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Thursday, February 28, 2013

'Scientists Call for Legal Trade in Rhino Horn'

Traveling -- a quick one from the road: Is this the answer?:

Scientists call for legal trade in rhino horn: Four leading environmental scientists today urged the international community to install a legal trade in rhino horn – in a last ditch effort to save the imperiled animals from extinction. ...
"Current strategies have clearly failed to conserve these magnificent animals and the time has come for a highly regulated legal trade in horn", says lead author Dr Duan Biggs of the ARC Centre of Excellence for Environmental Decisions (CEED) and University of Queensland.
"As committed environmentalists we don't like the idea of a legal trade any more than does the average member of the concerned public. But we can see that we need to do something radically different to conserve Africa's rhino."
The researchers said the Western Black Rhino was declared extinct in 2011. There are only 5000 Black Rhinos and 20,000 White Rhinos left, the vast majority of which are in South Africa and Namibia.
"Poaching in South Africa has, on average, more than doubled each year over the past 5 years. Skyrocketing poaching levels are driven by tremendous growth in the retail price of rhino horn...
World trade in rhino horn is banned under the CITES Treaty - and this ban, by restricting supplies of horn, has only succeeded in generating huge rewards for an illegal high-tech poaching industry, equipped with helicopters and stun-darts, which is slaughtering rhinos at alarming rates.
Attempts to educate Chinese medicine consumers to stop using rhino horn have failed to reduce the growth in demand, they said.
The scientists argue that the entire world demand for horn could be met legally by humanely shaving the horns of live rhinos, and from animals which die of natural causes. Rhinos grow about 0.9kg of horn each year, and the risks to the animal from today's best-practice horn harvesting techniques are minimal. The legal trade in farmed crocodile skins is an example of an industry where legalization has saved the species from being hunted to extinction. ... A legal trade in rhino horn was first proposed 20 years ago, but rejected as 'premature'.
However, the time has now come for a legal trade in horn, says Dr Biggs. ... "Legitimizing the market for horn may be morally repugnant to some, but it is probably the only sensible way to prevent extinction of Africa's remaining rhinos," the scientists conclude.
###
Their paper Legal Trade of Africa's Rhino Horns by Duan Biggs, Franck Courchamp, Rowan Martin and Hugh Possingham, appears in the latest edition of the journal Science (March 1).

    Posted by on Thursday, February 28, 2013 at 04:47 PM in Economics | Permalink  Comments (20)


    So Much for 'Economic Uncertainty'

    I was thinking along the same lines:
    So much for 'economic uncertainty', by Steve Benen: In 2009 and 2010, the single most common Republican talking point on economic policy included the word "uncertainty." I did a search of House Speaker John Boehner's (R-Ohio) site for the phrase "economic uncertainty" and found over 500 results, which shows, at a minimum, real message discipline.
    The argument was never especially compelling from a substantive perspective. For Boehner and his party, President Obama was causing excessive "uncertainty" -- through regulations, through the threat of tax increases, etc. -- that held the recovery back. Investors were reluctant to invest, businesses were reluctant to hire, traders were reluctant to trade, all because the White House was creating conditions that made it hard for the private sector to plan ahead.
    It was a dumb talking point borne of necessity -- Republicans struggled to think of a way to blame Obama for a crisis that began long before the president took office -- but the GOP stuck to it.
    That is, Republican used to stick to it. Mysteriously, early in 2011, the "economic uncertainty" pitch slowly faded away without explanation. I have a hunch we know why: Republicans decided to govern through a series of self-imposed crises that have created more deliberate economic uncertainty than any conditions seen in the United States in recent memory. ...

    It's hard to count all of the really bad predictions Republicans have made about interest rates, inflation, uncertainty, and so on in their attempt to use the recession to make ideological and political gains. But people still seem to listen.

    It's not the uncertainty about what might happen as much as it's policy, what actually has happened -- austerity during a recession -- that's problematic. Now we are about to get more austerity that is ill-timed -- as Ben Bernanke said this week it's far too front-loaded -- and very poorly designed. It was constructed after all to motivate parties to action, so it is intentionally loathsome.

    The Fed can be frustrating. Congress, the modern Republican contingent in particular, is ridiculous. It's hurting our ability to recover from the recession and provide jobs for millions of unemployed workers struggling to make ends meet each month.

      Posted by on Thursday, February 28, 2013 at 10:05 AM in Economics, Fiscal Policy, Politics | Permalink  Comments (68)


      Fed Watch: Know Your Fed Chairs

      Tim Duy:

      Know Your Fed Chairs, by Tim Duy: Tennessee Senator Bob Corker (R) went on the offensive during the Q&A period of Federal Reserve Chairman Ben Bernanke's Senate testimony this week. A portion of the transcript, via Business Insider:

      Sen. Corker: I don't think there's any question that you would be the biggest dove, if you will, since World War II. I think that's something you're rather proud of...Do you all ever talk about the longer term degrading effect of these policies as we try to live for today?

      Chairman Bernanke: I think one concern we have is the effect of long term unemployment and the people who haven't had jobs for years. That means they're never going to acquire skills for years and be a productive part of our workforce

      You called me a dove. Well maybe in some respects I am but on the other hand my inflation record is the best of any Federal Reserve chairman in the post-war period, or at least one of the best — about 2 percent average inflation...

      It is not clear that Corker knows much about the history of inflation since WWII, so I thought a little chart would be handy:

      Fedmonth[Click on image for larger chart]

      As is clear to anyone who looks at the data, Bernanke does in fact have one of the better records on inflation in the post-WWII period. Is it the best? On the basis of average headline CPI during time as chair, Bernanke looks to come in second behind William McChesney Martin, Jr. Note, however, that it would be reasonable to point out that inflation accelerated during Martin's watch, setting the stage for the high-inflation 1970's. Taking the path of inflation into account, I would tend to argue the Bernanke's record is superior to Martin's.
      If we change the focus to headline PCE inflation (quarterly), then Bernanke comes slightly ahead of Martin on averages alone:

      Fedquarter

      [Click on image for larger chart]

      Of course, using only inflation averages might not be the best measure on Fed performance. Volcker, for example, had high average inflation rates during his tenure, but inflation declined dramatically. And inflation declined further under Greenspan. Overall, I consider the Chairmen who presided over the 1965 to 1980 period as having the worst records on inflation, while all the Chairman since 1980 have solid inflation records. McCabe is a mixed bag. Clearly inflation was volatile during his tenure, but the Fed was working in the context of the transition out of WWII.
      Finally, this whole discussion presupposes that low inflation is always desirable and ignores the fact that the Fed has a dual mandate. Monetary policy is about more than low inflation - it is about stable inflation in the context of the overall economic and financial landscape. Bernanke's battle hasn't even been to contain inflation; his focus has been preventing deflation. But putting these issues aside for the moment, it seems pretty clear that if the only metric that Corker cares about is low inflation, Bernanke has clearly delivered.

        Posted by on Thursday, February 28, 2013 at 12:29 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (112)


        Links for 02-28-2013

          Posted by on Thursday, February 28, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (104)


          Wednesday, February 27, 2013

          'Austerity is Already Here'

          Govjobs

          [source, article]

          Alternative title: "How to Make a Slow Recovery Even Slower." I'm guessing you already know my opinion of austerity. Cutting the budget during a deep recession and expecting the confidence fairy to undo the harm is (and has proven to be) a very bad idea.

            Posted by on Wednesday, February 27, 2013 at 05:27 PM in Economics, Fiscal Policy, Unemployment | Permalink  Comments (14)


            'Maybe It's Time to Cut Back on the C-List Outrages'

            Assume everything that can go wrong does go wrong, and that nothing whatsoever goes right. Then, surprise, (and drum roll for Senator Sessions), the result will not be very good:

            Jeff Sessions, Wonk McCarthyite, by Jon Chait: Senator Jeff Sessions announced yesterday that he had uncovered a staggering new fact. Obamacare, according to a new report from the General Accounting Office, would add $6.2 trillion to the deficit over the next 75 years. The report would be out the next day. We’d all see. Conservatives were right all along! Obamacare is turning America into Greece!
            Well, the report is out, and conservatives are afire with rage. National Review, the Daily Caller, the Heritage Foundation, and many others are all reporting the new bombshell. But the report turns out to be following directions to assume that all of the efforts in the law to control health-care cost inflation fail or are repealed, and the portions that provide coverage are kept in place.
            So, yeah. If Congress keeps the parts of the law that cost the government money, and repeals the parts that save money, the law will increase deficits. Alternatively, if the government repeals the parts that cost money and keeps the parts that save money, it will reduce the deficit by more than we’re projecting. ...

            Let me turn the microphone over to Kevin Drum (where the title of this post comes from):

            ... This is what Sessions asked the GAO to do. He wanted a report describing what would happen if all the costs of Obamacare stayed intact but all the revenues and savings measures didn't. To the surprise of no one, under those conditions the deficit would go up. You could pretty much plug any government program into a scenario like that and get the same result. ...
            This is so obviously moronic...
            If conservatives are looking for examples of utterly wasteful government spending...

              Posted by on Wednesday, February 27, 2013 at 03:35 PM in Economics, Politics | Permalink  Comments (18)


              2013 West Coast Trade Workshop

              If any academics happen to be in Eugene this weekend:

              2013 West Coast Trade Workshop (link)

              All sessions will be held in the Walnut room in the Inn at the 5th.

              Saturday March 2nd

              8:15 am-10:15 am Session 1 – Innovation and Growth (Chair – Nicholas Sly)

              10:15am - 10:30am Coffee Break

              10:30am- 12:30pm Session 2 – International Trade and Worker Skills (Chair – Bruce Blonigen)

              12:30pm-2pm Lunch Break 2pm-4pm Session 3 – Foreign Direct Investment (Chair – Jennifer Poole)

               Evening Hosted Group Dinner

              Sunday, March 3rd ­8:30am-10:30am Session 4 – Consequences of the Trade Liberalization (Chair – Alan Spearot)

              10:30am – 10:45am Coffee Break 10:45am-12:45pm Session 5 – Offshoring (Chair – Anca Cristea)

              Adjourn

                Posted by on Wednesday, February 27, 2013 at 02:22 PM in Academic Papers, Economics | Permalink  Comments (2)


                'Fiscal Policy and MPC Heterogeneity'

                Income growth for the working class has not kept pace with productivity. Instead, much of the growth has gone to the top of the income distribution (in my view, more than can be justified by any reasonable estimate of the marginal productivity of the wealthiest among us). It appears that redirecting that income so that the gap -- positive or negative -- between productivity and income growth falls is also stimulative (and the stimulus is strongest when the income goes to households at the lowest rungs of the income distribution):

                Fiscal Policy and MPC Heterogeneity, by Owen Zidar: Tullio Jappelli and Luigi Pistaferri have a recent paper called Fiscal Policy and MPC Heterogeneity. Here’s an interesting figure from it that shows how MPC varies by cash-on-hand:

                Mpc[1]

                They aren’t the only ones who document MPC heterogeneity. Dynan, Skinner, Zeldes have a nice JPE 2004 paper on this and so does Parker (AER 1999).

                So why does this matter? As Tullio Jappelli and Luigi Pistaferri put it:

                the results have important implications for the evaluation of fiscal policy, and for predicting household responses to tax reforms and redistributive policies. In particular, we find that a debt-financed increase in transfers of 1 percent of national disposable income targeted to the bottom decile of the cash-on-hand distribution would increase aggregate consumption by 0.82 percent.

                  Posted by on Wednesday, February 27, 2013 at 02:07 PM in Economics, Fiscal Policy | Permalink  Comments (19)


                  What Explains the Racial Wealth Gap?

                   Opportunity is far from equal:

                  What Explains the Racial Wealth Gap?, by Neil Shah, WSJ: White families build wealth faster than black households... What explains this growing divide? ... The findings are the latest evidence that barriers in workplaces, schools and communities — rather than personal attributes and cultural factors — may be making it harder for blacks to accumulate wealth than whites over time. ...
                  Home ownership is the biggest contributor to net worth. But white families, the researchers say, buy homes and start acquiring equity on average eight years earlier than black families, largely because white families can lean on their own families for help with down payments...
                  The recession had a disproportionately bad effect on blacks, researchers said. “Half the collective wealth of African-American families was stripped away during the Great Recession due to the dominant role of home-equity in their wealth portfolios and the prevalence of predatory high-risk loans in communities of color,” said Thomas Shapiro, director of the Institute on Assets and Policy. “Borrowers of color are more than twice as likely to lose their homes.”
                  Meanwhile, accomplishments like job promotions and pay increases don’t appear to pay off for black families the way they do for whites. ... Differences related to inheritances, college education and unemployment also play a role. Whites are five times more likely to inherit, while 80% of black students graduate with debt compared with 64% for whites. “Similar college degrees produce more wealth for whites,” Shapiro said.

                    Posted by on Wednesday, February 27, 2013 at 10:31 AM in Economics | Permalink  Comments (16)


                    'Republicans Must Bridge the Income Gap'

                    Sheila Bair:

                    Grand Old Parity, by Sheila Bair, Commentary, NY Times: ... I am a capitalist and a lifelong Republican. I believe that, in a meritocracy, some level of income inequality is both inevitable and desirable... But I fear that government actions, not merit, have fueled ... extremes in income distribution through taxpayer bailouts, central-bank-engineered financial asset bubbles and unjustified tax breaks that favor the rich.
                    This is not a situation that any freethinking Republican should accept. Skewing income toward the upper, upper class hurts our economy because the rich tend to sit on their money... But more fundamentally, it cuts against everything our country and my party stand for. Government’s role should not be to rig the game in favor of “the haves” but to make sure “the have-nots” are given a fair shot. ...
                    For instance, as part of renewed fiscal discussions over sequestration, Republicans should put fundamental tax reform on the table and make it our priority to end preferential treatment of investment income, which lets managers of hedge funds pay half the tax rate of managers of shoe stores. ... If we eliminate this and other unjustified tax breaks, we can produce enough new revenues to lower marginal rates and reduce the deficit...
                    Republicans should also put rebuilding the nation’s transportation and energy infrastructure high on our political agenda. ...
                    Having worked for Senate Republicans in the 1980s, I remember a time when Republicans stood up to special interests and purged the tax code of preferences for investment income and other special breaks. ...

                      Posted by on Wednesday, February 27, 2013 at 10:07 AM in Economics, Income Distribution, Politics, Taxes | Permalink  Comments (34)


                      Links for 02-27-2013

                        Posted by on Wednesday, February 27, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (165)


                        Tuesday, February 26, 2013

                        Ben Bernanke's Biggest Worry is Congress

                        A few (later than hoped for) comments on Ben Bernanke's testimony this morning before the Senate Banking Committee:

                        Ben Bernanke's Biggest Worry is Congress

                        I guess it continues a theme.

                          Posted by on Tuesday, February 26, 2013 at 03:20 PM in Economics, Monetary Policy, MoneyWatch | Permalink  Comments (24)


                          Calculated Risk on New Home Sales

                          Calculated Risk:

                          New Home Sales at 437,000 SAAR in January, by Bill McBride: ... On New Home Sales: The Census Bureau reports New Home Sales in January were at a seasonally adjusted annual rate (SAAR) of 437 thousand. This was up from a revised 378 thousand SAAR in December (revised up from 369 thousand). ...
                          This is the strongest sales rate since 2008. This was another solid report. ... [New Home Sales graphs]

                          There are, of course, lots of graphs in the original post. In another post, he adds:

                          1) January is seasonally the weakest month of the year for new home sales, so January has the largest positive seasonal adjustment. Also this was just one month with a sales rate over 400 thousand - and we shouldn't read too much into one month of data. But this was the highest level since July 2008 and it is clear the housing recovery is ongoing. 
                          2) Although there was a large increase in the sales rate, sales are still near the lows for previous recessions. This suggest significant upside over the next few years (based on estimates of household formation and demographics, I expect sales to increase to 750 to 800 thousand over the next several years).
                          3) Housing is historically the best leading indicator for the economy, and this is one of the reasons I think The future's so bright, I gotta wear shades. Note: The key downside risk is too much austerity too quickly, but that is a different post. ...

                            Posted by on Tuesday, February 26, 2013 at 11:16 AM in Economics, Housing | Permalink  Comments (24)


                            Our Real Worry Isn’t the Debt, It’s Our Politicians

                            We are, as they say, live:

                            Our Real Worry Isn’t the Debt, It’s Our Politicians

                            The political environment, particularly today's Republican Party, is the biggest threat to future economic growth.

                              Posted by on Tuesday, February 26, 2013 at 11:11 AM in Budget Deficit, Economics, Fiscal Times, Politics | Permalink  Comments (134)


                              Links for 02-26-2013

                                Posted by on Tuesday, February 26, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (115)


                                Monday, February 25, 2013

                                Fed Watch: ECB Should Pledge to Not Do Anything Stupid

                                Tim Duy:

                                ECB Should Pledge to Not Do Anything Stupid, by Tim Duy: Market participants were rattled today by the election news out of Italy, as it looks like the economically-challenged nation is now politically adrift. But what exactly might worry investors? I pulled this quote from Bloomberg:

                                “We don’t want to see more chaos out of Europe,” Bruce McCain, chief investment strategist at the private-banking unit of KeyCorp in Cleveland, said in a phone interview. His firm oversees more than $20 billion. “Any question about whether or not Italy would be committed to austerity measures after the elections gets investors concerned.”

                                Why should we be concerned that Italy backslides on its commitment to austerity? After all, evidence of the economic damage wrought by such policies continues to mount. If anything, a reversal of recent austerity should be welcome.

                                I suspect, however, that it is not the austerity that worries market participants. It is the fear that European Central Bank head Mario Draghi will threaten to pull his pledge to do whatever is takes to save the Euro in the face of Italian intransigence. The fear that European policymakers are about to partake in another grand game of chicken that once again will bring the sustainability of the single currency back into question. In short, I think that market participants fear tight monetary policy much more than loose fiscal policy.

                                I am very much hoping that the ECB will keep calm and not do anything that encourages market participants to once again doubt the central bank's commitment to the Euro. Otherwise, this spring and summer will look much like last year's. And the year before that. And the year before that.

                                  Posted by on Monday, February 25, 2013 at 03:23 PM in Economics, Fed Watch, International Finance, Monetary Policy | Permalink  Comments (12)


                                  'How To (Maybe) End Too Big To Fail'

                                  This is from a St. Louis Fed write-up of the following Dialogue:

                                  St. Louis Fed economist William Emmons led the Dialogue, titled “Robo-signing, the London Whale and Libor Rate-Rigging: Are the Largest Banks Too Complex for Their Own Good?” Joining Emmons for the Q&A that followed were Mary Karr, senior vice president and general counsel of the St. Louis Fed; Steven Manzari, senior vice president of the New York Fed’s Complex Financial Institutions unit; and Julie Stackhouse, senior vice president of Banking Supervision and Regulation at the St. Louis Fed. See the videos and Emmons’ presentation slides at www.stlouisfed.org/dialogue.

                                  Here's the last part of the write-up on dealing with the too big to fail problem:

                                  The Big Banks: Too Complex To Manage?, Central Banker, Winter 2012, FRB St. Louis:

                                  ... How To (Maybe) End “Too Big To Fail”

                                  So, how will we deal with the megabanks? Emmons outlined two basic approaches: radical and incremental. The radical approach involves structural changes imposed on the banks themselves or the creation of a different legal definition of what a bank is and what it can do. Radical proposals include:

                                  • Reduce their complexity and size – Revive the 1933 Glass-Steagall Act (partially repealed by the 1999 Gramm-Leach-Bliley Act) prohibiting combining commercial banking with investment banking or insurance underwriting. Also, reduce their size by placing limits on banks’ assets or deposits. However, Emmons said this proposal likely wouldn’t succeed because combining commercial and investment banking was not the main source of problems; in fact, many of the “too-big-to-fail” institutions that caused problems during the crisis would have been allowed to operate under Glass-Steagall.
                                  • Create “narrow banks” – Separate payments functions from all other financial activities. Such a bank would take deposits and make payments but not make loans except those that have very little default risk. Emmons said this proposal wouldn’t be successful either because such banks are not likely to be viable. Narrow banks likely would seek to make riskier loans to improve their profitability, while non-narrow banks would seek to enter the payments business in one way or another.

                                  “In fact, we have chosen not to pursue radical approaches to solving the ‘too-big-to-fail’ problem,” he said. “Instead, we’re implementing incremental—albeit significant—reforms of the existing legal, regulatory and governance frameworks in which banks operate.” Meanwhile, bankers, regulators and legislators won’t know whether the regulatory reform efforts will actually work until they are actually used. Those efforts, which have sparked a lot of profound debate throughout the financial industry, include:

                                  • The 2010 Dodd-Frank Act – The law includes living wills for orderly dissolution, capital requirements, stress tests, risk-based assessments on deposit insurance, FDIC orderly liquidation authority, the Volcker Rule and investor protections. “These are all pushing banks to be more effective in internal discipline,” Emmons said.
                                  • Basel III Accord – The third round of the Basel Accords is looking to improve the quality of bank capital and make other changes related to capital so that big banks demonstrate that they “have more skin in the game,” Emmons said.

                                  Emmons also offered another proposal: Make a strictly enforced “death penalty” regime, a law mandating that any bank requiring government assistance would be nationalized, with a plan to sell it back to new shareholders at some point in the future. “The crux of the matter would be carrying through this pledge to re-privatize the institution,” he said. “It should reduce the incentives to take risk because the ‘death penalty’ is such a severe penalty that it would act as a deterrent.” Emmons noted that TARP (the Troubled Asset Relief Program) was a half-step in this direction, in which the federal government took noncontrolling equity positions in megabanks—preferred instead of common equity—and didn’t wipe out shareholders or management.

                                  “It’s not so radical of a proposal because we did impose a ‘death penalty’ on Fannie Mae and Freddie Mac: Their shareholders and management were wiped out. General Motors and Chrysler were forced into bankruptcy, and AIG was effectively nationalized,” he said.

                                  “If this were to be the plan, we would need (to continue the metaphor) an undertaker standing by—an institution that would be ready to exact this discipline on the firms,” he said, pointing to other nations’ permanent “sovereign wealth funds” that can take equity positions in firms.

                                  The Jury Is Still Out

                                  While investigations and lawsuits continue, regulations are written for new laws, and the industry wrestles with proposed capital and other standards, the question remains: Will any of this solve “too big to fail,” successfully rein in systemic risk or prevent future “misbehaviors”? Simply put, we don’t know yet.

                                  “I think it’s really important to realize that these are the early days in terms of the reform efforts for the financial system, and many firms still have to navigate a pretty complex set of changes to the regulatory landscape, how the world is unfolding and how they’re going to generate profits,” Manzari said during the Q&A portion.

                                  Stackhouse noted that of the 400 or so regulations and rules required by the Dodd-Frank Act, only about one-third are actually in place. “The financial community, large banks in particular—those with over $50 billion in assets—have a lot ahead of them,” she said. “The Dodd-Frank Act right now is the mechanism on the table to deal with these very large firms. The jury is still out on how that particular rule making will take place and how effective it will be.”

                                  A strictly enforced "death penalty" sounds good to me, but I'd also like to reduce the ability of large financial institutions to influence politicians and regulators. The discussion does note that:

                                  The revelations of recent controversies such as robo-signing, the London Whale and Libor rate-rigging—explored in the “Big Bank Misbehaviors” sidebar at the bottom—as well as other problems not mentioned here indicate that something critical was lacking in the discipline of large, complex banks.

                                  But the regulatory capture aspect of large banks isn't addressed.

                                  I mostly wanted to highlight this slide from the presentation because it answers a question I've been asking for a long time, how big do banks need to be in order to reach the minimum efficient scale?

                                  Frbstl1
                                  And from another slide, the size of the largest banks:

                                  Frbstl2
                                  Some summary measures:

                                  Frbstl3
                                  The conclusion seems obvious to me.

                                    Posted by on Monday, February 25, 2013 at 01:40 PM in Economics, Financial System, Regulation | Permalink  Comments (12)


                                    'Fix the Economy, Not the Deficit'

                                    Dean Baker:

                                    Fix the Economy, Not the Deficit, by Dean Baker, The American Prospect: It’s hard to be happy about the prospect of the sequester ... going into effect at the end of the week. Not only will it will mean substantial cuts to important programs; it will be a further drag on an already weak economy, shaving 0.6 percentage points off our growth rate. ...
                                    Of course, it could be worse. Half of the cuts are on the military side. This will help to bring our bloated military sector closer to its pre-September 11 share of the economy, and going forward, the principle that domestic cuts be matched by cuts in defense spending is certainly better than the idea of attacking domestic spending alone. In addition, the most important programs in the budget—Social Security, Medicare, and Medicaid—have been largely spared the ax—an important victory in the 2011 negotiations. ...
                                    The next step at that point is unclear. President Obama has explicitly offered cuts in Social Security and Medicare if the Republicans will go along with higher taxes. For those who oppose cuts to these programs, the generous view of this maneuver is that he knows that the Republicans won’t budge on taxes; by offering a compromise, he is simply making them look unreasonable. The less  generous view is that he is actually willing to make cuts in these programs, sharing the view of Washington Post-centrist types that seniors are living too high on the hog. 
                                    While the odds are against a “grand bargain” that couples tax increases with cuts to Medicare, Medicaid, and Social Security, it remains a possibility. However, it’s more likely that President Obama and Congress will agree to some scaled-down version of the sequester... This will have the deficit hawks yelling and screaming, but that would be the best plausible outcome from the standpoint of the economy. ...

                                    My view is of the less generous variety. I think Obama is quite willing to make these cuts.

                                      Posted by on Monday, February 25, 2013 at 09:00 AM in Budget Deficit, Economics, Politics, Social Insurance, Social Security | Permalink  Comments (80)


                                      Paul Krugman: Austerity, Italian Style

                                      What does the election in Italy tell us about the impact of failed austerity policies on the political and economic stability of Europe?:

                                      Austerity, Italian Style, by Paul Krugman, Commentary, NY Times: Two months ago, when Mario Monti stepped down as Italy’s prime minister, The Economist opined that “The coming election campaign will be, above all, a test of the maturity and realism of Italian voters.” The mature, realistic action, presumably, would have been to return Mr. Monti — who was essentially imposed on Italy by its creditors — to office, this time with an actual democratic mandate.
                                      Well, it’s not looking good. Mr. Monti’s party appears likely to come in fourth; not only is he running well behind the essentially comical Silvio Berlusconi, he’s running behind an actual comedian, Beppe Grillo, whose lack of a coherent platform hasn’t stopped him from becoming a powerful political force.
                                       It’s an extraordinary prospect... But without trying to defend the politics of bunga bunga, let me ask the obvious question: What good, exactly, has what currently passes for mature realism done in Italy or for that matter Europe as a whole?
                                      For Mr. Monti was, in effect, the proconsul installed by Germany to enforce fiscal austerity on an already ailing economy... This would be fine if austerity policies actually worked — but they don’t. And far from seeming either mature or realistic, the advocates of austerity are sounding increasingly petulant and delusional..., austerity hasn’t even achieved the minimal goal of reducing debt burdens. And because austerity policies haven’t been offset by expansionary policies elsewhere, the European economy as a whole ... is back in recession...
                                      Given all of this, one might have expected some reconsideration and soul-searching on the part of European officials, some hints of flexibility. Instead, however, top officials have become even more insistent that austerity is the one true path. ...
                                      Which brings me back to Italy, a nation that for all its dysfunction has in fact dutifully imposed substantial austerity — and seen its economy shrink rapidly as a result.
                                      Outside observers are terrified about Italy’s election, and rightly so: even if the nightmare of a Berlusconi return to power fails to materialize, a strong showing by Mr. Berlusconi, Mr. Grillo, or both would destabilize not just Italy but Europe as a whole. But remember, Italy isn’t unique: disreputable politicians are on the rise all across Southern Europe. And the reason this is happening is that respectable Europeans won’t admit that the policies they have imposed on debtors are a disastrous failure. If that doesn’t change, the Italian election will be just a foretaste of the dangerous radicalization to come.

                                        Posted by on Monday, February 25, 2013 at 12:24 AM in Economics, Politics | Permalink  Comments (53)


                                        Links for 02-25-2013

                                          Posted by on Monday, February 25, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (36)


                                          Sunday, February 24, 2013

                                          'Our Top priority Should be Middle Class Jobs'

                                          The President's weekly address:

                                          Remarks of President Barack Obama As Prepared for Delivery The White House February 23, 2013: Hi, everybody. Our top priority as a country right now should be doing everything we can to grow our economy and create good, middle class jobs.
                                          And yet, less than one week from now, Congress is poised to allow a series of arbitrary, automatic budget cuts that will do the exact opposite. They will slow our economy. They will eliminate good jobs. They will leave many families who are already stretched to the limit scrambling to figure out what to do.
                                          But here’s the thing: these cuts don’t have to happen. Congress can turn them off anytime with just a little compromise. They can pass a balanced plan for deficit reduction. They can cut spending in a smart way, and close wasteful tax loopholes for the well-off and well-connected.
                                          Unfortunately, it appears that Republicans in Congress have decided that instead of compromising – instead of asking anything of the wealthiest Americans – they would rather let these cuts fall squarely on the middle class. ...
                                          Are Republicans in Congress really willing to let these cuts fall on our kids’ schools and mental health care just to protect tax loopholes for corporate jet owners? Are they really willing to slash military health care and the border patrol just because they refuse to eliminate tax breaks for big oil companies? Are they seriously prepared to inflict more pain on the middle class because they refuse to ask anything more of those at the very top?
                                          These are the questions Republicans in Congress need to ask themselves. And I’m hopeful they’ll change their minds. Because the American people have worked too hard for too long to see everything they’ve built undone by partisan recklessness in Washington. ...
                                          Making America a magnet for good jobs. Equipping our people with the skills required to fill those jobs. Making sure your hard work leads to a decent living. That’s what this city should be focused on like a laser. And I’m going to keep pushing folks here to remember that.
                                          Thanks.

                                          I suppose it's a sign that the president has compromised like he claims, but the compromise has gone too far already from my perspective and I am not enthralled with his deficit reduction plan (though at least Obama finally seems to be getting his priorities -- jobs first -- correct).

                                            Posted by on Sunday, February 24, 2013 at 09:53 AM in Budget Deficit, Economics, Politics | Permalink  Comments (149)


                                            'No Longer'

                                            Thomas Friedman:

                                            ... Mexico still has huge governance problems to fix, but ... after 15 years of political paralysis, Mexico’s three major political parties have just signed “a grand bargain ... to work together to fight the big energy, telecom and teacher monopolies that have held Mexico back. If they succeed, maybe Mexico will teach us something about democracy. Mexicans have started to wonder about America lately, said Bichara from the Center for Citizen Integration. “We always thought we should have our parties behave like the United States’ — no longer. We always thought we should have the government work like the United States’ — no longer.”

                                            [The column is about "How Mexico Got Back in the Game," but Dean Baker disagrees with Friedman's optimistic view of Mexico's economic future.]

                                              Posted by on Sunday, February 24, 2013 at 12:24 AM in Economics, Politics | Permalink  Comments (63)


                                              Links for 02-24-2013

                                                Posted by on Sunday, February 24, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (49)


                                                Saturday, February 23, 2013

                                                'Gambling with the Economy for Political Ends'

                                                Change "George Osborne" to "the Republican Party," the "UK" to the "US," and this pretty much holds true. From Simon Wren-Lewis:

                                                ... As Paul Krugman has pointed out many times, the ‘debt problem’ is seen by many on the right as a useful cover to reduce the size of the state. Seen through this lens, the details of the austerity programme make much more sense. A focus on demand ‘rich’ items like investment, local authority spending and welfare, and avoiding temporary increases in taxes that have a much lighter demand impact? - because the aim is to permanently reduce the size of the state. George Osborne was prepared to take a gamble with the economy for political ends.

                                                Of course all Chancellors are politicians. Most would take small liberties with the macoeconomics to gain political advantage: for example before 1997 by delaying raising interest rates until after the party conference, or after 1997 by being a little too optimistic about tax receipts to minimise unpopular tax increases. However in most cases these are the equivalent of minor indiscretions, which do not fundamentally alter the fortunes of the economy. The centrepiece of Osborne’s strategy was accelerated austerity for political ends, and it stopped the recovery dead.

                                                So my final verdict on George Osborne? He is a political tactician, who time and again has put party political gain ahead of the economic interests of the economy. ... It is defined by both what he has not done (total inaction on monetary policy, when - unlike the US and Europe - he has considerable power), as well as what he has done (accelerated austerity). The politics may still come good for him, but the damage to the UK economy his action and inaction has caused is final.

                                                When the recession hit, I expected politicians on both sides of the aisle to care deeply about the struggles of households dealing with unemployment, foreclosure, and other problems that were caused by events outside their control. Working class households didn't cause the problems, but they certainly felt the costs. But I feel kind of silly thinking that now, as it is clear that ideological goals, e.g. smaller government so that taxes on the wealthy can be lowered, are much more important to Republicans than the travails of middle class households. Even Democrats seemed to forget that the unemployed need to come first, and Democrats have not fought as hard -- win or lose -- to help those in need as I expected.

                                                The fact that Republicns in particular have put "political gain ahead of the economic interests of the economy" ought to trigger outrage. Why isn't the public outraged (they kind of are, but the anger is, I think, misdirected)? One answer is that the media/pundits haven't been able to move from the center and point fingers at the true cause, Republican obstructionsism, hostage taking, and the like to get their way. But why not? Why has the media let us down? Why hasn't public pressure driven by media reports caused politicians on the right to change course? Paul Krugman tries to answer:

                                                ...they won’t change course; basically, they can’t, for careerist reasons. And that’s the story of a lot of what’s going on now.

                                                Ralph Waldo Emerson understood this. The original version of his famous quote — I had forgotten this — reads:

                                                A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines.

                                                I don’t know about the divines bit, but the little statesmen thing is completely accurate. Suppose George Osborne were to admit that austerity isn’t working. What, then, would be left of his claim to be qualified to do, well, anything? He has to stick it out until something turns up, no matter how many lives it destroys.

                                                Pretty much the same thing is going on among pundits now stuck in what Jonathan Chait memorably calls the “fever swamp of the center”. Suppose that some pundit who has spent his whole career calling for bipartisanship, a compromise between the extremes of left and right, were to admit the plain fact that Obama is very much a centrist, who is in particular proposing deficit reduction through exactly the kind of mix of tax hikes and spending cuts “centrist” pundits demand — and that the GOP, by contrast, is an extremist organization whose extremism is almost solely responsible for the bitterness of the partisan divide. A pundit making that admission would in effect be saying that everything he has said and done for the past several years was not just useless but harmful, actively misleading readers about the state of the debate. He just can’t do it.

                                                The point is that a large part of the reason we’re locked into such a mess is careerism. And yes, that’s quite vile, if you think about it: politicians and pundits alike letting the world burn — probably unconsciously, but still — because their personal position would be hurt if they admitted to past mistakes.

                                                And a pundit "making that admission" would be accused by Republicans as taking sides, something they can't seem to do while they are stuck in the “fever swamp of the center”. They might be viewed as partisan, and that would, in their minds, undermine their credentials as unbiased, very serious centrist observers. But when they refuse to take sides -- when they always put themselves in the middle and blame both Republicans and Democrats equally, or approximately so -- it makes it very easy for Republicans to pull the debate (the so-called Overton window) to the right and to keep the public in the dark about what is really interfering with progress in Congress that might actually help the majority of the people rather than the select few.

                                                  Posted by on Saturday, February 23, 2013 at 11:17 AM in Economics, Politics | Permalink  Comments (27)


                                                  Links for 02-23-2013

                                                    Posted by on Saturday, February 23, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (133)


                                                    Friday, February 22, 2013

                                                    'Nature Abhors an Output Gap'

                                                    David Altig admits to "overly rosy projections" about the course of the economy (which can cause policy to be too timid), and he tries to explain how this can happen. I can't really claim the high ground here. My first post for CBS MoneyWatch in November 2009 explained why employment might not fully recover until 2013. I was very pessimistic relative to most, and wondered at the time if I was being too pessimistic in saying it could be four years, but of course it turned out I wasn't pessimistic enough (I suppose I could argue that I relied in part upon an SF Fed forecast for the recovery timing, but that's not much of a defense since I didn't question the forecast in the post). My main message was that it was going to be a long time before employment recovered and policy needed to do more to help, much more, (that's still true) so I was at least pushing in the right direction:

                                                    Nature Abhors an Output Gap, macroblog: In The Washington Post, Neil Irwin highlights a shortcoming that I know all too well... In fact I don't think Irwin's indictment is overly harsh, and he is on the right track when he offers up this explanation for the last several years' persistently overly rosy projections:

                                                    Economic forecasters tend to look at past experience and extrapolate; in the past, when there has been a recession, the very forces that caused the recession become unwound, sowing the seeds for expansion...

                                                    Here is a basic fact about macroeconomic forecasting. The truly powerful driver of forecasts is mean reversion, which is the tendency of models to predict that gross domestic product (GDP) will move toward an average trend over time. This fact holds true whether we are talking about formal statistical analysis or the intuitive judgmental adjustments that all forecasters apply to their formal statistical models.

                                                    Forecasters are not completely robotic, of course. Irwin is correct when he says "forecasters tend to look at past experience and extrapolate, but forecasters do leaven past experience with incoming details that alter judgments about what is the mean—the "normal state," if you will—to which the economy will converge. But whatever is that normal state, our models insist that we will converge to it.

                                                    Nothing illustrates this property of forecasting reality better than this chart, which supplements the latest economic projections from the Congressional Budget Office:

                                                    130222a
                                                    The potential GDP line in that chart is the level of production that represents the structural path of the economy. Forecasters, no matter where they think that potential GDP line might be, all believe actual GDP will eventually move back to it. "Output gaps"—the shaded area representing the cumulative miss of actual GDP relative to its potential—simply won't last forever. And if that means GDP growth has to accelerate in the future (as it does when GDP today is below its potential)—well, that's just the way it is.
                                                    Unfortunately, potential GDP is not so simple to divine. We have to guess (or, more generously, estimate) what it is. That guessing game has been harder than usual over the past several years. Here is the record of the CBO's potential GDP since 2009:
                                                    130222b

                                                    I think this picture is a fairly representative record of how views about the potential level of U.S. GDP has evolved over the past several years. ...

                                                    This much, in any event, is clear: Given any starting point where the level of GDP is below its potential level—that is, given an output gap—forecasts will include a bounce back in GDP growth above its long-run average, at least for a while. That's just the way it works.

                                                    If, contrary to conventional wisdom, you believe that the true output gaps are much smaller than suggested in the CBO picture above, you might want to take the under on a bet to whether GDP forecasts will prove too optimistic once again.

                                                      Posted by on Friday, February 22, 2013 at 04:24 PM in Economics, Monetary Policy | Permalink  Comments (61)


                                                      Fed Watch: Bernanke Not Afraid of Bubbles

                                                      Tim Duy:

                                                      Bernanke Not Afraid of Bubbles, by Tim Duy: Yesterday I wrote:

                                                      For now, our default should be that Federal Reserve Chairman Ben Bernanke shares the view that the real benefits of QE outweigh the imaginary costs. As long is that is true, then Williams will be correct - expect asset purchases to continue at the current pace deep into this year. What we are looking for, then, are signs that Bernanke's commitment is wavering as much as that of some of his colleagues.

                                                      Today it was leaked (via Bloomberg):

                                                      Federal Reserve Chairman Ben S. Bernanke minimized concerns that the central bank’s easy monetary policy has spawned economically-risky asset bubbles in comments at a meeting with dealers and investors this month, according to three people with knowledge of the discussions.

                                                      The people, who asked not to be identified because the talks were private, said Bernanke made the remarks at a meeting in early February with the Treasury Borrowing Advisory Committee. Fed spokeswoman Michelle Smith declined to comment.

                                                      The Fed chairman brushed off the risks of asset bubbles in response to a presentation on the subject from the group, one person said. Among the concerns raised, according to this person, were rising farmland prices and the growth of mortgage real estate investment trusts. Falling yields on speculative- grade bonds also were mentioned as a potential concern, two people said.

                                                      So, for now at least, it appears that Bernanke dismisses one of the oft-discussed risks of the current stance of monetary policy, that of investors "reaching for yield."

                                                        Posted by on Friday, February 22, 2013 at 11:28 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (45)


                                                        'David Brooks, Obama Plan Birther'

                                                        I was going to post this earlier today, but decided not to:

                                                        Jon Chait is unhappy with David Brooks:

                                                        David Brooks, Obama Plan Birther: ... David Brooks today ... lashes out at the obstinacy of the Republican Party and its refusal to compromise on the deficit. But he has to balance it out by asserting that President Obama, too, lacks any such plan...
                                                        This is demonstrably false. Whatever you think about the substantive merits of Obama’s plan, it does exist. ...

                                                        So is Steve Benen:

                                                        When false claims drive the debate: As best as I can tell, New York Times columnist David Brooks is a well-connected pundit. Powerful people return his phone calls, and when he wants information from top governmental offices, Brooks tends to get it.
                                                        And with this in mind, it's puzzling that Brooks based his entire column today on an easily-checked error. The conservative pundit insists President Obama "declines to come up with a proposal to address" next week's sequester mess, adding, "The president hasn't actually come up with a proposal to avert sequestration."
                                                        I'll never understand how conservative media personalities get factual claims like this so very wrong. If Brooks doesn't like Obama's sequester alternative, fine; he can write a column explaining his concerns. But why pretend the president's detailed, already published plan, built on mutual concessions from both sides, doesn't exist? ...

                                                        But this addition, via Brad DeLong, changes my mind -- this is worth echoing:

                                                        Ezra Klein Smacks Down David Brooks: "Centrism" Weblogging, by Brad DeLong: Unbelievable:

                                                        David Brooks: In my ideal world, the Obama administration would do something Clintonesque… a budget policy… like… Robert Rubin… and if the Republicans rejected that, moderates like me would say that’s awful…

                                                        Ezra Klein: I’ve read Robert Rubin’s tax plan. He wants $1.8 trillion in new revenues. The White House… is down to $1.2 trillion…. [T]he White House’s offer seems more centrist…. People say the White House should do something centrist like Simpson-Bowles, even though their plan has less in tax hikes and less in defense cuts…

                                                        At this point David Brooks has a choice: he can say "I am an idiot who does not know what I am talking about"; or he can change the subject.

                                                        Guess what he does?

                                                        David Brooks: My first reaction is I’m not a huge fan of Simpson-Bowles anymore; I used to be. Among others, you persuaded me the tax reform scheme in theirs is not the best. Simpson-Bowles just doesn’t do enough on entitlements…

                                                        If I were running the New York Times, I would look at this and immediately say: We need to get Brooks out of our pages yesterday if not before, and we need an Ezra Klein of our own very badly.

                                                        Why oh why can't we have a better press corps?

                                                        The context: Does Obama have a plan? A conversation with David Brooks: ...

                                                        A much longer take:

                                                        Ezra Klein: In the column, you said that the Obama administration doesn’t have a plan to replace the sequester. I feel like I’ve had to spend a substantial portion of my life reading their various budgets and plans to replace the sequester, and my sense is that you’ve had to do this, too. So, what am I missing?

                                                        David Brooks: First, the column was a bit of an over-the-top… I probably went a bit too far when saying the president didn’t have a response to the sequester…. I was unfair…. [But] there’s no scorable plan they’ve come up with, at least this time around… it would serve the country well if they put out something specific….

                                                        EK: CBO did score the president’s budget, and almost all of their proposals are drawn from that. I find, in general, that legislators often ask Elmendorf if he’s scored things from the White House and then crow about the fact that he hasn’t, when all that’s really going on is CBO doesn’t score everything the president does or says.

                                                        DB: If you look at the charts I’ve seen, they’re targets that, say, cut x from agriculture spending, and specifically how you do that is vague…. I think having something concrete and standalone is the way for the president to go… he's got a responsibility…. I don’t think he’s given us a document that would anchor the debate in a boring, managerial framework so we can have a debate over substance.

                                                        EK: On that point, one theme in your column, and in a lot of columns these days, is this idea that the president should, on the one hand, be putting forward centrist policies, and on the other hand, that if he’s putting forward policies that the Republican Party won’t agree to, those policies don’t count, as they’re nothing more than political ploys… it seems a bit dangerous and strange to say the boundaries of the discussion should be set by the agenda that lost the last election.

                                                        DB: In my ideal world, the Obama administration would do something Clintonesque: They’d govern from the center; they’d have a budget policy that looked a lot more like what Robert Rubin would describe, and if the Republicans rejected that, moderates like me would say that’s awful…

                                                        EK: But I’ve read Robert Rubin’s tax plan. He wants $1.8 trillion in new revenues. The White House, these days, is down to $1.2 trillion. I’m with Rubin on this one, but given our two political parties, the White House’s offer seems more centrist…. People say the White House should do something centrist like Simpson-Bowles, even though their plan has less in tax hikes and less in defense cuts….

                                                        DB: My first reaction is I’m not a huge fan of Simpson-Bowles anymore; I used to be. Among others, you persuaded me the tax reform scheme in theirs is not the best. Simpson-Bowles just doesn’t do enough on entitlements…. I agree with you [that Republicans] shouldn’t be given veto power over the debate, but I still think that if you look at what moderates want the administration to do, they have not gone far enough.

                                                        EK: What would be far enough, in your view? What would you like to see them offer?

                                                        DB: My fantasy package, and I’m not running for office, would include a progressive consumption tax, and it would have chained CPI, and it would have a pretty big means-test of Medicare. I’d direct you to Yuval Levin’s piece in the Times a few days ago, which seemed sensible.

                                                        EK: On the topic of deals Republicans should take, I’m completely confused by their stance on the sequester…. They want to reduce the deficit, cut entitlements, protect defense, simplify the tax code by cutting out various expenditures, and lower rates…. Republicans could get four of their five goals by striking a sequester deal, and they could always cut tax rates later, whenever they get into power. What am I missing?

                                                        DB: Here’s something I’m confused by: how much they still believe in top rate reductions. I would say in the conservative economist world I think I know almost nobody… super motivated by top rate reductions anymore. I don’t think that’s true with Republican members of Congress. I think there’s a lag between the wonks and the legislators. The second thing is, for them, the big issue is overall size of government. When they try to explain why growth is so slow, it’s because we’re saddled with this large, unproductive public sector, and they need to bring that down. And cutting tax expenditures would generate money for a bigger more unproductive public sector.

                                                        EK: So, then, what do you see as the White House’s motivating theory?

                                                        DB: If I were to capsulize their theory, it’s lets stabilize the debt over 10 years, maybe do some things that would make it better beyond the 10-year window, but let’s not try to take care of the long-term debt issue all at once. Achieve a floor and then focus on growth and equity. And I guess my response would be, as the [International Monetary Fund] and others have said, if you don’t lay the groundwork for a long-term debt solution now, it gets immeasurably harder every year you wait. I agree there are three big issues — equity, growth and debt — and it’s hard to address all three at the same time. But that’s what we need to do. ...

                                                          Posted by on Friday, February 22, 2013 at 11:28 AM in Budget Deficit, Economics, Politics | Permalink  Comments (36)


                                                          Paul Krugman: Sequester of Fools

                                                           Take a sad song, and make it worse:

                                                          Sequester of Fools, by Paul Krugman, Commentary, NY Times: ... The ... “sequester” [is] one of the worst policy ideas in our nation’s history. Here’s how it happened: Republicans engaged in unprecedented hostage-taking, threatening to push America into default by refusing to raise the debt ceiling unless President Obama agreed to a grand bargain on their terms. Mr. Obama, alas, didn’t stand firm; instead, he tried to buy time. And, somehow, both sides decided that the way to buy time was to create a fiscal doomsday machine that would inflict gratuitous damage on the nation through spending cuts unless a grand bargain was reached. Sure enough, there is no bargain, and the doomsday machine will go off at the end of next week. ...
                                                          But that’s water under the bridge. The question ... is who has a better plan for dealing with the aftermath of that shared mistake. ...
                                                          Unfortunately, neither party is proposing that we just call the whole thing off. But the proposal from Senate Democrats at least moves in the right direction, replacing the most destructive spending cuts — those that fall on the most vulnerable... — with tax increases on the wealthy, and delaying austerity in a way that would protect the economy.
                                                          House Republicans, on the other hand, want to take everything that’s bad about the sequester and make it worse: canceling cuts in the defense budget, which actually does contain a lot of waste and fraud, and replacing them with severe cuts in aid to America’s neediest. This would hit the nation with a double whammy, reducing growth while increasing injustice.
                                                          As always, many pundits want to portray the deadlock ... as a situation in which both sides are at fault, and in which both should give ground. But there’s really no symmetry here. A middle-of-the-road solution would presumably involve a mix of spending cuts and tax increases; well, that’s what Democrats are proposing, while Republicans are adamant that it should be cuts only. And given that the proposed Republican cuts would be even worse than ... under the sequester, it’s hard to see why Democrats should negotiate at all, as opposed to just letting the sequester happen.
                                                          So here we go. The good news is that compared with our last two self-inflicted crises, the sequester is relatively small potatoes. ... But the looming mess remains a monument to the power of truly bad ideas — ideas that the entire Washington establishment was somehow convinced represented deep wisdom.

                                                            Posted by on Friday, February 22, 2013 at 07:02 AM in Budget Deficit, Economics, Politics | Permalink  Comments (42)


                                                            Confidence is Just around the Corner!

                                                            Kevin O'Rourke:

                                                            The good news: confidence is just around the corner, by Kevin O’Rourke, Irish Economy Blog: You might have thought that the disastrous but wholly unsurprising eurozone GDP numbers indicate that the bloc is in a bad way, and will continue to be so until the current macroeconomic policy mix is jettisoned.

                                                            Happily, Olli “Don’t mention the multiplier” Rehn has good news for us:

                                                            The current situation can be summarised like this: we have disappointing hard data from the end of last year, some more encouraging soft data in the recent past and growing investor confidence in the future.

                                                            Thank goodness for that.

                                                            As noted in the comments of the post, Rehn also says:

                                                            Rehn urged nations to keep cutting budgets and overhauling their economies in the face of slowing growth. In a statement, he said any shift away from fiscal consolidation would prolong the downturn.
                                                            “The decisive policy action undertaken recently is paving the way for a return to recovery,” Rehn said. “We must stay the course of reform and avoid any loss of momentum, which could undermine the turnaround in confidence that is under way, delaying the needed upswing in growth and job creation.”

                                                            See also "A week after official figures showed a steep fall in euro-zone output in late 2012 the European Commission has added to the gloom by unveiling some gloomy forecasts for 2013. ..."

                                                              Posted by on Friday, February 22, 2013 at 06:09 AM in Economics | Permalink  Comments (24)


                                                              'Big Health Insurance Rate Hikes are Plummeting'

                                                              Some evidence that Obamacare is reducing the rate of increase in the cost of health insurance:

                                                              Big health insurance rate hikes are plummeting, by Sarah Kliff: The number of double-digit rate increases requested by health insurers has plummeted over the past four years, according to a Friday report from the Obama administration.
                                                              Researchers combed through data available from the 15 states that publicly post all requests for rate increases in the individual market. They found that, in 2009, 74 percent of all requests came in above 10 percent. By 2012, that number had fallen to 35 percent. Preliminary data for 2013, which only cover a handful of states, shows 14 percent of rate increases asking for a double-digit bump. Here’s what this looks like in chart form:

                                                              rate increases

                                                              Does Obamacare get credit? The administration thinks so...
                                                              One other possible explanation: Over this time period, there has also been a big slowdown in the rate of health care cost growth. That began in 2009, so it’s not completely impossible that the health insurance industry, noticing that trend, began pricing individual market products at lower rates.
                                                              The administration has considered that idea though and looked at the large group market to test it. If the health cost slowdown really was driving lower premiums, the thinking went, it would show up across all insurance products. It didn’t...

                                                              Speaking of Obamacare, from Brad DeLong: Douglas Holtz-Eakin and Avik Roy: "You Know All That Stuff We Have Been Saying for Four Years? Nevermind!", and from Paul Krugman: More Swiss Myths.

                                                                Posted by on Friday, February 22, 2013 at 06:03 AM in Economics, Health Care, Regulation | Permalink  Comments (29)


                                                                Anthony Juan Bautista Wants You To Know He Has Been Banned From Comments

                                                                I don't do this often, but two days ago I decided to ban two people from comments. One, Anthony Juan Bautista, is now attempting to "tattle" on me in comments and he is also impersonating many of you in numerous attempts to get his comments through (when people are banned -- I think there are five people in total who are -- they always think it's what they say, i.e. that it's political, etc., rather than how they say it, i.e. their behavior).

                                                                When he impersonates regular commentors, he says things you surely wouldn't appreciate. I was having second thoughts about banning him -- the other person was much worse, a no-brainer ban, and I was worried I might have made a mistake in my irritation at the time -- but his behavior since, the impersonation of regular commentors in particular, has convinced me the decision to ban him was correct (this post can serve as a character reference when he is Googled). If he impersonates you and I miss it when I clean his comments out, please let me know (so far, it's been cm, bakho, ilsm, paine, Emichael, Lafayette, and DrDick).

                                                                Thanks.

                                                                  Posted by on Friday, February 22, 2013 at 12:24 AM in Economics, Weblogs | Permalink  Comments (0)


                                                                  Links for 02-22-2013

                                                                    Posted by on Friday, February 22, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (39)


                                                                    Thursday, February 21, 2013

                                                                    The 'Woodford Period'

                                                                    Bill C:

                                                                    The 'Woodford Period': A Bourbon for Bernanke?, Twenty Cent Paradigms: The news release summarizing St. Louis Fed President's James Bullard's recent speech on the "current stance of monetary policy" includes the following:

                                                                    He stated that “the current St. Louis Fed forecast for the unemployment rate implies that the 6.5 percent threshold will be crossed in June 2014.” However, he noted, the policy rate implied jointly by the Taylor (1999) rule and the St. Louis Fed forecasts should increase in August 2013. Thus, “The Committee’s thresholds imply a ‘Woodford period’ since the policy rate would be held at zero past the point where ordinary FOMC behavior would indicate an increase,” Bullard said.

                                                                    William McChesney Martin, who chaired the Fed in the 1950's and 60's once said it was the Fed's job "to take the punch bowl away just as the party gets going." It sounds like the Fed's new corollary to Martin's rule involves leisurely sipping bourbon for a while when the economic slump is ending. If the slump is the hangover from a financial crisis, maybe its kind of a "hair of the (monetary) dog" thing.

                                                                    The release continues:

                                                                    The period from August 2013 to June 2014 would be the “Woodford period,” which refers to Michael Woodford of Columbia University. “According to received theory, this is a more stimulative monetary policy and possibly even an optimal monetary policy when the zero lower bound is constraining,” Bullard added.

                                                                    Oh, "Woodford" is the author of Interest and Prices, not Woodford Reserve bourbon whiskey. ...

                                                                      Posted by on Thursday, February 21, 2013 at 06:34 PM in Economics, Monetary Policy | Permalink  Comments (3)


                                                                      Fed Watch: Don't Dismiss the Communications Value of QE

                                                                      Tim Duy:

                                                                      Don't Dismiss the Communications Value of QE, by Tim Duy: The minutes of the last FOMC meeting indicated that one group of policymakers was getting anxious about the size and pace of QE:

                                                                      Several participants emphasized that the Committee should be prepared to vary the pace of asset purchases, either in response to changes in the economic outlook or as its evaluation of the efficacy and costs of such purchases evolved....A number of participants stated that an ongoing evaluation of the efficacy, costs, and risks of asset purchases might well lead the Committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labor market had occurred.

                                                                      Another group saw a different side of the coin:

                                                                      Several others argued that the potential costs of reducing or ending asset purchases too soon were also significant, or that asset purchases should continue until a substantial improvement in the labor market outlook had occurred.

                                                                      Unsurprisingly, San Francisco Fed President John Williams falls in the latter group. In a speech today, Williams reiterates the labor market objective in setting asset purchase policy:

                                                                      Critically, we indicated we will continue these purchases until the outlook for the job market improves substantially, in the context of stable prices. I anticipate that purchases of mortgage-backed securities and longer-term Treasury securities will be needed well into the second half of this year.

                                                                      Clear commitment with no discussion of imaginary risks, except to dismiss inflation concerns:

                                                                      Some analysts have argued that our policy initiatives have increased the risk of an undesirable rise in inflation. I want to assure you that in no way have we relaxed our commitment to our price stability mandate. We constantly monitor inflation trends and inflation expectations. And we will not hesitate to act if necessary. In this regard, I want to emphasize that we remain committed to our 2 percent inflation target. The 2½ percent inflation threshold in our forward guidance is not a weakening of that commitment.

                                                                      For now, our default should be that Federal Reserve Chairman Ben Bernanke shares the view that the real benefits of QE outweigh the imaginary costs. As long is that is true, then Williams will be correct - expect asset purchases to continue at the current pace deep into this year. What we are looking for, then, are signs that Bernanke's commitment is wavering as much as that of some of his colleagues.

                                                                      I do have one quibble with John Williams. In his description of Fed policy, he states:

                                                                      We’ve relied on two primary tools. The first is forward policy guidance, that is, public communications aimed at guiding expectations about the future path of the federal funds rate. The second is large-scale asset purchases, which also go by the name quantitative easing. As I’ll explain, both of these tools stimulate the economy by lowering longer-term interest rates.

                                                                      I would argue that quantitative easing also acts as a communications device that guides expectations; asset purchases are a signal about the Fed's commitment to accomodative policy. Indeed, it is the only positive action they can take to signal policy intent; otherwise, due to the zero bound, policy amounts to doing exactly nothing at this point. Hence why altering the pace of purchases changes expectations about the timing of rate hikes. I see Ryan Avent has the same idea:

                                                                      But the discussion alone was enough to influence market expectations. And a change in expectations is a change in policy.

                                                                      This is something the Fed is only slowly grasping, or at least only slowly building into its policymaking. The Fed initiated asset purchases with the primary goal of having a positive and mechanical effect on the economy: purchases were begun to ease funding conditions in distressed markets, hold down interest rates, and boost asset prices. As a matter of course, it acknowledged that purchases could also operate through an expectations channel, but it did not behave as though this were a significant or justifying benefit of purchase plans.

                                                                      The reaction of financial market participants to what policymakers might have viewed as a relatively innocuous debate should be a red flag that they need to tread very carefully in changing the pace of asset purchases prior to achieving a substantially stronger labor market.

                                                                      Bottom Line: Williams is committed to the current pace of asset purchases. He does not, however appear to place much weight on the communications value of the asset purchases. Instead, asset purchases work only "by increasing demand for longer-term Treasury and mortgage-related securities." I think they have communications value as well, something illustrated after the release of the January minutes. Rather than the current nebulous language surrounding asset purchases, the Fed would be better served by communicating a version of the Evan's rule to tie changes in the asset purchase program to specific economic objectives, presumably some point on the way to the Evan's rule thresholds.

                                                                        Posted by on Thursday, February 21, 2013 at 03:10 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (9)


                                                                        'It's an Affinity Thing'

                                                                        The other day I asked why anyone listens to Bowles/Simpson. After all:

                                                                        Simpson is, demonstrably, grossly ignorant on precisely the subjects on which he is treated as a guru, not understanding the finances of Social Security, the truth about life expectancy, and much more. He is also a reliably terrible forecaster, having predicted an imminent fiscal crisis — within two years — um, two years ago.

                                                                        In addition, he is:

                                                                        cantankerous, potty-mouthed individual, who evidently feels not a bit of empathy for those less fortunate.

                                                                        He's also partisan, and has a clear agenda. Yet "he’s lionized" by the media. Paul Krugman tries to explain the attraction, and what it says about those who hold him in such high regard.

                                                                          Posted by on Thursday, February 21, 2013 at 10:59 AM in Budget Deficit, Economics, Politics, Press | Permalink  Comments (20)


                                                                          'Rebuilding Unemployment Insurance'

                                                                          Have distractions this morning, so a quick one. Thoughts on this? (I don't like all of these proposals, but do like the ones that offer a positive incentive, e.g. a bonus, for finding work sooner rather than later):

                                                                          Rebuilding Unemployment Insurance, by Tim Taylor: In theory, the federal government sets minimum guidelines for each state's unemployment insurance system, and then each state sets its own rules for what is paid in and and what benefits are offered. Each state has its own unemployment trust fund. The idea is that the the trust fund will build up in good economic times, and then be drawn down in recessions. But it hasn't actually worked that way for a long time, and the problem is getting worse.  Christopher J. O’Leary lays out the issue and possible solutions in "A Changing Federal-State Balance in Unemployment Insurance?" written for the January 2013 Employment Research Newsletter published by the Upjohn Institute. 

                                                                          When a recession hits, the federal government has developed a habit of stepping in with extra unemployment insurance funds. For example, the feds stepped in with additional funding ... in 1958, 1961, 1971, 1974, 1982, 1991 and 2002--as well as during the most recent recession. With the feds stepping up, it has been easier and easier for the states to keep their unemployment taxes as low as possible. For example, average unemployment insurance taxes (adjusted for inflation) were $274/employee in 2008, lower than the $350/employee in 1994 and the $515/employee in 1984, according to Ronald Wilus of the U.S. Department of Labor. 

                                                                          As a result, over time the feds are paying for a larger share of unemployment insurance during recessions. ... What would be needed to get back to a system where states save up funds for unemployment insurance money in trust funds--even if some federal help might occasionally be needed?

                                                                          One step suggested by O'Leary is to raise the "tax base." At present, the minimum federal standard requires that states collect unemployment insurance taxes on the first $7000 of taxable wages--a level that was established back in 1983. Just adjusting that $7,000 base for inflation would mean increasing it to about $16,000. O'Leary notes that 35 states currently have a taxable wage base at or below $15,000.

                                                                          A second step would be to have a rule that unemployment insurance benefits would not kick in until after a waiting period. O'Leary writes: "A much neglected potential reform on the benefit side would be to institute waiting periods of 2–4 weeks, with the duration of the wait depending inversely on the aggregate level of unemployment. ... A somewhat longer waiting period will reduce program entry by those with ready reemployment options, and help to preserve the income security strength of the system for those who are involuntarily jobless for 4, 5, or 6 months."

                                                                          Yet another step would be to use federal rules to discourage states from lowballing the funding of their unemployment insurance and relying on an influx of federal funding. ...

                                                                          It's worth pointing out that unemployment insurance has a number of problems other than whether it is pre-funded. You need to meet certain qualification tests for unemployment insurance, typically based on earnings in the previous year or so, and as a result, many of the unemployed do not receive unemployment insurance. In January 2013, about 3.5 million people were receiving unemployment insurance benefits, but about 12.3 million people were unemployed. 

                                                                          There are also a number of proposals that seek to adjust the incentives so that unemployment insurance can better co-exist with incentives to find a new job. Some proposals are that unemployment benefits should be larger, so as to soften the economic blow of unemployment, but for a shorter time, to hasten the incentive to find a new job. Some proposals would require or allow people to set up individual unemployment accounts, which they could keep at retirement, so that people would tap their own money before turning to the government fund. One proposal would offer a bonus to those receiving unemployment insurance if they found a job quickly, because it could be less costly for the unemployment insurance trust fund if they find a job faster rather than linger on receiving benefits.

                                                                          The Great Recession and its aftermath have wrecked the premises of the existing unemployment insurance system. It's time to rebuild.

                                                                            Posted by on Thursday, February 21, 2013 at 10:14 AM in Economics, Social Insurance, Unemployment | Permalink  Comments (58)


                                                                            Fed Watch: Fed's Commitment In Question

                                                                            Tim Duy:

                                                                            Fed's Commitment In Question, by Tim Duy: The Fed's commitment to open-ended quantitative easing is more fragile than believed. That is my first takeaway from the minutes of the January FOMC meeting. My second takeaway follows from the first: If the Fed is already wavering on the pace of quantitative easing, can it be long before they waver on their commitment to low rates as well?

                                                                            Step back to the statement from the January meeting. A central part of that statement was this sentence:

                                                                            If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability.

                                                                            What exactly is "substantially"? We don't really know, but I would be hard-pressed to claim that the labor market has improved substantially. Improved, yes. Substantially, no. And the Fed seemed to agree. From the minutes:

                                                                            In their comments on labor market developments, participants viewed the decline in the unemployment rate from the third quarter to the fourth and the continued moderate gains in payroll employment as consistent with a gradually improving job market. However, the unemployment rate remained well above estimates of its longer-run normal level, and other indicators, such as the share of long-term unemployed and the number of people working part time for economic reasons, suggested that the recovery in the labor market was far from complete.

                                                                            And I don't think the subsequently released employment report would have altered this view substantially (there's that word again!), so there should be no reason to worry about changing the pace of asset purchases. But maybe instead we should focus on the next line in the FOMC statement:

                                                                            In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.

                                                                            One would have thought the cost/benefit analysis had been completed when the Fed adopted open-ended QE and then followed by converting Operation Twist into additional QE. But apparently not. The cost/benefit line is the Fed's get-out-of-jail-free card; it allows them to unwind QE regardless of the progress in the labor market. And this shows up in the minutes.

                                                                            The discussion begins with the beneficial effects of open-ended QE.

                                                                            The Committee again discussed the possible benefits and costs of additional asset purchases. Most participants commented that the Committee's asset purchases had been effective in easing financial conditions and helping stimulate economic activity, and many pointed, in particular, to the support that low longer-term interest rates had provided to housing or consumer durable purchases. In addition, the Committee's highly accommodative policy was seen as helping keep inflation over the medium term closer to its longer-run goal of 2 percent than would otherwise have been the case. Policy was also aimed at improving the labor market outlook. In this regard, several participants stressed the economic and social costs of high unemployment, as well as the potential for negative effects on the economy's longer-term path of a prolonged period of underutilization of resources.

                                                                            But the discussion turns negative quickly:

                                                                            However, many participants also expressed some concerns about potential costs and risks arising from further asset purchases. Several participants discussed the possible complications that additional purchases could cause for the eventual withdrawal of policy accommodation, a few mentioned the prospect of inflationary risks, and some noted that further asset purchases could foster market behavior that could undermine financial stability. Several participants noted that a very large portfolio of long-duration assets would, under certain circumstances, expose the Federal Reserve to significant capital losses when these holdings were unwound, but others pointed to offsetting factors and one noted that losses would not impede the effective operation of monetary policy. A few also raised concerns about the potential effects of further asset purchases on the functioning of particular financial markets, although a couple of other participants noted that there had been little evidence to date of such effects....

                                                                            ...Several participants emphasized that the Committee should be prepared to vary the pace of asset purchases, either in response to changes in the economic outlook or as its evaluation of the efficacy and costs of such purchases evolved. For example, one participant argued that purchases should vary incrementally from meeting to meeting in response to incoming information about the economy. A number of participants stated that an ongoing evaluation of the efficacy, costs, and risks of asset purchases might well lead the Committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labor market had occurred.

                                                                            Now, in all honesty, we should have seen this coming. Cleveland Federal Reserve President Sandra Pianalto:

                                                                            While our policies have been effective, our experience with our asset purchase programs is limited, and, as a result, we must analyze their benefits and costs carefully. Over time, the benefits of our asset purchases may be diminishing. For example, given how low interest rates currently are, it is possible that future asset purchases will not ease financial conditions by as much as they have in the past. And it is also possible that easier financial conditions, to the extent they do occur, may not provide the same boost to the economy as they have in the past.

                                                                            In addition to the possibility that our policies may have diminishing benefits, they also may have some risks associated with them. I will mention four: credit risk, interest rate risk, the risk of adverse market functioning, and inflation risk. These and other risks are not easy to see or measure, but they need to be taken into account when setting monetary policy.

                                                                            First, financial stability could be harmed if financial institutions take on excessive credit risk by “reaching for yield” —that is, buying riskier assets, or taking on too much leverage—in order to boost their profitability in this low-interest rate environment. Second, interest rate risk could arise if financial companies are not prepared to manage the losses they might suffer by holding too many long-term, fixed-rate, low-yield assets when interest rates rise. Third, financial market functioning could, at some point, become distorted as a result of the Federal Reserve's large and growing presence in mortgage-backed securities and Treasury securities markets. And last, but certainly not least, there is the risk that the Federal Reserve's ability to respond to future inflationary pressures could be complicated by the size and composition of our balance sheet....

                                                                            Federal Reserve Governor Jeremy Stein explores the issue of overheating in credit markets:

                                                                            The third factor that can lead to overheating is a change in the economic environment that alters the risk-taking incentives of agents making credit decisions. For example, a prolonged period of low interest rates, of the sort we are experiencing today, can create incentives for agents to take on greater duration or credit risks, or to employ additional financial leverage, in an effort to "reach for yield."

                                                                            Robin Harding of the Financial TImes recently interviewed James Bullard, and came away with this:

                                                                            US Federal Reserve officials fear a backlash from paying billions of dollars to commercial banks when the time comes to raise interest rates...

                                                                            ...Officials at the US central bank fear it could create a public-relations nightmare after the Fed was lambasted for rescuing banks during the financial crisis. It is one factor prompting some inside the Fed to reconsider the eventual “exit strategy” from easy monetary policy....

                                                                            ...Mr Bullard said that neither interest paid to banks nor possible losses on exit made any difference to the substance of monetary policy.

                                                                            “I think it’s more just a question of the optics, and how you’re going to play the optics,” he added, referring to the perception of losses by the central bank. “And since it shouldn’t matter in a monetary policy sense you might as well play the optics in a better way than the one we’ve got planned.”

                                                                            Ways to play the optics include slowing the pace of asset purchases or accelerating the pace of sales when they occur. Harding reads the minutes and concludes:

                                                                            The US Federal Reserve is cooling on open-ended asset purchases as officials grow nervous about the dangers of a bigger balance sheet.

                                                                            You might find this discussion frustrating as the Fed sees a clear benefit from QE, yet only imaginary risks. See Matthew Yglesias. Still, some sanity prevailed:

                                                                            Several others argued that the potential costs of reducing or ending asset purchases too soon were also significant, or that asset purchases should continue until a substantial improvement in the labor market outlook had occurred. A few participants noted examples of past instances in which policymakers had prematurely removed accommodation, with adverse effects on economic growth, employment, and price stability; they also stressed the importance of communicating the Committee's commitment to maintaining a highly accommodative stance of policy as long as warranted by economic conditions. In this regard, a number of participants discussed the possibility of providing monetary accommodation by holding securities for a longer period than envisioned in the Committee's exit principles, either as a supplement to, or a replacement for, asset purchases.

                                                                            Some participants are rightly concluding the if the Fed's switches gears on QE too soon, market participants will get a wee bit nervous that the same will be true for interest rates. The key sentence in the statement:

                                                                            In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.

                                                                            A rock-solid commitment to the Evans rule, correct? But, then again, maybe not. On to the next sentence:

                                                                            In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.

                                                                            "Readings on financial developments" is a pretty opened-ended concept. In fact, one might argue that it pretty much allows the Fed to ignore the Evans rule entirely should they sense, for example, that investors are "reaching for yield." And where have I been hearing that lately?

                                                                            In short, I question that there is an elegant way for the Fed to convince market participants that pulling back on QE for imaginary threats in the face of evidence of real benefits does not necessarily imply that they will also ignore the Evans rule when faced with additional imaginary threats.

                                                                            Now, you should go read Cardiff Garcia, who is not so bleak as I, and concludes his analysis with:

                                                                            But it would not mean that the Fed was preparing to undo its thresholds approach or reverse the other changes it made in the second half of last year. Eventually the markets would figure this out.

                                                                            To which I would reply that the Fed could argue that they are not reversing their approach, they are simply exercising the stated option within that approach to address "readings on financial developments." Still, as Garcia notes:

                                                                            All very speculative, of course, and today’s minutes do confirm that those lingering communications issues remain unsolved.

                                                                            Yes, indeed.

                                                                            Bottom Line: The minutes suggest the Fed is wavering on their commitment to QE. We should watch upcoming speeches for unequal weight in the benefits vs. costs discussion. If the weight shifts increasingly toward costs, a change may be close at hand. And if they exercise the cost/benefit clause to ignore the job market clause and alter the direction of the large scale asset purchase program, recognize that the Evan's rule also has its own open-ended clause for the Fed to place imaginary concerns over real outcomes. After all, when you are the central bank, what exactly does not come under the realm of "readings on financial developments?"

                                                                              Posted by on Thursday, February 21, 2013 at 12:15 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (32)


                                                                              Links for 02-21-2013

                                                                                Posted by on Thursday, February 21, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (115)


                                                                                Wednesday, February 20, 2013

                                                                                China Says It May Implement a Carbon Tax

                                                                                China may implement a (modest) carbon tax:

                                                                                Taxing Carbon, by Vikas Bajaj, NY Times: Long considered the biggest holdout in climate change negotiations, China said this week that the country would implement new taxes designed to curb greenhouse gas emissions. Officials in Beijing provided few details, but a report by the state-owned Xinhua news service suggested that the government is working on a relatively modest plan. ...
                                                                                The Xinhua report ... did not say how big a tax the country would impose, but it pointed to a three-year-old proposal by government experts that would have levied a 10-yuan ($1.60) per ton tax on carbon in 2012 and raised it to 50-yuan ($8) a ton by 2020. Those prices are far below the $80 (500-yuan) a ton that some experts have suggested would be needed to achieve “climate stability,” and which would raise the cost of gasoline by about 70 American cents a gallon.
                                                                                China’s plan will not make a serious dent in global warming, though the tax may still have some beneficial impact within the country, where air pollution is a serious problem. ...
                                                                                Meanwhile, in the U.S., many members of Congress find the idea of carbon taxes totally anathema and think such taxes would wreck the economy. They might, however, want to consider a proposal promoted by Mr. Hansen that would take the money collected from carbon taxes — or carbon fees as he prefers to call them — and rebate it in full to individuals. That would help consumers pay for more expensive electricity and gasoline, while giving them an incentive to cut their use of energy and fossil fuels. It’s an elegant way to limit damage to the economy while giving people incentives to do what is right for the planet.

                                                                                Contrary to what "many members of Congress" (i.e. many Republicans) claim, eliminating a market failure through a carbon tax moves the economy closer to the optimal growth path rather than further from it.

                                                                                  Posted by on Wednesday, February 20, 2013 at 05:43 PM in China, Economics, Environment, Market Failure | Permalink  Comments (22)


                                                                                  'Setting the Record Straight on Medicare's Overhead Costs'

                                                                                  I don't know much about the quality of the journal where this research appears, but it's still worth noting:

                                                                                  Setting the record straight on Medicare's overhead costs, EurekAlert: ...The traditional Medicare program allocates only 1 percent of total spending to overhead compared with 6 percent when the privatized portion of Medicare, known as Medicare Advantage, is included, according to a study in the June 2013 issue of the Journal of Health Politics, Policy and Law.
                                                                                  The 1 percent figure ... is based on data contained in the latest report of the Medicare trustees. The 6 percent figure, on the other hand, is based on data contained in the latest National Health Expenditure Accounts (NHEA) report.  ...
                                                                                  According to ... [Minneapolis-based researcher Kip Sullivan, there is] confusion about Medicare's overhead costs. "The confusion is due partly to the existence of two government reports," says Sullivan, "and partly to claims by critics of Medicare that the government fails to report all of Medicare's overhead costs." The paper addresses both sources of confusion. The article explains the difference between the yardstick used by the trustees and the one used by the NHEA and concludes both are accurate. ...
                                                                                  The 1 percent figure is the one that should be used to analyze several hotly debated health reform issues, including whether to expand traditional Medicare to all Americans and whether to turn Medicare over to the insurance industry, either by expanding the Medicare Advantage program of by converting Medicare to a voucher program as Rep. Paul Ryan has proposed. ... The average overhead of the health insurance industry is approximately 20 percent, he said.
                                                                                  The large difference between traditional Medicare's overhead and that of the insurance industry has caused some conservative critics of Medicare to assert that the federal government is ignoring numerous administrative expenditures incurred by various federal agencies that should be attributed to Medicare.
                                                                                  Sullivan's paper ... describes this criticism as the second major source of confusion about Medicare's overhead. Sullivan's study reports that the 1 percent figure includes all appropriate administrative expenses incurred on Medicare's behalf, including those by the IRS, the Social Security Administration, and the FBI, as well as the cost of numerous pilot projects that Congress orders CMS to conduct. ...

                                                                                    Posted by on Wednesday, February 20, 2013 at 09:52 AM in Economics, Health Care | Permalink  Comments (32)


                                                                                    How Do BS Tax Cuts Help With Deficit Reduction?

                                                                                    Via Steve Benen, if Bowles and Simpson are so serious about reducing the deficit, why does their deficit reduction plan include tax cuts?:

                                                                                    We talked in some detail yesterday about the flaws in the latest debt-reduction plan from former Sen. Alan Simpson (R-Wyo.) and Erskine Bowles (D-N.C.), the folks celebrated by the political/media establishment as sage voices on fiscal issues for reasons I've never been able to identify. The Simpson-Bowles 2.0 plan probably isn't going anywhere, but before we move on, Tim Noah flags a detail I'd overlooked.
                                                                                    It turns out, in their drive to reduce deficits, Simpson and Bowles want to lower tax rates, replacing the revenue with scaling back "most" tax expenditures. It's not unreasonable to wonder why in the world the so-called deficit hawks would do this. ... Worse, they make this recommendation without explanation. Perhaps they think it's obvious that tax cuts are a good idea.

                                                                                    And if they want to make that case, fine, we can have the debate and point to the flaws in their assumption. But let's not keep up the charade that Simpson-Bowles is purely about fiscal responsibility, when there's also clearly a conservative ideological goal underpinning parts of the outline.

                                                                                      Posted by on Wednesday, February 20, 2013 at 09:28 AM in Budget Deficit, Economics | Permalink  Comments (28)


                                                                                      Links for 02-20-2013

                                                                                        Posted by on Wednesday, February 20, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (90)


                                                                                        Tuesday, February 19, 2013

                                                                                        Ageing and Productivity in Economics

                                                                                        Daniel Hamermesh argues that innovation in economics is slowing, and that allows older economists to stay in the game longer than in the past:

                                                                                        Ageing and productivity: Economists and others, by Daniel S. Hamermesh, Vox EU: Is economics still a young person’s game? If not, what is changing? This column argues that although top-level economic research in the 1990s was very much a young person’s game, the last 15 years has been kinder to older economists. More and more economists over 50 are being published in the top journals. Why? Because technological change in economic research is slowing, giving young researchers less competitive edge. ...

                                                                                        There's an alternative explanation. Older economists have more power over journals and other key research outlets than they used to, and they have kept the topics they work on alive much longer than in the past.

                                                                                        As for the thesis about technological change, it may be true about micro, though even there I'm not sure -- Varian does differ from Mas-Colell -- but what students in macro learn today is very different, both in technique and content, from what they learned 50 years ago. Same for some aspects of econometrics, e.g. the rise of the Bayesians. But if you take a shorter horizon in macro, since the rise of DSGE as a technique, and consider the forces for change that ought to exist in macro presently, it's harder to disagree with the stagnation thesis Hammermesh puts forward (which is mainly over the last 15 years). I think it's the hold that some of the "older" macroeconomists still have over the journals, NBER meetings, and the like -- that allows them to steer the theoretical agenda. But it's mostly just an hypothesis, I don't really have any hard evidence to back it up and I'm not all that confident it's correct. Maybe it's just that nothing better has come along.

                                                                                        In any case, here's a hint he's mostly thinking about micro:

                                                                                        In no way should the implied slowdown in methodological advance be viewed as negative for the profession as a whole. For the role of economics in society, the question is whether the profession is keeping up with the problems of an evolving complex society, not how it solves them. While one might despair of our progress in understanding issues and offering solutions for macroeconomic difficulties, the remarkable advances in the application of microeconomic ideas to real-world problems should be reassuring.

                                                                                        The "implied slowdown in methodological advance" might be okay for microeconomists, and for the "profession as a whole" if micro carries the most weight, but innovation -- perhaps aided by a change in the power structure within the profession -- is surely needed in macro.

                                                                                          Posted by on Tuesday, February 19, 2013 at 05:56 PM in Economics, Methodology | Permalink  Comments (11)


                                                                                          Good News on Health Care Costs and the Budget

                                                                                          The biggest driver of the "we must cut the national debt now, now, now" is the expectation that the cost of medical services (and hence the cost of Medicare) will escalate rapidly. But that argument is being undercut by new estimates from the CBO:

                                                                                          Here’s some good news on the fiscal front: projected Medicare spending over the 2011-2020 period has fallen by more than $500 billion since late 2010 — based on a comparison of the latest Congressional Budget Office (CBO) projections with those of August 2010. ...
                                                                                          CBO has reduced its projections of Medicare spending in response to a pattern of very low spending growth in the past three years. ... Medicare spending growth has slowed even more than costs in private health insurance, according to Standard & Poor’s and Medicare’s actuary. Although some of the slowdown stems from the recession, CBO Director Douglas Elmendorf and other experts have concluded that a substantial part reflects structural changes in the health care system. Professional associations, hospitals, and doctors are taking steps to curb costly and ineffective procedures and treatment. ...

                                                                                          The deficit hawks want to hurry and cut spending now. Their goal, after all, is smaller government and lower taxes on the wealthy needed to support it. Thus, they need to get the cuts in place before people figure out that they've been misled about the immediacy of the problem -- the scary projections are down the road, not tomorrow -- and that the problem is not as big as we thought.

                                                                                          (And who the hell cares what Bowles and Simpson think? I certainly don't. But apparently someone cares, because even though they couldn't get the committee they headed to agree on their previous budget plan, the unofficial plan they released was treated as official by the media. Now they are back in the news again with a another plan -- sanctioned by nothing but their own egos -- that tries to move the budget discussions more in the direction of what the GOP desires. Please just go away.)

                                                                                            Posted by on Tuesday, February 19, 2013 at 04:45 PM in Budget Deficit, Economics, Health Care, Politics | Permalink  Comments (42)


                                                                                            Fed Watch: And the Pressure on the Bank of Japan Rises

                                                                                            Tim Duy:

                                                                                            And the Pressure on the Bank of Japan Rises, by Tim Duy: The Wall Street Journal reports that Japanese Prime Minister Shinzo Abe is serious about a 2 percent inflation target:

                                                                                            "It would be necessary to proceed with revising the BOJ law if the central bank cannot produce results under its own mandate," Mr. Abe said during a debate Monday. He didn't elaborate on the substance of any revision, but indicated he was seeking ways to hold the bank responsible for meeting the inflation target, saying that under the current law, the government can't even introduce a target without the BOJ's consent.

                                                                                            Not exactly a veiled threat. Hit a 2 percent target, or your independence (what little you have left) is history. Abe doesn't comment on current policy, but "hints" at some future policies:

                                                                                            "There are views calling for foreign-bond purchases," as well as for purchases aimed at directly boosting the stock market, he noted, without expressing his own opinion on such proposals. "I hope the BOJ will take effective policy steps that would contribute to overcoming deflation."

                                                                                            The problem with foreign bond purchases - a problem that Abe may simply choose to ignore - is that such purchases would be consistent with outright intervention in the foreign exchange market. It would then become much more difficult to defend the depreciation of the Yen as simply a side-effect of domestic monetary policy. Refer to ECB President Mario Draghi's efforts to limit some of the currency war hysteria:

                                                                                            “Most of the exchange rate movements that we have seen were not explicitly targeted; they were the result of domestic macroeconomic policies meant to boost the economy,” Mr. Draghi told the committee, without mentioning any countries by name. “In this sense, I find really excessive any language referring to currency wars.”

                                                                                            Draghi did add:

                                                                                            But Mr. Draghi also seemed to suggest that central banks could succumb to mutual suspicion about whether exchange rates were being deliberately weakened.

                                                                                            “The less we talk about this, the better it is,” he said.

                                                                                            If the BOJ goes on a foreign bond-buying spree, such suspicion will spread further.

                                                                                            Also interesting is the possibility that Abe will push the next BOJ head to a more active role in supporting equity prices. Japan's economy minister Akira Amari already made clear that boosting stocks is a high priority, even going so far as to put a goal of 13,000 on the Nikkei buy the end of March. The BOJ could help make this a reality.

                                                                                            The question is how they would go about it? My suspicion is that they continue with purchases of equities in fixed quantities, much as it has in the past. From MarketWatch last year:

                                                                                            The central bank emphasizes that the program has only broad goals such as supporting interest rates and reducing risk premiums, rather than supporting financial markets.

                                                                                            Jefferies Japan’s head of Japanese strategy Naomi Fink says that while the ETF purchases are really part of the broad push to reflate asset prices in the deflation-plagued country, they do “provide a bit of a backstop, when they think they can curb the downside” for the market.

                                                                                            “Still, it’s a very small amount,” Fink said of the ETF purchases. “It’s more designed to bolster sentiment ... [and] it works best when sentiment is fragile.”

                                                                                            What would be much more interesting is if the BOJ simply set a price target, offering to purchase a Nikkei ETF at 13,000 from whoever wants to sell. If policymakers want 13,000, why not just take the direct route?

                                                                                            Bottom Line: The pressure on the BOJ shows no signs of easing.

                                                                                              Posted by on Tuesday, February 19, 2013 at 10:56 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (7)


                                                                                              Big Data?

                                                                                              Paul Krugman:

                                                                                              Data, Stimulus, and Human Nature, by Paul Krugman: David Brooks writes about the limitations of Big Data, and makes some good points. But he goes astray, I think, when he touches on a subject near and dear to my own data-driven heart:

                                                                                              For example, we’ve had huge debates over the best economic stimulus, with mountains of data, and as far as I know not a single major player in this debate has been persuaded by data to switch sides.

                                                                                              Actually, he’s not quite right there, as I’ll explain in a minute. But it’s certainly true that neither stimulus advocates nor hard-line stimulus opponents have changed their positions. The question is, does this say something about the limits of data — or is it just a commentary on human nature, especially in a highly politicized environment?

                                                                                              For the truth is that there were some clear and very different predictions from each side of the debate... On these predictions, the data have spoken clearly; the problem is that people don’t want to hear..., and the fact that they don’t happen has nothing to do with the limitations of data. ...

                                                                                              That said, if you look at players in the macro debate who would not face huge personal and/or political penalties for admitting that they were wrong, you actually do see data having a considerable impact. Most notably, the IMF has responded to the actual experience of austerity by conceding that it was probably underestimating fiscal multipliers by a factor of about 3.

                                                                                              So yes, it has been disappointing to see so many people sticking to their positions on fiscal policy despite overwhelming evidence that those positions are wrong. But the fault lies not in our data, but in ourselves.

                                                                                              I'll just add that when it comes to the debate over the multiplier and the macroeconomic data used to try to settle the question, the term "Big Data" doesn't really apply. If we actually had "Big Data," we might be able to get somewhere but as it stands -- with so little data and so few relevant historical episodes with similar policies -- precise answers are difficult to ascertain. And it's even worse than that. Let me point to something David Card said in an interview I posted yesterday:

                                                                                              I think many people are concerned that much of the research they see is biased and has a specific agenda in mind. Some of that concern arises because of the open-ended nature of economic research. To get results, people often have to make assumptions or tweak the data a little bit here or there, and if somebody has an agenda, they can inevitably push the results in one direction or another. Given that, I think that people have a legitimate concern about researchers who are essentially conducting advocacy work.

                                                                                              If we had the "Big Data" we need to answer these questions, this would be less of a problem. But with quarterly data from 1960 (when money data starts, you can go back to 1947 otherwise), or since 1982 (to avoid big structural changes and changes in Fed operating procedures), or even monthly data (if you don't need variables like GDP), there isn't as much precision as needed to resolve these questions (50 years of quarterly data is only 200 observations). There is also a lot of freedom to steer the results in a particular direction and we have to rely upon the integrity of researchers to avoid pushing a particular agenda. Most play it straight up, the answers are however they come out, but there are enough voices with agendas -- particularly, though not excusively, from think tanks, etc. -- to cloud the issues and make it difficult for the public to separate the honest work from the agenda based, one-sided, sometimes dishonest presentations. And there are also the issues noted above about people sticking to their positions, in their view honestly even if it is the result of data-mining, changing assumptions until the results come out "right," etc., because the data doesn't provide enough clarity to force them to give up their beliefs (in which they've invested considerable effort).

                                                                                              So I wish we had "Big Data," and not just a longer time-series of macro data, it would also be useful to re-run the economy hundreds or thousands of times, and evaluate monetary and fiscal policies across these experiments. With just one run of the economy, you can't always be sure that the uptick you see in historical data after, say, a tax cut is from the treatment, or just randomness (or driven by something else). With many, many runs of the economy that can be sorted out (cross-country comparisons can help, but the all else equal part is never satisfied making the comparisons suspect).

                                                                                              Despite a few research attempts such as the billion price project, "Little Data" and all the problems that come with it is a better description of empirical macroeconomics.

                                                                                                Posted by on Tuesday, February 19, 2013 at 10:37 AM in Economics, Fiscal Policy, Macroeconomics, Methodology, Monetary Policy | Permalink  Comments (20)


                                                                                                Links for 02-19-2013

                                                                                                  Posted by on Tuesday, February 19, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (85)


                                                                                                  Monday, February 18, 2013

                                                                                                  Scarborough and Friends 'Bug-Eyed, Table-Pounding Terror'

                                                                                                  After two relatively wonky posts, let's turn to Jon Chait for a bit of (serious) fun:

                                                                                                  Scarborough and Friends Trying to Make ‘Debt Deniers’ Happen, by Jonathan Chait: The deficit scold cause has suffered significant intellectual erosion... In the short run, the interest rate spike they keep insisting will happen keeps not happening. In the long run, the health-care-cost inflation that is at the root of the long-term fiscal predicament is growing markedly less dire. The case for prudent fiscal adjustment remains strong, but the case for bug-eyed, table-pounding terror is growing increasingly ridiculous.
                                                                                                  But bug-eyed, table-pounding terror is the stock-in-trade of the fiscal scold movement. And so they are striking back by labeling anybody with a calmer view of the deficit as a “debt denier.” Joe Scarborough ... has a new op-ed in Politico brandishing the epithet. ... Let’s examine their case on the merits...
                                                                                                  Analyzing the argument in a Joe Scarborough–authored op-ed is inherently challenging. (The written word in general is just a terrible medium for Scarborough, hiding his winning personality while exposing his inaptitude for analysis.) It mainly consists of using variations of “debt denier” repeatedly to describe his opponents. To his credit, Scarborough finally cites one actual economist... Unfortunately for Scarborough, the economist he cites, Alan Blinder, turns out to hold essentially the same view as Krugman. ... That Scarborough would support his claim that Krugman’s view is “extreme” and “indefensible” by citing Blinder is just a total failure of reading comprehension. ...
                                                                                                  It is the belief of the debt scolds that their issue holds such overweening importance that it can only be considered in moralistic terms. To Joe Scarborough and the whole team of anti-debt television personalities, calibrating out the ideal terms of debt reduction is like calibrating out how much to spend fighting Hitler. The fiscal scolds have so successfully inculcated their moralistic urgency about debt, so thoroughly dominated the news agenda, that millions of people like Joe Scarborough think it is self-evidently insane and evil to in any way minimize the awesome scale of the crisis. Scarborough can't really explain why Krugman is wrong, because the nub of the issue is that Krugman's way of looking at the issue simply offends him.

                                                                                                  We do have to make adjustments in the long-run, but as Jon Chait notes, "Not only do we not need to start reducing the budget deficit this year, it would actually be harmful to do so with unemployment still high." That's the most important problem we face right now, high levels of long-term unemployment (e.g. see here for how harmful it can be to individuals). If Scarborough and friends would use their "bug-eyed, table-pounding terror" when talking about long-term unemployment, we might get somewhere on addressing this problem. But somehow the struggles of real people in the real world are less important than imaginary problems in the future that, despite dire predictions from the deficit hawks, have not materialized.

                                                                                                    Posted by on Monday, February 18, 2013 at 12:30 PM in Budget Deficit, Economics, Politics, Unemployment | Permalink  Comments (59)


                                                                                                    Jordi Galí: Monetary Policy and Rational Asset Price Bubbles

                                                                                                    Another paper to read:

                                                                                                    Monetary Policy and Rational Asset Price Bubbles, by Jordi Galí, NBER Working Paper No. 18806, February 2013 [open link]: Abstract I examine the impact of alternative monetary policy rules on a rational asset price bubble, through the lens of an overlapping generations model with nominal rigidities. A systematic increase in interest rates in response to a growing bubble is shown to enhance the fluctuations in the latter, through its positive effect on bubble growth. The optimal monetary policy seeks to strike a balance between stabilization of the bubble and stabilization of aggregate demand. The paper's main findings call into question the theoretical foundations of the case for "leaning against the wind" monetary policies.

                                                                                                    What's the key mechanism working against the traditional "lean against the wind" policy? That rational bubbles grow at the rate of interest, hence raising (real) interest rates makes the bubble grow faster. From the introduction:

                                                                                                    ...The role that monetary policy should play in containing ... bubbles has been the subject of a heated debate, well before the start of the recent crisis. The consensus view among most policy makers in the pre-crisis years was that central banks should focus on controlling inflation and stabilizing the output gap, and thus ignore asset price developments, unless the latter are seen as a threat to price or output stability. Asset price bubbles, it was argued, are difficult if not outright impossible to identify or measure; and even if they could be observed, the interest rate would be too blunt an instrument to deal with them, for any significant adjustment in the latter aimed at containing the bubble may cause serious "collateral damage" in the form of lower prices for assets not affected by the bubble, and a greater risk of an economic downturn.1

                                                                                                    But that consensus view has not gone unchallenged, with many authors and policy makers arguing that the achievement of low and stable inflation is not a guarantee of financial stability and calling for central banks to pay special attention to developments in asset markets.2 Since episodes of rapid asset price inflation often lead to a financial and economic crisis, it is argued, central banks should act preemptively ... by raising interest rates sufficiently to dampen or bring to an end any episodes of speculative frenzy -- a policy often referred to as "leaning against the wind." ...

                                                                                                    Independently of one's position in the previous debate, it is generally taken for granted (a) that monetary policy can have an impact on asset price bubbles and (b) that a tighter monetary policy, in the form of higher short-term nominal interest rates, may help disinflate such bubbles. In the present paper I argue that such an assumption is not supported by economic theory and may thus lead to misguided policy advice, at least in the case of bubbles of the rational type considered here. The reason for this can be summarized as follows: in contrast with the fundamental component of an asset price, which is given by a discounted stream of payoffs, the bubble component has no payoffs to discount. The only equilibrium requirement on its size is that the latter grow at the rate of interest, at least in expectation. As a result, any increase in the (real) rate engineered by the central bank will tend to increase the size of the bubble, even though the objective of such an intervention may have been exactly the opposite. Of course, any decline observed in the asset price in response to such a tightening of policy is perfectly consistent with the previous result, since the fundamental component will generally drop in that scenario, possibly more than offsetting the expected rise in the bubble component.

                                                                                                    Below I formalize that basic idea... The paper's main results can be summarized as follows:

                                                                                                    • Monetary policy cannot affect the conditions for existence (or nonexistence) of a bubble, but it can influence its short-run behavior, including the size of its fluctuations.
                                                                                                    • Contrary to the conventional wisdom a stronger interest rate response to bubble fluctuations (i.e. a "leaning against the wind policy") may raise the volatility of asset prices and of their bubble component.
                                                                                                    • The optimal policy must strike a balance between stabilization of current aggregate demand -- which calls for a positive interest rate response to the bubble -- and stabilization of the bubble itself (and hence of future aggregate demand) which would warrant a negative interest rate response to the bubble. If the average size of the bubble is sufficiently large the latter motive will be dominant, making it optimal for the central bank to lower interest rates in the face of a growing bubble.

                                                                                                    ...

                                                                                                    But before we lower interest rates in response to signs of an inflating bubble, it would be good to heed this warning from the conclusion:

                                                                                                    Needless to say the conclusions should not be taken at face value when it comes to designing actual policies. This is so because the model may not provide an accurate representation of the challenges facing actual policy makers. In particular, it may very well be the case that actual bubbles are not of the rational type and, hence, respond to monetary policy changes in ways not captured by the theory above. In addition, the model above abstracts from many aspects of actual economies that may be highly relevant when designing monetary policy in bubbly economies, including the presence of frictions and imperfect information in financial markets. Those caveats notwithstanding, the analysis above may be useful by pointing out a potentially important missing link in the case for "leaning against the wind" policies.

                                                                                                      Posted by on Monday, February 18, 2013 at 11:40 AM in Academic Papers, Economics, Financial System, Monetary Policy | Permalink  Comments (17)