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Laura D’Andrea Tyson:
... The single most important factor behind the projected growth in federal
spending is the growth in health care spending, driven primarily by the growth
in Medicare spending per beneficiary.
The outlook has already improved as a result of significant changes in the
delivery and payment of health care services in the Affordable Care Act. As
a result of these changes, growth in Medicare spending per enrollee is
projected to slow to 3.1 percent a year during the next decade, about the same
as the annual growth of nominal G.D.P. per capita and about two percentage
points slower than the annual growth of private insurance premiums per
Speeding up the pace of the Affordable Care Act changes along with others, such
as reducing subsidies for high-income beneficiaries and drug benefits and
introducing small co-pays on home health-care services, would mean even larger
A “structural reform” popular among Republican deficit hawks like Representative
Paul Ryan of Wisconsin to convert Medicare to a premium-support or voucher
system would be
counterproductive and would
drive up both spending per beneficiary and overall costs in the health care
The goal of a “go big” plan for deficit reduction should be to ensure the
economy’s long-term growth and competitiveness. Yet the debate over spending in
Washington is fixated on cutting entitlement spending. Very little is heard
about the need to increase federal spending in education and training, research
and development and infrastructure, three areas with proven track records in
rate of return, job creation, opportunity and growth. ...
Posted by Mark Thoma on Friday, November 30, 2012 at 06:31 PM in Economics, Fiscal Policy |
Kevin Drum explains that the surplus in the Social Security Trust fund
allowed taxes on the wealthy to be cut, and that it's only fair that taxes on
the wealthy should go back up to repay the money in the Trust Fund that was used
to finance lower taxes. If it's not paid back, then it is, plainly and simply, a
raid by the wealthy (through tax cuts) on the funds working class
households are relying upon, and are counting on -- they held their end of the
bargain and paid more into the system that it needed for decades -- for their
No, the Social Security Trust Fund Isn't a Fiction, by Kevin Drum: Charles
Krauthammer is upset that Dick Durbin says Social Security is off the table in
the fiscal cliff negotiations
because it doesn't add to the deficit...
What Krauthammer means is that as Social Security draws down its trust fund, it
sells bonds back to the Treasury. The money it gets for those bonds comes from
the general fund, which means that it does indeed have an effect on the deficit. That much is true. But the idea that the trust fund is a "fiction" is absolutely
Starting in 1983, the payroll tax was deliberately set higher than it needed to
be to cover payments to retirees. For the next 30 years, this extra money was
sent to the Treasury, and this windfall allowed income tax rates to be lower
than they otherwise would have been. During this period, people who paid payroll
taxes suffered from this arrangement, while people who paid income taxes
Now things have turned around. As the baby boomers have started to retire,
payroll taxes are less than they need to be to cover payments to retirees. To
make up this shortfall, the Treasury is paying back the money it got over the
past 30 years, and this means that income taxes need to be higher than they
otherwise would be. For the next few decades, people who pay payroll taxes will
benefit from this arrangement, while people who pay income taxes will suffer.
If payroll taxpayers and income taxpayers were the same people, none of this
would matter. The trust fund really would be a fiction. But they aren't. Payroll
taxpayers tend to be the poor and the middle class. Income taxpayers tend to be
the upper middle class and the rich. ... When wealthy
pundits like Krauthammer claim that the trust fund is a fiction, they're trying
to renege on a deal halfway through because they don't want to pay back the
loans they got.
As it happens, I think this was a dumb deal. But that doesn't matter. It's the
deal we made, and the poor and the middle class kept up their end of it for 30
years. Now it's time for the rich to keep up their end of the deal. Unless you
think that promises are just so much wastepaper, this is the farthest thing
imaginable from fiction. It's as real as taxes.
Posted by Mark Thoma on Friday, November 30, 2012 at 09:47 AM in Economics, Social Security |
The class war isn't over:
Class Wars of 2012, by Paul Krugman, Commentary, NY Times: On Election Day
... Logan International Airport in Boston was running short of parking spaces.
Not for cars — for private jets. Big donors were flooding into the city to
attend Mitt Romney’s victory party.
They were, it turned out, misinformed about political reality. But the
disappointed plutocrats weren’t wrong about who was on their side. This was very
much an election pitting the interests of the very rich against those of the
middle class and the poor.
And the Obama campaign won largely by disregarding the warnings of squeamish
“centrists” and ... stressing the class-war aspect of the confrontation. This
ensured not only that President Obama won by huge margins among lower-income
voters, but that those voters turned out in large numbers, sealing his victory.
The important thing to understand now is that while the election is over, the
class war isn’t. The same people who bet big on Mr. Romney, and lost, are now
trying to win by stealth — in the name of fiscal responsibility — the ground
they failed to gain in an open election. ...
Consider, as a prime example, the push to raise the retirement age, the age of
eligibility for Medicare, or both. This is only reasonable, we’re told — after
all, life expectancy has risen... In reality,... it would be a hugely regressive
Or take a subtler example, the insistence that any revenue increases should come
from limiting deductions rather than from higher tax rates. The key thing to
realize here is that the math just doesn’t work... So any proposal to avoid a
rate increase is, whatever its proponents may say, a proposal that we let the 1
percent off the hook and shift the burden, one way or another, to the middle
class or the poor.
The point is that the class war is still on, this time with an added dose of
deception. And this, in turn, means that you need to look very closely at any
proposals coming from the usual suspects, even — or rather especially — if the
proposal is being represented as a bipartisan, common-sense solution. ...
So keep your eyes open as the fiscal game of chicken continues. It’s an
uncomfortable but real truth that we are not all in this together; America’s
top-down class warriors lost big in the election, but now they’re trying to use
the pretense of concern about the deficit to snatch victory from the jaws of
defeat. Let’s not let them pull it off.
Posted by Mark Thoma on Friday, November 30, 2012 at 01:08 AM in Economics, Income Distribution, Politics |
Posted by Mark Thoma on Friday, November 30, 2012 at 12:06 AM in Economics, Links |
Have to teach classes in a bit, and running late, so just have time for a quick post -- this is from
Ricardo Fernholz, a professor of economics at Claremont McKenna College:
High-Frequency Trading and High Returns, The Baseline Scenario: The rise of
high-frequency trading (HFT) in the U.S. and around the world has been rapid and
well-documented in the media. According to a report by the
Bank of England, by 2010 HFT accounted for 70% of all trading volume in US
equities and 30-40% of all trading volume in European equities. This rapid rise
in volume has been accompanied by extraordinary performance among some prominent
hedge funds that use these trading techniques. A 2010 report from
Barron’s, for example, estimates that Renaissance Technology’s Medallion
hedge fund – a quantitative HFT fund – achieved a 62.8% annual compound return
in the three years prior to the report.
Despite the growing presence of HFT, little is known about how such trading
strategies work and why some appear to consistently achieve high returns. The
purpose of this post is to shed some light on these questions and discuss some
of the possible implications of the rapid spread of HFT. ...
Posted by Mark Thoma on Thursday, November 29, 2012 at 11:51 AM in Economics, Financial System, Technology |
Since Brad DeLong is such a shy, wallflower type, I'll take it upon myself to
highlight his latest column:
America’s Political Recession, by Brad DeLong, Commentary, Project Syndicate:
The odds are now about 36% that the United States will be in a recession next
year. The reason is entirely political: partisan polarization has reached levels
never before seen, threatening to send the US economy tumbling over the “fiscal
Obama broadly follows Ronald Reagan’s (second-term) security policy, George H.W.
Bush’s spending policy, Bill Clinton’s tax policy, the bipartisan Squam Lake
Group’s financial-regulatory policy, Perry’s immigration policy, John McCain’s
climate-change policy, and Mitt Romney’s health-care policy... And yet he has gotten next to no
Republicans to support their own policies. ...
There are obvious reasons for this. A large chunk of the Republican base,
including many of the party’s largest donors, believes that any Democratic
president is an illegitimate enemy of America, so that whatever such an
incumbent proposes must be wrong and thus should be thwarted. ... Moreover, ever
since Clinton’s election in 1992, those at the head of the Republican Party have
believed that creating gridlock whenever a Democrat is in the White House ... is their best path to
That was the Republicans’ calculation in 2011-2012. And November’s election did
not change the balance of power anywhere in the American government...
Now, it is possible that Republican legislators may rebel against their
leaders... It is possible that Republican leaders like Representatives John
Boehner and Eric Cantor and Senator Mitch McConnell will conclude that their
policy of obstruction has been a failure. ... But don’t count on it. ...
It seems to me that the odds are around 60% that real negotiation will not begin
until tax rates go up on January 1. And it seems to me that, if gridlock
continues into 2013, the odds are 60% that it will tip the US back into
recession. Let us hope that it will be short and shallow.
Nah, the press will do its job,
the fraud that underlies the Republican's budget and tactics, and they will
be forced to fold their hand (are you laughing yet -- that's supposed to be a
Posted by Mark Thoma on Thursday, November 29, 2012 at 09:49 AM in Economics, Politics |
Are you tired of paying too much for low-quality cable, internet, and phone
Bad Connections, by David Cay Johnston, Commentary, NY Times: Since 1974,
when the Justice Department sued to break up the Ma Bell phone monopoly,
Americans have been told that competition in telecommunications would produce
innovation, better service and lower prices.
What we’ve witnessed instead is low-quality service and prices that are higher
than a truly competitive market would bring.
After a brief fling with competition, ownership has reconcentrated into a stodgy
duopoly of Bell Twins — AT&T and Verizon. ...
The AT&T-DirectTV and Verizon-Bright House-Cox-Comcast-TimeWarner behemoths
market what are known as “quad plays”: the phone companies sell mobile services
jointly with the “triple play” of Internet, telephone and television
connections, which are often provided by supposedly competing cable and
satellite companies. And because AT&T’s and Verizon’s own land-based services
operate mostly in discrete geographic markets, each cartel rules its domain as a
The result of having such sweeping control of the communications terrain,
naturally, is that there is little incentive for either player to lower prices,
make improvements to service or significantly invest in new technologies and
infrastructure. And that, in turn, leaves American consumers with a major
disadvantage compared with their counterparts in the rest of the world. ...
The remedy ... is straightforward: bring back real competition to the telecom
industry. The Federal Communications Commission, the Justice Department and
lawmakers have long said this is their goal. But absent new rules that promote
vigorous competition among telecom companies, it simply won’t happen.
Just as canals and railroads let America grow in the 19th century, and highways
and airports did so in the 20th century, the information superhighway is vital
for the nation’s economic growth in the 21st. The nation can’t afford to leave
its future in the hands of the cartels.
Posted by Mark Thoma on Thursday, November 29, 2012 at 12:24 AM in Economics, Regulation, Web/Tech |
Posted by Mark Thoma on Thursday, November 29, 2012 at 12:06 AM in Economics, Links |
This is from a much longer Ezra Klein interview of Chrystia Freeland:
‘Romney is Wall Street’s worst bet since the bet on subprime’, by Ezra Klein:
Ezra Klein: You’ve written about the revolt of the very rich against
President Obama, and all the money they spent and time they dedicated to
defeating him. So what’s the mood in those circles now that they’ve lost?
Chrystia Freeland: There’s a great joke on Wall Street which is that the bet
on Romney is Wall Street’s worst bet since the bet on subprime. But I found
the hostility towards Obama astonishing. ... On that Tuesday, the big Romney
backers I was talking to were sure he was going to win. They were all flying
into Logan Airport for the victory party. There’s this stunned feeling of
how could we be so wrong, and a feeling of alienation.
The Romney comments to his donors,... I think they accurately reflected the
view of a lot of these money guys. It’s the continuation of this 47 percent
idea. They believe that Obama has been shoring up the entitlement society,
and if you give enough entitlements to enough people, they’ll vote for you.
EK: Here’s my question about those comments. Romney was promising the very
rich either a huge tax cut or, if you believe he would’ve paid for every
dime and dollar of his cut, protection from any tax increases. He was
promising financiers that he would roll back Dodd-Frank and Sarbanex-Oxley.
He was promising current seniors that he wouldn’t touch their benefit. How
are these not “gifts”?
CF: Let me be clear that I’m not defending any of them. But I think the way
it works — and I think Romney’s comments were very telling in this regard — ...they’re
absolutely convinced that they’re not asking for special privileges for
themselves. They’re convinced that it just so happens that their
self-interest coincides perfectly with the collective interest. That’s where
you get this idea of the “job creators”. ... If you’ve developed an ideology
that what’s good for you personally also happens to be good for everyone
else, that’s quite wonderful because there’s no moral tension. ...
EK: ... From my reporting with the White House, I think the president’s view
of the economy is that globalization is here and it’s not going away. The
economy rewards high skills more than ever. Automatic and computerization
and foreign competition are wiping out many middle class jobs, and while
some new ones are created, it’s not at all clear that enough are being
created. But in his view, he sees more redistribution as very necessary in
this context. He thinks that if the economy is going to grow but the gains
won’t be broadly shared, then it’s the government’s role to try and
redistribute some, though of course not all, or even most, of those gains.
My experience is that the very rich are open to higher taxes in the context
of a deficit deal. ... But they don’t like the idea that their money should
be redistributed simply because they have too much of it. They don’t like
the idea that, so to speak, they didn’t build all of this, and as such, they
need to give back in order to make sure it continues. ... They see it as
punishing their success.
CF: I completely agree. ...
Posted by Mark Thoma on Wednesday, November 28, 2012 at 02:59 PM in Economics, Income Distribution, Politics |
A Little Less Dovish..., by Tim Duy: In the midst of an internal debate over
policy communication, Chicago Federal Reserve President Charles Evans pulled
back on his 3 percent inflation threshold
in a speech yesterday. Arguably, as the only policymaker suggesting
guidance well above the Fed's stated 2 percent target, Evans was
the last true dove at the Fed. With Evan's falling in line with his
colleagues, it looks like the last sliver of hope that the Fed would tolerate
slightly higher inflation to accelerate the reduction of real burden has now
There is a lot of interesting material in Evan's speech, but here I focus
only on his basic outlook and the implications for policy. Regarding growth:
That said, monetary policymakers must formulate policy for today. In the
United States, forecasts by both private analysts and FOMC participants see real
GDP growth in 2012 coming in at a bit under 2 percent. Growth is expected to
move moderately higher in 2013, but only to a pace that is just somewhat above
potential. Such growth would likely generate only a small decline in the
Of course, he added earlier that this forecast is vulnerable to the possible
of an austerity bomb in 2013, but for the moment assume that issue is resolved:
Having said all that, most forecasters are predicting that the pace of growth
will pick up as we move through next year and into 2014. Underlying these
projections is an assumption that fiscal disaster will be avoided—and with this,
that some important uncertainties restraining growth should come off the table.
Also, deleveraging will run its course, and as it does, the economy’s
more-typical cyclical recovery dynamics will take over. As the FOMC indicated in
its policy moves last September, the current highly accommodative stance for
monetary policy will be kept in place for some time to come.
He then praises recent policy actions:
Tying the length of time over which our purchases will be made to economic
conditions is an important step. Because it clarifies how our policy decisions
are conditional on progress made toward our dual mandate goals, markets can be
more confident that we will provide the monetary accommodation necessary to
close the large resource gaps that currently exist; additionally, markets can be
more certain that we will not wait too long to tighten if inflation were to
become an important concern.
And then tackles a big question:
The natural question at this point is to ask: What constitutes substantial
improvement in labor markets? Personally, I think we would need to see several
things. The first would be increases in payrolls of at least 200,000 per month
for a period of around six months. We also would need to see a faster pace of
GDP growth than we have now — something noticeably above the economy’s potential
rate of growth.
From Evan's perspective, these conditions would be sufficient to end the
expansion of the balance sheet, although interest rates will remain near zero
beyond that point. When should rates rise?
Of course, we will not maintain low rates indefinitely. For some time, I have
advocated the use of specific, numerical thresholds to describe the economic
conditions that would have to occur before it might be appropriate to begin
On the employment mandate:
In the past, I have said we should hold the fed funds rate near zero at least
as long as the unemployment rate is above 7 percent and as long as inflation is
below 3 percent. I now think the 7 percent threshold is too conservative....This
logic is supported by a number of macro-model simulations I have seen, which
indicate that we can keep the funds rate near zero until the unemployment rate
hits at least 6-1/2 percent and still generate only minimal inflation risks.
So he shifts to a 6.5 percent threshold for unemployment, and later argues
that even this might be a bit conservative as his models don't foresee much
inflation pressure before 6 percent. See also Federal reserve Janet Yellen's
recent speech; Evans' view is consistent with the optimal path forecasts. On
one hand this is somewhat of a shift to the dovish side on the inflation
forecast, suggesting that inflation will not accelerate as quickly as some might
expect. What about the threshold for the rate of inflation itself?
With regard to the inflation safeguard, I have previously discussed how the 3
percent threshold is a symmetric and reasonable treatment of our 2 percent
target. This is consistent with the usual fluctuations in inflation and the
range of uncertainty over its forecasts. But I am aware that the 3 percent
threshold makes many people anxious. The simulations I mentioned earlier suggest
that setting a lower inflation safeguard is not likely to impinge too much on
the policy stimulus generated by a 6-1/2 percent unemployment rate threshold.
Indeed, we’re much more likely to reach the 6-1/2 percent unemployment threshold
before inflation begins to approach even a modest number like 2-1/2 percent.
So, given the recent policy actions and analyses I mentioned, I have
reassessed my previous 7/3 proposal. I now think a threshold of 6-1/2 percent
for the unemployment rate and an inflation safeguard of 2-1/2 percent, measured
in terms of the outlook for total PCE (Personal Consumption Expenditures Pride
Index) inflation over the next two to three years, would be appropriate.
Notice that he really doesn't have a reason to shift his threshold; he
doesn't even expect to hit the inflation threshold before hitting the employment
threshold. His reason for essentially is that the 3 percent threshold makes
people "anxious." Anxious about what? Anything that is perceived to be a
threat to the Fed's credibility.
Does this shift on Evans' part really change anything? Probably not. He was
always an outlier among Fed policymakers, with a tolerance for inflation as high
as 3 percent making him a true dove. But he was never going to get any
additional traction on that front from his colleagues. The 2 percent target is
set in stone, and it is too much to expect the Fed will tolerate any meaningful
deviations from that target. Of course, it is questionable that 3 percent is a
meaningful deviation to begin with, but that is question is almost irrelevant at
Bottom Line: By shifting his threshold on inflation, Evan's concedes to the
political realities within the Fed. There was never much support for anything
like tolerance for 3 percent inflation; for most policymakers, I suspect
anything above 2.25 percent would be considered a threat to credibility. By
falling in line with the rest of the FOMC, Evan abandons his role as a true
dove, someone willing to tolerate substantially higher inflation. He is a dove
now in the modern sense - a policymaker with a lower inflation forecast that
allows for a longer period of easier policy.
Posted by Mark Thoma on Wednesday, November 28, 2012 at 10:49 AM in Economics, Fed Watch, Monetary Policy |
I thought I'd note this column from several weeks ago for two reasons. First,
it was widely misinterpreted as supporting laws against price-gouging, but I
didn't mean to disavow the price-system. The point was that there is a lesson in
the public's reaction to price-gouging: When the public believes the
price-allocation mechanism results in unfairness, they won't support it. Market
fundamentalists, and those who support capitalism more generally, should worry
more than they do about how increasing inequality or the increasing market and
political power of those at the top will affect the public's perception of the
fairness of the capitalist system. If the belief that the system is unfair
crosses the tipping point, who knows what type of system could be adopted in its
place. Second, and more to the point, I haven't had much luck finding things to
post today, and no time to write something myself (so this is filler):
Hurricane Sandy’s Lesson on Preserving Capitalism: With long gas lines and
other shortages putting people on edge in the wake of Hurricane Sandy, the usual
post-disaster debate over the economics and ethics of
underway. However, while the question of whether it is okay, even desirable,
for businesses to raise prices after natural disasters is certainly important,
there are larger lessons that can be drawn from this debate.
Economists do not like the term “price-gouging.” They believe that price
increases are the best way to allocate scarce goods and services after a natural
disaster and, importantly, to encourage additional supply. When people can make
a large profit by supplying goods and services to a market, they will work
extraordinarily hard to meet the demand.
But if there is such an advantage to allowing the price system to work after an
event like Hurricane Sandy, why did producers often choose to stick with
pre-disaster prices? Why would they leave profits on the table by maintaining
pre-disaster prices and allocating goods through other mechanisms such as
first-come, first-serve until supplies run out? One answer is that price-gouging
after a natural disaster is illegal in many places. But this just begs the
question. Why do so many places choose to prohibit large price increases in
response to disaster induced shortages?
Most of the explanations economists have come up with rely upon the idea of
Let me add one reference to a study by Daniel Kahneman I didn't know about when I wrote this supporting the notion that perceptions of unfairness undermine support for the price-allocation system:
As far as
most economists are concerned, it would be totally reasonable for a grocery
store to raise prices the day be for a hurricane. In fact, that's what's
supposed to happen. If prices don't go up when demand increases, you wind up
with shortages. To an economist, empty shelves at grocery stores are evidence
that prices were too low.
In a famous
study, the Nobel laureate Daniel Kahneman and his co-authors asked ordinary
people lots of questions about pricing and fairness. In one question, a hardware
store raised the price of snow shovels from $15 to $20 the morning after a
The higher price sends a signal to the world that says: Send more snow
shovels! Someone who runs a hardware store an hour away might be inspired by to
put a bunch of shovels in the back of a truck and bring them to town, easing a
potential shortage and, perhaps, driving prices back down.
But, not surprisingly, eighty percent of people surveyed said raising the
price of snow shovels after a storm would be unfair. Presumably, those people
would also say it's unfair for a store to double prices on canned food the day
before a hurricane.
People feel so strongly about this that they've passed price-gouging laws in
many states, banning merchants from raising prices during hurricanes or other
Posted by Mark Thoma on Wednesday, November 28, 2012 at 10:29 AM in Economics, Regulation |
Rajiv Sethi on the "death of a prediction market":
Death of a Prediction Market: A couple of days ago Intrade
announced that it was closing
its doors to US residents in response to "legal and regulatory pressures."
American traders are required to close out their positions by December 23rd, and
withdraw all remaining funds by the 31st. Liquidity has dried up and spreads
have widened considerably since the announcement. There have even been sharp
price movements in some markets with no significant news, reflecting a skewed
geographic distribution of beliefs regarding the likelihood of certain events.
The company will survive, maybe even thrive, as it adds new contracts on
sporting events to cater to it's customers in Europe and elsewhere. But the
contracts that made it famous - the US election markets - will dwindle and
perhaps even disappear. Even a cursory glance at the Intrade forum reveals the
importance of its US customers to these markets. Individuals from all corners of
the country with views spanning the ideological spectrum, and detailed knowledge
of their own political subcultures, will no longer be able to participate. There
will be a rebirth at some point, perhaps launched by a new entrant with
regulatory approval, but for the moment there is a vacuum in a once vibrant
corner of the political landscape.
The closure was precipitated by a CFTC
alleging that the company "solicited and permitted" US persons to buy and sell
commodity options without being a registered exchange, in violation of US law.
appears that hostility to prediction markets among regulators runs deeper
than that, since an attempt by Nadex to register and offer binary options
contracts on political events was previously denied on
the grounds that "the contracts involve gaming and are contrary to the public
The CFTC did not specify why exactly such markets are contrary to the public
interest, and it's worth
the basis for such a position might be.
I can think of two reasons, neither of which are particularly compelling in this
context. First, all traders have to post margin equal to their worst-case loss,
even though in the aggregate the payouts from all bets will net to zero. This
means that cash is tied up as collateral to support speculative bets, when it
could be put to more productive uses such as the financing of investment. This
capital diversion effect. Second, even though the exchange claims to
keep this margin in segregated accounts, separate from company funds, there is
always the possibility that its deposits are not fully insured and could be lost
if the Irish banking system were to collapse. These losses would ultimately be
incurred by traders, who would then have very limited legal recourse.
These arguments are not without merit. But if one really wanted to restrain the
diversion of capital to support speculative positions, Intrade is hardly the
place to start. Vastly greater amounts of collateral are tied up in support of
speculation using interest rate and currency swaps, credit derivatives, options,
and futures contracts. It is true that such contracts can also be used to reduce
risk exposures, but so
can prediction markets. Furthermore, the volume of derivatives trading has far
exceeded levels needed to accommodate hedging demands for at least a
decade. Sheila Bair recently described synthetic
CDOs and naked CDSs as "a game of fantasy football" with unbounded stakes. In
comparison with the scale of betting in licensed exchanges and over-the-counter
swaps, Intrade's capital diversion effect is truly negligible.
The second argument, concerning the segregation and safety of funds, is more
relevant. Even if the exchange maintains a strict separation of company funds
from posted margin despite the absence of regulatory oversight, there's always
the possibility that it's
deposits in the Irish banking system are not fully secure. Sophisticated
traders are well
aware of this risk, which could be substantially mitigated (though clearly
not eliminated entirely) by licensing and regulation.
In judging the wisdom of the CFTC action, it's also worth considering the
benefits that prediction
markets provide. Attempts at
manipulation notwithstanding, it's hard to imagine a major election in the
US without the prognostications of pundits and pollsters being measured against
the markets. They have become part of the fabric of social interaction and
conversation around political events.
But from my perspective, the primary benefit of prediction markets has been
pedagogical. I've used them frequently in my financial economics course to
illustrate basic concepts such as expected return, risk, skewness, margin, short
sales, trading algorithms, and arbitrage. Intrade has been generous with its
data, allowing public access to order books, charts and spreadsheets, and this
information has found its way over the years into slides, problem sets, and
exams. All of this could have been done using other sources and methods, but the
canonical prediction market contract - a binary option on a visible and familiar
public event - is particularly well suited for these purposes.
The first time I
wrote about prediction markets on this blog was back in August 2003. Intrade
didn't exist at the time but its precursor, Tradesports, was up and running, and
the Iowa Electronic Markets had already been active for over a decade. Over the
nine years since that early post, I've used data from prediction markets to
discuss arbitrage, overreaction, manipulation, self-fulfilling
trading, and the interpretation of
order books. Many of these posts have been about broader issues that also
arise in more economically significant markets, but can be seen with great
clarity in the Intrade laboratory.
It seems to me that the energies of regulators would be better directed
elsewhere, at real and significant threats to financial stability, instead of
being targeted at a small scale exchange which has become culturally significant
and serves an educational purpose. The CFTC action just reinforces the
perception that financial sector enforcement in the United States is a random,
arbitrary process and that regulators keep on missing the wood for the trees.
Posted by Mark Thoma on Wednesday, November 28, 2012 at 09:30 AM in Economics, Regulation |
Posted by Mark Thoma on Wednesday, November 28, 2012 at 12:06 AM in Economics, Links |
Robert Reich is worried:
Will Tim Geithner Lead Us Over or Around the Fiscal Cliff?, by Robert Reich:
I’m trying to remain optimistic that the President and congressional Democrats
will hold their ground over the next month as we approach the so-called “fiscal
But leading those negotiations for the White House is outgoing Secretary of
Treasury Tim Geithner, whom Monday’s Wall Street Journal
described as a “pragmatic deal maker” because of “his long relationship with
former Treasury Secretary Robert Rubin, for whom balancing the budget was a
priority over other Democratic touchstones.” ...
Both Rubin and Geithner are hardworking and decent. But both see the world
through the eyes of Wall Street rather than Main Street. I battled Rubin for
years in the Clinton administration because of his hawkishness on the budget
deficit and his narrow Wall Street view of the world.
During his tenure as Treasury Secretary, Geithner has followed in Rubin’s path —
engineering a no-strings Wall Street bailout that didn’t require the Street to
help stranded homeowners, didn’t demand the Street agree to a resurrection of
the Glass-Steagall Act, and didn’t seek to cap the size of the biggest bank,
which in the wake of the bailout have become much bigger. In an
interview with the Journal, Geithner repeats the President’s stated
principle that tax rates must rise on the wealthy, but doesn’t rule out changes
to Social Security or Medicare. And he notes that in the president’s budget
(drawn up before the election), spending on non-defense discretionary items —
mostly programs for the poor, and investments in education and infrastructure —
are “very low as a share of the economy relative to Clinton.” If “pragmatic deal
maker,” as the Journal describes Geithner, means someone who believes any deal
with Republicans is better than no deal, and deficit reduction is more important
than job creation, we could be in for a difficult December.
Not sure if this will make you feel more confident, but a recent post on the
Treasury's blog from Jason Furman asserted that "Increasing
Taxes on Middle-Class Families Will Hurt Consumer Spending." Unfortunately,
it didn't say much about Social Security and Medicare. I am worried too.
Posted by Mark Thoma on Tuesday, November 27, 2012 at 10:44 AM in Budget Deficit, Economics, Politics, Social Insurance, Taxes |
President of the Atlanta Fed,
...A real financial stabiliy concern ... is the potential for malicious
disruptions to the payments system in the form of broadly targeted cyberattacks.
Just in the last few months, the United States has experienced an escalating
incidence of distributed denial of service attacks aimed at our largest banks.
The attacks came simultaneously or in rapid succession. They appear to have been
executed by sophisticated, well-organized hacking groups who flood bank web
servers with junk data, allowing the hackers to target certain web applications
and disrupt online services. Nearly all the perpetrators are external to the
targeted organizations, and they appear to be operating from all over the globe.
Their motives are not always clear. Some are in it for money, while others are
in it for what you might call ideological or political reasons.
Unlike other cybercrime activity, which aims to steal customer data for the
purpose of unauthorized transactions, distributed denial of service attacks do
not necessarily result in stolen data. Rather, the intent appears to be to
disable essential systems of financial institutions and cause them financial
loss and reputational damage. The intent may be mischief on a grand scale, but
also retaliation for matters not directly associated with the financial sector.
Banks have been defending themselves against cyberattacks for a while, but the
recent attacks involved unprecedented volumes of traffic—up to 20 times more
than in previous attacks. Banks and other participants in the payments system
will need to reevaluate defense strategies. The increasing incidence and
heightened magnitude of attacks suggests to me the need to update our thinking.
What was previously classified as an unlikely but very damaging event affecting
one or a few institutions should now probably be thought of as a persistent
threat with potential systemic implications.
I'm drawing your attention to this area of risk... But I feel the need to be
measured about the potential for severe financial instability from this source.
In my judgment, cyberattacks on payments systems are not likely to have as deep
or long lasting an impact on financial system stability as fiscal crises or bank
runs, for example. Nonetheless, there is real justification for a call to
Even broad adoption of preventive measures may not thwart all attacks.
Collaborative efforts should be oriented to building industry resilience.
Resilience measures would be similar to those put in place in the banking
industry to maintain operations in a natural disaster—multiple backup sites and
redundant computer systems, for example.
Posted by Mark Thoma on Tuesday, November 27, 2012 at 10:16 AM in Economics, Fed Speeches, Regulation |
Fatih Birol, chief economist of the International Energy Agency and chair of
the World Economic Forum’s Energy Advisory Board,
discusses his projection that "the United States will become the world’s
leading oil producer within a few decades":
Q. The new report has attracted great press attention for its
projection that the United States may soon become the world’s leading oil
producer. Can you discuss what you see as the greatest implications of this
change, in terms of energy security, geopolitics and carbon emissions?
A. The most striking implications concern U.S. oil imports and
international oil-trade patterns. The upward trend in production is partly
responsible for a sharp fall in U.S. oil imports. By 2035, we project oil
imports into the United States of only 3.4 million barrels a day, which implies
a substantial (60 percent) reduction in oil-import bills. North America as a
whole actually becomes a net oil exporter. In international oil markets, this
accelerates the shift in trade patterns toward Asia, raising the geostrategic
importance of trade routes between Middle East producers and Asian consumers.
But what should attract equal attention … is the essential role played by energy
efficiency. I believe that energy efficiency has been an epic failure by
policymakers in almost all countries. Its potential is huge but much of it
remains untapped. Compared with today, savings from more rigorous vehicle
fuel-economy standards could prompt a 30 percent fall in U.S. oil demand by
Posted by Mark Thoma on Tuesday, November 27, 2012 at 10:16 AM in Economics, Oil |
Meanwhile, in Japan..., by Tim Duy: Back in September, I
What I expect to happen is this: The Bank of Japan will be forced into
outright monetization at some point; a soft default in the form of higher
inflation will occur. And dramatically higher inflation, I fear. Japan has not
had inflation for two decades. I suspect they will experience all that pent-up
inflation in the scope of a couple of years.
Sure enough, the battle begins. Almost lost in the holiday weekend, from
Japan's main opposition Liberal Democratic Party (LDP) said on Wednesday that
on its return to power it would set a 2 percent inflation target with an eye to
revising the law governing the Bank of Japan so as to boost cooperation between
the government and the central bank...
...In its campaign platform unveiled on Wednesday, the LDP called for bold
monetary easing through cooperation between the government and the central bank
on debt management, but it made no mention of Abe's calls for the BOJ to buy
debt to finance infrastructure projects.
The response from the Bank of Japan
But BOJ Governor Masaaki Shirakawa dismissed many of Abe's proposals,
including the possible revision of the Bank of Japan law, a step critics say is
aimed at clipping the central bank's independence and forcing it to print money
to finance public debt that is already double the size of Japan's economy.
"Central bank independence is a system created upon bitter lessons learned
from the long economic and financial history in Japan and overseas countries,"
Shirakawa told a news conference....
...Shirakawa was adamant the central bank would not directly underwrite
government debt because bond yields would spike and hurt the economy.
"No advanced country has adopted such a policy," he said.
Shirakawa is correct. Modern central banks may have lost some control over
inflation at times, but I don't think any has engaged in outright monetization
of government debt. Yet despite Shirakawa's insistence to the contrary, I still
think that is exactly where Japan is headed. More central bank history in the
Posted by Mark Thoma on Tuesday, November 27, 2012 at 12:15 AM in Economics, Fed Watch, Monetary Policy |
Posted by Mark Thoma on Tuesday, November 27, 2012 at 12:06 AM in Economics, Links |
For infrastructure spending, in particular spending on roads and highways, Sylvain Leduc
and Daniel Wilson
"find that the multiplier is at least two":
Highway Grants: Roads to Prosperity?, by Sylvain Leduc
and Daniel Wilson, FRBSF Economic Letter: Increasing government spending during periods of economic weakness to offset
slower private-sector spending has long been an important policy tool. In
particular, during the recent recession and slow recovery, federal officials
put in place fiscal measures, including increased government spending, to
boost economic growth and lower unemployment. One form of government
spending that has received a lot of attention is public investment in
infrastructure projects. The 2009 American Recovery and Reinvestment Act
(ARRA) allocated $40 billion to the Department of Transportation for
spending on the nation’s roads and other public infrastructure. Such public
infrastructure investment harks back to the Great Depression, when programs
such as the Works Progress Administration and the Tennessee Valley Authority
One criticism of public infrastructure programs is that they take a long
time to put in place and therefore are unlikely to be effective quickly
enough to alleviate economic downturns. The fact is, though, that
surprisingly little empirical information is available about the effect of
public infrastructure investment on economic activity over the short and
This Economic Letter examines new research (Leduc and Wilson,
forthcoming) on the dynamic effects of public investment in roads and
highways on gross state product (GSP), the total economic output of a state.
This research focuses on investment in roads and highways in part because it
is the largest component of public infrastructure in the United States.
Moreover, the procedures by which federal highway grants are distributed to
states help us identify more precisely how transportation spending affects
We find that unanticipated increases in highway spending have positive but
temporary effects on GSP, both in the short and medium run. The short-run
effect is consistent with a traditional Keynesian channel in which output
increases because of a rise in aggregate demand, combined with
slow-to-adjust prices. In contrast, the positive response of GSP over the
medium run is in line with a supply-side effect due to an increase in the
economy’s productive capacity.
We also assess how much bang each additional buck of highway spending
creates by calculating the multiplier, that is, the magnitude of the effect
of each dollar of infrastructure spending on economic activity. We find that
the multiplier is at least two. In other words, for each dollar of federal
highway grants received by a state, that state’s GSP rises by at least two
The Federal-Aid Highway Program
The federal government’s involvement in financing road construction goes
back to the early part of the past century. Although initially small, this
involvement became much more significant in 1956 with the enactment of the
Federal-Aid Highway Act, which authorized almost $34 billion in 1956 dollars
over 13 years for the construction of the Interstate Highway System. At the
time, The New York Times noted that “the highway program will constitute a
growing and ever-more-important share of the gross national product …
(affecting) every phase of economic life in this country.”
The Interstate Highway System was completed in 1992. Since then, the federal
government has continued to provide funding to states mostly through a
series of grant programs collectively known as the Federal-Aid Highway
Program (FAHP). The FAHP helps fund construction, maintenance, and other
improvements on a wide range of public roads beyond the interstate highways.
Local roads are often considered federal-aid highways and are eligible for
federal funding, depending on how important the federal government judges
them to be.
Because road projects typically take a long time to complete, advance
knowledge of future funding sources can help smooth planning. Congress
designs transportation legislation to minimize uncertainty. First, it enacts
legislation that typically extends five to six years. Second, it apportions
funds to states according to set formulas. Thus, a typical highway bill will
specify an annual national amount for each highway program over the life of
the legislation and spell out the formula by which that program’s national
amount will be apportioned to states. Importantly, these formulas are based
on road-related metrics measured several years earlier. That means that
changes to current and future highway funding are not driven by current
Highway bills generally include information that helps states forecast
relatively accurately the amount of grants they are likely to receive while
the legislation is in effect. For the past two highway bills, the Federal
Highway Administration (FHWA) published forecasts of each state’s annual
future grants under each program.
Estimating the effects of road spending
We conduct a statistical analysis to estimate the effects of federal highway
spending on state economic activity. Specifically, we construct a variable
that captures revisions to forecasts of current and future highway grants to
the states, based on information from highway bills since 1991. We closely
follow, but also expand on, the FHWA’s methodology for forecasting each
state’s future grants.
These forecast revisions serve as proxies for changes in expectations about
current and future highway spending in a given state. In economic terms,
these changes can be regarded as shocks, that is, unanticipated events that
affect economic activity.
We study forecast revisions rather than changes in actual highway spending
for two reasons. First, actual spending may both affect and be affected by
current economic conditions, making it difficult to sort out the true causal
effects of the spending.
Second, changes in actual spending are most likely to be anticipated years
in advance. For that reason, some of their economic effects may be felt
before the spending changes actually take place. For instance, a state
government and other important players, such as construction and engineering
firms, may decide to spend more today if they expect the state to receive
more highway grants in the future. In this way, changes in expectations
regarding future grants to the states may be important for current economic
activity. Failing to account for changes in expectations may lead to
incorrect conclusions about how government spending affects economic
activity (see Ramey 2011a).
Average response of state GDPs to unexpected grants
In our analysis of how changes in forecasts of highway grants to the states
affect state GSP, we control for lags in state GSP, lags in receipt of
highway grants, average state GSP levels, and national movements of gross
domestic product (GDP) over the sample period from 1990 to 2010.
In Figure 1, the solid line shows the average percentage change in a state’s
GSP following a 1% increase in forecasted future highway grants to the
states. The shaded area around the line represents a 90% probability range.
The horizontal axis indicates the number of years after the unanticipated
change in forecasted highway grants to the states. The figure shows that
changes in the forecasts have a significant short-term effect on state
output in the first one to two years. This effect fades, but then increases
sharply six to eight years after the forecast revisions, before declining
again. This pattern holds up well with alternative estimation techniques,
the inclusion of different control variables, and with different data
This pattern is consistent with New Keynesian theoretical models in which
public infrastructure, such as roads, are used by the private sector in the
production of goods and services and take time to be built (see Leduc and
Wilson, forthcoming). In this framework, the initial impact is due to a
traditional Keynesian effect of an increase in aggregate demand. The
medium-term effect on output arises once the public infrastructure is built,
thus increasing the economy’s productive capacity.
The highway grant multiplier
One concept often used to assess the effectiveness of government spending is
the multiplier. The fiscal multiplier represents the dollar change in
economic output for each additional dollar of government spending. Thus, a
multiplier of two implies that, when government spending increases by one
dollar, output rises by two dollars.
Based on the results shown in Figure 1, we find that multipliers for federal
highway spending are large. On initial impact, the multipliers range from
1.5 to 3, depending on the method for calculating the multiplier. In the
medium run, the multipliers can be as high as eight. Over a 10-year horizon,
our results imply an average highway grants multiplier of about two.
Our estimated multipliers are noticeably larger than those typically found
in the literature on the effects of government spending. For instance, in a
recent survey, Valerie Ramey reports multipliers between 0.5 and 1.5 (see
Ramey 2011b). One possible reason for the wide differences is that we
consider a very different form of government spending. Most of the
literature concentrates on the multiplier effect of military spending. But
such spending is arguably nonproductive in an economic sense. By contrast,
government investment in infrastructure, such as roads, can raise the
economy’s productive capacity. In that respect, it can have a higher fiscal
multiplier. Another difference is that we concentrate on the multiplier
effect on GSP, while the literature typically studies the effect on U.S. GDP
as a whole.
The American Recovery and Reinvestment Act
The deep recession of 2007–09 led to the enactment of ARRA, which included a
large one-time increase of $27.5 billion in federal highway grants to
states. ARRA was designed to have strong short-term effects. In general,
infrastructure projects are not viewed as effective forms of short-term
stimulus because of the long lags between authorization, planning, and
implementation. By the time the projects get under way, a recession may be
over. The extra spending could ultimately end up feeding an already booming
economy. To address this problem, ARRA stipulated that state governments had
to fully use their share of federal highway grants by March 2010.
It is conceivable that highway spending during a major downturn, when
productive capacity is underutilized, may affect output in a substantially
different way than spending during more normal times. To test this, we
examined whether unanticipated changes in highway spending in 2009 and 2010
had a different effect on GSP than in other years in our sample. We found
that spending in 2009 and 2010 was roughly four times as large as the peak
response shown in Figure 1. This suggests that highway spending can be
effective during periods of very high economic slack, particularly when
spending is structured to reduce the usual implementation lags.
Surprise increases in federal investment in roads and highways appear to
have had positive effects on gross state product in both the short and
medium run. The short-run impact is akin to the traditional Keynesian effect
that stems from an increase in aggregate demand. By contrast, the positive
impact on GSP in the medium run is probably due to supply-side effects that
boost the economy’s productive capacity. Infrastructure investment gets a
good bang for the buck in the sense that fiscal multipliers—the dollar of
increased output for each dollar of spending—are large.
Leduc, Sylvain, and Daniel J. Wilson. Forthcoming.
“Roads to Prosperity or
Bridges to Nowhere? Theory and Evidence on the Impact of Public
Infrastructure Investment.” NBER Macroeconomics Annual 2012.
Ramey, Valerie A. 2011a.
“Identifying Government Spending Shocks: It’s all in the Timing.”
Quarterly Journal of Economics 126(1), pp. 1–50.
Ramey, Valerie A. 2011b.
“Can Government Purchases Stimulate the Economy?” Journal of
Economic Literature 49(3), pp. 673–685.
Posted by Mark Thoma on Monday, November 26, 2012 at 03:47 PM in Economics, Fiscal Policy |
Here's a graph of spending on discretionary services from Jonathan McCarthy
of the NY Fed:
Household Services Expenditures: An Update, by Jonathan McCarthy, Liberty
This post updates and extends
my July 2011 blog piece on household discretionary services expenditures. I
examine the most recent data to see what they reveal about the depth of decline
in expenditures in the last recession and the extent of the recovery, and find
that the expenditures appear to be further below the peak identified earlier. I
then compare the pace of recovery for discretionary and nondiscretionary
services in this expansion with that of previous expansions, finding that the
pace in both cases is well below that of previous cycles. In summary, household
spending continues to be constrained by a combination of credit conditions and
weak income expectations. ...
The author also looks at the pace of the recovery of spending on both
discretionary and non-discretionary services, and finds both to be subpar (see
the last two graphs). The conclusion:
The pattern of a similarly sluggish pace of recovery for discretionary
and nondiscretionary services expenditures suggests that the fundamentals for
consumer spending remain soft. In particular, it appears that households—more
than three years after the end of the recession—remain wary about their future
income growth and employment prospects even though consumer confidence measures
have improved in recent months. In addition, households may still see the need
to repair their balance sheets from the damage incurred during the recession,
especially if they expect that increases in asset prices will be subdued at best
and that credit will continue to be constrained. Consequently, a positive
resolution of these issues is likely necessary before a stronger services and
overall consumer spending recovery can be sustained.
If households had gotten as much help with their balance sheet problems as banks got, the recovery would be a lot further along.
Posted by Mark Thoma on Monday, November 26, 2012 at 11:34 AM in Economics |
Jeff Sachs says "polluters must pay":
Polluters Must Pay: When BP and its drilling partners caused the Deepwater
Horizon oil spill in the Gulf of Mexico in 2010, the United States government
demanded that BP finance the cleanup, compensate those who suffered damages, and
pay criminal penalties for the violations that led to the disaster. BP has
already committed more than $20 billion in remediation and penalties. Based on a
settlement last week, BP will now pay the largest criminal penalty in US history
The same standards for environmental cleanup need to be applied to global
companies operating in poorer countries, where their power has typically been so
great relative to that of governments that many act with impunity, wreaking
havoc on the environment with little or no accountability. As we enter a new era
of sustainable development, impunity must turn to responsibility. Polluters must
pay, whether in rich or poor countries. Major companies need to accept
responsibility for their actions. ...
I can't see the companies doing this voluntarily.
Posted by Mark Thoma on Monday, November 26, 2012 at 11:34 AM in Economics, Environment, Politics, Regulation |
Stephen Williamson notes an interview of Robert Lucas:
SED Newsletter: Lucas Interview: The
November 2012 SED
Newsletter has ... an interview with Robert Lucas, which is a gem. Some
ED: If the economy is currently in an unusual state, do micro-foundations still
have a role to play?
RL: "Micro-foundations"? We know we can write down internally consistent
equilibrium models where people have risk aversion parameters of 200 or where a
20% decrease in the monetary base results in a 20% decline in all prices and has
no other effects. The "foundations" of these models don't guarantee empirical
success or policy usefulness.
What is important---and this is straight out of Kydland and Prescott---is that
if a model is formulated so that its parameters are economically-interpretable
they will have implications for many different data sets. An aggregate theory of
consumption and income movements over time should be consistent with
cross-section and panel evidence (Friedman and Modigliani). An estimate of risk
aversion should fit the wide variety of situations involving uncertainty that we
can observe (Mehra and Prescott). Estimates of labor supply should be consistent
aggregate employment movements over time as well as cross-section, panel, and
lifecycle evidence (Rogerson). This kind of cross-validation (or invalidation!)
is only possible with models that have clear underlying economics:
micro-foundations, if you like.
This is bread-and-butter stuff in the hard sciences. You try to estimate a given
parameter in as many ways as you can, consistent with the same theory. If you
can reduce a 3 orders of magnitude discrepancy to 1 order of magnitude you are
making progress. Real science is hard work and you take what you can get.
"Unusual state"? Is that what we call it when our favorite models don't deliver
what we had hoped? I would call that our usual state.
Posted by Mark Thoma on Monday, November 26, 2012 at 10:37 AM in Economics, Macroeconomics, Methodology |
The deficit scolds have been wrong again and again:
Fighting Fiscal Phantoms, by Paul Krugman, Commentary, NY Times: These are
difficult times for the deficit scolds who have dominated policy discussion for
almost three years. One could almost feel sorry for them, if it weren’t for
their role in diverting attention from the ongoing problem of inadequate
recovery, and thereby helping to perpetuate catastrophically high unemployment.
What has changed? For one thing, the crisis they predicted keeps not happening.
Far from fleeing U.S. debt, investors have continued to pile in, driving
interest rates to historical lows. Beyond that, suddenly the clear and
present danger to the American economy isn’t that we’ll fail to reduce the
deficit enough; it is, instead, that we’ll reduce the deficit too much. ...
Given these realities, the deficit-scold movement has lost some of its clout.
... But the deficit scolds aren’t giving up. Now yet another organization,
Fix the Debt, is
campaigning for cuts to Social Security and Medicare, even while making lower
tax rates a “core principle.” That last part makes no sense in terms of the
group’s ostensible mission, but makes perfect sense if you look at the array of
big corporations, from
Goldman Sachs to the UnitedHealth Group, that are involved in the effort and
would benefit from tax cuts. Hey, sacrifice is for the little people.
So should we take this latest push seriously? No... As far as I can tell, every
example supposedly illustrating the dangers of debt involves either a country
that, like Greece today, lacked its own currency, or a country that, like Asian
economies in the 1990s, had large debts in foreign currencies. Countries with
large debts in their own currency, like
France after World War I, have sometimes experienced big loss-of-confidence
drops in the value of their currency — but nothing like the debt-induced
recession we’re being told to fear.
So let’s step back for a minute, and consider what’s going on here. For years,
deficit scolds have held Washington in thrall with warnings of an imminent debt
crisis, even though investors, who continue to buy U.S. bonds, clearly believe
that such a crisis won’t happen; economic analysis says that such a crisis can’t
happen; and the historical record shows no examples bearing any resemblance to
our current situation in which such a crisis actually did happen.
If you ask me, it’s time for Washington to stop worrying about this phantom
menace — and to stop listening to the people who have been peddling this scare
story in an attempt to get their way.
Posted by Mark Thoma on Monday, November 26, 2012 at 12:24 AM in Budget Deficit, Economics, Politics |
Posted by Mark Thoma on Monday, November 26, 2012 at 12:06 AM in Economics, Links |
I agree with Gary Gorton:
Banking must not be left in the shadows, by Gary Gorton, Commentary, Financial
Times: ... Addressing the details of the recent financial crisis leaves open
the larger question of how it could have happened in the first place. ... One of
the findings of the Financial Stability Board report is that the global shadow
banking system grew to $62tn in 2007, just before the crisis. Yet we are only
now measuring the shadow banking system. ...
Measurement is the root of science. Our measurement systems, national income
accounting, regulatory filings and accounting systems are useful but limited.
... Now we need to build a national risk accounting system. The financial crisis
occurred because the financial system has changed in very significant ways. The
measurement system needs to change in equally significant ways. The efforts made
to date focus mostly on “better data collection” or “better use of existing
data” – phrases that, at best, suggest feeble efforts. A new measurement system
is potentially forward-looking in detecting possible risks.
Another problem is conceptual. Why weren’t we looking for the possibility of
bank runs before the crisis? The answer is that we did not believe a bank run
could happen in a developed economy. ... Why did we think that? For no good
reason. But, when an economic phenomenon occurs over and over again, it suggests
something fundamental... Another law, we now know, is that privately created
bank money is subject to runs in the absence of government regulation.
I'll just add the periodic reminder that we do not yet have the regulation in place that is needed to address the problem of bank runs of "privately created
bank money." Gary Gorton is skeptical that we can ever solve this problem, that's one of the pointsof th ecolumn, but if that's the case then we should be doing all we can to ensure that the consequences of a shadow bank run are minimized, and there is much more we can do along these lines.
Posted by Mark Thoma on Sunday, November 25, 2012 at 12:37 PM in Economics, Financial System, Regulation |
This got more attention than I expected on Twitter, Facebook, etc., so thought I'd highlight
Still think you can beat the market?, by Tim Harford: One of the most
maligned ideas in economics is the efficient market hypothesis... The EMH has
various forms, but in brief its message is very simple: an individual investor
cannot reliably outperform financial markets. The reasoning is equally simple...
Anything that could reasonably be anticipated already has been anticipated, and
so markets instead respond only to genuinely unexpected news.
But the EMH has a problem: researchers keep discovering predictable patterns in
the data... That is a minor embarrassment for the EMH; and it becomes a major
one if the anomalies persist after they have been discovered. Yet this seems
A new research paper by David McLean and Jeffrey Pontiff explicitly examines the
idea that academic research into anomalies is a self-denying endeavor. They find
some evidence of spurious patterns... But what is really striking is that after
an anomaly has been published, it quickly shrinks – although it does not
The anomalies are most likely to persist when they apply to small, illiquid
markets – as one might expect, because there it is harder to profit from the
The efficient markets hypothesis is surely false. What is striking is that it is
very close to being true. For the Warren Buffetts of the world, “almost true” is
not true at all. For the rest of us, beating the market remains an elusive
Posted by Mark Thoma on Sunday, November 25, 2012 at 11:08 AM in Economics |
Because of the way the Social Security program is funded -- through a payroll
tax on workers along with an employer contribution -- many people believe there
is an account for them at some government agency holding those contributions, or
at least giving them credit for them, and that they will be able to collect
their contributions when they retire. It's their money, collected from them
monthly, and no matter their income level they have a right to get that money
back when they retire. Try telling them that they don't. Even those people who
understand that if their income is high enough they may not receive payments
equal to all they put in get something back -- it's there for them no matter
what -- and this increases support for the program.
But if we change the funding so that payments for Social Security come out of the
general fund -- the money the government collects through taxes for all purposes
-- and impose means testing (i.e. phase out the payments once income is high
enough), the link between contributions and benefits would be broken and I fear
support for the program would be broken as well. It would become another welfare
program, and attacked. When programs are supported through the general fund there is competition for funding,
there is never enough money to go around, and it wouldn't be long before the
people in power, or with lots of influence over those in power (who don't really
need Social Security in most cases) would argue that the money is best used
I am far from the first person to make this point:
Ross Douthat Argues that Social Security Would be Easier to Cut If It Were
Changed from a Social Insurance Program to a Welfare Program, by Dean Baker:
argues convincingly that if we eliminated the link between contributions and
benefits it would be much easier politically to cut Social Security. Of course
he thinks ending the link would be a good idea for that reason, but his logic is
certainly on the mark, people will more strongly protect benefits that they feel
they have earned. ...
The payroll tax certainly can cover the program's expenses. In fact, had it not
been for the upward redistribution of income over the last three decades, which
nearly doubled the share of wage income going over the cap on taxable income,
the projected 75-year shortfall would be about half of its current level.
Even with the current projected shortfall, if ordinary workers shared in
projected productivity growth over the next three decades, a tax increase equal
to 6 percent of their wage growth over this period would be sufficient to make
the program fully solvent. The problem is clearly the policies that led to the
upward redistribution of income..., not Social Security.
It is worth pointing out that when Douthat proposes "means-testing for wealthier
beneficiaries," his notion of wealthy means school teachers and firefighters,
not Bill Gates and Mitt Romney. ...
Peggy Noonan said today that Republicans will accept tax increases if there
is significant entitlement reform. Assuming she can be believed (a rather heroic
assumption), and that she speaks for a significant portion of the Republican
Party in saying this (which is probably true, so I'm a bit less embarrassed
about quoting her), it's clear that Republicans are going to demand cuts to
programs like Social Security as a condition of raising taxes.
Democrats need to remember who won the election, and that despite their act
to the contrary, the Republicans are not the ones calling the shots at this
point. Democrats have considerable leverage, and they need to use it to protect
programs their core constituency values highly. Social Security is at the top of
Posted by Mark Thoma on Sunday, November 25, 2012 at 09:43 AM in Economics, Politics, Social Insurance, Social Security |
Posted by Mark Thoma on Sunday, November 25, 2012 at 12:06 AM in Economics, Links |
Stop The Holiday Shopping Media Circus, by Tim Duy: I feel as if every
December I need to mentally prepare myself for the onslaught of inane media
coverage of the holiday shopping season. This year, however, we seem to have a
few more voices of reason and common sense. Barry Ritholtz, a long-time veteran
of the Black Friday Media Wars,
sees signs of hope:
Over the years, I have been rather annoyed (perhaps too much) at the annual
foolishness over Black Friday forecasts. Each year, we hear breathless
predictions of ridiculous increases in consumer spending — holiday shopping
rises 16% this season! — which turn out to be wildly over-optimistic, and are
never confirmed by the actual data....
....This year, the idea seems to have spread into the mainstream: Lots of
coverage about it, with a few choice quotes from you know who tossed in for good
Ritholtz provides a host of links on the subject, but a recent entrant is
missing. Neil Irwin at the Washington Post delivers
the truth about Black Friday:
Black Friday is here, and if you happen to derive pleasure from streaming
around big box stores or mega malls as part of a teeming horde, well, who am I
to judge another person’s sources of enjoyment.
Let’s just not pretend that it means anything...
...sales over Thanksgiving weekend tell us virtually nothing about retail
sales for the full holiday season—let alone anything meaningful about the
economy as a whole.
So if it is a meaningless event from an economic perspective, what explains
the media obsession?
For the media, it is a ready-made story. It takes place at a time that there
is little other news, and it is known in advance, so editors and TV news
directors can plan in advance for coverage. And there’s no doubt that video of
people stampeding through the doors of a Wal-Mart in hot pursuit of a new Wii
makes for great television. That is even putting aside more cynical
possibilities, such as that media depend on retail advertising and thus have a
vested interest in creating a sense of hype and anticipation around an orgy of
Nothing more than another media manufactured trend. Bookmark the Irwin piece
and refer back to it each morning before you get sucked into the inevitable
Bloomberg stories detailing the ups and downs of the holiday season. And
remember that everyone will be looking for a quick sound bite to leverage off
the holiday mania. Sarah Kliff includes
one such bite in a piece on the latest Reuters/Michigan Consumer Sentiment
...the latest round of economic indicators suggest that economic gloom is
finally starting to set in with the general public, and the austerity crisis may
have something to do with it. The Reuters/University of Michigan Consumer
Sentiment Index fell 2.2 points from the preliminary reading early in November
to the final reading after the election...They’re still more optimistic about
the current state of the economy, but consumers have become more pessimistic
about what’s ahead—a change that IHS Global Insight chalks up to “increased
awareness by many Americans of the fiscal cliff.”
“If the political rhetoric and finger pointing reaches a fever pitch similar
to that of the debt ceiling crisis in the summer of 2011 then consumer
confidence is likely to take a very serious hit, and this holiday season will
not be very cheerful,” the IHS analysis concludes.
Aside from the pointlessness of attempting to gain deep understanding about
the economy from a minor blip in the confidence numbers, before you start
huddling in the corner for fear of imminent economic collapse, please refer back
to last summer's dive in
While the budget talks did undermine confidence last summer, the impact on
spending was essentially nil. I doubt very much that US households will focus
much on the fiscal cliff until the new year, choosing instead to focus on
holiday parties, egg nog, and gift giving. And if they do give some thought to
the cliff, they won't change their spending measurably; they have already set
their budgets for the year. That will only happen if going over the fiscal cliff
undermines the job market, something that would not be evident until much deeper
into 2013. For now, consumer sentiment is only catching back up to where we
would expect it to be given the pace of spending. Nothing more, nothing less.
For economic trends more relevant to the path of spending, see Neil Irwin's
reasons to be thankful this season.
Bottom Line: Black Friday hype - just say no.
Posted by Mark Thoma on Saturday, November 24, 2012 at 12:30 PM in Economics, Fed Watch, Monetary Policy |
Found this interview of Reinhart and Rogoff via Barry Ritholtz (I had to search the title in Google to get
past the paywall):
Top Culprit in the Financial Crisis: Human Nature, by Lawrence Strauss: ...
What are your thoughts about the steps taken to foster fiscal and monetary
Reinhart: We can always go back and figure out a way in which
the fiscal and monetary policy could have been made sharper, to do more. But the
thrust in a deep financial crisis, when you throw in both monetary and fiscal
stimulus, is to come up with something that helps raise the floor. That's why
the decline wasn't 10% or 12%. However, one area where policy really has left a
bit to be desired is that both in the U.S. and in Europe, we have embraced
forbearance. Delaying debt write-downs and delaying marking to market is not
particularly conducive to speeding up deleveraging and recovery. Write-downs are
not easy. On the whole, write-offs have been very sluggish.
Rogoff: ... Look at Europe. A lot of policies are directed at
keeping European banks afloat, and it is crippling the credit system. You could
have said the same about the U.S., where a lot of policies are about
recapitalizing the financial system. The policy makers were very, very cautious
about breaking eggs. The thinking was, "We just have got to hold out for a year,
and it is going to be fine." ...
Is there a regulatory framework that would prevent severe financial crises?
Reinhart: Of course there is. But can we get there?
Rogoff: And stay there?
Reinhart: That's the question. Getting there is one thing,
staying there is a different matter. And that's where the memory, or the
dissolution of memory, kicks in. This comes out very clearly in our chapter in
the book about banking crises. Devastated by what happened in the 1930s, the
architects of the Bretton Woods System at the end of World War II, including
John Maynard Keynes, were very leery of financial markets. This was an era of
financial repression. Trade boomed. Not trade in finance, but trade in goods and
services. And this very tight system, with all its distortions and problems,
still delivered decade after decade of no systemic crisis. Between 1945 and
1980, it was an unusually quiet period. But then, by the late-1990s, the
regulations seemed passé. The financial system found ways of circumventing
regulation. It was outmoded. It was discarded, and we started anew.
Rogoff: It's important to channel some financing into safer
instruments. If banks were to finance themselves like normal firms by raising a
significant share of their lendable capital through issuing equity or retained
earnings, we would have much, much safer financial system. So that's a very
simple change. ...
Reinhart: You go through history and, in good times, the
tendency is to liberalize. Then a crisis happens, and you retrench. But the
retrenchment lasts only as long as your memory does, and memory is not that
great. Not the memory of the policy makers and not the memory of the markets. So
as you start putting time in between where you are now and your last crisis,
complacency sets in, and you begin to be more cavalier about what your
indicators or warning signals are showing. That's the essence of the
this-time-is-different syndrome. The debt ratios are X, but we really don't have
to worry about that; the price-earnings ratios are Y, but that's not a concern.
And so, given that this is so grounded in human nature, I'm extremely skeptical
that we will overcome financial crises in any definitive way. We may have longer
stretches [without a major crisis], as we did after World War II during the era
of financial repression, which grew out of the crisis of the early 1930s. Back
then, you had a lot more regulation and clamps on risk-taking, both domestically
and cross-border. But then we outgrew it. It was passé. Who needed Glass-Steagall?
I mostly agree with what they say in the interview, but they are still too
hawkish on short-run fiscal policy for my taste. I believe their work and
statements in interviews such as this helped to drive the harmful austerity
movement in Europe and that should at least bring caution. Reinhart's
argument was that yes, immediate austerity makes things worse. But the
failure to invoke immediate austerity brings about even bigger problems down the
road, so big that the pain now is worth it. She has backed off a bit relative
to where she was a few years ago, but as the following quote shows Reinhart
will only say "the idea of withdrawing stimulus in what is still a frail
environment is not an easy one to tackle" -- notice that she doesn't say it
is the wrong policy for a country line the U.S.:
this is not the time to be an inflation hawk. I would rather see the margin of
error favor easing too much, rather than too little, for many reasons. The
frailty of the recovery is still an issue. The amount of debt that is still out
there for households, the financial industry, and the government is still large.
The fiscal side is more complicated, because the idea of withdrawing stimulus in
what is still a frail environment is not an easy one to tackle. However, over
the longer haul, a comprehensive, credible fiscal consolidation is very much
needed, because as much as we allude to the level of public debt, the level of
private debt, external debt, and so on are even higher. And we also have a lot
of unfunded liabilities in our pension scheme, a long-term issue that needs
The last statement is annoying. It's health care costs, not unfunded pension
liabilities that is the problem for the long-run federal budget. Maybe she has
unfunded state and local pension liabilities in mind as well, don't know, but a
bit more care when making these kinds of statements would be helpful since this
will be interpreted by most as a call for big cuts in Social Security. It
was enough to aid and abet the failed austerity movement, do they want to
similarly aid and abet the dismantling of Social Security with careless
statements such as this?
Posted by Mark Thoma on Saturday, November 24, 2012 at 11:40 AM
Posted by Mark Thoma on Saturday, November 24, 2012 at 12:06 AM in Economics, Links |
Why We Can't Take Inflation Hawks Seriously. by Tim Duy: Peter Coy at Bloomberg reports on the Shadow Open Market Committee. Not surprisingly, the SOMC fears an outbreak of inflation is just around the corner.
Conservative economists are paying attention to the man behind the curtain and not liking what they see. At a meeting in a Manhattan hotel on Nov. 20, the so-called Shadow Open Market Committee criticized Federal Reserve Chairman Ben Bernanke for an ultra-easy monetary policy that will, in their opinion, lead ultimately to dangerously higher inflation.
It is almost comical that those who profess to be experts on monetary policy appear to almost never listen to what Federal Reserve officials say. Case in point:
Marvin Goodfriend, an economist at Carnegie Mellon University, said the Federal Reserve “appears to be walking away” from a commitment it made last January to keep the inflation rate at or near 2 percent. In September, when it announced a new round of bond buying to bring down unemployment, the Fed made no mention of the 2 percent target, merely saying it would pursue its growth target “in a context of price stability.”
Made no mention of the 2 percent target? Really? Let's go to the tape:
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.
I think they were pretty clear about the 2 percent target, which is the Fed's definition of price stability. If Goodfriend can't remember this, he should bookmark the appropriate page on the Board's website:
The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. 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.
The only way this isn't clear is if you are deliberately ignoring what the Fed is saying. The SOMC also fears any policy that allows inflation to drift even temporarily above 2 percent:
Jeffrey Lacker, the hawkish president of the Federal Reserve Bank of Richmond, was the Shadow Open Market Committee’s invited keynote speaker. He shared the committee members’ concerns about letting inflation drift much above the 2 percent target in the name of growth, even for a short while.
“At the very least, the precedent set by an opportunistic attempt to raise inflation temporarily is likely to cloud our credibility for decades to come,” Lacker said.
First, actual inflation outcomes would be expected to fall in a symmetric pattern around 2 percent. When Lacker argues against allowing even a temporary drift above 2 percent, he is effectively saying that 2 percent is a ceiling, not a target, so that on average, inflation will be less than 2 percent over time (all the errors would be on the low side of the target). Thus, he is actually trying to enforce a price stability standard stricter than the current standard. Second, this whole discussion is something of a strawman to begin with. Realistically, only Chicago Federal Reserve Chairman Charles Evans supports any meaningful drift over 2 percent. Even Minneapolis Federal Reserve President Narayana Kocherlakota, much lauded for his move to the dovish side of the FOMC, sets an upward bound of just 2.25 percent before the Fed should consider a policy shift. And Federal Reserve Vice Chair Janet Yellen, also a well-noted dove, describes an optimal path for policy that foresees inflation just barely kissing 2.25 percent at best. In short, within the Fed there is very little support for any inflation drift that would "cloud our credibility for decades to come." This is simply a nonsensical fear on Lacker's part.
Next, we have the argument that we will never see inflation coming because of the Fed's large scale asset purchase program:
Mickey Levy, chief economist for Bank of America and an SOMC member, said that the Fed “has neutralized the bond vigilantes” by keeping rates low. In other words, even if bond traders are worried that inflation will heat up, they don’t dare bet that way by driving interest rates higher, because the Fed will swat them away by pushing rates back down. “The adage ‘Don’t fight the Fed’? It’s in full force,” Levy said.
Do people forget that both the BLS and the BEA publish monthly reports on prices? That the Fed would not incorporate this data into their decision making process? That the Fed can control inflation expectations as measured by the TIPS market, the very same expectations the Fed uses as a policy guide?
There will still be plenty of data and market indicators even within the context of bond purchases. Here is my expected sequence of events: If growth or inflation accelerates to the point that the Fed will be expected to change policy, bond market participants will bid down the price of Treasuries holding constant a given pace of asset purchases (that "all else equal" thing). The Fed will then have a choice - either prepare to tighten as the market expects, or accelerate the pace of asset purchases to hold rates down. If they choose the second route, the bond sell-off will accelerate as participants begin to suspect the Fed is not committed to the 2 percent target. That would be the signal the Fed is clearly moving in the wrong direction. And you should expect inflation to move higher. In other words, the Fed's bond purchase program does not by itself eliminate inflation signals should such signals emerge. The bond vigilantes have not been neutralized by the Fed; they have been neutralized by reality.
Finally, back to the 2 percent target:
The Shadow Open Market Committee meeting wrapped up just before Bernanke spoke a few blocks away at a meeting of the Economic Club of New York. Harvard University economist Martin Feldstein, who attended the SOMC symposium, was given the privilege of asking Bernanke questions at the Economic Club luncheon. He did not choose to ask the chairman whether the Fed was walking away from its 2 percent inflation target.
Right after the luncheon, though, Bloomberg TV’s Mark Crumpton asked Feldstein, who was President Ronald Reagan’s chief economic adviser, if he was concerned that the Fed hadn’t been talking about the 2 percent target lately. “Absolutely,” Feldstein said. “It’s very important for the Fed to reaffirm those goals.”
Notice that Feldstein claims the Fed is not discussing the target moments after Bernanke spoke. But what did Bernanke actually say? To the tape:
But with longer-term inflation expectations remaining stable, the ebbs and flows in commodity prices have had only transitory effects on inflation. Indeed, since the recovery began about three years ago, consumer price inflation, as measured by the personal consumption expenditures (PCE) price index, has averaged almost exactly 2 percent, which is the FOMC's longer-run objective for inflation. Because ongoing slack in labor and product markets should continue to restrain wage and price increases, and with the public's inflation expectations continuing to be well anchored, inflation over the next few years is likely to remain close to or a little below the Committee's objective.
How has the Fed not been talking about the 2 percent target? They repeatedly emphasize the target. Bernanke does so virtually every time he speaks. Cleveland Federal Reserve President Sandra Pianalto basically says the 2 percent target is so concrete that there should no longer be a distinction between hawks and doves. How can Feldstein sit through Bernanke's speech and completely miss the part that addresses Feldstein's concerns? How can he not say "the Fed talks about 2 percent every chance they get"? The only explanation: He simply does not want to recognize any information that departs from his pre-conceived view of the world.
Bottom Line: Inflation hawks continue to operate in a parallel universe.
Posted by Mark Thoma on Friday, November 23, 2012 at 10:46 AM in Economics, Fed Watch, Monetary Policy |
... Imagine economists had widely and credibly warned of a financial crisis
in the mid-00s. People would have responded to such warnings by lending less
and borrowing less (I'm ignoring agency problems here). But this would have
resulted in less gearing and so no crisis. There would now be a crisis in
economics as everyone wondered why the disaster we predicted never happened.
His main point, however, revolves around Keynes' statement that "If economists could manage to get themselves thought of as humble,
competent people on a level with dentists, that would be splendid":
I suspect there's another reason why
economics is thought to be in crisis. It's because, as Coase says,
(some? many?) economists lost sight of ordinary life and people,
preferring to be policy advisors, theorists or - worst of all -
In doing this, many stopped even trying
to pursue Keynes' goal. What sort of reputation would dentists have if
they stopped dealing with people's teeth and preferred to give the
government advice on dental policy, tried to forecast the prevalence of
tooth decay or called for new ways of conceptualizing mouths?
Perhaps, then, the problem with economists is that they failed to consider what function the profession can reasonably serve.
Posted by Mark Thoma on Friday, November 23, 2012 at 10:21 AM in Economics, Macroeconomics |
Republican anti-rational mind-set:
Grand Old Planet,
by Paul Krugman, Commentary, NY Times: ...Senator Marco Rubio, whom many
consider a contender for the 2016 Republican presidential nomination,... was asked how old the earth is. After declaring “I’m not a scientist,
man,” the senator went into desperate evasive action, ending with the
declaration that “it’s one of the great mysteries.”
It’s funny stuff, and conservatives ... say ... he was just pandering to likely voters in the
2016 Republican primaries — a claim that for some reason is supposed to comfort
But we shouldn’t let go that easily..., his inability to acknowledge scientific evidence speaks of the
anti-rational mind-set that has taken over his political party. ... In one interview, he
compared the teaching of
evolution to Communist indoctrination tactics...
What was Mr. Rubio’s complaint about science teaching? That it might
undermine children’s faith in what their parents told them to believe. And right
there you have the modern G.O.P.’s attitude, not just toward biology, but toward
everything: If evidence seems to contradict faith, suppress the evidence.
The most obvious example other than evolution is man-made climate change.
As the evidence for a warming planet becomes ever stronger — and ever scarier —
the G.O.P. has buried deeper into denial ...
accompanied by frantic efforts to silence and punish anyone reporting the
But the same phenomenon is visible in many other fields. The most recent
demonstration came in the matter of election polls..., the demonizing of The Times’s Nate
Silver, in particular, was remarkable to behold. ...
We are, after all, living in an era when science plays a crucial economic
role. How are we going to search effectively for natural resources if schools
trying to teach modern geology must give equal time to claims that the world is
only 6,000 years old? How are we going to stay competitive in biotechnology if
biology classes avoid any material that might offend creationists?
And then there’s the matter of ... the
study from the Congressional Research Service finding no empirical
support for the dogma that cutting taxes on the wealthy leads to higher economic
growth. How did Republicans respond?
suppressing the report. On economics, as in hard science, modern
conservatives don’t want to hear anything challenging their preconceptions — and
they don’t want anyone else to hear about it, either.
So don’t shrug off Mr. Rubio’s awkward moment. His inability to deal with
geological evidence was symptomatic of a much broader problem — one that may, in
the end, set America on a path of inexorable decline.
Posted by Mark Thoma on Friday, November 23, 2012 at 12:36 AM in Economics, Politics, Science |
Posted by Mark Thoma on Friday, November 23, 2012 at 12:06 AM in Economics, Links |
I don't know enough about this -- what more can you tell me about who should
lead the S.E.C.?:
Mary Miller vs. Neil Barofsky for the S.E.C.?, by Simon johnson, Commentary,
NY Times: The Obama administration is
floating the idea that
Mary J. Miller, under secretary for domestic finance at the Treasury
Department, could become its nominee to lead the Securities and Exchange
Commission. Ms. Miller, a longtime executive in the mutual funds industry,
has served in the Treasury under Timothy Geithner since February 2010.
Ms. Miller represents the financial sector's preferred approach to financial
some talk but very little by way of serious effort. ... And there is
no willingness to really face down powerful people on Wall Street.
Her potential candidacy faces ... obstacles... Mr. Barofsky is the most
important obstacle... The former special inspector general for the Troubled
Assets Relief Program ... he is an experienced prosecutor who
understands complex financial fraud. ... Mr. Barofsky is a lifelong Democrat
who has enjoyed bipartisan support in Congress. ...
A petition that Credo Action has put online urging President Obama to
appoint an S.E.C. chairman who will hold Wall Street accountable, and naming
Mr. Barofsky as a worthy choice, had more than 35,000 signatures by
The petition also recommends former Senator Ted Kaufman of Delaware and
Dennis Kelleher of Better Markets
- both of whom I endorsed here last week - and it expresses support for
Sheila Bair, who would be terrific ...
Mr. Barofsky is not popular with Mr. Geithner, precisely because he has
stood up to authority for all the right reasons. ... The mutual fund
industry does not want reform...
Choosing a new chairman of the S.E.C. is the perfect time for President
Obama to decide whether, despite everything, to go for the status quo -
which brought us to our current economic predicament - and nominate Ms.
Miller for the S.E.C. Or does he really want effective change? In that case,
he should nominate Mr. Barofsky or someone who can match his stellar
Posted by Mark Thoma on Thursday, November 22, 2012 at 01:50 PM in Economics, Financial System, Regulation |
I'm not so thankful for this:
Ben Bernanke pessimistic on potential GDP growth, by Gavyn Davies: Ben
speech to the New York Economic Club on Tuesday ... seems to have
accepted that the rate of growth in potential GDP has fallen sharply in
recent years, which is not something he has emphasized in the past. If he
persists with this more pessimistic interpretation of potential GDP growth,
it would imply that there is a speed limit on the pace at which the economy
can recover in the next few years, and that the Fed might need to tighten
policy earlier than previously assumed.
Ever since the financial crash, Mr Bernanke has consistently emphasised that
US GDP is well below its potential... The implication has been that a
shortage of demand is responsible for most of the output loss... Fix the
shortage of demand as quickly as possible, and you minimize the total losses
of output that will be incurred during the recession. This has resulted in
the assumption that the Fed would remain extremely accommodating...
What changed in this week’s speech? Importantly, the chairman did not change
his view of the natural rate of unemployment. He continues to suggest that
this is about 5.5 per cent to 6 per cent.. However, he now says that the
potential growth of GDP is lower than the 2.5 per cent that was in place
before the crisis. ...
Mr Bernanke offered three reasons why the growth in potential GDP might have
declined since 2009: a decline in fixed investment, reducing the capital
stock; a mismatch between the skills of unemployed workers and the needs of
the industries that are expanding; and tight credit conditions, along with
higher risk aversion...
The bottom line of this analysis is that the Fed may be satisfied with a
much lower growth rate over the next four years...
For the time being, this will not shift the Fed away from its dovish stance.
After all, actual GDP remains well below any of the potential GDP paths
shown in the chart. But it does mean that, if the economy embarks on a firm
recovery path, the Fed Chairman might favor an earlier tightening than some
of his earlier speeches have implied. ...
It's true that the turkey will continue to cook even after it is removed from
the oven (i.e. there are policy lags, so the heat should be turned off a bit
before we reach our full employment goal). But I hate raw turkey, and if we are
going to make a mistake on when to turn off the oven, let's make it one where labor
markets are a bit overheated rather then underheated. Please.
Posted by Mark Thoma on Thursday, November 22, 2012 at 11:10 AM in Economics, Monetary Policy, Unemployment |
As I look for something to post without being, or at least appearing, too
anti-social, let me say a simple thanks to all of you.
Here's repeat from 2005:
Held Their Noses, and Ate, by James E. McWilliams, Commentary, NY Times:
No contemporary American holiday is as deeply steeped in culinary tradition as
Thanksgiving. ... [It's] a feast with a narrowly proscribed list of foods -
usually some combination of turkey, corn, cranberries, squash and pumpkin pie.
Decorated with these dishes, the Thanksgiving table has become a secular altar
upon which we worship America's pioneering character, a place to show
reverence for the rugged Pilgrims who came to Plymouth in peace, sat with the
Indians as equals and indulged in the New World's cornucopia with gusto. But
you might call this comfort food for a comfort myth.
The native American food that the Pilgrims supposedly enjoyed would have
offended the palate of any self-respecting English colonist ... Our comfort
food ... was the bane of the settlers' culinary existence. Understanding this
paradox requires acknowledging that there's no evidence to support the
holiday's early association with food - much less foods native to North
America. ... It wasn't until the mid-19th century that domestic writers began
to play down Thanksgiving's religious emphasis and invest the holiday with
familiar culinary values. Sarah Josepha Hale and her fellow Martha Stewarts of
the day implored families to "sit down together at the feast of fat things"
and raise a toast to the Thanksgiving holiday. When Abraham Lincoln declared
Thanksgiving a national holiday in 1863, the cornucopia-inspired myth was, as
a result of these literary efforts, in full bloom. ... [H]owever, the earthy
victuals that Thanksgiving revisionists arranged on the Pilgrims' fictional
table were foods that Pilgrims and their descendants would have rather
The reason is fairly simple. Hale and her fellow writers seem to have
forgotten ... their Puritan forebears ... strict notions about food production
and preparation. Proper notions of English husbandry generally demanded that
flesh be domesticated, grain neatly planted and fruit and vegetables
cultivated in gardens and orchards. Given these expectations, English migrants
recoiled upon discovering that the native inhabitants hunted their game, grew
their grain haphazardly and foraged for fruit and vegetables. ... [T]he
English deemed the native manner of acquiring these goods nothing short of
barbaric. ... They typically prepared fields by setting fire to the underbrush
and girdling surrounding trees. Afterward, they planted corn, gourds and beans
willy-nilly across charred ground, possibly throwing in fish as fertilizer. To
the Indian women who tended the plants with clamshell hoes, the ecological
brilliance of this arrangement was abundantly clear: the cornstalks stretched
into sturdy poles for the beans to climb upon, the corn leaves fanned out to
provide squash with shade, and the beans enriched the soil with extra
nitrogen. But the English, blinded by tradition, never got it - they just
looked on in horror. Where were the fences? The neat rows of cross-sectioned
grain? The plows? ... The team of oxen? ... Why were perfectly good trees left
to rot? ... And those fish! Why not salt them down and export them to Europe
for a tidy profit? What was wrong with these people? The collective English
answer - "everything" - honed the colonists' distaste for foods, especially
corn and squash, that they quickly judged best for farm animals.
A similar culinary misunderstanding developed over meat. To be sure, the
English frequently hunted for their meals. But hunting was preferably a sport.
When the English farmer chased game to feed his family, he did so with pangs
of shame. To resort to the hunt was, after all, indicative of agricultural
failure... Thus the colonists reacted with extreme disapproval when they saw
Indian men ... disappearing into the woods for weeks at a time to track down
protein. Making the scene even more primitive was that the women who stayed
behind ... toiling away at odd jobs that the English valiantly considered
men's work. The elk, bear, raccoon, possum and indeed the wild turkeys that
the men hauled back to the village were, for all these reasons, tainted goods
reflective of multiple agricultural perversions.
They were also ... unavoidable. The methods that colonists condemned as
agriculturally backwards ... became necessary to their survival. No matter how
hard they tried, no matter how carefully they tended their crops and repaired
their fences ... and furrowed their fields, colonial Americans failed to
replicate European husbandry practices. Geography alone wouldn't allow it. The
adaptation of Indian agricultural techniques ... provoked severe cultural
insecurity. This insecurity turned to conspicuous dread when the colonists
were mocked by their metropolitan cousins as living, in the words of one
haughty Englishman, "in a state of ignorance and barbarism, not much superior
to those of the native Indians." This hurt. And under the circumstances no
status-minded English colonist would have possibly highlighted his adherence
to native American victuals ... Indeed, it wasn't until after the Revolution,
when the new nation was seeking ways to differentiate itself from the Old
World, that these foods became celebrated as a reflection of emerging ideals
like simplicity, manifest destiny and rugged individualism. ...
The year after Lincoln declared Thanksgiving a national holiday in 1863:
Posted by Mark Thoma on Thursday, November 22, 2012 at 10:08 AM in Economics, Weblogs |
Posted by Mark Thoma on Thursday, November 22, 2012 at 12:06 AM in Economics, Links |
Long drive ahead of me today, and I'm late getting on the road, so just a few
quick ones for now. This is from Chris Dillow:
Marx vs Coase: experimental evidence, Stumbling and Mumbling: Are firms
efficient institutions for responding to uncertainty, as Coase
thought? Or are they, as Marxists believe, means whereby capitalists exploit
workers? A new
paper by Ernst Fehr and colleagues provides experimental evidence. ...
Fehr and colleagues found that, in one-shot encounters where employment
contracts were struck, 51% of principals exploited agents. "The Marxian idea
that power can be used for exploitation is real" they conclude. ...
However, in repeated encounters, the prevalence of exploitation dropped to 21%.
This is because employers wanted to build a reputation for fairness which they
could use to encourage workers to stick to employment contracts.
Simple as it is, this gives us a framework to pose the question: under what
conditions are we likely to have Coasian rather than Marxian firms?
One is where there's a strong norm of fairness. ... Another is where firms have
a desire for a reputation as a "good" employer. This is more likely to be the
case under conditions of near-full employment, where they have to compete for
A third is the existence of strong unions. ... This corroborates my suspicion
that strong unions can be
good for an economy.
There is, however, a fourth possibility - for workers to have an outside option
such as welfare benefits that allow them to reject exploitative contracts.
The fact that many of capitalism's supporters reject this fourth course makes me
suspect that what they are interested in is not so much efficient Coasian firms
as the power of capital to exploit workers.
Posted by Mark Thoma on Wednesday, November 21, 2012 at 09:43 AM in Economics |
Is For Class Warfare, by Paul Krugman:
Chittum has a great piece about CNBC’s decision to drop even the pretense of
journalistic objectivity and throw its weight behind the deficit scolds.
Basically, the network has gone all in on behalf of the 0.01 percent.
One question Chittum doesn’t really get at, however, is why CNBC takes this tilt
— why, in fact, it has been so dominated by the fake deficit hawk faction, the
people who say that the debt is terrible, terrible, and that’s why we have to
cut taxes on the rich. After all, the network’s audience does not consists
mainly of the very rich; rather, it’s the 1 percent wannabees, who imagine that
watching many hours of talking heads will somehow let them absorb the secrets of
getting rich. ...
I ... think ... the main story ... is ... this is what the audience wants. And
it’s what they want even though the Austerian stuff the network peddles has been
wrong, wrong, wrong, wrong... Never mind that the Keynesians have been right
austerity, and more; the audience wants to hear about the debt crisis and
hyperinflation coming any day now unless we cut taxes on the rich, or something.
Only thing I'd say is that those preferences -- what viewers want to hear --
are unlikely to be independent of what they've heard from the media.
Posted by Mark Thoma on Wednesday, November 21, 2012 at 09:43 AM in Economics, Press |
How Drug Company Money is Undermining Science, by Charles Seife, Scientific
American: ...In the past few years the pharmaceutical industry has come up
with many ways to funnel large sums of money—enough sometimes to put a child
through college—into the pockets of independent medical researchers who are
doing work that bears, directly or indirectly, on the drugs these firms are
making and marketing. The problem is not just with the drug companies and the
researchers but with the whole system—the granting institutions, the research
labs, the journals, the professional societies, and so forth. No one is
providing the checks and balances necessary to avoid conflicts. Instead
organizations seem to shift responsibility from one to the other, leaving gaps
in enforcement that researchers and drug companies navigate with ease, and then
shroud their deliberations in secrecy.
“There isn't a single sector of academic medicine, academic research or medical
education in which industry relationships are not a ubiquitous factor,” says
sociologist Eric Campbell, a professor of medicine at Harvard Medical School.
Those relationships are not all bad. After all, without the help of the
pharmaceutical industry, medical researchers would not be able to turn their
ideas into new drugs. Yet at the same time, Campbell argues, some of these
liaisons co-opt scientists into helping sell pharmaceuticals rather than
generating new knowledge.
The entanglements between researchers and pharmaceutical companies take many
forms. There are speakers bureaus: a drugmaker gives a researcher money to
travel—often first class—to gigs around the country, where the researcher
sometimes gives a company-written speech and presents company-drafted slides.
There is ghostwriting: a pharmaceutical manufacturer has an article drafted and
pays a scientist (the “guest author”) an honorarium to put his or her name on it
and submit it to a peer-reviewed journal. And then there is consulting: a
company hires a researcher to render advice. ...
It is not just an academic problem. Drugs are approved or rejected based on
supposedly independent research. When a pill does not work as advertised and is
withdrawn from the market or relabeled as dangerous, there is often a trail of
biased research and cash to scientists. ...
The scientific community's answer to the conflict-of-interest problem is
transparency. Journals, grant-making institutions and professional organizations
press researchers to openly declare ... when they have any entanglements that
might compromise their objectivity. ... It is an honor system. Researchers often
fail to report conflicts of interest—sometimes because they do not even realize
that they present a problem. ...
In theory, there is a backup system. ... When a scientist fails to report such a
conflict, the university or hospital he or she works for is supposed to spot it
and report it. And when a university or hospital is not doing its job catching
conflicted research, then the government agency that funds most of that
research—the National Institutes of Health—is supposed to step in.
Unfortunately, that backup system is badly broken. ...
Posted by Mark Thoma on Wednesday, November 21, 2012 at 09:42 AM in Economics, Health Care, Regulation |
Posted by Mark Thoma on Wednesday, November 21, 2012 at 12:06 AM in Economics, Links |
Guess who's to blame for "starve the beast"?:
The New Republican Tax Policy, by Bruce Bartlett, Commentary, NY Times:
Although it is commonly believed that the Laffer curve - the idea that tax cuts
pay for themselves - is the core Republican idea about tax policy, this is
wrong. The true core idea is something called starve-the-beast - the idea that
tax cuts will force cuts in spending precisely because they reduce revenue. But
there are slight indications that some conservatives have awakened to the
reality that not only does starve-the-beast not work, but it also leads to
higher spending. ...
I have traced the origins of Republican starve-the-beast theory to testimony by
Alan Greenspan before the Senate Finance Committee on July 14, 1978...
Posted by Mark Thoma on Tuesday, November 20, 2012 at 08:51 PM in Economics, Politics |
This is a bit technical at times, but it makes an important point that is a
bit buried in the discussion that I'd like to highlight.
The first step in the
discussion is to explain what a non-linear Phillips curve is, and why
a non-linear specification is needed:
Compensation Growth and Slack in the Current Economic Environment, by M.
Henry Linder, Richard Peach, and Robert Rich, NY Fed: ...Our analysis is based on the estimation of a nonlinear
wage-inflation Phillips curve that draws upon the modeling approach outlined in
a Boston Fed
paper by Fuhrer, Olivei, and Tootell. The key feature of the nonlinear
Phillips curve is that the impact of a change in slack depends on the level of
slack. These features are illustrated in the chart below, where the slope of the
Phillips curve becomes steeper as the unemployment rate moves further below the
natural rate of unemployment (higher resource utilization), while the slope
becomes flatter as the unemployment rate moves further above it (lower resource
Why might the Phillips curve flatten out as the unemployment rate rises
further above the natural rate of unemployment? As a reminder, what matters for
labor market decisions is the real wage rate—the nominal wage adjusted for the
price level (or cost of living). One explanation for the flattening of the
Phillips curve is downward real wage rigidity—that is, a more sluggish response
of real wages when the unemployment rate is high (see the Boston Fed
paper by Holden and Wulfsberg for a more detailed discussion of theories of
real wage resistance during an economic downturn). In a situation of high
unemployment, wage growth becomes relatively stable around the recent level of
underlying inflation, so that real wages don’t fall sufficiently to clear the
Here's how they estimate the non-linear Phillips curve and an explanation of
why the sample begins in 1997:
Our Phillips curve model relates four-quarter growth in nominal compensation
per hour (for the nonfarm business sector) to economic slack, controlling for
movements in trend productivity growth and expected inflation. Our measure of
slack is the Congressional Budget Office (CBO) estimate of the unemployment
gap—the percentage point deviation between the actual unemployment rate and the
CBO estimate of the natural rate of unemployment. For trend productivity growth,
we use an average of the (annualized) quarterly growth rate of productivity. For
expected inflation, we construct a ten-year personal consumption expenditure
(PCE) survey measure by adjusting the Survey of Professional Forecasters’
ten-year expected CPI inflation series to account for the average differential
between CPI and PCE inflation. As the chart below shows, expected inflation has
been extremely stable during the post-1997 period. To provide additional
observations for estimation and to conduct the analysis in a low-inflation
environment with well-anchored expectations, we use data that cover the period
from 1997 through the present.
Our model relates economic slack to an adjusted compensation measure, where
we subtract the values of trend productivity growth and expected inflation from
the compensation growth series. This adjustment imposes the standard restriction
that increases in the real wage rate equal increases in labor productivity in
the long run. The chart below provides a scatter plot of the adjusted
compensation growth series and the unemployment gap. Negative (positive) values
of the unemployment gap represent conditions in which unemployment is below
(above) the natural rate of unemployment.
The estimated Phillips curve should have the shape predicted above, and it
An examination of the scatter plot shows that the general shape of the data
points bears a close resemblance to the chart of the nonlinear Phillips curve,
and estimation of the model provides evidence of a statistically significant
nonlinear relationship between (adjusted) compensation growth and slack. ...
We also consider two additional criteria to evaluate the nonlinear Phillips
curve model—within-sample fit and out-of-sample forecast performance. The
within-sample fit is based on estimation of the model using data from the full
sample to compare the predicted and actual values of growth in compensation per
hour. The out-of-sample forecast performance is based on estimation of the model
only using data through 2007:Q4 on the unemployment gap, trend productivity
growth, and expected inflation. With the resulting estimated model, we input the
actual values of the unemployment gap, trend productivity growth, and expected
inflation during the post-2007:Q4 period to generate forecasts of compensation
growth. The first forecast corresponds to compensation growth from 2008:Q1 to
The next chart plots the four-quarter change in compensation growth, the
within-sample predictions, and the post-2007:Q4 out-of-sample forecasts. While
the within-sample predictions fail to track some short-run movements in
compensation growth, they do capture the general movements in the series.
Moreover, both the within-sample predictions and out-of-sample forecasts capture
the magnitude of the decline in compensation growth since 2008 as well as its
Our analysis suggests that a nonlinear wage-inflation Phillips curve fits
the data well during the post-1997 episode and complements the results of
Fuhrer, Olivei, and Tootell, who find evidence of a nonlinear relationship
between price inflation and activity gap measures.
Here's what I want to highlight:
An important conclusion from
our analysis is that recent stability in the growth rate of labor compensation
measures may not be informative about the extent of slack or its change. That
is, stability in labor compensation measures doesn’t imply that the output gap
has closed, while changes in the output gap may only have a modest impact on
They also note that this implies real rather than nominal wage rigidity:
In an inflation environment where actual and expected price changes are low,
someone might interpret the earlier scatter plot as reflective of downward
nominal wage rigidity—the idea that workers and firms have incentives to avoid
reductions in nominal wages. However, the nonlinearity between wage growth and
slack appears to be evident in other episodes in which large fluctuations in
real activity were accompanied by high inflation and high compensation growth
(this point is also discussed by Fuhrer, Olivei, and Tootell). Thus, the mild
trade-off between compensation/wage growth and resource slack when slack is
sizable isn’t unique to recent experience. Moreover, the source of the
nonlinearity must stem from downward real wage rigidity, as downward nominal
wage rigidity can generate this feature only in a low-inflation environment.
They conclude with:
We recognize that our analysis comes with important caveats... Nevertheless, if the nonlinear
relationship between slack and wage/price inflation is an important feature of
the data, then it will be critical for policymakers to identify other indicators
that may be more responsive to slack and provide a quick and more reliable read
on its movements.
It is not surprising at all that wage movements would be uninformative about
labor market conditions when wages adjust sluggishly to economic conditions, but
the prevalence of claims about the condition of the labor market based upon
measures of compensation is a signal that people have missed this point. There
can be both considerable slack in the economy (so let's do something about it),
and relatively stable wages.
Posted by Mark Thoma on Tuesday, November 20, 2012 at 11:34 AM in Economics, Inflation, Unemployment |
There has been a lot of talk since the election about the possible emergence of
a new faction within the Republican party... These new Republicans, we’re told,
are willing to be more open-minded on cultural issues, more understanding of
immigrants, and more skeptical that trickle-down economics is enough; they’ll
favor direct measures to help working families.
So what should we call these new Republicans? I have a suggestion: why not call
There are three things you need to understand here.
First, on economic issues the modern Democratic party is what we would once have
considered “centrist”, or even center-right. ...
Second, today’s Republican party is an alliance between the plutocrats and the
preachers, plus some opportunists along for the ride — full stop. The whole
party is about low taxes at the top (and low benefits for the rest), plus
conservative social values and putting religion in the schools; it has no other
reason for being. Someday there may emerge another party with the same name
standing for a quite different agenda... But that will take a long time, and it
won’t really be the same party.
Finally, it’s true that there are some Republican intellectuals and pundits who
seem to be truly open-minded about both economic and social issues. But I worded
that carefully: they “seem to be” open-minded; indeed, they’re professional
seemers. When it matters, they can always be counted on — after making a big
show of stroking their chins and agonizing — to follow the party line, and
reject anything that doesn’t go along with the preacher-plutocrat agenda. If
they don’t deliver when it counts, they are excommunicated; see Frum, David.
Anyone who imagines that there is any real soul-searching going on is deluding
himself or herself.
... Practically every ambitious politician in the party is making soothing
noises about being nicer to Hispanics, lightening up on social issues, and
compromising on the fiscal cliff, but the thing is, it's all just talk. With
only a couple of exceptions from some of the few actual moderates still left in
the party, the Jindals and Walkers and Rubios are pretty transparently unwilling
to change any actual policies. They're as hardnosed as ever on abortion and
taxes and amnesty. They just think the party should sound a little less
We have "plutocrats and the
preachers" -- what happened to the libertarians?
Posted by Mark Thoma on Tuesday, November 20, 2012 at 10:18 AM in Economics, Politics |
We are live:
The Bigger They Are, The Harder They Fall on the Rest of Us
The title at the link is about breaking up big banks, but one of the points
is that the growing problems associated with size/interconnectedness, including those associated with too big to fail, occur in more than just the financial sector. These problems are getting worse, and the question is, what are we going to do about it?
Posted by Mark Thoma on Tuesday, November 20, 2012 at 12:33 AM in Economics, Fiscal Times, Market Failure |
Posted by Mark Thoma on Tuesday, November 20, 2012 at 12:06 AM in Economics, Links |
Industrial Production Stalls, by Tim Duy: Sober Look is questioning just how temporary will be the impact of Hurricane Sandy on the data. I tend to think about this in somewhat different terms. I am fairly confident that the impact of Sandy on the national data will be almost entirely transient. I am less confident that we are identifying underlying trends in the data as we dismiss any weaker than expected numbers as artifacts of Sandy. At the moment, however, I think this issue is largely confined to manufacturing data.
As is well known at this point, industrial production slipped 0.4% in October, but the Federal Reserve estimated that Sandy contributed to a 1 percentage point decline in production. The manufacturing side of the ledger, almost three-quarters of the index, was flat after accounting for Sandy, which is pretty much par for the course of the last year:
Obviously, the flat trend in manufacturing was in place well before Sandy, and could get much worse if the core durable goods new orders data is any indicator:
Seeing the trend in place makes me a little less comforted by the fact that the October slide can be attributed to Sandy. What if we see another slide in November? Will that too be attributed to Sandy, or is there something more than meets the eye? Should we be worried about recession? I think that answer depends on whether or not you view the manufacturing drag as largely caused by domestic or international factors. If it is largely external, I think it slows the US economy but does not tip us into recession. We experience something closer to 2007/8, with the housing rebound taking the place (albeit weakly) of the tech boom. A domestic event, would be more significant.
So which is it? The Wall Street Journal reports this morning:
U.S. companies are scaling back investment plans at the fastest pace since the recession, signaling more trouble for the economic recovery.
Half of the nation's 40 biggest publicly traded corporate spenders have announced plans to curtail capital expenditures this year or next, according to a review by The Wall Street Journal of securities filings and conference calls.
But why is capital spending weak?
At the same time, exports are slowing or falling to such critical markets as China and the euro zone as the global economy downshifts, creating another drag on firms' expansion plans...Corporate executives say they are slowing or delaying big projects to protect profits amid easing demand and rising uncertainty. Uncertainty around the U.S. elections and federal budget policies also appear among the factors driving the investment pullback since midyear....Companies fear that failure to resolve the fiscal cliff will tip the economy back into recession by sapping consumer spending, damaging investor confidence and eating into corporate profits.
Firms see the real impact of an external slowdown, and they fear the consequences of fiscal austerity. But which firms?
Snapon Inc., which makes equipment for auto technicians, reports healthy investment among the 800,000 small businesses it serves across the U.S. "Their confidence is fair and reasonable," said Snap-on CEO Nicholas Pinchuk. "As you move up to bigger companies, their foresight becomes broader and their confidence starts to erode."
This should not be surprising; large firms with significant international exposure are feeling the heat from Europe, China, etc. Already impacted by this weakness, they are especially sensitive to the potential impact from the fiscal cliff. This contrasts greatly with the evolving domestic side of the equation:
The slowdown in capital spending contrasts with a rebound in U.S. consumer spending and confidence, which has returned to a five-year high. Meanwhile, the latest survey by the Business Roundtable, which tracks expectations for sales and investment among its big-company CEOs, found the worst sentiment about the economic outlook in three years.
Consumer confidence has rebounded in recent months, and now looks consistent with the current pace of spending. Job growth continues while the unemployment rate continues to track down. The impact of Sandy on retail sales was relatively small, and note that the September number was revised up. And, importantly, it is hard to deny the upward progress in housing markets:
It would be a historical anamoly to experience a recession when housing is on the upswing, and I am challenged to believed that trade channels are by themselves sufficient to defy that history and trigger a domestic recession.
That said, I understand completely firms' lack of confidence. Particularly for larger, international firms, the impact of slowing growth overseas is real, and going over the fiscal cliff will only make their problems worse. Indeed, a rapid turn to austerity is the kind of domestic event that could turn history on its head and induce a recession despite a housing recovery.
At the moment, however, consumers seem far less concerned about the fiscal cliff than their corporate counterparts. Perhaps this is an artifact of the lack of partisan bickering since the election. Or maybe households rationally believe that since Congress has worked this out in the past, they will work it out now. But whatever the case, housesholds are not expecting Congress to disrupt their holiday spending plans. Let's hope that remains the case.
Bottom Line: The external sector is having an impact on manufacturing, and this was evident in the data well before Sandy, so we can't just ignore data weakness in that sector. The impact is greatest on just where you would expect - large multinationals. But the domestic economy still appears to be chugging along, with the housing market picking up the slack from manufacturing. On net, that suggests no great acceleration in aggregate activity in the near-term, especially when combined with more fiscal austerity. At the same time, however, the US should be able to escape the international turmoil without a recession. So what is the near term risk? Aside from the usual suspect (oil price surge from Mideast war, etc.), the fiscal cliff is still at the top of the list.
Posted by Mark Thoma on Monday, November 19, 2012 at 03:48 PM in Economics, Fed Watch, Monetary Policy |
James Kwak argues that "Forty years from now, America will be twice as rich
on average as we are today. But most of that wealth will go to the very richest
households. We only have a budget crisis if they refuse to pay higher taxes:
The U.S. Does Not Have a Spending Problem, We Have a Distribution Problem, by
James Kwak: In this season of fiscal silliness, many people are saying that
we cannot afford our current entitlement programs. They shake their heads
solemnly and say that Social Security and Medicare were well-intentioned ideas,
but we simply do not have the money to pay for them and there is no escaping the
need for "structural changes."
Hogwash. ... The federal government exists to serve the American people, not the
other way around. The real question is whether we as a society can afford our
current level of entitlement spending.
The answer is obviously yes. ...
Posted by Mark Thoma on Monday, November 19, 2012 at 11:41 AM in Budget Deficit, Economics, Social Insurance |