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Annualized 6 and 12 Month Trimmed Mean
PCE Inflation Rates from 1/12 - 12/12
Posted by Mark Thoma on Thursday, January 31, 2013 at 06:36 PM in Economics, Inflation |
One more from Tim Duy:
Interesting Anecdote, by Tim Duy: Looking at the
Reuters report on the latest consumer confidence numbers, this caught my
"The increase in the payroll tax has undoubtedly dampened consumers'
spirits and it may take a while for confidence to rebound and consumers to
recover from their initial paycheck shock," Lynn Franco, director of
economic indicators at The Conference Board, said in a statement.
One of the more interesting anecdotes I picked up last week was from a
businessman who said that after his firm issued the first paychecks of the year,
virtually every employee came to the payroll office and asked why their
paychecks were lower, evidently unaware that the payroll tax cut had expired.
If the expiration does come as a surprise to a large proportion of the
workforce, perhaps consumer spending in the first quarter will be somewhat
softer than current estimates. Something to watch for.
Posted by Mark Thoma on Thursday, January 31, 2013 at 02:02 PM in Economics, Fed Watch, Monetary Policy, Taxes |
Room For Upside in Tomorrow's ISM Report?, by Tim Duy:
Calculated Risk has the run down on tomorrow's employment report, opting
to bet on the high side of the forecast. Likewise, I am inclined to bet on
the high side of the ISM forecast of 50.7, up from 50.5 the previous month.
A couple of things to keep in mind:
1. Industrial production firmed in recent months:
Those that thought the mid-year slowdown in production
bolstered their case for an imminent recession need to head back to the
2. Core durable goods orders are stronger:
A significant portion of the sharp slowdown this year has been reversed.
Eventually, this will impact the ISM index.
Chicago PMI surprised on the upside, gaining sharply to 55.6 from 50.0
Markit PMI has tended to the strong side in recent months:
All in all, it looks like manufacturing is shaking off some of those
mid-year doldrums. Consequently, I would expect the ISM index to come in
ahead of expectations.
Posted by Mark Thoma on Thursday, January 31, 2013 at 02:01 PM in Economics, Fed Watch, Monetary Policy, Unemployment |
Wages, fairness & productivity: Do higher wages motivate workers to work
harder? A recent
conducted on Swiss newspaper distributors suggests the
answer's yes, but only partially so:
Workers who perceive being underpaid at
the base wage increase their performance if the hourly wage increases,
while those who feel adequately paid or overpaid at the base wage do not
change their performance.
This suggests that people are motivated
not so much by the cold cash nexus as by feelings of reciprocal
Posted by Mark Thoma on Thursday, January 31, 2013 at 10:50 AM in Economics, Equity, Income Distribution, Productivity |
Larry Kudlow tries to use the fact that the fall government spending in the
fourth quarter of last year was associated with a big drop in GDP
growth to argue that lower government spending is good for the
economy. Antonio Fatas correct his misguided thinking:
Celebrating negative growth, by Antonio Fatas: GDP growth during the last
quarter of 2012 turned negative in the US (-0.1%)... Looking at the different components of GDP, the biggest decline happened
in government spending and in net exports (due to the weakness in other
economies). This is just one quarter and the data is likely to be revised later
in the year, but what is to be learned from the data? The answer is whatever
justifies your priors. Here is the interpretation that
Larry Kudlow does
He makes the claim that this is indeed a good quarter because private spending
(consumption and investment) grew at about 3.4% - after removing inventories
that fell significantly. From here he concludes:
"Even with the fourth-quarter contraction, the latest GDP report shows that
falling government spending can coexist with rising private economic
activity. This is an important point in terms of the upcoming spending
sequester. Lower federal spending, limited government, and a smaller
spending-to-GDP ratio will be good for growth. The military spending plunge will
not likely be repeated. But by keeping resources in private hands, rather than
transferring them to the inefficient government sector, the spending sequester
is actually pro-growth."
So this is an interesting test that he is using to prove that decreasing
government spending is good for growth. As long as we see any growth in private
spending it means that the decrease in government spending is helping the
private sector grow. Of course, the real test is to compare the -0.1% to what
would have happened to GDP growth if government spending had not decreased.
Reading Larry Kudlow's article it sounds as if GDP growth would have been even
lower (although his statement is not as precise as this). Yes, consumption grew
and investment (once we exclude inventories) grew as well, but how much? Not
enough to compensate the decrease in government spending so the final outcome is
a negative (literally negative) performance for GDP growth. ...
We see that government spending fell and this is a
component of GDP. A natural reaction might be to argue that the fall in
government spending had a negative effect on GDP. Given that the GDP growth
number is so low (and lower than expected), this is a reason to believe that the
multiplier is positive and possibly large. But, as Larry Kudlow shows, there are
always other interpretations.
According to Kudlow's theory (which is contrary to the empirical evidence, but why should actual data matter when there's ideology to promote...note how he tosses inventories aside when they don't agree with his priors, doubt he does that if it is helpful to his case), a decline in government spending should cause the private sector to boom by more than enough to offset the decline in government spending (otherwise growth would fall on net). Yet he is pleased that the decline in government spending didn't cause a decline in the private sector ("shows that falling government spending can coexist with rising private economic
activity"), as though that somehow supports his case. It doesn't. Government spending fell, the private sector didn't boom by anywhere near enough to offset it, and the net result was a decline in GDP growth.
[Note: As Antonio points out, "we should not be doing this, to understand fiscal multipliers we need
more than one quarter of data, but I am just trying to follow his logic." For example, to qualify this is a way that could be helpful to Kudlow, there may be lags between changes in government spending and changes in private sector activity that cannot be captured in a single quarter of data. But as noted above, this actually doesn't help -- when the empirical analysis is done correctly, government spending multipliers in a depressed economy appear to be relatively large.
Let me add one more thing. I'm all for maximizing growth (with externalities internalized), but I'm also for full employment and sometimes a temporary increase in government spending in the short-run to put people back to work is the best course for long-run economic growth. This is one of those times, especially spending focused on infrastructure. Addressing our short-run problems in this way is, if anything, and contra the Kudlows, helpful for growth.
I don't have any problem asking question such as "what is the best way to raise a given amount of revenue," i.e. trying to minimize inefficiencies and inequities in the tax code with an eye toward growth. I also think it's worthwhile to think about what size of government we want to have, and figure out the best way to support it. I do have a problem with high unemployment, especially when there are steps we could take to put people to work, and even more so when theories about long-run growth that have been rejected by the data are used to institute policies that work against helping people find employment in a depressed economy (e.g. austerity). In any case, with all of our employment problems, why would anyone cheer -.1 percent growth unless "those people" don't matter?]
Posted by Mark Thoma on Thursday, January 31, 2013 at 10:04 AM in Economics, Fiscal Policy |
Unsurprisingly, the Fed Stands Pat, by Tim Duy: I fell off the grid a couple
of weeks ago, as seems to happen each time the teaching schedule ramps up. All
those projects and papers seem like such a good idea until they show up on my
desk needing to be graded. Between that and travel up and down I5 from one end
of the state to the other, blogging suffered, to say the least.
There, however, is nothing like
a Fed meeting to prod me back to the keyboard. Alas, the outcome of this
meeting was not entirely unexpected. Policy remains unchanged, with only
minimal changes to the FOMC statement. The Fed followed the path
of all analysts not of the Zero Hedge variety and largely dismissed the
unexpected decline in 4Q12 GDP:
Information received since the Federal Open Market Committee met in December
suggests that growth in economic activity paused in recent months, in large part
because of weather-related disruptions and other transitory factors.
"Transitory" = "don't panic." We can try to read something in the change of
The Committee remains concerned that, without sufficient policy
accommodation, economic growth might not be strong enough to generate sustained
improvement in labor market conditions.
The Committee expects that, with appropriate policy accommodation, economic
growth will proceed at a moderate pace and the unemployment rate will gradually
decline toward levels the Committee judges consistent with its dual mandate.
It sounds a little more optimistic, as though they are more comfortable they
have policy about right. This, in turn, would suggest that no one at the FOMC
is really thinking about accelerating the pace of asset purchases. Of course, I
don't think anyone was expecting that anyway.
There was no indication
of setting thresholds for the end of large scale asset purchases. Such
discussions are likely in their infancy; for now, all we know is that the end
will come before the unemployment rate hits the 6.5% threshold. 7.25%,
as suggested by Boston Federal Reserve President Eric Rosengren? Or a
sustained period of substantial nonfarm payroll growth,
as suggested by Chicago Federal Reserve President Charles Evans? Of course,
these two thresholds may be effectively equivalent.
Kansas City Fed President Esther George (was she invited to the
bloggers conference?) revealed herself as a true hawk with her dissent. To
be sure, not entirely surprising. Still, I had wanted a little more
confirmation before I labeled her a "hawk" rather than just having "hawkish
leanings." I got it. Her reason:
Voting against the action was Esther L. George, who was concerned that the
continued high level of monetary accommodation increased the risks of future
economic and financial imbalances and, over time, could cause an increase in
long-term inflation expectations.
The potential imbalances reason seems like the primary reason for her
dissent, and falls in-line with
her recent speech. Such views are not uncommon - see A. Gary Shilling in
Bloomberg, for example:
In desperation, monetary policies have become highly experimental. Huge
government deficits are limiting the possibility of additional fiscal stimulus
so policy makers are moving toward competitive devaluations. Meanwhile,
low interest rates have spawned distortions as well as zeal for yield,
regardless of risks.
I can't say that I am completely immune to such fears. Indeed, it is
difficult to ignore the reality that the last two expansions were correlated
with what I would argue were asset price bubbles. Moreover, I am somewhat
interested in learning if the Federal Reserve could in fact stoke the fires of
another asset bubble. But I think all of this speculation might be just a bit
premature. We have an increasingly better idea of what an asset bubble looks
like, and I don't think we are quite there:
Yes, premature. Another 25% of GDP and I will likely start getting a little
more nervous. Speaks to my concern that we are leaning a little too hard of
monetary policy and not enough on fiscal policy. But that train has left the
Bottom Line: Like the Fed, I think it best to discount the GDP data. I didn't
really think the economy was growing over 3 percent in the third quarter, and I
don't below it was really shrinking in the fourth quarter. The underlying rate
of growth is somewhere in between. More slow and steady for the time being.
Slow and steady, though, has been enough to push the unemployment rate lower.
As 6.5 percent comes closer - or if we see a handful of 200k+ nfp numbers - the
Fed will begin easing back on the asset purchases. But I have trouble see
that until mid-year at the earliest. For now, policy is on hold.
Posted by Mark Thoma on Thursday, January 31, 2013 at 12:24 AM in Economics, Fed Watch, Monetary Policy |
Posted by Mark Thoma on Thursday, January 31, 2013 at 12:06 AM in Economics, Links |
I'm sympathetic to the argument that excess leverage was a problem in the financial crisis, but I
don't see it the primal cause of the recession. Instead, leverage iss a magnifier that
makes things much, much worse when problems occur:
The Real, and Simple, Equation That Killed Wall Street, by Chris Arnade,
Scientific American: ...It ... is the overly simple narrative that many
in the media have spun about the last financial crisis. Smart meddling kids
armed with math hoodwinked us all.
March 2009 Wired magazine, even pinpointed an equation and a
mathematician. The article “Recipe for Disaster: The Formula That Killed
Wall Street,” accused the Gaussian Copula Function.
It was not the first piece that made this type of argument, but it was
the most aggressive. ...
This theme plays on the fallacy that danger always comes from complexity.
The reality is much simpler and less sexy. Wall Street killed itself in a
time-honored fashion: Cheap money, excessive borrowing, and greed. And yes,
there is an equation one can point to and blame. This equation, however,
requires nothing more than middle school algebra to understand and is taught
to every new Wall Street employee. It is leveraged return. ...
The Gaussian Copula Function, opaque to most, is convenient to blame. It
allows us to shake off our collective sense of guilt. It obscures the real
I'm willing to blame leverage for contributing to the magnitude of the crisis, and I've long-called for limits on leverage to mute the negative effects of the next
financial recession, which will come no matter how hard we try to avoid it. But
I don't think it's correct to blame leverage itself for our problems, i.e. that
"there is an equation one can point to and blame."
[The article actually notes many other factors, e.g. bad incentives for
ratings agencies, failures of regulation, easy moneary policy by the Fed, and so on, but
still ends up focusing on the leverage component as the key factor. In any case, the article is
directed squarely at Felix Salmon, and I'm posting this in the hope that it will
help prod him into responding.]
Posted by Mark Thoma on Wednesday, January 30, 2013 at 03:55 PM in Economics, Financial System, Market Failure, Regulation |
My quick reaction at MoneyWatch to today's GDP report and the Press Release from the Fed's FOMC meeting:
No Change in Fed Policy Despite Negative GDP Growth
Posted by Mark Thoma on Wednesday, January 30, 2013 at 12:46 PM in Economics, Monetary Policy |
Dean Baker on todays' news the GDP shrank in the 4th quarer of last year:
Falling Government Spending and Inventories Push Growth Negative in Quarter, by
Dean Baker: A sharp drop in government spending, heavily concentrated in
defense, coupled with a decline in inventories caused GDP to shrink at a 0.1
percent rate in the 4th quarter. Government spending fell at a 6.6 percent
annual rate, driven by a 22.2 percent decline in defense spending, subtracting
1.33 percentage points from the growth rate in the quarter. A 40.3 drop in the
rate of inventory accumulation reduced growth by another 1.27 percentage points.
Without these factors, GDP would have grown at a 2.5 percent annual rate in the
Pulling out these extraordinary factors, the GDP data were largely in line with
prior quarters. Consumption grew at a 2.2 percent annual rate, driven mostly by
13.9 percent growth in durable goods purchases, primarily cars. This number was
inflated due to the effects of Sandy, which destroyed many cars, forcing people
to buy new ones. Growth in this category will be substantially weaker and
possibly negative in the next quarter. On the other side, housing and utilities
subtracted 0.47 percentage points from growth in the quarter. This is likely a
global warming effect with warmer than normal weather leading to less use of
heating in the quarter. (There was a comparable falloff in the 4th quarter of
2011 when we also had unusually warm weather.)
One especially noteworthy item is the continuing slow pace in the growth of
spending on health care services, which accounts for almost three quarters of
all health care spending. Nominal spending grew at a just a 2.3 percent annual
rate in the quarter. Over the last year, nominal spending is up by just 1.8
percent, far less than the rate of growth of GDP, and well below the projections
from the Congressional Budget Office (CBO). It seems increasingly likely that we
are on a slower health care cost trajectory. The deficit picture will look very
different when CBO incorporates this slower growth trend into its projections.
Investment rebounded from a weak third quarter in which non-residential
investment actually shrank. This quarter it added 0.83 percentage points to
growth, with investment in equipment and software growing at a 12.4 percent
rate. Housing continued to be a big positive in the quarter, adding 0.36
percentage points to growth.
Net exports were a modest drag on growth. While both exports and imports fell in
the quarter, the 5.7 percent drop in exports more than offset the positive
impact of a 3.2 percent decline in imports. The state and local sector
government sector shrank at a 0.7 percent annual rate, knocking 0.08 percentage
points off growth. Non-defense federal spending rose at a 1.4 percent annual
The inflation hawks will be disappointed in this report with the overall price
index rising at just a 0.6 percent annual rate. The core CPE rose at a 0.9
percent rate. Insofar as there is any trend in these data it is toward lower
One interesting item in the report was a $122.90 jump (85.2 percent at an annual
rate) in dividend payouts. This was the result of companies deciding to pay out
dividends to shareholders in 2012 when a lower tax rate was in effect on
There is little evidence in this report to believe that the economy will diverge
sharply from a 2.5- 3.0 percent growth path, except for the impact of the
deficit reductions that Congress is considering or already put in place. Higher
tax collections from the ending of the payroll tax holiday are likely to knock
around 0.5 percentage points from growth. The sequester, or whatever cuts are
put in place in lieu of the sequester, are likely to have an even larger impact
on growth beginning in the second quarter.
One item worth noting is the GDP report provides zero evidence that "fiscal
cliff" concerns had any impact on growth in the quarter. Consumer durable
purchases and investment in equipment and software were the two strongest
components of GDP. If worries over the fiscal cliff were supposed to cause
people to put off purchases, consumers and businesses apparently did not get the
Nevertheless, with the slow recovery of output and employment all is not well no matter how we spin the numbers. We need more spnding on infrastructure
to help with the recovery.
Posted by Mark Thoma on Wednesday, January 30, 2013 at 09:22 AM in Economics |
Posted by Mark Thoma on Wednesday, January 30, 2013 at 12:06 AM in Economics, Links |
John Makin and Daniel Hanson of the conservative American Economic Institute talk sense on
the deficit. Now if we could just get them over their inflation fears -- the source of the "unfortunately" part of the title -- we might be able to get somewhere in addressing our biggest problem right now, high and persistent unemployment, and enhance our long-tern growth prospects at the same time:
Trillion dollar deficits are sustainable for now – unfortunately, by John H.
Makin and Daniel Hanson, Commentary, FT: An abrupt spending sequester at a
rate of about $110bn per year ($1.1tn over 10 years) scheduled to begin March 1
could cause a US recession, coming as it does on top of tax increases worth
about 1.5 per cent of GDP enacted in January. The April deadline for a
continuing resolution to fund federal spending could lead to a fight that shuts
down the government, placing a further drag on growth.
These ad hoc measures, aimed at creation of an artificial crisis, will fail to
produce prompt, sustainable progress towards reduction of “unsustainable”
deficits because deficits have been, and will continue to be for some time,
eminently sustainable. The Chicken Little “sky is falling” approach to
frightening Congress into significant deficit reduction has failed because the
sky has not fallen. Interest rates have not soared as promised...
Trillion-dollar federal budget deficits have continued to be sustainable because
the federal government is able to finance them at interest rates of half a per
cent or less. Two per cent inflation means that the real inflation-adjusted cost
of deficit finance averages −1.5 per cent...
The real danger facing American policy makers is ... the current sustainability
of trillion-dollar deficits, thanks to very low borrowing costs relative to GDP
growth. Eventually, the Federal Reserve’s QE programme of large government debt
purchases at a current rate of $800bn per year, largely aimed at sustaining the
growth of outlays on entitlements that do not support economic growth, will
cause inflation to rise. The Fed’s latest move to target the unemployment rate
with more quantitative easing only adds to the threat of inflation because the
only way monetary policy can affect growth or employment is by engineering a
higher-than-expected rate of inflation.
Despite the current absence of rising inflation, Washington is flirting with a
debt trap, where abrupt austerity forced by the sequester and/or a government
shut down would actually boost the ratio of debt to GDP by depressing growth too
rapidly. That outcome will be far more costly in terms of forgone income and
unemployment than moving preemptively to reduce American primary deficits to
about 3 per cent of GDP over a half decade. ...
By 2018, once the debt-to-GDP ratio has stabilised under such a programme,
reducing the primary deficit to 2 percent a year (given a growth rate of 3
percent above borrowing costs) will reduce the debt-to-GDP ratio gradually by 1
per cent a year. That is the meaning of sustainable long-run reduction of
government debt relative to income, which will ensure moderate deficit financing
costs for decades to come.
I can't let this pass:
the Federal Reserve’s QE programme of large government debt purchases at a
current rate of $800bn per year, largely aimed at sustaining the growth of
outlays on entitlements that do not support economic growth...
That's NOT what Fed policy is aimed at. There is no third part of its mandate
that says it needs to sustain the growth of entitlements. (And the casual, but
empirically unsupported claim that entitlement spending is anti-growth is
troublesome as well.)
Posted by Mark Thoma on Tuesday, January 29, 2013 at 10:23 AM in Budget Deficit, Economics, Inflation |
I couldn't resist one more plea for infrastructure construction:
How Spending on Infrastructure Can Reduce Our Long-Run Debt Burden
Spending more on infrastructure will improve our growth prospects, lower long-term
unemployment, and some types of spending can actually save us money in the long-run.
Posted by Mark Thoma on Tuesday, January 29, 2013 at 01:11 AM in Budget Deficit, Economics, Fiscal Policy, Fiscal Times, Unemployment |
Posted by Mark Thoma on Tuesday, January 29, 2013 at 12:06 AM in Economics, Links |
The Uneven Progress of Equal Opportunity:
... Five years into the 21st century, the data reveal a surprisingly high level
of job segregation in which African-American men, white women and especially
African-American women only rarely worked in the same occupation in the same
workplace as white men. In order to create a completely integrated
private-sector workplace, more than half of all private sector workers would
need to change jobs.
In most workplaces, the face of authority looks predictable. As the authors
put it, “White men are often in positions in management over everyone; white
women tend to supervise other women, black men to supervise black men and black
women tend to supervise black women.” ...
In this world, remarkable successes like the election of an
African-American president coexist with continuing failures, especially in
domains where disadvantages based on race, gender and class coincide and
Posted by Mark Thoma on Monday, January 28, 2013 at 12:18 PM in Economics |
The Future of the American Public Sector
Posted by Mark Thoma on Monday, January 28, 2013 at 10:44 AM in Economics, Video |
I need to read this:
The Supply and Demand for
Safe Assets, by Gary Gorton and Guillermo Ordonez, January 2013, NBER [open
link]: Abstract There is a demand for safe assets,
either government bonds or private substitutes, for use as collateral.
Government bonds are safe assets, given the governments’ power to tax, but
their supply is driven by fiscal considerations, and does not necessarily
meet the private demand for safe assets. Unlike the government, the private
sector cannot produce riskless collateral. When the private sector reaches
its limit (the quality of private collateral), government bonds are net
wealth, up to the governments own limits (taxation capacity). The economy is
fragile to the extent that privately-produced safe assets are relied upon.
In a crisis, government bonds can replace private assets that do not sustain
borrowing anymore, raising welfare.
Posted by Mark Thoma on Monday, January 28, 2013 at 10:43 AM in Academic Papers, Economics, Financial System |
, indirectly, that the unemployment problem
is mostly cyclical, not structural:
... I like to tell the story about what Senator Hubert Humphrey said when
President Ford’s Council of Economic Advisers, where I worked with Alan
Greenspan, reported to the Joint Economic Committee (JEC) that it was
raising the definition of the normal unemployment rate from 4.0% to 4.9%.
Humphrey, who chaired the JEC, was outraged and told us in the JEC hearing
that “if the country was suffering a plague and you economists were doctors
your solution would be to raise the definition of normal body temperature
above 98.6 degrees”
So I am worried when people stop talking about today’s very high
unemployment rates as if they were normal. ...
He goes on to try
to blame Obama for the slow recovery of labor markets ("It is not a good
sign that the inaugural address was silent on the subject..."), as though the Republicans -- his party -- and
its obstructionist ways has nothing to do with the fact that Obama couldn't get
his jobs program passed, or any further stimulus measures put in place. But it's
nice to see Taylor acknowledge that the problem is cyclical not structural, and
that fiscal policy can make a difference (Obama can hardly be blamed for the
Fed's actions, so when he complains that Obama isn't talking about this problem, he must have
fiscal policy in mind -- probably tax cuts for the wealthy rather than, say, spending on infrastructure, but it's a start.)
Posted by Mark Thoma on Monday, January 28, 2013 at 10:13 AM in Economics, Fiscal Policy, Politics, Unemployment |
Republicans are trying to improve their image and appear less extreme, but their
actual policies are moving in the opposite direction:
Makers, Takers, Fakers, by Paul Krugman, Commentary, NY Times: Republicans
have a problem. ... In the 2012 election,... the picture of the G.O.P. as the
party of sneering plutocrats stuck, even as Democrats became more openly
populist than they have been in decades.
As a result, prominent Republicans have begun acknowledging that their party
needs to improve its image. But here’s the thing: Their proposals for a makeover
all involve changing the sales pitch rather than the product. When it comes to
substance, the G.O.P. is more committed than ever to policies that take from
most Americans and give to a wealthy handful. ...
Why is this happening ... now, just after an election in which the G.O.P. paid a
price for its anti-populist stand?
Well, I don’t have a full answer, but I think it’s important to understand the
extent to which leading Republicans live in an intellectual bubble. They get
their news from Fox and other captive media, they get their policy analysis from
billionaire-financed right-wing think tanks, and they’re often blissfully
unaware both of contrary evidence and of how their positions sound to outsiders.
So when Mr. Romney made his infamous “47 percent” remarks, he wasn’t, in his own
mind, saying anything outrageous or even controversial. He was just repeating a
view that has become increasingly dominant inside the right-wing bubble, namely
that a large and ever-growing proportion of Americans won’t take responsibility
for their own lives and are mooching off the hard-working wealthy. Rising
unemployment claims demonstrate laziness, not lack of jobs; rising disability
claims represent malingering, not the real health problems of an aging work
And given that worldview, Republicans see it as entirely appropriate to cut
taxes on the rich while making everyone else pay more.
Now, national politicians learned last year that this kind of talk plays badly
with the public, so they’re trying to obscure their positions. Paul Ryan, for
example, has lately made a transparently dishonest attempt to claim that when he
about “takers” living off the efforts of the “makers”...
But in deep red states like Louisiana or Kansas, Republicans are much freer to
act on their beliefs — which means moving strongly to comfort the comfortable
while afflicting the afflicted.
Which brings me ... to Mr. Jindal, who declared ... “we are a populist party.”
No, you aren’t. You’re a party that holds a large proportion of Americans in
contempt. And the public may have figured that out.
Posted by Mark Thoma on Monday, January 28, 2013 at 12:33 AM in Economics, Politics |
Posted by Mark Thoma on Monday, January 28, 2013 at 12:06 AM in Economics, Links |
I think of Robert Stavins as being on the optimistic side when it comes to
action on climate change, but even he seems discouraged despite Obama's mention
of this issue in his inaugural address:
The Second Term of the Obama Administration,
Robert Stavins: In his
inaugural address on January 21st, President Obama surprised
many people – including me – by the intensity and the length of his comments
on global climate change. Since then, there has been a great deal of
the press and
in the blogosphere about what climate policy initiatives will be
forthcoming from the administration in its second term. ...
Although I was certainly surprised by
the strength and length of what the President said in his address, I confess
that it did not change my thinking about what we should expect from the
second term. Indeed, I will stand by
interview that was published by the Harvard Kennedy School on its website
five days before the inauguration (plus something I wrote in
previous essay at this blog in December, 2012). Here it is, with
a bit of editing to clarify things, and some hyperlinks inserted to help
Q: In the Obama administration’s second term, are there
openings/possibilities for compromises...?
A: It is conceivable – but in my view, unlikely – that
there may be an opening for implicit (not explicit) “climate policy” through
carbon tax. At a minimum, we should ask whether the defeat of
cap-and-trade in the U.S. Congress, the virtual unwillingness over the past
18 months of the Obama White House to utter the phrase “cap-and-trade” in
public, and the defeat of Republican Presidential candidate Mitt Romney
indicate that there is a new opening for serious consideration of a
carbon-tax approach to meaningful CO2 emissions reductions in the
First of all, there surely is such an opening in the policy wonk world.
Economists and others in academia, including important Republican economists
Greg Mankiw and
Glenn Hubbard, remain enthusiastic supporters of a national carbon tax.
much-publicized meeting in July, 2012, at the
American Enterprise Institute in Washington, D.C. brought together a
broad spectrum of Washington groups – ranging from
Public Citizen to the
R Street Institute – to talk about alternative paths forward for
national climate policy. Reportedly, much of the discussion focused on
Clearly, this “opening” is being embraced with enthusiasm in the policy
wonk world. But what about in the real political world? The good news is
that a carbon tax is not “cap-and-trade.” That presumably helps
with the political messaging! But if conservatives were able to tarnish
cap-and-trade as “cap-and-tax,” it surely will be considerably easier to
label a tax – as a tax! Also, note that President Obama’s silence extends
beyond disdain for cap-and-trade per se. Rather, it covers all
So as a possible new front in the climate policy wars, I remain very
skeptical that an explicit carbon tax proposal will gain favor in Washington.
A more promising possibility – though still unlikely – is that if
Republicans and Democrats join to cooperate with the Obama White House to
work constructively to address the short-term and long-term budgetary
deficits the U.S. government faces,... then there could be a political opening for new energy taxes,
even a carbon tax. ...
Those who recall the 1993 failure of the
BTU-tax proposal – with a less polarized and more cooperative Congress
than today’s – will not be optimistic. ... The key
group to bring on board will presumably be
conservative Republicans, and it is difficult to picture them being more
willing to break their
Grover Norquist pledges because it’s for a carbon tax.
Here's the surprising part (to me anyway), some optimism after all:
What remains most likely to happen is what I’ve been saying for several
years, namely that despite the apparent inaction by the Federal
government, the official U.S. international commitment —
a 17 percent reduction of CO2 emissions below 2005 levels by the
year 2020 – is nevertheless likely to be achieved! The reason is
the combination of CO2 regulations which are now in place because
Supreme Court decision [freeing the EPA to treat CO2 like other
pollutants under the Clean Air Act], together with
five other regulations or rules on SOX [sulfur compounds], NOX [nitrogen
compounds], coal fly ash, particulates, and cooling water withdrawals.
All of these will have profound effects on retirement of existing coal-fired
electrical generation capacity, investment in new coal, and dispatch of such
Combined with that is Assembly Bill 32 (AB 32) in the
state of California, which includes a CO2 cap-and-trade system
that is more ambitious in percentage terms than Waxman-Markey was in the
U.S. Congress, and which became binding on January 1, 2013. ... In other words, there
will be actions having significant implications for climate, but
most will not be called “climate policy,” and all will be within the
regulatory and executive order domain, not new legislation. ...
Posted by Mark Thoma on Sunday, January 27, 2013 at 10:58 AM in Economics, Environment, Market Failure, Policy, Politics, Taxes |
Gavyn Davies gives an update on where monetary policy in the UK is likely
headed when Mark Carney takes over as governor of the Bank of England:
Carney rejects King and supports the Fed doves, by Gavyn Davies: Mark Carney
comments on monetary policy at Davos, though not specifically about the UK,
opened a wide gap between his thinking and that of outgoing Governor Sir Mervyn
this earlier blog). The latter expressed doubts last week about the ability
of monetary policy to boost the economy further, given his concerns about the UK
supply-side, and his related worries about the 2% inflation target.
At Davos, Mark Carney showed very little sympathy for any of this, arguing that
there is plenty of scope for monetary policy to boost the developed economies
further... Mr Carney said that it might be acceptable for inflation to exceed
the government’s 2% target for a fairly lengthy period, especially in the
context of fiscal consolidation. ... But it is not clear how this approach can
be made compatible with the Bank of England’s current mandate, which has always
been interpreted by the MPC as requiring a return to a 2% inflation target over
roughly a two year horizon. ...
Mr Carney seems to think that he can just about square his remarks yesterday
with this “flexible inflation target” mandate, but in spirit his remarks are
more in keeping with a nominal GDP target, or a twin inflation/employment
mandate of the Fed variety. If policy is to shift in this direction, which means
placing a greater weight on unemployment within a Taylor rule framework, then
many members of the MPC might prefer the government to reduce confusion by
changing the official mandate. ...
Without a change in the mandate, there is some doubt about whether the majority
of the current MPC would support Mark Carney’s approach. ...
Posted by Mark Thoma on Sunday, January 27, 2013 at 08:21 AM in Economics, Monetary Policy |
Posted by Mark Thoma on Sunday, January 27, 2013 at 12:06 AM in Economics, Links |
Robert Shiller says caution is in order in housing markets:
A New Housing Boom? Don’t Count on It, by Robert Shiller, Commentary, NY Times:
We're beginning to hear noises that we’ve reached a major turning point in the
housing market — and that, with interest rates so low, this is a rare
opportunity to buy. But are such observations on target?
It would be comforting if they were. Yet the unfortunate truth is that the tea
leaves don’t clearly suggest any particular path for prices, either up or down..., any short-run increase in inflation-adjusted home prices has
been virtually worthless as an indicator of where home prices will be going over
the next five or more years. ...
The bottom line for potential home buyers or sellers is probably this: Don’t do
anything dramatic or difficult. There is too much uncertainty... If you have
personal reasons for getting into or out of the housing market, go ahead.
Otherwise, don’t stay up worrying about home prices any more than you do about
stock prices. ...
Posted by Mark Thoma on Saturday, January 26, 2013 at 12:21 PM in Economics, Housing |
Brad DeLong argues:
We have real problems. We don't need to stop ourselves from dealing with our
real problems out of fear of the invisible bond market vigilantes.
Posted by Mark Thoma on Saturday, January 26, 2013 at 11:14 AM in Budget Deficit, Economics |
... Now that Obama’s back in the White House, is the reform of labor laws
back on the agenda? Almost certainly not. With the Republicans controlling
the House, any effort to revive the card-check bill would be doomed. ...
With anything that requires congressional approval effectively ruled out,
Obama’s options ... are limited. One thing he’s already
speak out against the so-called right-to-work laws that Michigan and
other Republican-run states are introducing... As the latest figures from
the B.L.S. make clear, the Republican union-bashing is working. Last year,
union membership fell... The unions badly need the President’s active
involvement in the struggle against these G.O.P. initiatives...
The other venue where the unions will be looking for more favorable action
is the National Labor Relations Board, which enforces labor laws and
oversees elections at workplaces where unions are seeking to organize. ...
At the start of 2012, Obama used recess appointments to
appoint two union-friendly officials to the N.L.R.B.
By issuing some more rulings favorable to the unions over the next four
years, the N.L.R.B. will help tilt the balance of power in the workplace
back towards labor. But after many years in which employers were allowed to
flout the law and intimidate union organizers with impunity, nobody in the
labor movement is under any illusion that these administrative changes will
be sufficient to reverse the unions’ historic decline. Indeed, even some
economists who are sympathetic to unions believe that their decline is
irreversible. ... Changing that is going to take much more than two terms of
Obama in the White House. But if he is serious about pursuing a liberal
agenda, he can’t avoid getting involved.
I meant to post this yesterday, but travel got in the way. Today, things have changed:
In a ruling
that called into question nearly two centuries of presidential “recess”
appointments that bypass the Senate confirmation process, a federal
appeals court ruled on Friday that President Obama violated the Constitution when he installed three officials on the National Labor Relations Board a year ago. ...
Is anyone counting on the Supreme Court to overturn this?
Posted by Mark Thoma on Saturday, January 26, 2013 at 12:47 AM in Economics, Unions |
Posted by Mark Thoma on Saturday, January 26, 2013 at 12:15 AM in Economics, Links |
Deficit hawks are losing their clout:
Deficit Hawks Down, by Paul Krugman, Commentary, NY Times: President
Obama’s second Inaugural Address offered a lot for progressives to like. ...
But arguably the most encouraging thing of all was what he didn’t say: He
barely mentioned the budget deficit..., the latest sign that the self-styled
deficit hawks — better described as deficit scolds — are losing their hold
over political discourse. And that’s a very good thing.
Why have the deficit scolds lost their grip? I’d suggest four interrelated
First, they ... spent three years warning of imminent crisis — if we don’t
slash the deficit now now now, we’ll turn into Greece... But that crisis
keeps not happening ... So the credibility of the scolds has taken a ...
Second, both deficits and public spending as a share of G.D.P. have started
to decline..., and reasonable forecasts ... suggest that the federal deficit
will be below 3 percent of G.D.P., a not very scary number, by 2015.
And it was, in fact, a good thing that the deficit was allowed to rise as
the economy slumped. With private spending plunging..., the willingness of
the government to keep spending was one of the main reasons we didn’t
experience a full replay of the Great Depression. Which brings me to the
third reason the deficit scolds have lost influence: the ... claim that we
need to practice fiscal austerity even in a depressed economy, has failed
decisively in practice. Consider ... the case of Britain. In 2010, when the
new government of Prime Minister David Cameron turned to austerity
policies,... the sudden, severe medicine ... threw the nation back into
At this point, then, it’s clear that the deficit-scold movement was based on
bad economic analysis. But ... there was also ... a lot of bad faith
involved, as the scolds tried to exploit an economic (not fiscal) crisis on
behalf of a political agenda that had nothing to do with deficits. And the
growing transparency of that agenda is the fourth reason the deficit scolds
have lost their clout. ... Prominent deficit scolds can no longer count on
being treated as if their wisdom, probity and public-spiritedness were
beyond question. But what difference will that make?
Sad to say, G.O.P. control of the House means that we won’t do what we
should be doing: spend more, not less, until the recovery is complete. But
the fading of deficit hysteria means that the president can turn his focus
to real problems. And that’s a move in the right direction.
Posted by Mark Thoma on Friday, January 25, 2013 at 12:42 AM in Budget Deficit, Economics, Policy, Politics |
... How long will it be before the likes of Veronique de Rugy stop
denouncing Social Security, Medicare, Unemployment Insurance, etc. as
programs that have turned us into "a nation of takers", and stop denouncing
these programs beneficiaries as "moochers"?
It is in some ways very odd. It used to be that critics of the welfare state
pointed to high net marginal tax rates and argued that they had high
deadweight losses. Sometimes they had a point. Then, after bipartisan
reforms, we got to a point where there were few high net marginal tax rates
large enough to induce large deadweight losses.
And then, in the blink of an eye, the problem became not public-finance
deadweight losses but, rather, the moocher class, the nation of takers, etc.
Paul Krugman on Paul Ryan's (ahem) defense of Social Security and Medicare:
...everyone has noted Ryan’s raw dishonesty here, let’s not let the
cowardice pass unmentioned. If you’re a Randian conservative, as Ryan claims
to be, then you should consider Social Security and Medicare every bit as
much a part of the moocher conspiracy as Medicaid and food stamps. And don’t
say that you pay for what you get: Social Security benefits aren’t
proportional to payment, so that the system is somewhat redistributionist,
and Medicare benefits don’t depend at all on how much you pay in, so that
the system is strongly redistributionist. (You might even say that Medicare
takes from each according to his ability, and gives to each according to his
All of this is fine with me, but it should be anathema to Ryan. But he knows
that Social Security and Medicare are popular, so he pretends that his
radical philosophy has nothing bad to say about these programs, and that we
can massively downsize government on the backs of the undeserving poor.
But remember, he’s a Brave, Honest Conservative. Everyone says so.
Speaking of social insurance, here's
...Unsurprisingly, most Americans are split between various misconceptions
of what Social Security and Medicare are. Many, particularly right-wing
politicians and their media mouthpieces, see them as pure tax-and-transfer
programs: they gather money from one set of people and give it to another
set of people. This feeds easily into the makers-vs.-takers line, with
payroll taxes on workers going to fund benefits for non-workers. From this
point of view, they are bad bad bad bad bad and should be cut.
Many others, particularly beneficiaries and people who hope to see
beneficiaries, see them as earned benefits. The common conception is that
you pay in while you’re working, so you earned the benefits you get in
retirement..., you’re just getting back “your” money that you set aside
during your career.
Both of these perspectives are wrong, the latter more obviously so. Most
people, during their working careers, do not pay nearly enough in payroll
taxes to pay for their expected benefits. This is most obvious for
The problem with the tax-and-transfer argument is only slightly more subtle.
Sure, at any given moment some people pay taxes and others collect benefits
(and many do both, since Medicare is funded by general revenues). But most
of us will both pay and receive at different points in our lives. So both
programs are really more like income-shifting arrangements...
In the inaugural address, I think the president got it basically right. They
are risk-spreading programs. You don’t get back exactly what you put in:
they have a certain degree of progressivity (although less for Social
Security than is commonly imagined). Their main function is to protect
people against extreme outcomes by pooling a limited share of our resources.
Yes, rich people end up paying payroll taxes for insurance they end up not
needing. But that’s how insurance always works: you pay the premiums hoping
you won’t need it. And the key fact is that most young people, whey they
start paying payroll taxes, don’t know what their own personal outcomes will
be. ... Like any insurance scheme, you can make everyone better off simply
by moving money around between different states of the world.
These particular insurance schemes, as the president said, have a moral
element to them. They are a way of expressing out solidarity with each other
as Americans, people united, however loosely, in a common endeavor. They
also have an economic element to them. People protected against bad outcomes
are more willing to take the risks needed for a vibrant and prosperous
society. They are something to celebrate, not something to be embarrassed
about whenever the Republicans come after them.
I've written quite a bit about the insurance aspect as well, e.g. see
The Need for Social Insurance:
systems differ in their ability to provide goods and services and in
the level of economic risk faced by a typical household. Socialism is a
low mean, low variance economic system. With a planned economy, cycles
in unemployment do not occur unless mandated by planners. Worker
income, though low, is not subject to substantial variation over time.
Other economic risks, such as access to housing and risks related to
healthcare are also very low since these services are provided by the
state. Economic risks for workers are low in such a system, but so is
Under capitalism the average level of income is
much higher, but economic risk is higher as well. In a capitalist
system, workers can be involuntarily displaced as new products are
invented, new production techniques are implemented, production moves
outside the country, or inevitable business cycle variation occurs.
These are shocks that affect workers independent of their own behavior.
A worker who has shown up to work every day and worked hard to support
a family can be suddenly unemployed for reasons unrelated to anything
connected to his or her own behavior.
As the U.S. entered the
20th century, important social changes arising from industrialization
were becoming increasingly evident, and these changes exposed the high degree of
economic risk under a capitalist system. Migration to cities and the
resulting breakup of the extended family, reliance on wage income as a
primary means of support, and increasing life expectancy resulted in
increased economic risk for the typical worker relative to the more
agrarian economy that existed prior to industrialization.
agrarian economy, economic security is provided by extended family
relationships coupled with the largely self-sufficient nature of farms.
On a farm, a recession is a bad harvest, but it generally does not mean
a total lack of income. Times can be tough, food can be very scarce and
there can be hunger, but generating a subsistence level of income from
the farm is usually possible even in the worst of years. For a worker
dependent solely upon wage income, the consequences of a recession are
much more severe. A recession means a total lack of income, not just
hard times. Without the help of others or the existence of some type of
social insurance program, abject poverty is a real possibility (see Life After the Great Depression for descriptions of the misery that followed the Great Depression).
also takes on a different character. On the farm, retirement meant
gradually, if often reluctantly, letting the children take over
responsibility for the farm, but it did not mean a total loss of
income. Children provided for parents. But an aging worker in a city,
perhaps disconnected geographically from their children, faces a
different circumstance upon retirement. Such a worker may face a
complete loss of income, and disability from age is not always an event
that occurs according to plan. Even a worker who has diligently saved
for retirement can suddenly become impoverished due to events such
unexpected health costs, or even a much longer life than expected.
industrialization progressed, 1920 marks a benchmark year where, for
the first time, more than half of the population lived in cities. When
the Great Depression hit around a decade later, the social
changes the U.S. was experiencing and the need for new ideas regarding
the government’s responsibility for the economic security of its
citizens became clear. The Great Depression made it evident that in a
capitalist system, where the whimsies of the marketplace can wreak
havoc on people’s lives, the government has an obligation to provide
economic security. It was also evident that the private sector did not
provide the needed level of insurance and that government intervention
was required to overcome this problem (due to both moral hazard and
asymmetric information problems in the private insurance market).
is important that the economy be allowed to change with new technology
and changing preferences, but the consequences for innocent workers
affected by such changes is a social responsibility that needs to be
addressed. In addition, as extended family relationships are hindered
by geography and the social contract between parents and children
breaks down, the elderly need a way to avoid poverty. Programs such as
Unemployment Compensation, Medicare, and Social Security arose as a
means to mitigate these economic risks under capitalism using the least
amount of society’s valuable resources.
Drawing a rough analogy,
socialism is like investing in T-Bills. Low risk, but low return.
Capitalism is like the stock market. There is a higher average return
accompanied by higher risk. Financial theory tells how to insure
against such risks and there is no reason why this cannot be applied in
the social insurance arena to smooth variations in income.
There is a need for social insurance under capitalism.
Posted by Mark Thoma on Friday, January 25, 2013 at 12:33 AM in Economics, Social Insurance, Social Security |
Simon Wren-Lewis argues that the "crisis view" of change in macroeconomic
theory is too simple
Misinterpreting the history of macroeconomic thought, mainly macro: An
attractive way to give a broad sweep over the history of macroeconomic ideas
is to talk about a series of reactions to crises (see
Matthew Klein and
Noah Smith). However it is too simple, and misleads as a result. The
Great Depression led to Keynesian economics. So far so good. The inflation
of the 1970s led to ? Monetarism - well maybe in terms of a few brief policy
experiments in the early 1980s, but Monetarist-Keynesian debates were going
strong before the 1970s. The New Classical revolution? Well rational
expectations can be helpful in adapting the Phillips curve to explain what
happened in the 1970s, but I’m not sure that was the main reason why the
idea was so rapidly adopted. The New Classical revolution was much more than
The attempt gets really off beam if we try and suggest that the rise of RBC
models was a response to the inflation of the 1970s. I guess you could argue
that the policy failures of the 1970s were an example of the Lucas critique,
and that to avoid similar mistakes macroeconomists needed to develop
microfounded models. But if explaining the last crisis really was the prime
motivation, would you develop models in which there was no Phillips curve,
and which made no attempt to explain the inflation of the 1970s (or indeed,
the previous crisis - the Great Depression)?
What the ‘macroeconomic ideas develop as a response to crises’ story leaves
out is the rest of economics, and ideology. The Keynesian revolution (by
which I mean macroeconomics after the second world war) can be seen as a
methodological revolution. Models were informed by theory, but their
equations were built to explain the data. Time series econometrics played an
essential role. However this appeared to be different from how other areas
of the discipline worked. In these other areas of economics, explaining
behavior in terms of optimization by individual agents was all important.
This created a tension, and a major divide within economics as a whole.
Macro appeared quite different from micro.
A particular manifestation of this was the constant question: where is the
source of the market failure that gives rise to the business cycle. Most
macroeconomists replied sticky prices, but this prompted the follow up
question: why do rational firms or workers choose not to change their
prices? The way most macroeconomists at the time chose to answer this was
that expectations were slow to adjust. It was a disastrous choice, but I
suspect one that had very little to do with the nature of Keynesian theory,
and rather more to do with the analytical convenience of adaptive
expectations. Anyhow, that is another story.
The New Classical revolution was in part a response to that tension. In
methodological terms it was a counter revolution, trying to take
macroeconomics away from the econometricians, and bring it back to something
microeconomists could understand. Of course it could point to policy in the
1970s as justification, but I doubt that was the driving force. I also think
it is difficult to fully understand the New Classical revolution, and the
development of RBC models, without adding in some ideology.
Does this have anything to tell us about how macroeconomics will respond to
the Great Recession? I think it does. If you bought the ‘responding to the
last crisis’ narrative, you would expect to see some sea change, akin to
Keynesian economics or the New Classical revolution. I suspect you would be
disappointed. While I see plenty of financial frictions being added to DSGE
models, I do not see any significant body of macroeconomists wanting to ply
their trade in a radically different way. If this crisis is going to
generate a new revolution in macroeconomics, where are the revolutionaries?
However, if you read the history of macro thought the way I do, then macro
crises are neither necessary nor sufficient for revolutions in macro
thought. Perhaps there was only one real revolution, and we have been
adjusting to the tensions that created ever since.
Let me follow up on the ideological point with an example. Prior to the New
Classical revolution in the 1970s (which, contra some recent descriptions, is
different from DSGE models), the people who do not believe that government
intervention is bad had a problem. It was very clear in the data that there was
a positive correlation between changes in the money supply and changes in
employment and real income. Further, though this is harder to establish, the
relationship appeared causal. Money causes income, and this allowed government
to stabilize the economy.
The (neo)classical model, with its vertical AS curve, could not explain the
positive money-income correlation in the data. In the typical classical
formulation, so long as prices are perfectly flexible and all markets clear at
all points in time, the economy is always in long-run equilibrium. Thus, in
these models the prediction is a zero correlation between money and income. But
it wasn't zero.
However, a very clever idea from Robert Lucas in the 1970s allowed this
correlation to be explained without admitting government can do good, i.e.
without admitting that government can stabilize the economy using monetary
policy. This is the ideological part -- a way to explain the data without
acknowledging a role for government at the same time. I can't say that Lucas
approached the problem in this way, i.e. that he started out with the
ideological goal of explaining the money-income correlation without allowing a
role for government. Maybe it arose in a flash of brilliance completely
unconnected to ideological concerns, But I find it hard to explain why this
model came about in the form it did without ideology, and the view of government
the New Classical model supported surely didn't hurt its acceptance at places
like the University of Chicago (as it existed then).
Posted by Mark Thoma on Friday, January 25, 2013 at 12:24 AM in Economics, Macroeconomics, Methodology |
Roger Farmer (I have a short comment at the end):
Why financial markets are inefficient, by Roger E. A. Farmer , Vox EU:
Writing in a review of Justin Fox’s book The Myth of the Efficient
Market, Richard Thaler (2009) has drawn attention to two dimensions of
the efficient markets hypothesis, what he refers to as:
- ‘No free lunch’,
what economists refer to as ‘informational efficiency’;
- ‘The price is
right’, what economists refer to as ‘Pareto efficiency’.
My recent research with
Carine Nourry and Alain Venditti argues that while there are strong reasons
for believing there are no free lunches left uneaten by bonus-hungry market
participants, there are really no reasons for believing that this will lead
to Pareto efficiency, except, perhaps, by chance (Farmer, Nourry, Venditti
In separate work, I look
at the policy implications of this, showing that the Pareto inefficiency of
financial markets provides strong grounds to support central bank
intervention to dampen excessive fluctuations in the financial markets
(Farmer 2012b). These are strong and polarising claims. They are not made
Not irrationality, frictions, sticky prices nor credit
Some economists will be
sympathetic to my arguments because they believe that financial markets
experience substantial frictions. For example, it is frequently argued that
agents are irrational, households are borrowing constrained or prices are
sticky. Although there may be some truth to all of these claims, my argument
for direct central bank intervention in the financial markets does not rest
on any of these alleged market imperfections.
Other readers of this
piece will wish to challenge my view based on the assertion that competitive
financial markets must necessarily lead to outcomes that cannot be improved
upon by government intervention of any kind. That assertion has been
formalised in the first welfare theorem of economics that is taught to every
first-year economics graduate student.
The first welfare
theorem provides conditions under which free trade in competitive markets
leads to a Pareto efficient outcome, a situation where there is no way of
reallocating resources that makes one person better off without making
someone else worse off. In my work with Nourry and Venditti (Farmer, Nourry,
Venditti 2012), we show why the conditions that are necessary for the
theorem to hold do not characterise the real world.
We make some strong but
- Households are
rational and plan for the infinite future;
- They have rational
expectations of all future prices;
- There are complete
financial markets in the sense that all living agents are free to make
trades contingent on any future observable event;
- No agent is big
enough to influence prices.
Crucially, in our model,
there are at least two types of people who discount the future at different
rates; patient and impatient agents. We show that, even when both types
share common beliefs, the belief itself can independently influence what
occurs. This follows an important idea originating at the University of
Pennsylvania in the 1980s, what David Cass and Karl Shell (1983) call
‘sunspots’, or what Costas Azariadis (1981) refers to as a ‘self-fulfilling
The first welfare theorem, birth and death
What could possibly go
wrong when agents are rational, hold rational expectations, there are no
frictions, and markets are complete? Well, the first welfare theorem does
not account for the fact that people die and new people are born. In our
- Patient and
impatient agents each recognise that the financial markets are fickle
and that the value of the stock market could rise or fall;
- If the markets boom
then the patient savers, feeling wealthier, will lend more to the
- If the markets
crash, then the savers will recall their loans, made in better times.
But in our model
environment, booms and crashes occur simply as a consequence of the animal
spirits of market participants. Why should we care if there are big
movements in the asset markets? After all, the borrowers and lenders are
rational and they have made bets with each other in full knowledge that
these large asset movements might occur.
- The problem is that
the next generation is unable to insure against swings in wealth that
have a big influence on their lives.
Steve Davis and Till von
Wachter (2011) have shown that the present value of lifetime income of new
entrants to the labour market can differ substantially depending on whether
their first job occurs in a boom or a recession. In our model, the lifetime
income of the young can differ by as much as 20% across booms and slumps.
Given the choice, the
young agents in our model would prefer to avoid the risk of a 20% variation
in lifetime wealth. There is a feasible way of allocating resources that
would insure them against this risk, but financial markets cannot achieve
this allocation, except by chance. The inability of our children to trade in
prenatal financial markets is sufficient to invalidate the first welfare
theorem of economics.
In short, sunspots
matter. And they matter in a big way.
We show that financial
markets cannot work well in the real world except by chance because:
- There are many
- Only one of them is
- For all other
equilibria, the whims of market participants cause the welfare of the
young to vary substantially in a way that they would prefer to avoid, if
given the choice.
Our paper makes some
classical assumptions, but has Keynesian policy implications. Agents are
rational, they have rational expectations and there are no financial
frictions. Even when agents are rational, markets are not.
(1981), “Self-fulfilling Prophecies”, Journal of Economic Theory,
Cass, David and Karl
Shell, “Do Sunspots Matter?” (1983), Journal of Political Economy,
Davis, Steven and Till
Von Wachter (2011), “Recessions and the Costs of Job-Losses”, Brookings
Papers on Economic Activity.
Farmer, Roger E A
(2012a), “The Evolution of
Endogenous Business Cycles”, NBER Working Paper 18284 and CEPR
Discussion Paper 9080.
Farmer, Roger E A
Easing: How it Works and Why it Matters”, NBER working paper 18421 and
CEPR discussion paper 9153.
Farmer, Roger E A,
Carine Nourry and Alain Venditti (2012), “The
Inefficient Markets Hypothesis: Why Financial Markets Do Not Work Well in
the Real World”, CEPR Discussion Paper No. 9283.
Fox, Justin (2009),
The Myth of the Rational Market: A History of Risk, Reward and Delusion on
Wall Street, New York, Harper.
Thaler, Richard (2009),
“Markets can be wrong and the price is not always right”, Financial
Times, 4 August.
1 See my survey (Farmer
2012a), which documents the evolution of the Pennsylvania School of
Endogenous Business Cycles.
My question is whether these results hold if there were Barro ("Are Bonds Net
Wealth") preferences, i.e. if the utility of the parent depends upon the utility
of the child?:
U = Up(x1, x2, x3, ..., xn,
I asked Roger Farmer this question, and he replied this was a good research
My guess is that Barro preferences are not enough. Why? Because the trades
required to eliminate sunspot equilibria would require that some agents are
born with negative net worth in some states of the world. Since the courts
would not enforce those trades, the equilibrium would unravel.
Posted by Mark Thoma on Friday, January 25, 2013 at 12:15 AM in Economics, Financial System |
Posted by Mark Thoma on Friday, January 25, 2013 at 12:06 AM in Economics, Links |
This is part of the introduction to a new paper by Karen Dynan, Douglas
Elmendorf, and Daniel Sichel on household income volatility (they find that
volatility has increased in recent decades):
The Evolution of Household Income Volatility, by: Karen Dynan, Douglas
Elmendorf, and Daniel Sichel: Editor's Note: The full version of this
paper is available at the
website for the B.E. Journal of Economic Policy and Analysis. An earlier
working version of the paper can be directly downloaded [here].
1. Introduction Researchers have found it relatively
straightforward to document changes in the volatility of the U.S. economy as
a whole over the last several decades. The aggregate U.S. economy entered a
period of relative stability known as the Great Moderation in the mid-1980s
and, much more recently, has been in dramatic flux since the onset of the
financial crisis and Great Recession in 2007 and 2008. However, aggregate
trends do not necessarily translate into trends in the experiences of
individual households. For example, the Great Moderation is generally
thought to be a period over which the economy became more dynamic, with
globalization, deregulation, and technological change increasing the
competitive pressures and risks faced by workers. Given these developments,
it is not clear that the economic environment facing individual households
was in fact more stable during this period. Thus, to the extent that one is
interested in household economic security, one is compelled to consider
micro data. Accordingly, a large literature has developed that directly
examines the volatility of earnings and income at the household level. While
income volatility is not the same thing as the risk or uncertainty faced by
households, changes in volatility are likely to be associated with changes
in risk and uncertainty. ...
To summarize our results, we estimate that the volatility of household
income—as measured by the standard deviation of two-year percent changes in
income—increased about 30 percent between the early 1970s and the late
2000s. The rise in volatility did not occur in a single period but
represented an upward trend throughout the past several decades; it occurred
within each major education and age group as well. Yet, the run-up in
volatility was concentrated in one important sense: It stemmed primarily
from an increasing frequency of very large income changes rather than larger
changes throughout the distribution of income changes.
Turning to the components of income, we estimate notable increases in the
volatility of labor earnings and transfer income and a small increase in the
volatility of capital income. Household labor earnings (combining
earnings of heads and spouses before estimating volatility at the household
level) became more volatile even though the volatility of individual
earnings (heads and spouses taken as individual observations) edged down.
The explanation is that women’s earnings became less volatile while men’s
earnings became more volatile, and the latter matters more for household
earnings because men earn more than women on average. We show that rising
volatility in men’s earnings owes both to rising volatility in earnings per
hour and in hours worked, though our interpretation could be affected by
changes in PSID methodology. And we demonstrate that earnings shifts between
household members, as well as shifts in market income and transfer income,
provide only small offsets to each other. ...
Posted by Mark Thoma on Thursday, January 24, 2013 at 12:33 AM in Economics, Social Insurance |
Fred Moseley responds to my comments on his comments (I suggested that if he
wants a theory of exploitation that is consistent, he should consider dropping
Marx's Labor Theory of Value, which does not actually explain value, and instead
explain exploitation in more modern terms, i.e. with reference to why workers
have not received their marginal products in recent decades):
Thanks to Mark for posting my critical comment on Krugman’s explanation of
stagnant real wages and declining wage share of income, and for his
introductory comment, which raises fundamental issues.
A question for Mark: how do you know what the “MP benchmark” is that workers
should have received. The MP benchmark is presumably the “marginal product
of labor”, but how do you know what this is? I know of no time series
estimates of the aggregate MPL (independent of income shares) for recent
decades. If you know of such estimates, please send me the reference(s).
What you have in mind may be estimates like Mishel’s estimates of the
“productivity of labor” and the “real wage of production workers”, which
shows a widening gap in recent years (see Figure A in “The
wedges between productivity and median compensation growth”; ). But
these estimates of the “productivity of labor” are not of the MPL of
marginal productivity theory, but are instead the total product divided by
total labor. These estimates are more consistent with Marxian theory than
with marginal productivity theory. And I agree that explaining this
divergence is an important key to understanding the increasing inequality in
recent decades. I think the explanation has to do with a number of factors
that have put downward pressure on wages: higher unemployment, outsourcing
and threat of more, declining real minimum wage, attacks on unions, etc.
This is very different from Krugman’s “capital-biased technological change”.
A word on the labor theory of value: the LTV is not mainly a micro theory
of prices, but is instead primarily a macro theory of profit. And I think
that it is the best theory of profit by far in the history of economics
(there is not much competition). It explains a wide range of important
phenomena in capitalist economies: conflicts over wages, and conflicts over
the length of the working day and the intensity of labor in the workplace,
endogenous technological change, trends and fluctuations in the rate of
profit over time, endogenous causes of economic crises, etc. (For further
discussion of the explanatory power of Marx’s theory see my “Marx Economic
Theory: True or False? A Marxian Response to Blaug’s Appraisal”, in Moseley
(ed.) Heterodox Economic Theories: True or False?; available
Marginal productivity, in very unfavorable contrast, can explain none of
these important phenomena.
Just one comment. If the LTV cannot explain input or output prices, and it
doesn't, how can it explain profit?
(Okay, two -- In defense of Krugman, his book Conscience of a Liberal was anything but a “capital-biased technological change” explanation of rising inequality, and he stated the “capital-biased technological change” explanation as something to look into rather than a conclusion he has drawn. For example, he says:
More on robots and all that ... there’s another possible resolution: monopoly power. Barry Lynn and Philip Longman
have argued that we’re seeing a rapid rise in market concentration and
market power. The thing about market power is that it could
simultaneously raise the average rents to capital and reduce
the return on investment as perceived by corporations, which would now
take into account the negative effects of capacity growth on their
markups. So a rising-monopoly-power story would be one way to resolve
the seeming paradox of rapidly rising profits and low real interest
rates. As they say, this calls for more research; but the starting
point is to realize that there’s something happening here, what it is
ain’t exactly clear, but it’s potentially really important.
So I don't think it's completyely fair to say that Krugman's explanation for rising inequality is "capital-biased technological change.")
Posted by Mark Thoma on Thursday, January 24, 2013 at 12:24 AM in Economics, Income Distribution, Market Failure, Productivity, Technology |
Tim Taylor looks at recent evidence on the relationship between income and happiness:
Does Income Bring Happiness?, by Tim Taylor: Back in 1974, Richard
Easterlin published a paper called "Does Economic Growth Improve the Human
Lot? Some Empirical Evidence" (available
for example). Easterlin raised the possibility that what really matters to
most people is not their absolute level of income, but their income level
relative to others in society. If relative income is what matters, then an
overall rise in incomes doesn't make me any better off relative to others,
and so my happiness does not increase. ...
Since then, the question of whether income brings happiness has been
much-debated by economist and other social scientists. In
"The New Stylized Facts about Income
and Subjective Well-Being," Daniel W. Sacks, Betsey Stevenson, and
Justin Wolfers offer a compact and readable summary of the evidence (much of
which they generated in earlier research) that income is not just
relative--and so more income does increase happiness. The paper is available
as IZA Discussion Paper No. 7105, released in December.
At a basic level, this research looks at economic data on levels of income
and compares it with survey data on on life satisfaction. ... As a starting
point, let's compare countries across the world... The horizontal axis of
the graph is a logarithmic scale...
The general pattern is clear those in higher-income countries tend to report
more life satisfaction. The best-fit straight line is drawn through the
data. The much lighter dotted line is a "non-parametric" line which is a
best-fit line that isn't required to be straight, and thus flattens out near
the bottom and curves more steeply at the top than a straight line. Broadly
speaking, it seems as if each doubling of income does lead to a distinct
rise in the happiness scale, both for low-income and for high-income
Of course, this result by itself doesn't prove the case either way. It could
be that people in high-income countries are happier because they perceive
that they are not in low-income countries, and so the happiness from their
income is relative, rather than absolute. Thus, a second test is to look
within individual countries at the happiness level of those with different
income levels. If happiness from income is a relative concept, one might
expect that, say, the rise in income from being a low-income person in the
U.S to being a high-income person in the U.S. would bring more happiness,
but the rise in happiness should be much less within a country than it would
be across countries. However, the rise in happiness as a result of higher
incomes within a country ends up looking very much like the relationship
Yet another test is to look at comparisons over time: that is, as economic
growth gradually raises income levels, do people on average within a given
country report a higher level of happiness. The data here is harder to
interpret, because long-run data on happiness measures isn't available for
many countries, and the wording of the survey questions about life
satisfaction often changes over time. While acknowledging that the existing
evidence is messy and difficult to interpret firmly, the authors argue that
it is at least consistent with the same finding: that is, higher income
levels over time are correlated with higher reported life satisfaction.
But not for the United States! Sacks, Stevenson, and Wolfers write: "The US,
however, remains a paradoxical counter-example: GDP has approximately
doubled since 1972 and well-being, as measured by the General Social Survey,
has decreased slightly." The authors point out that any individual country
may have specific social changes that alter the reported "life
satisfaction." In particular, they point out that inequality of income
started rising in the U.S. economy in the 1970s, which may explain why the
typical or median person in the economy isn't feeling much better off. They
write: "We suggest that the US is more of an interesting outlier than a key
Those who want to sort through why Sacks, Stevenson, and Wolfers reach
different conclusion from Easterlin can dig into the paper itself: a lot of
the difference, they argue, is just that more and better data is available
For my own part, I confess that I find happiness surveys both intriguing and
dubious. It seems to me that higher levels of income are typically
correlated with more health, education, travel, consumption, and a higher
quality of recreation, so it's not a surprise to me it seems to me that
happiness rises with income. On the other side, it does seem to me that
survey questions about life satisfaction are answered in the context of a
particular place and time. If a person says that their life satisfaction was
a 7 in 1960 on a scale of 0-10, and another person says that their life
satisfaction is a 7 in 2013, are those two people really equally satisfied?
To put it another way, if the person from 2013 was transported by a time
machine back to live in 1960, with all their memories and knowledge of the
technologies, medicines, foods, education, and travel available in 2013,
would that time traveler really be equally happy in either time period? I
suspect that when most people are asked to rank happiness on a scale of
0-10, they don't say to themselves: "Well, people living 100 years from now
might have extraordinarily high levels of income and technology, so compared
with them, I'm really no more than a 2." At best, survey questions on a
scale of 0-10 seem like an extremely rough-and-ready way of measuring life
satisfaction across very different countries or across substantial periods
Posted by Mark Thoma on Thursday, January 24, 2013 at 12:15 AM in Economics |
Posted by Mark Thoma on Thursday, January 24, 2013 at 12:06 AM in Economics, Links |
Stiglitz and Bilmes:
No US peace dividend after Afghanistan, by Joseph Stiglitz and Linda Bilmes,
Commentary, FT: Nearly 12 years after the US-led invasion of Afghanistan
began, a war-weary America is getting ready to leave. ... But the true cost of the war is only just beginning. ...
The number of Iraq and Afghanistan veterans receiving government medical
care has grown to more than 800,000, and most have applied for permanent
disability benefits. Yielding to political pressure, the White House and
Congress have boosted veteran’s benefits ... and made it easier to qualify
for disability... But the number of claims keeps climbing. ... To recruit
volunteers to fight in highly unpopular wars, the military adopted higher
pay scales and enhanced healthcare benefits... Meanwhile, there is a huge
price tag for replacing ordinary equipment that has been consumed during the
... The US has already borrowed $2tn to finance the Afghanistan and Iraq
wars – a major component of the $9tn debt accrued since 2001... Today,... it could have been
hoped that the ending of the wars would provide a large peace dividend...
Instead, the legacy of poor decision-making from the expensive wars in
Afghanistan and Iraq will live on in a continued drain on our economy – long
after the last troop returns to American soil.
Posted by Mark Thoma on Wednesday, January 23, 2013 at 01:07 PM in Budget Deficit, Economics, Iraq and Afghanistan |
I don't get
this argument from Bank of England governor Mervyn King:
The governor of the Bank of England... Sir Mervyn King ... dismissed
suggestions made by his designated successor, Mark Carney, now governor of
the Bank of Canada, for the Bank to ease monetary policy further by
abandoning its inflation target if meaningful growth continues to elude the
UK. Mr Carney succeeds him at the start of July. ...
With the UK government pursuing fiscal consolidation, monetary policy has
been the mainstay of policy makers’ strategy to boost economic output... But
the governor, speaking in Belfast, warned against over-reliance on monetary
easing. “In many countries, including the UK, fiscal policy is constrained
by the size of government indebtedness, and monetary policy has come to be
seen as the only game in town,” Sir Mervyn said. “Relying on monetary policy
alone, however, is not a panacea.”
That says nothing at all about whether monetary policy should be easier,
tighter, or is currently just right. Actually, he does offer this:
The governor suggested the government should introduce supply-side reforms
to support the UK’s shift towards higher exports and lower imports.
“It cannot be for a central bank to design a programme of such supply
initiatives, but in economic terms there has never been a better time for
supply-side reform,” he said.
He is suggesting that the UK's problems are entirely on the supply-side, and
that further demand side measures cannot help (e.g. through further monetary
easing). Bluntly, I think that's wrong. I have my doubts about nominal GDP
targeting as the solution to our economic problems, but that doesn't imply that
the current policy approach is optimal, or that deviating from a strict
inflation target in the short-run (or the path to the target) cannot help.
Posted by Mark Thoma on Wednesday, January 23, 2013 at 12:33 AM in Economics, Inflation, Monetary Policy |
Healthcare is America’s real problem, by Peter Orszag, Commentary, FT:
Healthcare costs are the core long-term fiscal challenge facing the US...
This is why the recent deceleration of these costs is so encouraging...
The good news is that recent developments in health costs are better than
many appreciate. Cost growth has slowed dramatically...
Last year, the Congressional Budget Office estimated that the gap between
revenue and expenditure in the next 75 years would amount to 8.7 per cent of
GDP. Since then, enacted revenue increases and an improved underlying budget
outlook have reduced the gap to perhaps 7.5 per cent.
Achieving the lower health-cost growth would knock another 2.5 per cent of
GDP off, bringing the long-term fiscal hole down to 5 per cent of GDP – a
greater impact than any policy change currently being debated in Washington.
America’s fiscal policy is not in crisis: ...The federal government is
not on the verge of bankruptcy. If anything, the tightening has been too
much and too fast. The fiscal position is also not the most urgent economic
challenge. It is far more important to promote recovery. The challenges in
the longer term are to raise revenue while curbing the cost of health.
Meanwhile, people, just calm down.
By the way, where were the deficit hawks during the Bush years? Here's what Martin Wolf means by "If anything, the tightening has been too
much and too fast":
[via Kevin Drum]
The deficit hawks don't want you to know this, but our biggest problem right now is not the deficit, it's jobs.
Posted by Mark Thoma on Wednesday, January 23, 2013 at 12:24 AM
... Higher marginal taxes reduce the ability of high income people to
accumulate power, which may mean they work/play less. I don't know that
this is entirely a bad thing.
(The post is:
Do higher marginal tax rates lead superstar athletes to play less often? See
also Barry Ritholtz who asks
Who the Hell Are Phil Mickelson’s Financial Advisers?)
Posted by Mark Thoma on Wednesday, January 23, 2013 at 12:15 AM in Economics, Politics, Taxes |
Posted by Mark Thoma on Wednesday, January 23, 2013 at 12:06 AM in Economics, Links |
I guess that should be scepticism:
Monetary targetry: Might Carney make a difference?, by Charles A.E.
Goodhart, Melanie Baker, Jonathan Ashworth, Vox EU: The Bank of
England’s Governor-elect has argued for a switch to a nominal GDP target.
This column points out problems with nominal GDP targets, especially in
levels. Among other issues, nominal GDP targeting means that uncertainty
surrounding future real growth rates compounds uncertainty on future
inflation rates. Thus the switch is likely to raise uncertainty about future
inflation and weaken the anchoring of inflation expectations. ...
Posted by Mark Thoma on Tuesday, January 22, 2013 at 06:30 AM in Economics, Monetary Policy |
the great likelihood is that over the next 15 years debts will rise relative
to incomes in an unsustainable way if no actions are taken beyond those in
the 2011 budget deal and the recent “fiscal cliff” agreement. So even
without the risk of self-inflicted catastrophes — the possibility of default
or a potential government shutdown this spring — it is appropriate for
policy to focus on reducing prospective deficits. Those who argue against a
further focus on prospective deficits on the grounds that the ratio of debt
to gross domestic product may stabilize for a decade contingent on a
forecast that assumes no recessions counsel irresponsibly. Given all the
uncertainties and current U.S. debt levels, we should be planning to reduce
debt ratios if the next decade goes well economically.
Larry Summers then says:
Reducing prospective deficits should be a key priority but should not take
over economic policy.
But I don't get the very next sentence at all. How does a tax cut reduce the
Such an obsession risks the enactment of measures like pseudo-temporary tax
cuts that produce cosmetic improvements in deficits at the cost of extra
uncertainty and long-run fiscal burdens.
It's late, and it's been a long day -- I must be missing something. Anyway, I
agree with this:
Surely even leaving aside any possible stimulus benefits, current economic
conditions make this the ideal time for renewing the nation’s
infrastructure. Such investments, borrowed at near-zero interest rates, need
not increase debt ratios if their contribution to economic growth raises tax
Infrastructure represents only the most salient of the deficits facing the
United States. Nearly six years after the onset of financial crisis, we
clearly are living with substantial deficits in jobs and growth. Consider
that if an increase of just 0.15 percent in the economy’s growth rate were
maintained over the next 10 years, the debt-to-GDP-ratio in 2023 would be
reduced by about 2.5 percentage points. That’s an amount equal to the much
debated year-end fiscal compromise that raised taxes. Increasing growth also
creates jobs and raises incomes.
By all means, let’s address the budget deficit. But let’s not obsess over it
in ways that are counterproductive, nor should we lose sight of the jobs and
growth deficits that ultimately will have the greatest impact on how this
generation of Americans lives and what they bequeath to the next generation
The obsession with the deficit in Washington is not going to end, and the
deficit has received far too much attention relative to other issues like
unemployment (which really ought to take precedence in the short-run). There is
no need, at all, to remind policymakers of that the deficit needs attention.
The intent is different, but my fear is that phrases such as "the great likelihood is that over the next
15 years debts will rise relative to incomes in an unsustainable way if no
actions are taken" and "it is appropriate for policy to focus on reducing
prospective deficits" is the only message that Republicans and centrist
Democrats will hear in this column.
Update: Paul Krugman comments.
Posted by Mark Thoma on Tuesday, January 22, 2013 at 12:33 AM in Budget Deficit, Economics, Politics |
What if we actually achieve the target of limiting global warming to a 2
degree Celsius increase? We are unlikely to meet this goal -- it's looking much worse
than that -- but what if we did?:
... It is abundantly clear that the target of a 2-degree Celsius limit to
climate change was mostly derived from what seemed convenient and doable
without any reference to what it really means environmentally. Two degrees
is actually too much for ecosystems. Tropical coral reefs are extremely
vulnerable to even brief periods of warming. .. A 2-degree world will be one
without coral reefs (on which millions of human beings depend for their
well-being)..., there undoubtedly will be massive extinctions and widespread
ecosystem collapse. The difficulty of trying to buffer and manage change
will increase exponentially with only small increments of warming.
In addition, the last time the planet was 2 degrees warmer, the oceans were
four to six (perhaps eight) meters higher. We may not know how fast that
will happen (although it is already occurring more rapidly than initially
estimated), but the end point in sea-level rise is not in question. A major
portion of humanity lives in coastal areas and small island states that will
go under water. ...
More than a 2-degree increase should be unimaginable. Yet to stop at 2
degrees, global emissions have to peak in 2016. ...
Environmental change is happening rapidly and exponentially. We are out of
Of course, global emissions won't be anywhere near a peak in 2016.
Posted by Mark Thoma on Tuesday, January 22, 2013 at 12:30 AM in Economics, Environment, Regulation |
Housing cycles matter:
Revisited: 1975-2012, by Karl E. Case, John M. Quigley, Robert J. Shiller,
NBER Working Paper No. 18667, January 2013 [open
link, previous version]: We re-examine the links between changes in
housing wealth, financial wealth, and consumer spending. We extend a panel
of U.S. states observed quarterly during the seventeen-year period, 1982
through 1999, to the thirty-seven year period, 1975 through 2012Q2. Using
techniques reported previously, we impute the aggregate value of
owner-occupied housing, the value of financial assets, and measures of
aggregate consumption for each of the geographic units over time. We
estimate regression models in levels, first differences and in
error-correction form, relating per capita consumption to per capita income
and wealth. We find a statistically significant and rather large effect of
housing wealth upon household consumption. This effect is consistently
larger than the effect of stock market wealth upon consumption.
In our earlier version of this paper we found that households increase their
spending when house prices rise, but we found no significant decrease in
consumption when house prices fall. The results presented here with the
extended data now show that declines in house prices stimulate large and
significant decreases in household spending.
The elasticities implied by this work are large. An increase in real housing
wealth comparable to the rise between 2001 and 2005 would, over the four
years, push up household spending by a total of about 4.3%. A decrease in
real housing wealth comparable to the crash which took place between 2005
and 2009 would lead to a drop of about 3.5%
Posted by Mark Thoma on Tuesday, January 22, 2013 at 12:24 AM in Academic Papers, Economics, Housing |
Posted by Mark Thoma on Tuesday, January 22, 2013 at 12:06 AM in Economics, Links |
On Inequality: Responses to my
Joe Stiglitz have varied. Some are outraged that I might suggest that
inequality isn’t the source of all problems — there are even some suggestions
that I am acting as an apologist for the plutocrats, which will come as news to
the plutocrats. But there have also been some interesting points raised. ...
Posted by Mark Thoma on Monday, January 21, 2013 at 12:53 PM in Economics, Income Distribution |
Travel day, so a quick one:
Big Should Government Be?, by Justin Fox: There are a couple of fundamental
questions at the bottom of Washington's ongoing battles over deficits and debt:
(1) How big should the U.S. government to be? and (2) How should we pay for it?
The answers to both will ultimately have to be political ones — messy
calculations based on who pays, who benefits, who votes, and who makes the
campaign contributions. But it would be nice to know what the economics are,
It turns out economists have lots of theories of optimal government spending and
optimal taxation. This isn't the same as saying they have reliable or consistent
answers. As one critic wrote of Robert Lucas's American Economic Association
presidential address on economic growth in 2003, in which the Nobel laureate
cited several studies showing dramatic welfare gains from hypothetical tax cuts
in France and the U.S.:
Such findings have two distinctive features. First, they show big numbers.
Second, they are not really findings. Contrary to the words offered so
traditionally and casually by economists, none of these authors actually 'found'
or 'showed' their results. Rather, they chose to imagine the results they
announced. In every study Lucas cited here the crucial ingredient was a
theoretical model laden with assumptions.
The author of these words is University of California, Davis economic historian
Peter Lindert... People on the left love Lindert's conclusion,
this shorter working paper, that the rise in spending (and accompanying
taxation) has not carried with it the costs predicted by neoclassical economic
theories such as the ones wielded by Lucas. But those on the right love his
explanation that this is mostly because countries with high social spending have
tax systems that appear to have been designed by a neoclassical economist: with
low progressivity, low taxes on capital, and big value-added taxes on
Posted by Mark Thoma on Monday, January 21, 2013 at 10:09 AM in Economics, Fiscal Policy |
Progressives should cheer up:
The Big Deal, by Paul Krugman, Commentary, NY Times: On the day President Obama signed the Affordable Care Act into law, an exuberant
Vice President Biden famously pronounced the reform a “big something deal” —
except that he didn’t use the word “something.” And he was right..., if progressives look at where we are as the second term begins, they’ll find
grounds for a lot of (qualified) satisfaction.
Consider, in particular, three areas: health care, inequality and financial
Health reform is, as Mr. Biden suggested, the centerpiece of the Big Deal.
Progressives have been trying to get some form of universal health insurance
since the days of Harry Truman; they’ve finally succeeded. …
What about inequality? ... Like F.D.R., Mr. Obama took office in a nation
marked by huge disparities in income and wealth. But where the New Deal had a
revolutionary impact, empowering workers and creating a middle-class society
that lasted for 40 years, the Big Deal has been limited to equalizing policies
at the margin.
That said,... through new taxes ... 1-percenters will see their after-tax
income fall around 6 percent... This will reverse only a fraction of the huge
upward redistribution that has taken place since 1980, but it’s not trivial.
Finally, there’s financial reform. The Dodd-Frank reform bill is ... not the
kind of dramatic regime change one might have hoped for… Still, if plutocratic
rage is any indication, the reform isn’t as toothless as all that. …
All in all, then, the Big Deal has been, well, a pretty big deal. But will
its achievements last? ... I ... think so. For one thing, the Big Deal’s main
policy initiatives are already law. ... And ... the Big Deal agenda is, in fact,
fairly popular — and will become more popular once Obamacare goes into effect...
Finally, progressives have the demographic and cultural wind at their backs.
Right-wingers flourished for decades by exploiting racial and social divisions —
but that strategy has now turned against them...
Now, none of what I’ve just said should be taken as grounds for progressive
complacency. The plutocrats may have lost a round, but their wealth and the
influence it gives them in a money-driven political system remain. Meanwhile,
the deficit scolds (largely financed by those same plutocrats) are still trying
to bully Mr. Obama into slashing social programs. ...
Still, maybe progressives — an ever-worried group — might want to take a
brief break from anxiety and savor their real, if limited, victories.
Posted by Mark Thoma on Monday, January 21, 2013 at 12:33 AM in Economics, Financial System, Health Care, Income Distribution, Politics, Regulation, Taxes |
Is There a Big Inflation Mystery in Greece?, by Tim Duy: Tyler Cowen
The rates of price
inflation in Greece have
been running in the range of 0.8% to 2%...It’s funny how many people pretend
to understand what is going on here. If Greece were seeing a stronger bout
of price deflation, the situation would be much clearer.
This seems to me to be a case of trying to find a problem where none exists.
Greece consumer prices excluding energy:
What part of the deflation is not clear? Seems like any inflation is being
driven by energy costs:
So what going on in the energy sector? Stories
Greeks cutting back
on household expenses are turning from oil to wood to heat their homes, but in
turn are filling the night air with potentially hazardous pollutants, health
care officials have warned.
government, under pressure from the EU-IMF-ECB Troika to impose more austerity
measures, has pushed the price of heating oil to about 1.50 euros per litre by
raising the tax on heating oil by 40 percent. Besides being a revenue-raiser,
the government said the tax was meant to deter people from putting the oil in
their cars instead of more expensive diesel.
Greece raised electricity prices for households by up to 15 percent this year
to help state-controlled power company PPC cover costs for transmission rights,
the government said on Sunday...
...They come after a 9.2 percent average increase in prices last year.
PPC is the dominant player in the Greek energy market, and the country's EU
and IMF lenders are pressing the government to make room for private companies.
The company's tariffs are regulated by the state.
The Troika is remaking the energy sector, with the consequence of rising
prices in a way that looks like a sectoral supply shock that is very obviously
distinct from the demand side disturbance. What exactly is the big mystery
Posted by Mark Thoma on Monday, January 21, 2013 at 12:24 AM in Economics, Fed Watch, Inflation, Monetary Policy |