« September 2013 |
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Brad DeLong's remarks at the Oregon Economic Forum:
What Will the "New Normal" for America Be?: Scenarios, by Brad DeLong:
Picking up a thread from the last talk, let me adopt to some degree the
rhetoric of the Chinese Communist Party. Let me say that we are coming to
the end of a Special Period of Struggle in the American economy. Or perhaps
I should look forward to our last speaker's possible next job, and say that
as far as the American economy is concerned we hope very much that we are
coming to the end of the Years of Living Dangerously. This means we can
start thinking about, worrying about, hoping about what a normal economy
will look like in America in the future--what will be the "new normal" that
will emerge from this Special Period of Struggle, from theses Years of
Living Dangerously? Things will be substantially different from the "old
normal" we thought we understood back so long ago, back in 2007 and early
Thus I am here to talk about what the new normal is likely to be. And
because I have watched forecasters like Tim down there have to explain over
and over again, year after year, why this year is not like the forecast he
made last year, I am not going to make forecasts. I am simply going to set
out scenarios. I am going to give some alternatives with respect what the US
economy as a whole is going to look like, moving into the future, after the
next couple of years, when we do get back to a position in which the economy
is no longer clearly in substantial disequilibrium.
As far as this audience is concerned, the important things to focus on when
looking at what the economy’s "new normal" state will be are three. ...[continue
Posted by Mark Thoma on Thursday, October 31, 2013 at 12:44 PM in Economics |
Adrianna McIntyre at The Incidental Economist:
Where is the outrage over employer-sponsored coverage in the “rate shock”
debate?, by Adrianna McIntyre: I’ve been keeping pretty close tabs on
shock” debate... It’s a
complicated issue, and prophecies about young adult enrollment,
my own, have relied on broad strokes and guesswork. But one thing in
particular has been grating on me: when it comes to complaints about
redistribution and overly-generous benefits in health insurance, why is the
echo chamber limited to the individual market? Where is the outrage over
employer-sponsored insurance? ...
Some 90% of people with private insurance receive it through an employer,
and those plans are generally priced using “pure” experience-rating. This
means the company serves as one giant risk pool, and a firm’s youngest
employees have the exact same insurance premium as their eldest colleagues.
The practice has roots in tradition and history;
unions started negotiating these kinds of contracts after World War II,
and other plans followed suit. But it’s also a matter of law: HIPAA and the
prohibit premium variation by health status. Age rating is constrained
somewhat—though not entirely—by the Age
Discrimination in Employment Act.
Yet, I’ve seen exactly zero Obamacare opponents railing to amend the
employer-based practices that require most young healthies to pay more than
their “fair share.” No one is plying Congress to amend HIPAA or the ADA so
young invincibles can pay premiums appropriate to their health status. No
one is calling out employers on their “redistributionist” policies, even
though uniform insurance premiums force a substantial transfer from the
young to the old. It makes histrionics over Obamacare’s 3:1 age band hard to
take seriously. ...
I know many conservative wonks find fault in ties between employment and
insurance, but they haven’t injected that into recent critiques. If
messaging around rate shock is more than opportunistic hackery—if it’s
genuinely about how “health insurance” ought to be conceived—why are they
leaving the most prevalent and most redistributive form of private coverage
unscathed? Surprise me.
Posted by Mark Thoma on Thursday, October 31, 2013 at 09:27 AM in Economics, Health Care, Politics |
Why Bankers Still Aren't Chastened, by Martin Hesse and Anne Seith, Spiegel:
... At 1:45 on the morning of Oct. 19, Italian police arrested the
53-year-old [Raoul Weil, once one of the most influential executives at
Swiss bank UBS] ... and brought him to ... Dozza prison. The reason: US
authorities had indicted Weil, the former head of wealth management at UBS,
for allegedly helping American clients hide their assets from US tax
authorities on Swiss bank accounts.
Weil's arrest was only one of a series of reminders last week that bankers
around the globe are no longer the admired elite of the business world.
Public prosecutors, financial regulators and politicians everywhere now
suddenly seem to be striving to condemn all of the industry's excesses in
British authorities recently hit the
financial sector with record penalties. Last week, on the other side of
the Atlantic, a US court found Bank of America and a former manager guilty
of fraud because of a scheme involving shoddy home loans. Shortly before
that, Jamie Dimon, CEO of JPMorgan,reluctantly negotiated a record
settlement of $13 billion (€9.45 billion) to at least put a stop to civil
claims that his bank knowingly sold toxic US mortgage-backed securities. ...
The truth is, spectacular coups like Weil's arrest are little more than
symbolic gestures. The fines and settlements paid by many financial
institutions are akin to the indulgences sold by the medieval Catholic
Church. The sins of the past may now be forgiven -- but there are no
guarantees of improvement in the future.
Regulatory agencies and politicians have not set effective controls on banks
and bankers, and although their reputation may be tarnished, their power
remains unbroken. ...
Posted by Mark Thoma on Thursday, October 31, 2013 at 09:19 AM in Economics, Financial System, Regulation |
A Bit on the Hawkish Side, by Tim Duy: I fear I need to re-evaluate
my conviction that March is the earliest to expect the Fed to begin tapering
asset purchases. That conviction was largely based on the belief that the Fed
needed to see both stronger and sustainable data to justify tapering. But the
bar might be much lower, with only sustainable data necessary. In other words,
the Fed may pull the trigger on tapering if incoming data simply suggests the
economy is not falling over a cliff. Thus December and certainly January may be
more alive than I had believed.
The view of the degree of hawkishness in Fed policy is largely dependent on
how one views this line from the
October FOMC statement, a line that made its first appearance in
Taking into account the extent of federal fiscal retrenchment over the
past year, the Committee sees the improvement in economic activity and labor
market conditions since it began its asset purchase program as consistent
with growing underlying strength in the broader economy. However, the
Committee decided to await more evidence that progress will be sustained
before adjusting the pace of its purchases.
That line suggests that the Fed largely sees the "stronger" condition to
ending tapering as having been met. Yes, I understand where you might think that
is crazy. And yes, I realize this implies that the Fed has given up attempting
to accelerate economic activity, instead content with accepting the new normal.
And yes, I understand that one interpretation of the most recent employment
report is that the economy is losing momentum. But note that the Fed does not
see the world this way. While they did acknowledge that housing activity slowed
since the last meeting, they also noted that overall activity remained moderate.
They don't see a slowdown in broad activity.
Is moderate enough to justify tapering? The answer to that question, I
think, is the key to the timing of tapering. The answer also depends upon the
degree of FOMC bias against tapering. If the bias is high, as I suspect it
might be, then sustained "moderate" is enough.
Also note that an impediment to tapering was removed over the last six weeks,
as the Fed changed this line from the September statement:
The Committee sees the downside risks to the outlook for the economy and
the labor market as having diminished, on net, since last fall, but the
tightening of financial conditions observed in recent months, if sustained,
could slow the pace of improvement in the economy and labor market.
The Committee sees the downside risks to the outlook for the economy and
the labor market as having diminished, on net, since last fall.
Neil Irwin, I think, has the correct interpretation
The Fed view seems to be this: Conditions were too loose (e.g., bubbly)
in April. They were too tight in September. But October appears to feel just
Another door to tapering opens if rates remain "just right" in December, or,
in other words, financial markets don't try to front-run the Fed too much
between now and then.
Where do I stand on all this? I believe that the Fed has a bias against
tapering. Consequently, I think they are looking for an excuse to taper, and
looking to force incoming data into the framework of "stronger and sustainable."
But I also anticipate the data to be soft in the next few months as a result of
the federal shutdown, soft enough that the Fed will struggle to justify
tapering. This is especially the case if inflation continues to track below
Fed's 2% target. Hence I am hesitant to embrace tapering before March. But I
also recognize that the risk lies in that direction.
Bottom Line: The FOMC statement is slightly on the hawkish side,
opening the door to tapering sooner than March. The argument against tapering
sooner is that the Fed needs to see both stronger and sustainable data. But a
bias against asset purchases suggests the bar is lower, with just sustainable
data needed. Still, this seems to imply that a minimum for tapering is that
data do not deteriorate in the near term. The impact of the federal shutdown,
however, points to such a deterioration, thus arguing against tapering before
March. The degree of the FOMC bias against asset purchases, however, is an
unknown in this equation. The stronger the bias, the more likely the FOMC will
force the data - even weak data - into the framework of "stronger and
Posted by Mark Thoma on Thursday, October 31, 2013 at 12:24 AM in Economics, Fed Watch, Monetary Policy |
Posted by Mark Thoma on Thursday, October 31, 2013 at 12:03 AM in Economics, Links |
For now, the Fed will stay the course with its asset purchase program of $85
billion per month, in part, as the FOMC continues to remind us, because “fiscal
policy is restraining economic growth.” It will also continue "to keep the
target range for the federal funds rate at 0 to 1/4 percent":
Press Release, Release Date: October 30, 2013, For immediate release:
Information received since the Federal Open Market Committee met in
September generally suggests that economic activity has continued to expand
at a moderate pace. Indicators of labor market conditions have shown some
further improvement, but the unemployment rate remains elevated. Available
data suggest that household spending and business fixed investment advanced,
while the recovery in the housing sector slowed somewhat in recent months.
Fiscal policy is restraining economic growth. Apart from fluctuations due to
changes in energy prices, inflation has been running below the Committee's
longer-run objective, but longer-term inflation expectations have remained
Consistent with its statutory mandate, the Committee seeks to foster maximum
employment and price stability. The Committee expects that, with appropriate
policy accommodation, economic growth will pick up from its recent pace and
the unemployment rate will gradually decline toward levels the Committee
judges consistent with its dual mandate. The Committee sees the downside
risks to the outlook for the economy and the labor market as having
diminished, on net, since last fall. The Committee recognizes that inflation
persistently below its 2 percent objective could pose risks to economic
performance, but it anticipates that inflation will move back toward its
objective over the medium term.
Taking into account the extent of federal fiscal retrenchment over the past
year, the Committee sees the improvement in economic activity and labor
market conditions since it began its asset purchase program as consistent
with growing underlying strength in the broader economy. However, the
Committee decided to await more evidence that progress will be sustained
before adjusting the pace of its purchases. Accordingly, 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, which in turn should promote a stronger
economic recovery and help to ensure that inflation, over time, is at the
rate most consistent with the Committee's dual mandate.
The Committee will closely monitor incoming information on economic and
financial developments in coming months and will continue its purchases of
Treasury and agency mortgage-backed securities, and employ its other policy
tools as appropriate, until the outlook for the labor market has improved
substantially in a context of price stability. In judging when to moderate
the pace of asset purchases, the Committee will, at its coming meetings,
assess whether incoming information continues to support the Committee's
expectation of ongoing improvement in labor market conditions and inflation
moving back toward its longer-run objective. Asset purchases are not on a
preset course, and the Committee's decisions about their pace will remain
contingent on the Committee's economic outlook as well as its assessment of
the likely efficacy and costs of such purchases.
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
developments. When the Committee decides to begin to remove policy
accommodation, it will take a balanced approach consistent with its
longer-run goals of maximum employment and inflation of 2 percent.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman;
William C. Dudley, Vice Chairman; James Bullard; Charles L. Evans; Jerome H.
Powell; 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 expectations.
Posted by Mark Thoma on Wednesday, October 30, 2013 at 11:20 AM in Economics, Monetary Policy |
Economics, good and bad: Attacks on mainstream economics such as
this by Aditya Chakrabortty leave me hopelessly conflicted. ...[explains why he's conflicted]...
The division that matters is not so much between heterodox and mainstream
economics, but between good economics and bad. I'll give just two examples
of what I mean.
First, good economics tests itself against the facts. What makes Mankiw's
defence of the 1% so
risible is that it ducks out of the empirical
question of whether neoclassical explanations for rising inequality are
actually empirically valid. Just because something could be consistent with
a theory does not mean that it is.
Secondly, good economics asks: which model (or better, which mechanism or
which theory) fits the problem at hand? For example, if your question is
"should I invest in this high-charging actively managed fund?" you must at
least take the efficient market hypothesis as your starting point. But if
you're asking "are markets prone to bubbles?" you might not. As Noah
says, the EMH is a great guide for investors, but not so much for
It's in this sense that I don't like pieces like Aditya's. Ordinary everyday
economics - of the sort that's
useful for real people - isn't about bigthink and meta-theorizing, but
about careful consideration of the facts.
Posted by Mark Thoma on Wednesday, October 30, 2013 at 10:38 AM in Economics, Methodology |
Cash for Clunkers: An Evaluation of the Car Allowance Rebate System, by Ted
Gayer and Emily Parker: The Car Allowance Rebate System (CARS) or “cash
for clunkers” program, launched during the height of the recession with the
intention of stimulating the economy, creating jobs, and reducing emissions,
was actually far more expensive per job created than alternative fiscal
stimulus programs. Ted Gayer and Emily Parker have performed a wide-spread
evaluation of the various aspects of the program, from numbers of vehicles
traded-in to impact on GDP, cost per job, environmental impact and the types
of consumers who took advantage of the program. Among other conclusions,
they found that:
- The $2.85 billion program provided a short-term boost in vehicle
sales, but the small increase in employment came at a far higher implied
cost per job created ($1.4 million) than other fiscal stimulus programs,
such as increasing unemployment aid, reducing employers’ and
employees' payroll taxes, or allowing the expensing of investment costs.
- Total emissions reduction was not substantial because only about
half a percent of all vehicles in the United States were the new, more
energy-efficient CARS vehicles.
- The program resulted in a small gasoline reduction equivalent only
to about 2 to 8 days’ worth of current usage.
- In terms of distributional effects, compared to households that
purchased a new or used vehicle in 2009 without a voucher, CARS program
participants had a higher before-tax income, were older, more likely to
be white, more likely to own a home, and more likely to have a
high-school and a college degree.
Posted by Mark Thoma on Wednesday, October 30, 2013 at 09:41 AM in Economics, Fiscal Policy |
Posted by Mark Thoma on Wednesday, October 30, 2013 at 12:03 AM in Economics, Links |
Jared Bernstein tries to make clear that there's nothing new here:
The Latest ACA Dust-Up Should Not be a Dust-Up: Like Igor
Volsky, you might ask yourself why this particularly story has any legs
right now since it’s re-litigating an issue that was widely debated a few
years. But the answer is obvious: tis the season to attack the Affordable
Care Act, no matter if this one is a greatest hit from 2010.
At issue is the President’s claim when selling health care reform that if
you like your current health plan, you can keep it. That point in turn was
based on the provision that grandfathered existing plans in the individual
market (neither employer-based or government provided) by granting
exemptions from various standards and consumer protections that came into
effect when the law was signed in 2010.
However, as clearly stated at the time, if such a plan were to significantly
changes in ways that are inconsistent with consumer protections under the
ACA, that it would lose its grandfathered status.
Like I said, this has been known since the law was written. In fact, go
see a 2010 publication by my CBPP colleague Sarah Lueck that lists the ways
plans can lose its grandfathered status, like eliminating benefits to treat
certain conditions or significantly raising co-pays beyond what’s implied by
the rate of medical price inflation. ...
So, did the President misspeak? In a way, sure. He should have said: “If you
like your plan and it doesn’t get significantly worse such that it’s out of
sync with what we’re trying to do here, you can keep it.”
And, in fact, such nuances were clear at the time and not buried in the
weeds but discussed in the
Not much to see here folks…move along.
Posted by Mark Thoma on Tuesday, October 29, 2013 at 01:04 PM in Economics, Health Care, Politics |
Beckoning Frontiers: The Federal Reserve System remains in the news.
Sen. Rand Paul (R-Ky) has promised to oppose the nomination of Janet Yellen
to chair the Fed, perhaps with a “hold,” which could be overcome by sixty
votes. Former chair Alan Greenspan is promoting his new book,
The Map and the Territory: Risk, Human Nature and the Future of Forecasting,
in which he “recalibrates” his economic views in light of “what the 2008
crisis was telling us about ourselves).
Myself, I spent my free time reading a book published in 1951, Beckoning
Frontiers: Public and Personal Recollections, by Marriner Eccles.
Eccles is the man whose name is on the Fed headquarters, on Constitution
Ave. As principal author of Banking Act of 1935, he was the creator of
the modern Fed. He was its chair from 1934 to 1951. Returning to
Utah and his business interests, he lived until 1977.
I suppose that, among New Dealers, Secretary of Labor Frances Perkins is
probably better remembered today than any other, by more people, thanks to
her bit part in President Franklin Roosevelt’s
cabinet meeting scene
in the musical comedy Annie.
Eccles, on the other hand, is one of the most remarkable public servants of
the twentieth century, on a par with
Marshall and Paul
Volcker. Yet he would be all but unknown, except to students of banking
history, but for the 50-page chapter on him in
The Vital Few: The Entrepreneur and American Economic Progress, by the
economic historian Jonathan Hughes, a vastly underappreciated book (from
which most of this account is taken). ...[continue
Posted by Mark Thoma on Tuesday, October 29, 2013 at 11:36 AM in Economics, Monetary Policy |
The Next Big Thing You Missed: Big-Data Men Rewrite Government’s Tired
Economic Models, by Marcus Wohlsen, Wired: The Consumer Price Index is
one of the country’s most closely watched economic statistics... The trouble
is that it’s compiled by the U.S. government, which is still stuck in the
technological dark ages. This month, the index didn’t even arrive on time,
thanks to the government shutdown.
David Soloff, co-founder of a San Francisco startup called Premise, believes
the country needs something better. He believes we shouldn’t have to rely on
the creaky wheels of a government bureaucracy for our vital economic data.
“It’s a half-a-billion dollars of budget allocated toward this in the U.S.,
and they’re closed,” Soloff said when I met him earlier this month during
the depths of the shutdown, before questioning the effectiveness of the
system even when it’s up and running. “The U.S…has got a pretty highly
evolved stats-gathering infrastructure [compared to other countries], but
it’s still kind of post-World War II old-school.”
In Soloff’s view, the government’s highly centralized approach to analyzing
the health of the economy isn’t just technologically antiquated. It’s
doesn’t take into account how much the rest of the world has been changed by
technology. At Premise, the big idea is to measure economic trends around
the world on a real-time, granular level, combining the best of machine
learning with a small army of on-the-ground human data collectors that can
gather new information about our economy as quickly as possible. ...
This is a company of the Big Data Age. ... While its current product
offerings are focused on inflation and food security data, Soloff could see
the platform expand to answer questions that government bureaucracies don’t
But the article doesn't address the key question of costs of the service and
who will have access to these data (e.g. FRED is free to all).
Posted by Mark Thoma on Tuesday, October 29, 2013 at 09:52 AM in Economics, Methodology |
Posted by Mark Thoma on Tuesday, October 29, 2013 at 12:03 AM in Economics, Links |
Gavin Kennedy is
tired of hearing people mischaracterize Adam Smith's views:
... There are daily reports across the media and throughout academe of
direct statements [that greed is good] from mainstream neoclassical
economics, complete with endorsements of this mistaken theory allegedly
based upon the writings of Adam Smith in Wealth Of Nations. The "Greed is
Good" theme played well until recently and gave legitimacy to this
tendentious and immoral, view of economics, even though credit as the source
for such ideas belongs to Ayn Rand, and not to anything written by Adam
The ... is manifestly unwarranted and is not supported by anything that he
wrote in any edition of “Moral Sentiments” (1759) or in “Wealth Of Nations”
(1776). If you think you know differently, please feel free to post a
comment to that affect.
The claim that Adam Smith ever said anything in praise of “selfishness”,
even in a pragmatic and regretful acceptance of it, is wholly unwarranted.
Unfortunately such notions are widespread in US academe...
Posted by Mark Thoma on Monday, October 28, 2013 at 10:06 AM in Economics, History of Thought |
reminds us that:
... The United States is
still down almost 9m jobs from its trend path. We are losing close to $1tn a
year in potential output, with cumulative losses to date
These numbers correspond to millions of dreams ruined. Families who
struggled to save enough to buy a home lost it when house prices plunged or
they lost their jobs. Many older workers lose their job with little hope of
ever finding another one, even though they are ill-prepared for retirement;
young people getting out of school are facing the worst job market
since the Great Depression, while buried in student loan debt. ...
We still have a substantial number of unemployed -- millions
above full employment level (and that's not even including discouraged workers
and the underemployed):
Yet how much have you heard from Washington lately -- from either party --
about the need to do something to help with this problem? Sure Republicans would
stand in the way of doing more (though they favor doing less, e.g. cuts to
unemployment compensation, food stamps, etc.), but that's partly a reflection of
the Democrat's failure to make an issue of obstructionism in the press. Why
haven't Democrats made an issue of helping the unemployed at every opportunity
in the same way that Republicans make an issue of the debt, etc.?
Posted by Mark Thoma on Monday, October 28, 2013 at 09:15 AM in Economics, Politics, Unemployment |
Gloomy European Economist
who’s Gloomy: Wolfgang Munchau has an
excellent piece ... where he challenges the
increasingly widespread (and unjustified) optimism about the end of the EMU
crisis. The premise of the piece is that for the end of the crisis to be
durable, it must pass through adjustment between core and periphery. He cites
similar statements made in the latest IMF World Economic Outlook. This is good
news per se, because nowadays, with the exception of Germany it became
common knowledge that the EMU imbalances are structural and not simply the
product of late night parties in the periphery. But what are Munchau’s reasons
- Rebalancing is happening only in the periphery... The core’s
surpluses are virtually unchanged
- As a consequence, the eurozone as a whole is moving from equilibrium to
surplus. “In other words, the eurozone is adjusting at the expense of
the rest of the world”.
- Finally, the most serious: This adjustment is not structural, but purely
cyclical. The improvement in Spain’s competitiveness, for example, is mostly
due to cyclical factors (deflation, drop of domestic demand, etc). Nothing
that is likely to persist once growth resumes.
Munchau then joins the IMF in arguing that the necessary adjustment ... would need to
be immensely larger than what we observed so far. The solution then needs to be
a substantial reversal of export-led growth in Germany and in the core (very
unlikely), or a system of transfers of some sort, a fiscal union (even more
unlikely). This explains why Munchau is so pessimist.
Readers of this blog will not be surprised by my agreement with Munchau. ...
There is only one thing I would have written differently from Munchau: he
does not focus enough, in my opinion, on the
inherent flaws of the export-led model that – his article shows – Germany
managed to force upon the rest of the eurozone..., there is an obvious
fallacy of composition in this model. ...
How should domestic demand be supported? In the core it is clear. Countries
in good health should run expansionary policies and support widespread and
substantial wage increases. ...
For the periphery, burdened by debt and deteriorated public finances, the
recipe is more complicated.
I suggested a few months ago that proper reallocation of tax burdens, even
if revenue neutral, could increase disposable income of low and middle-income
households, and boost domestic spending. The October 2013
Monitor reaches very similar conclusions based on solid analytical
work. This is one of the issues that will be worth developing in the future.
Posted by Mark Thoma on Monday, October 28, 2013 at 08:34 AM
Did Obamacare have to be so complicated?:
The Big Kludge, by Paul Krugman, Commentary, NY Times: The good news
about HealthCare.gov, the portal to Obamacare’s health exchange, is that the
administration is no longer minimizing its problems. That’s the first step
toward fixing the mess — and it will get fixed... But while we wait for the
geeks to do their stuff, let’s ask a related question: Why did this thing
have to be so complicated in the first place? ...
Imagine ... a much simpler system in which the government just pays your
major medical expenses..., you wouldn’t have to shop for insurance..., you’d
be covered automatically by virtue of being an American.
Of course ... such a system ... already exists. It’s called Medicare..., and
it’s enormously popular. So why didn’t we just extend that system to cover
The proximate answer was politics: Medicare for all just wasn’t going to
happen, given both the power of the insurance industry and the reluctance of
workers who currently have good insurance through their employers to trade
that insurance for something new. Given these political realities, the
Affordable Care Act was probably all we could get — and make no mistake, it
will vastly improve the lives of tens of millions of Americans.
Still,... Obamacare is an immense kludge — a clumsy, ugly structure that
more or less deals with a problem, but in an inefficient way. ... And the
main reason that is happening, I’d argue, is ideology. ...
Republicans still dream of dismantling Medicare as we know it, instead
giving seniors vouchers to buy private insurance. In effect..., they want to
convert Medicare into Obamacare.
Why would we want to do ... these things? You might say, to reduce the
burden on taxpayers — but Medicare is cheaper than private insurance...
No, the assault on Medicare is really about an ideology that is
fundamentally hostile to the notion of the government helping people... And
this ideology, at a fundamental level ... is why Obamacare ended up being a
In saying this I don’t mean to excuse the officials and contractors who made
such a mess of health reform’s first month. ... For now, the priority is to
get this kludge working, and once that’s done, America will become a better
In the longer run, however, we have to tackle that ideology. A society
committed to the notion that government is always bad will have bad
government. And it doesn’t have to be that way.
Posted by Mark Thoma on Monday, October 28, 2013 at 12:27 AM in Economics, Health Care, Politics |
Posted by Mark Thoma on Monday, October 28, 2013 at 12:03 AM in Economics, Links |
Stolen from Brad DeLong:
John McDermott Reads Branco Milanovic on the Changing Shape of the World
Income Distribution Over the Past Generation: Stolen from FT Alphaville,
in turn stolen from John McDermott, in turn stolen from Branco Milanovic:
Note that these are not the changes in income of individuals in the world
economy. Rather, they are the changes in the incomes associated with
particular percentile slots in the world economy. Your average citizen of
China is in a much higher percentile of the income distribution today than
twenty years ago.
Also note that Milanovic's numbers on the prosperity of the pre-1991
Communist Bloc have always looked to me to be considerably higher than
reality--they have never seemed to me to make adequate allowances for
quality, variety, and the hassle factor involved in obtaining goods and
services in a centrally-planned really existing-socialist economy.
Plus I am a techno-optimist: I see the coming of internet access as
contributing an enormous amount to human well-being via consumer surplus
that is simply not captured by standard GDP accounts.
Nevertheless, the (relative) failure of development for the 75-90 percentile
of the world income distribution over 1988-2008 is a fact, a fascinating
one, and a somewhat terrifying one.
Now let me give the mike to John McDermott: ...
Posted by Mark Thoma on Sunday, October 27, 2013 at 06:48 PM in Economics, Income Distribution |
Posted by Mark Thoma on Sunday, October 27, 2013 at 12:03 AM
I honestly can't remember if I voted for Obama or Hillary in the primary, but
if I voted for Obama, it was a mistake:
Obama's Top Economic Adviser Tells Democrats They'll Have to Swallow
Entitlement Cuts, by Joshua Green: This morning, Gene Sperling, director
of the White House’s National Economic Council, appeared before a Democratic
business group for what was billed as a speech about the economy after the
shutdown, followed by a Q&A session. The White House didn’t push this as a
newsmaking event, so it didn’t get much billing. But I went anyway, and I
was struck by what Sperling had to say, especially about the upcoming budget
negotiations that are a product of the deal to reopen the government.
In his usual elliptical and prolix way, Sperling seemed to be laying out the
contours of a bargain with Republicans that’s quite a bit different that
what most Democrats seem prepared to accept. What stood out to me was how he
kept winding back around to the importance of entitlement cuts as part of a
deal, as if he were laying the groundwork to blunt liberal anger. Right now,
the official Democratic position is that they’ll accept entitlement cuts
only in exchange for new revenue—something most Republicans reject. If
Sperling mentioned revenue at all, I missed it.
But he dwelt at length—and with some passion—on the need for more stimulus,
though he avoided using that dreaded word. He seemed to hint at a budget
deal that would trade near-term “investment” (the preferred euphemism for
“stimulus’) for long-term entitlement reform. That would be an important
shift and one that would certainly upset many Democrats. ...
Posted by Mark Thoma on Saturday, October 26, 2013 at 09:31 AM in Economics, Politics, Social Insurance, Social Security |
Billionaires’ Row and Welfare Lines, by Charles Blow, Commentary, NY Times:
... It’s a great time to be a rich person in America. The rich are raking it
in during this recovery.
But in the shadow of their towering wealth exists a much less rosy recovery,
where people are hurting and the pain grows.
This is the slowest post-recession jobs recovery since World War II. The
unemployment rate is falling, but for the wrong reason: an increasing number
of people may simply be giving up on finding a job. ...
This disconnecting is particularly acute among young people..., a staggering
5.8 million young people nationwide — one in seven of those ages 16 to 24 —
are disconnected, meaning not employed or in school, “adrift at society’s
margins,” as the group put it.
Median household income continues to fall...
The dire statistics take on even more urgency when we consider what they
mean for America’s most vulnerable: our children.
First Focus,... “...The number of homeless children in public schools
has increased 72 percent since the beginning of the recession.” ... Nearly
one in four American children live in poverty. ...
And yet, the value of aid for those families is shrinking and under threat.
There is an inherent tension — and obscenity — in the wildly divergent
fortunes of the rich and the poor in this country, especially among our
children. The growing imbalance of both wealth and opportunity cannot be
sustained. Something has to give.
Posted by Mark Thoma on Saturday, October 26, 2013 at 09:31 AM in Economics, Income Distribution |
Posted by Mark Thoma on Saturday, October 26, 2013 at 12:03 AM in Economics, Links |
Another interesting paper that supports the New Keynesian sticky price
Are Sticky Prices Costly? Evidence From The Stock Market, by Yuriy
Gorodnichenko and and Michael Weber, NBER: Abstract We
show that after monetary policy announcements, the conditional volatility of
stock market returns rises more for rms with stickier prices than for firms
with more flexible prices. This differential reaction is economically large
as well as strikingly robust to a broad array of checks. These results
suggest that menu costs -- broadly defined to include physical costs of
price adjustment, informational frictions, etc. -- are an important factor
for nominal price rigidity. We also show that our empirical results are
qualitatively and, under plausible calibrations, quantitatively consistent
with New Keynesian macroeconomic models where firms have heterogeneous price
stickiness. Since our framework is valid for a wide variety of theoretical
models and frictions preventing firms from price adjustment, we provide "model-free" evidence that sticky prices are indeed costly.
Posted by Mark Thoma on Friday, October 25, 2013 at 11:51 AM in Academic Papers, Economics |
First paper at the conference is interesting:
Fiscal Multipliers: Liquidity Traps and Currency Unions, by Emmanuel Farhi
and Iván Werning, NBER: We provide explicit solutions for government
spending multipliers during a liquidity trap and within a fixed exchange
regime using standard closed and open-economy models. We confirm the
potential for large multipliers during liquidity traps. For a currency
union, we show that self-financed multipliers are small, always below unity.
However, outside transfers or windfalls can generate larger responses in
out- put, whether or not they are spent by the government. Our solutions are
relevant for local and national multipliers, providing insight into the
economic mechanisms at work as well as the testable implications of these
Discussant: The "Keynesian demand effect can potentially be very large." Here
is a bit of the introduction that explains further:
1 Introduction Economists generally agree that
macroeconomic stabilization should be handled first and foremost by monetary
policy. Yet monetary policy can run into constraints that impair its
effectiveness. For example, the economy may find itself in a liquidity trap,
where interest rates hit zero, preventing further reductions in the interest
rate. Similarly, countries that belong to currency unions, or states within
a country, do not have the option of an independent monetary policy. Some
economists advocate for fiscal policy to fill this void, increasing
government spending to stimulate the economy. Others disagree, and the issue
remains deeply controversial, as evidenced by vigorous debates on the
magnitude of fiscal multipliers. No doubt, this situation stems partly from
the lack of definitive empirical evidence, but, in our view, the absence of
clear theoretical benchmarks also plays an important role. Although various
recent contributions have substantially furthered our understanding, to
date, the implications of standard macroeconomic models have not been fully
worked out. This is the goal of our paper.
We solve for the response of the economy to changes in the path for
government spending during liquidity traps or within currency unions using
standard closed and open-economy monetary models. ...
Our results confirm that fiscal policy can be especially potent during a
liquidity trap. The multiplier for output is greater than one. The mechanism
for this result is that government spending promotes inflation. With fixed
nominal interest rates, this reduces real interest rates which increases
current spending. The increase in consumption in turn leads to more
inflation, creating a feedback loop. The fiscal multiplier is increasing in
the degree of price flexibility, which is intuitive given that the mechanism
relies on the response of inflation. We show that backloading spending leads
to larger effects; the rationale is that inflation then has more time to
affect spending decisions.
In a currency union, by contrast, government spending is less effective at
increasing output. We show that consumption is depressed, so that the
multiplier is less than one. Moreover, price flexibility diminishes the
effectiveness of spending, instead of increasing it. We explain this result
using a simple argument that illustrates its robustness. Government spending
leads to inflation in domestically produced goods and this loss in
competitiveness depresses private spending. Applied to current debates in
Europe, this highlights a possible tradeoff: putting off fiscal
consolidation may postpone internal devaluations that actually help
reactivate private spending.
It may seem surprising that fiscal multipliers are necessarily less than one
whenever the exchange rate is fixed, because this contrasts sharply with the
effects during liquidity traps. Our analytical approach allows us to uncover
the crucial difference in monetary policy: although a fixed exchange rate
implies a fixed nominal interest rate, the converse is not true. Indeed, we
prove that the liquidity trap analysis implicitly combines a shock to
government spending with a one-off devaluation. The positive response of
consumption relies entirely on this devaluation. A currency union rules out
such devaluations, explaining the negative response of consumption.
In the context of a currency union, our results uncover the importance of
transfers from the outside, from other countries or regions. In the short
run, when prices haven’t fully adjusted, positive transfers from the rest of
the world increase the demand for home goods, stimulating output. We compute
“transfer multipliers” that capture the response of the economy to transfers
from the outside. We show that these multipliers may be large and depend
crucially on the degree of openness of the domestic economy.
Outside transfers are often tied to government spending. In the United
States federal military spending allocated to a particular state is financed
by the country as a whole. The same is true for exogenous differences in
stimulus payments, due to idiosyncratic provisions in the law. Likewise,
idiosyncratic portfolio returns accruing to a particular state’s coffers
represent a windfall for this state against the rest. When changes in
spending are financed by such outside transfers, the associated multipliers
are a combination of self-financed multipliers and transfer multipliers. As
a result, multipliers may be substantially larger than one.
Finally, we explore non-Ricardian effects from fiscal policy by introducing
hand-to- mouth consumers. We think of this as a tractable way of modeling
liquidity constraints. In both in a liquidity trap and in a currency union,
government spending now has an additional stimulative effect. It increases
the income and consumption of hand-to-mouth agents. This effects is largest
when spending is deficit financed; indeed, the effects may in some cases
depend entirely on deficits, not spending per se. Overall, although hand to
mouth consumers introduce an additional effect most of our conclusions, such
as the comparison of fiscal multipliers in a liquidity trap and a currency
union, are unaffected. ...
Posted by Mark Thoma on Friday, October 25, 2013 at 07:54 AM in Academic Papers, Conferences, Economics |
I am here today:
NATIONAL BUREAU OF ECONOMIC RESEARCH, INC.
EF&G Research Meeting
Martin Eichenbaum and Erik Hurst, Organizers
Federal Reserve Bank of Chicago
Friday, October 25:
8:30 am Continental Breakfast
9:00 am Emmanuel Farhi, Harvard University and NBER
Ivan Werning, Massachusetts Institute of Technology and NBER
Fiscal Multipliers: Liquidity Traps and Currency Unions
Discussant: Jon Steinsson, Columbia University and NBER
10:00 am Break
10:30 am Jesus Fernandez-Villaverde, Univ of Pennsylvania and NBER
Pablo Guerron-Quintana, Federal Reserve Bank of Philadelphia
Keith Kuester, University of Bonn
Juan Rubio-Ramírez, Duke University
Fiscal Volatility Shocks and Economic Activity
Discussant: Nicholas Bloom, Stanford University and NBER
11:30 am Leonid Kogan, Massachusetts Institute of Technology and NBER
Dimitris Papanikolaou, Northwestern University and NBER
Amit Seru, University of Chicago and NBER
Noah Stoffman, Indiana University
Technological Innovation, Resource Allocation and Growth
Discussant: Pete Klenow, Stanford University and NBER
12:30 pm Lunch
1:30 pm Yuriy Gorodnichenko, UC Berkeley and NBER
Michael Weber, University of California at Berkeley
Are Sticky Prices Costly? Evidence From The Stock Market
Discussant: Ricardo Reis, Columbia University and NBER
2:30 pm Break
3:00 pm Gian Luca Clementi, New York University and NBER
Berardino Palazzo, Boston University
Entry, Exit, Firm Dynamics, and Aggregate Fluctuations
Discussant: Jeffrey Campbell, Federal Reserve Bank of Chicago
4:00 pm Andrew Atkeson, UCLA and NBER
Andrea Eisfeldt, University of California at Los Angeles
Pierre-Olivier Weill, University of California at Los Angeles and NBER
Measuring the Financial Soundness of US Firms, 1926-2012
Discussant: Thomas Philippon, New York University and NBER
5:00 pm Adjourn
Posted by Mark Thoma on Friday, October 25, 2013 at 04:50 AM in Conferences |
Why is Chicken Little so popular?:
Addicted to the Apocalypse, by Paul Krugman, Commentary, NY Times: Once
upon a time, walking around shouting “The end is nigh” got you labeled a
kook... These days, however,... you more or less have to subscribe to
fantasies of fiscal apocalypse to be considered respectable.
And I do mean fantasies. Washington has spent the past three-plus years in
terror of a debt crisis that keeps not happening, and, in fact, can’t happen
to a country like the United States, which has its own currency and borrows
in that currency. Yet the scaremongers can’t bring themselves to let go.
Consider, for example, Stanley Druckenmiller... Or consider the
deficit-scold organization Fix the Debt, led by the omnipresent Alan Simpson
and Erskine Bowles. ... [gives examples of doomsaying] ...
As I’ve already suggested, there are two remarkable things about this kind
of doomsaying. ... On the Chicken Little aspect: It’s actually awesome, in a
way, to realize how long cries of looming disaster have filled our airwaves
and op-ed pages. For example, I just reread
an op-ed article by Alan Greenspan ... warning that our budget deficit
will lead to soaring inflation and interest rates ... published in June
2010... — and both inflation and interest rates remain low. So has the
ex-Maestro reconsidered his views after having been so wrong for so long?
Not a bit. ...
Meanwhile, about that oft-prophesied, never-arriving debt crisis:... two and
half years ago,
Mr. Bowles warned that we were likely to face a fiscal crisis within
around two years... They just assume that it would cause soaring interest
rates and economic collapse, when
both theory and evidence suggest otherwise. ...
Look at Japan, a country that, like America, has its own currency and
borrows in that currency, and has much higher debt relative to G.D.P. than
we do. Since taking office, Prime Minister Shinzo Abe has, in effect,...
persuaded investors that deflation is over and inflation lies ahead, which
reduces the attractiveness of Japanese bonds. And the effects on the
Japanese economy have been entirely positive! ...
Why, then, should we fear a debt apocalypse here? Surely, you may think,
someone in the debt-apocalypse community has offered a clear explanation.
But nobody has.
So the next time you see some serious-looking man in a suit declaring that
we’re teetering on the precipice of fiscal doom, don’t be afraid. He and his
friends have been wrong about everything so far, and they literally have no
idea what they’re talking about.
Posted by Mark Thoma on Friday, October 25, 2013 at 12:33 AM in Budget Deficit, Economics, Inflation, Politics |
Posted by Mark Thoma on Friday, October 25, 2013 at 12:03 AM in Economics, Links |
Yet another travel day, can't remember the last weekend I was home (no
complaints though), so one
more from Brad DeLong and that's it for awhile:
Physiocracy and Robots, by Brad DeLong: The physiocrats saw France as having
four kinds of jobs:
- Skilled artisans
- Landowning aristocrats
Farmers, they thought, produced the net value in the economy--the net
product. Their labor combined with water, soil, and sun grew the food they and
others ate. Artisans, the physiocrats thought, were best seen not as creators
but as transformers of wealth--transformers of wealth in the form of food into
wealth in the form of manufactures. Aristocrats collected this net product--agricultural
production in excess of farmers' subsistence needs--and spent it buying
manufactured goods and, when they got sated with manufactured goods, employing
In this framework, the key economic variables are:
- the fraction f who are farmers.
- the net product per farmer n.
- the fraction who can be set to work making manufactured goods that
aristocrats can consume before becoming sated m.
The key equilibrium quantity in this system is:
(nf-m)/(1-f-m) = W
This gives the standard of living of the typical flunky--say, a runner for
His Grace the Cardinal. The numerator is the amount of resources on which
flunkies can subsist. The denominator is the number of flunkies. If this
quantity W is low, the country is poor: flunkies are ill-paid, begging and
thievery are rampant, and the reserve army of potential unemployed puts downward
pressure on artisan and farmer living standards as well. If this quantity is
high, the country is prosperous.
The physiocrats saw a France undergoing a secular decline in the farmer share
f, and they worried. A fall in f produced a sharper decline in W. Therefore they
- Scientific farming to boost n and so boost the net product nf.
- A reallocation of the tax burden to make it less onerous to be a
farmer--and so boost the farmer share f and so boost the net product
With the unquestioned assumption that there were limits on how high the net
product per farmer n could be pushed, the physiocrats would have forecast that
France of today, with only 5% of the population farmers, would be a hellhole:
huge numbers of ill-paid flunkies sucking up to the aristocratic landlords.
Well, the physiocrats were wrong about the decline of the agricultural share
of the labor force. And let us hope that the techno-pessimists are similarly
wrong about the rise of the robots.
Posted by Mark Thoma on Thursday, October 24, 2013 at 12:56 PM in Economics, History of Thought, Income Distribution, Productivity, Technology, Unemployment |
In case you missed this in the daily links. From Paul Krugman:
Gambling with Civilization, by Paul Krugman, NYRB [Review of
The Climate Casino: Risk, Uncertainty, and Economics for a Warming World,
by William D. Nordhaus]:
1. Forty years ago a brilliant young Yale economist named William Nordhaus
published a landmark paper, “The Allocation of Energy Resources,” that
opened new frontiers in economic analysis. 
Nordhaus argued that to think clearly about the economics of exhaustible
resources like oil and coal, it was necessary to look far into the future,
to assess their value as they become more scarce—and that this look into the
future necessarily involved considering not just available resources and
expected future economic growth, but likely future technologies as well.
Moreover, he developed a method for incorporating all of this
information—resource estimates, long-run economic forecasts, and engineers’
best guesses about the costs of future technologies—into a quantitative
model of energy prices over the long term.
The resource and engineering data for Nordhaus’s paper were for the most
part compiled by his research assistant, a twenty-year-old undergraduate... It was an invaluable apprenticeship. My
reasons for bringing up this bit of intellectual history, however, go beyond
personal disclosure—although readers of this review should know that Bill
Nordhaus was my first professional mentor. For if one looks back at “The
Allocation of Energy Resources,” one learns two crucial lessons. First,
predictions are hard, especially about the distant future. Second, sometimes
such predictions must be made nonetheless.
Looking back at “Allocation” after four decades, what’s striking is how
wrong the technical experts were about future technologies. For many years
all their errors seemed to have been on the side of overoptimism, especially
on oil production and nuclear power. More recently, the surprises have come
on the other side, with fracking having the biggest immediate impact on
markets, but with the growing competitiveness of wind and solar
power—neither of which figured in “Allocation” at all—perhaps the more
fundamental news. For what it’s worth, current oil prices, adjusted for
overall inflation, are about twice Nordhaus’s prediction, while coal and
especially natural gas prices are well below his baseline.
So the future is uncertain, a reality acknowledged in the title of
Nordhaus’s new book, The Climate Casino: Risk, Uncertainty, and Economics
for a Warming World. Yet decisions must be made taking the future—and
sometimes the very long-term future—into account. ... And as Nordhaus emphasizes, although perhaps not as strongly as
some would like, when it comes to climate change uncertainty strengthens,
not weakens, the case for action now.
Yet while uncertainty cannot be banished from the issue of global warming,
one can and should make the best predictions possible. Following his work on
energy futures, Nordhaus became a pioneer in the development of “integrated
assessment models” (IAMs), which try to pull together what we know about two
systems—the economy and the climate—map out their interactions, and let us
do cost-benefit analysis of alternative policies. 
At one level The Climate Casino is an effort to popularize the results of
IAMs and their implications. But it is also, of course, a call for action.
I’ll ask later in this review whether that call has much chance of
Posted by Mark Thoma on Thursday, October 24, 2013 at 12:55 PM in Economics, Environment, Policy, Politics |
A Very Expensive Tea Party, by Simon Johnson, Commentary, NY Times: The
recent government shutdown and confrontation over the federal debt ceiling
gained the Republicans nothing,... – and may have cost them politically... But it slowed the economy and undermined confidence in public
finances in a way that will have a significant negative impact on future
budgets of the United States. None of this should make for an appealing
strategy, but Tea Party Republicans are giving every indication that they
want to do the same thing again early next year. Their more moderate
colleagues need to take a firmer hand.
On the political gains from recent tactics, it is hard to find any good news
for the Republican side as a whole. ...
The shutdown and debt ceiling brinkmanship did real damage to the economy.
Members of the Tea Party movement express concern about the longer-run
federal budget... But their tactics are directly worsening the budget over
exactly the time horizon that they say they care about. ...
The major long-term issue the United States faces is rising health-care
costs..., but an
important part of our projected future deficits is interest costs...
The United States dollar is the world’s primary reserve currency and safe
haven; the asset that major investors, such as central banks and big
international companies, actually buy is United States Treasury debt. ...
Over a longer period of time, of course, investors get the message: United
States Treasury debt is not so safe... Unwittingly and perhaps
inadvertently, the Tea Party is helping to fulfill the prophecies of ... Arvind Subramanian, who
has long predicted
that the renminbi will eclipse the dollar... Speeding up such a transition
will directly increase the interest cost of the national debt and exactly
run counter to what Tea Party representatives claim they want to do. ...
In the American system,... the ... only force that can rein in Tea Party
extremism – and get the nation off the road to fiscal ruin – is resurgence
among Republican moderates. Unfortunately, their recent performance has not
Posted by Mark Thoma on Thursday, October 24, 2013 at 12:52 PM in Economics, International Finance, Politics |
Emmanuel Saez and Thomas Piketty:
Why the 1% should pay tax at 80%, by Emmanuel Saez and Thomas Piketty,
theguardian.com: In the United States, the share of total pre-tax income
accruing to the top 1% has more than doubled,
from less than 10%
in the 1970s to over 20% today (pdf). A similar pattern is true of other
English-speaking countries..., however, globalization and new technologies
are not to blame.
countries ... have seen far less concentration of income among the mega
At the same time, top income tax rates on upper income earners have declined
significantly since the 1970s... At a time when most OECD countries face
large deficits and debt burdens, a crucial public policy question is whether
governments should tax high earners more. The potential tax revenue at stake
is now very large. ...
There is a strong correlation between the reductions in top tax rates and
the increases in top 1% pre-tax income shares...
data show that there is no correlation between cuts in top tax rates and
average annual real GDP-per-capita growth since the 1970s. ... What that
tells us is that a substantial fraction of the response of pre-tax top
incomes to top tax rates may be due to increased rent-seeking at the top
(that is, scenario three), rather than increased productive effort....
By our calculations about the response of top earners to top tax rate cuts
being due in part to increased rent-seeking behavior and in part to
increased productive work, we find that the top tax rate could potentially
be set as high as 83% (as opposed to the 57% allowed by the pure supply-side
In the end, the future of top tax rates depends on what the public believes
about whether top pay fairly reflects productivity or whether top pay,
rather unfairly, arises from rent-seeking. With higher income concentration,
top earners have more economic resources to influence both social beliefs
(through thinktanks and media) and policies (through lobbying)...
The job of economists should be to make a top rate tax level of 80% at least
Posted by Mark Thoma on Thursday, October 24, 2013 at 09:12 AM in Economics, Income Distribution, Politics, Productivity, Taxes |
Posted by Mark Thoma on Thursday, October 24, 2013 at 12:03 AM in Economics, Links |
Contractionary policy is contractionary:
Paper by EU Economist Backs Austerity’s Critics, by Matina Stevis, WSJ:
Coordinated austerity in euro-area countries has stifled economic recovery
and deepened the crisis across the currency bloc, according to a new
technical paper prepared by an economist at the European Commission.
Spending cuts in Germany in particular have made things worse for the weaker
members of the euro area through “spillovers” – the economic impact on
economies connected to Germany’s– the paper says, adding that limited
stimulus programs in richer countries could help the whole of the currency
paper, which doesn’t necessarily represent the views of the
powers-that-be at the Commission, presents some inconvenient conclusions for
European authorities from one of their own economists. The European Union
and national governments have come under fire from outside economists for
pursuing austerity across the euro zone. These critics have argued that
Germany in particular should be running bigger deficits to help drag the
bloc’s weaker members out of their slumps.
The commission paper backs the critics. ...
Posted by Mark Thoma on Wednesday, October 23, 2013 at 12:33 AM in Economics, Fiscal Times |
Climate Change, Public Policy, and the University, by Robert Stavins:
Over the past year or more, across the United States, there has been a
groundswell of student activism pressing colleges and universities to divest
their holdings in fossil fuel companies from their investment portfolios.
On October 3, 2013, after many months of
discussion, and debate, the President of Harvard University,
Drew Faust, issued
a long, well-reasoned, and – in my view – ultimately sensible
statement on “fossil
fuel divestment,” in which she explained why she and the Corporation
(Harvard’s governing board) do not believe that “university divestment from
the fossil fuel industry is warranted or wise.” I urge you to read
and decide for yourself how compelling you find it, and whether and how it
may apply to your institution, as well.
About 10 days later,
two leaders of the student movement at Harvard responded to President Faust
in The Nation.
Andrew Revkin, writing at the New York
Dot Earth blog, highlighted the fact that the students responded in part
by saying, “We do not expect divestment to have a financial impact on fossil
fuel companies … Divestment is a moral and political strategy to
expose the reckless business model of the fossil fuel industry that puts our
world at risk.”
I agree with these students that fossil-fuel divestment by the University
would not have financial impacts on the industry, and I also agree with
their implication that it would be (potentially) of symbolic value only.
However, it is precisely because of this that I believe President Faust made
the right decision. Let me explain. ...
Posted by Mark Thoma on Wednesday, October 23, 2013 at 12:24 AM in Economics, Environment, Universities |
Posted by Mark Thoma on Wednesday, October 23, 2013 at 12:03 AM in Economics, Links |
I have a new column on how the internet is changing the practice of economics:
How the Internet is Changing What Economists Do
Or at least it should be.
Posted by Mark Thoma on Tuesday, October 22, 2013 at 07:29 AM in Economics, Fiscal Times, Weblogs |
Worth The Wait?, by Tim Duy: I drew back from blogging for the past
couple of weeks to clear my desk, a task that will not be complete until
next week. Seemed like an opportune time, as the focus had shifted away
from the Federal Reserve to the fiscal train wreck, in the process putting
monetary policy on indefinite hold. Federal Reserve hawks clearly lost
whatever leverage they had heading into the September FOMC, and any thought
of changing policy in October disappeared long ago. I wrote
earlier this month:
It's not just difficult to explain a cut [in asset purchases]
in the coming months. It just isn't going to happen. Stronger data? We
no longer have any of the most important data. Swift resolution of
fiscal uncertainties? That battle is even bloodier than that within the
Fed. Moreover, the impending leadership change also argues for delaying
tapering until 2014. Unless the economy lurches upward, what exactly is
the reason to pull the trigger on tapering before the March FOMC
meeting, after which future Chair Janet Yellen will lead a press
conference? None, really.
The September employment report further cemented the idea that March is the
next opportunity for an change to the asset purchase program. I am glad
that I did not get out of bed early for that report. I am not exactly sure
it was worth the wait. Rarely does one encounter such a lackluster mound of
data, summed up in the pattern of flat-lining of job growth:
Placed in context of the Yellen charts:
With the exception of the unemployment rate, it is difficult to see signs
that labor market momentum has definitively shifted toward "stronger and
sustainable." As for additional labor market indicators:
Only the recent uptick in wage growth gives hope that something more
positive might be happening underneath the surface of the data. Shifting to
measures of unemployment, though, leaves one less optimistic:
Overall, it is difficult to image that the data suddenly surges upward to
justify a shift policy shift in the near term. And even the focus on March
is suspect - more likely an artifact of leadership transition at the Fed
rather than anything else. Consider that the data will be murky for the
next few months. Then maybe we see the data improve, assuming fiscal
policymakers do not tighten policy further. And then, if the Fed doesn't
change its tune, we need a few more months of data to define that
improvement as "sustainable." So it is easy to see the current pace of
asset purchases continuing well into next year.
What could change that picture? There remains a contingent within the Fed
concerned with issues of easy policy driving financial instability, and that
contingent will have a larger voice with Dallas Federal Reserve President
Richard Fisher and Philadelphia Federal Reserve President Charles Plosser
becoming voting members. Moreover, President Obama could choose candidates
biased against asset purchases to fill open spots on the board.
Barring any change in the flow of data, it would need to be financial
stability concerns that drive a decrease in the pace of asset purchases, but
such concerns remain more ephemeral than specific at this point.
I imagine one could construct an argument linking together the falling
unemployment rate and accelerating wages gains as a signal that the labor
market has turned upward. This seems like a thin argument and requires that
the Fed throw remaining labor market indicators overboard. But downplaying
the decline in the unemployment rate leaves the Fed with another
communications challenge. The 6.5% unemployment threshold is looking pretty
silly at this point. Indeed, it is reasonable to believe that the
unemployment rate approaches to within a hair of 6.5% over the next several
months before the Fed has another opportunity to cut asset purchases. The
Fed really needs to change the 6.5% threshold. It already seems
meaningless, and will only become more so. Gavyn Davies is
right on this point.
Bottom Line: Incoming data are not exactly consistent with the definition
of "stronger and sustainable." And even if the data shift upward in the
next few months, it will take another three months to confirm that it is
sustainable. That pushes any decision on asset purchases out to March at
the earliest. If the Fed wants to taper sooner, policymakers will need to
hang their hats on the unemployment rate alone, which seems unlikely. In
the meantime, the one-way direction of financial markets will drive the
"financial stability hawks" on the FOMC crazy, but at the moment they lack
sufficient numbers to push forward their campaign to end asset purchases.
Posted by Mark Thoma on Tuesday, October 22, 2013 at 07:20 AM in Economics, Fed Watch, Monetary Policy, Unemployment |
Dean Baker dissects the jobs report:
Unemployment Edges Down as People Continue to Leave the Workforce in
September, by Dean Baker: The unemployment rate edged down to 7.2
percent in September, the lowest level since November of 2008. The Labor
Department’s establishment survey showed a gain of 148,000 jobs. With modest
upward revisions to the prior two months’ data, this brings the average rate
of job growth over the last three months to 143,000. This compares with an
average rate of job growth of 186,000 a month over the last year.
In spite of the September drop in unemployment, the employment-to-population
rate (EPOP) remained unchanged at 58.6 percent. This continues the pattern
that we have seen throughout the recovery as the unemployment rate falls
mainly because workers leave the labor market. The unemployment rate is now
down by 2.8 percentage points from its 10.0 percent peak in October of 2009.
However, the EPOP is up just 0.4 percentage points from its low point in
June of 2011. Over the last year the EPOP actually edged down by 0.1
percentage point, while the unemployment rate dropped by 0.6 percentage
points. This drop in labor force participation is now occurring at an equal
pace among men and women, with the participation of both dropping 0.5
percentage points in the last year. ...[more]...
Posted by Mark Thoma on Tuesday, October 22, 2013 at 07:11 AM in Economics, Unemployment |
Attack of the Sock Puppets - Paul Krugman
The wrong reading of the money multiplier - Antonio Fatas
Is a currency crisis bad for you at the ZLB? - mainly macro
- Lawrence R. Klein, Economic Theorist, Dies at 93 - NYTimes.com
- American Debt, Chinese Anxiety, Elaborated - Econbrowser
- Japan’s Abenomics: time to take stock - IMF Blog
- The ‘Great Rent Wars’ of New York - MIT News
- What exactly do student evaluations measure? - The Berkeley Blog
- Why Are Housing Inventories Low? - FRBSF Economic Letter
- No, technology isn’t going to destroy the middle class - James Bessen
- Agglomeration explains Lancashire’s high-wage success - vox
Sources of Tea Party Discontent - Brad DeLong
- Maybe Economics Is A Science, But... - Paul Krugman
- It’s Time to Bolster TANF - CBPP
- Alan Greenspan Sees Inflation - NYTimes.com
- Money as a Unit of Account - NBER
- American Debt, Chinese Anxiety - Menzie Chinn
- U.S. Economic Mobility Improving Very Slowly - WSJ
- Comments on Existing Home Sales - Calculated Risk
- Bowlesonomics Versus Abenomics - Paul Krugman
- Budget wars: 1575 version - vox
- The capitalist state - Stumbling and Mumbling
- The UK, Cannot Borrow Without Risking Default - Karl Smith
- May I, For One, Welcome Our New Robot Overlords? - Brad DeLong
- Forward guidance and the term structure in NK models - Nick Rowe
- HealthCare.gov really is the purest political failure - Digitopoly
- Why is the liquidity trap? - The Economist
- Assessing Alan Greenspan: DeLong Self-Smackdown - Brad DeLong
Posted by Mark Thoma on Tuesday, October 22, 2013 at 12:03 AM in Economics, Links |
American Debt, Chinese Anxiety, by Menzie Chinn, Commentary, NY Times:
Last week, the United States once again walked up to the precipice of a debt
default, and once again the world wonders why any country, much less the
world’s largest economy, would endanger its financial reputation and thus
its ability to borrow.
Though a potential global financial crisis was averted at the last minute,
one notable development has been a string of warnings by Chinese officials.
These statements, unusually blunt coming from the Chinese, show that
repeated, avoidable crises threaten the privileged position of the U.S. as
issuer of the world’s main reserve currency and (until now) risk-free debt.
It is unlikely that China would provoke a sudden, international financial
calamity — for instance, by unloading U.S. Treasury securities and other
government debt. Nonetheless, the process of repeated crises and temporary
reprieves will only solidify the Chinese government’s determination to
diversify its holdings away from dollar-denominated assets. Moreover, these
crises provide ammunition to advocates within the Chinese government for
expanding the role of the renminbi in international markets. Both of these
trends will erode the ability of the United States to issue debt at
super-low interest rates, and accelerate the ascent of China’s currency.
Posted by Mark Thoma on Monday, October 21, 2013 at 11:39 AM in China, Economics, International Finance |
From the NBER:
Predatory Lending and the
Subprime Crisis, by Sumit Agarwal, Gene Amromin, Itzhak Ben-David, Souphala
Chomsisengphet, Douglas D. Evanoff, NBER Working Paper No. 19550 Issued in
October 2013: We measure the effect of an anti-predatory pilot program
(Chicago, 2006) on mortgage default rates to test whether predatory lending
was a key element in fueling the subprime crisis. Under the program, risky
borrowers and/or risky mortgage contracts triggered review sessions by
housing counselors who shared their findings with the state regulator. The
pilot cut market activity in half, largely through the exit of lenders
specializing in risky loans and through decline in the share of subprime
borrowers. Our results suggest that predatory lending practices contributed
to high mortgage default rates among subprime borrowers, raising them by
about a third.
Posted by Mark Thoma on Monday, October 21, 2013 at 10:51 AM in Economics, Financial System, Housing, Regulation |
Conservatives will use whatever arguments they can find to deny health care
to the poor:
Lousy Medicaid Arguments, by Paul Krugman, Commentary, NY Times: For
now, the big news about Obamacare is the debacle of HealthCare.gov, the Web
portal through which Americans are supposed to buy insurance on the new
health care exchanges. For now, at least, HealthCare.gov isn’t working for
It’s important to realize, however, that this botch has nothing to do with
the law’s substance, and will get fixed. After all, a number of states have
successfully opened their own exchanges,...
In other words, the technical problems, while infuriating ... will not, in
the end, be the big story. The real threat remains the effort of
conservative groups to sabotage reform, especially by blocking the expansion
of Medicaid. This effort relies heavily on lobbying, lavishly bankrolled by
the usual suspects, including the omnipresent Koch brothers. But it’s not
just money: the right has also rolled out some really lousy arguments. ...
Enter ... experts ... to declare that Medicaid actually hurts its
recipients. Their evidence? Medicaid patients tend to be sicker than the
uninsured, and slower to recover from surgery.
O.K., you know what to do: Google “spurious correlation health.” You are
immediately led to the tale of certain Pacific Islanders who long believed
that having lice made you healthy, because they observed that people with
lice were, typically, healthier than those without. They were, of course,
mixing up cause and effect: lice tend to infest the healthy, so they were a
consequence, not a cause, of good health.
The application to Medicaid should be obvious. Sick people are likely to
have low incomes; more generally, low-income Americans who qualify for
Medicaid just tend in general to have poor health. So pointing to a
correlation between Medicaid and poor health as evidence that Medicaid
actually hurts its recipients is as foolish as claiming that lice make you
healthy. It is, as I said, a lousy argument.
And the reliance on such arguments is itself deeply revealing, because it
illustrates the right’s intellectual decline. I mean, this is the best
argument their so-called experts can come up with for their policy
Meanwhile, many states are still planning to reject the Medicaid expansion,
denying essential health care to millions of needy Americans. And they have
no good excuse for this act of cruelty.
Posted by Mark Thoma on Monday, October 21, 2013 at 01:44 AM in Economics, Politics |
Posted by Mark Thoma on Monday, October 21, 2013 at 12:03 AM in Economics, Links |
The Worst Ex-Central Banker in the World:
Steven Pearlstein reads Alan Greenspan’s new book, and discovers that
Greenspan believes that he bears no responsibility for all the bad things
that happened on his watch — and that the solution to financial crises is,
you guessed it, less government.
What Pearlstein doesn’t mention, but I think is important, is Greenspan’s
amazing track record since leaving office — a record of being
wrong about everything, and learning nothing therefrom. It is, in
particular, more than three years since he warned that we were going to
become Greece any day now, and declared the failure of inflation and
soaring rates to have arrived already “regrettable.”
The thing is, Greenspan isn’t just being a bad economist here, he’s being a
bad person, refusing to accept responsibility for his errors in and out of
office. And he’s still out there, doing his best to make the world a worse
this from Brad DeLong.
Posted by Mark Thoma on Sunday, October 20, 2013 at 09:13 AM in Economics, Monetary Policy |
Ideology and Macroeconomics, by Arnold Kling: Scott Sumner writes,
I am amazed by how many proponents of fiscal policy don’t understand that
it’s symmetrical. Fiscal policy doesn’t mean more government; it means more
government during recessions and less government during booms, with no
overall change in the average level of government. Anyone who doesn’t even
get to that level of understanding, who doesn’t think in terms of policy
regimes, is simply not part of the serious conversation.
I agree with the first two sentences, but not with the last.
Yes, in theory, there should be economists who, as they argued for more
stimulus in 2009, should at the same time have been arguing for entitlement
reform or other reductions in future spending. Other things equal, the bigger
debt that we have accumulated over the past five years would make a
non-ideological macroeconomist want to propose tighter fiscal policy somewhere
down the road.
But “nonideological” and macroeconomics are nearly oxymorons. ...
(from 2005, before the recession had even started):
... To use fiscal policy to stabilize the economy however, you have to spend
more or tax less in the bad times (increase the deficit) and then do the hard
thing which is to raise taxes or cut spending in the good times (decrease the
deficit). To keep the budget in balance the good has to be matched
somewhere by the bad. If you cut taxes for this disaster, or this
recession, or this war, and don’t raise them later, what do you do next time?
Cut again? Okay, what about the time after that? It won’t work
forever. The priming of the economy during the bad times must be matched
by a slowdown during the good. Borrow when income is low, pay it back when
income is high.
Furthermore, in stabilization policy, it’s also not possible in the long-run
to use both government spending and taxation at opposite points in the business
cycle. That is, suppose you cut taxes during the bad times, then cut
spending during the good times to pay it back. That will work for a
recession or two, a hurricane or two, but it won’t work forever because
eventually there will be nothing left to cut out of government. The
opposite will not work forever either. If you increase spending during the
bad times then increase taxes during the good, the size of government will grow
indefinitely over the long-run. In more graphic form:
G↑ (rec) → T↑ (boom) → G↑ (rec)→ T↑ (boom) → G↑ (rec)
→ T↑ (boom) → bloated government
T↓ (rec) → G↓ (boom) → T↓ (rec)→ G↓ (boom) → T↓ (rec) →
G↓ (boom) → no government
These two policies, or some combination of them (increase G and cut T in
recessions, do the opposite in booms) are sustainable:
G↑ (rec) → G↓ (boom) → G↑ (rec) → G↓ (boom) → G↑ (rec)
→ G↓ (boom) → sustainable size of government
T↓ (rec) → T↑ (boom) → T↓ (rec) → T↑ (boom) → T↓ (rec)
→ T↑ (boom) → sustainable size of government
The Democrats are accused of adopting the first strategy and bloating the
government. The Republicans claim to adopt the second strategy to shrink
government, but they’ve bloated government themselves (take the second line and
change it to T↓ (rec) → G↑ (boom) → etc., a clearly unsustainable path).
Neither party seems willing or able to use either the third and/or the fourth
lines as a means of stabilizing the economy. We are seeing that now, and
maybe even less stable budgetary variations. The WSJ and other
members of the GOP seems to advocate T↓ (rec)→ T↓ (boom) → etc. which, without
cuts in G, cause deficits rise no matter how much they claim otherwise.
There are, of course, lots and lots of variations on these basic chains of
events, e.g. to adjust the size of government the first or second strategies can
be adopted temporarily, and you hope lawmakers would put all their cards on the
table as they do so whichever direction government size is to be adjusted.
But fiscal policy that is sustainable in the long-run, through recession after
recession, natural disaster after natural disaster, war after war, has to adopt
some combination of the third and fourth lines. ...
(from 2008, a bit afer the recession started):
Short-run stabilization policy for the economy during a downturn involves
either cutting taxes to stimulate consumption and investment (and sometimes
net exports), or increasing government spending. Which of these is used and
the specific policy adopted has important implications for the effectiveness
of policy, but no matter how it is done it will raise the deficit, and the
increase in the deficit is often used to oppose the policy.
Theoretically, however, there is no reason at all why short-run
stabilization policy ought to impact the long-run budget picture. Ideally,
the deficits that accumulate during bad times are paid for by raising taxes
or cutting spending during the good times so that there is no net change in
the budget in the long-run.
Historically, we have been pretty good at spending money in bad times, but
not so good at paying for the spending when times are better. But if we are
serious about stabilization, that's what we need to do. When output is below
the long-run sustainable rate we increase economic activity by deficit
spending, and when output exceeds the long-run sustainable rate, we decrease
activity by running a surplus. Doing this fills the troughs with the shaved
peaks from the booms and keeps the economy closer to the long-run trend
I've been wondering if the current crisis will change our attitude about
paying for stabilization policy, i.e. if it will make us more willing to
raise taxes and cut spending when times are good. One of the problems with
the last two boom-bust cycles was unchecked exuberance. Any calls to raise
taxes or interest rates were met with howls about how it would cut off the
boom, and who would want to do that? But tempering the boom might have
helped to reduce the size of the meltdown we are experiencing now and left
us much better off.
When the next boom develops, will we be more willing to raise taxes, cut
spending, and tighten Fed policy? Will we remember what happened when the
previous two booms ended and be more willing to step in and slow down the
booming economy, will we be less susceptible to the argument that doing so
will eliminate creative and productive innovation (as opposed to
misdirecting resources during the mania phase)? This doesn't mean creating a
recession or slamming on the brakes so hard we hit our heads, it doesn't
mean ending innovative activity, it simply means what it says, bringing the
growth rate down to its sustainable rate, and attenuating the exuberance
that leads to housing and dot.com bubbles. Will we be more willing to take
the necessary steps the next time the economy begins to boom?
I doubt it.
And the problem is that if we aren't willing to pay our bills during the
good times, then it will be much harder to spend the money we need to spend
when times are bad -- our hands will be tied when it comes to stabilization
I could go on, but I'll just simply note that Krugman has been arguing (more than once) that
there is little evidence that expansionary fiscal policy in recessions is
Oh, and since we are talking about unwillingness to reverse policy for
ideological reasons, are conservatives arguing that the tax cuts they call for
in recessions ought to be reversed when the economy improves? Why aren't those
who are so worried about reversing policy in good times only talking about the
spending side of the equation? Could it be -- gasp -- that their ideology, there
belief that government is too big, is the reason?
Posted by Mark Thoma on Sunday, October 20, 2013 at 08:57 AM in Economics, Fiscal Policy, Politics |
Posted by Mark Thoma on Sunday, October 20, 2013 at 12:03 AM in Economics, Links |
Comments on this post from Dan Little?:
Polarization: Suppose a country had come to the brink of financial
catastrophe because the two parties in its legislature were unable to find
compromises in the public interest. Suppose further that the discourse in that
country had evolved towards a highly toxic and hateful stream of anathemas by
one party against the other. And suppose that one party projects an
unprecedented amount of vitriol and hatred towards the leader of the other
party, the president of the country. How would we describe this state of
affairs? And what hypotheses might we consider to explain how this state of
affairs came to be?
First, description. This seems like a society on the brink of political
breakdown. It is riven by hard hatreds, with almost no strands of civility and
shared values to hold it together. One side portrays the other in extreme terms,
with few voices that insist on the basic decency of the other party. (There is
one maverick voice, perhaps, who breaks ranks with the extremists of his party,
and who expresses a decent respect for his political foes. He is accused of
being too soft -- perhaps a secret ally of the opposition.)
Here is how the point is put in a recent piece in the Washington Post:
Today there is a New Confederacy, an insurgent political force that has
captured the Republican Party and is taking up where the Old Confederacy
left off in its efforts to bring down the federal government. (link)
Consider this map of the distribution and density of slaveholding in the
South that Abraham Lincoln found very useful in the run-up to the Civil War;
Compare this to a map created by Richard Florida in the Atlantic
There is a pretty strong alignment between the two maps.
So where does the extremism come from? There is a fairly direct hypothesis that
comes to mind: racism and racial resentment. We are facing a real inversion of
the white-black power relation that this country has so often embraced. Perhaps
this is just very hard for the president's opponents to accept. Perhaps it
creates a curdling sense of resentment that is difficult to handle. This is
certainly the impression created by the recent incident involving the waving of
a confederate flag in front of the White House, an act not so different from a
cross-burning in front of the home of a black family. And in fact, there is a
pretty striking correlation between the heart of this anti-government activism
and the distribution of slaveholding in the United States before the Civil War
that is revealed in the two maps above.
Another possibility is that it's really and truly about ideology. The right
really hates the president because they think he advocates an extreme left set
of policies. The problem with this idea is that the President is in fact quite
moderate and centrist. The health care reforms he spearheaded were themselves
advocated by conservative think tanks only a few years earlier; the President's
agenda has not given much attention to poverty; and the President has avoided
serious efforts at redistribution through more progressive taxation. So in fact
the President represents the center, not the left, on most economic policies.
So where do these trends seem to be taking us? I used the word "polarization" to
describe the situation, but perhaps that is not quite accurate. The percentage
of the electorate represented by the extremist faction is small -- nothing like
a plurality, let alone majority, of the population. So the extremism in our
politics is being driven by a fairly small segment of our society. Because of
the extreme degree of gerrymandering that exists in many Congressional
districts, though, these legislators are secure in their home districts. So we
can't have a lot of hope in the idea that their own electorates will turn them
Maybe this society will cycle back to a more moderate set of voices and values.
Maybe the public will express its displeasure with the extremist voices, and
like good political entrepreneurs they will adapt. Maybe. But we don't seem to
see the signs of thaw yet.
Posted by Mark Thoma on Saturday, October 19, 2013 at 10:47 AM in Economics, Politics |
Here's the conclusion from a
Vox EU piece by Òscar Jordà, Moritz Schularick,
The long-run historical record underscores the central role played by
private-sector borrowing behavior for the buildup of financial instability.
- The idea that financial
crises typically have their roots in fiscal problems is not supported by
- We find evidence,
however, that high levels of public debt can matter for the path of the
recovery, confirming the results of Reinhart et al. (2012).
However, this effect is
related to recoveries from financial crises rather than typical recessions.
- While high levels of
public debt make little difference in normal times, entering a financial
crisis recession with an elevated level of public debt exacerbates the
effects of private-sector deleveraging, and typically leads to a prolonged
period of sub-par economic performance.
Put differently, the
long-run data suggest that without enough fiscal space, a country’s capacity to
perform macroeconomic stabilisation and resume growth may be impaired.
Posted by Mark Thoma on Saturday, October 19, 2013 at 10:47 AM in Economics, Financial System |
On the road and out and about today, so -- for now -- just a quick one from Paul Krugman
responding to Antonio Fatas (some of Krugman's supporting evidence has been
Do Currency Regimes Matter?:
Antonio Fatas, citing new work by
Andy Rose (pdf),
suggests that currency regimes don’t really matter — in particular that
membership in the euro has not really been a special problem for peripheral
Challenging preconceptions is always good, and this is a serious debate. I
am still, however, very much on the other side. I’d argue two points.
First, nominal wage stickiness — the key argument for the virtues of
floating exchange rates — is an
overwhelmingly demonstrated fact. Rose doesn’t offer reasons why this
doesn’t matter; he just offers a reduced-form relationship between currency
regimes and economic performance, and fails to find a significant effect. Is
this because there really is no effect, or because his tests lack power?
Second, there is the very striking empirical observation that debt levels
matter much less for countries with their own currency than for those
without. ... Indeed: debt only seems to matter for euro nations.
So I don’t buy the notion that the currency regime is irrelevant. But
clearly the Rose results need to be taken seriously, and we have to figure
out why he finds what he does.
Posted by Mark Thoma on Saturday, October 19, 2013 at 09:54 AM in Economics, International Finance |