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No big changes, or even little ones other than a few changes in language, so not much to report from the Fed's
press release describing the FOMC meeting that ended today:
Press Release, Release Date: July 31, 2013, For immediate release: ...
To support a stronger economic recovery and to help ensure that inflation,
over time, is at the rate most consistent with its dual mandate, the
Committee decided to continue purchasing additional agency mortgage-backed
securities at a pace of $40 billion per month and longer-term Treasury
securities at a pace of $45 billion per month. The Committee is maintaining
its existing policy of reinvesting principal payments from its holdings of
agency debt and agency mortgage-backed securities in agency mortgage-backed
securities and of rolling over maturing Treasury securities at auction.
Taken together, these actions should maintain downward pressure on
longer-term interest rates, support mortgage markets, and help to make
broader financial conditions more accommodative. ...
To support continued progress toward maximum employment and price stability,
the Committee today reaffirmed its view that a highly accommodative stance
of monetary policy will remain appropriate for a considerable time after the
asset purchase program ends and the economic recovery strengthens. In
particular, the Committee decided to keep the target range for the federal
funds rate at 0 to 1/4 percent and currently anticipates that this
exceptionally low range for the federal funds rate will be appropriate at
least as long as the unemployment rate remains above 6-1/2 percent,
inflation between one and two years ahead is projected to be no more than a
half percentage point above the Committee's 2 percent longer-run goal, and
longer-term inflation expectations continue to be well anchored. In
determining how long to maintain a highly accommodative stance of monetary
policy, the Committee will also consider other information, including
additional measures of labor market conditions, indicators of inflation
pressures and inflation expectations, and readings on financial
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman;
William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Charles
L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C.
Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was
Esther L. George, who was concerned that the continued high level of
monetary accommodation increased the risks of future economic and financial
imbalances and, over time, could cause an increase in long-term inflation
Posted by Mark Thoma on Wednesday, July 31, 2013 at 11:30 AM in Economics, Monetary Policy |
News organizations should listen to
James Fallows. It's soooo frustrating to see reporting like this:
A False Equivalence Classic, by James Fallows: A reader sent in the
paragraph below as another classic in the false-equivalence chronicles. It comes
from a bigtime news organization... I'm intentionally leaving out the details, because what
makes the story significant is not that it's exceptional but that it's
The article is about the risk that the economy will be disrupted yet again,
by yet another showdown over raising the federal debt ceiling...:
With investors already nervous about the Federal Reserve's plan to start
scaling back its stimulus program, another fiscal policy standoff
could be more disruptive this time around.
In recent days, both Democrats and Republicans have been
digging in their heels, setting up another possible
nerve-wracking battle over the debt ceiling, which the Treasury expects to
hit by November.
"Hearing Washington banter back and forth over this again
was like a recurring bad dream," said [I'll leave out this
guy's name too]...
That's one way to describe what's going on: Another damned partisan flap!
Can't these politicians grow up and stop squabbling? ... This is of course the
tone that runs through most gridlock/ dysfunction stories...
If you describe the "disagreement" [this] ... way, no one's really to blame.
It's just politics, a sign of the symmetrical dysfunction that plagues us all.
If you describe it [a] second way, then one side is sticking to historic
norms and practices -- and the other is deliberately bringing on a showdown,
with the all consequent risks for the domestic and international economies,
via demands and threats out of scale with what previous Congresses have done.
This second version is what's happening. ...
What's going on now is ... like the 1970s-era hijackers Brendan Koerner
his recent book, who would threaten to blow up the plane unless they got the
ride to Cuba they wanted. Or, if you want a less violent analogy, it's like me
walking into a restaurant, ordering and enjoying a meal, and then when I
finished just tearing up the check and saying that I was "digging in my heels"
about whether I should pay. ...
Decent reporting on these issues that places the blame where it belongs would
help immensely, but I probably shouldn't hold my breath waiting for this to
Posted by Mark Thoma on Wednesday, July 31, 2013 at 09:45 AM in Economics, Press |
I have a question. Why should government spending as a percentage of GDP stay
constant as GDP grows? It seems that, as we grow wealthier as a society, we
would want relatively more of the kinds of goods government provides, e.g.
Posted by Mark Thoma on Wednesday, July 31, 2013 at 12:33 AM in Economics, Fiscal Policy |
While We Wait..., by Tim Duy: While we wait for the second quarter GDP report and the outcome of the FOMC meeting, you can amuse yourself watching Lakshman Achuthan of the Economic Cycle Research Institute desperately clinging to his call that a recession started in the middle of 2012:
A reminder of the high-frequency data employed in recession dating:
[Click to enlarge]
I am not saying its the most exciting data, but it still isn't a recession. Achuthan is apparently clinging to a thin reed of hope that every major data series is revised substantially downward. Given the low expectations for the second quarter GDP report, personally I would hold out hope for a surprise negative print. I still don't think the NBER would see such an outcome as anything more than a one quarter aberration, but I suspect it is Achuthan's best hope at this point.
Posted by Mark Thoma on Wednesday, July 31, 2013 at 12:24 AM
Posted by Mark Thoma on Wednesday, July 31, 2013 at 12:03 AM in Economics, Links |
Hawks and Doves, Again, by Tim Duy: Neil Irwin argues that the
classification of Fed policymakers into hawks and doves is too simplistic, and,
of course, he is correct. He
In other words, maybe instead of classifying central bankers by the
variety of bird they most resemble, we should instead judge them on their
ability to adapt their thinking to circumstance.
That said, I doubt we are going to change this convention anytime in the near
future. We can, however, better define the terms to at least reduce the
negative connotations associated with either identifier. I use the terms to
refer to a policymaker's judgment as to the appropriate level of monetary
accommodation given the current and expected economic situation. A "dovish"
policymaker tends to view the economy as likely needing more monetary
accommodation than a "hawkish" policymaker. Similarly, if I say the risk is
that tomorrow's FOMC statement will sound "dovish," it means that it will
suggest a greater amount of monetary accommodation relative to the last FOMC
statement. I think this is a refinement of my thoughts
the last time I tackled this subject:
I tend to think of the distinction in terms of the policymaker's
inflation forecast. A hawk is a policymaker who perceives a greater upside
risk to the inflation forecast and thus anticipates policy will turn tighter
sooner than later. On the other side, doves tend to see less upside risk to
the inflation forecast, or even downside risk, and thus do not anticipate a
tighter policy in the near term.
As Irwin points out, a policymaker might not be hawkish because of the
current inflation risk, but because of risk of financial instability. Thus, it
is more appropriate to use the terms to refer to a policy outlook rather than
the specific reason (such as inflation, deflation, financial instability, etc.)
for that outlook.
The key is that the terms hawks or doves refer to a perception about the
appropriate path of monetary policy, and it is possible - and desirable - that
the perceive path changes as the economy changes. In other words, a policymaker
could be "dovish" at one point in the business cycle, and "hawkish" at another.
If the FOMC turns "hawkish" in the near future, we can expect less
accommodation (or even tighter policy), which is what we would expect if the
economy were accelerating.
This definition does not imply that "hawks" or "doves" have different
inflation targets, which I think is an outdated classification. On that basis,
there are no such things as hawks or doves - the FOMC
has already quantified their objective of 2% annual PCE inflation over the
longer run. Even the Evan's rule is not technically at odds with that
objective; it merely allows the Fed to reach that objective from above, making
clear that actual inflation will likely be within a range around 2%. In other
words, the target is not a ceiling.
So when we learn that the doves, and specifically Vice Chair Janet Yellen,
have been better forecasters than the hawks, we should not conclude that
those favoring a higher inflation target have been correct. We should conclude
that those who favored additional monetary accommodation on the basis of their
forecasts were correct. Those who favored relatively less accommodation based
on their forecasts were incorrect.
The hawks/doves distinction has returned with the great debate over who
should take the helm of the Federal Reserve when current-chairman Ben Bernanke
steps down. Sadly, there is an effort to paint Janet Yellen in a negative light
because she is a "dove" and thus will favor higher inflation, the debasing of
the currency, cats and dogs living together, etc. This is the negative
connotation associated with the outdated definition of hawks and doves. The
attack on Yellen takes an ugly turn in the
Wall Street Journal:
Janet Yellen, the current Fed vice chairman, has emerged as the favorite
of the Democratic left. As an economist with long experience at the Fed, she
doesn't lack for professional credentials. But her cause has been taken up
by the liberal diversity police as a gender issue because she'd be the first
female Fed chairman.
Nancy Pelosi has bellowed her support, and Christina Romer, who was chief
White House economist for the first two years of Mr. Obama's Presidency, has
all but said it would be a defeat for women if Ms. Yellen doesn't get the
Fed job. That led our friends at the New York Sun to wonder if they had
somehow missed the creation of "the female dollar" given that they thought
the Fed's main task is to preserve the value of the currency.
Ms. Yellen is also seen, in and outside the Fed, as a leading monetary
dove. That isn't limited to her backing for Mr. Bernanke's monetary
interventions since the 2008 panic. We've followed Ms. Yellen for 20 years
and can't recall a key juncture when her default policy wasn't to keep
spiking the punchbowl. Many Democrats think the Fed needs to keep interest
rates at near zero through the 2016 election, and Ms. Yellen is their woman.
I suppose we are supposed to infer that all women are at heart dovish
policymakers bent on debasing the US currency. I think Kansas City Federal
Reserve President Esther George would disagree. And I am not sure how you read
this passage without realizing the case against Yellen is, at its core, nothing
more than sexism. Moreover, I am not sure how you read this column and not
realize the ignorance of the author. Regarding the punchbowl comment, Neil
Irwin, unsurprisingly, has a better recollection of the past twenty years:
For example, Janet Yellen, the current Fed vice-chair, is viewed in
markets as an uber-dove because she has been a strong advocate of the Fed’s
unconventional monetary easing to try to help the job market. But it wasn’t
always so. Larry Meyer served as a Fed governor with Yellen in the 1990s. In
1996, the two of them had concluded that the Fed needed to raise interest
rates to fight the threat of inflation. They went to Alan Greenspan and told
him of their concerns, threatening to dissent at a future meeting unless
there was a rate increase. They lost the argument, but it is a sign that
while Yellen may be a dove right now, the same would not be true in all
states of the world.
I also have followed Yellen for the better part of 20 years and never for a
moment considered her a dove relative to the old, outdated definition. If
anything, I would have considered her a hawk relative to the current 2% target.
Recall that she was an early advocate of numerical targets. From
...I find myself still pretty comfortable with the numerical objective I
had recommended almost a decade ago. More specifically, I would now favor a
1.5 percent numerical objective for inflation as measured using the core
personal consumption expenditures (PCE) price index, which, given the recent
average differences in measurement bias, corresponds to a 2 percent
objective for the core CPI. If the stability of my own views on the
appropriate numerical inflation objective is representative, it seems likely
that the FOMC’s numerical inflation objective would probably change fairly
little over time due to economic factors.
If you assume that core and headline rates converge to the same over time,
than at one time Yellen favored what could be considered a relatively more
hawkish stance regarding the appropriate rate of inflation. The
next year she suggested that even lower inflation was acceptable:
I see an inflation rate between 1 and 2 percent, as measured by the core
personal consumption expenditures price index, as an appropriate price
stability objective for the Fed.
But what she has not changed her view on achieving that outcome within the
structure of the dual mandate:
However, I also think it is critically important that a numerical
inflation objective not weaken our commitment to a dual mandate that
includes full employment. Therefore, I would see the numerical objective as
a long-run goal, and would want the Committee to have a flexible timeframe
within which to maintain it. We’ve done a good job under Chairman Greenspan
of promoting both price stability and full employment. I believe that a
numerical long-run objective for inflation will enhance our ability to
maintain that success even in the face of the significant challenges that
may come up.
Yellen doesn't view an inflation target as being inconsistent with achieving
full employment. And guess what? She has been right. The current pursuit of
full employment certainly has not fueled inflation. But if it did, if the 2%
target was in jeopardy, I am confident Yellen would act accordingly. Indeed, I
think she would surprise those who deride her as a "dove."
Bottom Line: The classification of policymakers into hawks and doves is
unfortunate given the negative connotation associated with doves in particular.
It is even more unfortuate that Yellen has been identified as a dove
innumerable times in the press and blogs (myself included). I don't know that
we can easily abandon the terminolgy, but we very much need to work to eliminate
any negative connotations to the terms.
Posted by Mark Thoma on Tuesday, July 30, 2013 at 04:32 PM in Economics, Fed Watch, Monetary Policy |
Haven't checked in with Jamie Galbraith for awhile (this came by email, so no
link -- also, it's relatively long, and I suppose I should note that I don't agree with
everything that is said):
Roger Strassburg: I was listening to your speeches. One of them
that I found was kind of interesting was
the one in
Croatia, where you talked about true and false Keynesianism. What
does that actually mean?
James Galbraith: Well, it's a politer term for the subspecies that
John Robinson referred to by a somewhat ruder word. What I'm getting
at there, hoping to stick some needles under the skin of certain people, is
the misleading, and I think fundamentally anti-Keynesian idea that the
macro-economic task consists of stimulating, and thereby returning the
economy from its present state to the track of potential output, which was
previously considered to be normal. What's wrong with this, is two
things. First of all, it conveys the false impression that the
macro-economic problem is a short-term problem amenable to a relatively
short-term solution consisting largely just of increased spending or
reduction of taxes. That, in turn diverts attention away from the
problems that I think are effective barriers to such a return.
So my view is that the Keynes, were he around today, would have a vivid
appreciation of the difficulties and would be taking a strategic and
long-term approach to these issues, putting in place institutional changes
that in my view are required. They include, first of all, regulation
of the debt issue, a transformation and restructuring of the banking sector,
new institutions to provide employment to those who need it, and a
strengthened system of comprehensive social insurance. All of those
things were part of the New Deal formula, and they are all, I think,
palpably essential, not to restore growth and full employment, but to face
the much more urgent task of preventing any imminent disaster.
Roger Strassburg: So you don't necessarily think that the growth trend
is a good measure?
Continue reading "Roger Strassburg Interview of Jamie Galbraith" »
Posted by Mark Thoma on Tuesday, July 30, 2013 at 10:18 AM in Economics |
This was in today's links, but it's worth highlighting:
Howard Dean Sells Out: Monday Health Care Lobbyist Smackdown Weblogging, by
Brad DeLong: The government already sets rates for Medicare, through the
RVS and the RUC process.
The Independent Payment Advisory Board--IPAB--is an attempt to set rates in
a less-stupid and more evidence-based way.
Thus Howard Dean claiming that "the ACA's rate-setting won't work", thereby
telling his readers that the creation of IPAB introduces rate-setting into
some equilibrium of free-market prices for Medicare, is Howard Dean being
mendacious to try to protect the profits of the clients of McKenna, Long, &
Aldridge. It is not Howard Dean weighing in on public policy trying to make
America a better place.
Shame on Howard Dean. Disgraceful. ...
Posted by Mark Thoma on Tuesday, July 30, 2013 at 06:21 AM in Economics, Health Care, Politics |
In almost every high income country, the share of 25-34 year-olds with
higher education is higher than that for the age 25-64 population as a
whole--about 7 percentage points higher. This is the pattern one would
expect to see if a country is expanding access to higher education. But the
U.S. is an exception, where the share of 25-34 year-olds with with a
tertiary education degree is lower than for the age 25-64 population.
Posted by Mark Thoma on Tuesday, July 30, 2013 at 12:42 AM in Economics, Universities |
We are, as they say, live:
Income Inequality: Obama vs.Limbaugh--Middle Out or Trickle Down?, by Mark A. Thoma:
President Obama unveiled
his latest initiative to enhance economic growth, create quality jobs,
and reduce inequality last week, an approach he calls growing from the
“middle out.” The basis of this approach is the idea that rising inequality
has redirected income from the middle class to the top of the income
distribution, and the reduced buying power of the middle class has reduced
economic growth. Thus, the key to higher growth is to enact policies that
increase the share of national income that flows to the middle class.
Of course, as with previous initiatives from the Obama administration to
address our economic problems, a divided, gridlocked government means there
is no chance of this initiative actually passing. In fact, the response from
the political right was predictable, a claim that “trickle-down” supply-side
policy is the key to fixing all that ails the economy. For example,
Rush Limbaugh reacted the president’s speech by saying ...
But, as the column goes on to explain, this is a false debate (and there's a
connection to inequality).
Posted by Mark Thoma on Tuesday, July 30, 2013 at 12:33 AM in Economics, Income Distribution, Policy, Politics |
Posted by Mark Thoma on Tuesday, July 30, 2013 at 12:03 AM in Economics, Links |
(Un)accountability, by Mark Kleiman: What does a Republican charter-school enthusiast who believes in school-level
accountability for educational results do when a charter school run by a big
Republican donor gets a lousy evaluation score? Why,
he cheats, of course.
Tony Bennett, former head education honcho in Indiana and current head
education honcho in Florida, to his chief of staff:
Anything less than an A for Christel House compromises all of our
Bennett to the official in charge of the grading system for schools:
I hope we come to the meeting today with solutions and not excuses and/or
explanations for me to wiggle myself out of the repeated lies I have told
over the past six months.
Somehow, magically, the score for Christel House went from 2.9 (C+) to 3.75
(a solid A).
Look: I believe in outcomes measurement. I believe in accountability. ...
What I don’t believe is that the current set of testing/accountability/choice
racketeers is going to make things better rather than worse. The cheating is so
pervasive that I now see no basis for believing any claimed good result. ...
You’d have thought that charter schools, like private prisons, could hardly
have done worse than their big, clumsy, bureaucratic, union-dominated public
competition. But you would have been wrong, twice.
Posted by Mark Thoma on Monday, July 29, 2013 at 06:04 PM in Economics |
I wanted to respond to this silly commentary in the WSJ,
The Inequality President, claiming that Obama has fueled
inequality, but never managed to do it. So I'm glad someone else (S.M. at The Economist) took up the
Growth and inequality,
by S.M., Democracy in Action, The Economist: The Wall Street Journal is deeply unhappy with Barack
speech on the economy at Knox College in Galensburg, Illinois. The rising
inequality in Americans’ incomes that Mr. Obama bemoaned last week, the
is a direct result of his administration’s policies...
The Journal is right that the middle class has seen little benefit
from the modest recovery... But is it true
that “Obamanomics” is to blame for the plight of the middle class? ...
A pair of disingenuous arguments
fuel the Journal’s claim that Mr Obama’s policies have put
a brake on the recovery. Here is the first:
The food stamp and disability rolls have exploded, which
reduces inequality but also reduces the incentive to work and rise on the
The Onion has
exposed the oddity of this proposition as well as anyone,
and recent research into the relationship between the Supplemental Nutrition
Assistance Program (SNAP) and work incentives belies the Journal’s
claim. It stands to reason that
hundred dollars in food stamps for you and your family every month would not
turn you into a beach bum or deter you from searching for a job. ...
More to the point, in the mid-2000s about 96% of people who
worked before receiving food stamps
continued to work
after entering the program. So helping people put food on the table does not
seem to contribute to unemployment and does not, according to available
evidence, hamper economic growth.
second warrant for the claim that Mr Obama's policies are anti-growth is
Mr. Obama's record tax increases have grabbed a bigger
chunk of affluent incomes, but they created uncertainty for business
throughout 2012 and have dampened growth so far this year.
This bald assertion makes little sense. Uncertainty may have
plagued the business community in the run-up to the fiscal cliff, but since the
year-ending deal to
very modestly increase tax rates on the highest earners,
there have been no real surprises. ...
[A]s Mr Obama emphasized in his speech last week, the middle class
continues to fall behind even as the stock market surges and the housing market
picks up, and there is no apparent quick fix for what seems to be a worsening
trend over at least the past decade. The president promises to provide detailed
proposals for a long-term solution in the coming weeks, and his ideas should be
scrutinized carefully. But dismissive, fact-blind critiques of Mr. Obama as an
“inequality president” are no help at all.
Posted by Mark Thoma on Monday, July 29, 2013 at 09:05 AM in Economics, Income Distribution |
What's the matter with Atlanta?:
Stranded by Sprawl, by Paul Krugman, Commentary, NY Times: Detroit is a
symbol of the old economy’s decline. ... Atlanta, by contrast, epitomizes
the rise of the Sun Belt...
Yet in one important respect booming Atlanta looks just like Detroit gone
bust: both are places where the ... children of the poor have great
difficulty climbing the economic ladder. In fact, upward social mobility ...
is even lower in Atlanta than it is in Detroit. And it’s far lower in both
cities than it is in, say, Boston or San Francisco, even though these cities
have much slower growth than Atlanta.
So what’s the matter with Atlanta? A
new study suggests
that the city may just be too spread out ... Atlanta is the Sultan of
Sprawl, even more spread out than other major Sun Belt cities. This would
make an effective public transportation system nearly impossible to
operate... As a result, disadvantaged workers often find themselves
stranded; there may be jobs available somewhere, but they literally can’t
The apparent inverse relationship between sprawl and social mobility
obviously reinforces the case for “smart growth” urban strategies... But it
also bears on a larger debate about what is happening to American society. I
know I’m not the only person who read the ... new study and immediately
thought, “William Julius Wilson.”
A quarter-century ago
Wilson, a distinguished sociologist, famously argued that the postwar
movement of employment out of city centers to the suburbs dealt
African-American families, concentrated in those city centers, a heavy blow,
removing economic opportunity just as the civil rights movement was finally
ending explicit discrimination. And he further argued that social phenomena
such as the prevalence of single mothers, often cited as causes of lagging
black performance, were actually effects —... the family was being
undermined by the absence of good jobs.
These days,... traditional families have become much weaker among
working-class whites, too. Why? Well,... the new research on social mobility
suggests that sprawl — not just the movement of jobs out of the city, but
their movement out of reach of many less-affluent residents of the suburbs,
too — is ... playing a role.
As I said, this observation clearly reinforces the case for policies that
help families function without multiple cars. But you should also see it in
the larger context of a nation that has lost its way, that preaches equality
of opportunity while offering less and less opportunity to those who need it
Posted by Mark Thoma on Monday, July 29, 2013 at 12:37 AM in Economics, Income Distribution |
FOMC Week, by Tim Duy: With the FOMC widely expected to hold the pace of its
asset purchase program steady, the real action will be in the statement. Two
issues bear watching, the economic outlook and and the forward guidance. The
risk is that one or both are more dovish than the last FOMC statement. But,
interestingly, being more dovish does not necessarily imply a delay to asset
purchase tapering; it could also mean that the Fed leaves a September tapering
in place, while using forward guidance to ease policy policy by signaling an
even more extended period of low rates.
At this risk of oversimplifying the last FOMC statement, narrow the
Fed's June outlook to:
Information received since the Federal Open Market Committee met in May
suggests that economic activity has been expanding at a moderate pace...
... The Committee sees the downside risks to the outlook for the economy
and the labor market as having diminished since the fall.
Putting inflation aside for a moment, the Fed can move in a dovish direction
by downgrading from "moderate" to "modest." As
Calculated Risk notes, much here hinges on the Fed's interpretation of what
is largely expected to be a weak GDP report (released the same day as the FOMC
statement), on the order of 1% or less for the second quarter. I tend to think
the Fed will largely dismiss the report as an artifact of fiscal contraction and
other one-off events. Indeed, in his recent Congressional testimony, Federal
Reserve Chairman Ben Bernanke indicated that the Fed's forecast had not changed
significantly since the last FOMC meeting despite knowing that the second
quarter GDP would be lackluster. Has he had a change of heart since then?
Another possible hint on the outlook could be the consistency of the last two
Beige Books. From the
June Beige Book:
Overall economic activity increased at a modest to moderate pace since
the previous report across all Federal Reserve Districts except the Dallas
District, which reported strong economic growth.
The language was
similar in July:
Reports from the twelve Federal Reserve Districts indicate that overall
economic activity continued to increase at a modest to moderate pace since
the previous survey.
Arguably a downgrade, but I doubt policy is likely to shift on a minor
pullback in activity in just one Federal Reserve District. Still, given that
the data flow has certainly not been better than expected, even if they do not
downgrade the basic assessment, they could suggest that the risks to the outlook
are more balanced (rather than "diminished" as in June). With this in mind,
recall that Bernanke's assessment of the risk appeared more balanced in his
Congressional testimony, which suggests this week's FOMC statement will indicate
Regarding inflation, the Fed last concluded:
The Committee also anticipates that inflation over the medium term likely
will run at or below its 2 percent objective.
This assessment is not likely to change. Possible, though I think unlikely,
would be a change to this sentence:
Partly reflecting transitory influences, inflation has been running below
the Committee's longer-run objective, but longer-term inflation expectations
have remained stable.
A decidedly dovish shift would be to remove the reference to "transitory
influences." Even more dovish would be to suggest that inflation expectations
are trending down, but I very much doubt the Fed will go that far.
In addition to shifting their assessment of the economy, the Fed may choose
to tighten up it's forward guidance. Considering that Fed speakers, including
Bernanke, have indicated that, given the inflation outlook, interest rates will
remain unchanged even after the unemployment rate hits 6.5%, it seems possible
that the FOMC could shift the unemployment threshold down to 6%. They could also
formalize Bernanke's 7% unemployment for ending quantitative easing. What they
won't do is increase the 2.5% inflation threshold; indeed, that one I view more
as a trigger than a threshold in any event.
It may be the case that, barring a sharp deterioration in the economy, we
will find that changes in the economic assessment should be interpreted as
changes in the expected timing of the first rate hike rather than the pace of
the exit from quantitative easing. This may be the case even if the forward
guidance is left unchanged. The Fed seems to desire a shift in the mix of
policy while maintaining the current level of accommodation, and they may use
the statement to signal such an intention.
Moreover, arguably there is little harm at this point to sticking with a plan
to end asset purchases by the middle of next year. Bernanke already shifted
expectations in such a way that interest rates jumped to a new range around
2.5%. In order to reverse that increase, I suspect the Fed would need to do
more than just suggest a delay in the tapering. I suspect they would need to
surprise markets with an increase in the pace of purchases. But I don't see
much appetite at the FOMC for such a move other than perhaps St. Louis Federal
Reserve President James Bullard. Thus, FOMC members could decide that they
still want out of QE and just use forward guidance to control the pace of any
further rate gains.
Bottom Line: This will be a very interesting FOMC meeting even if the
statement is left largely unchanged. That alone reveals that the Fed is moving
ahead with their plan to taper undeterred by any soft spots in the data. After
all, wouldn't this just be another midyear slowdown in the data flow? A move to
a more dovish statement, either in the economic assessment or fine-tuning the
forward guidance, however, does not necessarily mean any change in the plan to
end asset purchases. It could all be about the timing of the first rate hike at
this point. The plan to end asset purchases may have had more to do with market
functioning than economic activity in the first place. And that debate is
really over regardless of when the Fed actually tapers. Whether September or
December or early next year is probably no longer very important; the date of
the first rate hike, however, is still very important.
Posted by Mark Thoma on Monday, July 29, 2013 at 12:24 AM in Economics, Fed Watch, Monetary Policy |
Posted by Mark Thoma on Monday, July 29, 2013 at 12:03 AM in Economics, Links |
Simon Wren-Lewis on the economics of advertising for cigarettes. He asks, is
banning advertising paternalistic, or does it enhance our freedom?:
Advertising, Paternalism, Information and Plain Packaging of Cigarettes:
This is off the usual macro beat, so probably this point has been made in a
much clearer way by others, but it is hardly ever made in the public debate,
and I have read economists who argue
the opposite. It was prompted by the UK government’s predictable
decision to kick ‘plain packaging’ of cigarettes (example...)
into the long grass. One of the
arguments used against plain packaging is that it represents yet more
paternalism by the government. My general thought is this: is banning
advertising paternalistic, or is it enhancing our freedom? ...
The argument for advertising has to be that the benefits to the few in
getting useful information outweighs the costs to the many in either
avoiding it, or getting information they do not want. It is not
paternalistic to ban advertising, just as it is not paternalistic to stop
people being stalked.
That is the general point which hardly ever seems to be made. ... However
the debate about ‘plain packaging’ is not about either packaging that is
plain, or the pros and cons of advertising. The Australian version of plain
packaging replaces the logo of the cigarette with a picture of one of the
health risks if you smoke these cigarettes (see [here]).
So it is not about banning advertising, but replacing one type of
advertising with another.
Those who do not smoke and have no intention of smoking are not forced to
look at these adverts, so banning this kind of advertising would not
increase their freedom. For those who do not smoke but might smoke, and
probably for those who do smoke, the information content of the ‘plain
packages’ is clearly much greater than packages that were dominated by a
logo. So this is one example where the information content of advertising
does dominate any reduction in freedom that the advertising entails. ...
[I cut quite a bit from the original, particularly on the costs and benefits of advertising in
general that set up the second paragraph above.]
Posted by Mark Thoma on Sunday, July 28, 2013 at 09:31 AM in Economics, Market Failure |
The beginning of health inequality:
Inequality of Opportunity Begins at Birth, by Bill Gardner: Equality of
opportunity means that we are not a caste society. Who we will become is not
fixed by the circumstances of our births. Some children will do better than
others, but this should result from a fair competition. ...
But we don’t appreciate how deep inequality runs. The graph below is from a
Angus Deaton which (I believe) reported data from the National Health
Interview Survey. The horizontal axis is the logarithm of family income in
1982 dollars, running from about $3600 to over $80,000. The vertical axis is
self-reported ill-health (higher numbers reflect worse health). The parallel
lines represent different age groups of respondents.
There are three important facts packed into this slide. First, the lines
stack up in order of increasing age, meaning that older people reported worse
health than younger people. Second, all the lines slope downward, meaning that
the poorer you were, the more likely you had poor health. ...
Lastly, notice how the age lines are much more dispersed on the left
(poorest) side of the graph than the right (richest) side of the graph. This
means that health deteriorates more quickly with age among the poor than among
...there is substantial evidence that health inequality starts at birth, or
even conception. As
Janet Currie argues, there is
huge inequality in health at birth. For example, the incidence of low
birth weight (birth weight less than 2500 grams) is more than three times
higher among children of black high school dropout mothers than among
children of white college educated mothers.
...the infants of the poor are also at
risk because poor mothers have poorer health, are more stressed, and are more
likely to be exposed to environmental toxins. Poverty gets underneath the skin,
starting in the uterus.
Poor health deriving from inequality of economic well-being begins at birth
and accumulates as children develop. We are farther from equality of opportunity
than most of us acknowledge.
Posted by Mark Thoma on Sunday, July 28, 2013 at 12:24 AM in Economics, Health Care |
Posted by Mark Thoma on Sunday, July 28, 2013 at 12:03 AM in Economics, Links |
Paul Krugman) describes my position on QE:
...QE, in the eyes of its most enthusiastic advocates, can return us to
Milton’s Eden. And they are determined to read the evidence as confirming
that hopeful notion.
Yet there are many economists, myself included, who regard this view as
highly unrealistic, yet support more aggressive Fed action all the same.
Why? First, because it might help and is unlikely to do harm. Second,
because the alternative — fiscal policy — may be of proven effectiveness,
but is also completely blocked by politics. So the Fed’s efforts are all we
And I think his explanation for why so many conservatives have embraced QE is
right on the mark as well:
the affection for QE comes, instead, from the alluring prospect — to some
conservatives, at least — of getting economic stabilization without any need
for activist government outside the narrow sphere of monetary policy. What
he doesn’t say clearly, at least in this piece, is that this was the allure
of old-fashioned monetarism too. Just stabilize the money supply, declared
Milton Friedman, and we don’t need any of this Keynesian stuff (even though
Friedman, when pressured into providing an underlying framework, basically
acknowledged that he believed in IS-LM). Why, if only the Fed had stabilized
M2, there would have been no Great Depression!
I'd add that conservatives favor a rules-based QE rather than a discretionary QE
for the same reason, e.g. just stabilize nominal GDP and all will be well in the
world, no need for Fed activism beyond that simple rule.
Posted by Mark Thoma on Saturday, July 27, 2013 at 10:12 AM in Economics, Monetary Policy, Politics |
U.S. Firms Holding $1.8 Trillion in Liquid Assets, by Tim Taylor: U.S.
firms are holding $1.8 trillion in liquid assets: that is, either cash or
marketable securities. What's going on here? Laurie Simon Hodrick tackles
"Are U.S. Firms Really Holding Too Much Cash?" in a July 2013 Policy
Brief written for the Stanford Institute for Economic Policy Research.
For background, here are a couple of figures. The first shows cash and
marketable securities of firms over time--that is, "liquid assets"--rising
rapidly. The second shows these liquid assets as a share of the short-term
liabilities of firms. Of course, firms always like to have some cash on
hand, but historically, that has been about 30% of all short-term
liabilities. In the last few years, liquid assets have climbed to almost
half of all short-term liabilities.
The argument usually heard for holding additional liquid assets is that the
last few years have been times of considerable uncertainty about the economy
and economic policy, so firms need a bigger cushion. This explanation has
some truth in it, but it's not all of the truth.
1) This need for additional liquid assets is not affecting all firms or all
industries equally, but instead is affecting a smaller number of highly
profitable companies. ... As Hodrick explains: "... [C]ash holdings are
concentrated among highly profitable firms, many in the technology and
health care sectors."
2) Some of the cash holdings seem related to issues of the taxation of
multinational firms. ...
3) There's a long tradition in the economics and corporate finance
literature of being suspicious about firms that hold large amounts of cash.
After all, large amounts of cash on hand might help the job security and
emotional comfort of the managers, but not necessarily be in the best
interests of shareholders. There's an argument that cash-heavy firms should
either have a plan for at least potentially investing that cash in a project
that will increase future company profits... Saying that you need a cash
reserve to take advantage of unexpected opportunities sounds great--but
after a few years of doing this, shouldn't firms be able to point to a
series of actual unexpected opportunities of which they did take advantage?
There's are a few signs that, under pressure from shareholders and other
investors, some firms are starting to pay out some of their cash hoard. "On
April 23, 2013, Apple Inc. announced its intention to pay out a total of
$100 billion in cash by the end of calendar year 2015, the largest total
payout ever authorized." However, by some estimates this payout will only be
enough to keep Apple's overall cash hoard from increasing--not actually to
Posted by Mark Thoma on Saturday, July 27, 2013 at 01:34 AM in Economics |
Posted by Mark Thoma on Saturday, July 27, 2013 at 12:03 AM in Economics, Links |
Trout fishing in America today (near French Pete). Back later.
Posted by Mark Thoma on Friday, July 26, 2013 at 07:56 AM in Economics, Miscellaneous, Oregon |
The success of Obamacare is driving Republicans to yet another round of
potentially damaging brinsmanship:
Republican Health Care Panic, by Paul Krugman, Commentary, NY Times:
Leading Republicans appear to be nerving themselves up for another round of
attempted fiscal blackmail. With the end of the fiscal year looming, they
aren’t offering the kinds of compromises that might produce a deal and avoid
a government shutdown; instead,
they’re drafting extremist legislation ... that has no chance of
becoming law. Furthermore, they’re threatening, once again, to block any
rise in the debt ceiling, a move that would damage the U.S. economy and
possibly provoke a world financial crisis.
Yet even as Republican politicians seem ready to go on the offensive,
there’s a palpable sense of anxiety, even despair, among conservative
pundits and analysts. Better-informed people on the right seem, finally, to
be facing up to a horrible truth: Health care reform, President Obama’s
signature policy achievement, is probably going to work.
And the good news about Obamacare is, I’d argue, what’s driving the
Republican Party’s intensified extremism. Successful health reform wouldn’t
just be a victory for a president conservatives loathe, it would be an
object demonstration of the falseness of right-wing ideology. So Republicans
are being driven into a last, desperate effort to head this thing off at the
Over all,... health reform will help millions of Americans who were
previously either too sick or too poor to get the coverage they needed, and
also offer a great deal of reassurance to millions more...; it will provide
these benefits at the expense of a much smaller number of other Americans,
mostly the very well off. ...
And the prospect that such a plan might succeed is anathema to a party whose
whole philosophy is built around doing just the opposite, of taking from the
“takers” and giving to the “job creators,” known to the rest of us as the
“rich.” Hence the brinkmanship.
So will Republicans actually take us to the brink? If they do, it will be
crucial to understand why they would do such a thing, when their own leaders
have admitted that confrontations over the budget inflict substantial harm
on the economy. It won’t be because they fear the budget deficit, which
is coming down fast. Nor will it be because they sincerely believe that
spending cuts produce prosperity.
No, Republicans may be willing to risk economic and financial crisis solely
in order to deny essential health care and financial security to millions of
their fellow Americans. Let’s hear it for their noble cause!
Posted by Mark Thoma on Friday, July 26, 2013 at 12:33 AM in Economics, Health Care, Politics |
This is via Barry Ritholtz at The Big Picture:
McKinsey: US Infrastructure UnderInvestment vs Other Developed Nations, by
Barry Ritholtz:: The United States must raise infrastructure spending by
1 percentage point of GDP to meet future needs
Posted by Mark Thoma on Friday, July 26, 2013 at 12:24 AM in Economics, Fiscal Policy |
This is a summary of research by Esther Duflo, Abhijit Banerjee, Arun Chandrasekhar, and Matthew
Jackson on the spread of information about government programs through social
How anti-poverty programs go viral, by Peter Dizikes, MIT News Office:
Anti-poverty researchers and policymakers often wrestle with a basic
problem: How can they get people to participate in beneficial programs? Now
a new empirical study co-authored by two MIT development economists shows
how much more popular such programs can be when socially well-connected
citizens are the first to know about them.
The economists developed a new measure of social influence that they call
“diffusion centrality.” Examining the spread of microfinance programs in
rural India, the researchers found that participation in the programs
increases by about 11 percentage points when well-connected local residents
are the first to gain access to them.
“According to our model, when someone with high diffusion centrality
receives a piece of information, it will spread faster through the social
network,” says Esther Duflo, the Abdul Latif Jameel Professor of Poverty
Alleviation at MIT. “It could thus be a guide for an organization that tries
to [place] a piece of information in a network.”
The researchers specifically wanted to study how knowledge about a program
spreads by word of mouth, MIT professor Abhijit Banerjee says, because
“while there was a body of elegant theory on the relation between what the
network looks like and the speed of transmission of information, there was
little empirical work on the subject.”
The paper, titled “The Diffusion of Microfinance,” is published today in the
journal Science. ...
Microfinance is the term for small-scale lending, popularized in the 1990s,
that can help relatively poor people in developing countries gain access to
credit they would not otherwise have. The concept has been the subject of
extensive political debate; academic researchers are still exploring its
effects across a range of economic and geographic settings.
“Microfinance is the type of product which is very interesting to study,”
Duflo says, “because in many cases it won’t be well known, and hence there
is a role for information diffusion.” Moreover, she notes, “It is also the
kind of product on which people could have strongly held … opinions.” So,
she says, understanding the relationship between social structure and
adoption could be particularly important.
Other scholars believe the findings are valuable. Lori Beaman, an economist
at Northwestern University, says the paper “significantly moves forward our
understanding of how social networks influence people’s decision-making,”
and suggests that the work could spur other on-the-ground research projects
that study community networks in action.
“I think this work will lead to more innovative research on how social
networks can be used more effectively in promoting poverty alleviation
programs in poor countries,” adds Beaman... “Other areas would include
agricultural technology adoption … vaccinations for children, [and] the use
of bed nets [to prevent malaria], to name just a few.” ...
Posted by Mark Thoma on Friday, July 26, 2013 at 12:15 AM in Academic Papers, Economics |
Posted by Mark Thoma on Friday, July 26, 2013 at 12:03 AM in Economics, Links |
More on housing from Tim Duy, and how it might or might not influence
thinking at the Federal Reserve:
Negative Feedback Loops?, by Tim Duy: Earlier this week, we were greeted
with news that new homes sales posted a solid increase in June:
Calculated Risk has more
here, with the conclusion that is was "a solid report even with the
downward revisions to previous months." More interesting, though, is that
the gains came amid a spike in mortgage rates. This could be taken as
evidence that the rate rise has had only minimal impacts on housing markets,
thus clearing the way for the Fed to scale back asset purchases sooner than
That said, today we learned this, via
Rising mortgage rates contributed to increased cancellations and a
dropoff in traffic in June, according to Fort Worth, Texas-based D.R.
....Homebuyers are “shocked and disturbed” rates have moved up so fast,
D.R. Horton Chief Executive Officer Donald Tomnitz said on a conference
But not everyone in the industry is singing the same tune:
Richard Dugas, PulteGroup’s chief executive officer, said on a
conference call today that the higher mortgage rates haven’t hurt demand
and buyer traffic remained consistent throughout the quarter and into
“We’re in the camp that if higher rates reflect improving economic
conditions we’d expect a housing recovery to remain on track,” Dugas
said. “As an industry, we can sell more houses if more people have jobs,
even with modestly higher rates.”
On the margin, some buyers were certainly impacted by the sharp gain in
rates, but rates are only one part of the buying decision - factors like job
growth also matter. The initial sticker shock might only be temporary. And
perhaps even higher rates are necessary to make a significant dent in the
housing market. From
As Jed Kolko, Trulia’s chief economist wrote yesterday, homebuyers say
rising rates is their top worry when looking to buy, even more so than
rising prices or finding a home they like. But as Kolko points out,
people’s actions aren’t matching their words so far. Despite the higher
rates, applications for purchase mortgages rose in June, as did asking
prices for homes. Trulia’s data suggest that mortgage rates around 6
percent would be a tipping point that cause a majority of people to
Overall, I would say the negative anecdotal housing evidence is too limited
at this point to have a policy impact. And note the positive anecdotal
evidence from the latest Beige Book:
Residential real estate activity increased at a moderate to strong pace
in most Districts. Most Districts reported increases in home sales.
Cleveland noted that June sales of single-family homes were down
compared with earlier in the spring but up from last year. Boston, New
York, Minneapolis, Kansas City, Dallas, and San Francisco noted strong
residential real estate markets. Home prices increased throughout the
majority of the reporting Districts. Boston, New York, Richmond,
Atlanta, Minneapolis, Kansas City, and Dallas noted low or declining
home inventories and upward pressures on home prices in some areas.
Residential construction activity also improved moderately across the
Districts, and contacts in New York, Philadelphia, Chicago, Minneapolis,
Dallas, and San Francisco reported faster growth in multi-family
construction, in particular.
Moreover, it is not clear that taking some steam off the housing market was
not an intent of some policymakers. San Francisco Federal Reserve President
was quoted recently saying:
“The outsized response” in the yields of 10-year Treasuries in recent
weeks may have stemmed from complacency and “froth” in the market,
Williams said. Some investors expected the Fed to keep quantitative
easing and zero interest rates in place for longer than officials were
“The market reaction to me probably is a sign that there was complacency
and excesses going on,” Williams said. “It’s a good thing that maybe
came to an end, or maybe was lessened.”
But earlier in the article he said:
Federal Reserve Bank of San Francisco President John Williams, who has
never dissented from a policy decision, said “it’s still too early” for
the Fed to begin trimming its bond-buying, warning of risks to the
economy from low inflation and government budget cuts.
“We need to be sure that the economy can maintain its momentum in the
face of ongoing fiscal contraction,” Williams said in a speech today in
Rohnert Park, California. “It is also prudent to wait a bit and make
sure that inflation doesn’t keep coming in below expectations, possibly
signaling a more persistent decline in inflation.”
I find a lot of inconsistency in Fedspeak of late. If the economy needs
continued support, why even begin the tapering discussion? And if the
economy needs continuing support, then the rate rise represents a real
tightening of monetary conditions, not just a lessening of accommodation, so
how can Fed officials cheer-lead the rate rise? We saw
something similar from Federal Reserve Chairman Ben Bernanke:
The second reason for increases in rates is probably the unwinding of
leveraged and perhaps excessively risky positions in the market. It's
probably a good thing to hav e that happen, although the tightening
that's associated with that is unwelcome. But at least the benefit of
that is that some concerns about building financial risks are mitigated
in that way and probably make some FOMC participants comfortable with
this tool going forward.
In my opinion, we no longer know the Fed's reaction function. The reaction
function does not appear to be entirely dependent on unemployment and
inflation. There was never any reason to adjust QE on that basis, that's
why Bernanke's post-FOMC comments caught everyone by surprise. If you take
the economy off the table, then the Fed appears to have a financial
stability variable now built into their reaction function. Perhaps that
variable reflects concerns about leverage, perhaps,
as Izabella Kamiska suggests, it reflects liquidity issues. Maybe they
were worried about lighting a fire beneath Housing Bubble 2.0. We just
don't know; we just know that they are not entirely dissatisfied with rising
rates despite the potential for negative feedback on the economy.
Bottom Line: Still too early to conclude the extent of the negative
feedback of the recent rise in rates. Moreover, it is not clear to what
extent Fed officials are unhappy with that feedback. Less so than we might
suppose if they now have a financial stability variable in their reaction
function. If so, policy efforts will center less on reversing the rate
increase than in moderating the pace of increases.
Posted by Mark Thoma on Thursday, July 25, 2013 at 11:49 AM in Economics, Fed Watch, Financial System, Housing, Monetary Policy |
Jim Hamilton says to keep your eyes on China's economy:
Worries about China, by Jim Hamilton:
Paul Krugman is among those starting to be concerned about an economic
downturn in China. Here are my thoughts on this issue.
... What rings alarm bells for me is the recent sharp spikes
in interbank lending rates..., such moves could
definitely be signaling some financial fragility. ...
Paul Krugman writes:
Suppose that those of us now worried that China's
Ponzi bicycle is hitting a brick wall (or, as some readers have
suggested, a BRIC wall) are right. How much should the rest of the world
worry, and why?
I'd group this under three headings:
1. "Mechanical" linkages via exports, which are surprisingly small.
2. Commodity prices, which could be a bigger deal.
3. Politics and international stability, which involves some serious
To Paul's list, I would add a fourth: financial linkages. If there are
significant disruptions to China's system for funding credit, that could have
implications for anyone borrowing from or lending to Chinese entities.....
I'd also like to add an observation to Paul's second point involving
commodity prices. A significant economic downturn in China could well mean a
collapse in oil prices. One would think that, as a net importer, this would be
an overall favorable development for the United States, and certainly it would
be a significant plus for many individual U.S. firms and producers. But it's
worth remembering what happened after the collapse in oil prices in 1986. In the
years leading up to that, just as today, there had been a dramatic economic boom
in the U.S. oil-producing states... When oil prices collapsed, domestic
producers took a significant hit. ...
My bottom line: China is worth watching.
Posted by Mark Thoma on Thursday, July 25, 2013 at 11:06 AM in China, Economics, Financial System, International Trade, Oil, Politics |
Haven't checked in with Calculated Risk for awhile. He remains optimistic:
A Few Comments on New Home Sales, by Bill McBride, Calculated Risk: ...
Looking at the first half of 2013, there has been a significant increase in
sales this year. ... This was the highest sales for the first half of
the year since 2008.
And even though there has been a large increase in the sales rate, sales are
just above the lows for previous recessions. This suggests significant
upside over the next few years. Based on estimates of household
formation and demographics, I expect sales ... substantially higher than the
current sales rate.
And an important point worth repeating every month: Housing is historically
the best leading indicator for the economy, and this is one of the reasons I
The future's so bright, I gotta wear shades. ...
I'm a bit more cautious about the future (and I hope policymakers don't assume that we can sound the all clear). What do you think?
Posted by Mark Thoma on Thursday, July 25, 2013 at 10:02 AM in Economics, Housing |
A Better Way to Think About Trade, by Simon Johnson, Commentary, NY Times:
Representative Sander Levin of Michigan, the senior Democrat on the Ways and
Means Committee, which has jurisdiction over many trade issues, proposed
this week that the United States make a significant change in its approach
to international trade. ...
Mr. Levin made three main proposals... The first point is that enforceable
labor and environmental standards need to be given more emphasis in American
trade agreements... Recent horrendous events in Bangladesh have driven home
the unfortunate truth that if matters are left purely “to the market,” there
will be ... dangerous working conditions. ...
When I discuss these matters with global business executives, almost without
exception they are of the opinion that health and safety should be subject
to minimum acceptable ... standards everywhere. Mr.
Levin is pushing on an open door.
Mr. Levin’s second point is just as compelling. ... Many countries claim to
engage in free trade. But some governments ... have become adept at ...
engaging in unfair trade practices.
Mr. Levin is talking about removing government distortions, and this is why
I expect he may receive a great deal of Republican support.
And this is also where Mr. Levin’s third proposal will really hit a nerve.
There are countries that manipulate their exchange rate ... in order to gain
a competitive advantage... Again, the issue is ... governments’ getting away with actions that distort
markets on a grand scale. Here, too, I don’t know many Republicans who would
feel good about this. ...
This is a targeted and responsible proposal. It should get support from both
sides of the aisle on Capitol Hill. ...
Short on time and it's late, so I'm going to turn this over to you. Here's a
counterargument to one of the points:
Safety laws do workers more harm than good, by Jagdish Bhagwati and Amrita
But I don't expect it will find a very receptive audience. Comments?
Posted by Mark Thoma on Thursday, July 25, 2013 at 01:59 AM in Economics, International Trade |
Posted by Mark Thoma on Thursday, July 25, 2013 at 12:03 AM in Economics, Links |
Shock and Awe(ful), by Tim Duy: Yesterday's hot story from Ezra Klein that Larry Summers was the lead
candidate for the top spot at the Federal Reserve was greeted with shock and
awe(ful). I wish I could say that I was surprised, but at the end of last month
I often think we have prematurely declared Janet Yellen the front runner.
We forget that politics will be in play.
My concerns were only reinforced when news broke last week of the campaign
against current Vice Chair Janet Yellen. From
The favored parlor game of the political-economic complex right now is
guessing who will replace Ben Bernanke as chairman of the Federal Reserve.
The clear front-runner is Federal Reserve Vice Chairman Janet Yellen. But
she’s by no means a sure thing.
One important reason she’s not — and I don’t know another way to say this
— is sexism, as evidenced by the whispering campaign that’s emerged against
Yesterday, Klein declared Summers
People dismissed Summers’s chances a month or two ago, but he’s
increasingly viewed as the leading candidate today — and opinions on this,
for reasons I don’t fully understand (though I suspect have to do with a
bunch of elite trial balloons going up at the same time), have really
hardened in the last 72 hours.
Klein lists a variety of reasons in favor of Summers, most important of which
I think is that President Obama and his staff know and like Summers, while
Yellen is a virtual unknown in White House circles. This is also the message of
Washington Post reporter Zachary Goldfarb's tweet yesterday:
Larry Summers visited White House 14 times in past 2yrs. Janet Yellen
visited once, records show.
— Zachary A. Goldfarb (@Goldfarb)
July 23, 2013
Reaction was swift and fierce from some quarters of the blogosphere. Cardiff
Garcia begins with a defense of Summers:
...Some of the mistakes of his past, such as his role in deregulating
derivatives (the Brooksley Born episode) or the Harvard interest rate
blowup, don’t really tell us much about his capacity to guide macroeconomic
His more recent mistakes, specifically his failure to better advise Obama
on the stimulus (should have been bigger) and housing policy (should have
done more for people in foreclosure and underwater homeowners), included
political considerations that are hard to untangle from his actual views.
before launching into his reasons for supporting Yellen, beginning with the
The simplest reason is that she is more conventionally qualified for the
job, boasting a much longer entry in her CV as a monetary policymaker.
Like him or hate him, Summers lacks Yellen's depth of exposure to monetary
policy. If relative experience with monetary policy is a requirement for the
job, Yellen clearly has the upper hand. Felix Salmon,
not exactly a fan of Summers to begin with,
sums up the situation:
...if Obama picks Summers, it won’t be on the merits; instead, it will be
on the grounds that Obama likes Summers, and is in awe of his
intelligence. (Summers is, to put it mildly, not good at charming those he
considers to be his inferiors, but he’s surprisingly excellent at
cultivating people with real power.)
Salmon then launches into an attack on Summers:
What’s more, the move would be a calculated snub to bien pensant opinion.
Never mind the utter shambles that Summers made of Harvard, or the way he
treated Cornell West, or his tone-deaf speech about women’s aptitude, or the
pollution memo, or the Shleifer affair, or the way he shut down Brooksley
Born at the CFTC, or his role in repealing Glass-Steagal, or his generally
toxic combination of ego and temper — so long as POTUS likes Larry, and/or
so long as Summers is good at working key Obama advisors like Geithner, Lew,
and Rubin, that’s all that matters.
Evidently, Salmon holds a grudge a bit longer than Garcia. Now, if only
President Obama would shift his focus from Summers and Yellen to Ben Stein, then
we would see some real fireworks from Salmon.
Mark Thoma has a more
Larry Summers is the Front-Runner? WTF?
Perhaps not all is lost. Back to Klein:
That’s not to say Summers is anywhere near a sure thing. His confirmation
would be far tougher than Yellen’s, as Republicans will make him answer for
the stimulus and the bailouts, and progressive Democrats have a list of
grievances going back to financial deregulation in the Clinton-era. There’s
also the simple fact that appointing Yellen would break a significant glass
ceiling — and do so in an administration that hasn’t always been great about
appointing women to top economic positions. And Summers continues to be a
polarizing figure: Those who like him love him, but those who don’t like him
really don’t like him.
That said, one gets the feeling that this is not a sudden decision. Instead
it is one that has been building for weeks, at least since June 29, when I began
to get nervous about the assumption of Yellen as a front-runner. I suspect that
if the position has hardened within the White House as Klein suggests, it is
because Obama has made his choice and it is time for everyone to get on board.
I have to say that if Yellen is not the pick, I will be disappointed. I
think she the best qualified candidate for the job, and agree with the pro-Yellen
arguments of Garcia, Salmon, and
Bill McBride. I am very concerned about Summer's disposition to be a
de-regulator, especially after we see that the Federal Reserve, in its infinite
gave permission for investment banks to openly manipulate commodity markets.
Does anyone see Summers pushing back at that kind of regulation, or getting on
board? I don't think that he is the kind of person to take
the words of Adam Smith to heart:
The interest of the dealers, however, in any particular branch of trade
or manufactures, is always in some respects different from, and even
opposite to, that of the public. To widen the market and to narrow the
competition, is always the interest of the dealers. To widen the market may
frequently be agreeable enough to the interest of the public; but to narrow
the competition must always be against it, and can serve only to enable the
dealers, by raising their profits above what they naturally would be, to
levy, for their own benefit, an absurd tax upon the rest of their
fellow-citizens. The proposal of any new law or regulation of commerce which
comes from this order ought always to be listened to with great precaution,
and ought never to be adopted till after having been long and carefully
examined, not only with the most scrupulous, but with the most suspicious
attention. It comes from an order of men whose interest is never exactly the
same with that of the public, who have generally an interest to deceive and
even to oppress the public, and who accordingly have, upon many occasions,
both deceived and oppressed it.
Bottom Line: Nothing is certain until the announcement is made and the
Senate takes its turn, but it is looking like the White House is pushing to make
Larry Summers the next Federal Reserve Chairman. The curse of the Vice Chair
would then live on.
Posted by Mark Thoma on Wednesday, July 24, 2013 at 10:33 AM
Kevin O'Rourke on the need for economic history:
Why economics needs economic history, by Kevin H O’Rourke: The current
economic and financial crisis has given rise to a vigorous debate about the
state of economics, and the training which graduate and undergraduates economics
students are receiving. Importantly, among those arguing most strongly for a
change in the way that young economists are trained are the ultimate employers
of these students, in both the private and the public sector. Employers are
increasingly complaining that young economists don’t understand how the
financial system actually works, and are ill-prepared to think about appropriate
policies at a time of crisis.
Strikingly, many employers and policymakers are also arguing that knowledge
of economic history might be particularly useful.
- Stephen King, Group Chief Economist at HSBC, argues that: “Too few
economists newly arriving in the financial world have any real knowledge of
events that, while sometimes in the distant past, may have tremendous
relevance for current affairs…The global financial crisis can be more easily
interpreted and understood by someone who has prior knowledge about the 1929
crash, the Great Depression and, for that matter, the 1907 crash” (Coyle
- Andrew Haldane, Executive Director for Financial Stability at the Bank
of England, has written that “financial history should have caused us to
take credit cycles seriously,” and that the disappearance of subfields such
as economic and financial history, as well as money, banking and finance,
from the core curriculum contributed to the neglect of such factors among
policymakers, a mistake that “now needs to be corrected” (Coyle 2012, pp).
- In a recent Humanitas Lecture in Oxford, Stan Fischer said that “I think
I’ve learned as much from studying the history of central banking as I have
from knowing the theory of central banking and I advise all of you who want
to be central bankers to read the history books” (2013).
The benefits of trying to understand economic history
- Knowledge of economic and financial history is crucial in thinking about
the economy in several ways.
Most obviously, it forces students to recognise that major discontinuities in
economic performance and economic policy regimes have occurred many times in the
past, and may therefor occur again in the future. These discontinuities have
often coincided with economic and financial crises, which therefore cannot be
assumed away as theoretically impossible. A historical training would immunise
students from the complacency that characterised the “Great Moderation”. Zoom
out, and that swan may not seem so black after all.
- A second, related point is that economic history teaches students the
importance of context.
As Robert Solow points out, “the proper choice of a model depends on the
institutional context” (Solow 1985, p. 329), and this is also true of the proper
choice of policies. Furthermore, the 'right' institution may itself depend on
context. History is replete with examples of institutions which developed to
solve the problems of one era, but which later became problems in their own
- Third, economic history is an unapologetically empirical field,
exclusively dedicated to understanding the real world.
Doing economic history forces students to add to the technical rigor of their
programs an extra dimension of rigor: asking whether their explanations for
historical events actually fit the facts or not. Which emphatically does not
mean cherry-picking selected facts that fit your thesis and ignoring all the
ones that don't: the world is a complicated place, and economists should be
trained to recognise this. An exposure to economic history leads to an empirical
frame of mind, and a willingness to admit that one’s particular theoretical
framework may not always work in explaining the real world. These are essential
mental habits for young economists wishing to apply their skills in the work
environment, and, one hopes, in academia as well.
- Fourth, economic history is a rich source of informal theorising about
the real world, which can help motivate more formal theoretical work later
on (Wren-Lewis 2013).
Habakkuk (1962) and Abramowitz (1986) are two examples that immediately
spring to mind, but there are many others.
- Fifth, even once the current economic and financial crisis has passed,
the major long run challenges facing the world will still remain.
Among these is the question of how to rescue billions of our fellow human
beings from poverty that would seem intolerable to those of us living in the
OECD. And yet such poverty has been the lot of the vast majority of mankind over
the vast majority of history: what is surprising is not the fact that 'they are
so poor', but the fact that 'we are so rich'. In order to understand the latter
puzzle, we have to turn to the historical record. What gave rise to modern
economic growth is the question that prompted the birth of economic history in
the first place, and it remains as relevant today as it was in the late
nineteenth century. Apart from issues such as the rise of Asia and the relative
decline of the West, other long run issues that would benefit from being framed
in a long-term perspective include global warming, the future of globalisation,
and the question of how rapidly we can expect the technological frontier to
advance in the decades ahead.
- Sixth, economic theory itself has been emphasising – for well over 20
years now – that path dependence is ubiquitous (David 1985).
- Finally, and perhaps most importantly from the perspective of an
undergraduate economics instructor, economic history is a great way of
convincing undergraduates that the theory they are learning in their micro
and macro classes is useful in helping them make sense of the real world.
Far from being seen as a 'soft' alternative to theory, economic history
should be seen as an essential pedagogical complement. There is nothing as
satisfying as seeing undergraduates realise that a little bit of simple theory
can help them understand complicated real world phenomena. Think of Obstfeld and
Taylor’s use of the Mundell-Fleming trilemma to frame students’ understanding of
the history of international capital market integration over the last 150 years;
or Ronald Rogowski’s use of Heckscher-Ohlin theory to discuss political
cleavages the world around in the late nineteenth century; or the Domar thesis,
referred to in Temin (2013), which is a great way to talk to students about what
drives diminishing returns to labour. Economic history is replete with such
opportunities for instructors trying to motivate their students.
Abramovitz, M (1986), “Catching Up, Forging Ahead, and Falling Behind,”
Journal of Economic History 46, 385-406.
Coyle, D (2012), What’s the Use of Economics?: Teaching the Dismal
Science After the Crisis, London Publishing Partnership.
David, P A (1985), "Clio and the Economics of QWERTY." The American
Economic Review (Papers and Proceedings) 75, 332-37.
Fischer, S (2013), video, quotation begins at 43.48, available online at
Habakkuk, H J (1962), American and British Technology in the Nineteenth
Century, Cambridge University Press.
Solow, R (1985), “Economic History and Economics,” The American Economic
Review 75, 328-31
Temin, P (2013), “The Rise and Fall of Economic History at MIT,” MIT
Department of Economics Working Paper 13-11 (June).
Wren-Lewis, S (2013), “Economic
History and Krugman’s Crib Sheet”.
Posted by Mark Thoma on Wednesday, July 24, 2013 at 10:21 AM in Economics, History of Thought |
Posted by Mark Thoma on Wednesday, July 24, 2013 at 12:33 AM
Why so little support from the political right for programs that help
Pro-Baby, but Stingy With Money, by Eduardo Porter, NY Times:
Conservatives have a particularly soft spot for babies. They tend to have
more children than liberals and they are much more likely to oppose abortion
rights. They also appreciate babies’ power.
In December, Ross Douthat wrote an Op-Ed column for The New York Times
titled “More Babies, Please,” which noted that the United States’ relatively
high birthrates would give it an edge against aging rivals around the world.
But there is an odd inconsistency in conservatives’ stance on procreation:
many also support some of the harshest cuts in memory to government benefit
programs for families and children.
First Focus, an advocacy group for child-friendly policies, will release on
Wednesday its latest “Children’s Budget,” which shows how federal spending
on children has declined more than 15 percent in real terms from its high in
2010, when the fiscal stimulus law raised spending on programs like Head
Start and K-12 education.
Some school districts have been forced to fire teachers, cut services and
even shorten the school week. Head Start has cut its rolls. Families have
lost housing support. And the 2014 budget passed by Republicans in the House
cuts investments in children further — sharply reducing money for the
Departments of Education, Labor and Health and Human Services. ...
If conservatives truly believe that the United States needs more babies,
they might temper their hostility to programs that help families afford
Posted by Mark Thoma on Wednesday, July 24, 2013 at 12:24 AM in Economics |
Posted by Mark Thoma on Wednesday, July 24, 2013 at 12:03 AM in Economics, Links |
In case you missed the news:
Right now, Larry Summers is the front-runner for Fed chair by Ezra Klein:
The word among Federal Reserve watchers right now is that the choice is down
to Janet Yellen or Larry Summers as Ben Bernanke’s replacement. ...
People dismissed Summers’s chances a month or two ago, but he’s increasingly
viewed as the leading candidate today — and opinions on this, for reasons I
don’t fully understand..., have really hardened in the last 72 hours. So
after conversations with plugged-in sources both inside and outside the
process, here’s what’s behind the changing odds:
1) President Obama really likes Summers. ...
3) This White House, more so than any other in modern memory, knows in its
bones that the economy can fall apart at any second. ... This White House is
very comfortable with how Summers handles a crisis.
4) There’s also a feeling that the chair of the Federal Reserve can do more
if he or she is truly trusted by markets. Rightly or wrongly, there’s a
sense that Summers has the market’s trust in a way Yellen doesn’t.
5) The big open question is Summers’s ability to manage the Federal
Reserve’s Open Markets Committee. Here, Summers’s reputation for being
difficult to work with is a big issue. But inside the White House, that
reputation is considered overblown...
That’s not to say Summers is anywhere near a sure thing. ...
Against all that, the conventional wisdom — which I fully bought into — a
month or two ago was that Summers had little real chance. The politics of it
just didn’t make sense. ...
The politics of it still doesn't make any sense, and Yellen is more qualified
for the job (and the suggestion that a woman can't handle a crisis as well as a
man is just wrong -- as I see it, Summers is as likely to create problems as
solve them; plus, his record on financial regulation is anything but stellar).
I'm very much in the Yellen camp.
Posted by Mark Thoma on Tuesday, July 23, 2013 at 02:18 PM in Economics, Monetary Policy |
Has the administration finally realized that we ought to do something about
stagnating wages, the millions of unemployed, etc.? Is this a serious effort, or
is it, as in the past, mostly just for show (I'll believe it when I see some of
it actually happening)?:
President Obama Needs to Ground “Middle-Out” Economics in Broad-Based Wage
Growth, by Larry Mishel, EPI: Tomorrow at Knox College, President Obama
will kick off a series of speeches outlining his vision for rebuilding the
U.S. economy. He is expected to talk about how the economy works best when
it grows from the “middle-out,” not from the top down.
Growing from the middle out is indeed the right approach to economic growth.
I hope that President Obama will get to the heart of the matter, which is
that, adjusted for inflation, wages and benefits for the vast majority of
workers have not grown in ten years. This is true even for college
graduates, including those in business occupations or in STEM fields, whose
wages have been stagnant since 2002. Low and middle-wage workers, meanwhile,
have not seen much wage growth since 1979. Corporate profits, on the other
hand, are at historic highs. Income growth in the United States has been
captured by those in the top one percent, driven by high profitability and
by the tremendous wage growth among executives and in the finance sector.
The real challenge is how to generate broad-based real wage growth, which
was only present during the last three decades for a few short years at the
end of the 1990s.
To generate wage growth, we will need to rapidly lower unemployment, which
can only be accomplished by large scale public investments and the
reestablishment of state and local public services that were cut in the
Great Recession and its aftermath. The priority has to be jobs now, rather
than any deficit reduction... Overall, it means paying attention to job
quality and wage growth as a key priority in and of itself, and as a
mechanism for economic growth and economic security for the vast majority.
Posted by Mark Thoma on Tuesday, July 23, 2013 at 11:11 AM in Economics, Fiscal Policy, Income Distribution, Politics, Unemployment |
On the "inflationphobes":
This Time Was Predictable, by Paul Krugman: Bruce Bartlett
continues his interesting series on inflation panic, this time focusing
on the economists and politicians who keep predicting runaway inflation year
after year after year, and never seem to acknowledge having been wrong. ...
And that ... gets at the true sin of the inflationphobes. They were
wrong; well, that happens to everyone now and then. But the question is what
you do when events prove your doctrine wrong — especially when they unfold
almost exactly the way people with a different doctrine predicted. Do you
admit that maybe your premises were misguided? Do you admit that maybe those
other guys were on to something? Or do you just keep predicting the same
thing, never admitting your past mistakes?
Guess what the answer turned out to be.
Posted by Mark Thoma on Tuesday, July 23, 2013 at 09:30 AM in Economics, Inflation |
Where are you safest?:
Major cities often the safest places in the US, Penn Medicine study finds,
EurekAlert: Overturning a commonly-held belief that cities are
inherently more dangerous than suburban and rural communities, researchers
from the Perelman School of Medicine at the University of Pennsylvania and
the Children's Hospital of Philadelphia (CHOP) have found that risk of death
from injuries is lowest on average in urban counties compared to suburban
and rural counties across the U.S. The new study, which appears online ahead
of print in the Annals of Emergency Medicine, found that for the entire
population, as well as for most age subgroups, the top three causes of death
were motor vehicle collisions, firearms, and poisoning. When all types of
fatal injuries are considered together, risk of injury-related death was
approximately 20 percent lower in urban areas than in the most rural areas
of the country.
"Perceptions have long existed that cities were innately more dangerous than
areas outside of cities, but our study shows this is not the case" said lead
study author, Sage R. Myers, MD, MSCE, assistant professor of Pediatrics,
Perelman School of Medicine and attending physician, Department of Emergency
Medicine at CHOP. "These findings may lead people who are considering
leaving cities for non-urban areas due to safety concerns to re-examine
their motivations for moving. And we hope the findings could also lead us to
re-evaluate our rural health care system and more appropriately equip it to
both prevent and treat the health threats that actually exist." ...[more]...
Posted by Mark Thoma on Tuesday, July 23, 2013 at 12:24 AM in Economics |
Posted by Mark Thoma on Tuesday, July 23, 2013 at 12:03 AM in Economics, Links |
This article, which I somehow failed to include in today's links, is getting
a lot of attention today:
In Climbing Income Ladder, Location Matters, by David Leonhardt, NY Times:
Stacey Calvin spends almost as much time commuting to her job — on a bus,
two trains and another bus — as she does working part-time at a day care
center. She knows exactly where to board the train and which stairwells to
use at the stations so that she has the best chance of getting to work on
time in the morning and making it home to greet her three children after
“It’s a science you just have to perfect over time,” said Ms. Calvin, 37.
Her nearly four-hour round-trip stems largely from the economic geography of
Atlanta, which is one of America’s most affluent metropolitan areas yet also
one of the most physically divided by income. The low-income neighborhoods
here often stretch for miles, with rows of houses and low-slung apartments,
interrupted by the occasional strip mall, and lacking much in the way of
Stacey Calvin plays Scrabble with her three children, Jayde, 6, Jaela, 9,
and Jevon, 12, at their apartment in Stone Mountain, Ga. David Walter Banks
for The New York Times
This geography appears to play a major role in making Atlanta one of the
metropolitan areas where it is most difficult for lower-income households to
rise into the middle class and beyond, according
to a new study that other researchers are calling the most detailed
portrait yet of income mobility in the United States. ...
Posted by Mark Thoma on Monday, July 22, 2013 at 10:13 AM in Economics, Income Distribution |
The deficit scolds have a new battle cry -- ignore them:
Detroit, the New Greece, by Paul Krugman, Commentary, NY Times: When
Detroit declared bankruptcy, or at least tried to — the legal situation has
gotten complicated — I know that I wasn’t the only economist to have a
sinking feeling about the likely impact on our policy discourse. Was it
going to be Greece all over again? ...
O.K., what am I talking about? As you may recall, a few years ago Greece
plunged into fiscal crisis. ... Now, the truth was that Greece was a very
special case, holding few if any lessons for wider economic policy — and
even in Greece, budget deficits were only one piece of the problem.
Nonetheless, for a while policy discourse across the Western world was
completely “Hellenized” — everyone was Greece, or was about to turn into
Greece. And this intellectual wrong turn did huge damage to prospects for
So now the deficit scolds have a new case to misinterpret...; let’s obsess
about municipal budgets and public pension obligations!
Or, actually, let’s not.
Are Detroit’s woes the leading edge of a national public pensions crisis?
No. State and local pensions are indeed underfunded,... Boston College
estimates suggest that overall pension contributions this year will be about
$25 billion less than they should be. But in a $16 trillion economy, that’s
just not a big deal...
So was Detroit just uniquely irresponsible? Again, no. Detroit does seem to
have had especially bad governance, but for the most part the city was just
an innocent victim of market forces. ...
True, in Detroit’s case matters seem to have been made worse by political
and social dysfunction. ... So by all means let’s have a serious discussion
about how cities can best manage the transition when their traditional
sources of competitive advantage go away. And let’s also have a serious
discussion about our obligations, as a nation, to those of our fellow
citizens who have the bad luck of finding themselves living and working in
the wrong place at the wrong time — because, as I said, decline happens, and
some regional economies will end up shrinking, perhaps drastically, no
matter what we do.
The important thing is not to let the discussion get hijacked, Greek-style.
There are influential people out there who would like you to believe that
Detroit’s demise is fundamentally a tale of fiscal irresponsibility and/or
greedy public employees. It isn’t. For the most part, it’s just one of those
things that happens now and then in an ever-changing economy.
Posted by Mark Thoma on Monday, July 22, 2013 at 12:34 AM in Budget Deficit, Economics |
Posted by Mark Thoma on Monday, July 22, 2013 at 12:03 AM in Economics, Links |
In case you missed this:
When is the time
for austerity? - Alan Taylor
Kevin O'Rourke at the Irish Economy Blog has a succinct explanation
of the findings:
The boom, not the slump, is the right time for austerity, by Kevin O’Rourke:
Alan Taylor has a
piece on Vox today that is a nice contribution to the debate on the
output effects of austerity. That debate has largely been about the
endogeneity of fiscal policy: the more you take this into account, the more
contractionary austerity becomes. He and Oscar Jorda
show that if you give less weight to episodes where the austerity/no
austerity policy choice was more predictable (i.e. more endogenous) and more
weight to episodes where the policy choice was less predictable (i.e. more
exogenous) then you find that austerity was extremely contractionary in
slumps. This does not mean that fiscal consolidation is never necessary, but
that the time for consolidation is when times are good, not when times are
bad. It would be nice if Austerians could display a similar recognition that
Posted by Mark Thoma on Sunday, July 21, 2013 at 02:56 PM in Economics, Fiscal Policy |
The Great Pension Scare: OK, this is quite amazing:
Dean Baker catches the WaPo editorial page claiming that we have $3.8
trillion in unfunded state and local pension liabilities. Say it in your
best Dr. Evil voice: THREE POINT EIGHT TRILLION DOLLARS. Except the
study the WaPo cites very carefully says that it’s $3.8 trillion in
total liabilities, not unfunded; unfunded liabilities are only $1
I’ll be curious to see how the paper’s correction policy works here. ...
According to the survey,... state and local governments are ... underfunding
their pensions by around ... around $25 billion a year.
A $25 billion shortfall in a $16 trillion economy. We’re doomed!
OK, there are some questions about the accounting, mainly coming down to
whether pension funds are assuming too high a rate of return on their
investments. But even if the shortfall is several times as big as the
initial estimate, which seems unlikely, this is just not a major national
So, why is it being hyped? Do I even need to ask?
Posted by Mark Thoma on Sunday, July 21, 2013 at 06:05 AM in Economics |
Posted by Mark Thoma on Sunday, July 21, 2013 at 12:03 AM in Economics, Links |
Profits, norms and power, by Chris Dillow: Jesse Norman
says companies have a duty not just to obey the law but to follow an
ethic of good stewardship.
Andrew Lilico and
Stephen Pollard disagree. Implicit in this debate is something that
should be made explicit - the role of corporate power.
Lilico and Pollard are following the tradition of Milton Friedman, who
argued that "the social responsibility of business is to increase its
This principle is an expression of the first
theorem of welfare economics ... which says that rational self-interest
will lead to socially optimum outcomes.
However, this is only the case under a particular condition - that
companies' economic and political power is limited. ...
Now, here's the thing. When Friedman advocated profit-maximization as a
socially optimal strategy, he did so at a time when firms faced
countervailing power. In a pre-globalized era of strong unions, they
couldn't easily maximize profits by paying lousy wages or offering degrading
conditions, and they couldn't so easily dodge taxes. With their power
limited, it was at least possible that profit-maximization did increase
aggregate welfare. Friedman acknowledged this when he said that firms should
"[conform] to the basic rules of the society, both those embodied in law and
those embodied in ethical custom."
But things have changed. Firms' bargaining power is now so great that there
can be a tension between profit-maximizing and welfare. Maximizing profits
now entails ducking taxes, paying wages which are regarded by many as
unfair, and producing unpriced externalities such as
risk pollution (pdf).This is exacerbated by the fact that "ethical
custom", as perceived by capitalists and their apologists, tolerates such
There are several possible responses to this:
- To ignore the role of power. Doing so, I suspect is an example of how
beliefs, such as Friedman's, can persist after the conditions in which they
were reasonable have disappeared.
- To think that power can be restrained by social norms, as Jesse does. It's
a good conservative position, to think that free markets are
welfare-enhancing if they operate within a particular moral code.
- To think legislation is necessary to rein in firms. This is the statist
social democratic view.
There is, though, a fourth view - the Marxian one. This says that the
tension between profit maximization and welfare hasn't increased simply
because of a failure of law and morals, but because of a genuine shift in
the balance of class power. Firms now have power and one thing we know about
power is that it'll be used. Unless this changes, hopes of reconciling
profit maximization with well-being might well prove mistaken.
Posted by Mark Thoma on Saturday, July 20, 2013 at 09:45 AM in Economics, Market Failure, Unions |
I haven't been much in the mood for writing the last few weeks, but I hope that will change soon.
I've also lost track of comments lately, including those trapped in the spam filter.
Posted by Mark Thoma on Saturday, July 20, 2013 at 09:37 AM