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Wednesday, April 30, 2014

'Begging the Inequality Question'

Chris Dillow:

Begging the inequality question, by Chris Dillow: ... many of us dislike inequality not because we envy the mega-rich but because it is (sometimes) a symptom of malfunctioning markets... The fact that so many bosses get paid millions even for failure suggests that they are not paid their marginal product. Instead, some mix of agency failure, efficient wage considerations (bosses must be paid not to steal corporate assets) and arms races force pay above marginal product.
Sure, you can write models in which inequality emerges as if it were the product of free choices in a free market economy. You can also model a man's empty house as if he had called in the removal men - but if he has in fact been burgled, your models miss something.
I fear that some free market advocates - not all by any means, but some - are mistaking the map for the terrain. They forget that the textbook perfect competition model is not a description of reality but rather of a utopia against which to assess actually-existing markets. And sometimes - not always but in some important respects - they fall well short. ...

    Posted by on Wednesday, April 30, 2014 at 10:00 AM in Economics, Income Distribution, Market Failure | Permalink  Comments (80)

    'Real GDP increased at 0.1% Annualized Rate in Q1'

    Bill McBride:

    BEA: Real GDP increased at 0.1% Annualized Rate in Q1: From the BEA: Gross Domestic Product: First Quarter 2014 (advance estimate)

    Real gross domestic product ... increased at an annual rate of 0.1 percent in the first quarter..., according to the "advance" estimate released by the Bureau of Economic Analysis. ...
    The increase in real GDP in the first quarter primarily reflected a positive contribution from personal consumption expenditures (PCE) that was partly offset by negative contributions from exports, private inventory investment, nonresidential fixed investment, residential fixed investment, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, decreased.

    The advance Q1 GDP report, with 0.1% annualized growth, was below expectations of a 1.1% increase.  Personal consumption expenditures (PCE) increased at a 3.0% annualized rate - a solid pace.

    However the the change in inventories subtracted 0.57 percentage points from growth in Q1, exports subtracted 0.83 percentage points, and both non-residential and residential investment were negative. ... State and local governments subtracted from GDP in Q1.

    Overall this was a weak report, although PCE growth was decent.   Private investment (even excluding the change in inventories) was negative, and that is the key to more growth going forward.

      Posted by on Wednesday, April 30, 2014 at 09:12 AM in Economics | Permalink  Comments (32)

      'Where the World Is Headed'

      This panel brings together prominent economists to debate a range of issues with global scope: from inequality and emerging markets to austerity policies and the impact of technology on employment. This will be a free-ranging discussion focused on where the world is headed and what can be done to improve economies and people's lives everywhere.

      • Speakers: Ken Rogoff, Professor of Economics, Harvard University; Former Chief Economist, International Monetary Fund
      • Nouriel Roubini, Chairman, Roubini Global Economics; Professor of Economics, Stern School of Business, New York University
      • John Taylor, Mary and Robert Raymond Professor of Economics, Stanford University; George P. Schultz Senior Fellow in Economics, Hoover Institution
      • Moderator: Gerard Baker, Managing Editor, The Wall Street Journal; Editor-in-Chief, Dow Jones & Company

        Posted by on Wednesday, April 30, 2014 at 12:15 AM in Economics, Video | Permalink  Comments (20)

        Can't Keep Up With Email

        If you've written me, and haven't heard back, apologies. I try, I really do, but I can't keep up: Photo

        I feel like a real jerk when I don't reply to people who write to me, but I just can't answer all the email I get no matter how hard I try.

        Sincere apologies if I haven't responded to your email.

          Posted by on Wednesday, April 30, 2014 at 12:06 AM in Economics | Permalink  Comments (8)

          Links for 4-30-14

            Posted by on Wednesday, April 30, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (46)

            Tuesday, April 29, 2014

            Inequality and Mobility in America

            If you want a tutorial on how the political right responds to inequality and mobility concerns, this video is for you (Chrystia and Jared do their best to respond, and Jared has a nice summary of all of the potential causes of inequality in his opening remarks):

            Income inequality has diminished in many parts of the world--Chile, Turkey, Mexico and Hungary being a few examples. But in America, the gap has widened. Ironically, the same forces may be responsible for both: globalization and technology, which have eased poverty in the developing world but led to the loss of unskilled but well-paying middle-class jobs in the United States and other developed nations. For the first time in nearly a century, the top 10 percent of American earners take home more than half the nation's income. New research suggests that it's harder than ever for the poor to move up into the middle and upper classes, an issue that has potential consequences for our economy, government, institutions and people. What can--or should--be done to narrow this disparity? Is education the key? With many Americans falling behind, these questions are stirring concern among policymakers and the business community as well. This panel will examine the magnitude of this complex challenge and strategies for reversing the trend.

            • Speakers: Jared Bernstein, Economic Policy Fellow, Milken Institute; Senior Fellow, Center on Budget and Policy Priorities; Former Chief Economist to Vice President Joe Biden
            • Edward Conard, Author, "Unintended Consequences"; Former Senior Managing Director, Bain Capital
            • Robert Doar, Fellow in Poverty Studies, American Enterprise Institute; Former Commissioner, Human Resources Administration, City of New York
            • Chrystia Freeland, Member of Parliament, Canada; Author, "Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else"
            • Moderator: Alan Schwartz, Executive Chairman, Guggenheim Partners

              Posted by on Tuesday, April 29, 2014 at 01:59 PM in Economics, Income Distribution, Video | Permalink  Comments (19)

              'America's Debt and the Economy: A Hard Look at Public Spending and Finance'

              This session, as I thought it would be before it started, was annoying:

              America's Debt and the Economy: A Hard Look at Public Spending and Finance: With mandatory programs consuming 13.6 percent of GDP and rising, security spending at 5 percent, debt service at 1.5 percent (under benign interest-rate conditions), and revenue at 19 percent, there is little or no room in the nation's budget to fund the discretionary programs that support competitiveness and growth over the long term. That will require investment in infrastructure, technology, environmental protection, education and job training, among other areas. Despite the shutdowns and threats of default, both Republicans and Democrats understand that our future prosperity demands a responsible focus on these imperatives. But how can the government's budgeting process move beyond short-term fixes? This discussion will identify areas for strategic bipartisan collaboration to put the U.S. on track for meaningful reform, leading to the creation of a budget that better addresses our challenges and reflects our priorities.


              • Douglas Holtz-Eakin, President, American Action Forum; Former Director, Congressional Budget Office; Former Chief Economist, Council of Economic Advisers
              • Maya MacGuineas, President, Committee for Responsible Federal Budget
              • Steven Rattner, Chairman, Willett Advisors; Former Counselor and Lead Auto Advisor to the U.S. Secretary of the Treasury
              • Gene Sperling, Former Director, National Economic Council, The White House
              • Moderator: Maria Bartiromo, Anchor and Global Markets Editor, Fox Business Network

              I heard things such as:

              Need to get spending under control to create a good investment climate.
              Large spending programs are crowding out discretionary programs such as defense and infrastructure.
              One of the most serious issues we face.
              Wait until rates go up.
              Nobody in Washington is interested in talking about it.
              We have to cut entitlements (Medicare, Medicaid, Social Security).
              Our economic growth is lower because of the debt. Our economy is worse off because of it.
              Huge benefit right now from cutting deficit.
              Anyone who is sensible would agree with us.
              Neither Bush nor Obama has been willing to explain to the public what a huge problem the debt is.
              We need to do this, it is an important thing for our children.
              President needs to make this a national priority, like it did with income inequality.
              With all the problems in the world, is now the time to be cutting defense spending?
              Simpson Bowles was a very, very, very good plan.

              You get the idea. There was very little about tradeoffs, e.g. higher unemployment when we reduce the debt during a not so robust recovery, though Sperling did address this a bit, not enough on revenue enhancement, and -- though it did come up at times -- the relationship between health care costs and our long-term debt problems was not made as clear as it should have been.

              When it comes to recovering from the recession, these people are the problem, not the solution.

              But maybe I'm just being cranky (and biased from the start) -- watch the video and tell me what you think...

                Posted by on Tuesday, April 29, 2014 at 08:41 AM in Budget Deficit, Economics, Video | Permalink  Comments (32)

                'Narrow Banks Won't Stop Bank Runs'

                This is from a new blog by Stephen Cecchetti and Kermit Schoenholtz:

                Narrow Banks Won't Stop Bank Runs: Every financial crisis leads to a new call to restrict the activities of banks. One frequent response is to call for “narrow banks.” That is, change the legal and regulatory framework in a way that severely limits the assets that traditional deposit-taking banks can hold. One approach would require that all liabilities that are demandable at par be held in the form of deposits at the central bank. That is, accounts that can be withdrawn without notice and have fixed net asset value would face a 100% reserve requirement. The Depression-era “Chicago Plan” had this approach in mind.
                In the aftermath of the financial crisis of 2007-09, Lawrence Kotlikoff, Jeremy Bulow and Paul Klemperer, John Kay, and, most recently, John Cochrane, and Martin Wolf have resurrected versions of narrow banking. All of these proposals, both the old and the new, have a common core: banks should be split into two parts, neither of which would supposedly be subject to runs. ...
                Naturally, we share the objective of these reformers: preventing bank runs. The key issue is how to do so and at what cost. We suspect that narrow banking would be costly in terms of economic performance, yet unlikely to achieve this goal. ...
                We know that a combination of transparency, high capital and liquidity requirements, deposit insurance and a central bank lender of last resort can make a financial system more resilient. We doubt that narrow banking would.

                (The original post is much more detailed.)

                  Posted by on Tuesday, April 29, 2014 at 08:20 AM in Economics, Financial System, Regulation | Permalink  Comments (22)

                  Links for 4-29-14

                   A bit late with theswe today, so there are more than usual:

                    Posted by on Tuesday, April 29, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (35)

                    Monday, April 28, 2014

                    'New Data Sources: A Conversation with Google's Hal Varian'

                    Hal Varian is interviewed on Macroblog:

                    New Data Sources: A Conversation with Google's Hal Varian: In recent years, there has been an explosion of new data coming from places like Google, Facebook, and Twitter. Economists and central bankers have begun to realize that these data may provide valuable insights into the economy that inform and improve the decisions made by policy makers.
                    As chief economist at Google and emeritus professor at UC Berkeley, Hal Varian is uniquely qualified to discuss the issues surrounding these new data sources. Last week he was kind enough to take some time out of his schedule to answer a few questions about these data, the benefits of using them, and their limitations.
                    Mark Curtis: You've argued that new data sources from Google can improve our ability to "nowcast." Can you describe what this means and how the exorbitant amount of data that Google collects can be used to better understand the present?
                    Hal Varian: The simplest definition of "nowcasting" is "contemporaneous forecasting," though I do agree with David Hendry that this definition is probably too simple. Over the past decade or so, firms have spent billions of dollars to set up real-time data warehouses that track business metrics on a daily level. These metrics could include retail sales (like Wal-Mart and Target), package delivery (UPS and FedEx), credit card expenditure (MasterCard's SpendingPulse), employment (Intuit's small business employment index), and many other economically relevant measures. We have worked primarily with Google data, because it's what we have available, but there are lots of other sources.
                    Curtis: The ability to "nowcast" is also crucially important to the Fed. In his December press conference, former Fed Chairman Ben Bernanke stated that the Fed may have been slow to acknowledge the crisis in part due to deficient real-time information. Do you believe that new data sources such as Google search data might be able to improve the Fed's understanding of where the economy is and where it is going?
                    Varian: Yes, I think that this is definitely a possibility. The real-time data sources mentioned above are a good starting point. Google data seems to be helpful in getting real-time estimates of initial claims for unemployment benefits, housing sales, and loan modification, among other things.
                    Curtis: Janet Yellen stated in her first press conference as Fed Chair that the Fed should use other labor market indicators beyond the unemployment rate when measuring the health of labor markets. (The Atlanta Fed publishes a labor market spider chart incorporating a variety of indicators.) Are there particular indicators that Google produces that could be useful in this regard?
                    Varian: Absolutely. Queries related to job search seem to be indicative of labor market activity. Interestingly, queries having to do with killing time also seem to be correlated with unemployment measures!
                    Curtis: What are the downsides or potential pitfalls of using these types of new data sources?
                    Varian: First, the real measures—like credit card spending—are probably more indicative of actual outcomes than search data. Search is about intention, and spending is about transactions. Second, there can be feedback from news media and the like that may distort the intention measures. A headline story about a jump in unemployment can stimulate a lot of "unemployment rate" searches, so you have to be careful about how you interpret the data. Third, we've only had one recession since Google has been available, and it was pretty clearly a financially driven recession. But there are other kinds of recessions having to do with supply shocks, like energy prices, or monetary policy, as in the early 1980s. So we need to be careful about generalizing too broadly from this one example.
                    Curtis: Given the predominance of new data coming from Google, Twitter, and Facebook, do you think that this will limit, or even make obsolete, the role of traditional government statistical agencies such as Census Bureau and the Bureau of Labor Statistics in the future? If not, do you believe there is the potential for collaboration between these agencies and companies such as Google?
                    Varian: The government statistical agencies are the gold standard for data collection. It is likely that real-time data can be helpful in providing leading indicators for the standard metrics, and supplementing them in various ways, but I think it is highly unlikely that they will replace them. I hope that the private and public sector can work together in fruitful ways to exploit new sources of real-time data in ways that are mutually beneficial.
                    Curtis: A few years ago, former Fed Chairman Bernanke challenged researchers when he said, "Do we need new measures of expectations or new surveys? Information on the price expectations of businesses—who are, after all, the price setters in the first instance—as well as information on nominal wage expectations is particularly scarce." Do data from Google have the potential to fill this need?
                    Varian: We have a new product called Google Consumer Surveys that can be used to survey a broad audience of consumers. We don't have ways to go after specific audiences such as business managers or workers looking for jobs. But I wouldn't rule that out in the future.
                    Curtis: MIT recently introduced a big-data measure of inflation called the Billion Prices Project. Can you see a big future in big data as a measure of inflation?
                    Varian: Yes, I think so. I know there are also projects looking at supermarket scanner data and the like. One difficulty with online data is that it leaves out gasoline, electricity, housing, large consumer durables, and other categories of consumption. On the other hand, it is quite good for discretionary consumer spending. So I think that online price surveys will enable inexpensive ways to gather certain sorts of price data, but it certainly won't replace existing methods.

                      Posted by on Monday, April 28, 2014 at 12:01 PM in Economics | Permalink  Comments (9)

                      New Research in Economics: Central Banking For All: A Modest Case for Radical Reform

                      Via Nicholas Gruen:

                      Central Banking For All: A modest Case for Radical Reform (Download): This paper offers a  radical option for banking reform: government should offer central banking services not just to commercial banks, but directly to citizens.
                      Key Findings
                      Nicholas Gruen argues the UK and other countries need radical banking reform This can be achieved by a simple change: giving ordinary people the same right to use central banks’ services as big commercial banks have. Though they enjoy high margins and/or fees, banks add little value to ‘commodity services’ like customer accounts and highly-collateralised mortgages like older ones that are partially paid off which are basically riskless.
                      There’s widespread agreement that the UK needs better banks and a better deal for bank customers. This report by Nicholas Gruen, economist and founding chairman of Kaggle and The Australian Centre for Social Innovation, proposes a simple but radical solution.
                      Gruen argues that in the age of the internet, the Bank of England can now extend the services it currently offers only to banks to everyone in the UK. In particular, it should offer (for instance through National Savings & Investments) simple, cheap deposit and savings accounts to all, paying interest at Bank Rate. Second, it should offer to guarantee any well-collateralised mortgage (for instance a residential mortgage for less than 60 per cent of the value of the collateral).
                      At the moment, commercial banks provide these services at a cost (both in terms of worse rates, fees with their margins inflated by their funder’s knowledge that they are implicitly government guaranteed).
                      By cutting out the middle-man in the form of the banks, Gruen argues customers would get a better deal, and private competitors providing finance could focus on the provision of finance where the efficient pricing of risk is essential – most particularly residential finance above 60 per cent of the value of collateral.
                      Policy Recommendations
                      The government should allow the Bank of England to provide central banking services directly to anyone who wants them, not just banks. The Bank should offer to fund or guarantee any well-collateralised mortgage (e.g. with less than 60 per cent of the property value outstanding) The Bank should, through National Savings and Investments, offer simple deposit and savings accounts to anyone who wants them with no upper limits, paying Bank Rate of interest.

                        Posted by on Monday, April 28, 2014 at 10:43 AM in Academic Papers, Economics, Financial System | Permalink  Comments (20)

                        Have Blog, Will Travel

                        At the Milken Global Conference for the next few days.

                        At a session on Abenomics, and the "three arrows" (monetary stimulus, fiscal stimulus, and supply-side structural reform).

                        I'll post the video from interesting sessions.

                          Posted by on Monday, April 28, 2014 at 09:38 AM in Conferences, Economics | Permalink  Comments (1)

                          Paul Krugman: High Plains Moochers

                          Let freedom ring. But first, get a clue about what freedom is:

                          High Plains Moochers, by Paul Krugman, Commentary, NY Times: It is, in a way, too bad that Cliven Bundy — the rancher who became a right-wing hero after refusing to pay fees for grazing his animals on federal land, and bringing in armed men to support his defiance — has turned out to be a crude racist. Why? Because his ranting has given conservatives an easy out, a way to dissociate themselves from his actions without facing up to the terrible wrong turn their movement has taken.
                          For at the heart of the standoff was a perversion of the concept of freedom, which for too much of the right has come to mean the freedom of the wealthy to do whatever they want...
                          Start with the narrow issue of land use. For historical reasons, the federal government owns a lot of land in the West... Like any landowner, the Bureau of Land Management charges fees for the use of its property. The only difference from private ownership is that by all accounts the government charges too little... In effect, the government is using its ownership of land to subsidize ranchers and mining companies at taxpayers’ expense.
                          It’s true that some of the people profiting from implicit taxpayer subsidies manage ... to convince themselves and others that they are rugged individualists. But they’re actually welfare queens of the purple sage.
                          And this ... means that treating Mr. Bundy as some kind of libertarian hero is, not to put too fine a point on it, crazy. Suppose he had been grazing his cattle on land belonging to one of his neighbors, and had refused to pay for the privilege. That would clearly have been theft — and brandishing guns ... would have turned it into armed robbery. The fact that ... the public owns the land shouldn’t make any difference.
                          So what were people like Sean Hannity of Fox News, who went all in on Mr. Bundy’s behalf, thinking? Partly, no doubt, it was the general demonization of government..., that government takes money from hard-working Americans and gives it to Those People. White people who wear cowboy hats while profiting from government subsidies just don’t fit the stereotype. ...
                          I’d like to think that the whole Bundy affair will cause at least some of the people who backed him to engage in self-reflection, and ask how they ended up lending support, even briefly, to someone like that. But I don’t expect it to happen.

                            Posted by on Monday, April 28, 2014 at 12:33 AM in Economics, Politics | Permalink  Comments (31)

                            'Recovery Has Created Far More Low-Wage Jobs Than Better-Paid Ones'

                            Good jobs are harder to find:

                            Recovery Has Created Far More Low-Wage Jobs Than Better-Paid Ones: The deep recession wiped out primarily high-wage and middle-wage jobs. Yet the strongest employment growth during the sluggish recovery has been in low-wage work, at places like strip malls and fast-food restaurants.
                            In essence, the poor economy has replaced good jobs with bad ones. That is the conclusion of a new report from the National Employment Law Project, a research and advocacy group, analyzing employment trends four years into the recovery.
                            “Fast food is driving the bulk of the job growth at the low end — the job gains there are absolutely phenomenal,” said Michael Evangelist, the report’s author. “If this is the reality — if these jobs are here to stay and are going to be making up a considerable part of the economy — the question is, how do we make them better?”...
                            The National Employment Law Project study found especially strong growth in restaurants and food services, administrative and waste services and retail trades. Those industries — which often pay wages at the federal minimum — accounted for about 40 percent of the increase in private sector employment over the past four years.
                            There has also been strong jobs growth in some high-paying industries, like professional, scientific and technical services — a category that includes accountants, lawyers, software developers and engineers. That sector accounted for about 9 percent of the private-sector job gains in the recovery.

                              Posted by on Monday, April 28, 2014 at 12:24 AM in Economics, Unemployment | Permalink  Comments (27)

                              Links for 4-28-14

                                Posted by on Monday, April 28, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (50)

                                Sunday, April 27, 2014

                                Fed Watch: FOMC Week

                                Tim Duy:

                                FOMC Week, by Tim Duy: The FOMC will wrap up a two-day meeting this Wednesday. I suspect the subsequent statement will be met with little fanfare. There simply has been little in the way of data to prompt any new policy path. Steady as she goes.
                                To be sure, the Fed will be greeted by the Q1 GDP report Wednesday morning, and it is widely expected to be very weak. But incoming data (retail sales, auto sales, industrial production, and employment, for example) suggests that much of this weakness was weather related while the underlying pace of activity, albeit arguably unexciting, remains unchanged. In short, the economy is evolving largely according to the Fed's script, and thus we should expect no major policy change. I anticipate the statement will reflect a greater confidence that the first quarter growth hiccup was a weather effect, that low inflation remains a concern, and a reiteration of the Fed's commitment to a low-rate policy path as long as inflation remains a concern. And another $10 billion cut in asset purchases to push the taper further along.
                                The Fed may identify housing as an area of concern. Indeed, the recent softening of that sector appears unrelated to the weather. Instead, a variety of issues are at play - higher housing prices in many areas, tight underwriting conditions, insufficient job growth, low wages relative to home prices, uncertainty about the financial benefits of being a homeowner, tight financing for new home development, and limited lot availability and other supply side issues. See Neil Irwin's excellent review of the issues. You can sum this up quickly by saying the contours of the housing market have changed dramatically in the past decade and we do not know when and if we will see a return to what in the past was considered a normal environment.
                                Moreover, the Fed can have little impact on these issues, with the exception of one factor not mentioned above - interest rates. The roughly 100bp rise in mortgage rates since the taper talk began likely contributed to the softening of housing markets. There was a lack of countervailing factors at play to offset the tighter policy (see also Jared Bernstein). The Fed, however, is not likely to reverse course. They want out of the asset purchase business, and higher mortgage rates was the price that needed to be paid. For now, the policy impact of housing weakness is to ensure the long-term, low rate story holds (all else equal, of course).
                                I have characterized the Fed's decision to taper as a desire to normalize policy by shifting attention back to their primary policy instrument of short-term interest rates. They believed at the time that they could change the mix of policies without changing the level of accommodation. The softening of housing activity, however, suggests otherwise. Intentionally or not, the decision to taper resulted in a somewhat more hawkish reaction function than is consistent with the Fed's economic forecast and policymaker rhetoric.

                                This leads to a comment recently posed to me:

                                I think governors will soon come under a lot of pressure to get off of the zero bound before the next recession hits. Given the big delay in monetary impulse-response, I fear some overshooting could result.
                                I frequently hear similar sentiments, but I don't think this is the correct way to phrase the issue. I think that policymakers want to be able to normalize policy further, but that ultimately the ability to do so depends on the evolution of the economy. In other words, the path of short-term interest rates is an endogenous variable determined within the context of the Fed's current reaction function. Policymakers realize they can't rush to normalize rates because doing so is counterproductive. Premature tightening will only ensure a low rate environment is sustained even longer. And note the Fed is emphasizing the low levels of rates in their forecast, explicitly acknowledging rates will remain below "normal" levels far into the future. No rush to hike rates.
                                The tapering adventure and the subsequent impact on mortgage rates and housing has probably driven this point home. Indeed, it could be argued that the recent flattening of the yield curve is an indication that the Fed already risked the ability to normalize policy by initiating the tapering process and signaling their rate hiking intentions:


                                They probably do not want to push this any further just yet.
                                That doesn't mean the Fed can't overshoot further on the tighter side, only that I suspect any such overshoot will be the result of a forecast error that prompts excessive tightening, not simply a desire to normalize rates. We aren't there yet. I think we could get there quickly given the Fed's relatively dovish outlook (if firmer data quickly mounted), but not yet.
                                Bottom Line: I anticipate a relatively uneventful FOMC meeting. The data flow appears sufficiently consistent with the Fed's forecast to hold policy in check.

                                  Posted by on Sunday, April 27, 2014 at 10:59 AM Permalink  Comments (3)

                                  'Is the Stock Market Getting Bubbly?'

                                  Dean Baker:

                                  Is the Stock Market Getting Bubbly?: Washington Post columnist Steve Pearlstein argues it is, taking issue with fellow columnist Barry Ritholtz who says it isn't. I'm going to come down in the middle here.
                                  The market is somewhat above its historic levels relative to trend earnings. Pearlstein cites Shiller who puts the price to earnings ratio at 25 to 1, compared to a historic average of 16. ... I would agree that stock prices are somewhat above trend, but not by quite as large a margin as Shiller.
                                  To get some perspective, at the peak of the stock bubble in early 2000, the S&P peaked at just under 1530. The economy is almost than 70 percent larger today (in nominal dollars), which would mean that the S&P would be over 2600 today if it were as high relative to the economy. If we throw in that the economy is still operating at 5 percent below its potential then the S&P would have to be over 2700 now to be as high relative to the economy as it was at the peak of the stock bubble. With a Friday close of 1863, we can see the market is at a level that is a bit more than two thirds of its 2000 bubble peak, relative to the size of the economy.
                                  It also is much lower relative to the economy than it was in 2007 when almost no one was talking about a stock bubble. The S&P peaked at just over 1560 in the fall of 2007. Taking into account the economy's 18 percent nominal growth over this period, and the fact that we are still 5 percent below potential GDP, the S&P would have to be over 1900 today to be as high relative to potential GDP as it was in 2007. Given recent patterns, it certainly doesn't make sense to talk about a bubble for the market as a whole.
                                  However, there are some points worth noting. The social media craze has allowed many companies with no profits and few prospects for making profits to market valuations in the hundreds of millions or even billions of dollars. That sure looks like the Internet bubble. Some of these companies may end up being profitable and worth something like their current share price. The vast majority probably will not.
                                  The other point is that the higher than trend price to earnings ratio means that we should expect to see lower than trend real returns going forward. This is an important qualification to Ritholtz's analysis. While there is no reason that people should fear that stocks in general will take a tumble, as they did in 2000-2002, they also would be nuts to expect the same real returns going forward as they saw in the past.
                                  With a price to earnings ratio that is roughly one-third about the long-term trend, they should expect real returns that are roughly one-third lower than the historic average. This means that instead of expecting real returns on stock of 7.0 percent, they should expect something closer to 5.0 percent. That might still make stocks a good investment, especially in the low interest rate environment we see today, but probably not as good as many people are banking on.
                                  In short, there is not much basis for Pearlstein's bubble story, but we should also expect that because of higher than trend PE ratios stocks will not provide the same returns in the future as they did in the past. Anyone who thinks we can better have their calculator checked.

                                    Posted by on Sunday, April 27, 2014 at 09:13 AM in Economics, Financial System | Permalink  Comments (28)

                                    'Is A Banking Ban The Answer?'

                                    Paul Krugman:

                                    Is A Banking Ban The Answer?: OK, a genuinely interesting debate on financial reform is taking place. I’m not even sure where I stand. But it’s certainly worth talking about.
                                    Atif Mian and Amir Sufi draw our attention to proposals to either mandate or create strong incentives for 100-percent reserve banking, coming from Martin Wolf and, more surprisingly, John Cochrane. Equally surprising — at least to me — is that Cochrane seems more aware of the difficulties of the issue. ... So, three thoughts.
                                    First, Wolf’s omission is a big one. If we impose 100% reserve requirements on depository institutions, but stop there, we’ll just drive even more finance into shadow banking, and make the system even riskier.
                                    Second, Cochrane’s proposal calls for a remarkable amount of government intervention in finance; it makes liberal proposals for a transactions tax look like minor nuisances. Cochrane insists that we can easily run our economy without dangerous short-term private debt — that we can easily set things up so that the manager of your index fund sells a tiny piece of your stock portfolio every time you use a debit card at 7-11. Is this right?
                                    Third, and on a quite different note: Are we really sure that banking problems are the whole story about what went wrong? I’ve made this point before, but look at any measure of financial stress: what you see is a huge peak in 2008 that quickly went down:
                                    Yet ... we’re still depressed and many advanced countries are now on the edge of deflation, more than five years later. This strongly suggests that while bank runs may have brought things to a head, the problems ran deeper; in particular, I’m strongly of the view (based in part on Mian and Sufi’s work) that broader issues of excess leverage, and the resulting balance-sheet problems of many households, are key. And neither 100% reserves nor a repo tax would have addressed that kind of leverage. ...

                                      Posted by on Sunday, April 27, 2014 at 09:13 AM in Economics, Financial System | Permalink  Comments (7)

                                      Links for 4-27-14

                                        Posted by on Sunday, April 27, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (52)

                                        Saturday, April 26, 2014

                                        '100% Reserve Banking' and 'Big Data: Are we Making a Big Mistake?'

                                        A link to this post is being retweeted in unusually large numbers:

                                        100% Reserve Banking — The History, by Atif Mian and Amir Sufi: So both John Cochrane and Martin Wolf are advocating 100% reserve banking. If these two agree on anything, it’s worth taking seriously! (It’s pretty amazing how advocates for narrow banking come from across the political spectrum.) We ... we wanted to provide some history behind the idea. ...

                                        Using the "big data" from Twitter, this one too, though not quite on the same scale:

                                        Big data: are we making a big mistake?: Big data is a vague term for a massive phenomenon that has rapidly become an obsession with entrepreneurs, scientists, governments and the media ...
                                        “Big data” has arrived, but big insights have not. The challenge now is to solve new problems and gain new answers – without making the same old statistical mistakes on a grander scale than ever.

                                          Posted by on Saturday, April 26, 2014 at 11:05 AM in Economics | Permalink  Comments (23)

                                          'Greening Economics: It is Time'

                                          Another call for change in how economics is taught:

                                          Greening Economics: It is time, by Carlo Carraro, Marianne Fay, Marzio Galeotti, Vox EU: ... It took the deepest economic and financial crisis since the Great Depression to provoke an open debate amongst macroeconomists as to whether the ‘economic model’ taught in economics programs is adequate. We do hope it will not take the full realization of the adverse consequences of climate change for the profession to come to its senses regarding environmental economics and the way natural capital is ignored in most macroeconomic work. How many superstorm Sandys will it take? By how much does the sea level have to rise? How many severe droughts and floods (and where) will it take before we come to the realization that ignoring natural capital and its many externalities is simply bad economics?
                                          The difference between the financial and environmental crisis is that we actually do have a good body of work that incorporates natural capital in models of growth. The problem is that it has remained to a large extent the restricted domain of environmental economists. The vast majority of us were able to get degrees in economics without ever reading a single paper on environmental economics or encountering natural capital as an argument in the production functions we studied. We did hear about Pigouvian taxes of course – and so figured the problem had been solved…
                                          Environmental economists have long modified growth models to account for the role of the environment, thus revisiting the conditions that ensure growth, whether sustainable or sustained. Classical references are three 1974 articles by Partha Dasgupta and Geoffrey Heal, by William Nordhaus, and by Robert Solow (though Solow could be hardly defined an environmental economist). More generally, existing work is summarized in the survey chapters by Tasos Xepapadeas and by William Brock and Scott Taylor, both published in 2005. A more recent example that compares ‘traditional’ (brown?) and ‘green’ models of growth is a 2011 World Bank working paper by Stephane Hallegatte, Geoffrey Heal, Marianne Fay, and David Treguer.
                                          As a result, environmental economists tend not to talk about economic growth per se, but about sustainable economic growth. When macroeconomists refer to sustainable growth, however, they usually mean sustained growth. When growth economists study the role of externalities in the growth process they almost exclusively refer to technological and knowledge externalities, and generally ignore environmental ones, even though the latter are likely to become largely more relevant in the coming decades. Even social capital, a relative newcomer in economics, appears better integrated into the growth literature.
                                          Why such disregard for an issue that epitomizes market failures from externalities, common property issues, and whose importance in both growth processes and human well-being is well documented? Sheer ignorance, likely – or a vague notion that innovation will come to the rescue. But why would markets generate the technology to solve a problem that combines both knowledge and environmental externalities?
                                          The teaching of economics
                                          Here is a plea then for an urgent change in the economics curriculum, at both introductory and advanced levels. Growth chapters in today’s macroeconomics textbooks make no reference to the environment – whether as an input into the production function or as a limiting factor affecting the productivity of human or physical capital. This is the case, for example, of David Romer’s textbook, in its fourth edition in 2011; of Jean-Pascal Benassy’s 2011 volume; or those of the Chicago School economists, such as Nancy Stokey, Robert Lucas and Edward Prescott’s (1989) and of Lars Ljungqvist and Thomas Sargent (third edition, 2012); or even that of Neo-keynesian economists such as Olivier Blanchard and Stanly Fischer (1989); or, finally, the very recent example of Michael Wickens (2012).
                                          What is needed is not simply that more environmental economics be offered, but rather that the macroeconomics courses teach that natural capital is a key input into production processes, and that the environment – through massive mismanagement and a chronic failure to apply the basic principles of economics – has now become a serious macroeconomic problem, one that requires a profound and dramatic change in our model of growth. The development model of the industrial revolution (‘grow now and clean up later’) partly worked for a world of 1.5 million people; it simply won’t do for a global population approaching 9 billion.
                                          If introducing the notion and role of the environment is necessary in macroeconomics teaching, it is a fortiori necessary when the student is presented with the theory and models of economic growth. There are a few economic growth textbooks written by well-known growth economists who are very active in that area. Going through the tables of contents, however, one is quickly disappointed. Neither the volume by Robert Barro and Xavier Sala-i-Martin (2003) nor the one by Daron Acemoglu (2008), for instance, consider explicitly the role of the environment in the process and in the perspectives of economic growth of a country. The same holds for the textbook by Olivier de la Grandville (2009), while Charles Jones and Dietrich Vollrath (2013) include a chapter on economic growth and natural resources, which is only a component of natural capital. Only the book by Philippe Aghion and Peter Howitt (2008) includes a chapter – the sixteenth – where the authors study ‘how new growth theories can integrate the environmental dimension, and in particular how endogenous innovation and directed technical change make it possible to reconcile the sustained growth objective with the constraints imposed by exhaustible resources or the need to maintain the environment’ (p.377).
                                          It is remarkable that all textbooks on which undergraduate and graduate students learn the fundamental of economic growth invariably include a chapter on the role of human capital and of technological change, but always miss addressing the issue of the environment and natural capital.
                                          As we believe that it is time to stop teaching that economic growth is uniquely measured by the growth of the production of all goods and services, we also firmly believe that the time has come to teach – from the first steps – that economic growth cannot abstract from the explicit consideration of the constraints and opportunities imposed by the environment and natural exhaustible resources. It is clear from many recent assessments (including the recently released IPCC Fifth Assessment Report) that environmental externalities, constraints on natural resources, and climate change – largely a macro problem – will constantly and deeply affect mankind’s future. The teaching of economics can no longer ignore it.

                                            Posted by on Saturday, April 26, 2014 at 12:33 AM in Economics, Environment, Universities | Permalink  Comments (15)

                                            'The Moment Is Right for Housing Reform'

                                            Jason Furman and James Stock on housing finance reform:

                                            The Moment Is Right for Housing Reform, Commentary, WSJ: ... The reformed housing-finance system should enable the dreams of middle-class and aspiring middle-class Americans to own homes by supporting consumer-friendly mortgage products such as the 30-year fixed-rate mortgage. It should provide help ... to creditworthy first-time borrowers who might otherwise have trouble qualifying for a mortgage; and it should stimulate broad access to mortgages for historically underserved communities.
                                            A reformed housing-finance system should support rental housing... It should stimulate competition and innovation..., while building in consumer protections... And it should protect the taxpayer by placing substantial private capital in front of any government guarantee—and ensure that the taxpayer be properly compensated for that guarantee.
                                            Less discussed, but also important...: Housing-finance reform presents an opportunity to enhance macroeconomic stability by making the housing sector more cyclically resilient. Housing has long been one of the most volatile sectors of the economy,... with ... the most vulnerable and disadvantaged bearing the brunt of housing-related or magnified recessions. ...
                                            Housing-finance reform is a key unfinished piece of business from the financial crisis, and putting all the parts together is a complex undertaking. But the current period of relative economic calm is exactly the right time to do so. ...

                                              Posted by on Saturday, April 26, 2014 at 12:24 AM in Economics, Housing | Permalink  Comments (35)

                                              Links for 4-26-14

                                                Posted by on Saturday, April 26, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (51)

                                                Friday, April 25, 2014

                                                Paul Krugman: The Piketty Panic

                                                Money talks, but sometimes not very coherently:

                                                The Piketty Panic, by Paul Krugman, Commentary, NY Times: “Capital in the Twenty-First Century,” the new book by ... Thomas Piketty, is ... serious, discourse-changing scholarship... And conservatives are terrified. ...
                                                The really striking thing about the debate so far is that the right seems unable to mount any kind of substantive counterattack... Instead, the response has been all about name-calling — ...that Mr. Piketty is a Marxist...
                                                For the past couple of decades, the conservative response to attempts to make soaring incomes at the top into a political issue has involved two lines of defense: first, denial that the rich are actually doing as well and the rest as badly as they are, but when denial fails, claims that those soaring incomes at the top are a justified reward for services rendered. Don’t call them the 1 percent, or the wealthy; call them “job creators.”
                                                But how do you make that defense if the rich derive much of their income not from the work they do but from the assets they own? And what if great wealth comes increasingly not from enterprise but from inheritance?
                                                What Mr. Piketty shows is that these are not idle questions. Western societies before World War I were indeed dominated by an oligarchy of inherited wealth — and his book makes a compelling case that we’re well on our way back toward that state.
                                                So what’s a conservative, fearing that this diagnosis might be used to justify higher taxes on the wealthy, to do? He could try to refute Mr. Piketty in a substantive way, but, so far, I’ve seen no sign of that happening. Instead, as I said, it has been all about name-calling..., to ... denounce Mr. Piketty as a Marxist..., which only makes sense if the mere mention of unequal wealth makes you a Marxist. ...
                                                And The Wall Street Journal’s review, predictably, goes the whole distance, somehow segueing from Mr. Piketty’s call for progressive taxation as a way to limit the concentration of wealth ... to the evils of Stalinism. ...
                                                Now, the fact that apologists for America’s oligarchs are evidently at a loss for coherent arguments doesn’t mean that they are on the run politically. Money still talks — indeed, thanks in part to the Roberts court, it talks louder than ever. Still, ideas matter too, shaping both how we talk about society and, eventually, what we do. And the Piketty panic shows that the right has run out of ideas.

                                                  Posted by on Friday, April 25, 2014 at 12:15 AM in Economics, Income Distribution, Politics, Taxes | Permalink  Comments (145)

                                                  Links for 4-25-14

                                                    Posted by on Friday, April 25, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (47)

                                                    Thursday, April 24, 2014

                                                    'Will 2014 end up like 1914?'

                                                    Larry ("The Numerologist") Summers:

                                                    Will 2014 end up like 1914?: 2014 is a year, if you think about it correctly, of anniversaries. It is the 100th anniversary of 1914, a moment when the world mismanaged itself and reaped the legacy of its mismanagement in as terrible a way as has ever occurred. ... Seventy-five years ago the year was 1939. It had been thought that the war that began in 1914 was a war to end all wars. ... Fifty years ago it was 1964. ... 1964 was months after the assassination of President Kennedy. It was the year that saw the United States’ entry into Vietnam. ... Twenty-five years ago it was 1989. It was the year that in a historical sense the 20th century ended. ... A totalitarian ideology and empire was defeated without a shot having been fired. ...
                                                    So, if you believe in numerology, if you believe in centuries and quarter centuries, this is a remarkable year. History does not repeat itself, it has been said, but it does rhyme. If you think about the challenges that I have described, that sometimes were met well and sometimes were met poorly, echoes of many can be heard today. ...
                                                    I would suggest last that history teaches that no individual nation can be a guarantor of the stability of the system. It is only through the cooperation of nations, through the establishment of institutions, through the legitimacy that comes from convocation and dialogue, that firm and clear lines can be drawn...
                                                    My impulse to government, in a sense, came to me as a young child watching the first president who impinged on my consciousness, John F. Kennedy. He said, “Man’s problems were made by man. It follows that they can be solved by man.” There is no reason why the darker parts of history ever need to be re-enacted... It lies in our hands, as concerned citizens, to shape what somebody in 2114 will say when they reflect on the past hundred years.

                                                      Posted by on Thursday, April 24, 2014 at 10:07 AM in Economics | Permalink  Comments (37)

                                                      Consumption Inequality is Also Growing

                                                      Hearing a lot of talk about how Democrats never talk about consumption inequality, and that this is "the holy grail for inequality skeptics". It is talked about, and it's a "myth that growing consumption inequality is a myth." A very quick search of this blog turns up:

                                                      The Myth that Growing Consumption Inequality is a Myth 2012
                                                      Inequality of Income and Consumption 2012
                                                      Inequality Has Increased in Income and Consumption 2012
                                                      But They Have TVs and Cell Phones! - 2012
                                                      Has Consumption Inequality Mirrored Income Inequality? 2011
                                                      Is Consumption the Grail for Inequality Skeptics? 2009

                                                      Income Inequality, Spending Inequality, Wealth Inequality 2008

                                                      Consumption and Income Inequality 2008

                                                        Posted by on Thursday, April 24, 2014 at 08:46 AM in Economics, Income Distribution | Permalink  Comments (3)

                                                        Video: Piketty, Krugman, Stiglitz, and Durlauf on 'Capital in the Twenty-First Century'

                                                        "The French economist Thomas Piketty discussed his new book, Capital in the Twenty-First Century at the Graduate Center. In this landmark work, Piketty argues that the main driver of inequality—the tendency of returns on capital to exceed the rate of economic growth—threatens to generate extreme inequalities that stir discontent and undermine democratic values. He calls for political action and policy intervention. Joseph Stiglitz, Paul Krugman, and Steven Durlauf participated in a panel moderated by Branko Milanovic."

                                                          Posted by on Thursday, April 24, 2014 at 12:42 AM in Economics, Income Distribution, Video | Permalink  Comments (5)

                                                          'Gasoline Tax, Unchanged Since 1993, is Due for an Increase'

                                                          Barry Ritholtz:

                                                          U.S. on Highway to Flunking Out, by Barry Ritholtz: Roads are crumbling, bridges are collapsing, and what was once considered one of the greatest achievements of any government anywhere has fallen into embarrassing disrepair. I am of course discussing our nation’s infrastructure. ... How did this happen? Credit a combination of benign neglect and anti-tax ideology run amok. ...
                                                          Since 1993, the U.S. federal gasoline tax has been 18.4 cents a gallon, which finances the Highway Trust Fund. Adjusted for inflation, the tax is now about 10 cents a gallon. ...
                                                          The U.S. interstate highway system, once the envy of the world, is in mediocre and deteriorating condition today ... putting the U.S at a competitive disadvantage. ...
                                                          The solution is simple. Raise the federal gasoline tax five cents a year for the next five years. Index it to inflation starting in the fifth year. It's the least the U.S. can do to keep up.

                                                            Posted by on Thursday, April 24, 2014 at 12:24 AM in Economics, Fiscal Policy | Permalink  Comments (21)

                                                            Links for 4-24-14

                                                              Posted by on Thursday, April 24, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (16)

                                                              Wednesday, April 23, 2014

                                                              'Ukraine’s Path to Oligarchy: Lessons for the U.S.?'

                                                              After explaining why he believes Ukraine is an oligarchy, Berkeley's Yuriy Gorodnichenko says:

                                                              ...One may draw parallels between the U.S and Ukraine but frankly, relative to Ukraine, the U.S. seems far from an oligarchy. However, certain recent developments do make me somewhat concerned. For example, income inequality has been rising rapidly over the last three decades, the influence of the rich and of corporations on electoral outcomes appears to be increasing, and the political process strikes me as increasingly dysfunctional. But the U.S.’s history of fighting corruption and the tradition of a free and oppositional press are powerful counterforces to oligarchy. Or so I hope.

                                                                Posted by on Wednesday, April 23, 2014 at 05:27 PM in Economics, Politics | Permalink  Comments (6)

                                                                'Inequality in Well-Being'

                                                                From the House of Debt:

                                                                Inequality in Well-Being, by Atif Mian and Amir Sufi: As we mentioned in our post yesterday, economists care much more about inequality in well-being rather than inequality in income or wealth. Data on well-being are more difficult to gather, but we discussed some evidence that inequality in consumption also increased from 1980 to 2010. Consumption directly affects the utility of an individual in most economic models. Income does not.
                                                                Here is some more evidence, with a particular focus on the last few years ...
                                                                Another strategy in measuring well-being is to look beyond spending and toward measures of health. Life expectancy data are available, and they seem to tell a similar story...: the rise in life expectancy from 1980 to 2010 for people already 65 is driven almost entirely by the rich.
                                                                There has been a lot of attention on income and wealth inequality, and for good reason. But inequality in outcomes such as consumption and health are far more important. We’ve gathered some evidence here, but more is needed. The evidence so far suggests that inequality in well-being has tracked inequality in wealth and income closely. ...

                                                                  Posted by on Wednesday, April 23, 2014 at 05:21 PM in Economics, Income Distribution | Permalink  Comments (4)

                                                                  'Thomas Piketty Is Right'

                                                                  Solow on Piketty:

                                                                  Thomas Piketty Is Right: Everything you need to know about 'Capital in the Twenty-First Century', by Robert Solow: Income inequality in the United States and elsewhere has been worsening since the 1970s. The most striking aspect has been the widening gap between the rich and the rest. This ominous anti-democratic trend has finally found its way into public consciousness and political rhetoric. A rational and effective policy for dealing with it—if there is to be one—will have to rest on an understanding of the causes of increasing inequality. The discussion so far has turned up a number of causal factors: the erosion of the real minimum wage; the decay of labor unions and collective bargaining; globalization and intensified competition from low-wage workers in poor countries; technological changes and shifts in demand that eliminate mid-level jobs and leave the labor market polarized between the highly educated and skilled at the top and the mass of poorly educated and unskilled at the bottom.
                                                                  Each of these candidate causes seems to capture a bit of the truth. But even taken together they do not seem to provide a thoroughly satisfactory picture. They have at least two deficiencies. First, they do not speak to the really dramatic issue: the tendency for the very top incomes—the “1 percent”—to pull away from the rest of society. Second, they seem a little adventitious, accidental; whereas a forty-year trend common to the advanced economies of the United States, Europe, and Japan would be more likely to rest on some deeper forces within modern industrial capitalism. Now along comes Thomas Piketty, a forty-two-year-old French economist, to fill those gaps and then some. I had a friend, a distinguished algebraist, whose preferred adjective of praise was “serious.” “Z is a serious mathematician,” he would say, or “Now that is a serious painting.” Well, this is a serious book. ...

                                                                    Posted by on Wednesday, April 23, 2014 at 12:33 AM in Economics, Income Distribution | Permalink  Comments (65)

                                                                    Links for 4-23-14

                                                                      Posted by on Wednesday, April 23, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (60)

                                                                      Tuesday, April 22, 2014

                                                                      Assessing Fed Policy During the Great Recession

                                                                      On the road again, will blog as I can; For now, I have a new column:

                                                                      Report Card on Fed Policy During the Great Recession, by Mark Thoma: If the economy evolves according to the Federal Reserve’s forecast, quantitative easing is on track to come to a close by the end of this year. Increases in the federal funds rate are likely to follow. Thus, as the Fed’s policies to combat the Great Recession are coming to an end, it’s time to ask: Did these policies work? ...

                                                                        Posted by on Tuesday, April 22, 2014 at 10:33 AM in Economics, Monetary Policy | Permalink  Comments (17)

                                                                        Links for 4-22-14

                                                                          Posted by on Tuesday, April 22, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (50)

                                                                          Monday, April 21, 2014

                                                                          'House Prices and Secular Stagnation'

                                                                          Simon Wren-Lewis:

                                                                          House prices and secular stagnation: This post starts off talking about the UK, but then goes global
                                                                           ...Housing is becoming more and more unaffordable for first time buyers. Yet prices are currently booming (at least in London), and demand is so high estate agents are apparently now holding mass viewings to cope. In the UK the media now routinely call this a bubble, and the term ‘super bubble’ is now being used. ...
                                                                          Bubbles are where prices move further and further away from their fundamental value, simply because everyone expects prices to continue to rise. ...
                                                                          If we think of housing as an asset, then the total return to this asset if you held it forever is the weighted sum of all future rents, where you value rents today more than rents in the future. Economists call this the discounted sum of rents. (If you are a homeowner, it is the rent that you are avoiding paying.) So why would house prices go up, if rents were roughly constant and were expected to remain so? The answer is that prices would go up if the rate at which you discounted the future fell. The relevant discount rate here is the real interest rate on alternative assets. That interest rate has indeed fallen over much the same time period as house prices have increased, as Chapter 3 of the IMF’s World Economic Outlook for March 2014 documents. ...
                                                                          It is the expected return on other assets that matters here. The fact that actual real interest rates have fallen in the past would not matter much if they were expected to recover quickly. A key idea behind today’s discussion of secular stagnation is that real interest rates might stay pretty low for a long period of time. That in turn implies that house prices will be much higher relative to incomes than they were when real interest rates were higher.
                                                                          So what appears to be a bubble may instead be a symptom of secular stagnation. ...
                                                                          Does this mean we should stop calling what is happening in the UK a bubble? The first point is that secular stagnation is just an idea, and it may prove wrong, and if it does house prices may come tumbling down. Second, even if it is not wrong, it is still possible to have a bubble on top of the increase implied by lower interest rates. Indeed one of the concerns about the lower real interest rates associated with secular stagnation is that, by raising asset prices not just in housing but elsewhere, it may encourage bubbles to develop on top. So all we can say with certainty, for the UK at least, is that the Financial Policy Committee will have their work cut out when they next meet in June.

                                                                            Posted by on Monday, April 21, 2014 at 10:02 AM in Economics, Housing, Market Failure | Permalink  Comments (43)

                                                                            Paul Krugman: Sweden Turns Japanese

                                                                            Can you say, "sadomonetarist"?:

                                                                            Sweden Turns Japanese, by Paul Krugman, Commentary, NY Times: Three years ago Sweden was widely regarded as a role model in how to deal with a global crisis. ... Sweden, declared The Washington Post, was “the rock star of the recovery.”
                                                                            Then the sadomonetarists moved in..., the Riksbank — Sweden’s equivalent of the Federal Reserve — decided to start raising interest rates. ...
                                                                            Lars Svensson, a deputy governor at the time ... vociferously opposed the rate hikes. Mr. Svensson, one of the world’s leading experts on Japanese-style deflationary traps, warned that raising interest rates in a still-depressed economy put Sweden at risk of a similar outcome. But he found himself isolated, and left the Riksbank in 2013.
                                                                            Sure enough, Swedish unemployment stopped falling soon after the rate hikes began. Deflation took a little longer, but it eventually arrived. The rock star of the recovery has turned itself into Japan.
                                                                            So why did the Riksbank make such a terrible mistake? ... At first the bank’s governor declared that it was all about heading off inflation... But as inflation slid toward zero..., the Riksbank offered a new rationale: tight money was about curbing a housing bubble... In short, this was a classic case of sadomonetarism in action. ...
                                                                            At least as I define it, sadomonetarism ... involves a visceral dislike for low interest rates and easy money, even when unemployment is high and inflation is low..., they don’t change their policy views in response to changing conditions — they just invent new rationales. This strongly suggests that what we’re looking at here is a gut feeling rather than a thought-out position. ...
                                                                            Where does this gut dislike for low rates come from? At some level it has to reflect an instinctive identification with the interests of wealthy creditors as opposed to usually poorer debtors. But it’s also driven, I believe, by the desire of many monetary officials to pose as serious, tough-minded people — and to demonstrate how tough they are by inflicting pain.
                                                                            Whatever their motives, sadomonetarists have already done a lot of damage. ...
                                                                            And they could do much more damage... Financial markets have been fairly calm lately... But it would be wrong and dangerous to assume that recovery is assured: bad policies could all too easily undermine our still-sluggish economic progress. So when serious-sounding men in dark suits tell you that it’s time to stop all this easy money and raise rates, beware: Look at what such people have done to Sweden.

                                                                              Posted by on Monday, April 21, 2014 at 12:33 AM in Economics, Monetary Policy | Permalink  Comments (22)

                                                                              Links for 4-21-14

                                                                                Posted by on Monday, April 21, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (58)

                                                                                Sunday, April 20, 2014

                                                                                'Treat Wage Theft as a Criminal Offense'

                                                                                This was in yesterday's links, but it's worth highlighting:

                                                                                Treat wage theft as a criminal offense, by Catherine Rampell, Washington Post: Forget raising the minimum wage. How about enforcing the meager minimum already on the books?
                                                                                Over the past year, low-wage workers and their supporters have protested, struck and polemicized for a raise of some kind, a proposition that has support from the White House and most Americans, if not Republican politicians. But low-wage workers face an even more upsetting affliction that both parties should feel comfortable condemning: Employers are stealing from their employees, often with impunity.
                                                                                “Wage theft” is an old problem. It can take many forms, including paying less than the minimum hourly wage, working employees off the clock, not paying required overtime rates and shifting hours into the next pay period so that overtime isn’t incurred. ...
                                                                                Harsher penalties, including prison time, should be on the table more often when willful wrongdoing is proved. Thieves caught stealing thousands of dollars from someone’s home can go to jail; the same should be true for thieves caught stealing thousands of dollars from someone’s paycheck.

                                                                                  Posted by on Sunday, April 20, 2014 at 01:41 PM in Economics | Permalink  Comments (22)

                                                                                  Links for 4-20-14

                                                                                    Posted by on Sunday, April 20, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (38)

                                                                                    Saturday, April 19, 2014

                                                                                    The Near Future

                                                                                    Dan Little:

                                                                                    The near future: There is a lot going on in America and the world today: climate change, increasing separation between the rich and the non-rich, entrenched poverty in cities, continuing effects of racism in American life, and a rising level of political extremism in this country and elsewhere, for starters. Add to this politico-military instability in Europe, continuing social conflict over austerity in many countries, and a rising number of extreme-right movements in a number of countries, and you have a pretty grim set of indications of what tomorrow may look like for our children and grandchildren.
                                                                                    How should we think about what our country will look like in twenty or thirty years? And how can we find ways of acting today that make the prospects for tomorrow as good as they can be?
                                                                                    This is partly a problem for politicians and legislators. But it is also a problem for social scientists and historians, because the limits of our ability to predict the future are as narrow as they have ever been. (I wonder if the good citizens of Rome in the year 400 had any notion that Alaric was coming and that their way of life was already about to change?) The pace of change in the contemporary world is rapid, but even more, the magnitude of the changes we face is unprecedented. Will climate change and severe weather continue to worsen? Will the extreme right gain even more influence in determining American law and policy? Will economic crises of the magnitude of the 2008 recession recur with even more disastrous consequences? Will war and terrorism become even harsher realities in the coming decades with loose nukes and biological weapons in the hands of ruthless fanatics?
                                                                                    All these catastrophes are possible. So how should intelligent democracies attempt to avoid them? One possible approach is to attempt to design our way out of each of those pathways to catastrophe: create better arms control regimes, improve intelligence abilities against threats of terrorism, reach effective climate agreements, try to guide the economy away from meltdowns, create better protections for rights of participation so narrow minorities can't enact restrictions on basic health rights. In other words, engage in piecemeal engineering to solve the problems we face.
                                                                                    Another approach is the one advocated by Charles Perrow in The Next Catastrophe: acknowledge that we cannot anticipate, let alone solve, all these problems, and design for soft landings when harm comes knocking at our door. Risky processes (chemical plants, railways, LNG storage facilities) will inevitably fail once in a while; how can we design them and the system in which they operate so as to minimize the damage that occurs when they do? Perrow takes the example of increasingly severe hurricanes and flooding and their potential for decimating coastal communities, and he argues that the protective strategy isn't likely to succeed. A better strategy is to reduce population density around the highest risk locations, in order to reduce the impact of disasters that are ultimately impossible to prevent.
                                                                                    This approach would require quite a bit of change to very basic parts of our contemporary order: decentralize infrastructures like energy, information, and transportation; reduce our reliance on global-scale food systems by encouraging more local production; reduce population density where we can. These kinds of changes would make for a substantially safer world -- less concentrated risk, fewer tightly linked systems to go wrong. But achieving changes like these seems almost impossible because these outcomes are not likely to be the result of the uncoordinated actions of independent decision-makers. Rather, the state would need to legislate these kinds of outcomes, and it is hard to see how they might come about through normal electoral processes.
                                                                                    So we seem to be a little bit in the situation of myopic actors climbing Mount Improbable: our choices are likely to strand us in isolated local maxima, making it impossible for us to reach feasible outcomes on a more distant hilltop. And because of limitations on our ability to project future social outcomes, we often can't even see the alternative hilltops through the fog. Somehow we need to get to a more resilient form of risk assessment and planning that doesn't make excessive assumptions about our ability to foresee the near future.

                                                                                      Posted by on Saturday, April 19, 2014 at 08:58 AM in Economics | Permalink  Comments (38)

                                                                                      Links for 4-19-14

                                                                                        Posted by on Saturday, April 19, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (72)

                                                                                        Friday, April 18, 2014

                                                                                        Debate at KSU: Thoma vs. Williamson

                                                                                        [It starts around the 7:00 minute mark]

                                                                                          Posted by on Friday, April 18, 2014 at 03:05 PM in Economics, Monetary Policy, Video | Permalink  Comments (18)

                                                                                          Paul Krugman: Salvation Gets Cheap

                                                                                          The "price of solar panels has fallen more than 75 percent just since 2008":

                                                                                          Salvation Gets Cheap, by Paul Krugman, Commentary, NY Times: The Intergovernmental Panel on Climate Change ... has begun releasing draft chapters from its latest assessment, and ... the reading is as grim as you might expect. ...
                                                                                          But there is one piece of the assessment that is surprisingly, if conditionally, upbeat: Its ... the incredible recent decline in the cost of renewable energy, solar power...
                                                                                          Before I get to that..., however, let’s talk for a minute about the overall relationship between economic growth and the environment.
                                                                                          Other things equal, more G.D.P. tends to mean more pollution. ... But other things don’t have to be equal. There’s no necessary one-to-one relationship between growth and pollution.
                                                                                          People on both the left and the right often fail to understand this point. ... On the left, you sometimes find environmentalists asserting that to save the planet we must give up on the idea of an ever-growing economy; on the right, you often find assertions that any attempt to limit pollution will have devastating impacts on growth. But there’s no reason we can’t become richer while reducing our impact on the environment. ...
                                                                                          The sensible position ... has always been that ... if we give corporations and individuals an incentive to reduce greenhouse gas emissions, they will respond.

                                                                                          What form would that response take? ... One front many people didn’t take too seriously ... was renewable energy. ... And I have to admit that I shared that skepticism. ...
                                                                                          The climate change panel ... notes that “many RE [renewable energy] technologies have demonstrated substantial performance improvements and cost reductions”... The Department of Energy is willing to display a bit more open enthusiasm; it titled a report on clean energy released last year “Revolution Now.” That sounds like hyperbole, but you realize that it isn’t when you learn that the price of solar panels has fallen more than 75 percent just since 2008.
                                                                                          Thanks to this technological leap forward, the climate panel can talk about “decarbonizing” electricity generation as a realistic goal — and since coal-fired power plants are a very large part of the climate problem, that’s a big part of the solution right there. ...
                                                                                          So is the climate threat solved? Well, it should be. The science is solid; the technology is there; the economics look far more favorable than anyone expected. All that stands in the way of saving the planet is a combination of ignorance, prejudice and vested interests. What could go wrong? Oh, wait.

                                                                                            Posted by on Friday, April 18, 2014 at 01:52 PM in Economics, Environment | Permalink  Comments (61)

                                                                                            Links for 4-18-14

                                                                                              Posted by on Friday, April 18, 2014 at 02:44 AM Permalink  Comments (45)

                                                                                              Thursday, April 17, 2014

                                                                                              'Not Just the Long-Term Unemployed: Those Unemployed Zero Weeks Are Struggling to Find Jobs'

                                                                                              Mike Konczal:

                                                                                              Not Just the Long-Term Unemployed: Those Unemployed Zero Weeks Are Struggling to Find Jobs: Leave aside for a moment the difficulty that the long-term unemployed, those who were unlucky and have been looking for a job for more than 52 weeks, have in finding a job. Even those who have been unemployed zero weeks are having trouble finding jobs in this economy. And this is important evidence against the idea that the labor market is doing better than people realize if you just ignore the long-term unemployed. ...

                                                                                                Posted by on Thursday, April 17, 2014 at 03:02 PM in Economics, Unemployment | Permalink  Comments (6)

                                                                                                'Secular Stagnation or Secular Boom?'

                                                                                                Antonio Fatás:

                                                                                                Secular stagnation or secular boom?: The notion that some countries are caught in a long and protracted period of low growth ... has been labeled "secular stagnation". The pessimism that the idea of secular stagnation has created has been reinforced by the notion the potential for emerging markets to grow is becoming weaker. ...
                                                                                                Let's start with a simple chart that summarizes the pattern of annual growth in ... advanced and emerging markets...

                                                                                                ... So stagnation might be the right label for 50% of the world, but accelerating growth is the right label for the other half.
                                                                                                And if we look at the engines of growth, in particular investment rates (in physical capital) we can see again the divergence in performance.

                                                                                                ... Looking at the above charts... Could it be that investment opportunities in emerging markets moved capital away from advanced economies? Not obvious because we know that the explosion in investment rates in emerging markets came in many cases with even larger increases in saving rates and (financial) capital flew away from these countries. In fact, interest rates in the world were trending downwards during this period. And this makes the performance of advanced economies even more surprising: despite a favorable environment in terms of low interest rates, investment and growth declined.

                                                                                                  Posted by on Thursday, April 17, 2014 at 12:33 AM in Development, Economics | Permalink  Comments (46)

                                                                                                  'Antitrust in the New Gilded Age'

                                                                                                  Robert Reich:

                                                                                                  Antitrust in the New Gilded Age, by Robert Reich: We’re in a new gilded age of wealth and power similar to the first gilded age when the nation’s antitrust laws were enacted. Those laws should prevent or bust up concentrations of economic power that not only harm consumers but also undermine our democracy — such as the pending Comcast acquisition of Time-Warner. ...
                                                                                                  In many respects America is back to the same giant concentrations of wealth and economic power that endangered democracy a century ago. The floodgates of big money have been opened...
                                                                                                  Remember, this is occurring in America’s new gilded age — similar to the first one in which a young Teddy Roosevelt castigated the “malefactors of great wealth, who were “equally careless of the working men, whom they oppress, and of the State, whose existence they imperil.”
                                                                                                  It’s that same equal carelessness toward average Americans and toward our democracy that ought to be of primary concern to us now. Big money that engulfs government makes government incapable of protecting the rest of us against the further depredations of big money.
                                                                                                  After becoming President in 1901, Roosevelt used the Sherman Act against forty-five giant companies, including the giant Northern Securities Company that threatened to dominate transportation in the Northwest. William Howard Taft continued to use it, busting up the Standard Oil Trust in 1911. 
                                                                                                  In this new gilded age, we should remind ourselves of a central guiding purpose of America’s original antitrust law, and use it no less boldly. 

                                                                                                    Posted by on Thursday, April 17, 2014 at 12:24 AM in Economics, Income Distribution, Market Failure, Politics, Regulation | Permalink  Comments (9)

                                                                                                    Links for 4-17-14

                                                                                                      Posted by on Thursday, April 17, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (72)