« March 2013 | Main | May 2013 »

Tuesday, April 30, 2013

The Future of Money: What's in Your Digital Wallet?

I thought this session on electronic payments was interesting:

The Future of Money: What's in Your Digital Wallet?
Tuesday, April 30, 2013 9:30 AM - 10:30 AM
Speakers:
  • Eric Dunn, Senior Vice President, Commerce Network Solutions, Intuit
  • Paul Galant, CEO, Citi Enterprise Payments
  • Mark Lavelle, Senior Vice President, Strategy and Business Development, PayPal
  • Ed McLaughlin, Chief Emerging Payments Officer, MasterCard
Moderator: Lauren Lyster, Co-Host, "Daily Ticker," Yahoo! Finance
Money is by nature symbolic - representing the erratic value of goods and services - but will it become entirely electronic? Some digital evangelists, touting the frictionlessness of cashlessness, think so. E-transactions are burgeoning along with the capabilities and reach of the Internet. Software engineering has fused with financial engineering and online communities are creating new forms of digital currency. Yet cash in circulation is also rising. Hand-held currency is an easy, uncomplicated means to know what you have and get what you want, which is all the more appealing in an era of economic insecurity and bitcoin chaos. Why rely on intermediaries and invisible transactions? Why trust if one can't readily verify? This panel will explore the forces that are changing money and, at the same time, keeping it in its traditional forms.

    Posted by on Tuesday, April 30, 2013 at 04:28 PM in Economics, Video | Permalink  Comments (17)


    Why Do We Use Core Inflation?

    Paul Krugman:

    Blogging is a bit like teaching the same class year after year; inevitably there are moments when you feel exasperated at the class’s failure to grasp some point you know you explained at length — then you realize that this was last year or the year before, and it was to a different group of people.
    So, I gather that the old core inflation bugaboo is rearing its head again — the complaint that it’s somehow stupid, dishonest, or worse to measure inflation without food and energy prices, often coupled with the claim that the statistics are being manipulated anyway. So, time for a refresher. ...

    Hs refresher is here. Let me offer one of my own (from 2008):

    Why Do We Use Core Inflation?: There is a lot of confusion over the Fed's use of core inflation as part of its policy making process. One reason for confusion is that we using a single measure to summarize three different definitions of the term "core inflation" based upon how it is used.

    First, core inflation is used to forecast future inflation. For example, this recent paper uses a "bivariate integrated moving average ... model ... that fits the data on inflation very well," and finds that the long-run trend rate of inflation "is best gauged by focusing solely on prices excluding food and energy prices." That is, this paper finds that predictions of future inflation based upon core measures are more accurate than predictions based upon total inflation.

    Second, we also use the core inflation rate to measure the current trend inflation rate. Because the inflation rate we observe contains both permanent and transitory components, the precise long-run inflation rate that consumers face going forward is not observed directly, it must be estimated. When food and energy are removed to obtain a core measure, the idea is to strip away the short-run movements thereby giving a better picture of the core or long-run inflation rate faced by households. I should note, however that this is not the only nor the best way to extract the trend and the Fed also looks at other measures of the trend inflation rate that have better statistical properties. Thus while the first use of core inflation was for forecasting future inflation rates, this use of core inflation attempts to find today's trend inflation rate [There is a way to combine the first and second uses into a single conceptual framework that encompasses both, but it seemed more intuitive to keep them separate. In both cases, the idea is to find the inflation rate that consumers are likely to face in the future.]

    Let me emphasize one thing. If the question is "what is today's inflation rate," the total inflation rate is the best measure. It's intended to measure the cost of living and there's no reason at all to strip anything out. It's only when we ask different questions that different measures are used.

    Third, and this is the function that is ignored most often in discussions of core inflation, but to me it is the most important of the three. The inflation target that best stabilizes the economy (i.e. best reduces the variation in output and employment) is a version of core inflation.

    In theoretical models used to study monetary policy, the procedure for setting the policy rule is to find the monetary policy rule that maximizes household welfare (by minimizing variation in variables such as output, consumption, and employment). The rule will vary by model, but it usually involves a measure of output and a measure of prices, and those measures can be in levels, rates of change, or both depending upon the particular model being examined.

    In general, a Taylor rule type framework comes out of this process ( i.e. a rule that links the federal funds rate to measures of output and prices). However, in the policy rule, the best measure of prices is usually something that looks like a core measure of inflation. Essentially, when prices are sticky, which is the most common assumption driving the interaction between policy and movements in real variables in these models, it's best to target an index that gives most of the weight to the stickiest prices (here's an explanation as to why from a post that echoes the themes here).  That is, volatile prices such as food and energy are essentially tossed out of the index used in the policy rule.

    The indexes that come out of this type of theoretical exercise often includes both output and input prices, and occasionally asset prices as well. That is, a core measure of inflation composed of just output prices isn't the best thing for policymakers to target, a more general core inflation rate combining both input and output prices works better. ...

    Finally, there is also a question of what we mean by inflation conceptually. Does a change in relative prices, e.g. from a large increase in energy costs, that raises the cost of living substantially count as inflation, or do we require the changes to be common across all prices as would occur when the money supply is increased? Which is better for measuring the cost of living? Which is a better target for stabilizing the economy? The answers may not be the same. For a nice discussion of this topic, see this speech given yesterday by Dennis Lockhart, President of the Atlanta Fed:

    Inflation Beyond the Headlines, by Dennis P. Lockhart, President, Federal Reserve Bank of Atlanta: ...Let me begin by posing the simple question: What do we mean by "inflation"? The answer to that simple question isn't as simple as it may seem.

    The popular treatment of inflation in our sound bite society risks confusing inflation with relative price movements and the cost of living. By cost of living, I'm referring to the costs you and I incur to maintain our level of consumption of various goods and services including essential items such as food, gasoline, and lodging. 

    Relative price movements occur continuously in an economy as individual prices react to market forces affecting that good or service. Neither relative price movements nor sustained high living costs constitute inflation as economists commonly use the term....

    And I think I'll end with this part of his remarks:

    Attempts to measure the aggregate rate of price change—no matter how sophisticated—remain imperfect. As a result, when it comes to measuring inflation, judgment is needed to distinguish persistent price movements that underlie overall inflation from the relative price adjustments. Separating the inflation signal from noise involves much uncertainty—especially when making decisions in real time. Discerning accurately the underlying trend is difficult. It is essential for those of us who have responsibility for responding to these trends to use a wide variety of core measures and inflation projections to make the most informed judgment we can.

      Posted by on Tuesday, April 30, 2013 at 12:10 PM in Economics, Inflation, Monetary Policy | Permalink  Comments (6)


      Video: Global Overview

      This shouldn't be overly surprising, but Nouriel Roubini is pessimistic about the global economy (bubble/boom for two years, then a big crash):

      Lunch Panel: Global Overview
      Monday, April 29, 2013 12:00 PM - 1:45 PM
      Introduction By: Michael Klowden, CEO, Milken Institute
      Speakers:
      • Pierre Beaudoin, President and CEO, Bombardier Inc.
      • Scott Minerd, Managing Partner and Global Chief Investment Officer, Guggenheim Partners
      • Nouriel Roubini, Chairman and Co-Founder, Roubini Global Economics; Professor of Economics and International Business, Stern School of Business, New York University
      • Geraldine Sundstrom, Partner and Portfolio Manager, Emerging Markets Strategies Master Fund Limited, Brevan Howard
      Moderator: Paul Gigot, Editorial Page Editor and Vice President, The Wall Street Journal
      As mid-2013 comes into view, the crisis sparked by the international mortgage meltdown is receding into memory, spreading a sense of relief. In the eurozone, the debate is about austerity versus spending, but not dissolution. Meanwhile, living conditions are rising in many parts of the globe as millions join a swelling middle class. The expanding availability of healthcare could have a profound effect as well. Yet some regions continue to struggle. In our annual big-picture look at the world economy, we'll discuss whether China and the U.S. can pull other players along and how the debt bomb can be defused. What are the most potent trends steering capital markets? Which industries are rising, which are fading, and what governments are demonstrating they know how to solve problems? Can the flare-up in the Middle East be contained and give way to democracy and economic growth?

        Posted by on Tuesday, April 30, 2013 at 11:21 AM in Economics, Video | Permalink  Comments (5)


        'Are We Purging the Poorest?'

        “Should public resources go to the group most likely to take full advantage of them, or to the group that is most desperately in need of assistance?”:

        Are we purging the poorest?, by Peter Dizikes, MIT News Office: In cities across America over the last two decades, high-rise public-housing projects, riddled with crime and poverty, have been torn down. In their places, developers have constructed lower-rise, mixed-use buildings. Crime has dropped, neighborhoods have gentrified, and many observers have lauded the overall approach.

        But urban historian Lawrence J. Vale of MIT does not agree that the downsizing of public housing has been an obvious success.

        “We’re faced with a situation of crisis in housing for those of the very lowest incomes,” says Vale, the Ford Professor of Urban Design and Planning at MIT. “Public housing has continued to fall far short of meeting the demand from low-income people.”

        Take Chicago, where the last of the Cabrini-Green high-rises was torn down in 2011, ending a dismantling that commenced in 1993. Those buildings — just a short walk from the neighborhood where Vale grew up — have been replaced by lower-density residences. But where 3,600 apartments were once located, there are now just 400 units constructed for ex-Cabrini residents. Other Cabrini-Green occupants were given vouchers to help subsidize their housing costs, but their whereabouts have not been extensively tracked.

        “There is a contradiction in saying to people, ‘You’re living in a terrible place, and we’re going to put massive investment into it to make it as safe and attractive as possible, but by the way, the vast majority of you are not going to be able to live here again once we do so,’” Vale says. “And there is relatively little effort to truly follow through on what the life trajectory is for those who go elsewhere and don’t have an opportunity to return to the redeveloped housing.”

        Now Vale is expanding on that argument in a new book, “Purging the Poorest: Public Housing and the Design Politics of Twice-Cleared Communities”...

        “Chicago and Atlanta are probably the nation’s most conspicuous experiments in getting rid of, or at least transforming, family public housing,” Vale explains. However, he notes, “It’s hard to find an older American city that doesn’t have at least one example of this double clearance.”

        Essentially, Vale says, these cities exemplify one basic question: “Should public resources go to the group most likely to take full advantage of them, or to the group that is most desperately in need of assistance?”

        Vale sees U.S. policy as vacillating between these views over time. At first, public housing was meant “to reward an upwardly mobile working-class population” — making public housing a place for strivers. Slums were cleared and larger apartment buildings developed, including Atlanta’s Techwood Homes, the first such major project in the country. 

        But after 1960, public housing tended to be the domain of urban families mired in poverty. “The conventional wisdom was that public housing dangerously concentrated poor people in a poorly designed and poorly managed system of projects, and we are now thankfully tearing it all down,” Vale says. “But that was mostly a middle phase of concentrated poverty from 1960 to 1990.”

        Over the last two decades, he says, the pendulum has swung back, leaving a smaller number of housing units available for the less-troubled, which Vale calls “another round of trying to find the deserving poor who are able to live in close proximity with now-desirable downtown areas.”

        Vale’s critique of this downsizing involves several elements. Projects such as Cabrini-Green might have been bad, but displacing people from them means “the loss of the community networks they had, their church, the people doing day care for their children, the opportunities that neighborhood did provide, even in the context of violence.”

        Demolishing public housing can hurt former residents financially, too. “Techwood and Cabrini-Green were very central to downtown and people have lost job opportunities,” Vale says. Indeed, the elimination of those developments, even with all their attendant problems, does not seem to have measurably helped many former residents gain work...
        “We don’t have very fine-tuned instruments to understand the difference between the person who genuinely needs assistance and the person who is gaming the system,” Vale says. “Far larger numbers of people get demonized, marginalized or ignored, instead of assisted.” ...
        Ultimately, Vale thinks, the reality of the ongoing demand for public housing makes it an issue we have not solved. 

        “The irony of public housing is that people stigmatize it in every possible way, except the waiting lists continue to grow and it continues to be very much in demand,” Vale says. “If this is such a terrible [thing], why are so many hundreds of thousands of people trying to get into it? And why are we reducing the number of public-housing units?”

          Posted by on Tuesday, April 30, 2013 at 08:57 AM in Economics, Housing | Permalink  Comments (14)


          Links for 04-30-2013

            Posted by on Tuesday, April 30, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (60)


            Monday, April 29, 2013

            Is Quantitative Easing Becoming Quantitative Exhaustion?

            This discussion of Fed policy seems like a stacked deck:

            Central Banks: Is Quantitative Easing Becoming Quantitative Exhaustion?
            Monday, April 29, 2013 3:30 PM - 4:30 PM
            Speakers:
            • James McCaughan , CEO, Principal Global Investors
            • Cliff Noreen, President, Babson Capital Management LLC
            • Tad Rivelle, Chief Investment Officer, Fixed Income, TCW
            • Aram Shishmanian, CEO, World Gold Council
            • Kevin Warsh, Distinguished Visiting Fellow, Hoover Institution; Former Member, Federal Reserve Board of Governors
            Moderator: David Zervos, Chief Market Strategist, Jefferies LLC
            Among the monetary measures central banks have taken to address the lingering impact of the 2008 financial rupture, keeping interest rates artificially low has been a primary aim. The term "financial repression" has become associated with that policy. Such measures were launched in the hope of not only stimulating economic activity but to ease the pressure of servicing onerous public debt. Concern is growing, however, that quantitative easing has distorted markets by interfering with the proper pricing of risk and, by extension, obscuring the true cost of capital. Our panel of experts will explore the possible effects of sustained QE and the quest for financial stability. For instance, are bubbles inflating? Will these effects be similar or will they vary from market to market? What costs will long-tem financial repression impose on the Federal Reserve and other central banks? What tools can be employed as alternatives?

            It was stacked. Pretty much unanimous thumbs down on QE. Even the moderator is noting how one-sided the discussion is. It's making things worse! (e.g. QE drives up gas prices and holds back the economy). One panelist is even complaining that interest rates are too low, and no other panelist disagrees. They couldn't find anyone to defend the Fed's current policies? Someone to address all the questionable claims this panel is making? Wow. They are giving the Fed credit for stepping in saving markets when problems first hit financial markets, but seem to think we'd be better off if the Fed had done less. Sorry, but we wouldn't be. The Fed was slow to react and overly cautious at every stage of the crisis. We needed more, not less, and still do.

            (Weird, the guy arguing that QE made things worse is now arguing that the recovery has been much stronger than most people are aware, e.g. unemployment not so bad as we hear...).

            Anyway, think I've had enough of the Fox News version of a debate (actually, Fox would at least have an ineffective defender to tear apart). Time to move on.

            [The video from each session will be posted here several hours after the session ends. I'll add the video to this (and other posts) once it appears (Update: video added).]

              Posted by on Monday, April 29, 2013 at 04:23 PM in Economics, Monetary Policy | Permalink  Comments (74)


              Fed Watch: Just a Few Weeks Makes a World of Difference

              Tim Duy:

              Just a Few Weeks Makes a World of Difference, by Tim Duy: The minutes of the last FOMC meeting, concluded on March 20, included this passage:

              In light of the current review of benefits and costs, one member judged that the pace of purchases should ideally be slowed immediately. A few members felt that the risks and costs of purchases, along with the improved outlook since last fall, would likely make a reduction in the pace of purchases appropriate around midyear, with purchases ending later this year. Several others thought that if the outlook for labor market conditions improved as anticipated, it would probably be appropriate to slow purchases later in the year and to stop them by year-end. Two members indicated that purchases might well continue at the current pace at least through the end of the year.

              The center of the FOMC appeared to be shifting toward agreement that large scale asset purchase program would likely be wrapped up by year end. Of course, they included a caveat:

              It was also noted that were the outlook to deteriorate, the pace of purchases could be increased.

              Since the last FOMC meeting, it has become clear that the economy continues along a suboptimal path, as illustrated by the disappointing 2.5 percent GDP growth for the first quarter; just a few weeks ago, Macroeconomic Advisors was anticipating a 3.6 percent growth rate. In addition, both employment and manufacturing reports have been less than impressive (see Calculated Risk for his take on today's Dallas Fed numbers and the implications for the ISM report). Moreover, fiscal austerity continues to bite:

              0429GOVT

              The end result is that investors have concluded, rightly, that FOMC members looking forward to cutting the pace of purchases by mid-year were overly optimistic. Consequently, the 10-year yield was bid down to just 1.67 percent this afternoon, well below the 2.05 in early March.
              Probably more important, at this juncture is that disinflation is again evident, with headline and core PCE up just 1.0 and 1.1 percent, respectively, compared to last year:

              0429PCE

              In an April 17 Wall Street Journal interview, St. Louis Federal Reserve President James Bullard highlighted the possibility that a deteriorating inflation trend might require additional easing. Other policymakers have joined him in this concern. From Bloomberg:

              “I’d of course be giving serious thought” to additional stimulus if disinflation persists, Richmond Fed President Jeffrey Lacker, who voted against the bond program last year, said last week -- while adding he doesn’t think that will happen. The Minneapolis Fed’s Narayana Kocherlakota also said this month weaker inflation may be reason to consider more accommodation.

              The important point is that low inflation prompts concern even among policymakers who think the Fed can have little impact on employment growth. For this group, high unemployment is distressing but not actionable. But low inflation is both distressing and actionable. Thus, at a minimum, the low inflation numbers should push the FOMC back to avoiding a premature end to quantitative easing. In addition, it is easy to argue that the Fed should be thinking about additional easing. Not only are they missing on the employment mandate, but increasingly it looks like they are missing on the price stability mandate as well. A policy failure all around.

              Bottom Line: The FOMC statement should shift to indicate the softer economy and falling inflation numbers; I am watching for how much emphasis they place on the latter as a signal as to the likelihood of easing further in future meetings. Like most, I don't anticipate an expansion of the program at this juncture. I doubt the FOMC would see the current data as justifying a leap from thinking about ending the program to expanding the program just six weeks later. It would be interesting if Kansas City Federal Reserve President Esther George pulls her dissent. Her objection has been that the Fed's policy stance risks financial stability for little economic benefit. Pulling her dissent in response to falling inflation would signal that disinflation concerns run deep in the FOMC.

                Posted by on Monday, April 29, 2013 at 03:53 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (4)


                Debt and the Deficit: What's Really on the Table?

                I have a feeling this session is going to be a bit irritating:

                Debt and the Deficit: What's Really on the Table?
                Monday, April 29, 2013 2:15 PM - 3:15 PM
                • Speakers:
                • Bob Corker, U.S. Senator
                • David Cote, Chairman and CEO, Honeywell; Steering Committee Member, Campaign to Fix the Debt
                • Maya MacGuineas, Head, Campaign to Fix the Debt; President, Committee for a Responsible Federal Budget
                • Peter Orszag, Vice Chairman, Corporate and Investment Banking, Citigroup; former Director, Office of Management and Budget
                Moderator: Steven Rattner, Chairman, Willett Advisors; former Counselor and Lead Auto Advisor to the U.S. Secretary of the Treasury
                With outsize debt putting the stability of credit markets and the pace of economic growth at risk, will Americans embrace shared sacrifice to set the country on a path toward fiscal health? Or is the problem essentially the result of gridlock in Washington? And what does "shared sacrifice" actually mean? Who will bear the heavier burden: the rich, the elderly, the middle class? Are Simpson and Bowles still relevant? Our panel will examine the economics and politics around our accumulating public debt and annual deficit, with an eye toward palatable and realistic solutions. Can we grow our way out of the mess? How will we cope with the twin hazards of graying demographics and healthcare inflation? Back to the credit markets: Are Treasuries as safe as they seem?

                There was remarkably little discussion of increasing revenues through tax rate increases. There was some discussion of increasing revenue, but it was mainly about eliminating deductions like home interest rather than increasing tax rates. Instead, most of the focus was on, surprise, "entitlement reform" with only Orszag being careful to point to health care costs as the main problem to solve.

                The most entertaining moment was when the business guy on the panel, David Cote, said that unlike in business where what you think, say, and do must align, for Congress these are different decisions. Senator Corker said he was offended by that comment and went on to defend Congress (e.g. saying many people in business don't understand that politicians have to represent a diverse constituency). Ha. A Republican fighting with a business rep, then defending government. Too bad he wants to cut the crap out of it.

                Other than that, the degree of hawkery and the implicit assumption that the only way to solve problems with our long-run budget picture is to cut social insurance programs the working class relies upon was, in fact, irritating. The continued discussion about deficit reduction as the key to spurring private sector growth was similarly irritating. It's exactly what we heard about the Bush tax cuts, and we know how that turned out. A huge increase in the debt load with little (if any) increased growth to show for it.

                Finally, as far as I recall, the word "unemployment" did not come up. In the short-run, deficit hawkery is what's standing in the way of doing more to help with the unemployment problem. The key question -- whether the concern in the short-run with the debt rather than the unemployed is justified in the short-run (it isn't in my view) -- was not even discussed.

                  Posted by on Monday, April 29, 2013 at 03:16 PM in Budget Deficit, Conferences, Economics, Politics | Permalink  Comments (12)


                  'The Welfare Queen of Denmark'

                  [Listening to Nouriel Roubini's pessimism about the future during the lunch panel as I do this -- the video of the panel discussing the state of the global economy should be available later today.]

                  Nancy Folbre objects to the "gendered language" used in the debate over social insurance programs, and to the conclusion that "cuddly" capitalism is bad for innovation:

                  The Welfare Queen of Denmark, by Nancy Folbre, Commentary, NY Times: ...In short, the Danish record offers no support for the social-spending-hurts-growth position. That doesn’t mean that some economists can’t figure out a way to make that argument anyway. For instance, Daron Acemoglu, James A. Robinson and Thierry Verdier have devised a theoretical model to show why what they term “cuddly” capitalism of the Danish sort may just be free-riding on the “cutthroat” capitalism of the United States sort.
                  The model posits that cutthroat levels of inequality, as in the United States, promote high levels of technological innovation. The benefits of these innovations cross national borders to help Danes and other Scandinavians achieve growth. In other words, they may be able to get away with being “cuddly,” but some country (like the United States) just has to be tough enough to reward risk-taking, even if it leads to hurt feelings.
                  The gendered language deployed in this model echoes a general tendency to view social spending in feminine terms: women like to cuddle and are often described as more risk-averse than men. It’s not uncommon to see the term “nanny state” used as a synonym for the welfare state.
                  Call the Scandinavians sissies if you like, but plenty of evidence in the latest World Competitiveness Report testifies to high levels of overall innovation there — as you might expect in economies even more export-oriented than our own. Danes are world leaders in renewable energy technology, especially wind power. ...

                  As I've noted before, "an enhanced safety net -- a backup if things go wrong -- can give people the security they need to take a chance on pursuing an innovative idea that might die otherwise, or opening a small business. So it may be that an expanded social safety net encourages innovation."

                    Posted by on Monday, April 29, 2013 at 01:12 PM in Economics, Social Insurance, Technology | Permalink  Comments (41)


                    Risk of Debt?

                    Brad DeLong on when government debt is problematic, and when it's not -- a short excerpt from a much longer discussion:

                    Risks of Debt?: Extended Version, by Brad DeLong: ... The principal mistake Reinhart and Rogoff committed in their analysis and paper--indeed, the only significant mistake in the paper itself--was their use of the word "threshold".

                    It and the graph led very many astray. It led the usually-unreliable Washington Post editorial board to condemn the "new school of thought about the deficit…. 'Don’t worry, be happy. We’ve made a lot of progress', says an array of liberal pundits… [including] Martin Wolf of the Financial Times…" on the grounds that "their analysis assumes steady economic growth and no war. If that’s even slightly off, debt-to-GDP could… stick dangerously near the 90 percent mark that economists regard as a threat to sustainable economic growth." (Admittedly, experience since the start of the millennium gives abundant evidence that the Washington Post needs no empirical backup from anybody in order to lie and mislead in whatever way the wind blows.)

                    It misled European Commissioner Olli Rehn to claim that "when [government] debt reaches 80-90% of GDP, it starts to crowd out activity in the private sector and other parts of the economy." Both of these--and a host of others--think that if debt-to-annual-GDP is less than 90% (or, in Rehn's case, 80%, and I have no idea where the 80% comes from) an economy is safe, and that only if it is above 90% is the economy's growth in danger.

                    And in their enthusiasm when they entered congressional briefing mode it led Reinhart and Rogoff themselves astray. ...

                    Matthew O'Brien relays Tim Fernholz of Quartz's flagging of the following passage from Senator Tom Coburn:

                    Johnny Isakson, a Republican from Georgia and always a gentleman, stood up to ask [Reinhart and Rogoff] his question: "Do we need to act this year? Is it better to act quickly?"

                    "Absolutely," Rogoff said. "Not acting moves the risk closer," he explained, because every year of not acting adds another year of debt accumulation. "You have very few levers at this point," he warned us.

                    Reinhart echoed Conrad's point and explained that countries rarely pass the 90 percent debt-to-GDP tipping point precisely because it is dangerous to let that much debt accumulate. She said, "If it is not risky to hit the 90 percent threshold, we would expect a higher incidence."

                    And O'Brien quotes Reinhart and Rogoff writing in Bloomberg View:

                    Our empirical research on the history of financial crises and the relationship between growth and public liabilities supports the view that current debt trajectories are a risk to long-term growth and stability, with many advanced economies already reaching or exceeding the important marker of 90 percent of GDP…. The biggest risk is that debt will accumulate until the overhang weighs on growth…

                    Yet the threshold at 90% is not there. In no sense is there empirical evidence that a 90% ratio of debt-to-annual-GDP is in any sense an "important marker", a red line. That it appears to be in Reinhart and Rogoff's paper is an artifact of Reinhart and Rogoff's non-parametric method: throw the data into four bins, with 90% the bottom of the top bin. There is, instead, a gradual and smooth decline in growth rates as debt-to-annual-GDP increases. 80% looks only trivially different than 100%. ...

                      Posted by on Monday, April 29, 2013 at 11:34 AM in Budget Deficit, Economics, Fiscal Policy | Permalink  Comments (34)


                      Have Blog, Will Travel: Milken Global Conference

                      I am here today (Milken Global Conference 2013).

                      One quick first impression based upon the schedule of sessions. In the last few years, two or three years ago more so than last year, there were quite a few "soul-searching" sessions from the financial industry. How did financial markets fail, how can they be fixed, etc. That's not to say that there wasn't a lot of resistance to regulation from the industry, but they were at least dealing with the main issues, there was an attempt at an honest appraisal from many, and there were quite a few sessions on the topic.

                      There are sessions on regulation this year -- I'm currently in one called "Global Financial Regulation" (usual TBTF discussion so far, just turning to leverage) -- but compared to previous years the main concern now appears to be where we are headed in the next few years, opportunities for investment, etc. I suppose that's good news for the economy, but for financial stability? There's still a lot of work to be done, and an eroding will to do it.

                        Posted by on Monday, April 29, 2013 at 09:53 AM in Conferences, Economics, Financial System, Regulation | Permalink  Comments (6)


                        Paul Krugman: The Story of Our Time

                        Why it's "a very bad time for spending cuts":

                        The Story of Our Time, by Paul Krugman, Commentary, NY Times: Those of us who have spent years arguing against premature fiscal austerity have just had a good two weeks. Academic studies that supposedly justified austerity have lost credibility; hard-liners in the European Commission and elsewhere have softened their rhetoric. The tone of the conversation has definitely changed.
                        My sense, however, is that many people still don’t understand ... the nature of our economic woes, and why this remains a very bad time for spending cuts.
                        Let’s start with ... what happened after the financial crisis of 2008. Many people suddenly cut spending, either because they chose to or because their creditors forced them to; meanwhile, not many people were able or willing to spend more. The result was a plunge in incomes that also caused a plunge in employment ... that persists to this day. ...
                        So what could we do to reduce unemployment? The answer is, this is a time for above-normal government spending, to sustain the economy until the private sector is willing to spend again. The crucial point is that under current conditions,... government spending doesn’t divert resources away from private uses; it puts unemployed resources to work. Government borrowing doesn’t crowd out private investment; it mobilizes funds that would otherwise go unused. ...
                        Now, just to be clear,... let’s try to reduce deficits and bring down government indebtedness once normal conditions return... But right now we’re still dealing with the aftermath of a once-in-three-generations financial crisis. This is no time for austerity. ...
                        Is the story really that simple, and would it really be that easy to end the scourge of unemployment? Yes — but powerful people don’t want to believe it. Some of them have a visceral sense that suffering is good, that we must pay a price for past sins (even if the sinners then and the sufferers now are very different groups of people). Some of them see the crisis as an opportunity to dismantle the social safety net. And just about everyone in the policy elite takes cues from a wealthy minority that isn’t actually feeling much pain.
                        What has happened now, however, is that the drive for austerity has lost its intellectual fig leaf, and stands exposed as the expression of prejudice, opportunism and class interest it always was. And maybe, just maybe, that sudden exposure will give us a chance to start doing something about the depression we’re in.

                          Posted by on Monday, April 29, 2013 at 12:42 AM in Economics, Fiscal Policy | Permalink  Comments (44)


                          Links for 04-29-2013

                            Posted by on Monday, April 29, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (33)


                            Sunday, April 28, 2013

                            'Public and Private Sector Payroll Jobs: Bush and Obama'

                            One more before hitting the road once again:

                            Public and Private Sector Payroll Jobs: Bush and Obama by Bill McBride: ...several readers have asked if I could update the graphs comparing public and private sector job losses (or added) for President George W. Bush's two terms (following the stock market bust), and for President Obama tenure in office so far (following the housing bust and financial crisis). 
                            Important: There are many differences between the two periods. ...

                            The first graph shows the change in private sector payroll jobs from when Mr. Bush took office (January 2001) compared to Mr. Obama's tenure (from January 2009). ...

                            Private Sector Payrolls 
                            Click on graph for larger image.

                            The employment recovery during Mr. Bush's first term was very sluggish, and private employment was down 946,000 jobs at the end of his first term.   At the end of Mr. Bush's second term, private employment was collapsing, and there were net 665,000 jobs lost during Mr. Bush's two terms.  

                            The recovery has been sluggish under Mr. Obama's presidency too, and there were only 1,933,000 more private sector jobs at the end of Mr. Obama's first term.  A couple of months into Mr. Obama's second term, there are now 2,282,000 more private sector jobs than when he took office.

                            Public Sector Payrolls 

                            A big difference between Mr. Bush's tenure in office and Mr. Obama's presidency has been public sector employment. The public sector grew during Mr. Bush's term (up 1,748,000 jobs), but the public sector has declined since Obama took office (down 718,000 jobs). These job losses have mostly been at the state and local level, but they are still a significant drag on overall employment. ...

                              Posted by on Sunday, April 28, 2013 at 10:35 AM in Economics, Fiscal Policy | Permalink  Comments (33)


                              'Monetarism Falls Short'

                              I've was making this argument long before the crisis hit, I was among the first to say that monetary policy would not be enough to solve our problems, aggressive fiscal policy would also be needed, and nothing that's happened during the recession has changed my mind. I eventually tired of the debate and assumed everyone was tired of hearing me say we needed more fiscal stimulus -- arguing with monetarists won't change any minds anyway and policymakers weren't about to do more fiscal stimulus - - so I moved on to other things (mostly talking about the need for job creation through more aggressive policy of any type):

                              Monetarism Falls Short: ... Sorry, guys, but as a practical matter the Fed – while it should be doing more – can’t make up for contractionary fiscal policy in the face of a depressed economy.

                              Krugman is right.

                                Posted by on Sunday, April 28, 2013 at 10:03 AM in Economics, Fiscal Policy, Monetary Policy | Permalink  Comments (39)


                                'The Great Degrader'

                                Paul Krugman says the biggest problem with George Bush wasn't the things he did, it was how he did them:

                                The Great Degrader: ...I sort of missed the big push to rehabilitate Bush’s image; also..., I’m kind of worn out on the subject. But it does need to be said: he was a terrible president, arguably the worst ever, and not just for the reasons many others are pointing out.
                                From what I’ve read, most of the pushback against revisionism focuses on just how bad Bush’s policies were, from the disaster in Iraq to the way he destroyed FEMA, from the way he squandered a budget surplus to the way he drove up Medicare’s costs. And all of that is fair.
                                But I think there was something even bigger, in some ways, than his policy failures: Bush brought an unprecedented level of systematic dishonesty to American political life, and we may never recover.
                                Think about his two main “achievements”, if you want to call them that: the tax cuts and the Iraq war, both of which continue to cast long shadows over our nation’s destiny. The key thing to remember is that both were sold with lies. ... Basically, every time the Bushies came out with a report, you knew that it was going to involve some kind of fraud, and the only question was which kind and where.
                                And no, this wasn’t standard practice before. ... There was a time when Americans expected their leaders to be more or less truthful. Nobody expected them to be saints, but we thought we could trust them not to lie about fundamental matters. That time is now behind us — and it was Bush who did it.

                                The media also echoed the Bush talking points on tax cuts and the war without giving them the scrutiny and skeptical eye they deserved (I got so tired of hearing the false claim that the Bush tax cuts would pay for themselves). There has been an admission that, well, maybe a few mistakes were made, but has the media learned its lesson? The ability of Republicans to use the same tactics in recent political debates suggests the answer is no.

                                  Posted by on Sunday, April 28, 2013 at 12:33 AM in Economics, Politics | Permalink  Comments (76)


                                  Links for 04-28-2013

                                    Posted by on Sunday, April 28, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (33)


                                    Saturday, April 27, 2013

                                    A Dream House?

                                    A quick one from the road - Robert Shiller on housing:

                                    Today’s Dream House May Not Be Tomorrow’s, by Robert Shiller, Commentary, NY Times: Houses are just buildings, but homes are often beautiful dreams. Unfortunately, as millions of people have learned in the housing crisis, those dreams don’t always comport with reality.
                                    Economic and demographic changes may severely impair the value of a home when it’s time to sell, a decade or more in the future. Will a particular home still be fashionable then? Will social and economic shifts tilt demand toward new designs and types of communities —even toward renting rather than an outright purchase? Any of these factors could affect home prices substantially. ...

                                    His bottom line is that:

                                    Forecasting is indeed risky, because of factors like construction productivity, inflation, and the growth and bursting of speculative bubbles in both home prices and long-term interest rates. The outlook is so ambiguous that there is no single answer to the question of housing’s potential as a long-term investment.

                                    And:

                                    ... it may be wisest to choose the housing that best meets your personal needs, among the choices you can afford.

                                      Posted by on Saturday, April 27, 2013 at 04:37 PM in Economics, Housing | Permalink  Comments (24)


                                      Brad DeLong: Global Inequality

                                      Another long travel day today, so for now a quick post via Brad DeLong:

                                      Global Inequality: Saturday Twentieth Century Economic History Weblogging: Those economies relatively rich at the start of the twentieth century have by and large seen their material wealth and prosperity explode. Those nations and economies that were relatively poor have grown richer, but for the most part slowly. The relative gulf between rich and poor economies has grown steadily over the past century. Today it is larger than at any time in humanity’s previous experience...
                                      This glass can be viewed either as half empty or as half full. The glass is half empty: we live today in a world that is nearly the most unequal world ever. Only the world of the 1970s and 1980s—with standards of living in China greatly depressed by the legacy of Mao, his Great Leap Forward, and his Cultural Revolution and with standards of living in India depressed to a lesser extent by the License Raj of the Nehru Dynasty—was more unequal than ours is, even today. The glass is half full: most of the world has already made the transition to sustained economic growth; most people live in economies that (while far poorer than the leading-edge post-industrial nations of the world’s economic core) have successfully climbed onto the escalator of economic growth and thus the escalator to modernity. The economic transformation of most of the world is less than a century behind the of the leading-edge economies...
                                      On the other hand, one and a half billion people live in economies that have not made the transition to economic growth, and have not climbed onto the escalator to modernity. It is hard to argue that the median inhabitant of Africa has a higher real income than his or her counterpart of a generation ago.
                                      From an economist’s point of view, the existence, persistence, and increasing size of large gaps in productivity levels and living standards across nations seems bizarre. We can understand why pre-industrial civilizations had different levels of technology and prosperity: they had different exploitable nature resources, and the diffusion of new ideas from civilization to civilization could be very slow. Such explanations do not apply to the world today. The source of the material prosperity seen today in leading-edge economies is no secret: it is the storehouse of technological capabilities.. Most of it is accessible to anyone who can read. Almost all of the rest is accessible to anyone who can obtain an M.S. in Engineering. Because of modern telecommunications, ideas today spread at the speed of light. Governments, entrepreneurs, and individuals in poor economies should be straining every muscle ... to do what Japan began to do in the mid-nineteenth century: acquire and apply everything in humanity's storehouse of technological capabilities.
                                      This “divergence” in living standards and productivity levels is another key aspect of twentieth century economic history: economies are, by almost every measure, less alike today than a century ago in spite of a century’s worth of revolutions in transportation and communication. Moreover, there seems to be every reason to fear that this “divergence” in living standards and productivity levels will continue to grow in the future. ...
                                      This is a potential source of great danger, because today’s world is sufficiently interdependent—politically, militarily, ecologically—that the passage to a truly human world requires that we all get there at roughly the same time.

                                        Posted by on Saturday, April 27, 2013 at 10:06 AM in Economics, Income Distribution | Permalink  Comments (23)


                                        Links for 04-27-2013

                                          Posted by on Saturday, April 27, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (107)


                                          Friday, April 26, 2013

                                          'Wage Disparity Continues to Grow'

                                          There is stagnation and growing inequality in "usual wage income" (no overtime, bonuses, investment income, etc.):

                                          Wage Disparity Continues to Grow: The median pay of American workers has stagnated in recent years, but that is not true for all workers. When adjusted for inflation, the wages of low-paid workers have declined. But the wages for better-paid workers have grown significantly more rapidly than inflation.
                                          The Labor Department last week reported the levels of “usual weekly wages”... with details on the distribution of wages available since 2000. ... The national median wage in the first quarter of this year was $827 a week. In 2013 dollars, the median wage 13 years before was $819, so the increase is about 1 percent. The figures include all workers over the age of 25.
                                          The department said that ... to earn more money than 90 percent of those with jobs ... a person needed to earn $1,909 a week. That figure was nearly 9 percent higher than in early 1980. To reach the 10th percentile ... required an income of $387 a week. After adjusting for inflation, that figure is down 3 percent from 2000. ...
                                          Put another way, in 2000 a worker in the 75th percentile made 48 percent more than a worker at the median, or 50th percentile. Now, a worker in that group earns 58 percent more. ...
                                          If wage stagnation and growing inequality somehow caused flight delays and other inconveniences for those who are doing okay -- the people with the most political power -- maybe we'd put more effort into doing something about it.

                                            Posted by on Friday, April 26, 2013 at 01:30 PM in Economics, Income Distribution | Permalink  Comments (120)


                                            'GDP Report Has Good News and Bad News'

                                            Justin Wolfers characterizes today's GDP report:

                                            Gross Domestic Product Report Has Good News and Bad News: This morning's gross domestic product (GDP) report showed that the economic recovery continued through the first quarter of this year, growing at 2.5%. That's a reasonable (though not great) rate of growth, although a bit below expectations, which were for something closer to 3%. There's good news and bad news buried in the detail. The good is that consumers seem interested in spending again. We'll see whether that holds up over coming months. The bad is that firms aren't so optimistic, and investment was lackluster.
                                            Government spending continues to detract from economic growth, as it has for 10 of the past 11 quarters. This report also provides the latest reading on the core PCE deflator, which is the rate of inflation targeted by the Fed. This measure shows inflation running at 1.2%, well below the Fed's target. Let's not get lost in the detail. This GDP report provides a soon-to-be-revised and noisy indicator of what happened in the economy a few months back. The bigger picture is that we have a fledgling recovery which needs help, but isn't getting it: Fiscal policy is set as a drag on growth, and monetary policy delivering below-target inflation.

                                            See also Calculated Risk (more), Ryan Avent, and Catherine Rampell.

                                              Posted by on Friday, April 26, 2013 at 11:38 AM in Economics | Permalink  Comments (26)


                                              Paul Krugman: The 1 Percent’s Solution

                                              Does evidence matter?:

                                              The 1 Percent’s Solution, by Paul Krugman, Commentary, NY Times: Economic debates rarely end with a T.K.O. But the great policy debate of recent years between Keynesians, who advocate sustaining and, indeed, increasing government spending in a depression, and austerians, who demand immediate spending cuts, comes close... At this point, the austerian position has imploded; not only have its predictions about the real world failed completely, but the academic research invoked to support that position has turned out to be riddled with errors, omissions and dubious statistics.
                                              Yet two big questions remain. First, how did austerity doctrine become so influential in the first place? Second, will policy change at all now that crucial austerian claims have become fodder for late-night comics?
                                              On the first question:... the two main studies providing the alleged intellectual justification for austerity ... did not hold up under scrutiny. ... Meanwhile, real-world events ... quickly made nonsense of austerian predictions.
                                              Yet austerity maintained and even strengthened its grip on elite opinion. Why?
                                              Part of the answer surely lies in the widespread desire to see economics as a morality play... We lived beyond our means ... and now we’re paying the inevitable price. ... But... You can’t understand the influence of austerity doctrine without talking about class and inequality,... a point documented in a recent research paper... The ... average American is somewhat worried about budget deficits, which is no surprise given the constant barrage of deficit scare stories in the news media, but the wealthy, by a large majority, regard deficits as the most important problem we face. ... The wealthy favor cutting federal spending on health care and Social Security — that is, “entitlements” — while the public at large actually wants to see spending on those programs rise.
                                              You get the idea: The austerity agenda looks a lot like a simple expression of upper-class preferences, wrapped in a facade of academic rigor. What the top 1 percent wants becomes what economic science says we must do. ...
                                              And this makes one wonder how much difference the intellectual collapse of the austerian position will actually make. To the extent that we have policy of the 1 percent, by the 1 percent, for the 1 percent, won’t we just see new justifications for the same old policies?
                                              I hope not; I’d like to believe that ideas and evidence matter... Otherwise, what am I doing with my life? But I guess we’ll see just how much cynicism is justified.

                                                Posted by on Friday, April 26, 2013 at 12:24 AM in Economics, Fiscal Policy, Politics | Permalink  Comments (106)


                                                Links for 04-26-2013

                                                  Posted by on Friday, April 26, 2013 at 12:06 AM in Economics, Links | Permalink  Comments (39)


                                                  Thursday, April 25, 2013

                                                  'Unemployment Hits New Highs in Spain, France'

                                                  I've been having computer troubles all day. A quick one from Calculated Risk:

                                                  WSJ: "Unemployment Hits New Highs in Spain, France", by Bill McBride: This is no surprise ... from the WSJ: Unemployment Hits New Highs in Spain, France ... Maybe, just maybe, policymakers in Europe will get the message that the almost singular focus on deficit reduction has been a policy mistake.

                                                    Posted by on Thursday, April 25, 2013 at 03:12 PM in Economics, Fiscal Policy, Unemployment | Permalink  Comments (40)


                                                    Twitter Chat on Reinhart and Rogoff

                                                    Hi:

                                                    Doing a twitter chat with @TCFdotorg on austerity, R/R, and path forward at 4pm with @rortybomb & @a_fieldhouse. Check out hashtag #TCFBest.

                                                      Posted by on Thursday, April 25, 2013 at 12:38 PM in Economics | Permalink  Comments (1)


                                                      'Evidence and Economic Policy'

                                                      Paul Krugman:
                                                      Evidence and Economic Policy: Henry Blodget says that the economic debate is over; the austerians have lost and whatshisname has won. And it’s definitely true that in sheer intellectual terms, this is looking like an epic rout. The main economic studies that supposedly justified the austerian position have imploded; inflation has stayed low; the bond vigilantes have failed to make an appearance; the actual economic effects of austerity have tracked almost exactly what Keynesians predicted.
                                                      But will any of this make a difference? The story of the past three years, after all, is not that Alesina and Ardagna used a bad measure of fiscal policy, or that Reinhart and Rogoff mishandled their data. It is that important people’s will to believe trumped the already ample evidence that austerity would be a terrible mistake; A-A and R-R were just riders on the wave.
                                                      The cynic in me therefore says that after a brief period of regrouping, the VSPs will be right back at it — they’ll find new studies to put on pedestals, new economists to tell them what they want to hear, and those who got it right will continue to be considered unsound and unserious.
                                                      But maybe I’m wrong; maybe truth will prevail. Here’s hoping

                                                      On "the VSPs will be right back at it," Robert Samuelson to the rescue:

                                                      Although the newly discovered errors in Reinhart and Rogoff’s 2010 paper (“Growth in a Time of Debt”) are embarrassing, they do not alter one of its main conclusions: High debt and low economic growth often go together.

                                                      Paul Krugman responds here, Dean Baker here. Krugman makes a key point:

                                                      And anyway, the important story isn’t about the sins of the economists; it’s about our warped economic discourse, in which important people seize on academic work that fits their preconceptions.

                                                      Dani Rodrik thinks we should police ourselves:

                                                      Experts, knowledge and advocacy: This is so absolutely brilliant and important:

                                                      “One thing that experts know, and that non-experts do not, is that they know less than non-experts think they do.”

                                                      It comes from Kaushik Basu, currently chief economist at the World Bank and one of the world’s most thoughtful expert-economists.

                                                      Economists would be so much more honest (with themselves and the world) if they acted accordingly – letting their audience know that their results and prescriptions come with a large margin of uncertainty. Public intellectuals would do so much less damage if they did likewise. And if experts are not aware of the limits of their knowledge – well, they do not deserve to be called experts or intellectuals.

                                                      The real point, though, is that the other side – journalists, politicians, the general public -- always has a tendency to attribute greater authority and precision to what the experts say than the experts should really feel comfortable with. That is what calls for compensating action on the part of the experts.

                                                      So if you are an expert hang this gem from Basu prominently on your wall. And next time you talk to a journalist, advise a politician, or take to the stage in a public event, repeat it to yourself beforehand a few times.

                                                      This is asking a lot. My experience is that researchers really, really believe their own results so a call to temper enthusiasm will not work. They don't think they are overselling. So the cautions will have to come from people other than the authors of the work. That could help, but Krugman's point is, I think, more relevant. People have an interest in selling certain pieces of research that promote their political goals. For example, Reinhart and Rogoff played very well with those who wanted a smaller government and they helped to sell these results. Even if Reinhart and Rogoff had been quite humble about their findings, the correlations they found still would have likely been seized upon by those with an interest in using them to make progress toward ideological goals. Not sure how to solve this problem, but asking whether somebody has an interest in promoting a particular piece of research is a place to start.

                                                        Posted by on Thursday, April 25, 2013 at 11:49 AM in Economics, Fiscal Policy, Politics | Permalink  Comments (31)


                                                        Links for 04-25-2013

                                                          Posted by on Thursday, April 25, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (57)


                                                          Wednesday, April 24, 2013

                                                          'Why Gold and Bitcoin Make Lousy Money'

                                                          David Andolfatto:

                                                          Why gold and bitcoin make lousy money: A desirable property of a monetary instrument is that it holds its value over short periods of time. Most assets do not have this property: their purchasing power fluctuates greatly at very high frequency. Imagine having gone to work for gold a few weeks ago, only to see the purchasing power of your wages drop by 10% in one day. Imagine having purchased something using Bitcoin, only to watch the purchasing power of your spent Bitcoin rise by 100% the next day. It would be frustrating. 
                                                          Is it important for a monetary instrument to hold its value over long periods of time? I used to think so. But now I'm not so sure. While I do not necessarily like the idea of inflation eating away at the value of fiat money, I don't think that a low and stable inflation rate is such a big deal. Money is not meant to be a long-term store of value, after all. Once you receive your wages, you are free to purchase gold, bitcoin, or any other asset you wish. (Inflation does hurt those on fixed nominal payments, but the remedy for that is simply to index those payments to inflation. No big deal.)
                                                          I find it interesting to compare the huge price movements in gold and Bitcoin recently, especially since the physical properties of the two objects are so different. That is, gold is a solid metal, while Bitcoin is just an abstract accounting unit (like fiat money). 
                                                          But despite these physical differences, the two objects do share two important characteristics:
                                                          [1] They are (or are perceived to be) in relatively fixed supply; and
                                                          [2] The demand for these objects can fluctuate violently.
                                                          The implication of [1] and [2] is that the purchasing power (or price) of these objects can fluctuate violently and at high frequency. Given [2], the property [1], which is the property that gold standard advocates like to emphasize, results in price-level instability. In principle, these wild fluctuations in purchasing power can be mitigated by having an "elastic" money supply, managed by some (private or public) monetary institution. This latter belief is what underlies the establishment of a central bank managing a fiat money system (though there are other ways to achieve the same result). ...
                                                          The key issue for any monetary system is credibility of the agencies responsible for managing the economy's money supply in a socially responsible manner. A popular design in many countries is a politically independent central bank, mandated to achieve some measure of price-level stability. And whatever faults one might ascribe to the U.S. Federal Reserve Bank,... since the early 1980s, the Fed has at least managed to keep inflation relatively low and relatively stable. 

                                                            Posted by on Wednesday, April 24, 2013 at 03:21 PM in Economics, Financial System, Monetary Policy | Permalink  Comments (34)


                                                            'Unemployment and the Free Market'

                                                            Chris Dillow takes on the idea that free market policies can solve our unemployment problem:

                                                            Unemployment and the Free Market, Stumbling and Mumbling: Bryan Caplan deserves praise for calling on free market economists to pay more attention to the "grave evil" of unemployment. I fear, though, that he overstates what free market policies can contribute to solving the problem.
                                                            My chart shows the problem. It shows the UK unemployment rate between 1855 (when data begins) and 1914. You can see that the jobless rate was often high - it averaged 4% - and volatile.

                                                            Unem1855
                                                            Note: data comes from the Bank of England.

                                                            And this was during a period of as free markets as one could practically get. This undermines at least three "free market" explanations for unemployment:
                                                            - "Welfare benefits mean the unemployed have little incentive to get work." In the 19th C, though, the only state support the unemployed got was in the Workhouse - and even as late as in my lifetime, this was spoken of with terror.
                                                            - "Big government and taxes deter job creation." But public spending in this time averaged only around 10% of GDP, and labour market regulation except for a few Factory Acts was nugatory by modern standards.
                                                            - "Wages are too rigid". But wages fell in nominal terms in 13 of the 59 years here, and in real terms in 12 of these years. Average nominal wages fell by 9% between 1874 and 1879, which is consistent with some sectors seeing very large falls.
                                                            There is, though, an alternative theory that fits these data. It's that a free market will see large swings in aggregate demand and employment, and that unemployment cannot be prevented by wage reductions alone. This was pointed out most famously - well famous in my house anyway - by Michal Kalecki in 1935... [long quote] ...
                                                            There's a good reason why almost all major economies abandoned free market economics. It's that such economies didn't and couldn't avoid mass unemployment.
                                                            I'll concede - much more than most lefties - that there's a big place for free market economics. But the labour market ain't it. 

                                                              Posted by on Wednesday, April 24, 2013 at 11:09 AM in Economics, Policy, Unemployment | Permalink  Comments (39)


                                                              Our Lack of Skilled Policymakers

                                                              Dean Baker:

                                                              ...the sequester is throwing around 600,000 people out of work according to the Congressional Budget Office. These are people who have the necessary skills to fill jobs in the economy but who will not be working because people in Washington lack the skills to design policies to keep the economy near full employment.

                                                                Posted by on Wednesday, April 24, 2013 at 09:21 AM in Budget Deficit, Economics, Fiscal Policy, Unemployment | Permalink  Comments (35)


                                                                Links for 04-24-2013

                                                                  Posted by on Wednesday, April 24, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (48)


                                                                  Tuesday, April 23, 2013

                                                                  'Austerity Loses an Article of Faith'

                                                                  Martin Wolf:

                                                                  In 1816, the net public debt of the UK reached 240 per cent of gross domestic product. This was the fiscal legacy of 125 years of war against France. What economic disaster followed this crushing burden of debt? The industrial revolution.
                                                                  Yet Carmen Reinhart and Kenneth Rogoff of Harvard university argued ... that growth slows sharply when the ratio of public debt to GDP exceeds 90 per cent. The UK’s experience in the 19th century is such a powerful exception...

                                                                  I agree with the critics for reasons given by Gavyn Davies. The argument that data covering a long period of high debt should count for more than data covering a short one is persuasive. ...

                                                                  [A]fter a financial crisis, a huge excess of desired private savings is likely to emerge... In that situation, immediate fiscal austerity will be counterproductive. ... This is why I was – and remain – concerned about the intellectual influence in favor of austerity exercised by profs Reinhart and Rogoff, whom I greatly respect. The issue here is not even the direction of causality, but rather the costs of trying to avoid high public debt in the aftermath of a financial crisis. In its latest World Economic Outlook, the IMF notes that direct fiscal support for recovery has been exceptionally weak. Not surprisingly, the recovery itself has also been feeble. One of the reasons for this weak support for crisis-hit economies has been concern about the high level of public debt. Profs Reinhart and Rogoff’s paper justified that concern ... This was a huge blunder. It is still not too late to reconsider.

                                                                    Posted by on Tuesday, April 23, 2013 at 03:00 PM in Economics | Permalink  Comments (53)


                                                                    Our Unequal Recovery

                                                                    From the WSJ:

                                                                    Only Richest 7% Saw Wealth Gains From 2009 to 2011, by Neil Shah: ... From 2009 to 2011, the average wealth of America’s richest 7% — the 8 million households with a net worth north of about $800,000 — rose nearly 30% to $3.2 million from $2.5 million, according to a Pew Research Center report... By contrast, the average wealth of America’s remaining 93%, some 111 million households, actually dropped by 4% to $134,000 from $140,000. ...
                                                                    The findings show that America’s economic recovery has been not just sluggish, but painfully uneven in its benefits. Rallying stock and bond markets have boosted the wealth of America’s most affluent... The upper 7% of households held 63% of the nation’s wealth at the end of 2011, up from 56% in 2009.

                                                                    As the article notes, "the one-sidedness of the U.S.’s recovery ... has been supported by low-interest-rate policies from the Federal Reserve that have helped push asset prices higher."

                                                                    One of the things we need to think a lot harder about is how to improve the distributional effects of monetary policy. I'd feel better about taking care of the top 7 percent if it had somehow trickled down to more jobs for struggling households, or if we had used fiscal policy to address the unemployment problem to a far greater degree than we did.

                                                                      Posted by on Tuesday, April 23, 2013 at 11:43 AM in Economics, Income Distribution, Monetary Policy | Permalink  Comments (63)


                                                                      A New and Improved Macroeconomics

                                                                      New column:

                                                                      A New and Improved Macroeconomics, by Mark Thoma: Macroeconomics has not fared well in recent years. The failure of standard macroeconomic models during the financial crisis provided the first big blow to the profession, and the recent discovery of the errors and questionable assumptions in the work of Reinhart and Rogoff further undermined the faith that people have in our models and empirical methods.
                                                                      What will it take for the macroeconomics profession to do better? ...

                                                                        Posted by on Tuesday, April 23, 2013 at 12:30 AM in Economics, Macroeconomics, Methodology | Permalink  Comments (97)


                                                                        Links for 04-23-2013

                                                                          Posted by on Tuesday, April 23, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (56)


                                                                          Monday, April 22, 2013

                                                                          'New Preface to Charles Kindleberger'

                                                                          Brad DeLong and Barry Eichengreen in a new preface to Kindleberger's classic text argue that "We Need a Hegemon Who Won't Drive Us Crazy...":

                                                                          New Preface to Charles Kindleberger, "The World in Depression 1929-1939": ... Three [of Charles Kindleberger's] lessons stand out, the first having to do with panic in financial markets, the second with the power of contagion, the third with the importance of hegemony. ...
                                                                          Kindleberger’s third lesson ... has to do with the importance of hegemony, defined as a preponderance of influence and power over others, in this case over other nation states. Kindleberger argued that at the root of Europe’s and the world’s problems in the 1920s and 1930s was the absence of a benevolent hegemon: a dominant economic power able and willing to take the interests of smaller powers and the operation of the larger international system into account by stabilizing the flow of spending through the global or at least the North Atlantic economy, and doing so by acting as a lender and consumer of last resort. Great Britain, now but a middle power in relative economic decline, no longer possessed the resources commensurate with the job. The rising power, the US, did not yet realize that the maintenance of economic stability required it to assume this role. In contrast to the period before 1914, when Britain acted as hegemon, or after 1945, when the US did so, there was no one to stabilize the unstable economy. Europe, the world economy’s chokepoint, was rendered rudderless, unstable, and crisis- and depression-prone. ...
                                                                          It might be hoped that something would have been learned from this considerable body of scholarship. Yet today, to our surprise, alarm and dismay, we find ourselves watching a rerun of Europe in 1931. Once more, panic and financial distress are widespread. And, once more, Europe lacks a hegemon – a dominant economic power capable of taking the interests of smaller powers and the operation of the larger international system into account by stabilizing flows of finance and spending through the European economy.
                                                                          The ECB does not believe it has the authority: its mandate, the argument goes, requires it to mechanically pursue an inflation target – which it defines in practice as an inflation ceiling. It is not empowered, it argues, to act as a lender of the last resort to distressed financial markets... The EU, a diverse collection of more than two dozen states, has found it difficult to reach a consensus on how to react. And even on those rare occasions where it does achieve something approaching a consensus, the wheels turn slowly, too slowly compared to the crisis, which turns very fast.
                                                                          The German federal government, the political incarnation of the single most consequential economic power in Europe, is one potential hegemon. It has room for countercyclical fiscal policy. It could encourage the European Central Bank to make more active use of monetary policy. It could fund a Marshall Plan for Greece and signal a willingness to assume joint responsibility, along with its EU partners, for some fraction of their collective debt. But Germany still thinks of itself as the steward is a small open economy. It repeats at every turn that it is beyond its capacity to stabilize the European system: “German taxpayers can only bear so much after all”. Unilaterally taking action to stabilize the European economy is not, in any case, its responsibility, as the matter is perceived. The EU is not a union where big countries lead and smaller countries follow docilely but, at least ostensibly, a collection of equals. Germany’s own difficult history in any case makes it difficult for the country to assert its influence and authority and equally difficult for its EU partners, even those who most desperately require it, to accept such an assertion.[6] Europe, everyone agrees, needs to strengthen its collective will and ability to take collective action. But in the absence of a hegemon at the European level, this is easier said than done.
                                                                          The International Monetary Fund, meanwhile, is not sufficiently well capitalized to do the job even were its non-European members to permit it to do so, which remains doubtful. Viewed from Asia or, for that matter, from Capitol Hill, Europe’s problems are properly solved in Europe. More concretely, the view is that the money needed to resolve Europe’s economic and financial crisis should come from Europe. The US government and Federal Reserve System, for their part, have no choice but to view Europe’s problems from the sidelines. A cash-strapped US government lacks the resources to intervene big-time in Europe’s affairs in 1948; there will be no 21st century analogue of the Marshall Plan... Today,... the Congress is not about to permit Greece, Ireland, Portugal, Italy, and Spain to incorporate in Delaware as bank holding companies and join the Federal Reserve System.[7]
                                                                          In a sense, Kindleberger predicted all this in 1973. ... It was fear of this future that led Kindleberger to end The World in Depression with the observation: “In these circumstances, the ... alternative of international institutions with real authority and sovereignty is pressing.”
                                                                          Indeed it is, more so now than ever. ...

                                                                            Posted by on Monday, April 22, 2013 at 12:49 PM in Economics, Financial System | Permalink  Comments (38)


                                                                            Paul Krugman: The Jobless Trap

                                                                            We've been worried about the wrong thing:
                                                                            The Jobless Trap, by Paul Krugman, Commentary, NY Times: F.D.R. told us that the only thing we had to fear was fear itself. But when future historians look back at our monstrously failed response to economic depression, they probably won’t blame fear, per se. Instead, they’ll castigate our leaders for fearing the wrong things.
                                                                            For the overriding fear driving economic policy has been debt hysteria... After all, haven’t economists proved that economic growth collapses once public debt exceeds 90 percent of G.D.P.?
                                                                            Well, the famous red line on debt, it turns out, was an artifact of dubious statistics, reinforced by bad arithmetic. ... But while debt fears were and are misguided, there’s a real danger we’ve ignored: the corrosive effect, social and economic, of persistent high unemployment. ...
                                                                            Five years after the crisis, unemployment remains elevated, with almost 12 million Americans out of work. But what’s really striking is the huge number of long-term unemployed, with 4.6 million unemployed more than six months and more than three million who have been jobless for a year or more. Oh, and these numbers don’t count those who have given up looking for work because there are no jobs to be found. ...
                                                                            The key question is whether workers who have been unemployed for a long time eventually come to be seen as unemployable, tainted goods that nobody will buy. ... And there is, unfortunately, growing evidence that the tainting of the long-term unemployed is happening as we speak. ... So we are indeed creating a permanent class of jobless Americans.
                                                                            And let’s be clear: this is a policy decision. The main reason our economic recovery has been so weak is that, spooked by fear-mongering over debt, we’ve been doing exactly what basic macroeconomics says you shouldn’t do — cutting government spending in the face of a depressed economy.
                                                                            It’s hard to overstate how self-destructive this policy is. Indeed, the shadow of long-term unemployment means that austerity policies are counterproductive even in purely fiscal terms. Workers, after all, are taxpayers too; if our debt obsession exiles millions of Americans from productive employment, it will cut into future revenues and raise future deficits.
                                                                            Our exaggerated fear of debt is, in short, creating a slow-motion catastrophe. It’s ruining many lives, and at the same time making us poorer and weaker in every way. And the longer we persist in this folly, the greater the damage will be.

                                                                              Posted by on Monday, April 22, 2013 at 12:33 AM in Budget Deficit, Economics, Unemployment | Permalink  Comments (153)


                                                                              Fed Watch: Monetary Policy and Financial Stability

                                                                              Tim Duy:

                                                                              Monetary Policy and Financial Stability, by Tim Duy: I think it is difficult to ignore the role of asset prices in the dynamics of the past two business cycles:

                                                                              Networth

                                                                              If the objective of monetary policy is a combination of low inflation and unemployment, I think it is difficult to argue that the Federal Reserve pursued an overly loose policy stance in the periods of the internet and housing bubbles. Indeed, it is arguable that asset price bubbles were integral in fostering low unemployment.
                                                                              With this in mind, consider this conclusion from Minneapolis Federal Reserve President Narayana Kocherlakota, speaking at the 22nd Annual Hyman P. Minsky conference:
                                                                              In this way, unusually low real interest rates should be expected to be linked with inflated asset prices, high asset return volatility and heightened merger activity. All of these financial market outcomes are often interpreted as signifying financial market instability. And this observation brings me to a key conclusion. I’ve suggested that it is likely that, for a number of years to come, the FOMC will only achieve its dual mandate of maximum employment and price stability if it keeps real interest rates unusually low. I’ve also argued that when real interest rates are low, we are likely to see financial market outcomes that signify instability. It follows that, for a considerable period of time, the FOMC may only be to achieve its macroeconomic objectives in association with signs of instability in financial markets.
                                                                              This sounds like Kocherlakota believes that it is not possible for the Federal Reserve to accomplish its dual mandate in the absence of asset bubbles, excessive credit growth, etc. This leads to issue of how should the Federal Reserve deal with such instability:
                                                                              To answer this question, the Committee will need to confront an ongoing probabilistic cost-benefit calculation. On the one hand, raising the real interest rate will definitely lead to lower employment and prices. On the other hand, raising the real interest rate may reduce the risk of a financial crisis—a crisis which could give rise to a much larger fall in employment and prices. Thus, the Committee has to weigh the certainty of a costly deviation from its dual mandate objectives against the benefit of reducing the probability of an even larger deviation from those objectives.
                                                                              In other words, if they raise interest rates, the will clearly deviate from their objectives, but if they don't there is only a chance of suffering a larger deviation. So they should refrain from addressing financial instability (through raising interest rates) until it is clearly evident that it poses a significant risk to the dual mandate.
                                                                              But how might one measure financial instability? A new paper by Claudio Borio, Piti Disyatat, and Mikael Juselius offers a fresh look at potential output that incorporates information about the financial cycle. Note that traditional measures of potential output focus on the inflationary consequences of level of actual output. If inflation remains contained or falling, then by definition actual output is equal to or less than potential output. Borio et al, however, note that the economy may be on an unsustainable path even when inflation remains contained. Arguably, measures of potential output should incorporate information about financial factors that might signal the economy is on such a path.
                                                                              Why might be expect that we might be on a unsustainable path even under conditions of low and stable inflation? The authors summarize:
                                                                              There are at least four reasons for this. One is that unusually strong financial booms are likely to coincide with positive supply side shocks (eg Drehmann et al (2012))....A second reason is that the economic expansions may themselves weaken supply constraints. Prolonged and robust expansions can induce increases in the labour supply, either through higher participation rates or, more significantly, immigration....A third reason is that financial booms are often associated with a tendency for the currency to appreciate, as domestic assets become more attractive and capital flows surge. The appreciation puts downward pressure on inflation. A fourth, underappreciated, reason is that unsustainability may have to do more with the sectoral misallocation of resources than with overall capacity constraints. The sectors typically involved are especially sensitive to credit, such as real estate.
                                                                              Thus, unsustainable financial booms can be especially treacherous, as it is all too easy to be lulled into a false sense of security. Economic activity appears deceptively robust. Financial and real developments mask the underlying financial vulnerabilities that eventually bring the expansion to an end...
                                                                              The author's estimate what they describe as "finance neutral" output gaps via an expanded version of an H-P filter. Among their findings is that applying a Taylor rule to their output gap suggests that the Federal Funds rate was set too low during much of the 2000's, and possibly now as well. Still, the authors stop short of advocating that interest rate policy should be used to lean against financial headwinds. Tighter monetary policy might ease financial instabilities, but aggravate recovery from a balance sheet recession.
                                                                              Arguably, the current environment is a case where it would be imprudent to lean against potential financial instabilities. The Federal Reserve is holding interest rates low for a protracted period and thus fueling fears they are laying the groundwork for the next financial crisis. But raising rates doesn't seem like an appropriate option considering the economy is far from fully recovered from the recession. This speaks to Kocherlakota's comment. And those of Federal Reserve Chairman Ben Bernanke as said in a recent speech:
                                                                              One might argue that the right response to these risks is to tighten monetary policy, raising long-term interest rates with the aim of forestalling any undesirable buildup of risk. I hope my discussion this evening has convinced you that, at least in economic circumstances of the sort that prevail today, such an approach could be quite costly and might well be counterproductive from the standpoint of promoting financial stability. Long-term interest rates in the major industrial countries are low for good reason: Inflation is low and stable and, given expectations of weak growth, expected real short rates are low. Premature rate increases would carry a high risk of short-circuiting the recovery, possibly leading--ironically enough--to an even longer period of low long-term rates. Only a strong economy can deliver persistently high real returns to savers and investors, and the economies of the major industrial countries are still in the recovery phase.
                                                                              Admitedly, this is frustrating. It is as if we we are faced with a tradeoff between economic recovery and financial stability. But this begs an even greater question. Why do we have to make this tradeoff? Why is maintaining full-employment dependent on destabilizing asset bubbles? Commenting on this speech, Ryan Avent asks if the current dynamics are a result of the Fed's never-ending pursuit of low inflation:
                                                                              ...one very clear implication...price stability is keeping nominal rates low and is therefore an impediment to financial and macroeconomic stability. One has to weigh costs and benefits, of course, but one cannot miss the trade-off: the more you worry about low rates the less low and stable inflation should look like a good thing...
                                                                              ...It is perhaps premature to declare the existence of a new monetary trilemma, that over the medium-term central banks can choose at most two of the following: low inflation, low unemployment, and financial stability. But if Mr Bernanke continues arguing this effectively in favour of higher inflation, we may need to ask why he isn't pursuing it as an explicit goal.
                                                                              Has the pursuit of low inflation brought us to a point where we can maintain the Fed's dual mandate only at the presence of financial instability? That unless we allow for somewhat higher inflation, we are making a deliberate choice to follow only "inflation-neutral" measures of the output gap and ignore "finance-neutral" measures? And, importantly, might it not be the case that the costs of somewhat higher inflation are in fact less than the costs associated with the financial instabilities that seem to be part and parcel of the current low-inflation regime?
                                                                              Bottom Line: If Kocherlakota is correct and monetary policy can only pursue the dual mandate in the context of financial - and, by extension - macroeconomic instability, then we really need to consider which part of the dual mandate needs to be loosened to reduce the reliance on financial instability. My fear is that if Fed policy makers were asked this question, they would unanimously answer that it is the full-employment portion of the mandate that should be jettisoned.

                                                                                Posted by on Monday, April 22, 2013 at 12:24 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (29)


                                                                                Links for 04-22-2013

                                                                                  Posted by on Monday, April 22, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (38)


                                                                                  Sunday, April 21, 2013

                                                                                  'We are Essentially Rewriting Economic History'

                                                                                  There will be a big revision of macroeconomic data in July:

                                                                                  Data shift to lift US economy by 3%, by Robin Harding, FT: The US economy will officially become 3 per cent bigger in July as part of a shake-up that will for the first time see government statistics take into account 21st century components such as film royalties and spending on research and development. ...
                                                                                  In an interview with the Financial Times, Brent Moulton, who manages the national accounts at the Bureau of Economic Analysis, said the update is the biggest since computer software was added to the accounts in 1999.
                                                                                  “We are carrying these major changes all the way back in time – which for us means to 1929 – so we are essentially rewriting economic history,” said Mr Moulton.
                                                                                  The changes will affect everything from the measured GDP of different US states to the stability of the inflation measure targeted by the US Federal Reserve. They will force economists to revisit policy debates about everything from corporate profits to the causes of economic growth. ...

                                                                                  The changes are in addition to a comprehensive revision of the national accounts that takes place every five years... Steve Landefeld, the BEA director, said it was hard to predict the overall outcome given the mixture of new methodology and data updates. ... But while the level of GDP may change,... “I wouldn’t be looking for large changes in trends or cycles,” said Mr Landefeld. ...

                                                                                  When working with macroeconomic data, we don't generally assume that there are large measurement errors in the data when assessing the significance of the results. Maybe we should.

                                                                                    Posted by on Sunday, April 21, 2013 at 12:43 PM in Econometrics, Economics | Permalink  Comments (14)


                                                                                    Danes Aren't Working???

                                                                                    Josh Barro tweets:

                                                                                    As @DeanBaker13 points out, that NYT story on Danish welfare didn't really make the case that Danes aren't working.

                                                                                    Here's Dean:

                                                                                    NYT Uses News Story to Express Dislike of Danish Welfare State, by Dean Baker: The NYT ... features a diatribe against the Danish welfare state that is headlined, "Danes Rethink a Welfare State Ample to a Fault." There's not much ambiguity in that one. The piece then proceeds to present a state of statistics that are grossly misleading and excluding other data points that are highly relevant. ...
                                                                                    The piece ... goes on to describe the extent of the Danish welfare state with its 56 percent top marginal income tax rate, telling readers:
                                                                                    "But few experts here believe that Denmark can long afford the current perks. So Denmark is retooling itself, tinkering with corporate tax rates, considering new public sector investments and, for the long term, trying to wean more people — the young and the old — off government benefits."
                                                                                    Hmmm, it would be interesting to know what data the experts are looking at. According to the IMF, Denmark had a ratio of net debt to GDP at the end of 2012 of 7.6 percent. This compared to 87.8 percent in the United States. Its deficit in 2012 was 4.3 percent of GDP, but almost all of this was do the downturn. The IMF estimated its structural deficit (the deficit the country would face if the economy was at full employment) at just 1.1 percent of GDP. Furthermore, the country had a huge current account surplus of 5.3 percent of GDP in 2012... This means that Denmark is buying up foreign assets at a rapid rate. ...
                                                                                    If there is something unsustainable in this picture, it is not the sort of data that economists usually look at. Is marijuana legal in Denmark?
                                                                                    Then we find the real problem is that no one in Denmark is working:
                                                                                    "In 2012, a little over 2.6 million people between the ages of 15 and 64 were working in Denmark, 47 percent of the total population and 73 percent of the 15- to 64-year-olds.
                                                                                    "While only about 65 percent of working age adults are employed in the United States, comparisons are misleading, since many Danes work short hours and all enjoy perks like long vacations and lengthy paid maternity leaves, not to speak of a de facto minimum wage approaching $20 an hour. Danes would rank much lower in terms of hours worked per year."
                                                                                    So in spite of the generous Danish welfare state a higher percentage of its working age population works than in the United States. (Actually Denmark ranks near the top of the world in employment to population ratios.) Yet, somehow this doesn't really count because people in Denmark get vacations, work shorter hours, and have a higher effective minimum wage.
                                                                                    This ranks pretty high in the non sequitur category, apparently when you want to bash the welfare state, the rules of logic apparently do not apply. Danes, like most Europeans, have opted to take much of the gains in productivity growth over the last three decades in the form of shorter work years rather than higher income. (One interesting result of this practice is that we have some hope to save the planet from global warming -- greenhouse gas emissions are highly correlated with income.) Of course Danes still work about 8 percent more hours on average than hard-working Germans, according to the OECD. If there is a problem in this picture, the NYT might want to devote a few paragraphs to telling readers what it is.
                                                                                    As far as the $20 an hour effective minimum wage, isn't the problem of a high minimum wage supposed to be that it creates unemployment. But the NYT just told us that Denmark has higher employment... (My brain hurts.)
                                                                                    Okay, we get it. The NYT doesn't like Denmark's welfare state. It doesn't really have any data to make the case that Denmark's welfare state is falling apart and leading to all sorts of bad outcomes, but they can wave their arms really fast and hey, they are the New York Times.

                                                                                      Posted by on Sunday, April 21, 2013 at 10:57 AM in Economics, Social Insurance | Permalink  Comments (49)


                                                                                      Links for 04-21-2013

                                                                                        Posted by on Sunday, April 21, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (63)


                                                                                        Saturday, April 20, 2013

                                                                                        'The Economy Will Not Manage Itself, At Least Not In A Good Way'

                                                                                        Brad DeLong on the role of government in a market economy:

                                                                                        Economic Policy: Saturday Twentieth Century Economic History Weblogging: Note well: the economy will not manage itself, at least not in a good way.

                                                                                        As John Maynard Keynes shrilly stated back in 1926:

                                                                                        Let us clear… the ground…. It is not true that individuals possess a prescriptive 'natural liberty' in their economic activities. There is no 'compact' conferring perpetual rights on those who Have or on those who Acquire. The world is not so governed from above that private and social interest always coincide. It is not so managed here below that in practice they coincide. It is not a correct deduction from the principles of economics that enlightened self-interest always operates in the public interest. Nor is it true that self-interest generally is enlightened… individuals… promot[ing] their own ends are too ignorant or too weak to attain even these. Experience does not show that… social unit[s] are always less clear-sighted than [individuals] act[ing] separately. We [must] therefore settle… on its merits… "determin[ing] what the State ought to take upon itself to direct by the public wisdom, and what it ought to leave, with as little interference as possible, to individual exertion".

                                                                                        The management of economies by governments in the twentieth century was at best inept. And, as we have seen since 2007, little if anything has been durably learned about how to regulate the un-self-regulating market in order to maintain prosperity, or ensure opportunity, or produce substantial equality.

                                                                                        Before the start of the nineteenth century, there were markets but there was not really a market economy—and the peculiar dysfunctions that we have seen the market economy generate through its macroeconomic functioning were, if not absent, at least rare and in the background of attention. Wars, famines, government defaults were threats to life and livelihood. The idea that Alice might be poor and hungry because Bob would not buy stuff from her because Bob was unemployed because Carl wanted to deleverage because Dana was no longer a good credit risk because Alice had stopped paying rent to Dana--that and similar macroeconomic processes are a post-1800 phenomenon.

                                                                                        The problems of economic policy in the modern age are, speaking very broadly, threefold: first, the problem of attempts to replace the market with central planning--which is, for reasons well-outlined by the brilliant Friedrich von Hayek, a subclass of the problem of twentieth-century totalitarian tyranny--second, the problem of managing what Karl Polanyi called "fictitious commodities"; and, third, the problem of managing aggregate demand. ...[much more]...

                                                                                          Posted by on Saturday, April 20, 2013 at 11:48 AM in Economics, Fiscal Policy, Monetary Policy, Policy | Permalink  Comments (47)


                                                                                          Fed Watch: Three Parts to Macro Policy

                                                                                          Tim Duy:

                                                                                          Three Parts to Macro Policy, by Tim Duy: The G20 has accepted Japan's policy approach. From the Financial Times:

                                                                                          The yen fell sharply against other major currencies on Friday after the Japanese finance minister said Japan’s monetary policies had not met with resistance at the G20 group of nations in Washington.

                                                                                          This interpretation of the meeting helped sink the Yen to almost 100. More specifically, from the statement:

                                                                                          In particular, Japan’s recent policy actions are intended to stop deflation and support domestic demand.

                                                                                          Still, there remains a pro-austerity contingent:

                                                                                          Japan should define a credible medium-term fiscal plan.

                                                                                          I think the only credible medium-term plan for fiscal consolidation first involves higher near-term growth. More broadly than just Japan, but including Japan:

                                                                                          We will continue to implement ambitious structural reforms to increase our growth potential and create jobs.

                                                                                          How do these pieces fit together? I tend to see room for all three policy tools - monetary, fiscal, and structural - in fighting weak growth and outright recessions, although the weighting will vary according to circumstances. For instance, I don't deny the need for structural changes in the European periphery or Japan. Those changes, however, need to be cushioned with expansionary monetary and fiscal policy to yield a positive growth trajectory.

                                                                                          With this in mind, consider this recent post by Ed Harrison. He expands the Reinhart/Rogoff debate to current events in Japan:

                                                                                          This is the takeaway in Japan: stimulus without reform leads to a policy cul-de-sac. Monetary and fiscal stimulus is not a cure-all for economies or Japan would be the model and it most assuredly is not the model. If you want to use stimulus, then you need to have reform policies as well. It’s a three-pronged approach. The supply side matters. And that is the promise of Abenomics, isn’t it: fiscal and monetary stimulus as bridges to sustainable growth due to economic reform. Supposedly, this is what Abenomics is all about. And the Wall Street Journal told us yesterday that this reform, the third leg of this stool is now being put into place. Be sceptical, of course. Let’s just see what happens.

                                                                                          Mixing the RR debate and the Japanese and European experiences leads him to these conclusions:

                                                                                          Take a cue from Japan. The lesson is not to stimulate and deficit spend like mad and hope this succeeds in reflating the economy. That’s just a risk shift onto the public balance sheet. And the Japanese experience shows that people are uncomfortable with these kinds of deficits and will always work to reduce them irrespective of the consequences. You need supply side fixes too.

                                                                                          Take a cue from the euro zone. The lesson is also certainly not to undergo painful – and front-loaded – austerity like the euro zone. The Europeans have tied their hands with the euro. There is no currency sovereignty there and the ECB is legally forbidden to be politically aligned with any national government. The threat of insolvency is real. But Britain doesn’t have to go down this path. They have a lot more policy space. The bond vigilantes are a myth.

                                                                                          Read the post for more good insights.

                                                                                            Posted by on Saturday, April 20, 2013 at 12:33 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (29)


                                                                                            Links for 04-20-2013

                                                                                              Posted by on Saturday, April 20, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (58)


                                                                                              Friday, April 19, 2013

                                                                                              Fed Watch: Accepting Failure

                                                                                              Tim Duy:

                                                                                              Accepting Failure, by Tim Duy: It is starting to look like European policymakers have given up trying. Bundesbank President Jens Weidmann, via the Wall Street Journal:

                                                                                              "Overcoming the crisis and the crisis effects will remain a challenge over the next decade," he said in an interview from his conference room at Bundesbank's headquarters overlooking Frankfurt's financial district, contrasting recent comments from European Commission President José Manuel Barroso that the worst of Europe's crisis is over.

                                                                                              Also from the Wall Street Journal:

                                                                                              An aging society and the time needed to work through its debt crisis will keep growth in Europe subdued for years to come, German Finance Minister Wolfgang Schaeuble said Friday.

                                                                                              “No one should expect that Europe will deliver high growth rates for years,” he said.

                                                                                              Apparently the new strategy is to keep expectations low. One has to imagine that given the current path of activity and the lack of fiscal support from European nations, the European Central Bank will find itself not only cutting rates but implementing its own version of quantitative easing by year end. The only other option would be to sit back and watch Europe slide from recession to depression And that does not seem like a credible policy path.

                                                                                                Posted by on Friday, April 19, 2013 at 01:52 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (38)


                                                                                                'Getting Back to Full Employment'

                                                                                                Jared Bernstein calls for "direct, public job creation":

                                                                                                Getting Back to Full Employment: Getting back to full employment—not debt, deficits, sequester, debt ceilings—is what we ought to be talking about... I’m happy to say, in fact, that in my travels outside this benighted town (DC), it’s the question I get asked most often (“why isn’t Washington doing anything about jobs!!??”). ....

                                                                                                So how do we get there from here?
                                                                                                Of course, the first thing is to get the macro policy right, and I go on about that enough about that ... already. Dean Baker emphasizes dollar policy here as well: the trade deficit is a drag on growth and factory jobs, so that too is a target in the quest for full employment.
                                                                                                But for this post, I’d like to focus on something else, motivated by the chart below, one I’ve posted before. It simply plots private sector job growth against productivity growth. Up until about 15 years ago, you could have nicely employed this picture against your Luddite friends who complain about productivity killing jobs.

                                                                                                empprod
                                                                                                Source: BLS

                                                                                                Until then, the two lines largely grew together. Yes, we were more productive, but growth resulted in higher demand that fed back into the economy’s job-creation function in ways that boosted job growth. The income and wage benefits of growing productivity certainly haven’t reached very far down the income scale since the late 1970s—that’s the inequality story. But even as inequality grew in the 1980s and 1990s, job creation largely kept pace with output per hour.

                                                                                                That hasn’t been the case since, and it is a matter of grave concern. The reasons go beyond my scope here, but a prime suspect observed at the crime scene is an acceleration of labor-saving capital investment, like robotics (see Brynjolfsson and McAfee for incisive work on this question).

                                                                                                Here, I want to introduce a different solution, one that isn’t better fiscal and monetary policy to maximize growth. It’s direct, public job creation. That is, if the private sector can’t be counted upon to generate the needed job opportunities to absorb our labor supply, then there is a role for government to correct this important market shortcoming. ...

                                                                                                What, specifically, am I talking about? Not so much a bunch of guys setting up camp in the woods and building stuff circa the 1930s, though that worked well at the time...

                                                                                                But those days have passed, I think, and contemporary direct job creation programs are not limited to public sector jobs. A more common model today is subsidized work, often in the private or NGO sectors. The TANF subsidized jobs program during the Recovery Act is a good recent example of an effective, though small, program that placed over 250,000 low-income workers in 2009-10. As Pavetti et al report, the program worked with private and government employers to create “new temporary jobs that would otherwise have not existed.” ...

                                                                                                There’s obviously a ton to be done, both in terms of infrastructure (upgrading and repairing public goods) and services, and while displacement must be prohibited and monitored (and punished, when it’s exposed), research suggests that a lot of what happens here is you pull forward a hire that might have happened later or nudge an employer at the margin of a hiring decision to go ahead and pull the trigger.

                                                                                                I’ll have a lot more to say about this in coming weeks and yes, I know it’s way outside the current political box. But this relatively new gap between employment and productivity will only exacerbate the old gap between income and productivity unless we begin to think and act outside that box on ways to achieve full employment. Direct job creation is part of the answer.

                                                                                                  Posted by on Friday, April 19, 2013 at 01:34 PM in Economics, Fiscal Policy, Unemployment | Permalink  Comments (47)


                                                                                                  Paul Krugman: The Excel Depression

                                                                                                  Will the "Reinhart-Rogoff fiasco" change "the obviously intense desire of policy makers, politicians and pundits across the Western world to turn their backs on the unemployed and instead use the economic crisis as an excuse to slash social programs"?:

                                                                                                  The Excel Depression, by Paul Krugman, Commentary, NY Times: ... At the beginning of 2010, two Harvard economists, Carmen Reinhart and Kenneth Rogoff, circulated a paper ... that purported to identify a critical “threshold,” a tipping point, for government indebtedness. Once debt exceeds 90 percent of gross domestic product, they claimed, economic growth drops off sharply.
                                                                                                  Ms. Reinhart and Mr. Rogoff had credibility thanks to a widely admired earlier book on the history of financial crises, and their timing was impeccable. The paper came out just after Greece went into crisis and played right into the desire of many officials to “pivot” from stimulus to austerity. As a result, the paper ... was, and is, surely the most influential economic analysis of recent years.
                                                                                                  In fact,... Reinhart-Rogoff faced substantial criticism from the start... As soon as the paper was released, many economists pointed out that a negative correlation between debt and economic performance need not mean that high debt causes low growth. It could just as easily be the other way around, with poor economic performance leading to high debt. ...
                                                                                                  Over time, another problem emerged: Other researchers ... couldn’t replicate the Reinhart-Rogoff results. ... Finally,... the mystery of the irreproducible results was solved. First, they omitted some data; second, they used unusual and highly questionable statistical procedures; and finally, yes, they made an Excel coding error. Correct these oddities and errors, and you get what other researchers have found: some correlation between high debt and slow growth, with no indication of which is causing which, but no sign at all of that 90 percent “threshold.” ...
                                                                                                  The ... Reinhart-Rogoff fiasco needs to be seen in the broader context of austerity mania: the obviously intense desire of policy makers, politicians and pundits across the Western world to turn their backs on the unemployed and instead use the economic crisis as an excuse to slash social programs. ... For three years,... austerity advocates insisted ... that terrible things happen once debt exceeds 90 percent of G.D.P. But “economic research” showed no such thing; a couple of economists made that assertion, while many others disagreed. Policy makers abandoned the unemployed and turned to austerity because they wanted to, not because they had to.
                                                                                                  So will toppling Reinhart-Rogoff from its pedestal change anything? I’d like to think so. But I predict that the usual suspects will just find another dubious piece of economic analysis to canonize, and the depression will go on and on.

                                                                                                    Posted by on Friday, April 19, 2013 at 12:24 AM in Budget Deficit, Economics, Politics, Unemployment | Permalink  Comments (84)


                                                                                                    Links for 04-19-2013

                                                                                                      Posted by on Friday, April 19, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (25)