Old Men, by Paul Krugman: ... Actually, I was disappointed in Stockman’s
piece. I thought there would be some kind of real argument, some
presentation, however tendentious, of evidence. Instead it’s just a series
of gee-whiz, context- and model-free numbers embedded in a rant — and not
even an interesting rant. It’s cranky old man stuff, the kind of thing you
get from people who read Investors Business Daily, listen to Rush Limbaugh,
and maybe, if they’re unusually teched up, get investment advice from Zero
David Stockman Goes Way, Way Over the Top, by Jared Bernstein: He
has a featured piece in today’s NYT which, while about 11.8% absolutely and
totally on target, is mostly a horrific screed, an ahistorical, dystopic,
Hunger-Games vision of America based on debt obsession and willful ignorance
of macroeconomics and the impact of market failure. ...
Greg Mankiw says the goal for the budget should not be a stable debt-to-GDP
ratio as the president has called for, instead the ratio should be falling. But there are a few important qualifiers to
this statement that are easy to miss.
Even if you agree with Mankiw that the debt to GDP ratio should be falling
rather than stable, he never answers falling to what? (Does it fall forever
until it hits zero, then a surplus which gets larger and larger until spending is zero and taxes take
everything? I doubt that's what he has in mind.) How fast it should fall? (Do we balance
the budget this year or over 100 years?). Should the debt to GDP ratio vary over the business cycle
(i.e. can we do countercyclical fiscal policy?). On the
latter point, Owen Zidar:
While I completely agree that we should save in good times (i.e. have a
falling debt to GDP ratio), we are not in good times and it’s quite likely
that trying to save too much in bad times will be counterproductive.
A primary reason why we want to be creditworthy is to have the ability to
borrow for times like this. I simply have a hard time understanding why
preparing for the next crisis should supersede adequately dealing with the
It's easy to miss, but Mankiw actually covers this when he says " In
normal times, when we are lucky enough to enjoy peace and prosperity, the
debt-to-G.D.P. ratio shouldn’t just be stable; it should be falling." Notice the
key words "normal" and "prosperity". That's what Owen is saying too, we should a
surplus in good (normal, prosperous) times. But we should also run deficits in
bad times so that on balance the debt load is stable (or hits some target). Mankiw slips in the part
about a surplus in good times, though the qualifiers are easy to miss, but fails
to address what to do in a recession (these are not the normal, prosperous times
he cites as a condition for a falling ratio). That's a big omission because many
people are going to conclude he is pushing austerity, i.e. reducing the debt
during a severe recession. If he's really saying that (and I don't think he is), he should make it clear. If he's not saying that, if he believes in
countercyclical fiscal policy, he should say that as well. Leaving it vague, as he does, is not helpful at all.
Representative Paul D. Ryan, chairman of the House Budget Committee, has a
plan to balance the federal budget in 10 years.
Should we just fall out of our chairs laughing at such an incredibly absurd
statement? Ryan wants to cut tax rates but assume a level of tax revenues that
is over $500 billion a year above what many analysts suggest. And I have a plan
to replace Tim Duncan as the center for the Spurs even though I’m only 5 feet 6
inches. And then we get these canards:
With the exception of a few years starting in the late 1990s, when the
Internet bubble fueled an economic boom, goosed tax revenue and made
President Clinton look like a miracle worker, the federal government has run
a budget deficit consistently for the last 40 years.
Internet bubble? Mankiw really seems to hate that the Clinton years, which
started with the 1993 tax rates increases, had better economic performance that
either the Reagan-Bush41 years or the Bush43 years. As far as the deficit being
positive for all these other years, he should read what both Milton Friedman and
Robert Barro were writing on the deficit back in 1979 and 1980 – that
the debt in inflation adjusted terms was falling. Hey – I don’t mind a
conservative economists lecturing the President on fiscal policy if he gets the
facts right. This op-ed, however, fails to get a few key facts right.
Confused Americans want to know: Does Greg Mankiw believe in countercyclical fiscal policy in deep, prolonged recessions or not?
My daughter Amy in the SF Chronicle "on how the GOP can better talk to women":
GOP's future lies in heeding women's concerns, by Amy Thoma (open
link): The Republican Party needs help. That might be the understatement
of the past two election cycles. It seems that we're hemorrhaging voters -
especially young women. Registration numbers released this month only
underscore the party's need to expand its base. We're not giving women my
age enough reasons to stay or join.
As a 30-ish young professional, I don't see much coming out of the
party that resonates with me. We didn't lose twentysomething and
thirtysomething women in the last election because our digital efforts
lagged (though they did) or because some crazy white guys said
ridiculous things about rape (though they did), but rather because no
one bothered to ask what we think or care about. I don't see any women
on the national scene I relate to, and I don't hear any politicians
addressing issues I care about.
I want the Republican Party to succeed. A
successful two-party system is necessary to enact reasonable public
policy, and I still believe that entrepreneurship, personal
responsibility and freedom make the United States great. And Republicans
are best positioned to promote these ideas. ...
As noted below, it is a slow day, but this is well worth reading (there's
quite a bit more in the original post):
The Price Is Wrong, by Paul Krugman: It’s a slow morning on the economic
news front, as we wait for various euro shoes to drop, so I thought I’d share a
meditation I’ve been having on the diagnosis and misdiagnosis of the Lesser
So, start with our big problem, which is mass unemployment. Basic supply and
demand analysis says that ... prices are supposed to rise or fall to clear
markets. So what’s with this apparent massive and persistent excess supply of
labor? In general, market disequilibrium is a sign of prices out of whack... The
big divide comes over the question of which price is wrong.
As I see it, the whole structural/classical/Austrian/supply-side/whatever side
of this debate basically believes that the problem lies in the labor market. ...
For some reason, they would argue, wages are too high... Some of them accept the
notion that it’s because of downward nominal wage rigidity; more, I think,
believe that workers are being encouraged to hold out for unsustainable wages by
moocher-friendly programs like food stamps, unemployment benefits, disability
insurance, and whatever.
As regular readers know, I find this prima facie absurd — it’s essentially the
claim that soup kitchens caused the Great Depression. ...
So what’s the alternative view? It’s basically the notion that the interest rate
is wrong — that given the overhang of debt and other factors depressing private
demand, real interest rates would have to be deeply negative to match desired
saving with desired investment at full employment. And real rates can’t go that
negative because expected inflation is low and nominal rates can’t go below
zero: we’re in a liquidity trap. ..
There are strong policy implications of these two views. If you think the
problem is that wages are too high, your solution is that we need to meaner to
workers — cut off their unemployment insurance, make them hungry by cutting off
food stamps, so they have no alternative to do whatever it takes to get jobs,
and wages fall. If you think the problem is the zero lower bound on interest
rates, you think that this kind of solution wouldn’t just be cruel, it would
make the economy worse, both because cutting workers’ incomes would reduce
demand and because deflation would increase the burden of debt.
What my side of the debate would call for, instead, is a reduction in the real
interest rate, if possible, by raising expected inflation; and failing that,
more government spending to increase demand and put idle resources to work. ...
So yes, the price is wrong — but it’s a terrible, disastrous mistake to focus on
the wrong wrong price.
Why should workers bear the burden of a recession they had nothing to do with
causing? We should do our best to protect vulnerable workers and their families, and if it comes
at the expense of those who were responsible for the boom and bust, I can live with that (and no, the cause
wasn't poor people trying to buy houses -- people on the
right who are afraid they will be asked to pay for their poor choices, or who want to pursue an anti-government, do not help the unfortunate with my hard-earned investment income agenda have tried to make this claim, and they are still at it, but it is "prima facie absurd").
Is "Intellectual Property" a Misnomer?, by Tim Taylor: The terminology
of "intellectual property" goes back to the eighteenth century. But some
modern critics of how the patent and copyright law have evolved have come to
view the term as a tendentious choice. One you have used the "property"
label, after all, you are implicitly making a claim about rights that should
be enforced by the broader society. But "intellectual property" is a
much squishier subject than more basic applications of property, like
whether someone can move into your house or drive away in your car or empty
your bank account. ...
Is it really true that using someone else's invention is the actually the
same thing as stealing their sheep? If I steal your sheep, you don't have
them any more. If I use your idea, you still have the idea, but are less
able to profit from using it. The two concepts may be cousins, but they not
Those who believe that patent protection has in some cases gone overboard,
and is now in many industries acting more to protect established firms than
to encourage new innovators, thus refer to "intellectual property as a
"propaganda term." For a vivid example of these arguments, see "The
Case Against Patents," by Michele Boldrin and David K. Levine, in the
Winter 2013 issue of my own Journal of Economic
Perspectives. (Like all articles in JEP back to the first issue in 1987,
it is freely available on-line courtesy of the American Economic
Mark Lemley offers a more detailed unpacking of the concept of "intellectual
property" in a 2005 article he wrote for the Texas Law Review called
"Property, Intellectual Property, and Free Riding" Lemley writes: ""My
worry is that the rhetoric of property has a clear meaning in the minds of
courts, lawyers and commentators as “things that are owned by persons,” and
that fixed meaning will make all too tempting to fall into the trap of
treating intellectual property just like “other” forms of property. Further,
it is all too common to assume that because something is property, only
private and not public rights are implicated. Given the fundamental
differences in the economics of real property and intellectual property, the
use of the property label is simply too likely to mislead."
As Lemley emphasizes, intellectual property is better thought of as a kind
of subsidy to encourage innovation--although the subsidy is paid in the form
of higher prices by consumers rather than as tax collected from consumers
and then spent by the government. A firm with a patent is able to charge
more to consumers, because of the lack of competition, and thus earn higher
profits. There is reasonably broad agreement among economists that it makes
sense for society to subsidize innovation in certain ways, because
innovators have a hard time capturing the social benefits they provide in
terms of greater economic growth and a higher standard of living, so without
some subsidy to innovation, it may well be underprovided.
But even if you buy that argument, there is room for considerable discussion
of the most appropriate ways to subsidize innovation. How long should a
patent be? Should the length or type of patent protection differ by
industry? How fiercely or broadly should it be enforced by courts? In what
ways might U.S. patent law be adapted based on experiences and practices in
other major innovating nations like Japan or Germany? What is the role of
direct government subsidies for innovation in the form of
government-sponsored research and development? What about the role of
indirect government subsidies for innovation in the form of tax breaks for
firms that do research and development, or in the form of support for
science, technology, and engineering education? Should trade secret
protection be stronger, and patent protection be weaker, or vice versa?
These are all legitimate questions about the specific form and size of the
subsidy that we provide to innovation. None of the questions about
"intellectual property" can be answered yelling "it's my property."
The phrase "intellectual property" has been around a few hundred years, so
it clearly has real staying power and widespread usage I don't expect
the term to disappear. But perhaps we can can start referring to
intellectual "property" in quotation marks, as a gentle reminder that an
overly literal interpretation of the term would be imprudent as a basis for
reasoning about economics and public policy.
Even after four years of bug-eyed right-wing paranoia, Cheney’s op-ed stands
out for its utter dearth of the slightest whiff of perspective or factual
grounding. President Obama, she tells us,... does not want the economy to grow. (“He believes in greater
redistribution of a much smaller pie.”) Obama “seems unaware that the
free-enterprise system has lifted more people out of poverty than any other
economic system devised by man” — which is odd, because Obama is always
saying things like “business, and not government, will always be the primary
generator of good jobs...” The best approximations of America’s future under Obama are
tiny European nations that lack control of their own currency. (“If you're
unsure of what this America would look like, Google ‘Cyprus’ or ‘Greece.’”)
The most telling piece of Cheney’s rant may be a quote she uses, from
Ronald Reagan in 1961... In
speech, Reagan argued that establishing Medicare would inevitably lead ... inevitably
... to full government control over the entire economy...
Conservatives still quote this speech a lot, strangely considering it a
prescient warning rather than evidence that their fears of Big Government are
usually totally wrong. The paranoia is simply transferred from one event to the
Reagan, speaking a quarter-century later, assured his audience that he loved
Social Security but that Medicare would surely fulfill those same warnings.
Republicans now pledge their love for Medicare but see Obamacare as the death
knell for freedom.
Cheney, typically, draws the usual lesson. “President Reagan's words, spoken
52 years ago this weekend, still ring true, with one modification,” she writes,
“If we don't defend our freedoms now against the onslaught of President Obama's
policies, we won't have to wait until our sunset years for American freedom to
be a distant memory.” The destruction of freedom keeps happening in America, and
yet, somehow, not happening. It perpetually lies just over the horizon, close
enough to keep refreshing the supply of right-wing paranoia.
Inflation will soar, interest rates will spike, blah, blah, blah. When people
start to catch on to the 'cry wolf to make ideological gains' strategy,
shift to a new warning about a dismal future. It's always sunset in America
unless we follow their policies.
Speaking of sunset in America and destroying the economy, we should perhaps
remember that Obama inherited an economy that was already destroyed. Let's see,
who was president before Obama (hint: the same clowns were defending him even
though they now hardly speak his name)?
Over the past few weeks, there has been a remarkable change of position
among the deficit scolds.... It’s as if someone sent out a memo saying that
the Chicken Little act, with its repeated warnings of a U.S. debt crisis
that keeps not happening, has outlived its usefulness. Suddenly, the
argument has changed: It’s not about the crisis next month; it’s about the
long run, about not cheating our children. ...
There’s just one problem: The new argument is as bad as the old one. ...
What’s wrong with this argument? For one thing, it involves a fundamental
misunderstanding of what debt does to the economy.
Contrary to almost everything you read in the papers or see on TV, debt
doesn’t directly make our nation poorer; it’s essentially money we owe to
Yet there is, as I said, a lot of truth to the charge that we’re cheating
our children. How? By neglecting public investment and failing to provide
jobs. ... And right now — with vast numbers of unemployed construction
workers and vast amounts of cash sitting idle — would be a great time to
rebuild our infrastructure. Yet public investment has actually plunged since
the slump began.
Or what about investing in our young? We’re cutting back there, too, having
laid off hundreds of thousands of schoolteachers and slashed the aid that
used to make college affordable for children of less-affluent families.
Last but not least, think of the waste of human potential caused by high
unemployment among younger Americans — for example, among recent college
graduates who can’t start their careers and will probably never make up the
And why are we shortchanging the future so dramatically and inexcusably?
Blame the deficit scolds,... whose constant inveighing against the risks of
government borrowing, by undercutting political support for public
investment and job creation, has done far more to cheat our children than
deficits ever did.
Fiscal policy is, indeed, a moral issue, and we should be ashamed of what
we’re doing to the next generation’s economic prospects. But our sin
involves investing too little, not borrowing too much — and the deficit
scolds, for all their claims to have our children’s interests at heart, are
actually the bad guys in this story.
The cuts in the public-sector workforce—at the federal, state and local
levels—marked the deepest retrenchment in government employment of civilians
since just after World War II... down by about 740,000 jobs since the
recession ended in June 2009. At the same time, the private sector has added
more than 5.2 million jobs over the course of the recovery.
As the Journal article notes, the story of shrinking government
employment combining with private-sector payroll expansion has been remarkably
consistent for much of the recovery. ...
It is worth pointing out that the monthly average of 17,000 state, local, and
federal government jobs lost since March 2010 has been nearly matched by average
monthly increases of better than 14,000 jobs in manufacturing, a sector that
persistently shed jobs in the previous recovery. The replacement of private- for
public-sector employment has generated 175,000 to 185,000 net jobs per month in
both 2011 and 2012. To put one perspective on that figure, at current labor
force participation rates (along with some other assumptions and caveats), that
pace would be sufficient to reach
the Federal Open Market Committee's 6.5 percent unemployment threshold by
sometime in spring 2015 (as you can verify yourself with the
Fed's Jobs Calculator). That calculation raises the stake somewhat on the
matter of how "the rest of the private sector responds."
Think how much better things would be without shrinking government
employment, or even better with a temporary expansion in government employment to bridge the gap
until private sector employment prospects improve.
Brad DeLong rethinks his description of the economic downturn:
my conclusion is that I should stop calling the current episode the Lesser
Depression. Yes, its shape is different from that of the Great Depression;
but, so far at least, there is no reason to rank it any lower in the
hierarchy of macroeconomic disasters.
Corporations are making "historic levels" of profit:
Economy built for profits not prosperity, by Lawrence Mishel, EPI: Newly
released data on corporate profitability for 2012 show the continuation of
historic levels of profitability despite excessive unemployment and stagnant
wages for most workers. Specifically, the share of capital income (such as
profits and interest, which are hereafter referred to as ‘profits’) in the
corporate sector increased to 25.6 percent in 2012, the highest in any year
since 1950-1951 and far higher than the 19.9 percent share prevailing over
1969-2007, the five business cycles preceding the financial crisis. ...
This helps to explain the lack of enthusiasm among corporate leaders for a
jobs/stimulus program. They're doing fine. (Though that won't stop them from arguing that
corporate tax cuts -- which would further increase the mountain of cash they are
sitting on -- are the key to the recovery. Note however that business
investment is relatively strong and "This historic share of income going to
profits reflects historically high returns on investments, meaning more profit
per dollar of assets.")
Update: I meant to add, if only there was some way of putting those idle funds -- and people -- to work productively (picture Paul Krugman banging his head against the wall in frustration as our infrastructure crumbles...)
"The goal of intellectual property rights – such as the patent system – is
to provide incentives for the development of new technologies. However, in
recent years many have expressed concerns that patents may be impeding
innovation if patents on existing technologies hinder subsequent
innovation," said Heidi Williams, author of the study. "We currently have
very little empirical evidence on whether this is a problem in practice."
Williams investigated the sequencing of the human genome by the public Human
Genome Project and the private firm Celera. Genes sequenced first by Celera
were covered by a contract law-based form of intellectual property, whereas
genes sequenced first by the Human Genome Project were placed in the public
domain. Although Celera's intellectual property lasted a maximum of two
years, it enabled Celera to sell its data for substantial fees and required
firms to negotiate licensing agreements with Celera for any resulting
commercial discoveries. ...
conclusion points to a persistent 20-30 percent reduction in subsequent
scientific research and product development for those genes held by Celera's
"My take-away from this evidence is that – at least in some contexts –
intellectual property can have substantial costs in terms of hindering
subsequent innovation," said Williams. "The fact that these costs were – in
this context – 'large enough to care about' motivates wanting to better
understand whether alternative policy tools could be used to achieve a
better outcome. It isn't clear that they can, although economists such as
Michael Kremer have proposed some ideas on how they might. ..."
Our findings show that while job polarization is an important ongoing trend
in the labor market, it’s not a key contributor to the sluggish labor market
recovery. Our analysis suggests that the weakness in the labor market is
broad based and not limited to a certain segment of the market.
They find that the slow recovery is NOT due to pre-existing, "ongoing trends
in the labor market that were exacerbated during the recession," i.e.
(consistent with most evidence on this), it's a cyclical, lack of demand problem
not a structural problem.
The "news isn’t good" about the shift from defined-benefit to
defined-contribution pension plans:
Declining Wealth Brings a Rising Retirement Risk, by Bruce Bartlett,
Commentary, NY Times: ...[In] defined-benefit ... pension plans...,
workers are promised a specific income at retirement, which the employer
provides. The employer bears all the risk of market fluctuations. Under a
defined contribution scheme, such as a 401(k) plan, the worker and the
employer jointly contribute to a tax-deductible and tax-deferred account
from which the worker will finance retirement. ...
Now the first generation of workers who have virtually all their pension
saving in defined-contribution plans is nearing retirement, and the news
isn’t good. According to a March 19 report from
the Employee Benefit Research Institute, only about half of workers nearing
retirement have confidence that they have enough money saved for an adequate
Not surprisingly, retirement saving has taken a back seat to more pressing
concerns – coping with unemployment, maintaining standards of living during
an era of slow wage growth, putting children through increasingly expensive
colleges and so on. ...
This problem is much more severe for black Americans. ... The wealth gap
isn’t only racial, it’s generational...
What’s really depressing about these studies is the lack of solutions and
the likelihood that the problem will only get worse.
Republicans in Congress have pressed for years to convert Social Security, a
classic defined-benefit pension, into a defined contribution plan, and also
to convert Medicare into a voucher program. These changes would shift even
more of the financial risk in retirement onto families that have yet to
adapt to fundamental changes in employer pensions and the economy over the
last 30 years. The future doesn’t look pretty.
Members of Congress appear to be eager to cut retirement benefits
even further to show they can make the hard choices (and the president seems to be on board). They should raise the payroll cap instead, but the "hard choice" that
would hit the people who can afford it isn't under consideration. It's not hard
to imagine why.
The recent drop in the current conditions index ... should be taken as a
serious warning that consumers may be tightening their belts. That would not
be a surprising response to the ending of the payroll tax cut, plus some
amount of layoffs and cutbacks associated with the sequester.
This is just one report among many, but it does suggest that the recovery
optimists singing about having finally turned the corner may be wrong.
Fedspeak on Both Sides of the Atlantic, by Tim Duy: Federal Reserve Chairman
Ben Bernanke and New York Fed President William Dudley both took to the podium
yesterday. Dudley spoke directly to the current intersection between the
economic outlook and monetary policy, while Bernanke took on the topic of
monetary policy in a global context. Despite coming from different directions,
both were supportive of current policy.
Dudley first, as it seems journalists are seeing the speech with somewhat
different eyes. Jonathon Spicer at
Reuters walked away with:
New York Fed President William Dudley, a close ally of Fed Chairman Ben
Bernanke, gave a strong and comprehensive speech defending the very easy
monetary policies that he said were gaining traction and must not yet be
Spicer concludes from the speech, accurately I think, that it is consistent
with expectations that the Fed will continue large scale asset purchases at the
current pace for the foreseeable future (most of this year, by my expectations).
Notable was Dudley's view of the labor market. From
So how are we doing relative to our objective of a substantial
improvement in the labor market outlook?...The unemployment rate is modestly
lower and private non-farm payroll growth a bit higher...other important
indicators including the employment-to-population ratio and job-finding
rates are essentially unchanged...This suggests that the labor market is far
Moreover, our policy is based on the outlook for the labor market, not
the level of employment or unemployment today. In this context I note that
the recent improvement in payroll employment growth, which gets much of the
attention, is out-sized relative to the growth rate of economic activity
that supports it. We have seen this movie before...As a result, it is
premature to conclude that we will soon see a substantial improvement in the
labor market outlook.
The implication for policy:
Currently we are falling well short of our employment objective and the
restrictive stance of federal fiscal policy is a factor. On inflation, we
are also falling short, but by a considerably smaller margin. As a
consequence, we need to keep monetary policy very accommodative.
I do not claim that there are no costs or risks associated with our
unconventional monetary policy regime. But I see greater cost and risk in
moving prematurely to a policy setting that might not prove sufficiently
accommodative to ensure a sustainable, strengthening recovery...
Seems to be a clear indication that he is not inclined to alter the pace of
asset purchases in the near future. At a minimum, Dudley is looking for
evidence that the recent acceleration in job growth is sustainable (in concert
with improvement across a broad range of indicators), and I think that will come
only after another six months of nfp numbers consistently 200k+.
Other journalists took a different focus. The headline of Victoria McGrane's
Wall Street Journal piece is:
Fed Banker Backs Dialing Down Easy Money
Something of a hawkish tone, no? From the article:
A member of the Federal Reserve's inner circle Monday promoted a plan for
the central bank to scale back the pace of its bond-buying program as the
jobs market improves, though he stressed that a decision on how to proceed
is far from imminent.
Again, something of a hawkish take. Harding's lead-in:
One of the Federal Reserve’s biggest backers of easy monetary policy said
he supported the slowdown of the central bank’s asset purchases once the US
economy had enough momentum.
I think these headlines imply that the end of quantitative easing is closer
than conventional wisdom holds. I don't think that should be a takeaway. But
these articles focus on another takeaway, that the Fed is coalescing around a
plan to taper-off asset purchases, not end cold-turkey. From Harding's piece:
The comments by Bill Dudley amount to the first official hint that the
pace of a reduction in the asset purchase programme – known as QE3 – is
likely to be gradual, and may soothe market worries about the impact of
reduced purchases by the Fed.
Back to the speech:
In my view, we should calibrate the total amount of purchases to that
needed to deliver a substantial improvement in labor market conditions, by
allowing the flow rate of purchases to respond to material changes in the
labor market outlook...At some point, I expect that I will see sufficient
evidence of economic momentum to cause me to favor gradually dialing back
the pace of asset purchases.
Given the current outlook, FOMC members do not anticipate increasing the size
of asset purchases. The discussion will thus naturally turn toward the other
direction - when and how should we end asset purchases? I think Harding is
correct to conclude that a consensus is building within the Fed to taper-off
purchases gradually, but only after the sufficient progress is made on the labor
market front. But be wary of losing focus on the latter point. Even if the Fed
know how they want to end the asset purchase program, that time is still far off
given the current forecasts.
Dudley added an interesting footnote to the last sentence I quoted above:
Assuming that the improvement in the outlook is not endogenous to the
chosen policy setting to the extent that it would disappear if purchases
This suggests that it is not enough that the labor market makes sufficient
progress to justify changing policy. The Fed also has to be confident that the
progress is self-sustaining in the absence of quantitative easing. It seems to
me that this raises the bar for slowing asset purchases.
Bernanke took on the issue of the so-called currency wars. After a history
of exchange rate policy during the Great Depression, Bernanke concludes:
The lessons for the present are clear. Today most advanced industrial
economies remain, to varying extents, in the grip of slow recoveries from
the Great Recession. With inflation generally contained, central banks in
these countries are providing accommodative monetary policies to support
growth. Do these policies constitute competitive devaluations? To the
contrary, because monetary policy is accommodative in the great majority of
advanced industrial economies, one would not expect large and persistent
changes in the configuration of exchange rates among these countries. The
benefits of monetary accommodation in the advanced economies are not created
in any significant way by changes in exchange rates; they come instead from
the support for domestic aggregate demand in each country or region.
Moreover, because stronger growth in each economy confers beneficial
spillovers to trading partners, these policies are not "beggar-thy-neighbor"
but rather are positive-sum, "enrich-thy-neighbor" actions.
Obviously, Bernanke rejects the currency war story, at least as far as it
applies to developed nations. What about less-developed economies? The story
is a bit more complicated. Bernanke notes that developing nations may be
relying on an export-based growth strategy and may have underdeveloped financial
sectors that leave them vulnerable to capital inflows. Bernanke responds that
trade-weighted exchange rates are little changed since 2008, and that stronger
developed nation growth helps exporters in developing nations. In addition,
with regards to capital flows:
It is true that interest rate differentials associated with differences
in national monetary policies can promote cross-border capital flows as
investors seek higher returns. But my reading of recent research makes me
skeptical that these policy differences are the dominant force behind
capital flows to emerging market economies; differences in growth prospects
across countries and swings in investor risk sentiment seem to have played a
larger role. Moreover, the fact that some emerging market economies have
policies that depress the values of their currencies may create an
expectation of future appreciation that in and of itself induces speculative
Notice that at the end he hits the ball back to the currency manipulators?
Furthermore, he advocates considering capital controls:
Of course, heavy capital inflows and their volatility pose challenges to
emerging market policymakers, whatever their source. Policymakers do have
some tools to address these concerns. In recent years, emerging market
nations have implemented macroprudential measures aimed at strengthening
their financial systems and reducing overheating in specific sectors, such
as property markets. Policymakers have also experimented with various forms
of capital controls. Such controls raise concerns about effectiveness, cost
of implementation, and possible microeconomic distortions. Nevertheless, the
International Monetary Fund has suggested that, in carefully circumscribed
circumstances, capital controls may be a useful tool.
Again, Bernanke is pushing the conversation back onto his critics.
Developing nations have tools to address their concerns. Use them.
Bottom Line: The Fed is not thinking about expanding the pace of asset
purchases. Instead, they are thinking about when and how to end those
purchases. Policymakers anticipate a gradual end to the program, and they want
to communicate their intentions well ahead of the actual timing of the policy
change. So expect them to continue to walk a fine line between acknowledging
the exit strategy while making clear the exit is not imminent. Finally,
Bernanke continues to brush off critics, both home and abroad.
Why Don’t Politicians Care about the Working Class?, by Mark Thoma: If we want to ensure
that our children and grandchildren have the brightest possible future, the
national debt is not the most important problem to address. Reversing the
polarization of the labor market – the hollowing out of the middle class and the
associated rise in inequality over the last thirty years or so – is much more
important. But money driven politics and a political class that has all but
forgotten about the working class – Democrats in particular have forgotten who
they are supposed to represent – stand in the way of progress on this important
Glad to see someone (Josh Barro) trying to counter the latest nonsense from George Shultz,
Gary Becker, Michael Boskin, John Cogan, Allan Meltzer, and John Taylor:
For 'Faster Growth,' Soak the Poor?, by By Josh Barro: This weekend, the
Wall Street Journal assembled a redoubtable list of conservative heavies in
economics (George Schulz! Gary Becker! John Taylor!) to produce a completely
insane account of what is wrong with America's economy and how to fix
it. The upshot of the piece is that the U.S. economy is in the tank because
the government gives too much money to poor people, and so it should stop.
The article is another great example of conservatives' empathy gap on
economic issues. The authors emphasize that entitlement cuts must be done in
a "humane" way. But they do not stop and think about whether a one-third
reduction in Social Security benefits would seem humane to a middle-class
person who depends on Social Security as his largest source of income in
retirement, as most do. They don't reckon with the possibility that capping
the federal commitment to Medicaid would have not just fiscal effects but
also human ones: denying health care to people who need it and cannot afford
So why respond to the poverty-trap problem by calling for big cuts to
benefits? The answer, of course, is that every economic ill must be
shoehorned into an argument for lower taxes and less government spending. If
a proposed solution to an economic problem doesn't involve taking benefits
away from poor people, then it's not a solution at all -- at least by the
logic that prevails on the Wall Street Journal editorial page.
Did the Iraq War Cause the Great Recession?, Henry Farrell:
Thomas Oatley thinks that it very plausibly did. His argument draws upon
an interesting article (should
be ungated) in the new issue of Perspectives on Politics, where he, Kindred
Winecoff, Andrew Pennock and Sarah Bauerle Danzman argue that international
political economy scholars pay too little attention to the structural
characteristics of international politics. By concentrating too much on
states as unitary actors, they fail to recognize the importance of the
network connections between them. The network topology – the shape of the
network – can have consequences – networks where no node gets very much more
links than any other node are quite different in their consequences from
networks where one or a couple of nodes receive a lot more links than
others. This has implications for financial contagion – if contagion spreads
across links, network topology will have important consequences for the
likelihood of spread. As it turns out, there is strong reason to believe
that the international financial system is one of the latter kinds of
networks rather than one of the former. On two measures of financial ties,
most countries on the periphery of the network have few links to other
peripheral countries, but pretty well everyone has links to the US, and many
have links to the UK too. ...[more]...
I'm not fully convinced by this theory that the Iraq war caused the
recession, but it does bring up some important issue about network connectivity.
Are highly interconnected networks better at dispersing risk? It depends upon
the type of risk. Suppose a toxin hits a network. If diluting the toxin across
the network also dilutes its effects to practically nothing, then we want the
network to be as large and interconnected as possible. When shocks hit they will
be quickly diluted and rendered relatively harmless. But for toxins that are
deadly in minute doses, toxins that kill whatever they touch even when they are
highly diluted, we want the infected node on the network to be isolated as much
Optimally, then, assuming that most shocks are not toxic if they are
dispersed across a large network, we want the network to be large and highly
interconnected so that risks can be diversified across the network to
practically nothing. But we also want the ability to quickly disconnect nodes
that become infected with toxins that don't lose their potency as they are
diluted. And that's the problem, identifying when such a toxin hits a network is
difficult -- there will always be denial if disconnecting nodes in the financial
system costs people money -- and it may not be easy to quickly disconnect nodes
from the network so that problem nodes can be isolated/quarantined before the
We have been told that problems in places like Cyprus have been walled off --
nodes in the network have been isolated -- but so long as a few isolated
connections still exist that are difficult to cut, highly toxic shocks can
pollute the rest of the network. In addition,
as we saw today when "Jeroen Dijsselbloem, the current head of the Eurogroup,
held a formal, on-the-record joint interview with Reuters and the FT today,
saying that the messy and chaotic Cyprus solution is a model for future
bailouts" and financial markets reacted negatively (the statement is being
walked back), some connections -- those involving expectations -- cannot be
severed in any case.
Highly interconnected networks are highly desirable so long as (1) we can
quickly identify trouble, and (2) nodes can be quickly and effectively isolated. But when
those conditions are not present, the occasional highly toxic shock will cause
quite a bit of damage.
"What could shake them out of their own devices? One possibility, a fiscal
hawk in the Obama administration told me almost wistfully, would be a 'minor
market event.' A stock market plunge, an interest rate spike, a race to the
exits by America’s foreign lenders — just enough to spook Congress.
Are you surprised to hear that there are fiscal hawks in the Obama administration?
"But as long as the Federal Reserve is gobbling up U.S. debt to keep interest
rates low, such a mishap seems unlikely."
Yes, it must be awful when you have a view of the economy that the economy
refuses to corroborate. (In fairness, Hiatt, does add that such a market event
could spin out of control, so "it is not really to be wished for.")
As usual, Hiatt is upset that President Obama is not pushing hard enough for
cuts to Social Security and Medicare. While he does give Obama credit for
proposing some cuts to Medicare (what happened to the chained CPI?), what really
has him upset is that President Obama doesn't talk about inflicting pain... if Hiatt had access to economic data he would know that President
Obama's policies are already causing the middle class to feel plenty of pain.
Of course the needed change in policy is the opposite of what Hiatt is
pushing. We need larger deficits to generate the demand needed to boost the
The fiscal hawks and scolds will never admit it, but they've harmed our ability to respond effectively to the unemployment crisis.
This Economic Letter from the SF Fed says we can trust recent economic data
On the Reliability of Chinese Output Figures, by John Fernald, Israel
Malkin, and Mark Spiegel, FRBSF Economic Letter: Some commentators have
questioned whether China’s economy slowed more in 2012 than official gross
domestic product figures indicate. However, the 2012 reported output and
industrial production figures are consistent both with alternative Chinese
indicators of the country’s economic activity, such as electricity
production, and trade volume measures reported by non-Chinese sources. These
alternative domestic and foreign sources provide no evidence that China’s
economic growth was slower than official data indicate.
Hot Money Blues, by Paul Krugman, Commentary, NY Times: Whatever the
final outcome in the Cyprus crisis — we know it’s going to be ugly; we just
don’t know exactly what form the ugliness will take — one thing seems
certain:... the island nation will have to maintain fairly draconian
controls on the movement of capital in and out of the country. ... And ...
Cypriot capital controls may well have the blessing of the International
Monetary Fund, which has already supported such controls in Iceland.
That’s quite a remarkable development. It will mark the end of an era ...
when unrestricted movement of capital was taken as a desirable norm around
the world. ... To some extent this reflected the ... rise of free-market
ideology, the assumption that if financial markets want to move money across
borders, there must be a good reason, and bureaucrats shouldn’t stand in
their way. ...
But the truth, hard as it may be for ideologues to accept, is that
unrestricted movement of capital is looking more and more like a failed
It’s hard to imagine now, but for more than three decades after World War II
financial crises of the kind we’ve lately become so familiar with hardly
ever happened. Since 1980, however, the roster has been impressive: Mexico,
Brazil, Argentina and Chile in 1982. Sweden and Finland in 1991. Mexico
again in 1995. Thailand, Malaysia, Indonesia and Korea in 1998. Argentina
again in 2002. And, of course...: Iceland, Ireland, Greece, Portugal, Spain,
What’s the common theme...? Conventional wisdom blames fiscal profligacy —
but ... that story fits only one country, Greece. Runaway bankers are a
better story... But the best predictor of crisis is large inflows of foreign
money: in all but a couple of the cases I just mentioned, the foundation for
crisis was laid by a rush of foreign investors into a country, followed by a
sudden rush out. ...
Now what? I don’t expect to see a wholesale, sudden rejection of the idea
that money should be free to go wherever it wants, whenever it wants. There
may well, however, be a process of erosion, as governments intervene to
limit both the pace at which money comes in and the rate at which it goes
out. Global capitalism is, arguably, on track to become substantially less
And that’s O.K. Right now, the bad old days when it wasn’t that easy to move
lots of money across borders are looking pretty good.
After all, banks remain closed in Cyprus, which means a euro in a Cypriot
bank has very little value. If you can't spend it, is it really a euro? And
even when banks reopen, it is assumed that capital controls will be imposed to
prevent euros from leaving the island. So a French euro will be able to
purchase goods and services in Germany, but a Cypriot euro will not. It seems
then that a Cypriot euro is unambiguously worth less than a French euro.
Thus, there will be two Euros in circulation (if not already). This is the
thesis of blogger Guntrum B. Wolff (ht
The most important characteristic of a monetary union is the ability to
move money without any restrictions from any bank to any other bank in the
entire currency area. If this is restricted, the value of a euro in a
Cypriot bank becomes significantly inferior to the value of a euro in any
other bank in the euro area. Effectively, it means that a Cypriot euro is
not a euro anymore. By agreeing to this measure, the ECB has de-facto
introduced a new currency in Cyprus.
I think this might be right. If I can spend my dollar in Oregon but not in
California, it is really the same dollar? I think not.
Is this how the Eurozone experiment will end? Not with a formal "exit," but
with a return to banking dominated by national boundaries and enforced by
capital controls? No longer a true common currency, but a dozen currencies
sharing the same name, each with a different value?
There will be another banking crisis in Europe (just as a bank will fail in
some US state) and depositors are now aware that they are fair game in any
crisis response, so capital flight will intensify at an earlier stage in the
crisis. As may have been noted, European policymakers find rapid crisis
resolution to be something of a challenge, thus accelerated capital flight will
necessitate a more rapid imposition of capital controls in the future - and with
each round of capital controls, a new sub-euro will be born.
Bottom Line: Europe's response to the Cyprus situation will have
long-lasting impacts on the Eurozone experiment itself, none of the good.
Indeed, the imposition of capital controls should lead one to wonder if the
"solution" to Cyprus is effectively an exit from the Eurozone is everything but
name. And don't forget that the crisis also threatens to destabilize
geopolitcally. I don't think that "disaster" is too strong a word in this
I have a hard time getting excited about the Big Gulp thing (I live on Coke
Zero straight from 2 liter bottles and massive amounts of coffee, take those away and I would get excited), but Robert
Frank argues that the "Evidence suggests that the current high volume of soft-drink
consumption has generated enormous social costs":
To him, it hinges on this question: "Does frequent exposure to
sodas really limit parents’ freedom to raise healthy children?" He argues that it does, and asks "How do the benefits of your right to drink tax-free
sodas outweigh the substantial costs of defending it?"
as given that there really are "enormous social costs" from "supersize" soft drinks, I don't buy his argument that the peer effects undermining
parental freedom are similar for large soft-drinks and cigarettes.
A few thoughts about the sequester and the political battle surrounding it.
First, recall how it came about. When Democrats and Republicans in Congress
couldn't agree on how to cut the budget deficit -- budget cuts or tax increases,
and who bears the burden -- they decided to connect a "ticking clock" to a
"bomb" of budget cuts that both sides would find loathsome. The cuts would hack
away at favorite programs of both sides and be so terrible that the two sides
would certainly come to an agreement rather than let the bomb go off.
But suppose one side believes the cuts they object to, the
cuts to defense for example, will be easy to reinstate down the road by whipping up public
pressure, while the other side's programs will be much harder to bring back.
Then the right strategy is to let the cuts happen, then do your best to get your
programs reinstated while at the same time blocking the other side (and there's
probably some bias on both sides about how much the public values the programs
they support, and this bias makes it more likely that the thinking above will
take hold -- let the cuts happen, the public will support my side, the programs
my side likes will return, and the other side's programs will be gone).
The reinstatement of programs (or tax increases) will surely involve
compromise to some extent, agreeing to support programs or taxes the other side
likes in return for their support of your programs. But given the lack of compromise to date I have to laugh at myself for saying that, and it's more the game will be to try to force reinstatement without any
compromise by creating public backlashes against cuts (to say defense). In fact,
we've seen some of this already.
The sequester was supposed to make it too costly for the two political parties to fail to come to an
agreement. Each side would put up programs it really likes and the threat of
losing them would motivate compromise. But the programs one side really likes are
also generally the programs the other side really hates, and so long as it is
believed that your programs have broad public support and are likely to be
reinstated, the best strategy is to do exactly what was done, let the cuts
happen and then have the political fight over what to bring back.
Republicans don't believe that, in the long-run, support for defense will be
eroded. Future budgets (and fear-mongering) will take care of that. They do
believe they can block tax increases, mostly anyway, and block lots of programs
Democrats support from returning.
And they may be correct. Obama's attempt to generate public support by warning about all the bad
things that will happen fell flat, so far anyway (it could change as the impact
begins to be felt), and I think that Republicans are winning this battle. Unfortunately, that victory comes at a cost, the recovery of output and employment will be slower because of this ideological battle over the size and role of government. But that's a price Republicans are willing to pay in order to deliver this ideological victory to key constituents (most of whom are employed and doing quite well).
On the run today so I haven't had time to do more than skim this quickly
(it's relatively long), but this article on how financial regulation is quietly
being watered down comes highly recommended:
He Who Makes the Rules, by Haley Sweetland Edwards, Washington Monthly: In
late 2010, Bart Chilton, one of three Democratic commissioners at the U.S.
Commodity Futures Trading Commission (CFTC), walked into an upper-floor suite of
an executive office building to meet with four top muckety-mucks at one of the
biggest financial institutions in the world. ...
The main topic ... was the CFTC’s pending rule on what are known as “position
limits.” If implemented properly, position limits would put a leash on
speculation in the commodities market by making it harder for heavyweight
traders at places like Goldman Sachs and JPMorgan Chase to corner a market, make
a killing for themselves, and screw up prices for the rest of us. Position
limits are also one of many ways to tamp down the amount of risk big
institutions can take on, which ... minimizes the chance taxpayers will have to
bail them out. ...
The passage ... Dodd-Frank ... explicitly directs the CFTC to establish position
limits... “The Commission shall by rule, regulation or order establish limits on
the amount of positions, as appropriate,” it reads.
Still, even with the strength of the law behind him, Chilton waited until the
end of the meeting to broach what he knew would be a tense subject. ... They
deferred ... to their top lawyer, who explained that the ... CFTC was not
required to establish position limits at all. ... Their lawyer quietly referred
Chilton to the end of the sentence in question: as appropriate..., the statute
can be interpreted as saying that the commission shall—but only if
appropriate—establish position limits, he explained. ...
But it’s still, rather obviously, just that: a linguistic sleight of hand. The
words “as appropriate” have appeared in statutes governing the CFTC’s authority
to implement position limits for at least forty years without challenge. ...
The meeting ended abruptly... One of the muckety-mucks from the meeting walked
with him to the elevator. ... Chilton turned to his host. “You guys have got to
be kidding about this ‘as appropriate’ stuff, right?” he said. “I know,” the
muckety-muck replied, admitting it was a stretch. He let out a little
chuckle—“but that’s what we’re going with.” “He laughed,” Chilton told me
recently, remembering that day. “He was laughing about how ludicrous it was.”
A couple of months after that inauspicious meeting, the CFTC released a proposed
rule establishing position limits on oil, gas, coffee, and twenty-five other
commodities markets. ... Finally, in October 2011, the CFTC issued a final rule.
It was a victory, but a short-lived one. Two months later, two powerful industry
groups ... hired Eugene Scalia, the son of Supreme Court
Justice Antonin Scalia, as their lead counsel, and launched a lawsuit against
the CFTC. ...
House Democrats and nineteen senators, some of whom had drafted Dodd-Frank,
petitioned the court to rule in favor of the CFTC, a handful of op-eds beseeched
judges to do the right thing, and financial reform advocates called foul. None
of it made a difference. In September 2012, the U.S. Court for the District of
Columbia Circuit overturned the CFTC’s rule. ...[more]...
But they put off voting on a crucial new proposal until later this weekend — one
that would confiscate a stunning 22 percent to 25 percent of uninsured deposits
over 100,000 euros through a new tax to be placed on account holders in one of
the nation’s most troubled banks.
And so, going into the weekend ahead of a Monday deadline imposed by
the European Central Bank, it appeared there was still no immediate path to a
lifeline of 10 billion euros, or $13 billion, that Cyprus needs to keep its
banks from collapsing. ...
One of the provisions approved by Parliament on Friday would impose new
restrictions on withdrawing cash or moving money out of the country when the
banks reopen [capital controls]...
Lawmakers also voted to restructure the nation’s largest and most troubled bank,
Laiki Bank, by hiving off its troubled assets into a so-called bad-bank.
Accounts with no problem would be transferred to the nation’s largest financial
institution, the Bank of Cyprus, which lawmakers are now proposing to hit with a
22 to 25 percent tax on uninsured deposits. That measure ... will be considered
in coming days...
Cyprus’s so-called troika of lenders — the International Monetary Fund, the
European Commission and the European Central Bank — still must approve the plan.
Cyprus is imposing the 22-25 percent levy in an attempt to save its largest
bank, the Bank of Cyprus.
From the WSJ:
As details of the latest plan emerged late Friday, there were signs that the
country may be forced to also resolve Bank of Cyprus, its biggest lender, a
prospect it was fighting to avert by proposing an even deeper levy on the
lender's uninsured depositors than one demanded earlier by euro-zone partners.
Two officials involved in the negotiations said the government in Nicosia was
planning to impose a 20% levy on depositors with more than €100,000 in their
accounts in Bank of Cyprus. The government hoped that would allow them to
protect the lender, which holds more than one third of total deposits on the
island, some €28 billion.
But senior European finance-ministry officials in a call Friday evening
expressed doubts that the plan would raise enough money to ring fence the
lender, according to two officials on the call. ... Resolving both banks "makes
more sense," said [one] official. ...
The creation of a "good bank" and a "bad bank" could improve Cyprus's lot in two
ways. First, creditors of the bad bank could be made to bear steep losses. That
would reduce the amount of aid the Cypriot government needs to provide to the
banking system. Second, by bolstering Bank of Cyprus, the plan could persuade
the ECB to continue providing liquidity to the country's financial system—which
it has threatened to cut off.
As it says above, there's "still no immediate path to a
It's nice to see the Fed thinking in these terms. This is from a speech by Federal Reserve Governor Sarah Bloom Raskin:
Focusing on Low- and Moderate-Income Working Americans: ...
Challenges Posed by Labor Market Conditions
The Great Recession stands out for the magnitude of job losses we experienced
throughout the downturn. These factors have hit low- and moderate-income
Americans the hardest. The poverty rate has risen sharply since the onset of the
recession, after a decade of relative stability, and it now stands at 15
percent--significantly higher than the average over the past three decades.1
And those who are fortunate enough to have held onto their jobs have seen their
hourly compensation barely keep pace with the cost of living over the past three
About two-thirds of all job losses resulting from the recession were in
moderate-wage occupations, such as manufacturing, skilled construction, and
office administration jobs. However, these occupations have accounted for less
than one-quarter of subsequent job gains. The declines in lower-wage
occupations--such as retail sales and food service--accounted for about
one-fifth of job loss, but a bit more than one-half of subsequent job gains.
Indeed, recent job gains have been largely concentrated in lower-wage
occupations such as retail sales, food preparation, manual labor, home health
care, and customer service.3
Furthermore, wage growth has remained more muted than is typical during an
economic recovery. To some extent, the rebound is being driven by the low-paying
nature of the jobs that have been created. ... In fact, while average wages have
continued to increase steadily for persons who have remained employed all along,
the average wage for new hires have actually declined since 2010.4
The faces of low-wage Americans are diverse. They include people of varying
employment status, race, gender, immigration status, and other characteristics.
Many such Americans are attached to the workforce and are deeply committed to
both personal success and to making a contribution to society. For purposes of
reference, in 2011, low wage was defined as $23,005 per year or $11.06 per hour.5
Today, about one-quarter of all workers are considered "low wage." They are
sanitation workers, office receptionists, and nursing assistants; they are
single mothers of three who worry: How will I be able to send my children to
college? What if my landlord raises the rent this year? Tens of millions of
Americans are the people who ask themselves these questions every day.
This diverse group of workers faces numerous barriers when trying to access the
labor market or advance in their current positions. ...
We know, for example, that location presents thorny challenges for many low-wage
workers. Within metropolitan areas, jobs are not spread out evenly and job
creation tends to be depressed in low-income communities. As a result, many
low-wage workers face long commutes and serious commuting difficulties due to
less reliable transportation and an inadequate transportation infrastructure.
Moreover, a number of low-wage employees work non-standard hours, exacerbating
both transportation and childcare issues, as well as personal health problems.7
Traditionally, many workers find jobs through social networks and through
personal connections that they have to the labor market. But, because low-income
individuals are typically less mobile, more isolated, and less socially
connected than other people, they are often left out of the social networks
that, in practice, lead to jobs for most Americans. ...
[T]he 21st century labor market is increasingly complex; it continues
to generate new challenges. For example, growth in sectors such as green
industries and advanced manufacturing is creating jobs, but these jobs may
demand different skills. Access to reliable information becomes critical for
workers who are considering a new job, and must carefully weigh the skills and
credentials required by potential employers with the cost of training and the
likelihood of gaining employment.
And, more and more, employers are requiring post-secondary credentials. Today, a
high school diploma alone is less likely to qualify an individual for a job with
a path toward meaningful advancement. And, as demand for more credentials
increases, workers who lack those credentials will find it increasingly
difficult to gain upward mobility in the job market.
Many employers are looking to make the employment relationship more flexible,
and so are increasingly relying on part-time work and a variety of arrangements
popularly known as "contingent work." This trend toward a more flexible
workforce will likely continue. For example, while temporary work accounted for
10 percent of job losses during the recession, these jobs have accounted for
more than 25 percent of net employment gains since the recession ended.10
In fact, temporary help is rapidly approaching a new record, and businesses' use
of staffing services continues to increase.11
Contingent employment is arguably a sensible response to today's competitive
marketplace. Contingent arrangements allow firms to maximize workforce
flexibility in the face of seasonal and cyclical forces. The flexibility may be
beneficial for workers who want or need time to address their family needs.
However, workers in these jobs often receive less pay and fewer benefits than
traditional full-time or "permanent" workers, are much less likely to benefit
from the protections of labor and employment laws, and often have no real
pathway to upward mobility in the workplace.12
Many workers who hold contingent positions do so involuntarily. Department of
Labor statistics tell us that 8 million Americans say they are working part-time
jobs but would like full-time jobs.13 These are the people in our
communities who are "part time by necessity." As businesses increase their
reliance on independent contractors and part-time, temporary, and seasonal
positions, workers today bear far more of the responsibility and risk for
managing their careers and financial security. Indeed, the expansion of
contingent work has contributed to the increasing gap between high- and low-wage
workers and to the increasing sense of insecurity among workers.14
Flexible and part-time arrangements can present great opportunities to some
workers, but the substantial increase in part-time workers does raise a number
of concerns. Part-time workers are particularly vulnerable to personal shocks
due to lower levels of compensation, the absence of meaningful benefits, and
even a lack of paid sick or personal days. Not surprisingly, turnover is high in
these part-time jobs.
Access to Credit
The economic marginalization that comes with the growth of part-time and
low-paying jobs is exacerbated by inadequate access to credit for many working
Americans. Ideally, people chronically short of cash would have access to safe
and sound financial institutions that could provide reliable and affordable
access to credit as well as good savings plans. Unfortunately, many working
Americans have no practical access to reasonably priced financial products with
safe features, much less the kind of safe and fair credit that is available to
Working Americans have several core financial needs. They need a safe,
accessible, and affordable method to deposit or cash checks, receive deposits,
pay bills, and accrue savings. They may also need access to credit to tide them
over until their next cash infusion arrives. They may be coming up short on
paying their rent, their mortgage, an emergency medical expense, or an
unexpected car repair. They may want access to a savings vehicle that, down the
road, will help them pay for these items and for education or further training,
or start a business. And many want some form of non-cash payment method to
conduct transactions that are difficult or impossible to conduct using cash.
Products and services that serve these core financial needs are not consistently
available at competitive rates to working Americans. Those with low and moderate
incomes may have insufficient income or assets to meet the relatively high
requirements needed to establish a credit history. Others may have problems in
their credit history that inhibit their ability to borrow on competitive terms.
Many workers simply may not have banks in their communities, or may not have
access to banks that actually compete with each other in terms of pricing or
customer service. There is a growing trend toward greater concentration of
financial assets at fewer banks. In my mind, this raises doubts about whether
banking services will continue to be provided at competitive rates to all income
levels of customers wherever they may live. ... While branch-building has been
on the rise, indications are that the increase in the number of bank offices has
not occurred evenly across neighborhoods of varying income.15
In fact, a significant number of low- and moderate-income families have
become--or are at risk of becoming--financially marginalized. The percentage of
families earning $15,000 per year or less who reported that they have no bank
account increased between 2007 and 2009 such that more than one in four families
was unbanked. Families slightly further up the income distribution, earning
between $25,000 and $30,000 per year, are also financially marginalized: 13
percent report being unbanked and almost 24 percent report being underbanked.16
This combination of economic insecurity and financial marginalization has
incentivized more low- and moderate-income families to seek out alternative
financial service providers to meet their financial needs. Some of the providers
they find, such as check-cashers and outfits furnishing advance loans on
paychecks, can lead unwary workers into very deep financial holes. ...
There is no simple cure to these conditions, but government policymakers need to
focus seriously on the problems, not simply because of notions of fairness and
justice, but because the economy's ability to produce a stable quality of living
for millions of people is at stake. Our country cannot achieve prosperity
without addressing the powerful undertow created by flat wages and tenuous
financial security for so many millions of Americans.
The Role of Monetary Policy
So how can the Federal Reserve address these challenges? Let me start with
monetary policy. Congress has directed the Federal Reserve to use monetary
policy to promote maximum employment and price stability. The Federal Reserve's
primary monetary policy tool is its ability to influence the level of interest
rates. Federal Reserve policymakers pushed short-term interest rates down nearly
to zero as the financial crisis spread and the recession worsened in 2007 and
2008. By late 2008, it was clear that still more policy stimulus was necessary
to turn the recession around. The Federal Reserve could not push short-term
interest rates down further, but it could--and did--use the unconventional
policy tools to bring longer-term interest rates such as mortgage rates down
Fed policymakers intend to keep interest rates low for a considerable time to
promote a stronger economic recovery, a substantial improvement in labor market
conditions, and greater progress toward maximum employment in a context of price
stability. Both anecdotal evidence and a wide range of economic indicators show
that these attempts are working to strengthen the recovery and that the labor
market is improving.
Nonetheless, and again, the millions of people who would prefer to work full
time can find only part-time work. While the Federal Reserve's monetary policy
tools can be effective in promoting stronger economic recovery and job gains,
they have little effect on the types of jobs that are created, particularly over
the longer term. So, while monetary policy can help, it does not address all of
the challenges that low- and moderate-income workers are confronting. That said,
the existing mandate regarding maximum employment requires policymakers on the
Federal Open Market Committee (FOMC) to understand labor market dynamics, which
obviously must include an understanding of low- and moderate-income workers.
Regulatory and Supervisory Touchpoints
In addition to monetary policy, the Federal Reserve's regulatory and supervisory
policies have the potential to address some of the challenges faced by
low-income communities and consumers. ... If banking practices are undermining
the ability of the economically marginalized to become financially included and
to access the credit they need in an affordable way, regulators must move in
Swift and decisive corrective action is not always how federal bank regulators
have responded ... in the past. In my view, for example, regulators' response to
the rampant, long-running problems in loan-servicing practices at large
financial institutions was not swift and was not decisive. ...
Inequality, Evolution, &
Complexity: Why has mainstream neoclassical economics traditionally had
little to say about the causes and effects of inequality? This is the question
raised in an interesting
new paper by Brendan Markey-Towler and John Foster.
They suggest that the blindness is inherent in the very structure of the
discipline. If you think of representative agents maximizing utility in a
competitive environment, inequality has nowhere to come from unless you impose
it ad hoc, say in the form of "skilled" and "unskilled" workers.
But there's an alternative, they say. If we think of the economy as a complex
(pdf) adaptive system -
as writers such as Eric
Beinhocker, Cars Hommes and Brian
Arthur suggest - then inequality becomes a central feature. This is partly
because such evolutionary processes inherently generate winners and losers, and
partly because they ditch representative agents and so introduce lumpy granularity.
This ... new
paper by Pablo Torija ... shows how, since the 1980s, western politicians
have stopped maximizing the well-being of the median voter, and have instead
served the richest few per cent. If the economy is an adaptive ecosystem, it is one in which a few predators
are winning at the expense of the prey.
Despite the risks to financial stability, tax havens like Cyprus "are still operating pretty much the same way
that they did before the global financial crisis":
Treasure Island Trauma, by Paul Krugman, Commentary, NY Times: A couple of
years ago,... Nicholas Shaxson published a fascinating, chilling book titled
“Treasure Islands,” which explained how international tax havens — which are
also ... “secrecy jurisdictions” where many rules don’t apply — undermine
economies around the world. Not only do they bleed revenues from cash-strapped
governments and enable corruption; they distort the flow of capital, helping to
feed ever-bigger financial crises.
One question Mr. Shaxson didn’t get into..., however, is what happens when a
secrecy jurisdiction itself goes bust. That’s the story of Cyprus right now. ...
Now what? There are some strong similarities between Cyprus now and Iceland ...
a few years back. Like Cyprus now, Iceland had a huge banking sector, swollen by
foreign deposits, that was simply too big to bail out. Iceland’s response was
essentially to let its banks go bust, wiping out those foreign investors, while
protecting domestic depositors — and the results weren’t too bad. ...
Unfortunately, Cyprus’s response to its crisis has been a hopeless muddle. In
part, this reflects the fact that it no longer has its own currency, which makes
it dependent on decision makers in Brussels and Berlin — decision makers who
haven’t been willing to let banks openly fail.
But it also reflects Cyprus’s own reluctance to accept the end of its
money-laundering business; its leaders are still trying to limit losses to
foreign depositors in the vain hope that business as usual can resume,... they
... tried to limit foreigners’ losses by expropriating small domestic
depositors. As it turned out, however, ordinary Cypriots were outraged, the plan
was rejected, and, at this point, nobody knows what will happen.
My guess is that, in the end, Cyprus will adopt something like the Icelandic
solution... We’ll see.
But step back ... and consider the incredible fact that tax havens like Cyprus,
the Cayman Islands, and many more are still operating pretty much the same way
that they did before the global financial crisis. Everyone has seen the damage
that runaway bankers can inflict, yet much of the world’s financial business is
still routed through jurisdictions that let bankers sidestep even the mild
regulations we’ve put in place. Everyone is crying about budget deficits, yet
corporations and the wealthy are still freely using tax havens to avoid paying
taxes like the little people.
So don’t cry for Cyprus; cry for all of us, living in a world whose leaders seem
determined not to learn from disaster.
The Recovery is Real, by Tim Duy: A lot of ink has been spilled over the past
three years fretting about the fragility of the economy. But the reality is
largely the opposite. The economy has proved to be very resilient. We have
weathered external demand shocks, external financial crises, and even fiscal
contraction, and all the while economic activity continued to grind higher.
Looking back, it seems that the biggest risk the economy faced was the Fed's
start/stop approach to quantitative easing. That problem appears solved with
open-ended QE linked to economic guideposts.
At the risk of sounding overly optimistic, I am going to go out on a limb:
The recovery is here to stay. Not "stay" as in "permanent." I am not
predicting the end of the business cycle. But "stay" until some point after the
Federal Reserve begins to raise interest rates, which I don't expect until 2015.
This doesn't mean you need to be happy about the pace of growth. But it does
mean that a US recession in the next three years should be pretty far down on
your list of concerns.
Consider a handful of recent data. Last year's slowdown in manufacturing
activity has proved temporary:
Remember, this was the data that
ECRI claimed was a smoking gun in their hypothesis that the US economy
slipped into recession in the middle of last year. Retail sales continued to
gain in February despite the end of the payroll tax break:
Sure, you might complain
about weak consumer confidence, but I think it best to pay more attention to
what household do. The housing market is unambiguously improving, which by
itself should ease any recession concerns:
Still too high, but moving in the right direction; I expect claims will fall to
300k by then end of this year or early next year.
I anticipate monetary policy
will remain on hold for much of this year before the Federal Reserve turns
to the issue of tapering off the pace of asset purchases. Even then, rates will
not increase until 2015; inflation is simply too low and unemployment too high
to justify a policy shift before that time. Interestingly, I am believe the
biggest risk to my expectations is that the economy accelerates faster than
expected, prompting the Federal Reserve to raise rates in late 2014.
To be sure, I think that fiscal policy will weigh on growth in the first part
of 2013. And I think that the European crisis is far from solved (note today's
PMI release, not to mention Cyprus). And maybe China will slow further,
undermining exports. But as far as the implications for the US economy, I tend
to see these events as bumps in the road. They might cause air pockets for
equity markets, but are of second or third order importance in the evolution of
Indeed, it seems to me that betting on a recession when the Fed is not
tightening is clearly betting against history. Moreover, historically the Fed
has inverted the yield curve prior to a recession:
And yes, I realize this seems to imply that the US economy cannot have a
recession because the yield curve is upward sloping - which of course it has to
be when short rates are constrained by the lower bound. But that still doesn't
resolve the issue that recessions tend to occur only after a period of tighter
policy. As long as the Fed is able and willing to ease in the face of negative
shocks - and they have seemed to be willing to do so and have found a solution
to the zero bound problem in quantitative easing - I would expect that monetary
policy would largely offset most problems that comes down the pipeline.
Case is point is the Asian Financial Crisis. I remember predictions of US
recession due to the trade shock, but that never occurred. The Fed eased into
the crisis, mitigating its impact. The recession only occurred after the Fed
revered course and tightened sufficiently to invert the yield curve. Arguably
last summer's European shock was the same. The Fed met fire with fire, and
recession fears faded.
Could I imagine a shock the Federal Reserve could not offset sufficiently?
Something that just came on too strong, too fast? Sure - I suspect a US debt
default would be such a shock. But I also put very low probability on such an
occurrence. As a general rule, the US economy is a like a large ship. It may
run into headwinds that slows its progress and I can argue it needs more coals
in its furnace, but it doesn't turn on a dime. Pretty much best just to stay
out of its way until the Federal Reserve decides it turn the rudder.
Mostly now I concern myself with the pace of growth (still disappointing) and
the eventual policy reversal. Similar to Ryan Avent
here, I am not convinced that the Fed will be successful in pulling the
economy off the zero bound:
If recovery proceeds as the Fed anticipates, its interest-rate target will
remain at near zero until at least 2015. Perhaps more worrying, the FOMC's best
guess at the appropriate, long-run value of the fed funds rate is about 4%. That
is strikingly low. In each of the past three recessions the Fed has responded by
cutting the fed funds rate more than 4 percentage points. A fed funds rate at
that level virtually guarantees that the next downturn will result in a relapse
into ZLB territory. Unless the Fed suddenly becomes much more comfortable with
unconventional policy, the unemployment rate will rise more than it otherwise
would and recovery will be weaker as a result. And that's assuming that growth
over the next few years actually is robust enough to allow the Fed to get rates
back to 4%, which is not at all guaranteed.
My second concern is to what extent this expansion, like the last two, will
be dependent on asset valuations. What will this chart look like in two years?
Caution: Pure speculation follows. If this recovery is built on an asset
bubble (and I am starting to entertain a possibility that I had previously
discounted, that it could be a joint equity/housing bubble), then I suspect we
will learn after the Fed tightens policy that we are not off the zero bound. If
so, I further suspect the next recovery will require the Fed to deliver a
pure-helicopter drop of money.
Bottom Line: The US economy is less fragile than commonly believed; it has
endured a series of shocks over the last three years without major incident.
I am claiming neither that equity prices won't stumble, nor that we should be
happy with the pace of activity. But I do think that a recession is unlikely
before the Federal Reserve begins raising interest rates - something not likely
to happen for two years. While long-run predctions are dangerous, for the sake
of arguement add up to another two years for tighter policy to reverberate
through the economy and you are looking at sometime around 2016/2017 when the
next recession hits. That's the timeframe I am currently thinking about.
Using a large panel of income data from U.S. federal tax returns for
the period 1987-2009, the authors show that for men’s labor earnings, the
increase in inequality was entirely permanent (100 percent), while for total
household income, roughly three-quarters of the increase in inequality was
permanent. They estimate that the permanent variance for men’s earnings roughly
doubled in the 20 years between 1987 and 2009, while the permanent variance of
total household income increased by about 50 percent over the same period.
Looking at the impact of tax policy on inequality, the paper finds that
although the U.S. federal tax system is indeed progressive in that it has
provided some help in mitigating the increase in income inequality over the
sample period, it has, however, not significantly altered the broadly increasing
inequality trend. All told, the results suggest that rising income inequality
will likely lead to greater disparity in families’ well-being and reduce social
welfare in the long-run.
“The distinction between permanent and transitory inequality is important for
various reasons. First, it is useful in evaluating the proposed explanations for
the documented increase in annual cross-sectional inequality. For example, if
rising inequality reflects solely an increase in permanent inequality, then
consistent explanations would include, for example, skill-biased technical
change or long-lasting changes in firms’ compensation policies. By contrast, an
increase in transitory inequality could reflect increases in income mobility,
driven perhaps by greater flexibility among workers to switch jobs. Second, the
distinction is useful because it informs the welfare evaluation of
cross-sectional inequality increases. Specifically, lifetime income captures
long-term available resources, and hence an increase in permanent inequality
would reduce welfare according to most social welfare functions. By contrast,
increasing transitory inequality would have less of an effect on welfare,
especially in the absence of liquidity constraints restricting consumption
smoothing,” they write.
There's been a big debate/fight over whether the increase in inequality is
mostly due to technological change or to changes in the rules of the game (e.g.
institutional and political changes that helped the demise of unions). Above,
this is captured as "skill-biased technical change or long-lasting changes in
firms' compensation policies." I think both are at work, and that there are
interactions between the two explanations (technological change that allows production to be moved in fact or in threat to other countries, for
example, works against unions and changes the balance of political power, and that can lead to changes in the laws, rules, and regulations that unions need to be effective).
In any case, changing this long-run trend is one of the most important social issues that we
I disagree with the claim that our unemployment problem is mostly structural
(and hence there is nothing that monetary or fiscal policy can do about it) and
I've presented lots of evidence supporting the view that there is a large cyclical component (e.g.,
latest). But not everyone agrees. Here's Ed Leamer arguing for the
Here's how I see it. As I said, I am convinced by the evidence showing there's a large
cyclical component to the unemployment problem, but I could be wrong (and so
could Leamer and others -- I think they are). So which is the bigger error, not
helping struggling households who could be helped, or trying to extend a hand
when it's not going to do much good? I'd rather make the mistake of trying to
help when it isn't necessary instead of leaving people stranded when help is
But suppose unemployment is, in fact, mostly a structural
problem. If we could help to overcome the "slow uptake" problem after recessions
by (1) providing public employment that bridges the gap until private sector
jobs are available, (2) keeping people connected to the labor market and reducing the
likelihood they'll drop out, go on disability, or choose some other socially
costly alternative, (3) enhancing our long-run growth prospects, (4)
saving ourselves money in the long-run, and (5) accomplish this with policies
directed at "supply-side" problems that help with demand at the same time,
shouldn't we do it?
Infrastructure spending has these features. We can delay basic maintenance
for awhile much as a household or business can defer maintenance on a car or
delivery vehicles, but there comes a point when the failure to do basic
maintenance will cost us even more in the long-run (change your oil now, or
change your engine later). We have delayed investment in infrastructure long-enough, and it's time to put
people to work rebuilding for the future. These policies don't depend upon
whether its cyclical or structural, we have the need -- the benefits exceed the
costs (which are unusually low due to the recession) -- and there are millions
of people who want to work, but cannot find employment. Why not put them to work
doing something productive?
...Paul Krugman ... is a keen student of the British economy. And a stern
critic of the way it’s been managed. ... Krugman argues that what the Brits have
been doing to cut their debt is completely counterproductive. ... The
British government should borrow more to spend more, to spark up the
British Finance Minister Matthew Hancock dismisses that as
"We have a massive borrowing problem. We have overleveraged banks and they’re a
drag on the economy. And the argument that you can borrow your way out of
debt doesn’t make sense," claims Hancock.
The government and its supporters concede that the deficit reduction plan has
hit a sticky patch. They admit that growth has faltered. But they deny
that has anything to do with austerity. ...
Scientists at UK plc’s research labs used the 2013 Budget to reveal that their
much vaunted wonder drug – Austerity™ was not yet ready to go global. Other
nations had been watching its development with great excitement but regulators
now say they have found serious side effects in the late-stage trials that made
it unlikely to secure approval outside Germany and the Netherlands. ...
George Osborne, the economic scientist behind the development of the Austerity™
drug,... insists that Austerity™ works, saying the data have been corrupted by
confounding effects such as higher oil prices, a eurozone crisis, a falling
pound, the Queen’s jubilee, bad weather and the Olympics.
Mr Osborne admitted that the test results were a setback but said his team would
press on. ...
No sense changing policies that aren't working. Unless, of course, the real policy is something else and it's working after all. There's a reason conservatives like austerity despite its "failure".
Holds, by Tim Duy: The two-day FOMC meeting concluded
with policy unchanged, as expected. The statement itself was little changed
as well. The Fed acknowledged the improved flow of data since the last meeting,
noted tighter fiscal policy, and reaffirmed its view that inflation is likely to
remain at or below the 2 percent target. The Fed removed a statement referring
to easing global strains, presumably a reflection of the challenges in Cyprus at
the moment. Asset purchases continue at their current rate.
A more interesting change can be seen in the Fed's statement regarding the
future of the asset purchase program. The relative paragraph from the
The Committee will closely monitor incoming information on economic and
financial developments in coming months. 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. 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.
was changed to this (emphasis added):
The Committee will closely monitor incoming information on economic and
financial developments in coming months. The Committee will continue its
purchases of Treasury and agency mortgage-backed securities, and employ its
other policy tools as appropriate, until the outlook for the labor market has
improved substantially in a context of price stability. In determining the
size, pace, and composition of its asset purchases, the Committee will continue
to take appropriate account of the likely efficacy and costs of such purchases
as well as the extent of progress toward its economic objectives.
The addition of the final clause appears to be a bow to policymakers who are
concerned that the pace of easing might need to be curtailed in the nearer
future. I assume this issue will once again be highlighted in the minutes. It
appears to give the Fed room to alter the pace of purchases as the unemployment
rate tends toward the 6.5 percent threshold even if, for example, jobs continue
to grow in the 150k-200k range.
That said, I expect asset purchases to continue at this pace for most of this
year (if not into next year). Moreover, most policymakers expect this as well.
Note the relatively minimal changes to the projections:
While the expected unemployment rate was revised downward, the Fed expects it
to remain unacceptably high. Moreover, the top end of the expected inflation
rate was revised downward for this year. The combination of high unemployment
and low inflation argue for sustained easing. Indeed, the combination could
argue that policy needs to be even more accommodative. Note also that the
unemployment rate is expected to exceed 6.5% through 2015, putting that year as
timing of the first rate hike, And, unsurprisingly, that is the expectation of
vast majority of meeting participants.
In short, with unemployment this high and inflation this low, the benefits of
continued easing exceed any potential costs. And with this in mind, note that
Federal Reserve Chairman Ben Bernanke, in the press conference, stated that he
did not see anything unusual in current equity valuations, another indication
that he believes that concerns about financial market distortions are overblown.
Bottom Line: Policy is on hold. On hold for a long time. Unless activity
accelerates substantially, asset purchases will continue at the current rate
through most of this year (if not until well into next year), while short-term
interest rates will remain locked down near zero until 2015. Beware of reading
too much into the comments of the more hawkish monetary policymakers; they still
represent a minority view.
In order for the world economy to be prosperous, adjustment to
macroeconomic disequilibrium needs to be undertaken by both "surplus" and
"deficit" economies--not by "deficit" economies alone.
If the world economy is to have any chance of avoiding or limiting
crises, an integrated banking system requires an integrated bank regulator
In order for crises to be successfully managed, the lender of last resort
must truly be a lender of last resort: it must create whatever asset the
market thinks is the safest in the economy, and must be able to do so in
whatever quantity the market demands.
In order for any monetary union or fixed exchange rate system larger than
an optimum currency area to survive, it must be willing to undertake
large-scale fiscal transfers to compensate for the exchange rate movements
to rapidly shift inter-regional terms of trade that it prohibits.
I, at least, thought that everybody--or everybody who mattered in governing
the world economy--had learned these four lessons that 1919-1939 had so cruelly
taught us. Now it turns out that the dukes and duchesses of Eurovia had, in
fact, learned none of them. History taught the lesson. But while history was
teaching the lesson, the princes and princesses of Eurovia and their advisors
were looking out the window and gossiping on Facebook. ...
He goes on to try to explain why the system ended up with so many dysfunctional features. (I would add the us-them nature of
the interactions between the nations in Europe that the various crises have
exposed. It is not the "all for one and one for all" attitude that is needed to
implement the things Brad is suggesting, e.g. a "a single Eurovia-wide banking
regulator" and a " fiscal-transfer" system. Instead it's a point your finger at
others and moralize about the differences in behavior. It's a lot like the peace
we thought we had in macroeconomics -- the convergence of thought between the
various schools that people like Olivier Blanchard talked about -- until the
Great Recession exposed the deep divisions that still exist).