Friday, May 31, 2013
Remember all those calls from both conservatives and liberals for (sufficiently) equal opportunity? How's that working out?:
Public colleges are often no bargain for the poor, by Renee Schoof, McClatchy: Many public colleges and universities expect their poorest students to pay a third, half or even more of their families’ annual incomes each year for college, a new study of college costs has found.
With most American students enrolling in their states’ public institutions in hopes of gaining affordable degrees, the new data shows that the net price – the full cost of attending college minus scholarships – can be surprisingly high for families that make $30,000 a year or less.
The numbers track with larger national trends: the growing student-loan debt and decline in college completion among low-income students.
Because of the high net price, “these students are left with little choice but to take on heavy debt loads or engage in activities that lessen their likelihood of earning their degrees, such as working full time while enrolled or dropping out until they can afford to return,” Stephen Burd wrote in a recent report for the New America Foundation...
There's a graphic in the article that shows the "Average net annual cost of public 4-year schools for in-state students in families earning $30,000" (scroll over a state to see the cost). For Oregon, it's $10,701 according to their calculations.
The other day I posted a link to an article at Spiegel titled "Austerity About-Face: German Government to Gamble on Stimulus." Here's Gavyn Davies on whether this is really "The beginning of the end for Eurozone austerity?":
Fiscal austerity, a concept which German Chancellor Merkel says meant nothing to her before the crisis, may have passed its heyday in the eurozone. ...
this may not be the end of eurozone austerity, or even the beginning of the end, but it is the end of the beginning.
The "ugly, destructive war against food stamps":
From the Mouths of Babes, by Paul Krugman, Commentary, NY Times: ...I usually read reports about political goings-on with a sort of weary cynicism. Every once in a while, however, politicians do something so wrong, substantively and morally, that cynicism just won’t cut it; it’s time to get really angry instead. So it is with the ugly, destructive war against food stamps. ...
Food stamps have played an especially useful — indeed, almost heroic — role in recent years. In fact, they have done triple duty. First, as millions of workers lost their jobs..., food stamps ... did significantly mitigate their misery. Food stamps were especially helpful to children...
But there’s more. ... We desperately needed (and still need) public policies to promote higher spending on a temporary basis — and the expansion of food stamps ... is just such a policy. Indeed, estimates from ... Moody’s Analytics suggest that each dollar spent on food stamps in a depressed economy raises G.D.P. by about $1.70...
Wait, we’re not done yet. Food stamps greatly reduce food insecurity among low-income children, which, in turn, greatly enhances their chances of ... growing up to be successful, productive adults. So food stamps are ... an investment in the nation’s future...
So what do Republicans want to do with this paragon of programs? First, shrink it; then, effectively kill it.
The shrinking part comes from the latest farm bill released by the House Agriculture Committee... That bill would push about two million people off the program. ...
These cuts are, however, just the beginning... Remember,... Paul Ryan’s budget is still the official G.O.P. position..., and that budget calls for converting food stamps into a block grant program with sharply reduced spending. If this proposal had been in effect when the Great Recession struck,... it ... would have meant vastly more hardship, including a lot of outright hunger, for millions of Americans, and for children in particular.
Look, I understand the supposed rationale: We’re becoming a nation of takers, and doing stuff like feeding poor children and giving them adequate health care are just creating a culture of dependency — and that culture of dependency, not runaway bankers, somehow caused our economic crisis.
But I wonder whether even Republicans really believe that story — or at least are confident enough in their diagnosis to justify policies that more or less literally take food from the mouths of hungry children. As I said, there are times when cynicism just doesn’t cut it; this is a time to get really, really angry.
- Rethinking macroeconomic policy: Getting granular - Vox EU
- What does it mean to have "predicted the crisis"? - Noahpinion
- Why is the moon’s gravity so uneven? - MIT News
- Inequality on the Horizon of Need - Brad DeLong
- Government Potholes on Road to Recovery - WSJ
- Who Should Actually Have Say on Pay? - Justin Fox
- Economic policy is largely being driven by obstructionism - EPI
- At Least One Reason Why People Shouldn't Hate QE - macroblog
- The Flight of Sergei Guriev - EconoSpeak
- Paul Volcker Interview - Neil Irwin
- On Wang-Kimball - Evan Soltas
- Spurring growth in an era of constraints - Econbrowser
- Contra the Renegade Noah Smith - Robert's Stochastic Thoughts
- Weekly Initial Unemployment Claims increase - Calculated Risk
Thursday, May 30, 2013
I haven't read this paper, so I can't say a lot about how much confidence to place in the results, but it did grab my attention (and I believe it's in one of the top journals for sociology):
Labor union decline, not computerization, main cause of rising corporate profits, EurekAlert: A new study suggests that the decline of labor unions, partly as an outcome of computerization, is the main reason why U.S. corporate profits have surged as a share of national income while workers' wages and other compensation have declined.
The study, "The Capitalist Machine: Computerization, Workers' Power, and the Decline in Labor's Share within U.S. Industries," which appears in the June issue of the American Sociological Review, explores an important dimension of economic inequality...
Tali Kristal, an assistant professor of sociology at the University of Haifa in Israel ... found that from 1979 through 2007, labor's share of national income in the U.S. private sector decreased by six percentage points. This means that if labor's share had stayed at its 1979 level (about 64 percent of national income), the 120 million American workers employed in the private sector in 2007 would have received as a group an additional $600 billion, or an average of more than $5,000 per worker, Kristal said.
"However, this huge amount of money did not go to the workers," Kristal said. "Instead, it went to corporate profits, mostly benefiting very wealthy individuals."
The question is: why did this happen?
"Some economists contend that computerization is the primary cause and that it has increased the productivity of machines and skilled workers, prompting firms to reduce their overall demand for labor, which resulted in the rise of corporate profits at the expense of workers' compensation," Kristal said. "But, if that were the case,... then labor's share should have declined in all economic sectors, reflecting the fact that computerization has occurred across the board in the past 30 to 40 years."
This is not the case, however... "It was highly unionized industries — construction, manufacturing, and transportation — that saw a large decline in labor's share of income," Kristal said. "By contrast, in the lightly unionized industries of trade, finance, and services, workers' share stayed relatively constant or even increased. So, what we have is a large decrease in labor's share of income and a significant increase in capitalists' share in industries where unionization declined, and hardly any change in industries where unions never had much of a presence. This suggests that waning unionization, which led to the erosion of rank-and file workers' bargaining power, was the main force behind the decline in labor's share of national income."
In addition to the erosion of labor unions, Kristal found that rising unemployment as well as increasing imports from less-developed countries contributed to the decline in labor's share.
"All of these factors placed U.S. workers in a disadvantageous bargaining position versus their employers," said Kristal...
Spurred by renewed interest on the topic, especially as evidenced by the work by Kimball and Wang, I decided to finally post this short working paper on my website that builds on my guest blog post from a month and half ago:
A Note on Debt, Growth and Causality: Abstract: This note documents the timing in the relationship between the debt-to-GDP ratio and real GDP growth in advanced economies during the post World War II period using the Reinhart and Rogoff dataset. I first show that the debt ratio is more clearly associated with the 5-year past average growth rate, rather than the 5-year forward average growth rate–indicating a problem of reverse causality. Indeed, there is little evidence of a lower growth rate above the 90 percent threshold when using the 5-year forward average growth rate. I use a number of simple tools to account for some of the reverse causality in the bivariate regression–such as using forward growth rate, instrumenting the current debt ratio with its lag, and controlling for lagged GDP growth rates. These simple methods of accounting for reverse causality diminish the size of the association by between 50 and 70 percent, with the linear regression estimate indistinguishable from zero. Finally non- and semi-parametric plots provide visual confirmation that the relationship between debt-to-GDP ratio and growth is essentially flat for debt ratios exceeding 30 percent when we (1) use forward growth rates, (2) control for past GDP growth, or both.
Here's the Kimball and Wang work he mentions: After Crunching Reinhart and Rogoff’s Data, We Found No Evidence That High Debt Slows Growth.
One more from Tim Duy:
Steady As She Goes, by Tim Duy: The BEA released revisions to Q1 GDP numbers today, taking growth down a hair from the original 2.5% to 2.4%. Bloomberg is claiming that the downward revision to GDP and a rise in initial unemployment claims account for today's gain in equities. The idea is that the weaker data will dissuade the Fed from slowing down the pace of asset purchases this year.
It is of course dangerous to assign a cause to every fluctuation in asset prices. In this case, I am hard pressed to see that today's data has any meaningful impact on policy. If anything, a focus on the data over a longer period rather than the month-to-month or quarter-to-quarter movements should convince you that little has changed since 2010. Gross domestic product and income in levels:
Gross domestic product and income year-over-year:
Abstracting from inventory changes, look at the remarkable consistency of real final sales growth:
And as far as initial claims are concerned, you must have pretty sharp eyesight to conclude that something fundamentally changed last week:
Also note the the Fed may discount soft GDP numbers in any event. Recall the words of New York Federal Reserve President William Dudley:
“The important thing to recognize about the U.S. economy is that things are actually improving underneath the surface,” Dudley said in the interview. “We don’t really see that so much in the activity data yet because of the large amount of fiscal drag.”
Policymakers are trying to look past the fiscal drag to see if it is bleeding through to the broader economy. If not, they will conclude that growth is set to jump next year as the fiscal impact wanes. And they want to be ahead of the jump with respect to QE. Hence why the next few months of data are so important.
Bottom Line: Today's data is not likely to have an impact on monetary policy.
Last week, we advised investors to add to their 7s/30s and 10s/30s yield curve steepening positions with the view that Chairman Bernanke would calm expectations for tapering by September this year – helping keep rates and volatility low. These curves have since flattened back to the levels at which we suggested investors enter steepeners. Given the uncertainty Bernanke injected into the market, we suggest investors pare down positions to more sustainable levels. At the same time, we keep to our core steepening view. [emphasis added]
I find it curious the analyst believes that Federal Reserve Chairman Ben Bernanke increased uncertainty. I think it was just the opposite. Prior to Bernanke's remarks, opinion on policy was scattered among some looking for the Fed to scale back asset purchases as early as June and as late as 2014. Bernake narrowed that range to September as a likely date, and cleared the way for New York Federal Reserve President WIlliam Dudley and Boston Federal Reserve President Eric Rosengren to point us at September as well. Overall, it looks like more, not less, certainty.
Perhaps market participants are unhappy with the path Bernanke laid out, but that path is more obvious than it was a week ago.
- Do falling tax rates explain the rising incomes of the top 1%? - Miles Corak
- QE and Stock Markets: Boom or Crash? - Antonio Fatas
- Gains from trade: Firms and productivity - Vox EU
- This Time is Not So Different: The Euro Crisis and the 1840s - Carola Binder
- The Spinal Tap Approach to Government Loan Accounting - Jared Bernstein
- The Fed's tricky messaging: Tapering is not tightening - Ylan Q. Mui
- NPR: How Much Should We Trust Economics? - Supply-Side Liberal
- Austerity will drag hard on the economy in 2013 and 2014 - EPI
- The Fed's been keeping the economy afloat. That's the problem. - Neil Irwin
- High Debt/GDP Primarily a Result of Slower Growth - Brad DeLong
- Some International Minimum Wage Comparisons - Tim Taylor
- A Way to Tax Corporations That They Cannot Escape - Dean Baker
- Kids, Poverty, Safety Net, Recession…Over at TAP - Jared Bernstein
- Why Can’t America Be Sweden? - NYT
- Piggy Banks - Liberty Street Economics
- Stiglitz on globalization - ataxingmatter
- The Irish Recovery - Dean Baker
- The Neverending Irish Success Story - Paul Krugman
- Data, Theory and Central Bank Models - mainly macro
- The Case for a Profit Motive in Conserving the Environment - NYT
- Natural Resources and Political Institutions: Democracy - Why Nations Fail
- Volcker Plans to Restore Faith in Government - NYT
- Rate Stories - Paul Krugman
Wednesday, May 29, 2013
This is a brief follow-up to this post from Noah Smith (see this post for the abstract to the Marco Del Negro, Marc P. Giannoni, and Frank Schorfheide paper he discusses):
So far, we don't seem to have gotten a heck of a lot of a return from the massive amount of intellectual capital that we have invested in making, exploring, and applying [DSGE] models. In principle, though, there's no reason why they can't be useful.
One of the areas I cited was forecasting. In addition to the studies I cited by Refet Gurkaynak, many people have criticized macro models for missing the big recession of 2008Q4-2009. For example, in this blog post, Volker Wieland and Maik Wolters demonstrate how DSGE models failed to forecast the big recession, even after the financial crisis itself had happened...
This would seem to be a problem.
But it's worth it to note that, since the 2008 crisis, the macro profession does not seem to have dropped DSGE like a dirty dishrag. ... Why are they not abandoning DSGE? Many "sociological" explanations are possible, of course - herd behavior, sunk cost fallacy, hysteresis and heterogeneous human capital (i.e. DSGE may be all they know how to do), and so on. But there's also another possibility, which is that maybe DSGE models, augmented by financial frictions, really do have promise as a technology.
This is the position taken by Marco Del Negro, Marc P. Giannoni, and Frank Schorfheide of the New York Fed. In a 2013 working paper, they demonstrate that a certain DSGE model was able to forecast the big post-crisis recession.
The model they use is a combination of two existing models: 1) the famous and popular Smets-Wouters (2007) New Keynesian model that I discussed in my last post, and 2) the "financial accelerator" model of Bernanke, Gertler, and Gilchrist (1999). They find that this hybrid financial New Keynesian model is able to predict the recession pretty well as of 2008Q3! Check out these graphs (red lines are 2008Q3 forecasts, dotted black lines are real events):
I don't know about you, but to me that looks pretty darn good!
I don't want to downplay or pooh-pooh this result. I want to see this checked carefully, of course, with some tables that quantify the model's forecasting performance, including its long-term forecasting performance. I will need more convincing, as will the macroeconomics profession and the world at large. And forecasting is, of course, not the only purpose of macro models. But this does look really good, and I think it supports my statement that "in principle, there is no reason why [DSGEs] can't be useful." ...
However, I do have an observation to make. The Bernanke et al. (1999) financial-accelerator model has been around for quite a while. It was certainly around well before the 2008 crisis. And we had certainly had financial crises before, as had many other countries. Why was the Bernanke model not widely used to warn of the economic dangers of a financial crisis? Why was it not universally used for forecasting? Why are we only looking carefully at financial frictions after they blew a giant gaping hole in the world economy?
It seems to me that it must have to do with the scientific culture of macroeconomics. If macro as a whole had demanded good quantitative results from its models, then people would not have been satisfied with the pre-crisis finance-less New Keynesian models, or with the RBC models before them. They would have said "This approach might work, but it's not working yet, let's keep changing things to see what does work." Of course, some people said this, but apparently not enough.
Instead, my guess is that many people in the macro field were probably content to use DSGE models for storytelling purposes, and had little hope that the models could ever really forecast the actual economy. With low expectations, people didn't push to improve the existing models as hard as they might have. But that is just my guess; I wasn't really around.
So to people who want to throw DSGE in the dustbin of history, I say: You might want to rethink that. But to people who view the del Negro paper as a vindication of modern macro theory, I say: Why didn't we do this back in 2007? And are we condemned to "always fight the last war"?
My take on why these models weren't used is a bit different.
My argument all along has been that we had the tools and models to explain what happened, but we didn't understand that this particular combination of models -- standard DSGE augmented by financial frictions -- was the important model to use. As I'll note below, part of the reason was empirical -- the evidenced did matter (though it was not interpreted correctly) -- but the bigger problem was that our arrogance caused us to overlook the important questions.
There are many, many "modules" we can plug into a model to make it do various things. Need to propagate a shock, i.e. make it persist over time? Toss in an adjustment cost of some sort (there are other ways to do this as well). Do you need changes in monetary policy to affect real output? Insert a price, wage, or information friction. And so on.
Unfortunately, adding every possible complication to make one grand model that explains everything is way too hard and complex. That's not possible. Instead, depending upon the questions we ask, we put these pieces together in particular ways to isolate the important relationships, and ignore the more trivial ones. This is the art of model building, to isolate what is important and provide insight into the question of interest.
We could have put the model described above together before the crisis, all of the pieces were there, and some people did things along these lines. But this was not the model most people used. Why? Because we didn't think the question was important. We didn't think that financial frictions were an important feature of modern business cycles because technology and deregulation had mostly solved this problem. If the banking system couldn't collapse, why build and emphasize models that say it will? (The empirical evidence for the financial frictions channel was a bit wobbly, and that was also part of the reason these models were not emphasized. But that evidence was based upon normal times, not deep recessions, and it didn't tell us as much as we thought about the usefulness of models that incorporate financial frictions.)
Ex-post, it's easy to look back and say aha -- this was the model that would have worked. Ex-ante, the problem is much harder. Will the next big recession be driven by a financial collapse? If so, then a model like this might be useful. But what if the shock comes from some other source? Is that shock in the model? When the time comes, will we be asking the right questions, and hence building models that can help to answer them, or will we be focused on the wrong thing -- fighting the last war? We have the tools and techniques to build all sorts of models, but they won't do us much good if we aren't asking the right questions.
How do we do that? We must have a strong sense of history, I think, at a minimum be able to look back and understand how various economic downturns happened and be sure those "modules" are in the baseline model. And we also need to have the humility to understand that we probably haven't progressed so much that it (e.g. a financial collapse) can't happen again. History alone is not enough, of course, new things can always happen -- things where history provides little guidance -- but we should at least incorporate things we know can be problematic.
It wasn't our tools and techniques that failed us prior to the Great Recession. It was our arrogance, our belief that we had solved the problem of financial meltdowns through financial innovation, deregulation, and the like that closed our eyes to the important questions we should have been asking. We are asking them now, but is that enough? What else should we be asking?
However, I would also say that it may be undesirable to abruptly stop purchases, so it may make sense to consider a modest reduction in the pace of asset purchases if we see a few months more of gradual improvement in labor markets and improvement in the overall growth rate in the economy – consistent, by the way, with my forecast, which is somewhat more optimistic than that of many private forecasters.
A "few more months" I interpret as June, July, and August, which puts the beginning of tapering at the September FOMC meeting. I think that Fed speakers are sending pretty clear signals to prepare for a September policy change.
Some big names on Wall Street don't agree. Vincent Reinhart at Morgan Stanley believes the data will push the Fed back to December. The view at Goldman Sachs is reportedly similar. To be sure, the data might cut in that direction, but I think that the bar to tapering might be lower than believed by those looking for a shift in December. We may believe the Federal Reserve's dual mandate argues for a longer period of QE at its current pace, but I am thinking that for the Federal Reserve, the dual mandate has more to do with the lift-off date from ZIRP than the end of QE. They have tended to argue for more or less QE on the basis of "stronger and sustainable" improvement in labor markets, and, given the obvious shift in tone among Fed speakers, I think we have reached that benchmark. At this point, they are just looking for a little more confirmation, in their minds erring on the side of being "too easy."
A lot of data will be coming in the door over the next week and a half, culminating in the all-important employment report on Friday, June 5. I think even a moderately positive run of data will further cement a September shift. And I think the Federal Reserve would place less weight on a weak employment report than a strong employment report. The recent pattern of general upward revisions argues for a asymmetrical response. Moreover, I sense they are wary of being trapped by one weak number - I don't think they would have expanded QE last September if they knew that job growth for August was 165k rather than the initially reported 96k. They don't want to make that mistake again.
Bottom Line: I think the Federal Reserve is leaning toward a September policy shift. While it is as always data dependent, I think the data will need to be pretty weak to push the Fed to December.
I just realesed 150+ comments trapped in spam (many were duplicates, I tried to only post the original comment when that happened).
Apologies for getting so far behind, and for the continuing problems with the spam filter.
Ezra Klein on the equality of opportunity:
No one really believes in ‘equality of opportunity’, by Ezra Klein: ...Everyone in American life professes to believe in equality of opportunity. But nobody really believes in it. ... You can’t have real equality of opportunity without equality of outcome. A rich parent can purchase test prep a poor parent can’t. A rich parent can usher their children into social networks a poor parent can’t. A rich parent can make donations to Harvard that a poor parent can’t. ...
When people say they believe in “equality of opportunity,” they really mean they believe in “sufficiency of opportunity.” They don’t believe all children should start from the same place. But they believe all children should start from a good enough place. They believe they should have decent nutrition and functioning schools and a safe community and loving parents. They believe they should have a chance.
The question is what they’re willing to do about that belief. Democrats who believe in sufficiency of opportunity tend to want to spend more on health care and education for the poor. ... They believe that the less children or their parents need to worry about staying afloat, the more they’ll be free to work to get ahead.
On the Republican side, Rep. Paul Ryan (Wis.) has taken the lead in arguing that conservatives should focus on opportunity. But his approach largely consists of cuts to the safety net. ... These are not policies required by the finances of government. ... Rather, they’re required by Ryan’s theory of opportunity, which is that a key problem for the poor is the transformation of “our social safety net into a hammock, which lulls able-bodied people into lives of complacency and dependency.” His budget reflects this theory. According to the Center on Budget and Policy Priorities, almost two-thirds of his cuts come from programs that serve the poor.
Helping the poor by cutting the programs they rely on is, to say the least, a risky theory of uplift. It’s easier to see what Ryan’s plan does to impede sufficiency of opportunity than to spread it. ...
I don't see how we can achieve equality of opportunity without some degree of income redistribution. Republicans, of course, generally oppose income redistribution.
I've obscured the point of Ezra Klein's post in the extract above, it's mostly about whether "conservative reformers" who profess to believe in equal opportunity are serious, or simply using the mantra of "equal opportunity" to defend the same old policies that favor key constituencies. There are certainly people in the Republican Party who truly believe that government intervention harms the poor, but for the most part this looks like an excuse to pursue "you're on your own" polices that lower taxes and favor those at the top.
[Note: I have been battling an allergic reaction for the last several days, nothing serious but it is a big annoyance and distraction (the itchiest hives you can imagine from head to toe along with scary tongue swelling, hands a bit swollen, etc., no idea what causes it but Benadryl in large doses provides relief). I'm hoping it will be over soon, in the past it has never lasted this long and I'm "itching" for it to end, but in the meantime it's been hard to focus on blogging (or anything else) -- hence the mostly "echo blogging" the last few days.]
The Real IRS Scandal, ataxingmatter: ... It does not appear to be quite so clear that the IRS actions were either "outrageous" (as so many hopping on the IRS "scandal" bandwagon suggest) or even "inappropriate". ...
Most of the media--which is generally right of center--has foamed at the mouth over the "scandal", puffing it up to bigger and bigger proportions with each day. ... A great deal of that coverage (much of it from the right) involves super emphasis on the word "scandal" and not much emphasis on the underlying facts of the matter.
So kudos to the New York Times for a recent story on the issue that probes the question of politicking much more closely. Confessore & Luo, Groups Targeted by IRS Tested Rules on Politics, New York Times (May 26, 2013). See also Barker & Elliot, 6 things you need to know about dark money groups, Salon.com (May 27, 2013).
Here are the Times writers' descriptions of a few of the groups that applied for C-4 status and "cried foul" about the IRS's selection of them for closer scrutiny for politicking:
- CVFC: "its biggest expenditure [the year it applied for C-4 status] was several thousand dollars in radio ads backing a Republican candidate for Congress"
- Wetumpka Tea Party, Alabama: in the year it applied, it "sponsored training for a get-out-the-vote initiative dedicated to the 'defeat of President Barack Obama' "
- Ohio Liberty Coalition: its head "sent out e-mails to members about Mitt Romney campaign events and organized members to distribute Mr. Romney’s presidential campaign literature"
As noted in the report, "a close examination of these groups and others reveals an array of election activities that tax experts and former I.R.S. officials said would provide a legitimate basis for flagging them for closer review." That is what the IRS is supposed to do, suggesting that much of the scandal mongering that is going on is more about furthering the anti-tax/anti-government rightwing goal of "starving the beast" than it is about ensuring that the law is appropriately enforced. The stakes are high, since the ability of politicking groups to use C-4 status permits high-powered donors and strategists to cloak their campaign activities behind the veneer of social welfare activity.
Which is probably why of the right-wing bloviators are bloviating over this in Congress, calling for jail time for IRS employees, calling for a special prosecutor, insisting that this is a "scandal" along the lines of Watergate that goes to the heart of Obama's presidency. Hogwash, folks, pure and simple. This so-called "scandal" is just another instance of right-wing obstructionism that is willing to sacrifice good government for maintaining or increasing political power.
DSGE models are "surprisingly accurate":
Inflation in the Great Recession and New Keynesian Models, by Marco Del Negro, Marc P. Giannoni, and Frank Schorfheide: It has been argued that existing DSGE models cannot properly account for the evolution of key macroeconomic variables during and following the recent Great Recession, and that models in which inflation depends on economic slack cannot explain the recent muted behavior of inflation, given the sharp drop in output that occurred in 2008-09. In this paper, we use a standard DSGE model available prior to the recent crisis and estimated with data up to the third quarter of 2008 to explain the behavior of key macroeconomic variables since the crisis. We show that as soon as the financial stress jumped in the fourth quarter of 2008, the model successfully predicts a sharp contraction in economic activity along with a modest and more protracted decline in inflation. The model does so even though inflation remains very dependent on the evolution of both economic activity and monetary policy. We conclude that while the model considered does not capture all short-term fluctuations in key macroeconomic variables, it has proven surprisingly accurate during the recent crisis and the subsequent recovery. [pdf]
- There Is a Substantive Analytical Point at Issue - Brad DeLong
- Europe should embrace a financial transaction tax - FT.com
- Regulators Could Vote Next Week On Systemic Non-Bank Firms - WSJ
- Central Banks Act With a New Boldness - NYT
- Taxing the Rich - Paul Krugman
- The Unknowing John Hinderaker - The Bonddad Blog
- The long shadow of macroeconomic shocks - Vox EU
- Why hasn't austerity been more of a drag on the U.S. economy? - Neil Irwin
- Kansas City Fed Wanted to Raise Discount Rate - WSJ
- US Monetary Policy is Less Powerful in Recessions - SSRN
- How Well Does "Core" Inflation Capture Permanent Price Changes? - SSRN
- Surprise! When the rich get richer, taxes go lower - Ezra Klein
- The hollowed middle - Stumbling and Mumbling
- Perspectives on the Current Economy - Charles Evans
- Can Japan Export Its Way to Recovery? - Econbrowser
- Procyclical Policy for Germany - Paul Krugman
- Europe and China Trade Talks End Bitterly - NYT
- How can we spot a boom? - Nick Rowe
Tuesday, May 28, 2013
And that's not a good thing:
China and the Environmental Kuznets Curve: The original Kuznets curve posited, back in 1955, that inequality of incomes would follow an inverted-U pattern as a nation's economy developed, first rising, and then declining. In 1955, this looked reasonable! The "environmental Kuznets curve" suggests that pollution may follow an inverted-U pattern as a nation's economy develops. Pollution first rises as a low income nation industrializes with few limitations on pollution. But then the nation becomes better-off and more able and willing to pay the costs of limiting pollution, and the nation's economy shifts from industry to services, and pollution levels fall. For a useful overview article, Susmita Dasgupta, Benoit Laplante, Hua Wang, and David Wheeler wrote on "Confronting the Environmental Kuznets Curve" in the Winter 2002 issue of the Journal of Economic Perspectives. (Like all articles in JEP, it is freely available online compliments of the American Economic Association. Full disclosure: I've been the Managing Editor of JEP for the last 26 years.)
Of course, the environmental Kuznets curve is a theory that needs to be supported or refuted with evidence... And the experience of China, with its burgeoning economy and extraordinary environmental issues, is at the center of the debate. ...
The conventional environmental Kuznets is that emissions of pollutants rise up until some level between about $5000 and $8000 in per capita income, and then fall after that point. There is some historical evidence to support this claim. ...
According to the World Bank, China's per capita GDP was $5,445 in 2011, so it is just reaching the levels where its pollution should first start to level off, and then to decline. ...
Interestingly, there are signs that for some pollutants, the level of pollution is no longer rising with the growth of China's economy. For example, here's a figure about air pollution. The top line shows the growth of GDP. Emissions of sulfur dioxides and soot have not been rising with GDP, and even emissions of carbon dioxide have been lagging behind the rise in GDP in the last few years.
Here's a similar figure for water pollution. Chemical oxygen demand (COD) measures the level of organic pollutants in water. Both that measure and wastewater are at least not rising at the same pace as GDP.
It remains true that China's amount of pollution relative to its economic output is high by the standards of high income countries. ...
The policy prescription for reducing pollution in China is clear enough: close down older facilities, and make sure their replacements have up-to-date anti-pollution equipment; keep building sewage treatment facilities; put a price on polluting activities to encourage conservation; and so on. Sam Hill's paper has details.
But ultimately, China's path along the environmental Kuznets curve will be determined by politics and public pressure, and public pressure in China does seem to be building for stronger environmental protection. The (wonderfully named) Elizabeth C. Economy at the Council of Foreign Relations recently wrote a brief piece on "China’s Environmental Politics: A Game of Crisis Management," which notes the growing number of environmental public protests in China. In a society under such a high degree of government control, environmental protests can become a place where those discontented with government have a semi-safe space for dissent.
- Debating Helicopter Money - mainly macro
- What can you do with a DSGE model? - Noahpinion
- Fed Wrestles With Market Expectations About Pace of QE - WSJ
- On Dean Baker Vs Paul Krugman - Robert's Stochastic Thoughts
- No Villagers, this is not a center-right country - Hullabaloo
- Austerity About-Face: German Government to Gamble on Stimulus - Spiegel
- Christopher Carroll on Saving and Presidential Communications - Tim Taylor
- Bets do not (necessarily) reveal beliefs - Noahpinion
- Technology and income dynamics: 1800-2000 - Vox EU
- Nonsense in the Reinhart-Rogoff Rescue Effort - Dean Baker
- Optimal Civility - Modeled Behavior
- Let Them Make Their Own Jobs - Economix
- Beware Capitalist Tools - Robert Reich
- Nightmare in Portugal - Paul Krugman
Monday, May 27, 2013
Joe Stiglitz on tax avoidance by companies such as Apple and Google:
Globalisation isn't just about profits. It's about taxes too: ... Apple, like Google, has benefited enormously from what the US and other western governments provide: highly educated workers trained in universities that are supported both directly by government and indirectly (through generous charitable deductions). The basic research on which their products rest was paid for by taxpayer-supported developments – the internet, without which they couldn't exist. Their prosperity depends in part on our legal system – including strong enforcement of intellectual property rights; they asked (and got) government to force countries around the world to adopt our standards, in some cases, at great costs to the lives and development of those in emerging markets and developing countries. Yes, they brought genius and organizational skills, for which they justly receive kudos. But while Newton was at least modest enough to note that he stood on the shoulders of giants, these titans of industry have no compunction about being free riders, taking generously from the benefits afforded by our system, but not willing to contribute commensurately. Without public support, the wellspring from which future innovation and growth will come will dry up – not to say what will happen to our increasingly divided society. ...
To say that Apple or Google simply took advantage of the current system is to let them off the hook too easily: the system didn't just come into being on its own. It was shaped from the start by lobbyists from large multinationals. Companies like General Electric lobbied for, and got, provisions that enabled them to avoid even more taxes. They lobbied for, and got, amnesty provisions that allowed them to bring their money back to the US at a special low rate, on the promise that the money would be invested in the country; and then they figured out how to comply with the letter of the law, while avoiding the spirit and intention. If Apple and Google stand for the opportunities afforded by globalization, their attitudes towards tax avoidance have made them emblematic of what can, and is, going wrong with that system.
Much more here.
What does the new evidence on Obamacare tell us?:
The Obamacare Shock, by Paul Krugman, Commentary, NY Times: Obamacare goes fully into effect at the beginning of next year, and predictions of disaster are being heard far and wide. There will be an administrative “train wreck,” we’re told; consumers will face a terrible shock. Republicans, one hears, are already counting on the law’s troubles to give them a big electoral advantage.
No doubt there will be problems, as there are with any large new government initiative, and ... we have the added complication that many Republican governors and legislators are doing all they can to sabotage reform. Yet important new evidence — especially from California... — suggests that the real Obamacare shock will be one of unexpected success. ...
In ... California..., insurers have submitted the prices at which they are willing to offer coverage on the state’s newly created Obamacare exchange. And the prices ... are surprisingly low..., it looks as if Obamacare’s first year in California is going to be an overwhelmingly positive experience.
What can still go wrong? Well, Obamacare is a complicated program, basically because simpler options, like Medicare for all, weren’t considered politically feasible. So there will probably be ... administrative confusion as the law goes into effect, again especially in states where Republicans have been doing their best to sabotage the process.
Also, some people are too poor to afford coverage even with the subsidies. These Americans were supposed to be covered by a federally financed expansion of Medicaid, but in states where Republicans have blocked Medicaid expansion, such unfortunates will be left out in the cold.
Still, here’s what it seems is about to happen: millions of Americans will suddenly gain health coverage, and millions more will feel much more secure knowing that such coverage is available if they lose their jobs or suffer other misfortunes. Only a relative handful of people will be hurt at all. And as contrasts emerge between the experience of states like California that are making the most of the new policy and that of states like Texas whose politicians are doing their best to undermine it, the sheer meanspiritedness of the Obamacare opponents will become ever more obvious.
So yes, it does look as if there’s an Obamacare shock coming: the shock of learning that a public program designed to help a lot of people can, strange to say, end up helping a lot of people — especially when government officials actually try to make it work.
- Looking forward to the end of QE - Antonio Fatas
- What will happen to markets when QE ends? - Gavyn Davies
- Reinhart And Rogoff Are Not Happy - Paul Krugman
- Portraying the Debt-and-Growth Association - Brad DeLong
- Lifting Asia's economic voice - The Interpreter
- Revenge Editing and Wikipedia - Digitopoly
- The Left-Right Divide in U.S. Politics - Dean Baker
- What Reinhart and Rogoff should do now - Angry Bear
- Let Them Make Their Own Jobs - Economix
- Macroeconomic Hippie-Punching - Paul Krugman
- Sixth night of violence in Sweden - FT.com
Sunday, May 26, 2013
Krugman Misrepresents the Left-Right Divide in U.S. Politics: In his contribution to the debate over whether there is a group of open-minded "reformed" conservatives, Paul Krugman misrepresents the central focus of the left-right divide in national politics. He tells readers:
"Start with the proposition that there is a legitimate left-right divide in U.S. politics, built around a real issue: how extensive should be make our social safety net, and (hence) how much do we need to raise in taxes? This is ultimately a values issue, with no right answer."
This is not an accurate characterization of the left-right divide in U.S. politics since there is actually little difference between Republicans and Democrats or self-described conservatives and liberals in their support of the key components of the social safety net: Social Security, Medicare, Medicaid, and even unemployment insurance. Polls consistently show that the overwhelming majority of people across the political spectrum strongly support keeping these programs at their current level or even expanding them. The main impulse for cutting back these programs comes from elites of both political parties who would like to pay less in taxes....
I think there is a distinction here after all. Republicans who support these programs do so because (often based upon a misunderstanding of how these programs are funded) they believe it is their money. Each month they contribute to Social Security, Medicare, and Unemployment Compensation, the government keeps it safe for them somewhere, and then at some future date they will spend the money they contributed. It's their money. They don't want the programs eliminated, but they do want to stop the "underserving" from spending the money they contributed. Democrats, on the other hand, are much more likely to support these programs as a means of lifting the unfortunate -- i.e. as a social insurance transfer from those who had good luck with where they were born, family wealth, education, health, and so on to those who had bad luck of one type or another. To put this another way, I don't think the elites in the Democratic Party mind paying higher taxes to support these programs even if it means that there are transfers from the fortunate to the not so fortunate (but they are naive with their "we need to save the programs through cuts now to avoid cuts later" arguments). Republicans mind quite a bit.
We can see this distinction more clearly through another point Dean makes:
There are much smaller programs that are designed primarily to help the poor or near poor where there is a clearer partisan divide (e.g. TANF, SSI, WIC). While it may be more accurate to describe the debate over these programs as a values issue (with a strong racial component), they amount to a relatively small portion of government budgets. These programs may be important to the people directly affected, but they are not central to debates over the budget.
It is plausible to argue that these anti-poverty programs have taken an outsize role in national debates, but this is largely because the electorate is poorly informed about their size. In that case the debate is not over values (I would be for cutting back TANF too if I thought it was one-third of the federal budget), but simple an issue of misinformation.
Another way to say this is that as soon as many conservatives think their money might go to someone else, the underserving poor in particular, they object.
I don't mean to imply that there are no Republicans using the ideological issue of smaller, less intrusive government as a cover for policies that serve special interests (businesses, the wealthy). Many do. I just don't think the statement that "there is actually little difference between Republicans and Democrats or self-described conservatives and liberals in their support of the key components of the social safety net: Social Security, Medicare, Medicaid, and even unemployment insurance" is fully accurate. There's an important distinction that underlies the concept of social insurance, the distinction between a society where risks that individuals cannot control are shared broadly or felt individually, and it's important to recognize this difference between the two political parties.
I didn't realize how fast water levels in aquifers are falling:
Water Waste May Leave Us Thirsty, by David Biello, Scientific American: Since 1900, the U.S. has pulled enough water from underground aquifers to fill two Lake Eries. And in just the first decade of the 21st century, we've extracted underground water sufficient to raise global sea level by more than 2 percent. We suck up 25 cubic kilometers of buried water per year.
That's the message from the U.S. Geological Survey's evaluation of how the U.S. is managing its aquifers. Or mismanaging. For example: water levels in the aquifer that underlies the nation's bread basket have dropped in some places by as much as 160 feet.
The rest of the world isn't doing any better. ... Mismanagement of water resources is a hallmark of this new human-dominated era in the Earth's geologic history, known as the Anthropocene. Despite building, on average, one large dam every day for the last 130 years, we use more water than we store. And we're letting that freshwater escape to the seas. Which means we may find ourselves with water, water everywhere, but not much fit to drink.
- The Closing of the Conservative Mind - Paul Krugman
- Five Positive Economic Signs Are on the Horizon - Tyler Cowen
- Showing the IRS some love after witch hunt - Michael Hiltzik
- The new farm bill is an economic disaster - Heidi Moore
- To Clever by a Factor of 9 Title - Robert's Stochastic thoughts
- The Prejudice that Keynesianism Is Obsessed with the SR - EconoSpeak
Saturday, May 25, 2013
Robert Waldmann's comments on the response to Michael Kinsley remind me of this old article from Paul Krugman (I've posted this before, but it seems like a good time to post it again -- it was written in 1998 and it foreshadows/debunks many of the bad arguments used to justify austerity, etc.):
The Hangover Theory: A few weeks ago, a journalist devoted a substantial part of a profile of yours truly to my failure to pay due attention to the "Austrian theory" of the business cycle--a theory that I regard as being about as worthy of serious study as the phlogiston theory of fire. Oh well. But the incident set me thinking--not so much about that particular theory as about the general worldview behind it. Call it the overinvestment theory of recessions, or "liquidationism," or just call it the "hangover theory." It is the idea that slumps are the price we pay for booms, that the suffering the economy experiences during a recession is a necessary punishment for the excesses of the previous expansion.
The hangover theory is perversely seductive--not because it offers an easy way out, but because it doesn't. It turns the wiggles on our charts into a morality play, a tale of hubris and downfall. And it offers adherents the special pleasure of dispensing painful advice with a clear conscience, secure in the belief that they are not heartless but merely practicing tough love.
Powerful as these seductions may be, they must be resisted--for the hangover theory is disastrously wrongheaded. Recessions are not necessary consequences of booms. They can and should be fought, not with austerity but with liberality--with policies that encourage people to spend more, not less. Nor is this merely an academic argument: The hangover theory can do real harm. Liquidationist views played an important role in the spread of the Great Depression--with Austrian theorists such as Friedrich von Hayek and Joseph Schumpeter strenuously arguing, in the very depths of that depression, against any attempt to restore "sham" prosperity by expanding credit and the money supply. And these same views are doing their bit to inhibit recovery in the world's depressed economies at this very moment.
The many variants of the hangover theory all go something like this: In the beginning, an investment boom gets out of hand. Maybe excessive money creation or reckless bank lending drives it, maybe it is simply a matter of irrational exuberance on the part of entrepreneurs. Whatever the reason, all that investment leads to the creation of too much capacity--of factories that cannot find markets, of office buildings that cannot find tenants. Since construction projects take time to complete, however, the boom can proceed for a while before its unsoundness becomes apparent. Eventually, however, reality strikes--investors go bust and investment spending collapses. The result is a slump whose depth is in proportion to the previous excesses. Moreover, that slump is part of the necessary healing process: The excess capacity gets worked off, prices and wages fall from their excessive boom levels, and only then is the economy ready to recover.
Except for that last bit about the virtues of recessions, this is not a bad story about investment cycles. Anyone who has watched the ups and downs of, say, Boston's real estate market over the past 20 years can tell you that episodes in which overoptimism and overbuilding are followed by a bleary-eyed morning after are very much a part of real life. But let's ask a seemingly silly question: Why should the ups and downs of investment demand lead to ups and downs in the economy as a whole? Don't say that it's obvious--although investment cycles clearly are associated with economywide recessions and recoveries in practice, a theory is supposed to explain observed correlations, not just assume them. And in fact the key to the Keynesian revolution in economic thought--a revolution that made hangover theory in general and Austrian theory in particular as obsolete as epicycles--was John Maynard Keynes' realization that the crucial question was not why investment demand sometimes declines, but why such declines cause the whole economy to slump.
Here's the problem: As a matter of simple arithmetic, total spending in the economy is necessarily equal to total income (every sale is also a purchase, and vice versa). So if people decide to spend less on investment goods, doesn't that mean that they must be deciding to spend more on consumption goods--implying that an investment slump should always be accompanied by a corresponding consumption boom? And if so why should there be a rise in unemployment?
Most modern hangover theorists probably don't even realize this is a problem for their story. Nor did those supposedly deep Austrian theorists answer the riddle. The best that von Hayek or Schumpeter could come up with was the vague suggestion that unemployment was a frictional problem created as the economy transferred workers from a bloated investment goods sector back to the production of consumer goods. (Hence their opposition to any attempt to increase demand: This would leave "part of the work of depression undone," since mass unemployment was part of the process of "adapting the structure of production.") But in that case, why doesn't the investment boom--which presumably requires a transfer of workers in the opposite direction--also generate mass unemployment? And anyway, this story bears little resemblance to what actually happens in a recession, when every industry--not just the investment sector--normally contracts.
As is so often the case in economics (or for that matter in any intellectual endeavor), the explanation of how recessions can happen, though arrived at only after an epic intellectual journey, turns out to be extremely simple. A recession happens when, for whatever reason, a large part of the private sector tries to increase its cash reserves at the same time. Yet, for all its simplicity, the insight that a slump is about an excess demand for money makes nonsense of the whole hangover theory. For if the problem is that collectively people want to hold more money than there is in circulation, why not simply increase the supply of money? You may tell me that it's not that simple, that during the previous boom businessmen made bad investments and banks made bad loans. Well, fine. Junk the bad investments and write off the bad loans. Why should this require that perfectly good productive capacity be left idle?
The hangover theory, then, turns out to be intellectually incoherent; nobody has managed to explain why bad investments in the past require the unemployment of good workers in the present. Yet the theory has powerful emotional appeal. Usually that appeal is strongest for conservatives, who can't stand the thought that positive action by governments (let alone--horrors!--printing money) can ever be a good idea. Some libertarians extol the Austrian theory, not because they have really thought that theory through, but because they feel the need for some prestigious alternative to the perceived statist implications of Keynesianism. And some people probably are attracted to Austrianism because they imagine that it devalues the intellectual pretensions of economics professors. But moderates and liberals are not immune to the theory's seductive charms--especially when it gives them a chance to lecture others on their failings.
Few Western commentators have resisted the temptation to turn Asia's economic woes into an occasion for moralizing on the region's past sins. How many articles have you read blaming Japan's current malaise on the excesses of the "bubble economy" of the 1980s--even though that bubble burst almost a decade ago? How many editorials have you seen warning that credit expansion in Korea or Malaysia is a terrible idea, because after all it was excessive credit expansion that created the problem in the first place?
And the Asians--the Japanese in particular--take such strictures seriously. One often hears that Japan is adrift because its politicians refuse to make hard choices, to take on vested interests. The truth is that the Japanese have been remarkably willing to make hard choices, such as raising taxes sharply in 1997. Indeed, they are in trouble partly because they insist on making hard choices, when what the economy really needs is to take the easy way out. The Great Depression happened largely because policy-makers imagined that austerity was the way to fight a recession; the not-so-great depression that has enveloped much of Asia has been worsened by the same instinct. Keynes had it right: Often, if not always, "it is ideas, not vested interests, that are dangerous for good or evil."
Living in Terror of Dead Economists, by Francesco Saraceno: Kenneth Rogoff has a piece ... that is revealing of today’s intellectual climate. What does he say? ... In a sentence, intra eurozone imbalances are the source of the current crisis. Could not agree more…
Unfortunately, Rogoff does not stop here, but feels the irrepressible urge to add that
Temporary Keynesian demand measures may help to sustain short-run internal growth, but they will not solve France’s long-run competitiveness problems [...] To my mind, using Germany’s balance sheet to help its neighbors directly is far more likely to work than is the presumed “trickle-down” effect of a German-led fiscal expansion. This, unfortunately, is what has been lost in the debate about Europe of late: However loud and aggressive the anti-austerity movement becomes, there still will be no simple Keynesian cure for the single currency’s debt and growth woes.
The question then arises. Who ever thought that a more expansionary stance in the eurozone would solve the French structural problems? And at the opposite, why would recognizing that France has structural problems make it less urgent to reverse the pro-cyclical fiscal stance of an eurozone that is desperately lacking domestic demand? Let me try to sort out things here. This is the way I see it:
- European woes have deep sources. Institutional developments have led to a suboptimal currency area that endogenously created imbalances; as of today only extreme solutions seem to offer a durable solution: Either we cross the ford towards a fully fledged federal entity, with a federal budget (the United States of Europe, just to be adamant); or we go back where we were a few years ago: a common market, in which each country retains its own monetary and fiscal sovereignty (we could call it the British View).
- The eurozone structural problems made it fragile, and the crisis exposed them.
- Disastrous management, and widespread adherence to the Berlin View have imposed harsh austerity to the periphery and to the core alike, worsening the textbook Keynesian demand slump.
- There is little hope that the aggregate fiscal stance in the eurozone turn positive (thus fighting the recession), if core countries do not make a u-turn in their fiscal policies
...I infer that Rogoff would broadly agree with me on items 1-2. But I do not see why this would lead to deem appropriate the fiscal stance Europe is following today. Claiming that we need to sustain aggregate demand, here and now, in no way impacts on the diagnosis of the structural problems of the EU (even if I suspect that I would not have the same solutions as Rogoff for these problems). If anything, given that the fiscal expansion would mostly happen in the core, it would help, not hamper the necessary rebalancing between core and periphery.
The question remains of why we keep observing eminent economists that bash Keynesian policies even when this is inconsistent with (or irrelevant to) their general argument . Barring bad faith, I can’t find any other explanation than an ancestral aversion to Keynes and to its policy prescriptions (a couple of years ago Paul Krugman coined the term of Keynesophobia): whatever argument you are making , just find a way to slip into it a couple of paragraphs claiming that Keynesian policies would not work. This will keep you safe from hell. ...
- Obamacare Is Creating Uncertainty! Better Ditch It - Dean Baker
- Obamacare Will Be A Debacle — For Republicans - Paul Krugman
- Labor Force Participation Rate Sensitivity - Calculated Risk
- Living in Terror of Dead Economists - Gloomy European Economist
- Chart of the Day: Sequester Cuts Are Starting to Bite - Kevin Drum
- Suicide by Sequester: US Feels Pinch of Erratic Spending Cuts - Spiegel
- Monetary policy is not interest rate policy - Japanese version - Nick Rowe
- Self-Defeating Austerity and the Improved US Fiscal Outlook - Joseph Gagnon
- Beijing Plans to Reduce the State’s Role in the Economy - NYT
- The Four Percent Solution - Paul Krugman
- Parsing the Federal Reserve - Free exchange
- Are there atheists in foxholes? - EurekAlert
- Ken Rogoff on Europe - Brad DeLong
- The wages of sin - Free exchange
- In Bid for Clarity, Fed Delivers Opacity - WSJ
- Actually Computing the Sample Variance! - Dave Giles
- "What this country needs is another financial crisis" - EconoSpeak
- Vital Signs Chart: Fewer Collecting Unemployment - WSJ
- Fed Sent $15 Billion to Treasury in First Quarter - WSJ
- An equilibrium model of the African HIV/AIDS epidemic - Vox EU
- Why Democrats Can't be Trusted to Control Wall Street - Robert Reich
Friday, May 24, 2013
Via Language Log:
I agree that the world is better off with more of what Ben Goldacre has called "The noble and ancient tradition of moron-baiting", and that the blogosphere, for all its many faults, is the best method so far invented for "[making] bluffing harder".
It's a comment on Paul Krugman's The Sloppiness Syndrome, though one other NY Times columnist is also mentioned:
David Brooks writes for the New York Times, as Prof. Krugman does, and his motivation for shockingly sloppy presentations of "facts" and theories is usually to reinforce an all-too-familiar point of view, like "boys and girls need to be educated differently", or "social roles are determined by 'patterns that nature and evolution laid down long, long ago'", or "Western societies have an individualist mentality and Eastern societies have a collectivist mentality", or "individualism and governmentalization are rising, and morality is declining", or some combination of the above.
I'm still not fully convinced on this point. The internet may make bluffing harder, but it also makes it easier for "bullshitting (to use the correct philosophical terminology)" to spread within conservative and/or liberal circles (which are relatively isolated). But perhaps those calling bullshit are, on average, prevailing over those spreading it -- I sure hope so.
If Abenomics works, it could help to overcome the "economic defeatism" that has overtaken policymakers in the US and other countries:
Japan the Model, by Paul Krugman, Commentary, NY Times: A generation ago, Japan was widely admired — and feared — as an economic paragon. ... Then Japan fell into a seemingly endless slump, and most of the world lost interest. The main exceptions were a relative handful of economists... If one big, wealthy, politically stable country could stumble so badly, they wondered, couldn’t much the same thing happen to other such countries?
Sure enough, it both could and did. These days we are, in economic terms, all Japanese...
In a sense, the really remarkable thing about “Abenomics” — the sharp turn toward monetary and fiscal stimulus adopted by the government of Prime Minster Shinzo Abe — is that nobody else in the advanced world is trying anything similar. In fact, the Western world seems overtaken by economic defeatism. ...
It would be easy for Japanese officials to make the same excuses for inaction that we hear all around the North Atlantic: they are hamstrung by a rapidly aging population; the economy is weighed down by structural problems...; debt is too high (far higher, as a share of the economy, than that of Greece). And in the past, Japanese officials have, indeed, been very fond of making such excuses. ...
So, how is Abenomics working? The safe answer is that it’s too soon to tell. But the early signs are good..., with surprisingly rapid Japanese economic growth in the first quarter of this year... You never want to make too much of one quarter’s numbers, but that’s the kind of thing we want to see.
Meanwhile, Japanese stocks have soared, while the yen has fallen..., very good news for Japan because it makes the country’s export industries more competitive. ...
To be sure, Thursday’s sell-off in Japanese stocks put a small dent in that optimistic assessment. But stocks are still way up from last year...
So the overall verdict on Japan’s effort to turn its economy around is so far, so good. And let’s hope that this verdict both stands and strengthens over time. For if Abenomics works, it will serve a dual purpose, giving Japan itself a much-needed boost and the rest of us an even more-needed antidote to policy lethargy.
As I said at the beginning, at this point the Western world has seemingly succumbed to a severe case of economic defeatism; we’re not even trying to solve our problems. That needs to change — and maybe, just maybe, Japan can be the instrument of that change.
More Fed - It Never Ends, by Tim Duy: Bloomberg is carrying an interview with San Francisco President John Williams. Williams reiterates the possibility that future policy moves may be up or down:
“Even if we do adjust downward our purchases, it doesn’t mean we’re now in some autopilot of moving in the same direction,” Williams, 50, said in an interview yesterday in San Francisco. “You could even imagine a scenario where we adjust it downward based on good data and then adjust it back” if the economy weakened.
Yes, the Fed can change policy in any direction. But I reiterate what I said earlier: I simply do not believe that they believe that such changes will be likely. First, I don't think they will want to reduce the pace of purchases until they are sure they do not need to reverse course in the next meeting. Second, I think they will want to end asset purchases well ahead of hitting the 6.5% unemployment threshold. And I don't think they can do that if they are fooling around with the pace of purchases over the next year.
That said, we will hear many officials repeat this same line. Why? Williams has the answer:
“Because we have this freedom to adjust, how will people interpret it?” he said. “This is uncharted territory.”Once the Fed does decide to calibrate its bond-buying, its challenge will be to communicate that “these are just adjustments and not strong signals about things going forward,” he added.
The Fed is trying very hard to ensure that market participants do not overreact to any one policy shift, with the most likely overreaction being to tank Treasury prices and spike yields. The Fed believes that the way to prevent this is to continuously remind everyone that any subsequent moves might be up or down, so don't assume a downward move in the pace of purchases implies anything about the necxt meeting.
But keep in mind that the Fed does not have a forecast that suggests policy will shift up and down randomly. They have a forecast that the first cut to the pace of purchases will be the beginning of the end for quantitative easing and, in all reality, will start the clock on the first rate hike. In other words, they can talk about moving policy up-and-down, but I can't imagine that they really expect such ups-and-downs to be the path of policy going forward.
In other news, New York Federal Reserve President William Dudley reiterates Federal Reserve Chairman Ben Bernanke's position:
“I don’t really understand very well how the tug-of-war between the fiscal drag and the improving economy are going to sort of work their way out,” Dudley said in an interview with Michael McKee airing today on Bloomberg Television. “Three or four months from now I think you’re going to have a much better sense of, is the economy healthy enough to overcome the fiscal drag or not.”
Dudley adds something that I think is important:
“The important thing to recognize about the U.S. economy is that things are actually improving underneath the surface,” Dudley said in the interview. “We don’t really see that so much in the activity data yet because of the large amount of fiscal drag.”
Translation: Fiscal drag will weigh down the GDP numbers. Look underneath those numbers to building momentum in the economy. I think this means there will be extra weight on the jobs data rather than the GDP data as an indicator of the impact of fiscal policy. With that in mind, note that jobless claims reversed last week's spike:
I would say the downward path of claims remains intact despite the fiscal drag. That is what will be meaningful for assessing "strong and sustainable."
Bottom Line: Assuming current data holds, the beginning of the end of QE is coming. But not immediately. Maybe three meetings out in September assuming that the impact of fiscal drag remains largely contained to the GDP data. The Fed does not want us to jump to conclusions about future policy moves based on that initial shift. But I am hard-pressed to see a forecast that would allow for up-and-down moves once the Fed pulls the trigger. Up-and-down moves cannot be their expected policy path.
- The case for 4% inflation - Laurence Ball
- It’s Not About You - Paul Krugman
- Michael Kinsley's Repeated Factual Errors - Brad DeLong
- The Liquidity Trap and Macro Textbooks - mainly macro
- America's Frogs and Toads Disappearing Fast - Scientific American
- Conservative economists push immigration reform - Seung Min Kim
- The strangely familiar browsing habits of 14th-century readers - MIT News
- The Economic Nature of the Resource Curse: Mechanisms - Why Nations Fail
- I-5 bridge collapses, throwspeople into river (Infrastructure) - Register-Guard
- Is There Really a "Conservative Reform" Movement in Policy? - Rortybomb
- An Economist's Warning on Global Warming - Paul Solman
- Martin Wolf's climate change column - The Interpreter
- Google faces fresh inquiry from FTC - FT.com
- Fed Study Rebuts Banks on Swipe Fees - WSJ
- A Subtle View of Labor Market Improvement - macroblog
- IMF Rethinking Role in Managing Sovereign Debt in Crises - WSJ
- Michael Kinsley Gets It Wrong On "Austerians" - Rortybomb
- The Anatomy of a Digital Business Negotiation - Digitopoly
- Who Will Stick Up For the IRS? - Kevin Drum
- The Changing Face of Community Colleges - Economix
- Weekly Initial Unemployment Claims decline to 340,000 - Calculated Risk
- Elementary, My Dear Watanabe-san (Somewhat Wonkish) - Paul Krugman
- How a Big-Bank Failure Could Unfold - Economix
Thursday, May 23, 2013
"If we see continued improvement and we have confidence that that's going to be sustained then we could in the next few meetings ... take a step down in our pace of purchases," he said.
"Next few meetings" sounds like September at the eariliest. Indeed, September or December are the most likely meetings given both have an associated press conference.
For financial market participants, I would say this was a mixed message. Bernanke is dovish if you expect the Fed to move in June, hawkish if December at the earliest. But imagine the message that would have been delivered to financial markets had Bernanke not spoken ahead of the minutes of the April FOMC meeting:
A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth; however, views differed about what evidence would be necessary and the likelihood of that outcome.
It seems to me that the threat of an imminent policy change would have been taken very poorly had Bernanke not already spoken yesterday morning. So, in a sense, Bernanke saved traders from an even more tumultuous day. Expect Bernanke to use the June press conference to lay the ground work for a reduction in the pace of purchases as early as September.
From a different viewpoint, Bernanke might have just sandbagged his colleagues. Recent comments from Federal officials suggest they reasonably believed they were close to cutting the pace of purchases, and it seems like they received this impression from the discussion in the last few FOMC meetings. Hence, for example, why San Francisco Federal Reserve President John WIlliams felt comfortable suggesting an imminent reduction in the pace of purchases as recently as Monday of this week. Bernanke, however, sets everyone straight. It's not going to happen this summer. Maybe fall.
Notice also the communications challenge. Even as participants coalesced around a policy shift as early as June, they did not have internal agreement on what would justify such a shift. I am not sure how they communicate policy if there is no central view as to what should justify a particular policy. One gets the feeling that the Federal Reserve treats "strong and sustained growth" like the Supreme Court treats pornography: They will know it when the see it.
The communications plot thickens later in the minutes:
A few members expressed concerns that investor expectations of the cumulative size of the asset purchase program appeared to have increased somewhat since it was launched last September despite a notable decline in the unemployment rate and other improvements in the labor market since then. In contrast, a few other members focused on evidence that market expectations about the total size of the program had changed little, on net, since the program was launched or had responded appropriately to incoming information. Members generally agreed on the need for the Committee to communicate clearly that the pace and ultimate size of its asset purchases would depend on the Committee's continued assessment of the outlook for the labor market and inflation in addition to its judgments regarding the efficacy and costs of additional purchases and the extent of progress toward its economic objectives. To highlight its willingness to adjust the flow of purchases in light of incoming information, the Committee included language in the statement to be released following the meeting that said the Committee was prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.
The second sentence in this paragraph is a little bit clunky. But overall it sounds like there is concern among some officials that market participants are not sufficiently responding to incoming information. In other words, the Fed expected that incoming information would trigger a continuous reassessment of the pace of asset purchases, but they are not seeing that continuous reassessment reflected in expectations. Hence the reminder that policy is not a one way street.
I am thinking this morning that the Fed is asking an awful lot from market participants; if policy officials cannot agree on what constitutes sufficient evidence to trigger a change in policy, how can officials expect such knowledge on the part of market participants?
From all of this I am reminded of one important thing: Staying on top of the likely path of monetary policy means tracking Bernanke. Be wary of regional Federal Reserve presidents. What seems to happen is this sequence of events:
- Bernanke speaks.
- We all reach a common assessment of the policy path
- Bernanke drifts into the background amid a cacophony of Fed speakers.
- Our view of the policy path begins to splinter as each Fed speaker has a different interpretation of the implication of the data flow for policy.
- Bernanke speaks.
- We all reach a common assessment of the policy path.
- Repeat steps 3 through 6 above.
Bottom Line: Assuming the recent pace of activity continues through the summer, it is reasonable to expect the first cut in the pace of QE to begin as early as September. While the Fed will continue to say that they could adjust policy up or down, I don't believe that they really believe this. I think they expect the first reduction in the pace of easing to be the first stage to ending quantitative easing; as such, it is not their intention to start the process until they firmly believe they will not have to backtrack. A good reason to delay through the summer, in my opinion. Finally, there is a very, very simple way to improve communications: Bernanke needs to give more speeches directly pertaining to the policy path.
This is the kind of thing I had in mind when I called for bold, creative proposals from the Fed to address the unemployment problem. Via Brad DeLong:
Eschaton: Not Too Late For The Helicopters: A big tragedy of the last few years is the failure to recognize that being in a low inflation world at the zero lower bound was a tremendous opportunity to massively enhance human welfare in this country. Mailing out 10 grand checks to everyone would have been an egalitarian massive boost to the economic well-being of huge numbers of people. Instead, the Fed has goosed asset prices, mostly benefiting the rich. Trickle down through another means, but still trickle down. Better than doing nothing, probably, but there were other ways.
How can you oppose a social-democratic economic policy that had the endorsement of Robert A. Heinlein?
I'm trying to imagine Ben Bernanke answering questions about a policy like this in his hearing yesterday before the Joint Economic Committee. Questions from conservative maker-taker types in particular. (See here for a discussion of helicopter money.)
We really don't pay enough attention to distributional issues associated with Fed policy. Duncan Black again:
I'm curious if there's been any "serious" work on the distributional impacts of the Fed's quantitative easing. Whatever it's done for the economy overall, what has it done for rich people?
I haven't read it closely, but one paper is:
Innocent Bystanders? Monetary Policy and Inequality in the U.S., by Olivier Coibion, Yuriy Gorodnichenko, Lorenz Kueng, and John Silvia, NBER Working Paper No. 18170, Issued in June 2012: We study the effects and historical contribution of monetary policy shocks to consumption and income inequality in the United States since 1980. Contractionary monetary policy actions systematically increase inequality in labor earnings, total income, consumption and total expenditures. Furthermore, monetary shocks can account for a significant component of the historical cyclical variation in income and consumption inequality. Using detailed micro-level data on income and consumption, we document the different channels via which monetary policy shocks affect inequality, as well as how these channels depend on the nature of the change in monetary policy.
A bit more from the introduction:
Using these measures of inequality, we document that monetary policy shocks have statistically significant effects on inequality: a contractionary monetary policy shock raises the observed inequality across households in income, labor earnings, expenditures and consumption. These results are robust... In addition, monetary policy shocks appear to have played a non-trivial role in accounting for cyclical fluctuations in inequality over this time period. ... Furthermore, monetary policy shocks can account for a surprising amount of the historical cyclical changes in income and consumption inequality, particularly since the mid-1990s. ...
Two notes. First, it doesn't deal directly with quantitative easing (at least a search of the text does not turn anything up). Second, it works the opposite way from what most "populist" critics assert:
Contractionary monetary policy shocks appear to have significant long-run effects on inequality, leading to higher levels of income, labor earnings, consumption and total expenditures inequality across households, in direct contrast to the directionality advocated by Ron Paul and Austrian economists. Furthermore, while monetary policy shocks cannot account for the trend increase in income inequality since the early 1980s, they appear to have nonetheless played a significant role in cyclical fluctuations in inequality and some of the longer-run movements around the trends.
But there is this at the end of the paper:
the sensitivity of inequality measures to monetary policy actions points to even larger costs of the zero-bound on interest rates than is commonly identified in representative agent models. Nominal interest rates hitting the zero-bound in times when the central bank’s systematic response to economic conditions calls for negative rates is conceptually similar to the economy being subject to a prolonged period of contractionary monetary policy shocks. Given that such shocks appear to increase income and consumption inequality, our results suggest that standard representative agent models may significantly understate the welfare costs of zero-bound episodes.
To the extent that quantitative easing can offset these negative shocks, it ought to improve the income distribution (again, the opposite of what many critics assert). Policies such as "Mailing out 10 grand checks to everyone" ought to work in the same way (at the zero bound), perhaps even better.
Some people within the Fed have a view on this:
While the Federal Reserve's accommodative policies have boosted stocks and helped the rich, it is unclear whether they are doing enough for the broader U.S. economy, a top central bank official said on Monday. "We've made rich people richer...," Dallas Fed President Richard Fisher said on CNBC television. "Question is what have we done for working men and women in America?"
Fisher asks "what have we done for working men and women in America?" Answer: Not enough (and part of the reason is inflation hawks like Fisher). As I said recently, "the risks of inflation and financial instability have been overblown relative to the large costs associated with high long-term unemployment and it’s time for the Fed to address the unemployment problem with the same creativity, boldness, and perseverance it displayed when banks were its main concern."
- Measure it however you like: inflation has been low and falling - FT Alphaville
- Time Regained! (Physics of time) - The New York Review of Books
- Not too Late for the Social Credit Helicopters! (Bold, Creative) - Brad DeLong
- Another reason for NOT cutting Social Security benefits - ataxingmatter
- Equity Extraction and Mortgage Default - FRB Working Papers
- Credit-crunch dynamics with uninsured risk - FRB Working Papers
- Asset Purchases: From whom does the Fed buy? - FRB Working Papers
- Minimum MSE Estimation of a Regression Model - Dave Giles
- Sen. Sanders Again Targets Regional Fed Boards - WSJ
- Ratings agencies under fire again - FT.com
- We have a demand problem, not a skills problem - EPI
- FOMC Minutes: Exit Strategy Discussion - Calculated Risk
- The Pervasiveness of Bad Ideas - Kevin Drum
- Minutes of the Federal Open Market Committee - FRB
- Britain Must Do More for Economy, I.M.F. Warns - NYT
- Statement by Bernanke before the Joint Economic Committee - FRB
- The banking crisis as a giant carry trade gone wrong - Vox EU
- Foreign Borrowing in the Euro Periphery: End Is Near - Liberty Street
Wednesday, May 22, 2013
Ezra Klein is correct:
Stop celebrating our falling deficits: It’s time to stop celebrating last week’s Congressional Budget Office report. Our deficits aren’t dropping because we’re doing something right. They’re dropping because we’re doing everything wrong. ...
The CBO is saying that the federal government will be pulling demand out of the economy in 2013, 2014 and 2015. It will then start adding demand back in again — meaning we’ll be increasing the deficit — from 2016 through 2023, and presumably beyond.
That is literally the opposite of what we should want. Textbook economics says the government should add demand when the economy is weak and pull back when the economy is strong. The economy — and particularly the labor market — will remain weaker than we’d like in 2013, 2014 and 2015. That’s when the government should be helping, or at least making sure not to hurt too fast. It should be much stronger from 2016 to 2023. That’s when the government should be backing off. ...
Ben Bernanke also made this point -- yet again -- in his testimony today.
I have a few comments on Bernanke's testimony this morning at CBS MoneyWatch. The bottom line:
... Battling the inclination to exit too soon is the most important challenge that the Fed faces. I think Bernanke understands this, and his leadership and ability to steer the middle away from the tendency to exit too soon will be a critical factor in the pace of the recovery.
Paul Krugman on "the famed TNR/Slate premium on being 'counterintuitive', which in practice meant skewering supposed liberal pieties":
if you went back through all the clever counterintuitiveness of past years, you’d find that a lot of it was every bit as sloppy and ill-informed as what we’re seeing now. The difference is the existence now of a policy blogosphere (in economics, of course, but in a number of disciplines too), which makes bluffing harder. In the past grotesquely ill-informed articles on, say, the Clinton health plan could sit out there for years, with only a handful of specialists aware of just how bad they were; now the pundit emperor’s nakedness is all over the web within days if not hours.
And if this leads to hurt feelings – well, this is not a game. We’re having a discussion about policies that affect tens of millions of people. And you have no business participating in this discussion if you’re so busy trying to sound clever that you can’t be bothered to do your homework.
Even so, the degree to which bad/false ideas can be used to support political goals is still pretty frustrating.
- In Europe, a Fed President Urges Quantitative Easing - NYT
- BoJ holds off on fresh monetary easing - FT.com
- The Hidden, Unexpected Public Costs of a Stadium - Sports Economist
- Lessons at the Zero Bound from Japan and the US - William Dudley
- SNAP Rolls: They’re Elevated for a Reason - Jared Bernstein
- Why pre-tax inequality matters - Stumbling and Mumbling
- Urban Class Warfare: Are Cities Built for the Rich? - Spiegel
- Perma-Stimulus, Again - Paul Krugman
- What Our Words Don’t Tell Us - The Berkeley Blog
- Why Is Europe So Messed Up? - John Cassidy
- Variance Estimators That Minimize MSE - Dave Giles
- Despite Keynesians’ Victory, Economic Policy Holds - NYT
- The IRS tale--Times letter writers seem to get it ataxingmatter
- Exchanging Currency and Electronic Money - Supply-Side Liberal
- Kenya's Central Bank Macroeconometric Model - Brookings
- Reasonable Approaches to Fiscal Consolidation? - Econbrowser
- BRICS shows G20 the way - The Interpreter
- Spending on America's Pets - Tim Taylor
- Keynes-Skeptics Find New Economic Poster Boy - Jonathan Chait
- Government Failure vs. Market Failure - Jared Bernstein
- Sharing Abuse Fairly - Paul Krugman
- The Bush Tax-Cut Failure - Economix
Tuesday, May 21, 2013
It decided on May 1 to keep buying at an $85 billion monthly pace, and many economists say mixed economic data warrants keeping up the purchases through year-end.
But persistent warnings from more hawkish Fed officials had fanned talk that it might start to wind back soon.
The hawkish Fed officials would be Dallas Federal Reserve President Richard Fisher, Philadelphia Federal Reserve President Charles Plosser, and Richmond Federal Reserve President Jeffrey Lacker. These are often colorful voices, but as a general rule are not voices that will hold much sway with regards to the pace of easing. What is much more important is to what extent remaining policymakers are coming along to the same view. In other words, these three can ruffle their feathers all they want, but that ruffling should not be interpreted as consensus movement within the FOMC.
For consensus movement, turn more toward New York Federal Reserve President William Dudley. Great speech today, but I will narrow my focus with a few points I think are relevant for US policy. While Dudley is clearly concerned about deflation, this is important:
Similarly, current circumstances in the two countries are different, with deflationary expectations still in the process of being dislodged in Japan. The BoJ needs to push up inflation expectations, whereas in the U.S. the current level of inflation expectations is consistent with the long-term objective of the Fed.
This speaks to his concerns - or lack thereof - about the current US inflation numbers. My sense is that he will dismiss those low numbers as long as expectations stay anchored at 2 percent. Later he says:
Let me give a few examples of how my own thinking may evolve. In terms of our asset purchase program, I believe we should be prepared to adjust the total amount of purchases to that needed to deliver a substantial improvement in the labor market outlook in the context of price stability. In doing this, we might adjust the pace of purchases up or down as the labor market and inflation outlook changes in a material way. For me, the base case forecast is not the sole consideration—how confident we are about that outcome is also important.
Here he brings inflation back as an issue in determining the pace of purchases. But then in the next paragraph:
Because the outlook is uncertain, I cannot be sure which way—up or down—the next change will be. But at some point, I expect to see sufficient evidence to make me more confident about the prospect for substantial improvement in the labor market outlook. At that time, in my view, it will be appropriate to reduce the pace at which we are adding accommodation through asset purchases. Over the coming months, how well the economy fights its way through the significant fiscal drag currently in force will be an important aspect of this judgment.
Which sounds as if inflation is not the primary determinant in the decision to taper. The labor market is the primary determinant, which might be expected if he believes that low inflation numbers are not a relevant concern in the context of stable inflation expectations. In such a context, Dudley wants to see to what extent the labor market will feel the fiscal drag. In other words, be cautious about how far the low inflation story will travel in the FOMC.
To be sure, you can point to today's speech by St. Louis Federal Reserve President James Bullard as a reason that current inflation is relevant. From Reuters:
"Inflation is pretty low in the U.S.," Bullard told reporters after delivering a lecture in Frankfurt. "I can't envision a good case to be made for tapering unless the inflation situation turns around and we are more confident than we are today that inflation is going to move back toward target," he said.
But is this the consensus view? Robin Harding of the FT smartly tweets:
Re Bullard comments, low inflation has always been the main driver of QE for him. Entirely different for Bernanke, Yellen et al.— Robin Harding (@RobinBHarding) May 21, 2013
I think Harding is right. With inflation expectations stable, from the consensus FOMC viewpoint tapering will be much more dependent on the labor outlook than current inflation.
Other voices include Chicago Federal Reserve President Charles Evans who raises the prospect of a sharp end to quantitative easing. From Reuters:
"Another approach, which doesn't get talked about that much, we could continue to go with $85 billion a month until we decide that absolutely we've seen enough improvement, and then bring it to a quick conclusion at that time," Evans told reporters after the speech.
"That would be a program going into the fall, I would think, because you can't really have that much confidence to bring it to an end" before that, he said. "I think at the moment the key issue is whether or not it is extremely likely that this (improvement) is going to be maintained over the next few months."
That last line is important - I think it means that if the labor market continues on its current pace through the rest of spring and into the summer (again, assessing the impact of fiscal contraction), then the tapering will begin in later summer or early fall.
In contrast, Minneapolis Federal Reserve President Narayana Kocherlakota argues that policy is still too restrictive:
The FOMC has responded to this challenge by providing a historically unprecedented amount of monetary accommodation. But the outlook for prices and employment is that they will remain too low over the next two to three years relative to the FOMC’s objectives. Despite its actions, the FOMC has still not lowered the real interest rate sufficiently in light of the changes in asset demand and asset supply that I’ve described.
And, at a minimum, he would not favor reducing the pace of stimulus:
...this kind of analysis suggests that, currently, the gains from tightening related to improving financial stability are both speculative and slight. In contrast, the losses from tightening—in terms of pushing employment and prices even further below the Federal Reserve’s goals—are both tangible and significant. I conclude that financial stability considerations provide little support for reducing accommodation at this time.
I don't think he would favor it in three months regardless of the labor data.
So many voices, so many views. Looking through the noise, I think there is strong interest in tapering QE now that we have a string of job reports pointing to substantial and sustainable improvement in labor markets, but, given the fiscal contraction, little willingness to pull the trigger on tapering until we see another two or three similar reports. On net, I think disinflation concerns will move to the back-burner as long as inflation expectations are stable.
Still, at the same time, the Fed wants to keep its options open, as they are very much cognizant that past efforts to pull back on easing have been premature. Hence the talk that future moves could be up or down, which is really just plain confusing because why would the Fed even begin tapering if they thought there was a reasonable chance of having to reverse course the next month? It is even more confusing given that some officials seem to care about inflation, but others labor markets. The former says more purchases, arguably the latter says less. And I am not sure they have a consensus view of what would be the pace of tapering even if they all could agree on the forecast and relevant indicators. No wonder communications is a problem. Back to Dudley:
An important challenge for us will be to think carefully about what combination of actions and communications will best ensure that when we do eventually judge that it is appropriate to begin normalizing policy, the initial tightening of financial market conditions is commensurate to what we desire. There is a risk is that market participants could overreact to any move in the process of normalization.
It seems that lacking a more clear, consistent framework for the exit from quantitative easing, the risk of miscommunication is high. Hence, we are all looking toward tomorrow's speech by Federal Reserve Chairman Ben Bernanke to provide the clarity that appears very much needed.
Humanity has decided to yawn and let the real and present dangers of climate change mount. ... Judged by the world’s inaction, climate skeptics have won..., however rational it may be to seek to lower the risk of catastrophic outcomes, this is not what is happening now or seems likely to happen in the foreseeable future. ...
The attempt to shift our choices away from the ones now driving ever-rising emissions has failed. It will, for now, continue to fail. The reasons for this failure are deep-seated. Only the threat of more imminent disaster is likely to change this and, by then, it may well be too late. This is a depressing truth. It may also prove a damning failure.
As he says, it's not too late, "Unless the most apocalyptic scenario happens, humanity may be able to curb emissions and buy itself time," but the clock is running and it's hard to see how meaningful change will come about without substantial changes in the political environment. Gridlock favors the skeptics.
We are, as they say, live:
I'm not as happy with the Fed as I could be.
I did an interview with James Stafford of OilPrice.com:
It covers a few other topics as well.
- Where Are The Deficit Celebrations? - Paul Krugman
- Fed Paper Urges Trading Revamp - WSJ
- Senior poverty is much worse than you think - Dylan Mathews
- Jeffrey Frankel on Alesina - Brad DeLong
- Fears of Widespread “Rate Shock” Unfounded - CBPP
- Macroeconomic Machismo - Paul Krugman
- Projected Medicare/Medicaid Spending Has Fallen by $900 Billion - CBPP
- Integrating monetary policy and macroprudential regulation - Vox EU
- Global Urbanization and the Governance Challenge - Tim Taylor
- German Wages and Portuguese Competitiveness - Paul Krugman
- The Oral Tradition of the IH metaphor - Gavin Kennedy
- Peggy Noonan's Broken Soul - Kevin Drum
- Economic Outlook: Moving in the Right Direction - FRBSF
- Climate change: After activism - The Interpreter
- Tumblr and Yahoo’s portal strategy - Digitopoly
- Do Big Cities Help College Graduates Find Better Jobs? - Liberty Street
- What's the best way to pass a climate bill? - Brad Plumer
- Regulating pot - The Register-Guard
- The Theory of Interstellar Finance - Paul Krugman
Monday, May 20, 2013
Note: The video starts around the 43 minute mark
Liberty for Whom?, by James Kwak: ...Corey Robin's fascinating article on nineteenth-century European culture, Nietzsche, and the economic philosophy of Friedrich Hayek..., in very simplified form, goes like this. For Nietzsche, and for other cultural elitists of late-nineteenth-century Europe, both the rise of the bourgeoisie and the specter of the working class were bad things—the former for its mindless materialism, the latter for its egalitarian ideals, which threatened to drown the exceptional man among the masses. One set of Nietzsche’s descendants..., which Robin focuses on in this article, is the “Austrian” school of economics led by Friedrich Hayek.
People often like to think of the Austrians as advocates of liberty, both for its Economics 101 properties (free choice in free markets, under certain assumptions, maximizes societal welfare) and its moral properties. Robin ties Hayek’s conception of liberty, however, back to Nietzche’s. Hayek cared about liberty for ultimately elitist reasons: liberty is not an end in itself, but a condition that enables the select few to make the world a better place... And those select few are likely to be the rich, for only they have the requisite time and freedom from material concerns...
This idea is obviously echoed in Ayn Rand’s novels... It has also trickled into the contemporary conservative worship of the ultra-rich. The phrase today is “job creators” (whatever that means), but it has the same moralistic overtones as in Nietzsche and Hayek—a class of people who are better than the rest of us, on whom we depend for our salvation and prosperity, and whom we should not presume to question or constrain through, say, safety regulation or higher taxes (“penalizing success,” in the jargon).
I used to say that most Americans voted against their class interests because they thought they would one day be in the upper class... But today, five years after the financial crisis, with median income below where it was fifteen years ago and social mobility at developing-world levels, I can’t imagine many people really believe that vast riches are in their future. An alternative explanation is that many Americans just think the rich are better than they are and that it’s wrong to question your betters. ...
I think we sometimes forget that voting is multidimensional -- it depends upon more than economic interests (e.g. it's partly about choosing an identity and the other non-economic factors can dominate). In any case, not sure I buy that people "just think the rich are better than they are" argument. It didn't, for example, propel Romney to the presidency.
Don't say you weren't warned. This is Paul Krugman, just a few days under 10 years ago:
Stating the Obvious, by Paul Krugman, Commentary, NY Times, May 27, 2003: "The lunatics are now in charge of the asylum." So wrote the normally staid Financial Times, traditionally the voice of solid British business opinion, when surveying last week's tax bill. Indeed, the legislation is doubly absurd: the gimmicks used to make an $800-billion-plus tax cut carry an official price tag of only $320 billion are a joke, yet the cost without the gimmicks is so large that the nation can't possibly afford it while keeping its other promises.
But then maybe that's the point. The Financial Times suggests that "more extreme Republicans" actually want a fiscal train wreck: "Proposing to slash federal spending, particularly on social programs, is a tricky electoral proposition, but a fiscal crisis offers the tantalizing prospect of forcing such cuts through the back door."
Good for The Financial Times. It seems that stating the obvious has now, finally, become respectable.
It's no secret that right-wing ideologues want to abolish programs Americans take for granted. But not long ago, to suggest that the Bush administration's policies might actually be driven by those ideologues — that the administration was deliberately setting the country up for a fiscal crisis in which popular social programs could be sharply cut — was to be accused of spouting conspiracy theories.
Yet by pushing through another huge tax cut in the face of record deficits, the administration clearly demonstrates either that it is completely feckless, or that it actually wants a fiscal crisis. (Or maybe both.)
Here's one way to look at the situation: Although you wouldn't know it from the rhetoric, federal taxes are already historically low as a share of G.D.P. Once the new round of cuts takes effect, federal taxes will be lower than their average during the Eisenhower administration. How, then, can the government pay for Medicare and Medicaid — which didn't exist in the 1950's — and Social Security, which will become far more expensive as the population ages? (Defense spending has fallen compared with the economy, but not that much, and it's on the rise again.)
The answer is that it can't. The government can borrow to make up the difference as long as investors remain in denial, unable to believe that the world's only superpower is turning into a banana republic. But at some point bond markets will balk — they won't lend money to a government, even that of the United States, if that government's debt is growing faster than its revenues and there is no plausible story about how the budget will eventually come under control.
At that point, either taxes will go up again, or programs that have become fundamental to the American way of life will be gutted. We can be sure that the right will do whatever it takes to preserve the Bush tax cuts — right now the administration is even skimping on homeland security to save a few dollars here and there. But balancing the books without tax increases will require deep cuts where the money is: that is, in Medicaid, Medicare and Social Security.
The pain of these benefit cuts will fall on the middle class and the poor, while the tax cuts overwhelmingly favor the rich. For example, the tax cut passed last week will raise the after-tax income of most people by less than 1 percent — not nearly enough to compensate them for the loss of benefits. But people with incomes over $1 million per year will, on average, see their after-tax income rise 4.4 percent.
The Financial Times suggests this is deliberate (and I agree): "For them," it says of those extreme Republicans, "undermining the multilateral international order is not enough; long-held views on income distribution also require radical revision."
How can this be happening? Most people, even most liberals, are complacent. They don't realize how dire the fiscal outlook really is, and they don't read what the ideologues write. They imagine that the Bush administration, like the Reagan administration, will modify our system only at the edges, that it won't destroy the social safety net built up over the past 70 years.
But the people now running America aren't conservatives: they're radicals who want to do away with the social and economic system we have, and the fiscal crisis they are concocting may give them the excuse they need. The Financial Times, it seems, now understands what's going on, but when will the public wake up?