                                                  A few members observed that, in their judgment, current and prospective economic conditions--including elevated unemployment and inflation at or below the Committee's objective--could warrant the initiation of additional securities purchases before long.

                                                                                                  Presumably, Williams is among the few. I would like the Fed to publish their definition of a "few." In my book that is three or less, which is well short of the the majority necessary to shift policy. That said, the next line of the minutes is:

                                                                                                  Other members indicated that such policy action could become necessary if the economy lost momentum or if inflation seemed likely to remain below its mandate-consistent rate of 2 percent over the medium run.

                                                                                                  Now you have a solid majority willing to move forward with QE3 if the economy sags or inflation remains below 2%. The recent US data flow, however, has been generally positive, and it is hard to ignore the steady drop in initial unemployment claims. To be sure, we have been fooled by seemingly upbeat data in the past. But I suspect the median FOMC member will be wary about dismissing the generally positive data - sooner or later, some parts of the US economy, such as home building, are going to come back on line. Which leaves us pondering inflation data. With gasoline prices marching higher, headline inflation will head in that direction as well. Typically, however, the Fed will look toward core inflation as a gauge of where headline will eventually settle, and recently core has been soft:

                                                                                                  Corepce

                                                                                                  Still, notice the recent uptick. And if FOMC members want to focus on the year-over-year numbers, it looks like core and headline are set to converge at the 2% mark:

                                                                                                  Headline

                                                                                                  All in all, I tend to view the Fed as generally in wait and see mode. I doubt very much the case is as clear cut as Fisher or CR believes. However, I tend to think the general mood of the FOMC favors CR's position, as long as core inflation stays on the weak side of 2%. But if inflation ticks up and general economic data remains solid, hope of QE3 may quickly be dashed.

                                                                                                  Update: In a second post, Tim adds:

                                                                                                  Who Thinks Unemployment Isn't Too High, by Tim Duy: I noticed this line in the most recent Fed minutes:

                                                                                                  While overall labor market conditions had improved somewhat further and unemployment had declined in recent months, almost all members viewed the unemployment rate as still elevated relative to levels that they saw as consistent with the Committee's mandate over the longer run.

                                                                                                  "[A]lmost all" means that as least one FOMC member does not believe that the unemployment rate is not well above the natural rate. Who is it?

                                                                                                    Posted by on Friday, February 17, 2012 at 12:27 AM in Economics, Fed Watch, Inflation, Monetary Policy | Permalink  Comments (10)


                                                                                                    Links for 2012-02-17

                                                                                                      Posted by on Friday, February 17, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (27)