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Saturday, November 30, 2013

'Subprime MBS With a Government Guarantee'

Dean Baker is unhappy:

Subprime MBS With a Government Guarantee: [Creative Commons]: Way back in the last decade we had a huge housing bubble which was propelled in large part by junk loans that were packaged into mortgage backed securities (MBS) by Wall Street investment banks and sold all around the world. Unfortunately few people in policy positions are old enough to remember back to the this era, which is why they are now in the process of altering rules so that investment banks will be able to put almost any loan into a MBS without retaining a stake.
As Floyd Norris explains in his column this morning, the Dodd-Frank financial reform has a provision requiring investment banks to retain a 5 percent stake in less secure mortgages placed in the MBS they issue. This gives them an incentive to ensure that the mortgages they put into an MBS are good mortgages. However the definition of a secure mortgage has been gradually weakened over time. Originally many considered the cutoff to be a 20 percent down payment, which is the traditional standard for a prime mortgage. This was lowered to 10 percent and then 5 percent, even though mortgages with just 5 percent down default at four times the rate of mortgages with 20 percent down. 
Norris tells us that the latest proposed rules would allow mortgages with zero down payment to be placed into pools with no requirement that banks maintain a stake. This change would mean that banks would have the same incentive as in the housing bubble years to put junk mortgages in MBS. If this rule is coupled with the Corker-Warner proposal for having a government guarantee for MBS, it will mean that banks will likely find it far easier to pass on junk and fraudulent mortgages going forward than they did in the years of the housing bubble.
Further facilitating this process is the gutting of the Franken amendment. This amendment (which passed the Senate with 65 votes) would have required investment banks to call the Securities and Exchange Commission (SEC) to pick a bond rating agency for a new MBS. This removed the conflict of interest where bond rating agencies would have an incentive to give a positive rating in order to get more business. In the conference committee, the amendment was replaced by a requirement that the SEC study the issue. After two and a half years the SEC issued its study and essentially concluded that picking bond rating agencies exceeded its competence. This left the conflict of interest in place.
If Congress wants to set up the conditions for another housing bubble fueled by fraudulent mortgages it is doing a very good job.

    Posted by on Saturday, November 30, 2013 at 08:58 AM Permalink  Comments (59)


    Links for 11-30-2013

      Posted by on Saturday, November 30, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (76)


      Friday, November 29, 2013

      'The Long Slog: Economic Growth Following the Great Recession'

      Speaking of the Dallas Fed, here are two figures from a report documenting how slow this recovery has been relative to the recovery from past recessions:

      Dallas1

      Dallas2

        Posted by on Friday, November 29, 2013 at 09:32 AM in Economics | Permalink  Comments (30)


        'The Dallas Fed Rebuffs the Idea that Immigrants are Stealing Jobs from Americans'

        Gillian Tett of the FT summarizes research from the Dallas Fed:

        ...when it comes to immigration – of the legal and illegal kind – the Lone Star Fed is not sitting with the Tea Party core. On the contrary, it has just published a paper – under the provocative title “Gone to Texas” – arguing that immigration is good for the local economy. And it rebuffs the idea that immigrants are stealing jobs from native-born Americans. On the contrary, it insists, they tend to boost growth in a win-win way.
        Now, if this conclusion had emerged in a state with few immigrants and plenty of unfilled jobs (think North Dakota), that might be unsurprising. But the picture that Fed researchers paint of Texas is eye-popping. Since 1990, the number of foreign-born people living there has jumped from 1.5 million to 4.3 million...”, and that “among large states, none has experienced a surge like Texas has, with immigrants rising from 9 per cent of the population in 1990 to 16.4 per cent in 2012”.
        Some immigrants are highly skilled... But most are not: two-thirds do not have a high-school diploma, two-thirds come from Mexico, and almost half – or 1.8 million people – are illegal...

        Here's a link to the report.

          Posted by on Friday, November 29, 2013 at 09:12 AM in Economics, Immigration, Unemployment | Permalink  Comments (27)


          Paul Krugman: Obamacare’s Secret Success

          Bending the cost curve:

          Obamacare’s Secret Success, by Paul Krugman, Commentary, NY Times: The law establishing Obamacare was officially titled the Patient Protection and Affordable Care Act. And the “affordable” bit wasn’t just about subsidizing premiums. It was also supposed to be about “bending the curve” — slowing the seemingly inexorable rise in health costs. ...
          So, how’s it going? ... Has the curve been bent?
          The answer, amazingly, is yes. In fact, the slowdown in health costs has been dramatic .... Since 2010, when the act was passed, real health spending per capita ... has risen less than a third as rapidly as its long-term average. Real spending per Medicare recipient hasn’t risen at all; real spending per Medicaid beneficiary has actually fallen slightly.
          What could account for this good news? One obvious answer is the still-depressed economy, which might be causing people to forgo expensive medical care. But this explanation turns out to be problematic in multiple ways. ...
          A better story focuses on what appears to be a decline in ... expensive new blockbuster drugs, even as existing drugs go off-patent and can be replaced with cheaper generic brands. ... But since drugs are only about 10 percent of health spending, it can only explain so much.
          So what aspects of Obamacare might be causing health costs to slow? One clear answer is the act’s reduction in Medicare “overpayments”... A less certain but likely source of savings involves changes in the way Medicare pays for services. The program now penalizes hospitals if many of their patients end up being readmitted soon after being released — an indicator of poor care — and readmission rates have, in fact, fallen substantially. Medicare is also encouraging ... “accountable care,” in which health organizations get rewarded for overall success in improving care while controlling costs.
          Furthermore, there’s evidence that Medicare savings “spill over” to the rest of the health care system...
          And the biggest savings may be yet to come. The Independent Payment Advisory Board, a panel with the power to impose cost-saving measures (subject to Congressional overrides) if Medicare spending grows above target, hasn’t yet been established, in part because of the near-certainty that any appointments to the board would be filibustered by Republicans yelling about “death panels.” Now that the filibuster has been reformed, the board can come into being.
          The news on health costs is, in short, remarkably good..., health reform is starting to look like a bigger success than even its most ardent advocates expected.

            Posted by on Friday, November 29, 2013 at 12:24 AM in Economics, Health Care | Permalink  Comments (92)


            Links for 11-29-2013

              Posted by on Friday, November 29, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (22)


              Thursday, November 28, 2013

              Luck

              Chris Dillow:

              Luck: Rick's lovely account of how computers enabled him to write should remind us of a more general point - that luck determines pretty much all of our economic fate.
              The standard Mincer equations express individual earnings as a function of schooling and exprience - and, in more sophisticated versions, of personality or cognitive skills as well. Even these leave a huge chunk of earnings' varation across individuals' unexplained - suggesting that luck plays a big role...
              However, these equations under-estimate the role of luck, because luck helps determine how much human capital we acquire in the first place. I'm thinking of several mechanisms here...[list/discussion of mechanisms]...
              I suspect that pretty much all the differences between our incomes are due to luck; a capacity for hard work is also a matter for luck. We do not "deserve" our economic fate, and only the most witlessly narcissistic libertoon could claim otherwise. ...
              What it does mean is that the rich and successful should be more humble.

                Posted by on Thursday, November 28, 2013 at 07:35 PM in Economics, Income Distribution | Permalink  Comments (17)


                Happy Thanksgiving

                Just thanks.

                  Posted by on Thursday, November 28, 2013 at 09:11 AM in Economics | Permalink  Comments (23)


                  Links for 11-28-2013

                    Posted by on Thursday, November 28, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (77)


                    Wednesday, November 27, 2013

                    'Breadlines Return'

                    Sending people to food kitchens is not cool, especially with the labor market so far from full recovery and there aren't enough jobs for the unemployed:

                    Breadlines Return, by Teresa Tritch, NY Times: ...The Times’s Patrick McGeehan described a line snaking down Fulton Street in Brooklyn last week, with people waiting to enter a food pantry run by the Bed-Stuy Campaign Against Hunger. The line was not an anomaly. Demand at all of New York City’s food pantries and soup kitchens has spiked since federal food stamps were cut on Nov. 1. ...
                    The Great Recession was the worst downturn since the Great Depression.  And yet,... food stamp cuts are occurring even though need is still high and opportunity low. ...
                    And there are more food-stamp cuts to come. House Republicans have proposed to cut the program by $40 billion over 10 years...; the Senate has proposed a $4 billion reduction. ...
                    If the current downturn has not mirrored the Great Depression, that’s thanks to safety net programs... Breadlines have, by and large, been replaced by food stamp... Now is not the time to cut back. Now is the time to provide.

                      Posted by on Wednesday, November 27, 2013 at 12:33 AM in Economics, Social Insurance, Unemployment | Permalink  Comments (47)


                      'Who Made Economics?'

                      Daniel Little:

                      Who made economics?, by Daniel Little: The discipline of economics has a high level of intellectual status, even hegemony, in today’s social sciences — especially in universities in the United States. It also has a very specific set of defining models and theories that distinguish between “good” and “bad” economics. This situation suggests two topics for research: how did political economy and its successors ascend to this position of prestige in the social sciences? And how did this particular mix of techniques, problems, mathematical methods, and exemplar theoretical papers come to define the mainstream discipline? How did this governing disciplinary matrix develop and win the field?

                      One of the most interesting people taking on questions like these is Marion Fourcade. Her Economists and Societies: Discipline and Profession in the United States, Britain, and France, 1890s to 1990s was discussed in an earlier post (link). An early place where she expressed her views on these topics is in her 2001 article, “Politics, Institutional Structures, and the Rise of Economics: A Comparative Study” (link). There she describes the evolution of economics in these terms:

                      Since the middle of the nineteenth century, the study of the economy has evolved from a loose discursive "field," with no clear and identifiable boundaries, into a fully "professionalized" enterprise, relying on both a coherent and formalized framework, and extensive practical claims in administrative, business, and mass media institutions. (397)

                      And she argues that this process was contingent, path-dependent, and only loosely guided by a compass of “better” science:

                      Overall,contrary to the frequent assumption that economics is a universal and universally shared science, there seems to be considerable cross-national variation in (1) the and nature of the institutionalization of an economic knowledge field, (2) the forms of professional action of economists, and (3) intellectual traditions in the of economics. (398)

                      Fourcade approaches this subject as a sociologist; so she wants to understand the institutional and structural factors that led to the shaping and stabilization of this field of knowledge.

                      Understanding the relationship between the institutional and intellectual aspects of knowledge production requires, first and foremost, a historical analysis of the conditions under which a coherent domain of discourse and practice was established in the first place. (398)

                      A key question in this article (and in Economists and Societies) is how the differences that exist between the disciplines of economics in France, Germany, Great Britain, and the US came to be. The core of the answer that she gives rests on her analysis of the relationships that existed between practitioners and the state: "A comparison of the four cases under investigation suggests that the entrenchment of the economics profession was profoundly shaped by the relationship of its practitioners to the larger political institutions and culture of their country" (432). So differences between economics in, say, France and the United States, are to be traced back to the different ways in which academic practitioners of economic analysis and policy recommendations were situated with regard to the institutions of the state.

                      It is possible to treat the history of ideas internally ("systems of ideas are driven by rational discussion of their implications") and externally ("systems of ideas are driven by the social needs and institutional arrangements of a certain time"). The best sociology of knowledge avoids this dichotomy, allowing for both the idea that a field of thought advances in part through the scientific and conceptual debates that occur within it and the idea that historically specific structures and institutions have important effects on the shape and direction of the development of a field. Fourcade avoids the dichotomy by treating seriously the economic reasoning that took place at a time and place, while also searching out the institutional and structural factors that favored this approach or that in a particular national setting.

                      This is sociology of knowledge done at a high level of resolution. Fourcade wants to identify the mechanisms through which "societal institutions" influence the production of knowledge in the four country contexts that she studies (Germany, Great Britain, France, and the US). She does not suggest that economics lacks scientific content or that economic debates do not have a rational structure of argument. But she does argue that the configuration of the field itself was not the product of rational scientific advance and discovery, but instead was shaped by the institutions of the university and the exigencies of the societies within which it developed.

                      Fourcade's own work suggests a different kind of puzzle -- this time in the development of the field of the sociology of knowledge. Fourcade's topic seems to be one that is tailor-made for treatment within the terms of Bourdieu's theory of a field. And in fact some of Fourcade's analysis of the institutional factors that influenced the success or failure of academic economists in Britain, Germany, or the US fits Bourdieu's theory very well. Bourdieu's book Homo Academicus appeared in 1984 in French and 1988 in English. But Fourcade does not make use of Bourdieu's ideas at all in the 2001 article -- some 17 years after Bourdieu's ideas were published. Reference to elements of Bourdieu's approach appears only in the 2009 book. There she writes:

                      Bourdieu found that the social sciences occupy a very peculiar position among all scientific fields in that external factors play an especially important part in determining these fields' internal stratification and structure of authority.... Within each disciplinary field, the subjective (i.e., agentic) and objective (i.e., structural) positions of individuals are "homologous": in other words, the polar opposition between "economic" and "cultural" capital is replicated at the field's level, and mirrors the orthodoxy/heterodoxy divide. (23)

                      So why was Bourdieu not considered in the 2001 article? This shift in orientation may be simply a feature of the author's own intellectual development. But it may also be diagnostic of the rise of Bourdieu's influence on the sociology of knowledge in the 90's and 00's. It would be interesting to see a graph of the frequency of references to the book since 1984.

                      (Gabriel Abend's treatment of the differences that exist between the paradigms of sociology in the United States and Mexico is of interest here as well; link.)

                        Posted by on Wednesday, November 27, 2013 at 12:24 AM in Economics, Methodology | Permalink  Comments (25)


                        Links for 11-27-2013

                          Posted by on Wednesday, November 27, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (71)


                          Tuesday, November 26, 2013

                          The New Litmus Test for Right-Wing Sanity

                          I agree with this:

                          Janet Yellen Is Now a Litmus Test for Right-Wing Sanity, by Kevin Drum: Steve Benen notes that the increasingly shrill and hyperbolic Heritage Foundation has decided to make opposition to Janet Yellen a "key vote." That is, they'll count it on their end-of-the-year scorecard that tells everyone just how conservative you are:

                          Thanks to the “nuclear option” there’s very little chance Yellen’s nomination will fail — Joe Manchin appears to be her only Democratic opponent — but it now seems likely that most Senate Republicans will oppose the most qualified Fed nominee since the institution was founded.

                          That's true, which means this has become sort of a litmus test for wingnuttery. There's simply no serious reason to oppose Yellen...

                            Posted by on Tuesday, November 26, 2013 at 01:22 PM in Economics, Monetary Policy | Permalink  Comments (54)


                            'Conservative Leads Effort to Raise Minimum Wage in California'

                            Hmm:

                            Conservative Leads Effort to Raise Minimum Wage in California, by Jennifer Medina, NY Times: Ron Unz, a Silicon Valley millionaire, rose to fame by promoting a ballot initiative that essentially eliminated bilingual education in California. He went on to become publisher of The American Conservative, a libertarian-leaning magazine.
                            But after decades in the conservative movement, Mr. Unz is pursuing a goal that has stymied liberals: raising the minimum wage. He plans to pour his own money into a ballot measure to increase the minimum wage in California to $10 an hour in 2015 and $12 in 2016, which would make it by far the highest in the nation. Currently, it is $8 — 75 cents higher than the federal minimum.
                            Using what he sees as conservative principles to advocate a policy long championed by the left, Mr. Unz argues that significantly raising the minimum wage would help curb government spending on social services, strengthen the economy and make more jobs attractive to American-born workers.
                            “There are so many very low-wage workers, and we pay for huge social welfare programs for them,” he said in an interview. “This would save something on the order of tens of billions of dollars. Doesn’t it make more sense for employers to pay their workers than the government?” ...

                              Posted by on Tuesday, November 26, 2013 at 12:24 PM in Economics | Permalink  Comments (81)


                              Minneapolis Fed President and Research Department

                              My theory about what is happening at Minneapolis is that it is mostly about poor communication and insufficient leadership over a very strong willed group. That led to frictions between Narayana Kocherlakota and the research department. These issues came before his ideological conversion, have nothing to do with saltwater-freshwater, or pronouncements on low interest rates and deflation.

                                Posted by on Tuesday, November 26, 2013 at 11:59 AM in Economics, Monetary Policy | Permalink  Comments (45)


                                'The Economics of the Fed’s Press Conference'

                                This is from Fernando Duarte and Carlo Rosa of the NY Fed:

                                A Way With Words: The Economics of the Fed’s Press Conference, by Fernando Duarte and Carlo Rosa, FRB NY: When central bankers speak, traders, journalists, and politicians listen with bated breath. The marked asset price reaction to Chairman Bernanke’s June press conference confirms the importance of his comments in the marketplace.
                                The chart below shows the dynamics of U.S. asset prices in five-minute intervals (the ten-year Treasury rate, S&P 500, and euro/dollar exchange rate) during the announcement day. The strong market reaction was spurred not only by the release of the Federal Open Market Committee (FOMC) statement at 2 p.m., but also by the question-and-answer part of the press conference at 2:30 p.m., when journalists questioned the Chairman to better understand the Fed’s views. In this case, markets thought Chairman Bernanke revealed new, important information, and asset prices moved. But was this an exception? Do all press conferences provide new information, or is the FOMC statement the more market-moving Fed communication tool?

                                Traders-Took-Notice-June-19--2013-FOMC-Meeting

                                To answer this question, we exploit the timing in the release of information. We restrict our attention to 2012, when the FOMC met eight times to discuss monetary policy. At the end of each meeting for which there was a press conference (on January 25, April 25, June 20, September 13, and December 12), the FOMC released a statement at 12:30 p.m. providing an overview of its policy stance. Then, at 2 p.m., the FOMC released the “Summary of Economic Projections” (SEP), which provides individual Committee members’ forecasts for output growth, the unemployment rate, inflation, and the federal funds rate. Finally, at 2:15 p.m., the Chairman started the press conference, which usually concluded around 3:15 p.m. Press conferences were only held in conjunction with five of the eight yearly FOMC meetings. In 2013, the timing changed a bit and the SEP started to be released concurrently with the FOMC statement at 2 p.m.; to avoid confounding the effect of the FOMC statement with that of the SEP, our post only looks at 2012.
                                The next chart displays the five-minute volatility of the S&P 500. The blue line shows the average volatility on 2012 FOMC meeting days that featured a press conference, while the black line shows the average volatility on nonannouncement days. We can clearly see that stocks are much more volatile on FOMC meeting days, and that the high volatility is concentrated around 12:30 p.m., 2 p.m., and the 2:15-2:30 p.m. period, when announcements are made. The effect is also quite large: If stocks on a daily basis were as volatile as they were at 12:30 p.m. on an announcement day, then the annualized volatility would be 35 percent instead of the normal 8 percent (note that these are five-minute volatilities that were then annualized, not annual volatilities). A red circle appears on top of the blue line whenever the difference in volatility between announcement and nonannouncement days is unlikely to be due to chance. (For our beloved wonks: The red dot means that the difference is statistically significant at the 10 percent level.

                                S&P-500

                                We’re now ready to answer the original question. By looking at the chart, it’s apparent that the June FOMC meeting wasn’t an exception, but rather the rule. The stock market moves the most around the release of the FOMC statement, but also moves more than usual around the time of the press conference. Because we’re looking at very narrow windows of time in which no other relevant economic events or announcements took place, we’re confident that we can ascribe the extra volatility to FOMC-related activities.
                                The “announcement effect” we uncovered isn’t unique to equities. The next two charts show the reaction of government bonds and exchange rates. The average five-minute change in the ten-year Treasury yield is two basis points after announcements – eight times higher than at the same time on nonannouncement days. For the euro/dollar exchange rate, we see a similar pattern. A notable finding is that, unlike equities, bonds tend to react more to the SEP release than to the press conference.

                                Ten-Year-Treasury-Yield


                                Dollar-Euro-Exchange-Rate

                                One of us has also found that these effects are also present in Europe, supporting the idea that there are several important communication tools at the disposal of central bankers throughout the world. This is particularly relevant in today’s environment of unconventional monetary policy, in which there are multiple dimensions of decision making that need to be conveyed to the public.
                                [Disclaimer The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.]

                                  Posted by on Tuesday, November 26, 2013 at 10:00 AM in Economics, Monetary Policy | Permalink  Comments (0)


                                  Links for 11-25-2013

                                    Posted by on Tuesday, November 26, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (51)


                                    Monday, November 25, 2013

                                    Paul Krugman: California, Here We Come?

                                    Obamacare can work:

                                    California, Here We Come?, by Paul Krugman, Commentary, NY Times: It goes without saying that the rollout of Obamacare was an epic disaster. But what kind of disaster was it? Was it a failure of management, messing up the initial implementation of a fundamentally sound policy? Or was it a demonstration that the Affordable Care Act is inherently unworkable? ...
                                    Well, your wish is granted. Ladies and gentlemen, I give you California.
                                    Now, California isn’t the only place where Obamacare is looking pretty good. A number of states that are running their own online health exchanges instead of relying on HealthCare.gov are doing well. ...
                                    California is, however, an especially useful test case. First of all, it’s huge: if a system can work for 38 million people, it can work for America as a whole. Also, it’s hard to argue that California has had any special advantages other than that of having a government that actually wants to help the uninsured. ...
                                    For one thing, enrollment is surging. ... To work as planned, health reform has to produce a balanced risk pool — that is, it must sign up young, healthy Americans as well as their older, less healthy compatriots. And so far, so good: in October, 22.5 percent of California enrollees were between the ages of 18 and 34, slightly above that group’s share of the population.
                                    What we have in California, then, is a proof of concept. Yes, Obamacare is workable — in fact, done right, it works just fine.
                                    The bad news, of course, is that most Americans aren’t lucky enough to live in states in which Obamacare has, in fact, been done right. They’re stuck either with HealthCare.gov or with one of the state exchanges, like Oregon’s, that have similar or worse problems. Will they ever get to experience successful health reform?
                                    The answer is, probably yes. ...
                                    There will also probably be growing use of workarounds — for example, encouraging people to go directly to insurers. This will temporarily defeat one of the purposes of the exchanges, which was to make price comparisons easy, but it will be good enough as a short-term patch. And one shouldn’t forget that the insurance industry has a big financial stake in the success of Obamacare, and will soon be pitching in with big efforts to sign people up.
                                    Again, Obamacare’s rollout was a disaster. But in California we can see what health reform will look like, beyond the glitches. And it’s going to work.

                                      Posted by on Monday, November 25, 2013 at 06:25 AM in Economics, Health Care | Permalink  Comments (151)


                                      Sunday, November 24, 2013

                                      Links for 11-24-2013

                                        Posted by on Sunday, November 24, 2013 at 11:43 AM Permalink  Comments (43)


                                        Saturday, November 23, 2013

                                        Links for 11-23-2013

                                          Posted by on Saturday, November 23, 2013 at 04:44 AM in Economics, Links | Permalink  Comments (142)


                                          Friday, November 22, 2013

                                          'A Universal Income is Not Such a Silly Idea'

                                          Tim Harford argues that "A universal income is not such a silly idea". His argument ends with:

                                          ... There is an alternative way to look at all this: an increasing number of economists are beginning to worry that technological change may make large numbers of people completely unemployable. In short, the robots are coming to take our jobs. These concerns have been wrong before, but perhaps this time really is different. If so, we’ll need an economic system that can cope when lots of people have no way to making a living. I wonder if everyone has a basic income in Star Trek.

                                            Posted by on Friday, November 22, 2013 at 01:26 PM in Economics, Social Insurance | Permalink  Comments (74)


                                            What is 'Moral Hazard'

                                            At CBS MoneyWatch, my latest "explainer":

                                            Explainer: What is "moral hazard"

                                            What it is, and what to do about it.

                                              Posted by on Friday, November 22, 2013 at 08:28 AM in Economics, MoneyWatch | Permalink  Comments (31)


                                              Paul Krugman: Expanding Social Security

                                              Social Security benefits "should be expanded, not cut":

                                              Expanding Social Security, by Paul Krugman, Commentary, NY Times: For many years there has been one overwhelming rule for people who wanted to be considered serious inside the Beltway. It was this: You must declare your willingness to cut Social Security in the name of “entitlement reform.” It wasn’t really about the numbers, which never supported the notion that Social Security faced an acute crisis. It was instead a sort of declaration of identity, a way to show that you were an establishment guy, willing to impose pain (on other people, as usual) in the name of fiscal responsibility.
                                              But a funny thing has happened in the past year or so. Suddenly, we’re hearing open discussion of the idea that Social Security should be expanded, not cut. Talk of Social Security expansion has even reached the Senate, with Tom Harkin introducing legislation that would increase benefits. A few days ago Senator Elizabeth Warren gave a stirring floor speech making the case for expanded benefits.
                                              Where is this coming from? One answer is that the fiscal scolds driving the cut-Social-Security orthodoxy have, deservedly, lost a lot of credibility over the past few years. ... Beyond that, America’s overall retirement system is in big trouble. ...
                                              Many workers used to have defined-benefit retirement plans, plans in which their employers guaranteed a steady income after retirement. And a fair number of seniors ... are still collecting benefits from such plans.
                                              Today, however, workers who have any retirement plan at all generally have defined-contribution plans — basically, 401(k)’s... The trouble is that at this point it’s clear that the shift to 401(k)’s was a gigantic failure. Employers took advantage of the switch to surreptitiously cut benefits; investment returns have been far lower than workers were told to expect; and, to be fair, many people haven’t managed their money wisely.
                                              As a result, we’re looking at a looming retirement crisis, with tens of millions of Americans facing a sharp decline in living standards at the end of their working lives. For many, the only thing protecting them from abject penury will be Social Security. Aren’t you glad we didn’t privatize the program?
                                              So there’s a strong case for expanding, not contracting, Social Security. Yes, this would cost money, and it would require additional taxes...
                                              Realistically, Social Security expansion won’t happen anytime soon. But it’s an idea that deserves to be on the table — and it’s a very good sign that it finally is.

                                                Posted by on Friday, November 22, 2013 at 12:33 AM in Economics, Politics, Social Security | Permalink  Comments (126)


                                                Links for 11-22-2013

                                                  Posted by on Friday, November 22, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (122)


                                                  Thursday, November 21, 2013

                                                  Summers Says History Will Favor Fed's QE `98 to 2'

                                                  Since Larry Summers is all the rage these days, here he is on how history will view QE:

                                                    Posted by on Thursday, November 21, 2013 at 10:43 AM in Economics, Monetary Policy, Video | Permalink  Comments (20)


                                                    'Don’t Blame the Robots: Assessing the Job Polarization Explanation of Growing Wage Inequality'

                                                    From Lawrence Mishel, Heidi Shierholz, and John Schmitt:

                                                    Don’t Blame the Robots: Assessing the Job Polarization Explanation of Growing Wage Inequality, by Lawrence Mishel, Heidi Shierholz, and John Schmitt, EPI–CEPR Working Paper: Executive summary Many economists contend that technology is the primary driver of the increase in wage inequality since the late 1970s, as technology-induced job skill requirements have outpaced the growing education levels of the workforce. The influential “skill-biased technological change” (SBTC) explanation claims that technology raises demand for educated workers, thus allowing them to command higher wages—which in turn increases wage inequality. A more recent SBTC explanation focuses on computerization’s role in increasing employment in both higher-wage and lower-wage occupations, resulting in “job polarization.” This paper contends that current SBTC models—such as the education-focused “canonical model” and the more recent “tasks framework” or “job polarization” approach mentioned above—do not adequately account for key wage patterns (namely, rising wage inequality) over the last three decades. Principal findings include:
                                                    1. Technological and skill deficiency explanations of wage inequality have failed to explain key wage patterns over the last three decades, including the 2000s.
                                                    The early version of the “skill-biased technological change” (SBTC) explanation of wage inequality posited a race between technology and education where education levels failed to keep up with technology-driven increases in skill requirements, resulting in relatively higher wages for more educated groups, which in turn fueled wage inequality (Katz and Murphy 1992; Autor, Katz, and Krueger 1998; and Goldin and Katz 2010). However, the scholars associated with this early, and still widely discussed, explanation highlight that it has failed to explain wage trends in the 1990s and 2000s, particularly the stability of the 50/10 wage gap (the wage gap between low- and middle-wage earners) and the deceleration of the growth of the college wage premium since the early 1990s (Autor, Katz, and Kearney 2006; Acemoglu and Autor 2012). This motivated a new technology-based explanation (formally called the “tasks framework”) focused on computerization’s impact on occupational employment trends and the resulting “job polarization”: the claim that occupational employment grew relatively strongly at the top and bottom of the wage scale but eroded in the middle (Autor, Levy, and Murnane 2003; Autor, Katz, and Kearney 2006; Acemoglu and Autor 2012; Autor 2010). We demonstrate that this newer version—the task framework, or job polarization analysis—fails to explain the key wage patterns in the 1990s it intended to explain, and provides no insights into wage patterns in the 2000s. We conclude that there is no currently available technology-based story that can adequately explain the wage trends of the last three decades.
                                                    2. History shows that middle-wage occupations have shrunk and higher-wage occupations have expanded since the 1950s. This has not driven any changed pattern of wage trends.
                                                    We demonstrate that key aspects of “job polarization” have been taking place since at least 1950. We label this “occupational upgrading” since it primarily consists of shrinkage in relative employment in middle-wage occupations and a corresponding expansion of employment in higher-wage occupations. Lower-wage occupations have remained a small (less than 15 percent) and relatively stable share of total employment since the 1950s, though they have grown in importance in the 2000s. Occupational upgrading has occurred in decades with both rising and falling wage inequality and in decades with both rising and falling median wages, indicating that occupational employment patterns, by themselves, cannot explain the salient wage trends.
                                                    3. Evidence for job polarization is weak.
                                                    We use the Current Population Survey to replicate existing findings on job polarization, which are all based on decennial census data. Job polarization is said to exist when there is a U-shaped plot in changes in occupational employment against the initial occupational wage level, indicating employment expansion among high- and low-wage occupations relative to middle-wage occupations. As shown in Figure E (explained later in the paper but introduced here), in important cases, these plots do not take the posited U-shape. More importantly, in all cases the lines traced out fit the data very poorly, obscuring large variations in employment growth across occupational wage levels.
                                                    4. There was no occupational job polarization in the 2000s.
                                                    In the 2000s, relative employment expanded in lower-wage occupations, but was flat at both the middle and the top of the occupational wage distribution. The lack of overall job polarization in the 2000s is a phenomenon visible in both the analyses of decennial census/American Community Survey data provided by proponents of the tasks framework/job polarization perspective (Autor 2010; Acemoglu and Autor 2012) and in our analysis of the Current Population Survey. Thus, the standard techniques applied to the data for the 2000s do not establish even a prima facie case for the existence of overall job polarization in the most recent decade. This leaves the job polarization story, at best, as an account of wage inequality in the 1990s. It certainly calls into question whether it should be a description of current labor market trends and the basis of current policy decisions.
                                                    5. Occupational employment trends do not drive wage patterns or wage inequality.
                                                    We demonstrate that the evidence does not support the key causal links between technology-driven changes in tasks and occupational employment patterns and wage inequality that are at the core of the tasks framework and job polarization story. Proponents of job polarization as a determinant of wage polarization have, for the most part, only provided circumstantial evidence: both trends occurred at the same time. The causal story of the tasks framework is that technology (i.e., computerization) drives changes in the demand for tasks (increasing demand at the top and bottom relative to the middle), producing corresponding changes in occupational employment (increasing relative employment in high- and low-wage occupations relative to middle-wage occupations). These changes in occupational employment patterns are said to drive changes in overall wage patterns, raising wages at the top and bottom relative to the middle. However, the intermediate step in this story must be that occupational employment trends change the occupational wage structure, raising relative wages for occupations with expanding employment shares and vice-versa. We demonstrate that there is little or no connection between decadal changes in occupational employment shares and occupational wage growth, and little or no connection between decadal changes in occupational wages and overall wages. Changes within occupations greatly dominate changes across occupations so that the much-focused-on occupational trends, by themselves, provide few insights.
                                                    6. Occupations have become less, not more, important determinants of wage patterns.
                                                    The tasks framework suggests that differences in returns to occupations are an increasingly important determinant of wage dispersion. Using the CPS, we do not find this to be the case.  We find that a large and increasing share of the rise in wage inequality in recent decades (as measured by the increase in the variance of wages) occurred within detailed occupations.  Furthermore, using DiNardo, Fortin, and Lemieux’s reweighting procedure, we do not find that occupations consistently explain a rising share of the change in upper tail and lower tail inequality for either men or women.
                                                    7. An expanded demand for low-wage service occupations is not a key driver of wage trends.
                                                    We are skeptical of the recent efforts of Autor and Dorn (2013) that ask the low-wage “service occupations” to carry much or all of the weight of the tasks framework. First, the small size and the slow, relatively steady growth of the service occupations suggest significant limitations of a technology-driven expansion of service occupations to be able to explain the large and contradictory changes in wage growth at the bottom of the distribution (i.e., between middle and low wages, the 50/10 wage differential), let alone movements at the middle or higher up the wage distribution. The service occupations remain a relatively small share of total employment; in 2007, they accounted for less than 13 percent of total employment, and just over half of employment in the bottom quintile of occupations ranked by wages. Moreover, these occupations have expanded only modestly in recent decades, increasing their employment share by 2.1 percentage points between 1979 and 2007, with most of the gain in the 2000s. Relative employment in all low-wage occupations, taken together, has been stable for the last three decades, representing a 21.1 percent share of total employment in 1979, 19.7 percent in 1999, and 20.0 percent in 2007.
                                                    Second, the expansion of service occupation employment has not driven their wage levels and therefore has not driven overall wage patterns. The timing of the most important changes in employment shares and wage levels in the service occupations is not compatible with conventional interpretations of the tasks framework. Essentially all of the wage growth in the service occupations over the last few decades occurred in the second half of the 1990s, when the employment share in these occupations was flat. The observed wage increases preceded almost all of the total growth in service occupations over the 1979–2007 period, which took place in the 2000s, when service occupation wages were falling (another trend that contradicts the overall claim of the explanatory power of service occupation employment trends).
                                                    8. Occupational employment trends provide only limited insights into the main dynamics of the labor market, particularly wage trends.
                                                    A more general point can and should be drawn from our findings: Occupational employment trends do not, by themselves, provide much of a read into key labor market trends because changes within occupations are dominant. Recent research and journalistic treatment of the labor market has highlighted the pattern of occupational employment growth to assess the extent of structural unemployment, the disproportionate increase in low-wage jobs, and the “coming of robots”—changes in workplace technology and the consequent impact on wage inequality. The recent academic literature on wage inequality has highlighted the role of changes in the occupational distribution of employment as the key factor. In particular, occupational employment trends have become increasingly used as indicators of job skill requirement changes, reflecting the outcome of changes in the nature of jobs and the way we produce goods and services. Our findings indicate, however, that occupational employment trends give only limited insight and leave little imprint on the evolution of the occupational wage structure, and certainly do not drive changes in the overall wage structure. We therefore urge extreme caution in drawing strong conclusions about overall labor market trends based on occupational employment trends by themselves.

                                                    I suppose I should note that I haven't read this closely enough yet to endorse every word (or not). Full paper here (scroll down).

                                                      Posted by on Thursday, November 21, 2013 at 09:15 AM in Economics, Productivity, Technology, Unemployment | Permalink  Comments (34)


                                                      Fed Watch: Desperate to Taper

                                                      Tim Duy:

                                                      Desperate to Taper, by Tim Duy: The minutes of the October FOMC meeting leave little doubt that the Fed increasingly desires to end the asset purchase program, enough so to contemplate tapering regardless of seeing satisfactory improvement in labor markets. It is that desire - or perhaps desperation - that puts an element of random chance into the policymaking process and keeps the expectation of near-term tapering alive despite efforts of policymakers to reassure market participants that it is all data dependent. Trouble with that story is simple - it is not only data dependent. The Fed has already admitted as much.
                                                      Policy planning and communication strategy were the hot topic of this FOMC meeting, and the discussion of the specifics of the asset purchase program began with:
                                                      During this general discussion of policy strategy and tactics, participants reviewed issues specific to the Committee's asset purchase program. They generally expected that the data would prove consistent with the Committee's outlook for ongoing improvement in labor market conditions and would thus warrant trimming the pace of purchases in coming months.
                                                      The mythical taper - just a few months away. And it will always be just a few months away given the broad weakness in the labor chart. Recall the Yellen Charts:

                                                      YELLEN112113

                                                      Unless they narrow their focus to only the unemployment rate, the argument to taper is challenged to say the least. It is even more challenged considering inflation indicators. Knowing that the data continuously refuses to cooperate, the Fed explores plan B:
                                                      However, participants also considered scenarios under which it might, at some stage, be appropriate to begin to wind down the program before an unambiguous further improvement in the outlook was apparent.
                                                      To be sure, some doves shrieked:
                                                      A couple of participants thought it premature to focus on this latter eventuality, observing that the purchase program had been effective and that more time was needed to assess the outlook for the labor market and inflation; moreover, international comparisons suggested that the Federal Reserve's balance sheet retained ample capacity relative to the scale of the U.S. economy.
                                                      It may be premature, but if they are going to go down that road, they had better have an explanation:
                                                      Nonetheless, some participants noted that, if the Committee were going to contemplate cutting purchases in the future based on criteria other than improvement in the labor market outlook, such as concerns about the efficacy or costs of further asset purchases, it would need to communicate effectively about those other criteria.
                                                      And there it is - the missing piece. We know the Fed has been looking to pull the plug on asset purchases, they just haven't explained why. Well, not exactly. Federal Reserve Chairman Ben Bernanke was more direct on the subject in his speech this week:
                                                      ..though a strong majority of FOMC members believes that both the forward rate guidance and the LSAPs are helping to support the recovery, we are somewhat less certain about the magnitudes of the effects on financial conditions and the economy of changes in the pace of purchases or in the accumulated stock of assets on the Fed's balance sheet. Moreover, economists do not have as good an understanding as we would like of the factors determining term premiums; indeed, as we saw earlier this year, hard-to-predict shifts in term premiums can be a source of significant volatility in interest rates and financial conditions. LSAPs have other drawbacks not associated with forward rate guidance, including the risk of impairing the functioning of securities markets and the extra complexities for the Fed of operating with a much larger balance sheet, although I see both of these issues as manageable.
                                                      The problem with this cost and efficacy approach is that new "costs" could pop up at anytime. Definitely a policy wild card, and one the Fed is increasingly considering using.
                                                      The desire to taper also drives the frantic search for alternative modes of accommodation:
                                                      In those circumstances, it might well be appropriate to offset the effects of reduced purchases by undertaking alternative actions to provide accommodation at the same time.
                                                      One such way would be enhanced forward guidance:
                                                      As part of the planning discussion, participants also examined several possibilities for clarifying or strengthening the forward guidance for the federal funds rate, including by providing additional information about the likely path of the rate either after one of the economic thresholds in the current guidance was reached or after the funds rate target was eventually raised from its current, exceptionally low level.
                                                      There was not, however, widespread support for changing the thresholds:
                                                      A couple of participants favored simply reducing the 6-1/2 percent unemployment rate threshold, but others noted that such a change might raise concerns about the durability of the Committee's commitment to the thresholds. Participants also weighed the merits of stating that, even after the unemployment rate dropped below 6-1/2 percent, the target for the federal funds rate would not be raised so long as the inflation rate was projected to run below a given level. In general, the benefits of adding this kind of quantitative floor for inflation were viewed as uncertain and likely to be rather modest, and communicating it could present challenges, but a few participants remained favorably inclined toward it.
                                                      Instead, the favored path seems to be incorporating what we have been hearing from policymakers more directly in the FOMC statement:
                                                      Several participants concluded that providing additional qualitative information on the Committee's intentions regarding the federal funds rate after the unemployment threshold was reached could be more helpful. Such guidance could indicate the range of information that the Committee would consider in evaluating when it would be appropriate to raise the federal funds rate. Alternatively, the policy statement could indicate that even after the first increase in the federal funds rate target, the Committee anticipated keeping the rate below its longer-run equilibrium value for some time, as economic headwinds were likely to diminish only slowly.
                                                      Essentially, a commitment to ignore the thresholds without changing the thresholds. Later, the Fed circled back to an oldy but a goody:
                                                      Participants also discussed a range of possible actions that could be considered if the Committee wished to signal its intention to keep short-term rates low or reinforce the forward guidance on the federal funds rate. For example, most participants thought that a reduction by the Board of Governors in the interest rate paid on excess reserves could be worth considering at some stage, although the benefits of such a step were generally seen as likely to be small except possibly as a signal of policy intentions.
                                                      Notice a theme above? Fed officials have little faith in any of their alternatives. They want to pull back from quantitative easing, fearing that the costs will turn against them soon, yet have little to offer in return. Not good - it is almost as if the Fed is beginning to believe that they are near the end of their rope.
                                                      Interestingly, one of the costs of quantitative easing seems to be the inability to exit quantitative easing. This was revealed in today's bond market sell-off after the minutes were released. Despite the Fed's repeated efforts to use forward guidance to hold down rates, despite repeated reassurances that tapering is not tightening, Treasury yields gain almost 10 basis points at the 10 year horizon on even a whisper of tapering - and this after Bernanke's dovish speech and Vice Chair Janet Yellen's (perceived) dovish Senate hearing last week. Fine tuning policy with a tool of uncertain force is something of a challenge. Sufficient faith in an alternative tool would help clear the way for tapering despite this uncertainty, but after reading these minutes, I am somewhat concerned such faith is lacking.
                                                      Bottom Line: Clear evidence of the space we have been in for months. The Fed wants to taper, and is becoming increasingly nervous they will need to pull the trigger on that option before the data allows. That means that tapering is not data dependent. That means the policy deck is stacked with at least one wild card. And that sounds like a recipe for the kind of volatility the Fed is looking to avoid.

                                                        Posted by on Thursday, November 21, 2013 at 12:24 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (19)


                                                        Links for 11-21-2013

                                                          Posted by on Thursday, November 21, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (53)


                                                          Wednesday, November 20, 2013

                                                          'The Payments System and Monetary Transmission'

                                                          Rajiv Sethi (I like this idea):

                                                          The Payments System and Monetary Transmission: About forty minutes into the final session of a recent research conference at the IMF, Ken Rogoff made the following remarks:

                                                          We have regulation about the government having monopoly over currency, but we allow these very close substitutes, we think it's good, but maybe... it's not so good, maybe we want to have a future where we all have an ATM at the Fed instead of intermediated through a bank... and if you want a better deal, you want more interest on your money, then you can buy what is basically a bond fund that may be very liquid, but you are not guaranteed that you're going to get paid back in full. 

                                                          This is an idea that's long overdue. Allowing individuals to hold accounts at the Fed would result in a payments system that is insulated from banking crises. It would make deposit insurance completely unnecessary, thus removing a key subsidy that makes debt financing of asset positions so appealing to banks. There would be no need to impose higher capital requirements... And there would be no need to require banks to offer cash mutual funds, since the accounts at the Fed would serve precisely this purpose.

                                                          But the greatest benefit of such a policy would lie elsewhere, in providing the Fed with a vastly superior monetary transmission mechanism. In a brief comment on Macroeconomic Resilience a few months ago, I proposed that an account be created at the Fed for every individual with a social security number, including minors. Any profits accruing to the Fed as a result of its open market operations could then be used to credit these accounts instead of being transferred to the Treasury. But these credits should not be immediately available for withdrawal: they should be released if and when monetary easing is called for.

                                                          The main advantage of such an approach is that it directly eases debtor balance sheets when a recession hits. It can provide a buffer to those facing financial distress, allowing payments to be made on mortgages or auto loans in the face of an unexpected loss of income. And as children transition into adulthood, they will find themselves with accumulated deposits that could be used to finance educational expenditures or a down payment on a home.

                                                          In contrast, monetary policy as currently practiced targets creditor balance sheets. Asset prices rise as interest rates are driven down. The goal is to stimulate expenditure by lowering borrowing costs, but by definition this requires individuals to take on more debt. In an over-leveraged economy struggling through a balance sheet recession, such policies can only provide temporary relief. ...

                                                            Posted by on Wednesday, November 20, 2013 at 12:04 PM in Economics, Monetary Policy | Permalink  Comments (39)


                                                            Just a Reminder about the Condition of the Labor Market...

                                                            Emp-pop

                                                            Someone should do something.

                                                              Posted by on Wednesday, November 20, 2013 at 08:53 AM in Economics, Unemployment | Permalink  Comments (83)


                                                              Fed Watch: About That Unemployment Threshold....

                                                              Tim Duy:

                                                              About That Unemployment Threshold...., by Tim Duy: Federal Reserve Chairman Ben Bernanke delivered an excellent speech tonight; it is well worth the read. It reminded me that at least 75% of the Federal Reserve's communications problems would disappear if Bernanke had been willing to give a speech like this every two months. It is my hope that his successor Janet Yellen will deliver such speeches on a more regular basis.

                                                              There will be excellent coverage of the speech from the usual sources. So rather than a play-by-play review, I will focus on one topic, the unemployment threshold. There has been a great deal of speculation that the Fed will reduce the unemployment threshold to 5.5%. I have thought they will need to change the threshold because, at a minimum, the 6.5% number has already lost any operational meaning. But reading Bernanke's speech makes me think that they are very hesitant to change the threshold, and will instead continue to reinforce their existing forward guidance by emphasizing the likelihood that rates will remain low long after the threshold is breached.

                                                              Bernanke very clearly did not take this opportunity to hint that a change in the threshold was imminent. Instead, twice he reinforced the existing threshold. First:

                                                              In the judgment of the Committee, the unemployment rate--which, despite some drawbacks in this regard, is probably the best single summary indicator of the state of the labor market--is sufficient for defining the threshold given by the guidance. However, after the unemployment threshold is crossed, many other indicators become relevant to a comprehensive judgment of the health of the labor market, including such measures as payroll employment, labor force participation, and the rates of hiring and separation. In particular, even after unemployment drops below 6-1/2 percent, and so long as inflation remains well behaved, the Committee can be patient in seeking assurance that the labor market is sufficiently strong before considering any increase in its target for the federal funds rate.

                                                              And then later:

                                                              When, ultimately, asset purchases do slow, it will likely be because the economy has progressed sufficiently for the Committee to rely more heavily on its rate policies, the associated forward guidance, and its substantial continued holdings of securities to maintain progress toward maximum employment and to achieve price stability. In particular, the target for the federal funds rate is likely to remain near zero for a considerable time after the asset purchases end, perhaps well after the unemployment threshold is crossed and at least until the preponderance of the data supports the beginning of the removal of policy accommodation.

                                                              Note also that in a written response to Massachusetts Democratic Senator Elizabeth Warren and Louisiana Republican Senator David Vitter, Vice Chair Janet Yellen reiterated the same point. Via Reuters:

                                                              Warren asked in her letter if it would be helpful to lower the Fed's unemployment rate threshold - something that a number of economists, and some Fed officials, argue would be a potent way to do more to encourage consumer and business spending.

                                                              Yellen did not answer the question directly, but she repeated the Fed's talking point that the threshold was not a trigger for action, and rates could stay lower for longer.

                                                              "Monetary policy is likely to remain highly accommodative long after one of the economic thresholds for the federal funds rate has been crossed," she said.

                                                              The Fed's cautious approach of thresholds reflects a very real concern about the message a change would send. Jon Hilsenrath reveals this is the topic of active debate at the Fed because shifting the unemployment target could be considered a shift in the Fed's reaction function. Not everyone on the FOMC is comfortable with such a shift.

                                                              Hilsenrath describes the first line of thought at the Fed:

                                                              One line of thought is that the jobless rate is currently understating weakness in the job market because so many people are leaving the labor force. Under this view, there is much more slack in the job market than is indicated by 7.3% unemployment because millions of Americans are sitting on the sidelines, waiting to rejoin the job search process once opportunities become available. As this thinking goes, lowering the threshold to a number like 6% would bring the threshold better in line with the realities of the job market. It would be more a technical adjustment than a change in policy meant to add new stimulus to the economy.

                                                              This tends to be how I think of the issue - the 6.5% threshold is essentially irrelevant given economic conditions will induce the Fed to keep rates low long after the labor market crosses that threshold. Changing the threshold thus just brings the Fed's statement in line with reality. As Andy Harless reminded me in comments, however, the irrelevance of the 6.5% threshold is not "obvious" to everyone. Thus arises the implication that pushing the threshold down is a shift in the Federal Rerserve's reaction function. Back to Hilsenrath:

                                                              The other line of thought is that lowering the threshold would be meant to add more stimulus to a slow-growing economy by demonstrating to the public that the Fed is committed to keeping short-term interest rates low for even longer than previously planned.

                                                              I discussed this last in an earlier post. Fed research suggests that shifting the unemployment rate threshold to 5.5% would push back the expected lift-off from the zero bound by one quarter. Not a big change (again, economic conditions would not warrant a change at the 6.5% threshold to begin with), but an easier policy nonetheless. The Fed very much needs to understand which message it wants to send before setting themselves up for what could be another communications snafu. Hence the hesitation to jump in and change the threshold. I expect the minutes will reveal this was again a topic of conversation at the last FOMC meeting.

                                                              I am beginning to believe that the Fed will resist changing the threshold as long as possible, instead relying on emphasizing the "threshold not trigger" element of the existing forward guidance. Changing the threshold itself would then be reserved to add additional accommodation, if necessary, after the tapering process begins.

                                                              The problem with this story, however, is this: What does the Federal Reserve do if they have not raised interest rates after the 6.5% threshold is breached? Doesn't the threshold then become irrelevant? Do they then jettison the threshold based guidance entirely, or instead shift the threshold to 5.5%? But why make the change at that point, when policymakers would be even less certain about the sustainability of near zero rates?

                                                              In short, this forward guidance stuff is complicated.

                                                              Bottom Line: The issue of the thresholds is a hot topic at the Fed, but there is hesitancy to pull the trigger on the option of changing the threshold. They are not yet ready to chance signaling a change in the reaction function. And given that unemployment remains well above the threshold, there is no rush to change the threshold as long as the market believes it is not a trigger. This seems to be a message Bernanke is sending in this speech.

                                                                Posted by on Wednesday, November 20, 2013 at 12:15 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (27)


                                                                Links for 11-20-2013

                                                                  Posted by on Wednesday, November 20, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (73)


                                                                  Tuesday, November 19, 2013

                                                                  How Yellen Will Shape the Fed’s QE Exit Strategy

                                                                  I have a new column:

                                                                  How Yellen Will Shape the Fed’s QE Exit Strategy: After Janet Yellen’s excellent performance before the Senate Banking Committee last Thursday, she will almost surely be confirmed as the next Fed chair. 

                                                                  Once she’s confirmed, there are several important issues the Fed must address under her leadership such as improving the Fed’s communications with the public, ensuring that the financial sector is properly regulated, taking a stance on whether the Fed should pop bubbles, deciding whether to continue forward guidance in its present form, and so on. But the most important and most immediate problem Yellen will face during her term as chair is guiding the Fed to a smooth exit from its non-conventional policies. ...[continue]...

                                                                    Posted by on Tuesday, November 19, 2013 at 08:28 AM in Economics, Fiscal Times, Monetary Policy | Permalink  Comments (61)


                                                                    'The Geezers Are Not Alright'

                                                                    This editorial in the Washington Post really irritated me when I read it, so this response is nice to see:

                                                                    The Geezers Are Not Alright: The Washington Post editorial board wants to cut Medicare and Social Security. That has been its consistent position as long as I can remember. And what it advocates, always, are cuts in benefits, not costs..., things like a rise in the Medicare age. These are the kind of moves that are considered serious inside the Beltway. And as you might imagine, the Post has gone wild over recent suggestions that Social Security should be expanded, not cut.

                                                                    But perceived seriousness is not the same as actual seriousness, which depends on the facts. We now know that raising the Medicare age is a truly terrible idea, which would create a lot of hardship while making next to no dent in the budget deficit. And the central premise of the latest editorial — that the elderly are doing fine — just isn’t true.

                                                                    The Post writes:

                                                                    The bill’s authors warn of a looming “retirement crisis” because of low savings rates and disappearing private-sector pensions. In fact, the poverty rate among the elderly is 9.1 percent, lower than the national rate of 15 percent — and much lower than the 21.8 percent rate among children.

                                                                    This suggests that Social Security is doing a good job of fighting poverty as is and that those gains could be preserved in any attempt to trim the program.

                                                                    Guys, you have to keep up here. It’s well-known that the official poverty measure is quite flawed... — and it’s especially flawed when it comes to the elderly... The Census Supplemental Poverty Measure puts senior poverty at 14.8 percent, only slightly lower than the rate for younger adults.

                                                                    And some of today’s seniors are still benefiting from traditional defined-benefit retirement plans. In the future, income other than from Social Security will depend almost entirely on defined-contribution plans — basically 401(k)s. And 401(k)s are basically an experiment that failed, except for the already affluent.

                                                                    Maybe you don’t believe that the failure of defined-contribution plans is a reason to expand the one major defined-benefit plan we have, aka Social Security. But don’t make that argument by claiming that all is well with America’s seniors. The geezers are not alright.

                                                                    And even if the poverty rate among the elderly is tolerable as it is -- I'm not making that claim, but suppose it is -- the reason why advocates want to increase benefits is the fear that things will get worse in the future. Today's poverty rate doesn't tell us much about the "looming 'retirement crisis.'" Whether or not today's rate is in the tolerable range, should accept more poverty without trying to do something about it? Should we be happy about a large increase in the percentage that are in poverty just because we start from a tolerable figure? And what if today's figure isn't tolerable after all? In any case, this is about the rate of change in poverty among the elderly in the future, not the level now.

                                                                      Posted by on Tuesday, November 19, 2013 at 08:19 AM in Economics, Politics, Social Insurance | Permalink  Comments (80)


                                                                      Paul Ryan, Poverty Warrior? Huh?

                                                                      Jared Bernstein outlines Paul Ryan's "plan" to reduce poverty:

                                                                      Paul Ryan, Poverty Warrior? Huh?: ... This AM’s WaPo printed a feature on Rep. Paul Ryan’s plans to fight poverty... Then you read page after page, trying to figure out what the dude is actually saying he’d do to lower poverty, and here’s what you’re left with: vouchers, tax credits, and volunteerism. ...

                                                                      What are his accomplishments? He’s authored some of the harshest and most unrealistic budgets I’ve ever seen, and I’ve been on this beat for awhile–none of them have or are going anywhere legislatively. ...

                                                                      Nor is he an accomplished legislator. ... Quick–or for that matter, take your time: name one piece of enacted legislation in which he played a significant role…I’m waiting…still waiting…

                                                                      OK, time to get to work, and I’m sorry to start the day with negativity and snark. But the emperor in the empty suit has no clothes.

                                                                      Ryan Poverty Plan

                                                                      1. Cut spending on the poor, cut taxes on the wealthy
                                                                      2. Shred safety net through block granting federal programs
                                                                      3. Encourage entrepreneurism, sprinkle around some vouchers and tax credits
                                                                      4. ???
                                                                      5. Poverty falls

                                                                        Posted by on Tuesday, November 19, 2013 at 08:18 AM in Economics, Politics | Permalink  Comments (65)


                                                                        Links for 11-19-2013

                                                                          Posted by on Tuesday, November 19, 2013 at 12:03 AM Permalink  Comments (46)


                                                                          Monday, November 18, 2013

                                                                          'The Party of Practical Reform'

                                                                          David Warsh on Republican opposition to the Affordable Care Act:

                                                                          One Simple Step: ... What accounts for the ferocity of the opposition to the individual mandate as a means of assuring that all citizens are medically insured? What’s at stake here, I think, is the Republican Party’s wish to be seen as the party of reform. Traditionally, conservatives in US politics have been those who seek to defend the status quo, good and bad, whatever it is, while reformers are those who promise to improve matters, one way or another. Ronald Reagan was the master of these traditional conservatives, content as he was to affirm the achievements of the New Deal and the Second World War, but ready to insist that they had gone far enough, at least for a time.
                                                                          It was only after Reagan left office that young Republicans eager to occupy the White House sought to present themselves as the party of reform, House speaker Newt Gingrich with his “opportunity society,” George W. Bush with his “ownership society.” These reforms had to do mainly with curtailing or eliminating altogether measures that had been adopted in the past, the Social Security retirement system chief among them, in the name of aggregate economic efficiency and growth.
                                                                          The individual health insurance mandate is an invention of those times. It was proposed twenty-five years ago by Republican strategists at the Heritage Foundation, a conservative Washington think-tank, partly as a means of dealing with the problem of those who cannot obtain or cannot afford medical insurance. Essentially, it was a public health measure, tantamount to creating a new personal responsibility to have a doctor and, presumably, listen to him or her to some degree (don’t drink those half-gallon sodas).
                                                                          Massachusetts Republican governor Mitt Romney put the individual mandate into practice in 2005 as a step toward a presidential campaign. But in 2008 the Democrats wrested the reform impulse away from the Republicans and, In 2010, passed the measure themselves. The bitter mood of the present day has everything to do with whether the Democrats or the Republicans are to be viewed going forward as the party of practical reform. ...

                                                                            Posted by on Monday, November 18, 2013 at 09:53 AM in Economics, Health Care | Permalink  Comments (94)


                                                                            Paul Krugman: A Permanent Slump?

                                                                            How long will "depression rules" be in effect?

                                                                            A Permanent Slump?, by Paul Krugman, Commentary, NY Times: Spend any time around monetary officials and one word you’ll hear a lot is “normalization.” ...
                                                                            But what if the world we’ve been living in for the past five years is the new normal? What if depression-like conditions are on track to persist, not for another year or two, but for decades?
                                                                            You might imagine that speculations along these lines are the province of a radical fringe. ... In fact,... the person making that case was none other than Larry Summers. ...
                                                                            And if Mr. Summers is right, everything respectable people have been saying about economic policy is wrong, and will keep being wrong for a long time. ...
                                                                            We have, he suggested, an economy whose normal condition is one of inadequate demand — of at least mild depression — and which only gets anywhere close to full employment when it is being buoyed by bubbles. ...
                                                                            Why might this be happening? One answer could be slowing population growth. A growing population creates a demand for new houses, new office buildings, and so on; when growth slows, that demand drops off. ...
                                                                            Another important factor may be persistent trade deficits, which emerged in the 1980s and since then have fluctuated but never gone away.
                                                                            Why does all of this matter? One answer is that central bankers need to stop talking about “exit strategies.” Easy money should, and probably will, be with us for a very long time. This, in turn, means we can forget all those scare stories about government debt, which run along the lines of “It may not be a problem now, but just wait until interest rates rise.”
                                                                            More broadly, if our economy has a persistent tendency toward depression, we’re going to be living under the looking-glass rules of depression economics — in which ... attempts to save more (including attempts to reduce budget deficits) make everyone worse off — for a long time.
                                                                            I know that many people just hate this kind of talk. It offends their sense of rightness, indeed their sense of morality. Economics is supposed to be about making hard choices (at other people’s expense, naturally). It’s not supposed to be about persuading people to spend more.
                                                                            But as Mr. Summers said, the crisis “is not over until it is over” — and economic reality is what it is. And what that reality appears to be right now is one in which depression rules will apply for a very long time.

                                                                              Posted by on Monday, November 18, 2013 at 12:24 AM in Economics | Permalink  Comments (144)


                                                                              Links for 11-18-2013

                                                                                Posted by on Monday, November 18, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (27)


                                                                                Sunday, November 17, 2013

                                                                                Public Debt and Economic Growth: There is No ‘Tipping Point’

                                                                                One more quick one:

                                                                                Public debt and economic growth: There is no ‘tipping point’, by Markus Eberhardt and Andrea F Presbitero: The presence of a common threshold, or ‘tipping point’ – beyond which the detrimental impact of debt on growth is significant, or significantly increases – is currently taken as given in many policy circles. In the US, although many political battles impinge on the Congressional debate over the debt ceiling and the resulting government shutdown of October 2013, this somewhat reflected a widespread belief that debt is dangerous, and that fiscal austerity represents the only way of restoring sustainable growth. In the UK, Chancellor George Osborne displayed a similar sentiment when telling his annual party conference in Manchester this year that dealing with the repercussions of the financial crisis is not over “[u]ntil we’ve fixed the addiction to debt that got this country into this mess in the first place” (emphasis added). Without a doubt, these strong convictions and ensuing actions were strongly influenced by the work of Carmen Reinhart and Ken Rogoff (2010a), who were among the first to suggest a debt-to-GDP threshold of around 90%, beyond which economic growth is seriously affected by the debt burden. ...[continue]...

                                                                                  Posted by on Sunday, November 17, 2013 at 11:56 AM in Economics | Permalink  Comments (31)


                                                                                  Posts on Gasoline Prices and Secular Stagnation

                                                                                  I'm visiting my son Paul in Seattle today (he works at Amazon as an analyst), so just a quick post for now on two topics. First is Jim Hamilton on oil prices. He explains why the "boom in domestic drilling is bringing some real benefits to the U.S. economy. But a lower gasoline price for U.S. consumers isn't one of them":

                                                                                  Lower gasoline prices: "U.S. gasoline prices have fallen to their lowest level in nearly 33 months amid a boom in domestic oil drilling", the Wall Street Journal declared last week. That's a true statement, but there's more to the story.
                                                                                  Americans are indeed facing the lowest gasoline prices in almost three years, but not by much. ...

                                                                                  Second, at the risk of having a thin set of links for tomorrow, Paul Krugman's discussion of Larry Summer's recent talk on secular stagnation has generated quite a few responses:

                                                                                  Summer's presentation at the IMF Research Conference
                                                                                  Krugman's first post: Secular Stagnation, Coalmines, Bubbles, and Larry Summers

                                                                                  Responses:

                                                                                  Dean Baker: Bubbles Are Not Funny
                                                                                  Paul Krugman: Me Too! Blogging
                                                                                  Gavyn Davies: The implications of secular stagnation
                                                                                  Jared Bernstein: Paul, Larry, Secular Stagnation, and the Impact of Negative Real Rates

                                                                                    Posted by on Sunday, November 17, 2013 at 10:52 AM in Economics, Oil | Permalink  Comments (22)


                                                                                    Links for 11-17-2013

                                                                                      Posted by on Sunday, November 17, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (58)


                                                                                      Saturday, November 16, 2013

                                                                                      'Secular Stagnation, Coalmines, Bubbles, and Larry Summers'

                                                                                      Paul Krugman is annoyed (each of the four points below is discussed in detail):

                                                                                      Secular Stagnation, Coalmines, Bubbles, and Larry Summers, by Paul Krugman: I’m pretty annoyed with Larry Summers right now. His presentation at the IMF Research Conference is, justifiably, getting a lot of attention. And here’s the thing: I’ve been thinking along the same lines, and have, I think, hinted at this analysis in various writings. But Larry’s formulation is much clearer and more forceful, and altogether better, than anything I’ve done. Curse you, Red Baron Larry Summers!
                                                                                      OK, with professional jealousy out of the way, let me try to enlarge on Larry’s theme.
                                                                                      1. When prudence is folly ...
                                                                                      2. An economy that needs bubbles? ...
                                                                                      3. Secular stagnation? ...
                                                                                      4. Destructive virtue ...
                                                                                      I could go on, but by now I hope you’ve gotten the point. What Larry did at the IMF wasn’t just give an interesting speech. He laid down what amounts to a very radical manifesto. And I very much fear that he may be right.

                                                                                        Posted by on Saturday, November 16, 2013 at 01:17 PM in Economics | Permalink  Comments (96)


                                                                                        Links for 11-16-2013

                                                                                          Posted by on Saturday, November 16, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (95)


                                                                                          Friday, November 15, 2013

                                                                                          'Actually, Economists Can Predict Financial Crises'

                                                                                          I've argued for some time that we need new measures of systemic risk in financial markets -- we won't know if we can find reliable measures or not until we try -- so as it says below, recent "efforts to develop measures of systemic risk are encouraging":

                                                                                          Actually, Economists Can Predict Financial Crises, by Mark Buchanan, Commentary, Bloomberg: ... In recent years, an inconsistency has emerged in the economics profession. Many, including some Nobel Prize winners, maintain that crises are by their very nature unpredictable. At the same time, others -- aided by engineers, physicists, ecologists and computer scientists -- are developing ways to detect and quantify systemic risks, including measures that regulators could use to identify imbalances or vulnerabilities that might result in a crisis. ...
                                                                                          The challenge for economists is to find those indicators that can provide regulators with reliable early warnings of trouble. ...
                                                                                          Work is racing ahead. In the U.S., the newly formed Office of Financial Research has published various papers on topics such as stress tests and data gaps -- including one that reviews a list of some 31 proposed systemic-risk measures. The economists John Geanakoplos and Lasse Pedersen have offered specific proposals on measuring the extent to which markets are driven by leverage, which tends to make the whole system more fragile.
                                                                                          One problem has been “physics envy” -- a longing for certainty and for beautiful, timeless equations that can wrap up economic reality in some final way. Economics is actually more like biology, with perpetual change and evolution at its core. This means we’ll have to go on discovering new ways to identify useful clues about emerging problems as finance changes and investors jump into new products and strategies. Perpetual adaptation is part of living in a complex world.
                                                                                          The efforts to develop measures of systemic risk are encouraging. ...

                                                                                            Posted by on Friday, November 15, 2013 at 10:18 AM in Economics, Financial System, Regulation | Permalink  Comments (19)


                                                                                            'Infant Mortality and the President’s Party'

                                                                                            Chris Blattman:

                                                                                            Do Republican Presidents kill babies?:

                                                                                            Across all nine presidential administrations, infant mortality rates were below trend when the President was a Democrat and above trend when the President was a Republican.

                                                                                            This was true for overall, neonatal, and postneonatal mortality, with effects larger for postneonatal compared to neonatal mortality rates.

                                                                                            Regression estimates show that, relative to trend, Republican administrations were characterized by infant mortality rates that were, on average, three percent higher than Democratic administrations.

                                                                                            In proportional terms, effect size is similar for US whites and blacks. US black rates are more than twice as high as white, implying substantially larger absolute effects for blacks.

                                                                                            A new paper titled, “US Infant Mortality and the President’s Party“. I like my title better.

                                                                                            The abstract also says:

                                                                                            Conclusions: We found a robust, quantitatively important association between net of trend US infant mortality rates and the party affiliation of the president. There may be overlooked ways by which macro-dynamics of policy impact micro-dynamics of physiology, suggesting the political system is a component of the underlying mechanism generating health inequality in the United States.

                                                                                              Posted by on Friday, November 15, 2013 at 10:18 AM in Academic Papers, Economics | Permalink  Comments (47)


                                                                                              Paul Krugman: The Money Trap

                                                                                              Is the euro holding Europe together or pulling it apart?:

                                                                                              The Money Trap, by Paul Krugman, Commentary, NY Times: ... Not long ago, European officials were declaring that the Continent had turned the corner... But now ... the specter of deflation looms over much of Europe ... and last week the E.C.B. cut interest rates..., but the E.C.B.’s action will surely make, at best, a marginal difference. Still, it was a move in the right direction.
                                                                                              Yet the move was hugely controversial... And the controversy took an ominous form, at least for anyone who remembers Europe’s terrible history. For arguments over European monetary policy aren’t just a battle of ideas; increasingly, they sound like a battle of nations, too.
                                                                                              For example, who voted against the rate cut? Both German members of the E.C.B. board, joined by the leaders of the Dutch and Austrian central banks. Who, outside the E.C.B., was harshest in criticizing the action? German economists, who made a point not just of attacking the substance of the bank’s action but of emphasizing the nationality of Mario Draghi, the bank’s president, who is Italian. ...
                                                                                              What’s scary here is the way this is turning into the Teutons versus the Latins, with the euro — which was supposed to bring Europe together — pulling it apart instead.
                                                                                              What’s going on? Some of it is national stereotyping: the German public is eternally vigilant against the prospect that those lazy southern Europeans are going to make off with its hard-earned money. But there’s also a real issue here. Germans just hate inflation, but if the E.C.B. succeeds in getting average European inflation back up to around 2 percent, it will push inflation in Germany — which is booming even as other European nations suffer Depression-like levels of unemployment — substantially higher than that, maybe to 3 percent or more.
                                                                                              This may sound bad, but it’s how the euro is supposed to work. In fact, it’s the way it has to work. If you’re going to share a currency with other countries, sometimes you’re going to have above-average inflation. ...
                                                                                              The truly sad thing is that, as I said, the euro was supposed to bring Europe together, in ways both substantive and symbolic. It was supposed to encourage closer economic ties, even as it fostered a sense of shared identity. What we’re getting instead, however, is a climate of anger and disdain on the part of both creditors and debtors. And the end is still nowhere in sight.

                                                                                                Posted by on Friday, November 15, 2013 at 12:24 AM in Economics, International Finance | Permalink  Comments (64)


                                                                                                Links for 11-15-2013

                                                                                                  Posted by on Friday, November 15, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (33)


                                                                                                  Thursday, November 14, 2013

                                                                                                  'How Does the Fed Stimulate the Economy?'

                                                                                                  At MoneyWatch, a very basic explanation of how the Fed changes interest rates to stimulate or slow the economy:

                                                                                                  Explainer: How does the Fed stimulate the economy?

                                                                                                  In addition to discussing traditional policy, there's also a brief discussion of quantitative easing and how it works.

                                                                                                    Posted by on Thursday, November 14, 2013 at 12:49 PM in Economics, Monetary Policy, MoneyWatch | Permalink  Comments (18)


                                                                                                    'The Backbones of Banana Slugs'

                                                                                                    Robert Reich:

                                                                                                    Having the Backbone to Set Minimum Standards for Health Insurance: Democrats are showing once again they have the backbones of banana slugs.
                                                                                                    The Affordable Care Act was meant to hold insurers to a higher standards. So it stands to reason that some insurers will have to cancel their lousy sub-standard policies.
                                                                                                    But spineless Democrats (including my old boss Bill Clinton) are caving in to the Republican-fueled outrage that the President “misled” Americans into thinking they could keep their old lousy policies — and are now urging the White House to forget the new standards and let people keep what they had before.
                                                                                                    And some congressional Republicans are all too eager to join them, and allow insurers to offer whatever crap they were offering before...

                                                                                                      Posted by on Thursday, November 14, 2013 at 10:30 AM in Economics, Health Care, Politics | Permalink  Comments (155)