Don’t Know Much About (Ancient) History: The things I do for book sales. I debated, sort of, Ron Paul on Bloomberg.Video here. I thought we might have a discussion of why the runaway inflation he and his allies keep predicting keeps not happening. But no, he insisted (if I understood him correctly) that currency debasement and price controls destroyed the Roman Empire. I responded that I am not a defender of the economic policies of the Emperor Diocletian.
Actually, though, appeals to what supposedly happened somewhere in the distant past are quite common on the goldbug side of economics. And it’s kind of telling.
I mean, history is essential to economic analysis. You really do want to know, say, about the failure of Argentina’s convertibility law, of the effects of Chancellor Brüning’s dedication to the gold standard, and many other episodes.
Somehow, though, people like Ron Paul don’t like to talk about events of the past century, for which we have reasonably good data; they like to talk about events in the dim mists of history, where we don’t really know what happened. And I think that’s no accident. Partly it’s the attempt of the autodidact to show off his esoteric knowledge; but it’s also the fact that because we don’t really know what happened — what really did go down during the Diocletian era? — you can project what you think should have happened onto the sketchy record, then claim vindication for whatever you want to believe.
It’s funny, in a way — except that this sort of thinking dominates one of our two main political parties.
One proposed solution is for Germany to employ fiscal stimulus at home, to increase domestic inflation and increase investment and spending. Simon Wren-Lewis goes as far as to argue that this is what a truly but hypothetical European government would do. I disagree: a European government would employ stimulus in the periphery, not Germany.
Broadly, I agree with this, although I think we view it through a different lens. If Europe had a true fiscal authority, it would automatically redistribute resources via transfer payments and taxes from wealthly regions to less wealthy regions - thus creating demand in the periphery as it adjusts. And also, such a system would allow for a mechanism to boost oerall growth as well via deficit spending.
Absent a direct transfer, the next option is an indirect transfer - stimulating Germany in the hopes that greater domestic demand will stimulating exports from the periphery. Assuming that Germany has no interest in pursuing either strategy, Kantoos puts the ball in the ECB's court:
We live in a Keynesian world here in Europe, where downward wage adjustments are very hard. Add to this high debt levels, and it is clear that the internal devaluation process, in the midst of a deleveraging process by households, banks and firms, together with austerity will doom these countries to deflationary recessions....What the ECB should do is to toughen lending standards in Germany, raise collateral requirements, down payments etc., and do the reverse in Spain. This should limit investment and consumption in Germany, and encourage it in Spain. It should mimic a differentiated monetary policy, and try to come as close as possible to the respective natural interest rates.
I think this approach suffers from a number of challenges. First, if capital is relatively mobile, it would be difficult to prevent a loan in Spain from making its way to Germany, so I am not sure the ECB can produce a differential monetary policy. Second, it is not clear that easing lending conditions in the periphery would encourage additional spending. I don't think it will be all that easy to reverse the process of private sector deleveraging in the periphery simply by easing lending conditions.
More to the point, policy to date has been to match private sector deleveraging with public sector deleveraging - the austerity program. What the ECB could do in this situation is to alleviate the need for public sector deleveraging by acting to bring down interest rates on government debt in the periphery. And not with haphazard, start and stop programs the ECB activates only when their back is up against the wall. But instead, to make it clear they are a lender of last resort for Eurozone nations.
Also, I can't imagine that slowing the German economy, and by extension, the overall Eurozone economy, by enacting tighter credit conditions is in anybodies economic interest. I am skepital that this demand will suddenly appear in Spain. And this, I think, is fundamentally the error in Kantoos' argument - he seems to see this as a zero sum gain. If we reduce demand in Germany, we can make it appear in Spain, thereby reducing the risk of overheating and bubbles in Germany. There are too many internal frictions to prevent such a smooth transfer of demand. Instead, acting to slow growth in Germany will only aggravate the drag in the periphery, thus generating more of the hysterisis effects decribed by Kantoos.
Finally, Kantoos directed his post at Paul Krugman, not me. But I think that Krugman would see his concerns about high inflation in Germany might refer Kantoos back to this post.
Spending Update, by Tim Duy: Real personal spending growth was weakish in March on the back of a solid February gain that supported spending growth for the quarter. No surprise - don't get overly optimistic or pessimistic about any one piece of data. Slow and steady is the rule:
Note that the post-recession trend is slowing somewhat as the "recovery" continues, a feature more easily evident in the year-over-year numbers:
Inflation continues to converge to 2 percent:
The recent trend in core inflation, however, is a little above 2 percent:
This may get the Fed hawks a little more nervous. With inflation hovering around 2 percent, the bar to another round of QE is pretty high. Overall, I would say this report mirrors my overall read on GDP from last week:
Uninspiring but not disastrous - unless, of course, you are unemployed or have any hope of seeing a return to pre-recession spending, nominal or real. But good enough to keep the Fed on the sidelines.
The recent San Francisco Federal Reserve Bank conference on workforce skills examined labor market changes that may have accelerated during the Great Recession. These changes may have increased mismatches between employer needs and worker skills. In general, we find that this doesn’t appear to be the case. Estimates of the extent of skill mismatches in recent years indicate that it has been limited and is likely to dissipate. Moreover, the conference’s research presentations and a panel of workforce development specialists did not identify a noticeable increase in mismatches in recent years. Thus, concerns about growing skill mismatches may be overblown. On the other hand, successful integration of low-skilled workers into the workforce represents a continuing problem. Conference participants offered useful ideas on how to meet this challenge, stressing the roles of community colleges and well-designed training programs.
Nancy Folbre says the evidence does not support the contention that people aren't trying very hard to find jobs "because they would prefer to live off unemployment insurance or other social benefits" (I wonder if the editors at Economix will ever tire of having their economics correspondents waste valuable space explaining why another correspondent, Casey Mulligan, is wrong):
Many such voters are also drawn to a particular austerity strategy my fellow Economix blogger Casey B. Mulligan laid out last week: cutting taxes for high earners and cutting subsidies for low earners. This strategy makes perfect sense if you believe that most people who are struggling to pay their bills aren’t trying hard enough.
This argument appeals for several reasons. It absolves believers of any responsibility for other people’s hardships. It lends credence to the assertion that the labor market would work just fine if it weren’t jammed up by a social safety net. It lays the blame for persistent unemployment squarely on President Obama...
But the ... social safety net is not a hammock that workers can luxuriate in. In a New York Times/CBS News poll conducted last fall, two-thirds of those receiving benefits said they were not enough to pay for basics like housing and food. Another poll conducted by National Public Radio and the Kaiser Family Foundation ... found that only 22 percent of the long-term unemployed were receiving unemployment benefits.
One widely cited study published by the Federal Reserve Bank of San Francisco ... found that extended unemployment benefits could not account for more than eight-tenths of one percentage point of the increased unemployment rate in the later years.
A paper by Jesse Rothstein ... of ... the University of California, Berkeley, asserts that extensions of unemployment insurance added at most two-tenths to six-tenths of a percentage point to the unemployment rate. ...
The unemployed want jobs badly enough. But many Americans don’t seem to care much about helping them get some. ...
I find this argument -- blaming the unemployed and the meager help they get for the unemployment problem -- really annoying (insert shrill comment).
College graduates are struggling, and the "war on the young" is "doing immense harm, not just to the young, but to the nation’s future":
Wasting Our Minds, by Paul Krugman, Commentary, NY Times: In Spain, the unemployment rate among workers under 25 is more than 50 percent. In Ireland almost a third of the young are unemployed. Here in America, youth unemployment is “only” 16.5 percent, which is still terrible — but things could be worse.
And sure enough, many politicians are doing all they can to guarantee that things will, in fact, get worse. ... Let’s start with some advice Mitt Romney gave to college students..., “Take a shot, go for it, take a risk, get the education, borrow money if you have to from your parents, start a business.”
The first thing you notice .. is ... the distinctive lack of empathy for those who ... can’t rely on the Bank of Mom and Dad to finance their ambitions. ... I mean, “get the education”? And pay for it how? Tuition ... has soared... Mr. Romney ... would drastically cut federal student aid, causing roughly a million students to lose their Pell grants. ...
There is, however, a larger issue: even if students do manage, somehow, to “get the education,” which they do all too often by incurring a lot of debt, they’ll be graduating into an economy that doesn’t seem to want them. ... And research tells us that the price isn’t temporary..., their earnings are depressed for life.
What the young need most of all, then, is a better job market. People like Mr. Romney claim that they have the recipe for job creation: slash taxes on corporations and the rich, slash spending on public services and the poor. But we now have plenty of evidence on how these policies actually work in a depressed economy — and they clearly destroy jobs rather than create them. ...
What should we do to help America’s young? Basically, the opposite of what Mr. Romney and his friends want. We should be expanding student aid, not slashing it. And we should reverse the de facto austerity policies that are holding back the U.S. economy — the unprecedented cutbacks at the state and local level, which have been hitting education especially hard.
Yes, such a policy reversal would cost money. But refusing to spend that money is foolish and shortsighted even in purely fiscal terms. Remember, the young aren’t just America’s future; they’re the future of the tax base, too.
A mind is a terrible thing to waste; wasting the minds of a whole generation is even more terrible. Let’s stop doing it.
The price-to-rent ratio graph Dr Altig presented seemed to show that house prices were getting back to normal, but the graph based on Professor Shiller's work seemed to suggest that house prices could fall much further. Below is an updated graph from Shiller through Q4 2011.
The Shiller graph has suggested to many observers that house prices ... adjusted for inflation are stable - except for bubbles... Last year I pointed out the slope depends on the data series used, and that if Professor Shiller had used either Corelogic or the Freddie Mac house prices series, before Case-Shiller was available, there would a greater upward slope to his graph.
An upward slope to real prices makes sense to me as I've argued before: "In many areas - if the population is increasing - house prices increase slightly faster than inflation over time, so there is an upward slope for real prices."
This is the updated graph from Professor Shiller.
Click on graph for larger image in new window.
...[The next] graph shows the upward slope for both real price indexes. Even the Shiller "Irrational Exuberance" real price index has an upward slope (about 0.5% per year) - and the CoreLogic upward slope is steeper (about 1.5% per year).
Right now the real CoreLogic HPI is only slightly above the trend line (it could overshoot), and the Case-Shiller national index will probably be just above the trend line when the Q1 data is released.
This would suggest nominal prices are at the bottom (and real prices are close too). This is one reason I think the Case-Shiller and Corelogic house prices indexes probably stopped falling, NSA, in March 2012 (the March data will be released next month).
In a way bankers are Marx's dream, it's the workers getting the fruits of their labours. It's funny that the left is usually angry at shareholders, for taking money out of companies and thereby bringing down workers' salaries. Yet with the banks they want shareholders to press the banks to do exactly that, and curb pay.
I ignored this sort of remark when Tim made it, thinking it to be a silly Oxford Union-type debating point. But since it looks like spreading, it needs correcting. Bankers' high pay is NOT a Marxist dream at all, for at least three reasons.
1. Bankers' don't get the fruits of the labour only from shareholders. They get them from other workers generally, in two ways described by Andrew Haldane. One is through the implicit "too big to fail" subsidy, which has been worth (pdf) tens of billions a year to banks, even though it is not entirely an out-of-pocket cost to others. The other is through risk pollution (pdf); the risk of banking crises falls upon the general public, whilst the benefits of risk-taking accrue to bankers themselves. In these two senses, bankers exploit ordinary workers - and Marx hated exploitation.
2. Insofar as bankers' do gain at shareholders' expense, it indicates that there is a distinction between formal or apparent ownership and real ownership. Shareholders appear to own banks, but bankers, in effect, really do. This opposes Marx in two ways. For one thing, in one of his few programmtic statements (in the Communist Manifesto) he called for a state monopoly of banking. And for another, one of Marx's beefs with capitalism was that it created a big distinction between essence and appearance - for example labour contracts appear as fair exchanges but in essence are not. It's reasonable to suppose that Marx would have wanted to abolish the essence-appearance dichotomy in ownership structures as he did in labour markets.
3.One of Marx's most famous slogans is, of course, "from each according to his ability, to each according to his need*." This principle is obviously broken.
* Whilst bankers' technical ability is questionable, their ability to extract rent is certainly considerable.
And, returning to a recent them on the "mal-distribution" of income in recent decades and its contribution to inequality, that does not exhaust the reasons why the executives might gain at workers expense.
Have they looked at their own numbers? It has been two years since moves to austerity started, but the crisis is still with us. Growth in European gross domestic product was negative in the last quarter of 2011. Unemployment in the entire euro zone in February was 10.8 percent; in Spain it was an astounding 23.6 percent. And judging from the renewed turbulence in bond markets, investors don’t believe that prosperity is just around the corner.
Fiscal austerity is normally a sensible response to a loss in confidence in a country’s solvency, as has occurred in parts of Europe. But the current situation is exceptional. ...[continue reading]...
Travel day, so I had this set aside to highlight, and in the interim Paul Krugman beat me to it. But it's still worth noting (and it supports my contention that there has been a "mal-distribution" of income in recent decades):
Understanding the driving forces behind the productivity-median hourly compensation gap is the subject of a new paper, The wedges between productivity and median compensation growth, that previews a portion of the analysis in the forthcoming State of Working America. This research reflects the results in a more technical paper, Why Aren’t Workers Benefiting from Labour Productivity Growth in the United States, that I co-authored with Kar-Fai Gee...
During the 1973 to 2011 period, labor productivity rose 80.4 percent but real median hourly wage increased 4.0 percent, and the real median hourly compensation (including all wages and benefits) increased just 10.7 percent. ... If the real median hourly compensation had grown at the same rate as labor productivity over the period, it would have been $32.61 in 2011 (2011 dollars), considerably more than the actual $20.01 (2011 dollars). Consequently, the conventional notion that increased productivity is the mechanism by which living standards increases are produced must be revised to this: Productivity growth establishes the potential for living standards improvements and economic policy must work to reconnect pay and productivity.
The objective of our new paper is to provide a comprehensive and consistent decomposition of the factors explaining the divergence between growth in real median compensation ... and labor productivity since 1973 in the United States, with particular attention to the post-2000 period. In particular, the paper identifies the relative importance of three wedges driving the median compensation-productivity gap: 1) rising compensation inequality, 2) declining share of labor compensation in the economy (the shift from labor to capital income), and 3) divergence of consumer and output prices....
Growing inequality of compensation and the erosion of labor’s income share are the key overall drivers of the wedge between productivity and median compensation, accounting for two-thirds of the wedge since 1973 and about 85 percent of the wedge since 2000. These factors, in turn, reflect the various ways that the typical worker has lost bargaining power in the economy over the last three decades: excessive unemployment, eroded labor market institutions such as the minimum wage and unions, globalization, deregulation of industries, privatization, and the rising power of finance. The third factor, the fact that output prices (covering investment, exports, imports, government as well as consumption) grew more slowly than the prices of consumer purchases—sometimes labeled a deterioration in “labor’s terms of trade”—was evident throughout most of the last three decades and was most important in the 1970s and least important in the 2000s.
Maintaining rapid overall productivity growth—through innovation, restoring manufacturing, improved education and skills—is obviously an important policy goal. But if we want to improve the living standards of the vast majority—and we definitely can do so given the expected productivity growth—then we must also place the challenge of reconnecting growth in overall productivity and median compensation at the center of economic policy.
My view on whether this problem will correct itself:
I’ve never favored redistributive policies, except to correct distortions in the distribution of income resulting from market failure, political power, bequests and other impediments to fair competition and equal opportunity. I’ve always believed that the best approach is to level the playing field so that everyone has an equal chance. If we can do that – an ideal we are far from presently – then we should accept the outcome as fair. Furthermore, under this approach, people are rewarded according to their contributions, and economic growth is likely to be highest.
But increasingly I am of the view that even if we could level the domestic playing field, it still won’t solve our wage stagnation and inequality problems. ..
We’ve given self-correction mechanisms 40 years to solve the problem of growing inequality, and the result has been even more inequality. ... Some people say education is the answer, but we have been trying to reform education for decades, yet the problems remain. The idea that a fix for education is just around the corner is wishful thinking.
If we want to preserve a growing and socially healthy economy, and avoid moving to lower growth points on the inequality curve, then we will need to do much more redistribution of income than we have done over the last several decades. We must ensure that the rising economic tide lifts all boats, not just the yachts. That means the wealthy will no longer get it all, they will be asked to share economic growth with the workers who helped to bring it about, workers who ought to be rewarded for their growing productivity.
We can expect considerable protest when the wealthy are asked to give up a portion of the growth that has been flowing exclusively to them for so long, and we’ll hear every reason you can think of and a few more as to why redistributive polices are bad for America. But sharing economic gains among all those who had a hand in creating them is the right thing to do. For the foreseeable future, redistributive polices appear to be the only way to ensure that workers receive their share of the growing economic pie.
And, something I wrote just before the Occupy Wall Street movement broke out:
Many of the policies enacted during and after the Great Depression not only addressed economic problems but also directly or indirectly reduced the ability of special interests to capture the political process. Some of the change was due to the effects of the Depression itself, but polices that imposed regulations on the financial sector, broke up monopolies, reduced inequality through highly progressive taxes, and accorded new powers to unions were important factors in shifting the balance of power toward the typical household.
But since the 1970s many of these changes have been reversed. Inequality has reverted to levels unseen since the Gilded Age, financial regulation has waned, monopoly power has increased, union power has been lost, and much of the disgust with the political process revolves around the feeling that politicians are out of touch with the interests of the working class.
We need a serious discussion of this issue, followed by changes that shift political power toward the working class. But who will start the conversation? Congress has no interest in doing so; things are quite lucrative as they are. Unions used to have a voice, but they have been all but eliminated as a political force. The press could serve as the gatekeeper, but too many news outlets are controlled by the very interests that the press needs to confront. Presidential leadership could make a difference, but this president does not seem inclined to take a strong stand on behalf of the working class...
Another option is that the working class will say enough is enough and demand change. There was a time when I would have scoffed at the idea of a mass revolt against entrenched political interests and the incivility that comes with it. We aren’t there yet – there’s still time for change – but the signs of unrest are growing, and if we continue along a two-tiered path that ignores the needs of such a large proportion of society, it can no longer be ruled out.
People often object to the idea of a multiplier because it comes from the old Keynesian model. Real macroeconomists, we are told, use DSGE models. But using a DSGE model doesn't matter, the result is essentially the same:
A case for balanced-budget stimulus, by Pontus Rendahl, Vox EU: ...there is little, if any, support in the current macroeconomic literature for the view that expansionary fiscal policy must come at the price of ramping up debt. In fact,... a ‘balanced-budget stimulus’ can set the economy on a steeper recovery path...
[W]hile Ricardian equivalence might have put a nail in the coffin of the Keynesian multiplier, it has certainly not pre-empted the underlying idea: that an increase in government spending may provoke a kickback in output many times the amount initially spent. Indeed, a body of recent research suggests that the fiscal multiplier may be very large, independently of the foresightedness of consumers (Christiano et al 2011, Eggertson 2010). And in a recent study of mine (Rendahl 2012), I identify three crucial conditions under which the fiscal multiplier can easily exceed 1 irrespective of the mode of financing. These conditions, I argue, are met in the current economic situation.
Condition 1. The economy is in a liquidity trap … When interest rates are near, or at, zero, cash and bonds are considered perfect substitutes. ...
Under these peculiar circumstances the laws of macroeconomics change. A dollar spent by the government is no longer a dollar less spent elsewhere. Instead, it’s a dollar less kept in the mattress. And the logic underpinning Say’s law – the idea that the supply of one commodity must add to the immediate demand for another – is broken. ...
Condition 2. … with high unemployment …
So while a dollar spent by the government is not a dollar less spent elsewhere, it is not immediate, nor obvious, whether this implies that government spending will raise output. The second criterion therefore concerns the degree of slack in the economy.
If unemployment is close to, or at, its natural rate, an increase in spending is unlikely to translate to a substantial rise in output. Labor is costly and firms may find it difficult to recruit the workforce needed to expand production. An increase in public demand may just raise prices and therefore offset any spending plans by the private sector.
But at a high rate of unemployment, the story is likely to be different. The large pool of idle workers facilitates recruitment, and firms may cheaply expand business. An increase in public demand may plausibly give rise to an immediate increase in production, with negligible effects on prices. Crowding-out is, under these circumstances, not an imminent threat.
Combining the ideas emerging from Conditions 1 and 2 implies that the fiscal multiplier – irrespective of the source of financing – may be close to 1 (cf Haavelmo 1945).
Condition 3. … which is persistent
But if unemployment is persistent, these ideas take yet another turn. A tax-financed rise in government spending raises output, and lowers the unemployment rate both in the present and in the future. As a consequence, the increase in public demand steepens the entire path of recovery, and the future appears less disconcerting. With Ricardian or forward-looking consumers, a brighter outlook provokes a rise in contemporaneous private demand, and output takes yet another leap. Thus, with persistent unemployment, a tax-financed increase in government purchases sets off a snowballing motion in which spending begets spending.
Where does this process stop? In a stylised framework in which there are no capacity constraints and unemployment displays (pure) hysteresis, I show that the fiscal multiplier is equal to the inverse of the elasticity of intertemporal substitution, a parameter commonly estimated to be around 0.5 or lower. Under such conditions, the fiscal multiplier is therefore likely to lie around 2 or thereabout.
To provide more solid grounds to these arguments, I construct a simple DSGE model with a frictional labour market.1 A crisis is triggered by an unanticipated (and pessimistic) news shock regarding future labour productivity. As forward-looking agents desire to smooth consumption over time, such a shock encourages agents to save rather than to spend, and the economy falls into a liquidity trap. In similarity to the aforementioned virtuous cycle, a vicious cycle emerges in which thrift reinforces thrift, and unemployment rates are sent soaring. ...
There are three important messages [from the work]:
First, for positive or small negative values of the news shock, the multiplier is zero. The reason is straightforward: With only moderately pessimistic news, the nominal interest rate aptly adjusts to avert a possible liquidity trap, and a dollar spent by the government is simply a dollar less spent by someone else.
Second, however, once the news is ominous enough, the economy falls into a liquidity trap. The multiplier takes a discrete jump up, and public spending unambiguously raises output. Yet, in a moderate crisis with an unemployment rate of 7% or less, private consumption is at least partly crowded-out.
Lastly, however, in a more severe recession with an unemployment rate of around 8% or more, the multiplier rises to, and plateaus at, around 1.5. Government spending now raises both output and private consumption, and unambiguously improves welfare...
As evidence that theoretical models -- the DSGE models used in modern macroeconomics -- support fiscal policy, and that the implied multipliers are relatively high in severe recessions, it becomes increasingly clear that much of the opposition to fiscal policy is ideological.
Poverty rates fell in the first half of the last decade for almost all age groups of older Americans (defined as age 50 or older) but increased since 2005 for every age group. ...
Poverty rates, as defined by U.S. Census poverty thresholds, were highest for the oldest of the elderly. Almost 15 percent of Americans older than age 85 were in poverty in 2009... Additionally, in 2009, 6 percent of those age 85 or older were new entrants in poverty. ...
Poverty rates for women were nearly double that of men... The EBRI report found that in 2009, the poverty rate for Hispanics was 21 percentage points higher than for whites. For blacks it was 17 percentage points higher than for whites. ...
David Andolfatto has some questions for supporters of NGDP targeting (David's request to point him in the direction of past defenses of NGDP targeting reminds me of this from David Beckworth responding to some questions I posed in a post that explained why Bernanke and Mishkin do not think that targeting nominal GDP growth is better than targeting inflation. However, as I recently noted in a post highlighting the close connection between NGDP and inflation targeting, I've learned some things since then and one or two of the questions would differ today):
NGDP Targeting: Some Questions, Macromania: Let me start by saying that the idea of a NGDP target does not sound outlandish to me. But I feel the same way about price-level and inflation targeting. The first order of business for a central bank is, in my view, is to provide a credible nominal anchor. Probably not much disagreement about this out there.
Proponents of NGDP targeting, however, like Scott Sumner and David Beckworth, for example, seem to believe very strongly in the vast superiority of a NGDP target--not just as a policy that would mitigate the effects of future business cycles--but also as a policy that should be adopted right now by the Fed to cure (what they and many others perceive to be) an ongoing "aggregate demand deficiency."
What I am curious about is not that they believe this, but how strongly they believe in it. I respect both of these writers a lot, so naturally I am led to ask myself how they came to hold such a strong belief in the matter. What is the theoretical underpinning for NGDP targeting? And what is the empirical evidence that leads them to believe that an NGDP target right now is a cure for whatever ails us right now?
One way to seek answers to these questions is to spend hours perusing their past blog posts. I'm sure they must have answered these questions somewhere. But I figure it will be more efficient for me to just state my questions and have them (or somebody else) point me in the right direction for answers.
In an economy in which debt obligations are fixed in nominal terms, but there are otherwise no nominal rigidities, a monetary policy that targets inflation inefficiently concentrates risk, tending to increase the financial distress that accompanies adverse real shocks. Nominal-income targeting spreads risk more evenly across borrowers and lenders, reproducing the equilibrium that one would observe if there were perfect capital markets. Empirically, inflation surprises have no independent influence on measures of financial strain once one controls for shocks to nominal GDP.
Alright, fine. The argument hinges on the existence of nominal debt obligations. Well, not just debt that is stated in nominal terms, but debt that is fixed in nominal terms (renegotiation is ruled out). This is, of course, a story that goes back at least to Irving Fisher (1933): The Debt-Deflation Theory of Great Depressions.
I've always like the Fisher story. And it obviously has an element of truth to it. But admitting this is different than asserting that the mechanism is quantitatively important, especially for generating decade-long recessionary episodes.
First of all, as I alluded to above, people can and do renegotiate the terms of nominal debt obligations if things get too far out of whack. True, renegotiation (including outright default) is costly and imperfect, but it happens nevertheless. And to the extent it does, nominal debt is not as "fixed" as some make it out to be. It would be good to know how much renegotiation does or does not happen out there.
Second, even if renegotiation is quantitatively unimportant, we should consider the dynamics of debt creation and retirement. At any point in time there is an outstanding stock of nominal debt, with terms negotiated in the past on the basis of future price level paths (among other things, of course). We should also keep in mind that new debt agreements are being formed, and old agreements are being retired continuously throughout time. How big are these flows relative to the outstanding stock of debt?
I think the answer to the previous question is important for understanding how long the real effects of a "negative price-level shock" can be expected to last. If "debt turnover" is high, then such a shock cannot reasonably be expected to generate a decade of subnormal economic performance.
We are presently more than 3 years out from the sharp decline in the price-level that occurred in the fall of 2008. How much new nominal debt has been issued since then--debt that would have presumably been negotiated with expectations of a new price-level path? Does anybody know? In particular, if one is advocating a return to the old price-level path right now, what does this mean for the creditors who have extended loans over the past 3 years? Should we care? Why or why not?
I have not even touched upon the practical feasibility of NGDP targeting--I'll save this for another day. But for now, I'd like to know the answers to my questions above. Who knows, I too may become one of the faithful!
[Si]nce 1991 inflation has exceeded 1% only twice... the slow or even negative rate of price increase points strongly to a diagnosis of aggregate demand deficiency…. [C]ountries that currently target inflation… have tended to set their goals for inflation in the 2-3% range, with the floor of the range as important a constraint as the ceiling….
and concludes that Bernanke previously believed the inflation target should be between 2 and 3 percent, with 2 percent being a floor. One could infer, then, that Bernake at one point believed in a symmetric objective around 2.5 percent, with a hard floor and ceiling on 50bp of either side of that objective. Now the Fed has sanctified a 2 percent target.
This shift is important and evident in the path of inflation, and was my point in this post. Prior to the recession, headline PCE inflation was running about 2.4 percent a year. Now the trend is a smidgen above 2 percent:
DeLong, in another post, does a similar picture using core-CPI. I have tended to shift to headline number number because that is the Fed's stated target and there is widespread misunderstanding about the relevance of core-inflation in the policymaking process. Indeed, the belief that policymakers are somehow misleading the public about the true path of inflation runs deep in the Fed itself. Note that Beckworth takes a different direction, focusing on the path of nominal demand rather than inflation and reaches a similar conclusion - the we are witnessing an attack of the body snatchers.
I think we can conclude, by Bernanke's statement's in the past and the actual path of inflation now, that Bernanke has embraced the recession as yet another exercise in opportunitistic disinflation in which the Fed can knock another 40bp off the expected rate of inflation.
The story gets more interesting. In his press conference, Bernanke says:
So it's not a ceiling, it's a symmetric objective and we tend to bring inflation close to 2 percent. And in particular, if inflation were to jump for whatever reason and we don't have, obviously, don't have perfect control of inflation, we'll try to return inflation to 2 percent at a pace which takes into account the situation with respect to unemployment.
Avent rightly calls foul on this claim:
Perhaps more telling, the Fed gives a range for projected inflation over the next three years with 2% as the upper extent. If the Fed does indeed have a symmetric approach to the target, as Mr Bernanke asserted yesterday, one would expect 2% to be at the middle of the range, not the top. This is particularly damning as the Fed's estimate of the natural rate of unemployment doesn't appear at all in the projected unemployment-rate range over the next three years; the closest the Fed comes to meeting that side of the mandate is in 2014, when the bottom end of the projected unemployment-rate range gets within 0.7 percentage points of the top end of the natural-rate range.
Bernanke is clearly misleading us when he claims the target is symmetric as the Fed's own projections clearly treat the target as a hard ceiling. The next words out of Bernanke's mouth are also telling:
The risk of higher inflation, you say 2-1/2 percent, well, 2-1/2 percent expected change might involve a distribution of outcomes. Some of which might be much higher than 2-1/2 percent.
This was the topic my post earlier this week. Monetary policy is not neutral with regards to the distribution of income and wealth. The Fed does not want inflation to exceed the 2 percent inflation target as that will result in a new distribution. The subsequent alterations to the outcomes will not be symmetric; some will gain more than 2.5 percent, some will lose more.
Note - and I think this is important - when Bernanke's Fed took the opportunity to shift down the path of inflation by sanctifying the 2 percent target, they were comfortable with the subsequent shift in the distribution of outcomes. And consider that shift. At a time when households were overwhelmed with excessive debt, the Fed deliberately chose to increase the real burden of the debt by changing the inflation trajectory.
Why one would use a balance sheet recession to shift downward the path of prices is certainly something of a mystery. But it does imply that the Fed wanted to induce a new distibution of outcomes, even knowing that the beneficiaries would not be households.
Bottom Line: Bernanke is being disingenous in his defence. Despite his claims that his earlier views only applied to deflation, his writings still appear at odds with his willingness to embrace a new price and aggregate demand paths. Moreover, the Fed's own forecasts clearly do not support his contention that the target is symmetric, but indeed a hard ceiling. The Fed must also know that the by reducing the path of inflation they have knowing altered the distribution of outcomes in a way that is likely to slow the pace of recovery. Finally, with inflation near 2 percent, I suspect the bar toward another round of QE is higher than many believe.
As Farmer's post makes clear, equilibrium in an intertemporal model requires not only that individuals make plans that are optimal conditional on their beliefs about the future, but also that these plans are themselves mutually consistent. The subjective probability distributions on the basis of which individuals make decisions are presumed to coincide with the objective distribution to which these decisions collectively give rise. This assumption is somewhat obscured by the representative agent construct, which gives macroeconomics the appearance of a decision-theoretic exercise. But the assumption is there nonetheless, hidden in plain sight as it were. Large scale asset revaluations and financial crises, from this perspective, arise only in response to exogenous shocks and not because many individuals come to realize that they have made plans that cannot possibly all be implemented.
Farmer points out, quite correctly, that rational expectations models with multiple equilibrium paths are capable of explaining a much broader range of phenomena than those possessed of a unique equilibrium. His own work demonstrates the truth of this claim: he has managed to develop models of crisis and depression without deviating from the methodology of rational expectations. The equilibrium approach, used flexibly with allowances for indeterminacy of equilibrium paths, is more versatile than many critics imagine.
Nevertheless, there are many routine economic transactions that cannot be reconciled with the hypothesis that individual plans are mutually consistent. For instance, it is commonly argued that hedging by one party usually requires speculation by another, since mutually offsetting exposures are rare. But speculation by one party does not require hedging by another, and an enormous amount of trading activity in markets for currencies, commodities, stock options and credit derivatives involves speculation by both parties to each contract. The same applies on a smaller scale to positions taken in prediction markets such as Intrade. In such transactions, both parties are trading based on a price view, and these views are inconsistent by definition. If one party is buying low planning to sell high, their counterparty is doing just the opposite. At most one of the parties can have subjective beliefs that are consistent with with the objective probability distribution to which their actions (combined with the actions of others) gives rise.
If it were not for fundamental belief heterogeneity of this kind, there could be no speculation. This is a consequence of Aumann's agreement theorem, which states that while individuals with different information can disagree, they cannot agree to disagree as long as their beliefs are derived from a common prior. That is, they cannot persist in disagreeing if their posterior beliefs are themselves common knowledge. The intuition for this is quite straightforward: your willingness to trade with me at current prices reveals that you have different information, which should cause me to revise my beliefs and alter my price view, and should cause you to do the same. Our willingness to transact with each other causes us both to shrink from the transaction if our beliefs are derived from a common prior.
Hence accounting for speculation requires that one depart, at a minimum, from the common prior assumption. But allowing for heterogeneous priors immediately implies mutual inconsistency of individual plans, and there can be no identification of subjective with objective probability distributions.
The development of models that allow for departures from equilibrium expectations is now an active area of research. A conference at Columbia last year (with Farmer in attendance) was devoted entirely to this issue, and Mike Woodford's reply to John Kay on the INET blog is quite explicit about the need for movement in this direction:
The macroeconomics of the future... will have to go beyond conventional late-twentieth-century methodology... by making the formation and revision of expectations an object of analysis in its own right, rather than treating this as something that should already be uniquely determined once the other elements of an economic model (specifications of preferences, technology, market structure, and government policies) have been settled.
There is a growing literature on heterogeneous priors that I think could serve as a starting point for the development of such an alternative. However, it is not enough to simply allow for belief heterogeneity; one must also confront the question of how the distribution of (mutually inconsistent) beliefs changes over time. To a first approximation, I would argue that the belief distribution evolves based on differential profitability: successful beliefs proliferate, regardless of whether those holding them were broadly correct or just extremely fortunate. This has to be combined with the possibility that some individuals will invest considerable time and effort and bear significant risk to profit from large mismatches between the existing belief distribution and the objective distribution to which it gives rise. Such contrarian actions may be spectacular successes or miserable failures, but must be accounted for in any theory of expectations that is rich enough to be worthy of the name.
GDP growth for the first quarter, as noted in the post below this one, is estimated to be 2.2%. That is not as high as it needs to be to recover in a decent amount of time, and one of the problems is that government spending has declined during the recession. This has been driven largely by cuts at the state and local level, and it is holding back GDP growth.
I probably should have used the mediocre growth in the first quarter to call, yet again for more aggressive monetary and fiscal policy -- fiscal policy in particular. What are we thinking making cuts like this as the economy is trying to recover from such a severe recession? But what's the use? Policymakers have made it very clear they are unwilling to do more to try to help the unemployed. In fact, many policymakers would like to do less and it's only because of gridlock on Congress, and gridlock on the Fed's monetary policy committee that the cuts (austerity) haven't been worse, and interest rates are still low.
So I probably should have noted the need for more aggressive policy, but thought, why bother? I suppose there's value in pointing out the failure, but at this point that shouldn't be news.
The advance Real GDP growth estimate for the first quarter was 2.2 percent:
Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.2 percent in the first quarter of 2012 (that is, from the fourth quarter to the first quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the fourth quarter of 2011, real GDP increased 3.0 percent.
The Bureau emphasized that the first-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see the box on page 3). The "second" estimate for the first quarter, based on more complete data, will be released on May 31, 2012.
The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, and residential fixed investment that were partly offset by negative contributions from federal government spending, nonresidential fixed investment, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased.
The deceleration in real GDP in the first quarter primarily reflected a deceleration in private inventory investment and a downturn in nonresidential fixed investment that were partly offset by accelerations in PCE and in exports.
This number wil be revised, so it's not the final word. As it stands it could be worse, but this is not the robust growth we need to reabsorbr all the workers who lost jobs during the recession back into productive employment and recover in an acceptable amount of time.
For the past two years most policy makers in Europe and many politicians and pundits in America have been in thrall to a destructive economic doctrine. According to this doctrine, governments should respond to a severely depressed economy not the way the textbooks say they should — by spending more to offset falling private demand — but with fiscal austerity, slashing spending in an effort to balance their budgets.
Critics warned from the beginning that austerity in the face of depression would only make that depression worse. But the “austerians” insisted that the reverse would happen. Why? Confidence! ... Or as I put it..., the idea was that the confidence fairy would come in and reward policy makers for their fiscal virtue.
The good news is that many influential people are finally admitting that the confidence fairy was a myth. ... Several events — the collapse of the Dutch government over proposed austerity measures, the strong showing of the vaguely anti-austerity François Hollande in the first round of France’s presidential election, and an economic report showing that Britain is doing worse in the current slump than it did in the 1930s — seem to have finally broken through the wall of denial. ...
The question now is what they’re going to do about it. And the answer, I fear, is: not much.
For one thing, while the austerians seem to have given up on hope, they haven’t given up on fear — that is, on the claim that if we don’t slash spending, even in a depressed economy, we’ll turn into Greece, with sky-high borrowing costs.
Now, claims that only austerity can pacify bond markets have proved ... wrong... And serious analysts now argue that fiscal austerity in a depressed economy is probably self-defeating: by shrinking the economy and hurting long-term revenue, austerity probably makes the debt outlook worse rather than better.
But while the confidence fairy appears to be well and truly buried, deficit scare stories remain popular. Indeed, defenders of British policies dismiss any call for a rethinking of these policies, despite their evident failure..., on the grounds that any relaxation of austerity would cause borrowing costs to soar.
So we’re now living in a world of zombie economic policies — policies that should have been killed by the evidence that all of their premises are wrong, but which keep shambling along nonetheless. And it’s anyone’s guess when this reign of error will end.
This principle was aptly illustrated by the “budget analysis” Mitt Romney’s chief economic adviser, Glenn Hubbard, recently put forward. In a Wall Street Journal op-ed this week, Hubbard constructs a budget plan that he imagines President Obama might propose someday, engages in a set of his own extrapolations and then makes assertions about it. He does not discuss the actual Obama plan or how it has been evaluated by the CBO. ...
The independent CBO confirms that the Obama budget would stabilize the debt as a share of the economy... Rather than criticize this approach, Hubbard ignores it — and instead chooses to invent assumptions that bear no relationship to the president’s actual policies. ...
Hubbard should perhaps address some of the many gaps in Romney’s plans. ... The Romney campaign has been very clear about what the former governor is promising: $5 trillion in tax cuts on top of extending the Bush tax cuts,... heavily weighted toward the country’s wealthiest taxpayers. Romney himself has acknowledged the lack of details... Romney has also proposed a massive defense buildup, even while he says he will cut spending deeply enough to balance the budget. ...
This is a consequential presidential election. As the country continues to recover from the largest economic crisis in generations, we need to strengthen the job market, address big fiscal challenges and build an economy that is based on sustainable, shared economic growth. ... Obama — consistent with his obligations as president — has laid out a multiyear budget embodying his vision for the future, and it has been evaluated by independent experts. It is time for Romney to do the same.
Ideas over Interests, by Dani Rodrik, Commentary, Project Syndicate: The most widely held theory of politics is also the simplest: the powerful get what they want. Financial regulation is driven by the interests of banks, health policy by the interests of insurance companies, and tax policy by the interests of the rich. Those who can influence government the most ... eventually get their way.
It’s the same globally. ... It is a compelling narrative... Yet this explanation is far from complete, and often misleading. ... Our interests are in fact hostage to our ideas.
So, where do those ideas come from? Policymakers ... perspectives on what is feasible and desirable are shaped by ... economists and other thought leaders... The ideas that have produced, for example, the unbridled liberalization and financial excess of the last few decades have emanated from economists...
In the aftermath of the financial crisis, it became fashionable for economists to decry the power of big banks. It is because politicians are in the pockets of financial interests, they said, that the regulatory environment allowed those interests to reap huge rewards at great social expense. But this argument conveniently overlooks the legitimizing role played by economists themselves. It was economists and their ideas that made it respectable for policymakers and regulators to believe that what is good for Wall Street is good for Main Street.
Economists love theories that place organized special interests at the root of all political evil. In the real world, they cannot wriggle so easily out of responsibility for the bad ideas that they have so often spawned. With influence must come accountability.
There are differences on these issues among economists. The fact that some ideas, e.g. that austerity is somehow expansionary, take hold while others do not has a lot to do, I think, with the interests of the powerful. So I'm not fully convinced that economists are the primary driving force. They are part of it, to be sure, but when those with the most political power promote one idea over another, it matters.
Levels of copper, cadmium, lead and other metals in Southern California's coastal waters have plummeted over the past four decades, according to new research from USC.
Samples taken off the coast reveal that the waters have seen a 100-fold decrease in lead and a 400-fold decrease in copper and cadmium. Concentrations of metals in the surface waters off Los Angeles are now comparable to levels found in surface waters along a remote stretch of Mexico's Baja Peninsula.
Sergio Sañudo-Wilhelmy, who led the research team, attributed the cleaner water to sewage treatment regulations that were part of the Clean Water Act of 1972 and to the phase-out of leaded gasoline in the 1970s and 1980s. ...
Ideology and Facts in the Economic Policy Debate: The fact that ideology matters in the economic policy debate should not be a surprise to anyone. But the influence that ideology has has in some of the economic analysis we have seen since the beginning of the financial crisis has led to completely contradictory statements about the facts behind the causes and potential remedies to the crisis.
When he (Obama) came into office, he favored a massive injection of new government spending into the economy in the name of “stimulus” — counter-cyclical federal activity aimed at offsetting depressed consumer demand emanating from a recession-battered private sector. The net result provides little if any boost to aggregate demand because the states — and to some extent private citizens — simply pocket the federal money and reduce their deficits and debts. Meanwhile, what federal taxpayers get is a permanent increase in the size of government.
We have all heard similar statements before which tend to be supported by references to $800 billion to $1 trillion stimulus packages and bailouts both in the US and Europe.
But have we really see an unusual expansion of government size? Quite the contrary. As I argued in a previous post, what we have seen during the current crisis is exactly the opposite. Relative to previous crisis government spending has been growing at a much slower rate this time. Paul Krugman makes an even more interesting comparison in blog, a comparison that reveals how inaccurate the above statement is. He compares government employment under the Obama administration to the Bush and Clinton administrations. The Bush administration is probably the most relevant comparison because it also started in the middle of a recession. Here is the chart from Krugman's analysis. ...
The data speaks for itself. 40 months into the Obama administration, the number of government employees (all levels of government) has gone down by 600,000. During the Bush administration the number had increased by about 700,000. A difference of 1.3 million. So where is the increase in government size? ...
[See here for another graph comparing government spending during recent recoveries.]
I don't think the evidence supports the assertion that the preponderance of the stimulus was saved rather than spent. But suppose that it was. For consumers in particular, this is a form of balance sheet repair -- they are saving to make up for losses in asset values that they were depending upon for retirement, to pay for college, and so on. Balance sheet repair does not show up in current GDP statistics, so it looks like the policy is doing nothing. But since consumers won't begin spending normally until their balance sheets are repaired, high savings allows us to exit the recession faster than otherwise (though balance sheet repair is a slow process in any case). State and local budgets --balance sheets --were also wiped out by the recession, so similar arguments can be made here. If state and local government did use this money mostly to backfill revenue losses instead of taking on new projects, that's a sign they didn't get enough help (this is also reflected in the fall in state and local employment). State and local governments have to make up for budget shortfalls somehow, and the sooner they are able to do that, the sooner the layoffs and so on stop. So although we don't see the savings component in current GDP figures, the savings allows balance sheet repair to happen faster, and that allows an earlier exit from the recession.
Again, though, there is plenty of evidence that runs counter to the claim that the stimulus did nothing. The ARRA (stimulus package) had more tax cuts than I would have preferred, and hence there was more savings and less spending than a better designed package might have produced (but the package would not have made it through Congress if it was more spending, less tax cuts). But the higher rate of saving does have benefits in a balance sheet recession.
My reaction to the Fed's Press Release from its monetary policy meeting that ended today.
Fed Policy Remains on Hold: (MoneyWatch) COMMENTARY The Federal Reserve just concluded a two-day meeting to decide what's next for monetary policy, and as was widely expected the Federal Reserve decided to keep policy on hold. Interest rates are still expected to remain extraordinarily low through late 2014, and there is no change in the Fed's other programs intended to stimulate the economy such as its program "to extend the average maturity of its holdings of securities" and reinvest principle as the assets mature.
The question is whether this is the correct policy. Presently, the Fed is missing its employment target, and it is also below its declared inflation target of 2 percent. As the statement says, "the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate." So there is no risk of overshooting the inflation target according to the Fed, only a risk of undershooting it.
If that's true, if the Fed is likely to undershoot both of its targets -- the committee believes that in the worst case it will only hit its inflation target, not exceed it -- then why not pursue more aggressive policy?
The answer, despite what the press release says about low inflation risks, is fear of inflation. In particular, it is the fear that inflation expectations will become unmoored. The Fed believes that expectations of inflation are largely self-fulfilling. If people expect prices to go up, they will take actions such as demanding wage increases that will make that happen, and the expectation will be validated. Then, as inflation begins rising, that can then lead to further increases in expected inflation which will also be self-fulfilling, and an upward spiral is set in motion.
Is this fear realistic? Some of us, myself included, think the Fed should overshoot the inflation target in the short-run since that would stimulate the economy, then bring inflation back to target once the economy nears full employment. But the Fed seems unwilling to tolerate even the possibility that inflation might cross the 2 percent threshold.
I think the Fed should have more faith in itself. It is still paralyzed by the 1970s when the self-fulfilling inflation expectations scenario above played out to the detriment of the economy. But the inflation didn't just happen without the central banks participation, policy mistakes had a lot to do with the outcome. Does the central bank think it has learned nothing? Would it really stand by and watch inflation rates go into the double digits without taking corrective action?
If inflation expectations begin to rise, and there's no sign of that presently, the Fed has the tools to bring them back down again if it has the will to use them. Is that the problem? Is the Fed worried that it won't have the courage to bring down inflation if it is called for (which would likely slow the economy)? If the unemployment rate is still relatively high and inflation begins accelerating, would the Fed be unwilling to try to fix the problem?
If unemployment is still too high, there's no reason to fix the problem. That's the policy that is called for. The important question is what happens as we approach full employment, and I have little doubt that the Fed will take appropriate action in such a case. I just wish the Fed had more faith in itself. If it did -- if it was absolutely clear that the appropriate action will be taken as the economy reaches full employment -- then long-term expectations would not be a problem.
Maybe you can help me. As you may or may not know, I grew up in a relatively small town (just under 4,000 people) in Northern California. So I have always been somewhat attuned to the GOP's use of small town America in its political rhetoric (Democrats do this too, but not as much). Much to the chagrin of city folk, small town America has always been held up as an ideal:
why is it OK to disrespect big city values, even to suggest — as Bush has — that big-city dwellers aren’t part of the “real America”? ... The big-city immigrant experience is as much a part of what made America as the rural, small-town experience. It deserves the same degree of respect.
That always made me laugh since people in rural areas complain that cities have all the power and influence. Where I grew up Sacramento and LA steal all the water, etc., and to some extent the glorifying of small-towns is playing to this feeling of political powerlessness. The dog whistle here is, of course, that those immoral cities that are full of decadence and decay are stealing the tax money of hard-working, small town America to support social programs that mostly goes to urban areas (the reality of how money actually flows notwithstanding -- rural areas actually do quite well all things considered, but that is not generally known). And the feeling that they lack political power makes this a relatively easy sell.
But this year, this type of rhetoric seems to be largely absent from the presidential race, and I'm trying to understand what has changed (maybe I've just missed it?) A few ideas:
Is it because Romney is a city boy and can't credibly wear Bush-type cowboy boots to show his affinity with rural America (and does this help to explain the soft-support for Romney from small town tea party types)?
Did Palin kill harm the small-town brand?
Or is it something more fundamental?
I think it's something more fundamental, perhaps reflecting a shift of political power from rural to urban areas, but I don't know for sure. For example, what has replaced the small-town rhetoric? The dog-whistling about taxes flowing to the undeserving is still there, but the implied us against them is both a different us and a different them.
So here's the question. Have I simply missed that the same old rhetoric is actually being used, or is there something else going on? If it's something else, what is it? These are quick, unformed thoughts -- mostly what I'm looking for is perspectives on this issue.
Let's beef up Social Security benefits instead of cutting them, by Michael Hiltzik: Advocates for strengthening Social Security have come to dread the release of the annual report of the program's trustees. That's because the event has become the basis for more hand-wringing about Social Security's fiscal condition and calls to cut benefits for current and future retirees. This week's release of the 2012 report is no exception. ...
What won't be adequately explained is that the program isn't "insolvent" or "bankrupt." ... Economic recovery alone will improve the program's fiscal condition, and the trustees say that even if Congress does absolutely nothing, in 2033 there still will be money to pay about 75% of currently scheduled benefits.
And by the way, despite facing the worst economic conditions in its history, the program ran a surplus of $69 billion last year, increasing the trust fund to nearly $2.7 trillion. ...
It's time to shut down the talk of cutting benefits, which serves nobody, and pump up the volume on making them better. ... Of the customary three legs of the retirement stool, two — personal savings and employer-paid pensions — have been shattered into smithereens by the markets, high unemployment and changes in workplace benefits. Social Security is the third leg. ...
Modernizing Social Security is crucial today because the actions of government and industry have increased Americans' dependence on the program. ...
Undoubtedly you're going to hear that improving Social Security will bankrupt America. This is the mating cry of the haves-and-want-mores, and it's malarkey. Federal taxes ... amounted to about 15.4% of our gross national product last year... That's lower than the level of every other industrialized country...
Isn't it curious that the same people who insist that America is the greatest, richest country in the world, ever, are those who insist that there's no way we can afford to provide for our elderly, our disabled and the survivors of our deceased workers to the same degree as the rest of the industrialized world? ...
We can afford to give people a decent retirement. People who benefitted from the hard work of others -- those who reaped the gains of increasing inequality and have more than enough -- can do more to help provide a decent retirement to the people who toiled day in and day out to help create that wealth. And as I've said again and again, the income distribution mechanism has gone awry in recent decades. People at the lower income are not getting what they have earned, and people at the top are getting more than what they contribute. So I view this as simply returning income to its rightful owners.
At least one prediction can be made with high confidence... in the course of the next century there will be several financial and economic crises. Each crisis will be preceded by a boom and by a state of euphoria, when almost everyone will believe that “this time is different; we have learned how to avoid crises, and have finally learned the secret of how to sustain the Great Moderation.”
When the crisis hits, policymakers everywhere will be shocked and unprepared. Their panicked responses will merely paper over the real problems and sow the seeds of the next crisis a few years down the line.
In America, recurrent macroeconomic crises will be made worse by the loss of technological leadership, as governments controlled by or beholden to religious conservative forces forbid research on the frontiers of biotech and related areas. American education will continue to be squeezed...; this will accelerate the decline. China lost its technological leadership in the 1400s because of capricious decisions of its emperors, and took almost six centuries to climb back; for the U.S. the 21st century will be just be beginning of a similar downhill slide.
A side-effect of this decline will become good news for some: the U.S. will regain its position as a manufacturing economy. As early as 2011, production of some mops and brooms was coming back to the U.S. from China. The Chinese didn’t want to be making these crappy plastic goods any longer; they wanted to move into more advanced and complex technological sectors. At least this reversal will create employment for the poorly educated and unskilled U.S. workers.
my real purpose in depicting such nightmares is, of course, to shock the readers, and hopefully to help set in motion some actions that will reduce the risk of turning the nightmares into reality.
He goes on to give his "dream scenario," and the set of actions that might bring it about.
Joshua Gans notes a new development in the eBook wars:
The DRM free movement for eBooks expands, Digitopoly: So it started with JK Rowling who went platform independent and effectively DRM free on the Harry Potter series. This meant that for those books purchasers would not be locked into any one platform (e.g., Kindle) and that also meant that no platform could use lock-in to build up market power. Interestingly, you can’t buy those books from Apple’s iBookstore but you can buy them direct from Pottermore and import them into iBooks... Some other publishers have offered DRM free versions but JK Rowling was the first to break through Amazon’s store to get what is effectively a non-platform specific version on the Kindle.
Today comes an announcement from TOR books (who is owned by Macmillan) that their entire line of science fiction books will be available in a DRM free version. ...
Now as Amazon sells these as does Apple, I wonder if that means TOR will be using a similar method that Pottermore uses to break through those platforms. It will be interesting to see.
This all suggests that publishers are waking up to the fact that if they have ceded power to eBook platforms it is of their own choosing by insisting on DRM. ...
The same thing happened in music. DRM was the thing that got music publishers interested in digital downloads (like iTunes) and then something we couldn’t have predicted in 2003 happened; DRM was abandoned and nobody really noticed. What is more DRM was abandoned with a coincidental 30% (!) price increase to consumers as compensation for the extra value provided by portability. My feeling (based on no real evidence) is that overall the consumers won out of that deal (they are paying a little more to save on paying lots more later). It will be interesting to see how TOR’s pricing changes as it goes DRM free.
Publishers were always aggregators to some extent. They (supposedly) found the best writing from all the manuscripts that are out there, or solicited it themselves, and then made it available for a fee (the price of the book).
As authors take things into their own hands and self-publishing in the form of eBooks proliferates, there will likely be a role for publishers to continue doing this. They won't get paid for binding books in the traditional sense, but they can still offer a platform where authors will get noticed in return for exclusivity. That is, if a site develops a reputation for aggregating the best content and has a large following, then it can use that reputation to attract the best authors to the site. It can also lock the authors up with contracts that do not allow them to publish on other sites in return for exposure (which works best with new authors). The public can go to the site, know there's a good chance of finding something interesting -- just like browsing for books now -- and then purchase an eBook (the sites could also be supported, in part or in whole, by ads).
"Social Security’s bleak outlook is primarily driven by the ever-larger numbers of people in the baby boom generation entering retirement."
Actually the fact that baby boomers would enter retirement is not news. Back in 1983, the Greenspan Commission knew that the baby boomers would retire, yet they still projected that the program would be able to pay all promised benefits into the 2050s.
The main reason that the program's finances have deteriorated relative to the projected path is that wage growth has not kept pace with the path projected. This is in part due to the fact that productivity growth slowed in the 80s, before accelerating again in the mid-90s and in part due to the fact that much more wage income now goes to people earning above the taxable cap.
In 1983 only 10 percent of wage income fell above the cap and escaped taxation. Now more than 18 percent of wage income is above the cap.
Raising the cap is my favored solution, but (surprise) somehow raising taxes of those with the most political power is not on the agenda. Instead, the proposed solutions always seem to hit those who are the most politically and economically vulnerable.
For the past thirty years we have seen repeated campaigns to eviscerate Social Security—to privatize it, siphon off its finances, drain it of its essential social insurance character. These have failed, not because of the brilliance or commitment of its defenders, but simply because it fulfills a vital social function and is wildly popular. Even those who, in their heart of hearts, want to crush it to bits, claim to be in favor of “saving” it. So what’s the strategy of the anti-SS minions?
Cynicism. Convince younger voters, whose benefits are still decades away, that the program is dying a slow but certain death, and that politicians are too myopic or pandering or just stupid to do anything about it. From time to time I poll my students, and by a big majority they always tell me that SS will not be around to support them in their retirement. (Not that this has provoked a big Feldsteinesque spike in their personal savings....) As this mindset takes hold, it becomes easier to simply tune out the debate over SS. After all, it’s not like it’s actually going to be there when I’m old, no matter what they say, right? At some point, it goes from being a third rail to a footnote to just background noise, to mangle a bunch of metaphors.
What I’d like to see are news stories that say something like, “Social Security has had its ups and downs, but it’s in better financial shape now than it was a generation ago, and unless its enemies prevail, it will be there for you when you need it.”
People also need to realize that "Social Security faces a shortfall — NOT bankruptcy — a quarter of a century from now. OK, I guess that’s a real concern. But compared to other concerns, it’s really pretty minor, and doesn’t deserve a tenth the attention it gets. It’s also worth noting that even if the trust fund is exhausted and no other financing provided, Social Security will be able to pay about three-quarters of scheduled benefits, which would mean real benefits higher than it pays now."
Notice that even under the worse case scenario, real benefits would be higher than they are now. The benefits would not keep up with increases in productivity as they do presently -- payments rise as the standard of living rises -- but the benefits would still rise as much or more than inflation. So today's standard of living would still be available even in the worst possible case. But there is the problem of how to cover the productivity increases over the next quarter century. What to do?
But will taxable incomes of the top 1% respond to a tax increase by declining so much that revenue rises very little or even drops? In other words, are we already near or beyond the peak of the famous Laffer Curve, the revenue-maximizing tax rate? ...
According to our analysis..., the revenue-maximizing top federal marginal income tax rate would be in or near the range of 50%-70%... Thus we conclude that raising the top tax rate is very likely to result in revenue increases at least until we reach the 50% rate that held during the first Reagan administration, and possibly until the 70% rate of the 1970s. ...
But will raising top tax rates significantly lower economic growth? In the postwar U.S., higher top tax rates tend to go with higher economic growth—not lower. ... Neither does international evidence support a case for lower growth from higher top taxes. ...
By itself, a suitable increase in the taxation of top earners will not solve our unsustainable long-term fiscal trajectory. But that is no reason not to use this tool to contribute to addressing this problem.
With the "taxes harm growth" and Laffer curve arguments undercut by research such as this, Republicans have fallen back on the argument that it's unfair to take income away from those who earn it. But that presumes that the system allocates income fairly, a claim that is hard to swallow given how much financial executives are paid relative to their contribution to the productive process (to name just one example). There's nothing unfair about using taxes to "clawback" misdirected income, and it won't harm growth to send income where it should have gone in the first place.
No End in Sight, by James Surowiecki, New Yorker: The talk in Washington these days is all about budget deficits, tax rates, and the “fiscal crisis” that supposedly looms in our near future. But this chatter has eclipsed a much more pressing crisis here and now: almost thirteen million Americans are still unemployed. ...
Being unemployed is even more disastrous for individuals than you’d expect. Aside from the obvious harm—poverty, difficulty paying off debts—it seems to directly affect people’s health, particularly that of older workers. ...
Unemployment doesn’t hurt just the unemployed, though. It’s bad for all of us. Jobless workers, having no income, aren’t paying taxes, which adds to the budget deficit. More important, when a substantial portion of the workforce is sitting on its hands, the economy is going to grow more slowly...
Most worrying... Right now, unemployment is mainly the result of what economists call cyclical factors... But if high long-term unemployment continues there’s a danger that ... cyclical unemployment could become structural unemployment... The longer people are unemployed, the harder it is for them to find a job... Being out of a job can erode people’s confidence and their sense of possibility; and employers, often unfairly, tend to take long-term unemployment as a signal that something is wrong. A more insidious factor is that long-term unemployment can start to erode job skills...
You’d think that Congress and the Federal Reserve would be straining every sinew to avoid such a fate. It isn’t as if they’re out of tools. ... Sadly, there’s little sign that policymakers have much interest in using these tools. ...
I don't know how many ways, or how many times I can say that labor markets need more help than they are getting. It's futile, I know -- Congress turned its back on the unemployed long ago and the Fed is not inclined to fill the gap any more than it already has -- but I can't help trying.
I've been pushing hard for more help for labor markets for quite awhile -- at times I've thought it was a bit repetitive, but necessary -- but it's probably time for me to give up and accept that we are going to have a slower recovery than we could have had with more aggressive fiscal policy. ... Congress is not going to provide anything more than token help from here forward. ...
I'll still complain -- there's no reason to let policymakers off the hook -- but it's time to give up the hope that anything more will be done to help the unemployed find jobs.
If we'd done more then -- or even earlier like many of us were calling for -- we'd be in much better shape today. The thing is, it's still not too late. If we do more now, two years from now we'll be happy that we did.
But the question was raised with particular force last week, when Mr. Romney tried to make a closed drywall factory in Ohio a symbol of the Obama administration’s economic failure. It was a symbol, all right — but not in the way he intended.
First..., George W. Bush ... was president when the factory in question was closed. Does the Romney campaign expect Americans to blame President Obama for his predecessor’s policy failure?
Yes, it does. Mr. Romney constantly talks about job losses under Mr. Obama. Yet all of the net job loss took place in the first few months of 2009,... before any of the new administration’s policies had time to take effect. ...
But Mr. Romney’s poor choice of a factory for his photo-op aside,... Mr. Romney is essentially advocating a return to ... Bush policies. And he’s hoping that you don’t remember how badly those policies worked. ... Yes, Mr. Obama’s jobs record has been disappointing — but it has been unambiguously better than Mr. Bush’s over the comparable period of his administration. ...
Which brings me to another aspect of the amnesia campaign: Mr. Romney wants you to attribute all of the shortfalls in economic policy ... to the man in the White House, and forget ... that Mr. Obama has faced scorched-earth political opposition since his first day in office. ...
So am I saying that Mr. Obama did everything he could, and that everything would have been fine if he hadn’t faced political opposition? By no means. Even given the political constraints, the administration did less than it could and should have in 2009, especially on housing. Furthermore, Mr. Obama was an active participant in Washington’s destructive “pivot” away from jobs to a focus on deficit reduction.
And the administration has suffered repeatedly from complacency — taking a few months of good news as an excuse to rest on its laurels... So there is a valid critique one can make of the administration’s handling of the economy.
But that’s not the critique Mr. Romney is making. Instead, he’s basically attacking Mr. Obama for not acting as if George Bush had been given a third term. Are the American people — and perhaps more to the point, the news media — forgetful enough for that attack to work? I guess we’ll find out.
Actually, most wages follow in step with inflation, although some workers do see declines in real wages when inflation rises.
People seem to forget the connection between inflation and wages. A sustained increase in inflation needs to be accompanied by a matching increase in wages, otherwise higher inflation would simply undermine real purchasing power, leading to slower growth and a subsequent decline in the inflation rate. To be sure, as Baker notes, while on average higher inflation is matched with higher nominal wages, it does not affect all workers equally - workers with less bargaining power could see their real wages decline even if average real wages hold constant.
Baker identifies this basic chart (I replaced CPI with PCE inflation) to support his argument (click on figures for larger versions):
Notice that Baker correctly shifts from real wages to the broader measure of real compensation. He says:
These series give the basic story, although they are not perfect for reasons that you do not want to hear about. If you can see a negative relationship (i.e. higher inflation leads to lower real wage growth) you have better eyesight than me.
In fact, the correlation between these two series is 0.36. In other words, there is a weak positive relationship between inflation and real compensation - although I would be wary about calling it a causal relationship, and instead only point out that although it is often claimed that inflation erodes real wages, this is not obvious. What is more evident, and causally related, is the link between productivity and real compensation:
The correlation is 0.75, and the story is a familiar one - we expect that higher productivity growth results in higher real wage growth. That said, a careful eye will notice that the growth rates are not identical, yielding this well-known result:
Certainly since the 1980s, the gap between output and real compensation is rising. Another version of this issue is that labor's share of income has been falling since 1980. What is of course curious is that this occurs despite the sustained period of disinflation. Those who claim that inflation erodes real wage growth seem to miss that the period since 1980 has seen real compensation growth slow to a pace below productivity growth despite falling inflation. This issue is taken up by Steve Randy Waldman at interfluidity with a thought provoking post:
An increase in unit labor costs can mean one of two things. It can reflect an increase in the price level — inflation — or it can reflect an increase in labor’s share of output. The Federal Reserve is properly in the business of restraining the price level. It has no business whatsoever tilting the scales in the division of income between labor and capital.
Yet throughout the Great Moderation, increases in unit labor costs were the standard alarm bell cited by Fed policy makers as an event that would call for more restrictive policy. And all through the Great Moderation, except for a brief surge during the tech boom, labor’s share of output was in secular decline...
...even if the Fed didn’t “cause” the decline in labor’s share, Great Moderation monetary policy made it very difficult for labor’s share to grow...
...Since the early 1990s, all actors in the US political system have understood that policies that increase unit labor costs risk a response by the “inflation fighting” central bank, whose “credibility” was swaggeringly defined as a willingness to provoke recession rather than risk inflation. In this environment, the decline of labor unions and their shift in focus from wage growth to working conditions was understandable...
Waldman is saying that the Federal Reserve is at least complicit in allowing the competition between capital and labor to be tilted toward capital (not sure this should be a surprise - I don't see a revolving door between the Federal Reserve and the AFL-CIO). In other words, monetary policy has a direct impact on the distribution of income. It's not just simply raising and lowering interest rates to affect the level of output - it has an impact on how the subsequent output is split up. Waldman offers some policy advice:
All of this is one more reason to prefer the NGDP path target promoted by Scott Sumner and his merry Market Monetarists. It might prove difficult in practice to target inflation without paying some especial attention to wage growth. But a central bank can target the path of aggregate expenditure without playing favorites about who pays what to whom. Simple neutrality by the central bank in the contest between capital and labor would be a huge improvement over the status quo.
Note that even if the central bank is no longer playing "favorites", monetary policy would still have a distributional impact. For example, reverting to the pre-recession path of nominal spending would likely entail a temporarily higher rate of inflation than currently expected. And higher than expected inflation will indeed create some winners and losers:
However, the biggest losers are creditors who are almost by definition wealthy, since people owe them money. If a creditor has lent out $100 million at 2 percent interest (e.g. buying a 10-year U.S. or German government bond) and the inflation rate rises from 2 percent to 4 percent, this creditor has lost an amount equal to 100 percent of his expected income or 2 percent of his wealth. This is a far larger loss than any worker could experience as a result of this increase in the inflation rate.
Who would be the winners?
Also, most workers are debtors to some extent. They are likely to have mortgage debt, credit care debt, student loan debt and or car debt. A higher rate of inflation means that they can repay this debt in money that is worth less than the money they borrowed.
And once again, we get to the same place - changing monetary policy at this juncture would likely have significant impacts on the distribution of income and wealth. And an unwillingness to alter this current distribution is likely another reason we would not expect the Federal Reserve to change their basic policy framework away from the current 2 percent inflation target regime.