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Joe Stiglitz in a review of Martin Wolf's new book "The Shifts and the Shocks":
... If I have a point of difference with Wolf’s analysis, it is that he ... is insufficiently critical of the “savings glut” hypothesis advanced by former Federal Reserve chairman Ben Bernanke, among others, which presents what used to be a virtue (savings) as a vice, shifting blame to China and (less vocally) to Germany. Yet the investment needs of today are staggering: for infrastructure in the developing world, let alone in the US; for retrofitting the global economy to cope with global warming; even for small and medium-sized enterprises starved of capital in much of the world. This should make it obvious that the problem is not an excess of savings but a financial system that is more fixated on speculation than on fulfilling its societal role of intermediation ... in which scarce savings are allocated to the investments of highest social returns.
The problem goes beyond a "financial system that is more fixated on speculation":
It is striking how much Wolf, like so many advocates of financial reform, focuses on protecting us against the banks: making sure that they don’t engage in excessive risk-taking... Wolf doesn’t dwell much on some of the more antisocial aspects evidenced in the aftermath of the crisis: the market manipulation (as in the Libor and forex scandals), the anti-competitive practices, the predatory and discriminatory lending, the lack of transparency, the fraudulent behavior. Presumably, this is because he believes, or hopes, that even too-big-to-fail and too-big-to-jail banks won’t be politically powerful enough to continue such behavior unimpaired. But he says too little about what might be done to make banks actually fulfill the societal role that they should be playing. ...
Posted by Mark Thoma on Sunday, August 31, 2014 at 08:52 AM in Economics, Financial System, Regulation |
Olivier Blanchard (a much shortened version of his arguments, the entire piece is worth reading):
Where Danger Lurks: Until the 2008 global financial crisis, mainstream U.S. macroeconomics had taken an increasingly benign view of economic fluctuations in output and employment. The crisis has made it clear that this view was wrong and that there is a need for a deep reassessment. ...
That small shocks could sometimes have large effects and, as a result, that things could turn really bad, was not completely ignored by economists. But such an outcome was thought to be a thing of the past that would not happen again, or at least not in advanced economies thanks to their sound economic policies. ... We all knew that there were “dark corners”—situations in which the economy could badly malfunction. But we thought we were far away from those corners, and could for the most part ignore them. ...
The main lesson of the crisis is that we were much closer to those dark corners than we thought—and the corners were even darker than we had thought too. ...
How should we modify our benchmark models—the so-called dynamic stochastic general equilibrium (DSGE) models...? The easy and uncontroversial part of the answer is that the DSGE models should be expanded to better recognize the role of the financial system—and this is happening. But should these models be able to describe how the economy behaves in the dark corners?
Let me offer a pragmatic answer. If macroeconomic policy and financial regulation are set in such a way as to maintain a healthy distance from dark corners, then our models that portray normal times may still be largely appropriate. Another class of economic models, aimed at measuring systemic risk, can be used to give warning signals that we are getting too close to dark corners, and that steps must be taken to reduce risk and increase distance. Trying to create a model that integrates normal times and systemic risks may be beyond the profession’s conceptual and technical reach at this stage.
The crisis has been immensely painful. But one of its silver linings has been to jolt macroeconomics and macroeconomic policy. The main policy lesson is a simple one: Stay away from dark corners.
That may be the best we can do for now (have separate models for normal times and "dark corners"), but an integrated model would be preferable. An integrated model would, for example, be better for conducting "policy and financial regulation ... to maintain a healthy distance from dark corners," and our aspirations ought to include models that can explain both normal and abnormal times. That may mean moving beyond the DSGE class of models, or perhaps the technical reach of DSGE models can be extended to incorporate the kinds of problems that can lead to Great Recessions, but we shouldn't be satisfied with models of normal times that cannot explain and anticipate major economic problems.
Posted by Mark Thoma on Sunday, August 31, 2014 at 08:24 AM in Economics, Macroeconomics, Methodology |
Posted by Mark Thoma on Sunday, August 31, 2014 at 12:03 AM in Economics, Links |
Incarceration society: It is becoming increasingly clear that the criminal justice system is an important component of the system of race in the United States today. Michelle Alexander's important book The New Jim Crow: Mass Incarceration in the Age of Colorblindness makes the case that the war on drugs and the war on crime have functioned disproportionately to incarcerate and control young black men in America's inner cities. ...
Posted by Mark Thoma on Saturday, August 30, 2014 at 09:40 AM in Economics |
I have interviews with Peter Diamond and Edmund Phelps available here and here, and an interview I did with Lars Hansen should be available later this week. All are from the Nobel Meetings in Economics at Lindau, Germany last week. But if you are itching for still more from the Nobel Laureates in economics (four of the five were not in Lindau), here is a set of interviews available at the IMF:
- Global Warming by George A. Akerlof
- Increasing Demand by Paul Krugman
- Secular Stagnation by Robert Solow
- Inclusiveness by Michael Spence
- Inequality by Joseph Stiglitz
Posted by Mark Thoma on Saturday, August 30, 2014 at 08:47 AM in Economics |
Posted by Mark Thoma on Saturday, August 30, 2014 at 12:33 AM in Economics, Links |
Why didn't François Hollande reverse austerity policies in France?:
The Fall of France, by Paul Krugman, Commentary, NY Times: François Hollande, the president of France since 2012, coulda been a contender. He was elected on a promise to turn away from the austerity policies that killed Europe’s brief, inadequate economic recovery... But it was not to be. Once in office, Mr. Hollande promptly folded, giving in completely to demands for even more austerity.
Let it not be said, however, that he is entirely spineless. Earlier this week, he took decisive action, but not, alas, on economic policy... Mr. Hollande ... was focused on purging members of his government daring to question his subservience to Berlin and Brussels.
It’s a remarkable spectacle. To fully appreciate it, however, you need to understand two things. First, Europe, as a whole, is in deep trouble. Second,... France’s performance is much better than you would guess from news reports. France isn’t Greece; it isn’t even Italy. But it is letting itself be bullied as if it were a basket case. ...
Why ... does France get such bad press? It’s hard to escape the suspicion that it’s political: France has a big government and a generous welfare state, which free-market ideology says should lead to economic disaster. So disaster is what gets reported, even if it’s not what the numbers say.
And Mr. Hollande, even though he leads France’s Socialist Party, appears to believe this ideologically motivated bad-mouthing. Worse, he has fallen into a vicious circle in which austerity policies cause growth to stall, and this stalled growth is taken as evidence that France needs even more austerity.
It’s a very sad story, and not just for France.
Most immediately, Europe’s economy is in dire straits. ... Meanwhile, Germany is incorrigible. Its official response to the shake-up in France was a declaration that “there is no contradiction between consolidation and growth” — hey, never mind the experience of the past four years, we still believe that austerity is expansionary.
So Europe desperately needs the leader of a major economy — one that is not in terrible shape — to stand up and say that austerity is killing the Continent’s economic prospects. Mr. Hollande could and should have been that leader, but he isn’t.
And if the European economy continues to stagnate or worse, what will become of the European project — the long-term effort to secure peace and democracy through shared prosperity? In failing France, Mr. Hollande is also failing Europe as a whole — and nobody knows how bad it might get.
Posted by Mark Thoma on Friday, August 29, 2014 at 04:26 AM in Economics, Fiscal Policy |
Posted by Mark Thoma on Friday, August 29, 2014 at 04:04 AM in Economics, Links |
There seems to be a problem with embedding this video -- it's here:
Repugnant Markets and Prohibited Transactions
Posted by Mark Thoma on Thursday, August 28, 2014 at 09:21 AM in Economics |
When Do We Start Calling This “The Greater Depression”?: We started by calling it the financial crisis of 2007. Then it became the financial crisis of 2008. Next it was the downturn of 2009-2009. By the middle of 2009 it was clearly the biggest thing since the 1930s, and acquired the name of “The Great Recession”. By the end of 2009 the business cycle trough had been passed, and people breathed a sigh of relief: “The Great Recession” would be its stable name–we would not have to change its name again, and move on to labels containing the D-word.
But we breathed our sigh of relief too soon..., the United States did not experience a rapid V-shaped recovery carrying it back to the previous growth trend of potential output. ...
Things have been even worse in Europe. The Eurozone experienced not recovery but renewed recession with a second-wave downturn starting in 2010...
Cumulative output losses relative to the 1995-2007 trends now stand at 78% of a year’s GDP for the United States, and at 60% of a year’s GDP for the Eurozone. These are extraordinary magnitudes of foregone prosperity...: nobody back in 2007 was forecasting ... the ... extraordinary decline in the rate of growth of potential output that statistical and policymaking agencies are now baking into their estimates. These magnitudes made me conclude at the start of 2011 that “The Great Recession” was no longer adequate: it was time to start calling this episode “The Lesser Depression”. ...
Posted by Mark Thoma on Thursday, August 28, 2014 at 07:18 AM in Economics |
Posted by Mark Thoma on Thursday, August 28, 2014 at 12:06 AM in Economics, Links |
This is from Edward S. Knotek II and Saeed Zaman of the Cleveland Fed:
On the Relationships between Wages, Prices, and Economic Activity: Labor costs and labor compensation have garnered considerable attention from economists in the wake of the financial crisis and recession. Across a range of measures, wage growth slowed sharply during the recession. Recently, wage growth has remained near historically low levels despite improvements in the labor market.
Subdued wage growth has been variously seen as both a cause and a consequence of the slow pace of economic growth and persistently low inflation rates. It also may have contributed to rising inequality. In some forecast narratives, a pickup in wage growth is viewed as a necessary condition for a stronger recovery and rising inflation. In others, it is a natural consequence of a tightening labor market.
This Commentary takes a closer look at the relationships between wages, prices, and economic activity. It finds that the connections among wages, prices, and economic activity are more akin to a tangled web than a straight line. In the United States, wages and prices have tended to move together, and causal relationships are difficult to identify. We do find that wages are sensitive to economic activity and the level of slack in the economy, but our forecasting results suggest that the ability of wages to help predict future inflation is limited. Thus, wages appear to be useful in assessing the current state of labor markets, but not necessarily sufficient for thinking about where the economy and inflation are going. ...
So even if wages do finally begin rising, policymakers shouldn't panic about inflation (wishful thinking).
Posted by Mark Thoma on Wednesday, August 27, 2014 at 07:00 AM in Economics, Inflation, Monetary Policy, Unemployment |
Simon Wren-Lewis (a bit technical):
Filling the gap: monetary policy or tax cuts or government spending: Suppose there is a shortfall in aggregate demand associated with a rise in involuntary unemployment in a simple closed economy with no capital. Do we try and raise private consumption (C) or government consumption (G)? If the former, why do we prefer to use monetary policy rather than tax cuts? ...
Posted by Mark Thoma on Wednesday, August 27, 2014 at 07:00 AM in Economics, Fiscal Policy, Monetary Policy |
From Michael Mazerov of the CBPP:
More Evidence That State Income Taxes Have Little Impact on Interstate Migration: The New York Times’ Upshot blog has published a fascinating set of graphs of Census Bureau data on interstate migration patterns since 1900, bolstering our argument that state income taxes don’t have a significant impact on people’s decisions about where to live.
We plotted the same Census data, which shows which states do the best job of retaining their native-born populations, on the chart below, also noting which states have (or don’t have) a state income tax. Our chart shows that taxes have little to do with the extent to which native-born people leave their states of origin.
If Heritage Foundation economist Stephen Moore’s claim (which other tax-cut advocates often repeat) that “taxes are indisputably a major factor in determining where . . . families locate” were true, states without income taxes would see below-average shares of their native-born populations leaving at some point in their lifetime, while states with relatively high income taxes would see the opposite. But the graph shows no such pattern...
Posted by Mark Thoma on Wednesday, August 27, 2014 at 07:00 AM in Economics, Taxes |
Posted by Mark Thoma on Wednesday, August 27, 2014 at 12:06 AM in Economics, Links |
[Still on the road ... three quick ones before another long day of driving.]
A New Reason to Question the Official Unemployment Rate: ...A new academic paper suggests that the unemployment rate appears to have become less accurate over the last two decades, in part because of this rise in nonresponse. In particular, there seems to have been an increase in the number of people who once would have qualified as officially unemployed and today are considered out of the labor force, neither working nor looking for work.
The trend obviously matters for its own sake: It suggests that the official unemployment rate – 6.2 percent in July – understates the extent of economic pain in the country today. ... The new paper is a reminder that the unemployment rate deserves less attention than it often receives.
Yet the research also relates to a larger phenomenon. The declining response rate to surveys of almost all kinds is among the biggest problems in the social sciences. ...
Why are people less willing to respond? The rise of caller ID and the decline of landlines play a role. But they’re not the only reasons. Americans’ trust in institutions – including government, the media, churches, banks, labor unions and schools – has fallen in recent decades. People seem more dubious of a survey’s purpose and more worried about intrusions into their privacy than in the past.
“People are skeptical – Is this a real survey? What they are asking me?” Francis Horvath, of the Labor Department, says. ...
Posted by Mark Thoma on Tuesday, August 26, 2014 at 06:52 AM in Economics, Methodology, Unemployment |
Who Pays Corporate Taxes? Possibly You: Who pays corporate income taxes? Just one thing’s for sure: it’s not corporations. ...
For a long time it was thought the owners paid the tax. That belief can be traced largely to a classic 1962 theoretical analysis by economist Arnold Harberger...
Harberger saw this as a bad thing. By taking money away from capital owners, the corporate income tax was depressing investment and distorting the economy. But for those more concerned with the distributional effects of taxation, Harberger’s model at least showed the burden landing on people who were wealthier than average.
His theoretical model, however, assumed a closed economy... As the world’s economies became more intertwined in recent decades, economists — Harberger among them — began constructing open-economy models that showed workers bearing a larger share of the burden. ...
So in the past few years there’s been a determined attempt to answer the question empirically... Gravelle has a 2011 summary of this work, and her chief conclusions are that the results are all over the place and the most dramatic ones just aren’t credible. But most of these studies do show some significant chunk of the corporate tax burden landing on workers, which is perhaps not yet conclusive but is really interesting.
Most public discussions of corporate taxes in the U.S., however, still ignore the possibility that workers might actually be the ones bearing the burden. ... Perhaps it’s ... just that, if corporations pay lower taxes, individuals have to pick up the slack. And even if you understand tax incidence perfectly well, a direct tax is still more noticeable than an indirect one.
Posted by Mark Thoma on Tuesday, August 26, 2014 at 06:51 AM in Economics, Taxes |
Property Rights and Saving the Rhino: South Africa is the home for 75% of the world's population of black rhinos and 96% of the world's population of white rhinos. There must be some lessons for conservationists behind those statistics. Michael 't Sas-Rolfes tells the story in "Saving African Rhinos: A Market Success Story," written as a case study for the Property and Environment Research Center (PERC).
The story isn't just about markets. In 1900, the white rhinoceros had been hunted almost to extinction, with about 20 remaining in a single game preserve in South Africa. The population slowly recovered a bit, and by the middle of the 20th century, there were enough to start relocating breeding groups of white rhinos to other national parks in South Africa, as well as private game ranches. In 1968, the first legal hunt of a white rhino was authorized.
But by the 1980s, Sas-Rolfes reports, a strange disjunction had emerged. In 1982, the Natal Parks Board had a list price for a white rhino of about 1,000 South African rands, but the average price paid by a hunter for a rhino trophy that year was 6,000 rands. Private game preserves were quick to take advantage of the arbitrage opportunity. The Natal Parks Board soon began auctioning its rhinos. In 1989, it was selling rhinos for 49,000 rand, but the average price to a hunter for a rhino trophy had risen to 92,000 rand. There were obvious questions about whether this system of raising and hunting rhinos was a useful tool from a broader environmental perspective.
But property rights and markets enter the story in a different way in 1991.
Before 1991, all wildlife in South Africa was treated by law as res nullius or un-owned property. To reap the benefits of ownership from a wild animal, it had to be killed, captured, or domesticated. This created an incentive to harvest, not protect, valuable wild species—meaning that even if a game rancher paid for a rhino, the rancher could not claim compensation if the rhino left his property or was killed by a poacher. . . . Recognizing the problems associated with the res nullius maxim, the commission drafted a new piece of legislation: the Theft of Game Act of 1991. This policy allowed for private ownership of any wild animal that could be identified according to certain criteria such as a brand or ear tag. The combined effect of market pricing through auctions and the creation of stronger property rights over rhinos changed the incentives of private ranchers. It now made sense to breed rhinos rather than shoot them as soon as they were received.
For a sense of how much difference these issues of property rights and incentives can make to conservation, consider the difference in populations between black and white rhinos. Sas-Rolfes explains: "Figure 2 shows trends in white rhino numbers from 1960 until 2007. Contrast those
numbers with the black rhino, which mostly lived in African countries with weak or absent wildlife market institutions such as Kenya, Tanzania, and Zambia. In 1960, about 100,000 black rhinos roamed across Africa, but by the early 1990s poachers had reduced their numbers to less than 2,500. . . . Unprotected wild rhino populations are rare to non-existent in modern Africa. The only surviving African rhinos remain either in countries with strong wildlife market institutions (such as South Africa and Namibia) or in intensively protected zones."
A strong demand for rhino horn remains, and especially since about 2008, rhinos across Africa face a risk of illegal poachers. Here's a figure from the conservation group Save the Rhino showing the level of rhino poaching in South Africa:
Along with the existing choices of "intensively protected zones"--which implies costly and not-very-corruptible protectors--and allowing for private game preserves, the other option is to seek to undercut the black market for rhino horn with a legal market. Other more controversial options discussed at the Save the Rhinos website include de-horning rhinos, to make them less attractive to poachers, and perhaps even allowing legal sale of these rhino horns, to undercut the prices paid to poacher. Rhino horns are made of keratin, similar to the substance in fingernails and hair, and the horn could be removed every year or two. There are strong arguments on both sides of allowing legal sale of rhino horn: perhaps rather than undercutting the illegal market, it might also make it easier for poachers to sell their illegally obtained rhino horn. In the end, given that South Africa is now the home to most of the world's rhinos, I suspect that South Africa will end up making the decision about whether to proceed with these options.
Those interested in how property rights might be one of the tools for helping to protect endangered species might also want to check this post on "Saving Jaguars and Elephants with Property Rights and Incentives" (December 19, 2011).
Posted by Mark Thoma on Tuesday, August 26, 2014 at 06:51 AM in Economics, Environment |
Posted by Mark Thoma on Tuesday, August 26, 2014 at 12:06 AM in Economics, Links |
Why have sunbelt states experienced faster job growth than other regions of the country?:
Wrong Way Nation by Paul Krugman, Commentary, NY Times: Gov. Rick Perry of Texas is running for president again. What are his chances? ... I have absolutely no idea. This isn’t a horse-race column.
What I’d like to do, instead, is take advantage of Mr. Perry’s ambitions to talk about one of my favorite subjects: interregional differences in economic and population growth.
You see, while Mr. Perry’s hard-line stances and religiosity may be selling points for the Republican Party’s base, his national appeal, if any, will have to rest on claims that he knows how to create prosperity. And it’s true that Texas has had faster job growth than the rest of the country. So have other Sunbelt states with conservative governments. The question, however, is why.
The answer from the right is, of course, that it’s all about avoiding regulations that interfere with business and keeping taxes on rich people low, thereby encouraging job creators to do their thing. But it turns out that there are big problems with this story..., wages in the places within the United States attracting the most migrants are typically lower than in the places those migrants come from...
So why are people moving to these relatively low-wage areas? Because living there is cheaper, basically because of housing. ...
In other words, what the facts really suggest is that Americans are being pushed out of the Northeast (and, more recently, California) by high housing costs rather than pulled out by superior economic performance in the Sunbelt. ...
So conservative complaints about excess regulation and intrusive government aren’t entirely wrong, but the secret of Sunbelt growth isn’t being nice to corporations and the 1 percent; it’s not getting in the way of middle- and working-class housing supply.
And this, in turn, means that the growth of the Sunbelt isn’t the kind of success story conservatives would have us believe. Yes, Americans are moving to places like Texas, but ... they’re moving the wrong way, leaving local economies where their productivity is high for destinations where it’s lower. And the way to make the country richer is to encourage them to move back, by making housing in dense, high-wage metropolitan areas more affordable.
So Rick Perry doesn’t know the secrets of job creation, or even of regional growth. It would be great to see the real key — affordable housing — become a national issue. But I don’t think Democrats are willing to nominate Mayor Bill de Blasio for president just yet.
Posted by Mark Thoma on Monday, August 25, 2014 at 12:33 AM in Economics |
Posted by Mark Thoma on Monday, August 25, 2014 at 12:06 AM in Economics, Links |
My take on the Acemoglu-Robinson critique of Piketty: A couple of days ago Daron Acemoglu and James Robinson published a critique of Piketty’s Capital in the 21st century. It is published here. Because of the renown of the authors, perhaps more than because of its intrinsic quality, it is a review worth reading. I read it today and my brief reaction to the three main critiques by Acemoglu and Robinson is as follows. ...
[Travel day, squeezing this one in before hurrying to my next flight.]
Posted by Mark Thoma on Sunday, August 24, 2014 at 03:43 PM in Economics, Income Distribution |
Posted by Mark Thoma on Sunday, August 24, 2014 at 12:06 AM in Economics, Links |
Posted by Mark Thoma on Saturday, August 23, 2014 at 12:33 AM in Economics, Video |
Posted by Mark Thoma on Saturday, August 23, 2014 at 12:06 AM in Economics, Links |
David Keohane at FT Alphaville:
Buiter on helicopter drops: Some further, further reading on Friday — a new paper from Citi’s Willem Buiter, on why helicopter drops of money always work. From the abstract...:
Three conditions must be satisfied for helicopter money always to boost aggregate demand. First, there must be benefits from holding fiat base money other than its pecuniary rate of return. Second, fiat base money is irredeemable – viewed as an asset by the holder but not as a liability by the issuer. Third, the price of money is positive. Given these three conditions, there always exists – even in a permanent liquidity trap – a combined monetary and fiscal policy action that boosts private demand – in principle without limit. Deflation, ‘lowflation’ and secular stagnation are therefore unnecessary. They are policy choices.
The full paper is here.
Posted by Mark Thoma on Friday, August 22, 2014 at 10:10 AM in Economics, Monetary Policy |
Via Vox EU:
Minority mortgage market experiences leading up to and during the financial crisis, by Stephen L. Ross, Vox EU: The foreclosure crisis that followed the subprime crisis has had significant negative consequences for minority homeowners. This column reviews recent evidence in the racial and ethnic differences in high cost loans and in loan performance. Minority homeowners, especially black homebuyers, faced higher price of mortgage credit and had worse credit market outcomes during the crisis. This is largely due to the fact that minority borrowers are especially vulnerable to the economic downturn. ...
Posted by Mark Thoma on Friday, August 22, 2014 at 09:51 AM in Economics, Financial System, Housing |
The inflation "obsession" continues despite the fact that there is little evidence that inflation is likely to be a problem. Why?:
Hawks Crying Wolf, by Paul Krugman, Commentary, NY Times: According to a recent report in The Times, there is dissent at the Fed: “An increasingly vocal minority of Federal Reserve officials want the central bank to retreat more quickly” from its easy-money policies, which they warn run the risk of causing inflation. ...
That may well be the case. But there’s something you should know: That “vocal minority” has been warning about soaring inflation more or less nonstop for six years. And the persistence of that obsession seems, to me, to be a more interesting and important story than the fact that the usual suspects are saying the usual things. ...
The point is that when you see people clinging to a view of the world in the teeth of the evidence, failing to reconsider their beliefs despite repeated prediction failures, you have to suspect that there are ulterior motives involved. So the interesting question is: What is it about crying “Inflation!” that makes it so appealing that people keep doing it despite having been wrong again and again? ...
Eight decades ago, Friedrich Hayek warned against any attempt to mitigate the Great Depression via “the creation of artificial demand”; three years ago, Mr. Ryan all but accused Ben Bernanke, the Fed chairman at the time, of seeking to “debase” the dollar. Inflation obsession is as closely associated with conservative politics as demands for lower taxes on capital gains.
It’s less clear why. But faith in the inability of government to do anything positive is a central tenet of the conservative creed. Carving out an exception for monetary policy ... may just be too subtle a distinction to draw in an era when Republican politicians draw their economic ideas from Ayn Rand novels.
Which brings me back to the Fed, and the question of when to end easy-money policies.
Even monetary doves like Janet Yellen, the Fed chairwoman, generally acknowledge that there will come a time to take the pedal off the metal. And maybe that time isn’t far off...
But the last people you want to ask about appropriate policy are people who have been warning about inflation year after year. Not only have they been consistently wrong, they’ve staked out a position that, whether they know it or not, is essentially political rather than based on analysis. They should be listened to politely — good manners are always a virtue — then ignored.
Posted by Mark Thoma on Friday, August 22, 2014 at 02:34 AM in Economics, Inflation, Monetary Policy |
Posted by Mark Thoma on Friday, August 22, 2014 at 12:06 AM in Economics, Links |
Posted by Mark Thoma on Thursday, August 21, 2014 at 03:43 AM in Economics, Unemployment, Video |
Who wins and loses from global trade?: Why are most economists more in favor of free trade than the general public?
One reason may be that the models economists use to evaluate the impact of global trade often overlook some significant ways it affects jobs, income and social services. ...
Posted by Mark Thoma on Thursday, August 21, 2014 at 03:42 AM in Economics, International Trade |
Posting the video mysteriously causes formatting problems for the blog, so took it down and replaced it with link to the video:
Chris Sims: Inflation, Fear of Inflation, and Public Debt
Posted by Mark Thoma on Thursday, August 21, 2014 at 01:18 AM in Budget Deficit, Economics, Inflation, Video |
Posted by Mark Thoma on Thursday, August 21, 2014 at 12:06 AM in Economics, Links |
Posted by Mark Thoma on Wednesday, August 20, 2014 at 08:41 AM in Economics, Income Distribution |
What does the Fed have to do with Social Security? Plenty: Most of the people who closely follow the Federal Reserve Board’s decisions on monetary policy are investors trying to get a jump on any moves that will affect financial markets. Very few of the people involved in the debate over the future of Social Security pay much attention to the Fed. That’s unfortunate because the connections are much more direct than is generally recognized. ...
Posted by Mark Thoma on Wednesday, August 20, 2014 at 04:46 AM in Economics, Monetary Policy, Social Security |
I am here today:
5th Lindau Meeting on Economic Sciences
19-23 August 2014, Lindau, Germany
Lindau Meeting of the Laureates of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel
The 5th Lindau Meeting on Economic Sciences will provide an open exchange of economic expertise and inspire cross-cultural and inter-generational encounters among economists from all over the world. From 19 to 23 August, the participating 18 Nobel Laureates and 460 young scientists will have plenty of opportunity for an intensive exchange of ideas.
The meeting will open on 20 August with a keynote address by the German Chancellor Angela Merkel, and will also feature “a panoramic view on the situation and prospects in Latin America” by Mario Vargas Llosa, the 2010 Nobel Laureate in Literature. The scientific programme will address central fields of the discipline, ranging from econometrics, game theory, and neo-classical growth theory to mechanism design and systemic risk measurement. The overarching question “How useful is economics – how is economics useful?” will also be subject of the meeting’s closing panel debate on Mainau Island on Saturday, 23 August.
The scientific programme of the 5th Lindau Meeting on Economic Sciences will comprise lectures and panel discussions (accessible for all registered meeting participants and guests), as well as discussion sessions and master classes (both accessible only for participating Nobel Laureates and young scientists).
A detailed version of the programme including all lecture titles of the participating laureates with links to their abstracts is available in the Lindau Mediatheque. Please find a PDF version of the printed programme here. To get an overview of the meeting schedule you can also download the programme structure.
18 Laureates will attend the 5th Lindau Meeting on Economic Sciences. Among 17 economists there will also be Mario Vargas Llosa, Nobel Laureate in Literature in 2010, participating in the meeting. Please find further information on the Laureates' profiles including their CVs in the Lindau Mediatheque.
Peter DiamondLars Peter Hansen
Robert C. Merton
Mario Vargas Llosa
Wednesday, 20 August
8.30 Plenary Lecture Inselhalle Lars Peter Hansen Uncertainty and Valuation
09.00 Plenary Lecture Inselhalle Alvin E. Roth Repugnant Markets and Prohibited Transactions
09.30 Plenary Lecture Inselhalle Edmund S. Phelps Bringing Dynamism, Homegrown Innovation and Human Flourishing into Economics
10.00 Coffee Break
10.30 Plenary Lecture Inselhalle Christopher A. Sims Inflation, Fear of Inflation, and Public Debt
11.00 Plenary Lecture Inselhalle Vernon L. Smith Rethinking Market Experiments in the Shadow of Recessions: The Good and the Sometimes Ugly; Propositions on Recessions
14.00 Opening Ceremony Inselhalle Opening Ceremony
Angela Merkel Chancellor of the Federal Republic of Germany Master of Ceremony
16.00 Discussion Lars Peter Hansen Discussion with young scientists
16.00 Discussion Edmund S. Phelps Discussion with young scientists
16.00 Alvin E. Roth Discussion with young scientists
16.00 Discussion Christopher A. Sims Discussion with young scientists
16.00 Discussion Vernon L. Smith Discussion with young scientists
20.00 Social Function Inselhalle Get-Together
Posted by Mark Thoma on Wednesday, August 20, 2014 at 04:23 AM in Conferences, Economics, Travel |
Posted by Mark Thoma on Wednesday, August 20, 2014 at 03:33 AM in Economics, Links |
Brad DeLong tries to make sense of the labor market:
Over at Equitable Growth: In Which I Make Myself Very Confused About Cyclical Recovery: Will somebody please tell me that I have made a gross arithmetic error in what is below, and can be much more optimistic? ...
I really do not understand the triumphalism of the very sharp Steve Braun et al. from the CEA...
So the labor market is, they say, 5/6 of the way back to normal--the current unemployment rate of 6.2% is 3.8%-points down from the peak of 10.0%, and has only 0.8%-point left to go before it hits a pre-crisis NAIRU of 5.4%. When it does, we will attain a "cyclically normal" labor market with a participation rate at 63.4%, 0.5%-points higher than today's 62.9%, and an associated employment-to-population ratio of 60.0%.
By that metric, we have done 3/4 of the work of cyclical recovery: from a 5.5%-point gap between employment and participation at the trough to a 3.9%-point gap now and a 3.4%-point gap at NAIRU. We will have made 1.7%-points back from the trough on the employment-to-population ratio when cyclical recovery is complete. The permanent damage to employment from the Great Recession Lesser Depression appears to be less than 0.9%-points of participation because there are also ongoing "cohort effects unrelated to aging" that reduce participation.
Let me stress that this is not senior and not-so-senior White House officials under pressure from political operatives putting as positive a spin on things as they can without actually losing their... No: what I mean to say is this: this is what the CEA's Steven Braun, John Coglianese, Jason Furman, Betsey Stevenson, and Jim Stock actually believe is true about the world--that the labor market is recovering successfully and strongly from the disaster of 2008-9.
But I look at 25-54. The employment rate is down from 79.9% in 2007 to 76.6% in July 2014--3.3%-points less, compared to 4.0%-point a fall from 63% to 59% over the entire population. The participation rate is down from 80.8% in July 2014 compared to 83.1% for 2007--2.3%-points, compared to the 3.1%-point fall from 66.0% to 62.9% over the entire population.
A normal NAIRU spread would put the 25-54 employment-to-population ratio at 78.7%, 2.5%-points below the 81.2% cyclically-adjusted 25-54 participation ratio. When cyclical recovery is complete, we would then expect to make back 3.7%-points back from the trough on the 25-54 employment-to-population ratio. So far we have made back only 1.0%-point.
So which is it? Has hysteresis done 1.8%-points of damage to 25-54 employment or 0.9%-points to total employment? Have we done 3/4 of the work of recovery relative to the proper labor force-trend share benchmark? Or have we done only 1/3 of the work of recovery?
The 25-54 data and the economy-wide aging trend-adjusted data used by the CEA appear to be telling us very different things both about the cyclical state of the labor market and about the damage done by hysteresis. How to reconcile? Which is right?
Posted by Mark Thoma on Tuesday, August 19, 2014 at 01:42 PM in Economics, Unemployment |
Irrational exuberance meets secular stagnation: Robert Shiller warns us in the New York Times about the potential risks of high stock market valuations in the US. According to Shiller "the United States stock market looks very expensive right now". Brad DeLong and Dean Baker disagree with Shiller and argue that stock prices might look higher than historical averages but this could be ok given other changes in the economic environment. ... But there are ... reasons why the historical average might not be relevant...
Posted by Mark Thoma on Tuesday, August 19, 2014 at 01:42 PM in Economics, Financial System |
The Agent-Based Method: It's nice to see some attention being paid to agent-based computational models on economics blogs, but Chris House has managed to misrepresent the methodology so completely that his post is likely to do more harm than good.
In comparing the agent-based method to the more standard dynamic stochastic general equilibrium (DSGE) approach, House begins as follows:
Probably the most important distinguishing feature is that, in an ABM, the interactions are governed by rules of behavior that the modeler simply encodes directly into the system individuals who populate the environment.
So far so good, although I would not have used the qualifier "simply", since encoded rules can be highly complex. For instance, an ABM that seeks to describe the trading process in an asset market may have multiple participant types (liquidity, information, and high-frequency traders for instance) and some of these may be using extremely sophisticated strategies.
How does this approach compare with DSGE models? House argues that the key difference lies in assumptions about rationality and self-interest:
People who write down DSGE models don’t do that. Instead, they make assumptions on what people want. They also place assumptions on the constraints people face. Based on the combination of goals and constraints, the behavior is derived. The reason that economists set up their theories this way – by making assumptions about goals and then drawing conclusions about behavior – is that they are following in the central tradition of all of economics, namely that allocations and decisions and choices are guided by self-interest. This goes all the way back to Adam Smith and it’s the organizing philosophy of all economics. Decisions and actions in such an environment are all made with an eye towards achieving some goal or some objective. For consumers this is typically utility maximization – a purely subjective assessment of well-being. For firms, the objective is typically profit maximization. This is exactly where rationality enters into economics. Rationality means that the “agents” that inhabit an economic system make choices based on their own preferences.
This, to say the least, is grossly misleading. The rules encoded in an ABM could easily specify what individuals want and then proceed from there. For instance, we could start from the premise that our high-frequency traders want to maximize profits. They can only do this by submitting orders of various types, the consequences of which will depend on the orders placed by others. Each agent can have a highly sophisticated strategy that maps historical data, including the current order book, into new orders. The strategy can be sensitive to beliefs about the stream of income that will be derived from ownership of the asset over a given horizon, and may also be sensitive to beliefs about the strategies in use by others. Agents can be as sophisticated and forward-looking in their pursuit of self-interest in an ABM as you care to make them; they can even be set up to make choices based on solutions to dynamic programming problems, provided that these are based on private beliefs about the future that change endogenously over time.
What you cannot have in an ABM is the assumption that, from the outset, individual plans are mutually consistent. That is, you cannot simply assume that the economy is tracing out an equilibrium path. The agent-based approach is at heart a model of disequilibrium dynamics, in which the mutual consistency of plans, if it arises at all, has to do so endogenously through a clearly specified adjustment process. This is the key difference between the ABM and DSGE approaches, and it's right there in the acronym of the latter.
A typical (though not universal) feature of agent-based models is an evolutionary process, that allows successful strategies to proliferate over time at the expense of less successful ones. Since success itself is frequency dependent---the payoffs to a strategy depend on the prevailing distribution of strategies in the population---we have strong feedback between behavior and environment. Returning to the example of trading, an arbitrage-based strategy may be highly profitable when rare but much less so when prevalent. This rich feedback between environment and behavior, with the distribution of strategies determining the environment faced by each, and the payoffs to each strategy determining changes in their composition, is a fundamental feature of agent-based models. In failing to understand this, House makes claims that are close to being the opposite of the truth:
Ironically, eliminating rational behavior also eliminates an important source of feedback – namely the feedback from the environment to behavior. This type of two-way feedback is prevalent in economics and it’s why equilibria of economic models are often the solutions to fixed-point mappings. Agents make choices based on the features of the economy. The features of the economy in turn depend on the choices of the agents. This gives us a circularity which needs to be resolved in standard models. This circularity is cut in the ABMs however since the choice functions do not depend on the environment. This is somewhat ironic since many of the critics of economics stress such feedback loops as important mechanisms.
It is absolutely true that dynamics in agent-based models do not require the computation of fixed points, but this is a strength rather than a weakness, and has nothing to do with the absence of feedback effects. These effects arise dynamically in calendar time, not through some mystical process by which coordination is instantaneously achieved and continuously maintained.
It's worth thinking about how the learning literature in macroeconomics, dating back to Marcet and Sargent and substantially advanced by Evans and Honkapohja fits into this schema. Such learning models drop the assumption that beliefs continuously satisfy mutual consistency, and therefore take a small step towards the ABM approach. But it really is a small step, since a great deal of coordination continues to be assumed. For instance, in the canonical learning model, there is a parameter about which learning occurs, and the system is self-referential in that beliefs about the parameter determine its realized value. This allows for the possibility that individuals may hold incorrect beliefs, but limits quite severely---and more importantly, exogenously---the structure of such errors. This is done for understandable reasons of tractability, and allows for analytical solutions and convergence results to be obtained. But there is way too much coordination in beliefs across individuals assumed for this to be considered part of the ABM family.
The title of House's post asks (in response to an earlier piece by Mark Buchanan) whether agent-based models really are the future of the discipline. I have argued previously that they are enormously promising, but face one major methodological obstacle that needs to be overcome. This is the problem of quality control: unlike papers in empirical fields (where causal identification is paramount) or in theory (where robustness is key) there is no set of criteria, widely agreed upon, that can allow a referee to determine whether a given set of simulation results provides a deep and generalizable insight into the workings of the economy. One of the most celebrated agent-based models in economics---the Schelling segregation model---is also among the very earliest. Effective and acclaimed recent exemplars are in short supply, though there is certainly research effort at the highest levels pointed in this direction. The claim that such models can displace the equilibrium approach entirely is much too grandiose, but they should be able to find ample space alongside more orthodox approaches in time.
The example of interacting trading strategies in this post wasn't pulled out of thin air; market ecology has been a recurrent theme on this blog. In ongoing work with Yeon-Koo Che and Jinwoo Kim, I am exploring the interaction of trading strategies in asset markets, with the goal of addressing some questions about the impact on volatility and welfare of high-frequency trading. We have found the agent-based approach very useful in thinking about these questions, and I'll present some preliminary results at a session on the methodology at the Rethinking Economics conference in New York next month. The event is free and open to the public but seating is limited and registration required.
Posted by Mark Thoma on Tuesday, August 19, 2014 at 06:26 AM in Environment, Macroeconomics, Methodology |
Posted by Mark Thoma on Tuesday, August 19, 2014 at 12:06 AM in Economics, Links |
[Long, long travel day today, so just a few quick ones before hitting the road.]
Steven Braun, John Coglianese, Jason Furman, Betsey Stevenson, and Jim Stock:
Understanding the decline in the labour force participation rate in the United States, by Steven Braun, John Coglianese, Jason Furman, Betsey Stevenson, and Jim Stock, Vox EU: The labour force participation rate in the US has fallen dramatically since 2007. This column traces this decline to three main factors: the ageing of the population, cyclical effects from the Great Recession, and an unexplained portion, which might be due to pre-existing trends unrelated to the first two. Of these three, the ageing of the population plays the largest role since it is responsible for half of the decline. Taken together, these factors suggest a roughly stable participation rate in the short-term, followed by a longer-term decline as the baby boomers continue to age. However, policy can play a meaningful role in mitigating this trend. ...
Posted by Mark Thoma on Monday, August 18, 2014 at 05:03 AM in Economics, Unemployment |
Balanced-budget fundamentalism: Europeans, and particularly the European elite, find popular attitudes to science among many across the Atlantic both amusing and distressing. In Europe we do not have regular attempts to replace evolution with ‘intelligent design’ on school curriculums. Climate change denial is not mainstream politics in Europe as it is in the US (with the possible exception of the UK). Yet Europe, and particularly its governing elite, seems gripped by a belief that is as unscientific and more immediately dangerous. It is a belief that fiscal policy should be tightened in a liquidity trap. In the UK economic growth is currently strong, but that cannot disguise the fact that this has been the slowest recovery from a recession for centuries. Austerity may not be the main cause of that, but it certainly played its part. Yet the government that undertook this austerity, instead of trying to distract attention from its mistake, is planning to do it all over again. Either this is a serious intention, or a ruse to help win an election, but either way it suggests events have not dulled its faith in this doctrine. ...
Posted by Mark Thoma on Monday, August 18, 2014 at 05:03 AM in Economics, Fiscal Policy |
Cecchetti & Schoenholtz:
To RMB or not to RMB? Lessons from Currency History: China is the world’s largest trader and (on a purchasing power parity basis) is about to surpass the United States as the world’s largest economy (see chart). China already accounts for about 10% of global trade in goods and services, and over 15% of global economic activity. ...
So, as China takes its place as the biggest economy on the globe, will its currency, the renminbi (RMB), become the most widely used international currency as well? Will the RMB supplant the U.S. dollar as the leading reserve currency held by central bankers and others, or as the safe-haven currency in financial crises? ...
Posted by Mark Thoma on Monday, August 18, 2014 at 05:03 AM in Economics, International Finance |
Why do wars still exist?
Why We Fight, y Paul Krugman, Commentary, NY Times: A century has passed since the start of World War I, which many people at the time declared was “the war to end all wars.” Unfortunately, wars just kept happening. And with the headlines from Ukraine getting scarier by the day, this seems like a good time to ask why.
Once upon a time wars were fought for fun and profit; when Rome overran Asia Minor or Spain conquered Peru, it was all about the gold and silver. And that kind of thing still happens. ...
If you’re a modern, wealthy nation, however, war — even easy, victorious war — doesn’t pay. And this has been true for a long time. ... Modern nations can’t enrich themselves by waging war. Yet wars keep happening. Why?
One answer is that leaders may not understand the arithmetic.... It’s only a guess, but it seems likely that Vladimir Putin thought that he could overthrow Ukraine’s government, or at least seize a large chunk of its territory, on the cheap — a bit of deniable aid to the rebels, and it would fall into his lap.
And for that matter, remember when the Bush administration predicted that overthrowing Saddam and installing a new government would cost only $50 billion or $60 billion?
The larger problem, however, is that governments all too often gain politically from war, even if the war in question makes no sense in terms of national interests. ...
And the fact is that nations almost always rally around their leaders in times of war, no matter how foolish the war... Argentina’s junta briefly became extremely popular during the Falklands War. For a time, the “war on terror” took President George W. Bush’s approval to dizzying heights, and Iraq probably won him the 2004 election. True to form, Mr. Putin’s approval ratings have soared since the Ukraine crisis began. ...
Most immediately, we have to worry about escalation in Ukraine. All-out war would be hugely against Russia’s interests — but Mr. Putin may feel that letting the rebellion collapse would be an unacceptable loss of face.
And if authoritarian regimes without deep legitimacy are tempted to rattle sabers when they can no longer deliver good performance, think about the incentives China’s rulers will face if and when that nation’s economic miracle comes to an end — something many economists believe will happen soon.
Starting a war is a very bad idea. But it keeps happening anyway.
Posted by Mark Thoma on Monday, August 18, 2014 at 12:24 AM in Economics, Politics |
Posted by Mark Thoma on Monday, August 18, 2014 at 12:06 AM in Economics, Links |
...How successful was operation twist at changing the maturity structure of Treasury securities held by the public? ...I break down Treasuries held by the public as a fraction of total debt outstanding. This ... shows that although the Fed switched its holdings from yields of three months to two years to yields in the two to ten year range (Figure 3) this operation was swamped, after November of 2008, by Treasury operations that increased the supply of maturities in the two to ten year range (Figure 4). The end result was that the public ended up holding more of these two to ten year bonds in 2010 than before the recession hit.
Could we have a little coordination here guys?
Posted by Mark Thoma on Sunday, August 17, 2014 at 04:35 PM in Economics, Fiscal Policy, Monetary Policy |
Posted by Mark Thoma on Sunday, August 17, 2014 at 12:06 AM in Economics, Links |
About that skills gap -- this is from Dean Baker:
The Skills Gap is Most Evident in Retail Trade and Restaurants: Floyd Norris has an interesting column comparing the numbers of job openings, hirings, and quits from 2007 with the most recent three months in 2014. The most striking part of the story is that reporting openings are up by 2.1 percent from 2007, while hirings are still down by 7.5 percent.
While Norris doesn't make this point, some readers may see this disparity as evidence of a skills gap, where workers simply don't have the skills for the jobs that are available. If this is really a skills gap story then it seems that it is showing up most sharply in the retail and restaurant sectors. (Data are available here.) Job openings in the retail sector are up by 14.6 percent from their 2007 level, but hires are down by 0.7 percent. Job opening in the leisure and hospitality sector are up by 17.0 percent, while hiring is down by 7.4 percent.
If the disparity between patterns in job openings and hires is really evidence that workers lack the skills for available jobs then perhaps we need to train more people to be clerks at convenience stores and to wait tables.
Posted by Mark Thoma on Saturday, August 16, 2014 at 08:04 AM in Economics, Unemployment |
Monopoly is a bureaucrat’s friend but a democrat’s foe: ...Large companies are all around us. ... Monopolists can sometimes use their scale and cash flow to produce real innovations – the glory years of Bell Labs come to mind. But the ferocious cut and thrust of smaller competitors seems a more reliable way to produce many of the everyday innovations that matter.
That cut and thrust is no longer so cutting or thrusting as once it was. ... That means higher prices and less innovation, but perhaps the game is broader still..., large companies enjoy power as lobbyists. When they are monopolists, the incentive to lobby increases because the gains from convenient new rules and laws accrue solely to them. Monopolies are no friend of a healthy democracy. ...
No policy can guarantee innovation, financial stability, sharper focus on social problems, healthier democracies, higher quality and lower prices. But assertive competition policy would improve our odds, whether through helping consumers to make empowered choices, splitting up large corporations or blocking megamergers. Such structural approaches are more effective than looking over the shoulders of giant corporations and nagging them; they should be a trusted tool of government rather than a last resort.
As human freedoms go, the freedom to take your custom elsewhere is not a grand or noble one – but neither is it one that we should abandon without a fight.
Posted by Mark Thoma on Saturday, August 16, 2014 at 08:04 AM in Economics, Market Failure |