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When Europe Stumbled: Doing some homework on the European economy...
... What was happening in 2011-2012? Europe was doing a lot of austerity. But so, actually, was the U.S., between the expiration of stimulus and cutbacks at the state and local level. The big difference was monetary: the ECB’s utterly wrong-headed interest rate hikes in 2011, and its refusal to do its job as lender of last resort as the debt crisis turned into a liquidity panic, even as the Fed was pursuing aggressive easing.
Policy improved after that... But I think you can make the case that the policy errors of 2011-2012 rocked the euro economy back on its heels...
Oh, and America might have turned European too if the Bernanke-bashers of the right had gotten what they wanted.
Posted by Mark Thoma on Saturday, April 30, 2016 at 02:13 PM in Economics, Fiscal Policy, Monetary Policy |
Posted by Mark Thoma on Saturday, April 30, 2016 at 12:06 AM in Economics, Links |
Listen Carefully for Signs of the Next Global Recession: Economists are good at measuring the past but inconsistent at forecasting future events, particularly recessions. That’s because recessions aren’t caused merely by concrete changes in the markets. Beliefs and stories passed on by thousands of individuals are important factors, maybe even the main ones, in determining big shifts in the economy.
That is likely to be the case again, whenever we next endure a global recession. Worries that a big downturn might be imminent seem to have abated, but they still abound. In April, for example, the International Monetary Fund reported in its World Economic Outlook that while very modest growth is likely this year, the world economy was in a “fragile conjuncture.”
It is therefore worth asking what actually sets off a real global recession. ...
He end with:
We don’t know whether any specific event — say, an unexpected spike in oil prices or a decline in the stock market — will help transform any of the current social stories into a truly virulent economic disruption. We don’t know what is coming or when. But history does tell us that human imagination can spontaneously transform discrete events into world-shaking narratives of unexpected color and force.
Posted by Mark Thoma on Friday, April 29, 2016 at 09:55 AM in Economics |
The fall of the Republican establishment:
Wrath of the Conned, by Paul Krugman, Commentary, NY Times: ... Think about where we were a year ago. At the time, Hillary Clinton and Jeb Bush were widely seen as the front-runners for their parties’ nods. If there was any dissent from the commentariat, it came from those suggesting that Mr. Bush might be supplanted by a fresher, but still establishment, face, like Marco Rubio.
And now here we are. But why did Mrs. Clinton ... go the distance, while the G.O.P. establishment went down to humiliating defeat? ... [B]asically it comes down to fundamental differences between the parties and how they serve their supporters.
Both parties make promises to their bases. But while the Democratic establishment more or less tries to make good on those promises, the Republican establishment has essentially been playing bait-and-switch for decades. And voters finally rebelled against the con.
First, about the Democrats: Their party defines itself as the protector of the poor and the middle class, and especially of nonwhite voters. Does it fall short of fulfilling this mission much of the time? Are its leaders sometimes too close to big-money donors? Of course. Still, if you look at the record of the Obama years, you see real action on behalf of the party’s goals.
Above all, you have the Affordable Care Act, which has given about 20 million Americans health insurance, with the gains biggest for the poor, minorities and low-wage workers. That’s what you call delivering for the base... And this was paid for largely with higher taxes on the rich...
Things are very different among Republicans. Their party has historically won elections by appealing to racial enmity and cultural anxiety, but its actual policy agenda is dedicated to serving the interests of the 1 percent, above all through tax cuts for the rich — which even Republican voters don’t support, while they truly loathe elite ideas like privatizing Social Security and Medicare.
What Donald Trump has been doing is telling the base that it can order à la carte. He has, in effect, been telling aggrieved white men that they can feed their anger without being forced to swallow supply-side economics, too. Yes, his actual policy proposals still involve huge tax cuts for the rich...
Mr. Trump is playing a con game of his own, and they’ll eventually figure that out, too. But it won’t happen right away, and in any case it won’t help the party establishment. Sad!
Posted by Mark Thoma on Friday, April 29, 2016 at 07:15 AM
Warning: Hawkishness Ahead, by Tim Duy: The Fed has proven very dovish since their December rate hike. Tumultuous financial markets gave the Fed doves the upper hand, leading the Fed to pause in it’s “normalization” campaign and cut in half the expected pace of rate hikes this year.
But be prepared for the tenor of the song to change. I would not be surprised to see doves shedding their feathers to reveal the hawk underneath.
Boston Federal Reserve President Eric Rosengren exemplifies this shift. Twice in recent weeks, Rosengren, typically considered a notable dove, warned that financial markets were underestimating the odds of rates hikes this year. The Fed made clear in the dots they expect at least two hikes; financial markets anticipate only one.
What is going on here? First, as I said earlier this week, the Fed is not happy that markets wrote of a June rate hike. I am wary that the data arrives to support a rate hike, but don’t think the Fed is ready to give up on that hike just yet.
One thing to remember is that the Fed still prefers to hike early and slowly if possible. They are more aware of the asymmetric risks they face than in December, and hence recognize that they should error on the side of looser policy in an uncertain environment. Hence skip March and April. But once the risk subsides, they will return to old habits. And old habits in this case mean a return to quarterly rate hikes.
My assumption is that they want the option to both hike quarterly and hike three times should the economic environment shift. That means they are thinking June-September-December is a possibility still (the dots are just a forecast, they are not committed to just two rate hikes). So they really need to keep the June option open, otherwise they run a greater risk of bunching up the next few hikes. Which means they want to raise the odds of a June hike to something closer to 50-50. The recent FOMC statement, in which declined to mention the risks, was an early signal of the direction they want to move.
And note that not mentioning the risks at all is arguably a de facto assessment of balanced risks in the world of central banking. My suspicion is the Fed feared that actually saying “balanced” would be a stronger indicator than they wanted to send. But they still said a lot by saying nothing at all.
Now, why should the Fed have a change of heart? Didn’t Federal Reserve Chair Janet Yellen just go all dovish? How can they change their story so fast?
They can change their story within the scope of six weeks. Just like they did from the December to January meetings. And they have the one good reason to change the story: The dramatically change in financial market conditions.
The tightening in financial markets during the winter was the proximate cause of a more cautious Fed. The data didn’t help, to be sure, but more on that later. The combination of a surging dollar, collapsing oil, and a stock market headed only south signaled that the Fed’s policy stance has turned too hawkish, too fast. The Fed relented and heeded the market’s warnings.
But things are different now. US stock market rebounded. The dollar is languishing. And oil is holding its gains, despite disappointment with the lack of an output agreement.
This improvement will not go unnoticed on Constitution Ave. Even among the doves.
That brings us to the data story. To be sure, incoming data this quarter has been lackluster. But that might soon be changing. Gavyn Davies, writing for the FT, is spinning a more optimistic tale:
The Fulcrum nowcast suggest that US activity growth fell continuously from the beginning of 2015 to February 2016, by which time it was around 1.0 per cent. However, in a potentially important change, the nowcast moved sharply higher in March and April, and it is now fluctuating around 2.0-2.5 per cent. This change was rapidly reflected in the prices of US risk assets, which recovered slightly before, and then along with, the daily US nowcasts.
Financial markets do not wait for quarterly GDP to be published, and they often ignore it altogether when it does finally appear. We prefer to ignore the noise from quarterly GDP, while focusing attention on the underlying activity factor that is driving the business cycle.
He includes this picture:
Be forewarned: The Fed is primed by financial markets to change their story. If the data shifts as well, they will be looking hard at June. I don’t think the data will line up in time, but the possibility should be on your radar. There is a lot of data between the April and June meetings – two releases of many critical indicators. Too much data to be complacent.
Bottom Line: Remember, the Fed can turn hawkish as quickly as it turned dovish.
Posted by Mark Thoma on Friday, April 29, 2016 at 03:00 AM in Economics, Fed Watch, Monetary Policy |
Posted by Mark Thoma on Friday, April 29, 2016 at 12:06 AM in Economics, Links |
Another weak quarter for U.S. GDP: The Bureau of Economic Analysis announced today that U.S. real GDP grew at a 0.5% annual rate in the first quarter. That’s disappointing, even by standards of the weak growth that has become the norm since getting out of the Great Recession. ...
Housing investment was one bright point. Another was growth in government spending at the state and local level which more than made up for a drop at the federal level. An important drag came from the decline in exports, reflecting economic weakness outside the United States. The biggest negative was a drop in nonresidential fixed investment, which by itself subtracted 3/4 of a percent from the Q1 annual growth rate. ... Further declines in investment spending in the oil-producing sector contributed to that. ...
The disappointing Q1 GDP numbers brought our Econbrowser Recession Indicator Index up to 15.7%. ... That’s still significantly below the 67% threshold at which our algorithm would declare that the U.S. had entered a new recession. ...
U.S. growth is certainly facing some significant headwinds, and lower oil prices do not appear to have helped. Nevertheless, the employment numbers have been showing strong momentum, and housing can make further positive contributions in the coming two years. Maybe not enough to get us back to 3%. But we can still hope to get back to 2%.
The White House's view: Advance Estimate of Gross Domestic Product for the First Quarter of 2016, by Jason Furman, whitehouse.gov.
[I should add that the estimate will be revised later, and there are questions about the seasonal adjustment procedure for 1st quarter numbers.]
Posted by Mark Thoma on Thursday, April 28, 2016 at 09:35 AM in Economics |
High-Risk Pools Don't Work, Have Never Worked, and Won't Work in the Future: Even among conservative voters, Obamacare's protection of people with pre-existing conditions has always been popular. ... But popular or not, Paul Ryan wants nothing to do with it:
..."Less than 10 percent of people under 65 are what we call people with pre-existing conditions, who are really kind of uninsurable," Ryan, a Wisconsin Republican, told a student audience at Georgetown University. "Let's fund risk pools at the state level to subsidize their coverage, so that they can get affordable coverage," he said. "You dramatically lower the price for everybody else. You make health insurance so much more affordable, so much more competitive and open up competition."
It's true that the cost of covering sick people raises the price of insurance for healthy people. That's how insurance works. But there's no magic here. It costs the same to treat sick people whether you do it through Obamacare or through a high-risk pool—and it doesn't matter whether you fund it via taxes for Obamacare or taxes for something else. However, there are some differences:
- Handling everyone through a single system is more efficient and more convenient.
- High-risk pools have a lousy history. They just don't work.
- Implementing them at the state level guarantees a race to the bottom, since no state wants to attract lots of sick people into its program.
- Ryan's promise to fund high-risk pools is empty. He will never support the taxes it would take to do it properly, and he knows it.
This is just more hand waving. Everyone with even a passing knowledge of the health care business knows that high-risk pools are a disaster, but Republicans like Ryan keep pitching them anyway as some kind of bold, new, free-market alternative to Obamacare. They aren't. They've been around forever and everyone knows they don't work.
See also Shorter Paul Ryan to Cancer Patients: Die Quickly from Charles Gaba.
Sorry, that's really the only headline which came to mind when I read this story...
The magic solution to the problem, according to Ryan and the GOP, is "high risk pools", which simply means separating out the sickest, most expensive people in the country and dumping them into a separate program.
With the "bad apples" (ie, human beings with terrible medical problems) safely tucked out of the way, the average cost of treating everyone else supposedly suddenly becomes less pricey.
This is the exact opposite of the entire point of health insurance in the first place...spreading the risk. In addition, as Jean P. Hall notes in this Commonwealth Fund analysis, it doesn't actually save anyone a dime...
Harold Pollack put it far more succinctly for the Twitter age:
@charlesornstein @LenMNichols @Reuters_Health high risk pools are among the very worst ideas in health policy.
— Harold Pollack (@haroldpollack) April 28, 2016
Posted by Mark Thoma on Thursday, April 28, 2016 at 09:23 AM in Economics, Health Care |
From an interview of Joe Stiglitz:
...White: ... To what extent do you feel economist and economic theory is culpable for the crisis? What is the role of an economist going forward?
Stiglitz: The prevalent ideology—when I say prevalent it’s not all economists— held that markets were basically efficient, that they were stable. You had people like Greenspan and Bernanke saying things like “markets don't generate bubbles.” They had precise models that were precisely wrong and gave them confidence in theories that led to the policies that were responsible for the crisis, and responsible for the growth in inequality. Alternative theories would have led to very different policies. For instance, the tax cut in 2001 and 2003 under President Bush. Economists that are very widely respected were cutting taxes at the top, increasing inequality in our society when what we needed was just the opposite. Most of the models used by economists ignored inequality. They pretended that macroeconomy was unaffected by inequality. I think that was totally wrong. The strange thing about the economics profession over the last 35 year is that there has been two strands: One very strongly focusing on the limitations of the market, and then another saying how wonderful markets were. Unfortunately too much attention was being paid to that second strand.
What can we do about it? We've had this very strong strand that is focused on the limitations and market imperfections. A very large fraction of the younger people, this is what they want to work on. It's very hard to persuade a young person who has seen the Great Recession, who has seen all the problems with inequality, to tell them inequality is not important and that markets are always efficient. They'd think you're crazy. ...
When I first started blogging, I used to do posts with the title "Market Failure in Everything." as a counter to "the prevalent ideology." Maybe I should revive something similar.
Posted by Mark Thoma on Thursday, April 28, 2016 at 06:59 AM in Economics, Market Failure |
Posted by Mark Thoma on Thursday, April 28, 2016 at 12:06 AM in Economics, Links |
Output growth has slowed, labor markets and inflation have improved, less concern about the global economy, no rate hike. An increase in the target rate is on the table for June, but far from certain at this point:
Press Release, Release Date: April 27, 2016: Information received since the Federal Open Market Committee met in March indicates that labor market conditions have improved further even as growth in economic activity appears to have slowed. Growth in household spending has moderated, although households' real income has risen at a solid rate and consumer sentiment remains high. Since the beginning of the year, the housing sector has improved further but business fixed investment and net exports have been soft. A range of recent indicators, including strong job gains, points to additional strengthening of the labor market. Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and falling prices of non-energy imports. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo. Voting against the action was Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.
Posted by Mark Thoma on Wednesday, April 27, 2016 at 11:17 AM in Economics, Monetary Policy |
Some good news from Catherine Rampell:
Millennials are increasingly rejecting voodoo economics: As my colleague Max Ehrenfreund noted, the latest youth poll from Harvard’s Institute of Politics suggests that young people are becoming more liberal. Compared with responses from the past few years, today’s 18-to-29-year-olds are more likely to believe “basic health insurance is a right for all people,” “basic necessities, such as food and shelter, are a right that government should provide to those unable to afford them,” and “the government should spend more to reduce poverty.”
Here’s another interesting data point that I haven’t seen others mention: Young people have also become less likely to believe the central tenet of supply-side (a.k.a. “voodoo”) economics.
Just 35 percent of respondents said they agreed with the statement that tax cuts are an effective way to increase growth, which is 5 percentage points lower than last year and the lowest share since the poll first asked a question with this phrasing. This is bad news for Republican candidates...
Posted by Mark Thoma on Wednesday, April 27, 2016 at 07:25 AM
The World Needs More U.S. Government Debt: ...The federal government is causing great harm by failing to issue enough debt. ...
To some, the idea that the U.S. government isn't issuing enough debt may seem counterintuitive -- after all, federal debt outstanding has more than doubled over the past 10 years. But scarcity is not about supply alone. In the wake of the financial crisis, households and businesses are demanding more safe assets to protect themselves against sudden downturns. Similarly, regulators are requiring banks to hold more safe assets. Market prices tell us that the government needs to produce more safety in order to meet this increased demand.
The scarcity of safety creates hardships... Retirees can’t get adequate returns on their nest eggs. Banks can't earn enough on safe, long-term investments to cover the costs of attracting deposits (interest rates on which can’t fall much below zero). ...
The inadequate provision of safe assets also has profound implications for financial stability. Without enough Treasury bonds to go around, investors “reach for yield” by buying apparently safe securities from the private sector (remember all those triple-A-rated subprime-mortgage investments of the 2000s?). If such behavior becomes widespread, it can create systemic risks that tip the financial system into crisis. ...
No private entity would behave like this. Imagine a corporation with such a safe cash flow and such low borrowing costs. It would issue debt to fund expansions or payouts to its shareholders.
Analogously, the U.S. government should issue more debt, using the proceeds to invest in infrastructure, cut taxes or both. Instead, political forces have imposed artificial constraints on debt -- constraints that punish savers, choke off economic growth and could sow the seeds of the next financial crisis.
Posted by Mark Thoma on Wednesday, April 27, 2016 at 07:09 AM in Economics, Financial System, Fiscal Policy |
Posted by Mark Thoma on Wednesday, April 27, 2016 at 12:06 AM in Economics, Links |
The Fed will stand pat this week. We know it, they know it. So what then will the Fed talk about for two days?
The April meeting of the Federal Open Market Committee (FOMC) will be about the June meeting. Policymakers' fundamental challenge is that the FOMC doesn't want to rule out a June hike, but the markets already have. They need to decide if they want to make a play for a June hike and how to communicate such a message. They'll probably want to keep the option for a June hike open and hence will alter this week’s statement accordingly. ... Continued at Bloomberg...
Posted by Mark Thoma on Tuesday, April 26, 2016 at 12:36 PM in Economics, Monetary Policy |
Curious what you think:
Police versus Prisons, by Alex Tabarrok: ...The ... United States spends much more per-capita on prison guards than does the rest of the world. Given our prison population, that isn’t surprising. What is surprising is that on a per-capita basis we spend 35% less on police than the world average. That’s crazy.
Our focus on prisons over police may be crazy but it is consistent with what I called Gary Becker’s Greatest Mistake, the idea that an optimal punishment system combines a low probability of being punished with a harsh punishment if caught. That theory runs counter to what I have called the good parenting theory of punishment in which optimal punishments are quick, clear, and consistent and because of that, need not be harsh.
We need to change what it means to be “tough on crime.” Instead of longer sentences let’s make “tough on crime” mean increasing the probability of capture for those who commit crimes.
Increasing the number of police on the street, for example... Indeed, in a survey of crime and policing that Jon Klick and I wrote in 2010 we found that a cost-benefit analysis would justify doubling the number of police on the street....,a dollar spent on policing is more effective at reducing crime than a dollar spent on imprisoning.
Unfortunately, selling the public on more policing is likely to be difficult. ... We aren’t likely to get more policing until people are convinced that we have better policing. Moreover, people are right to be skeptical because the type of policing that works is not simply boots on the ground. ...
Greater trust can come with body cameras as well as community oversight and other efforts to bring transparency and accountability. Most importantly, the drug war has eroded trust between police and community and that has led to an endogenous equilibrium in which some communities are rife with both drugs and crime. Fortunately, marijuana decriminalization and legalization have begun to move resources away from the war on drugs. .... As we move resources away from drug crime, police will have more resources to raise the punishment rate for those traditional crimes like murder, robbery and rape that communities everywhere do want punished.
Posted by Mark Thoma on Tuesday, April 26, 2016 at 07:43 AM in Economics |
On multipliers: Richard Murphy writes:
[The government and OBR] believe that austerity generates growth and so cuts the deficit. The trouble for them is that all the evidence shows that the opposite is true: cuts shrink national income and government spending increases it.
This has attracted cheap abuse from some... Such abuse is wrong, and misses the point. It’s wrong, because - in the context he is writing about – Richard is right to claim that fiscal multipliers are big. There’s widespread agreement (pdf) that multipliers are bigger in recessions (pdf) than in normal times. For example, Lawrence Christiano, Martin Eichenbaum, and Sergio Rebelo say (pdf):
The government-spending multiplier can be much larger than one when the zero lower bound on the nominal interest rate binds.
The fact that Osborne’s austerity has failed to cut the deficit as much as expected is wholly consistent with this. Bigger multipliers than Osborne assumed meant that austerity depressed output by more than he expected thus making it harder to reduce borrowing.
In this sense, Richard’s critics are plain wrong. However, multipliers aren’t always big. They vary. ... One important factor here is the monetary offset. ... If inflation is around its target, the Bank of England would respond to fiscal expansion by raising rates, resulting in a lower multiplier. This might or might not be a good thing – the appropriate fiscal-monetary policy mix is a legitimate matter of debate – but it would mean that the fiscal multiplier might be disappointingly small. ...
In this sense, advocates of a fiscal expansion after 2020 might be making the same error as advocates of expansionary fiscal contraction in 2010 – they are wrongly assuming that the same fiscal multiplier applies at all times. It doesn’t.
I’m making two points here, one about economics and one about politics. ...
The political point is that Labour supporters should not rely upon a big multiplier as a case for fiscal expansion. And not need they do so. Lots of leftist policies ... can be designed without reliance upon fragile claims about the macroeconomy.
[Note: link fixed.]
Posted by Mark Thoma on Tuesday, April 26, 2016 at 07:11 AM in Economics, Fiscal Policy |
How will global trade affect the U.S. elections?, by Mark Thoma: In textbook economic models, adjusting to changes in the economy is deceptively simple. If the labor market suffers a "shock" due, for example, to increased globalization, it adjusts quickly to restore full employment.
In the real world, it doesn't happen like this. It takes time for workers to find new jobs, if they can find them. New businesses and new job openings at existing businesses aren't created instantaneously. And wage adjustments, which create the incentives for workers to move and new jobs to be created, don't happen as fast as the textbooks generally assume.
And now, the effect of international trade and globalization has become a big issue in the presidential campaign. Recent research showing that a large number of manufacturing jobs have been lost to China helps explain why. But what evidence shows that trade with China actually changes voting behavior?
A recent paper from the National Bureaus of Economic Research attempts to answer this question. ...
Posted by Mark Thoma on Tuesday, April 26, 2016 at 06:30 AM in China, Economics, Politics |
Posted by Mark Thoma on Tuesday, April 26, 2016 at 12:06 AM in Economics, Links |
On the run so no time to pull excerpts -- this is is worth reading.
Posted by Mark Thoma on Monday, April 25, 2016 at 08:09 AM in Economics |
Are the presidential candidates prepared to handle an economic crisis?:
The 8 A.M. Call, by Paul Krugman, NY Times: Back in 2008, one of the ads Hillary Clinton ran during the contest for the Democratic nomination featured an imaginary scene in which the White House phone rings at 3 a.m. with news of a foreign crisis, and asked, “Who do you want answering that phone?” ... As it turned out ... Mr. Obama, a notably coolheaded type who listens to advice, handled foreign affairs pretty well...
That 3 a.m. call is one thing; but what about the 8 a.m. call – the one warning that financial markets will melt down as soon as they open? ...
At this point there are three candidates who have a serious chance of receiving their party’s presidential nomination. ... So what do we know about their economic policy skills?
Well, Mrs. Clinton isn’t just the most knowledgeable, well-informed candidate in this election, she’s arguably the best-prepared candidate on matters economic ever to run for president. ...
On the other side, I doubt that anyone will be shocked if I say that Mr. Trump doesn’t know much about economic policy, or for that matter any kind of policy. He still seems to imagine, for example, that China is taking advantage of America by keeping its currency weak — which was true once upon a time, but bears no resemblance to current reality.
Oh, and coping with crisis in the modern world requires a lot of international cooperation. Things like currency swap lines... How well do you think that kind of cooperation would work in a Trump administration?
Yet things could be worse. The Donald doesn’t know much, but Ted Cruz knows a lot that isn’t so..., he demands a gold standard to produce a “sound dollar.” He chose, as his senior economic adviser, Phil Gramm — an architect of financial deregulation who helped set the stage for the 2008 crisis, then dismissed warnings of recession when that crisis came, calling America a “nation of whiners.”
Mr. Cruz is ... utterly divorced from reality and impervious to evidence... A financial crisis with him in the White House could be, let’s say, an interesting experience.
I don’t know how much play the candidates’ readiness for economic emergencies will get in the general election. There will, after all, be so many horrifying positions, on everything from immigration to Planned Parenthood, to dissect. But let’s try to make some room for this issue. For that 8 a.m. call is probably coming, one way or another.
Posted by Mark Thoma on Monday, April 25, 2016 at 06:44 AM in Economics, Financial System, Politics |
Posted by Mark Thoma on Monday, April 25, 2016 at 12:06 AM in Economics, Links |
Presidential Candidates and Fed Accountability: In an interview with Fortune, Donald Trump gave his views on Federal Reserve Chair Janet Yellen, who will come up for reappointment in 2018. "I don’t want to comment on reappointment, but I would be more inclined to put other people in," he remarked, despite his opinion that Yellen "has done a serviceable job." ...
Recently, Narayana Kocherlakota, who was President of the Federal Reserve Bank of Minneapolis from 2009 through 2015, has been urging Presidential candidates to address their views on the Fed. ...
The other candidate who has said most about the Fed is Bernie Sanders, who wrote an op-ed about the Fed in the New York Times in December. Sanders' remarks focus mainly on Fed governance and financial regulation, though he also comments on the Fed's interest rate policy...
I asked Bernanke whether he thought that the presidential candidates should talk about monetary policy and the (re)appointment of the Fed Chair. He agreed with Kocherlakota that candidates should talk about what they would like to see in a Fed Chair, but said that he does not think it's a good idea to politicize individual interest rate decisions, emphasizing that the Fed does not have goal independence, but does have instrument independence. In other words, Congress has given the Fed a monetary policy mandate—full employment and price stability—but does not specify what the Fed needs to do to try to achieve those goals.
Anyone who wants to is welcome to evaluate the Fed on how successfully they are achieving that mandate. Anyone who wants to is also welcome to evaluate the merits of the mandate itself. Different people will come to different evaluations depending on their own beliefs and preferences. But neither of these two evaluations requires an audit of monetary policy by the Government Accountability Office, as both Sanders and Trump have advocated.
Anyone who is dissatisfied with the mandate itself can go through the usual channels of political change in a democracy and pressure Congress to change the mandate. Congress, by design, is susceptible to such pressure: they need votes. Presidential candidates are in a good position to draw public attention to the Fed's mandate and urge change if they believe it is necessary. Sanders, for example, could propose redefining the Fed's full employment mandate to mean unemployment below 4 percent. I'm not quite sure what kind of mandate Trump would support. It is also fair game for any member of the public to evaluate the Fed on how successfully they are achieving their mandate. But Congress does not (or at least, should not) tell the Fed how to set interest rates to achieve its mandate, and Presidential candidates shouldn't either.
Posted by Mark Thoma on Sunday, April 24, 2016 at 02:17 PM in Economics, Monetary Policy, Politics |
Posted by Mark Thoma on Sunday, April 24, 2016 at 08:40 AM in Economics, Oil |
Posted by Mark Thoma on Sunday, April 24, 2016 at 12:06 AM in Economics, Links |
From UW News and Information:
Early analysis of Seattle’s $15 wage law: Effect on prices minimal one year after implementation: Most Seattle employers surveyed in a University of Washington-led study said in 2015 that they expected to raise prices on goods and services to compensate for the city’s move to a $15 per hour minimum wage.
But a year after the law’s April 2015 implementation, the study indicates such increases don’t seem to be happening.
The interdisciplinary Seattle Minimum Wage Study team, centered in the Evans School for Public Policy & Governance surveyed employers and workers and scanned area commodity and service prices. The team’s report found “little or no evidence” of price increases in Seattle relative to other areas, its report states. ...
Posted by Mark Thoma on Saturday, April 23, 2016 at 01:42 PM in Economics |
Boris Is Bad Enough: Thank you, Boris Johnson. You’ve finally given me the moral courage to weigh in on a subject I’ve been avoiding: Brexit... It’s not as easy a case as I’d like – but Johnson’s intervention makes it clear: Britain should stay in, lest it empower people like him.
Let me start with the economics. There are a number of estimates of the economic impact of Brexit out there..., but I like to have a quick-and-dirty calculation I understand; it’s not out of line with other, more detailed results. ... Brexit would reduce British real income by 1.7 percent. Call it 2 percent, with the understanding that there are big error margins around all of this. ... 2 percent is a lot! It’s very, very hard to come up with policies that will make a country 2 percent richer in perpetuity. You’d have to have very good reasons to leave the EU to be willing to make that big a sacrifice.
What about income distribution, which is a big issue in many trade agreements? In this case, it’s pretty much irrelevant... So Trumpsandersism shouldn’t matter here.
So what’s this all about? In a word, governance. The case for Brexit is, basically, that EU membership ties Britain to a very badly run institution. And that case is, unfortunately, reasonably strong. ... But... If Britain does leave the EU..., who will it be empowering instead? ...
And that’s where Boris Johnson’s tirade against President Obama is so wonderfully clarifying. It tells us who the anti-EU wing of the Conservatives really are; it tells us not just that they are pretty close to UKIP, but that intellectually and emotionally they live in the same fever swamps as the American right. And they would, all too probably, take on a strong, even dominant role in British politics post-Brexit.
So Britain, don’t do this. You would pay a fairly large economic price, and in return you would get governance so bad that it would make the EU look good.
Posted by Mark Thoma on Saturday, April 23, 2016 at 08:19 AM in Economics |
Posted by Mark Thoma on Saturday, April 23, 2016 at 12:06 AM in Economics, Links |
First, from MIT news:
How history can help us solve global economic issues: ...Professor Anne McCants is an historian whose research projects span multiple centuries of European economic development..., she has worked for decades to better understand the standards of living in the past and those features of the economy that contribute to social welfare. ...
Q: How can the field of history help us in solving the world’s economic issues?
A: In the same way that cosmology and geology (the two historical sciences) have been absolutely critical to most important developments in science — for example, we depend on the fossil record, the tectonic record, and the cosmic record for much of the evidence necessary for the study of everything from biology to theoretical physics — so too the study of history provides the accumulated evidence of how human systems function, and more importantly thrive.
History matters because without a credible story about where we have been before, we truly have no idea where we are now. And without evidence about past sequences of cause and effect, it is well-nigh impossible to develop intelligent plans for the future. ...
Q: What is the key barrier you see to multi-disciplinary, sociotechnical collaborations, and how can we overcome it?
A: In a way, all humans are historians. Every decision we make is framed on the basis of what we believe to be true about the past. The key, of course, is for us to be good historians, knowing true and useful things about the past, or at the very least having a method that explicitly seeks that as its goal. All of the disciplines benefit then by working alongside history, to increase their stock of evidence on which to draw, and to ensure the validity and reliability of that evidence. ...
Q: What has your extensive experience as an historian of economic development taught you that can help in the process of making tools that can enable anyone to innovate?
A: Economic history viewed on a very long timescale tells us that innovation and population size/density are highly correlated. The mechanism here is easy enough to imagine. Great ideas often emerge serendipitously, and more people represent more opportunities for such moments. Once one person has a good idea, many can go on to benefit from it, so there is not the per capita diminishment of good ideas the way there is for a field of grain, for example. Broadly then, innovation has been greatest in places where there are many people.
However, economic history viewed on shorter time horizons tells us that population size alone is not enough. Rather, it is in populations where lots of people are both permitted and capable of “having a go,” to quote my colleague Deirdre McCloskey, where innovation thrives best.
What allows people to have a go? Two conditions are critical: 1) being accorded the social dignity to speak their minds and pursue their own goals; and 2) access to the human capital that allows them to achieve their full potential. Both of these factors are severely limited by rigid systems of hierarchy and by the conditions of poverty. Hierarchical systems depend on keeping people in their “place.” And for the majority, being in place means a priori not having a go. Poverty works its damage through the second mechanism, namely it sabotages human capital in a process that starts at birth, indeed even before birth.
If your mother is nutritionally deficient or immunocompromised during your gestation; if you are born with a low birthweight; if your protein intake in infancy and early childhood is too low to support your inherited growth potential; if you ingest lead or other toxins from a contaminated household environment as a toddler; if you are not exposed to a rich human vocabulary long before you can read; if your home is plagued by insecurity of multiple kinds so that your own response is the early and frequent production of an abundance of stress hormones; we know from detailed medical, economic, and historical research that all of these conditions un-level the playing field long before the “game” as we typically measure it even begins — that is, before you head off to school, take your first exams, participate in your first sports, or try to form your own first relationships.
So, the tools needed for anyone to be able to innovate have to start with programs that mitigate the terrible (and multiplying) effects of poverty, especially on the youngest members of our society. And we have to create the social conditions that allow everyone the full human dignity to try and have a go.
Q: What economic, sociopolitical, or cultural issues do you think most need to be addressed to make progress toward the global economic goals MIT has identified?
A: ... We fret endlessly (as we well might) about the quality of our schools, and admission to and curriculum in our universities. Yet we too rarely talk about the damage that social exclusion and economic inequality intermingled with absolute poverty do before children come anywhere near such institutions.
Second, from today's links, this is from Anton Howes:
How Innovation Accelerated in Britain 1651-1851: I successfully defended my PhD thesis a few weeks ago, and will soon be turning it into a publishable book manuscript.
In 1651 Britain had just finished a destructive civil war. Tens of thousands had died. Its monarch had been beheaded. Its mode of government overturned. In its weakened state, it was about to engage in the first of many wars with the Dutch Republic for supremacy over trade.
Fast forward two centuries to 1851 and Britain was a country triumphant. It was the world’s technological leader, and now pressed its advantage to accumulate the largest empire in history. ...
The dramatic transformation - an Industrial Revolution - had been brought about by an acceleration in the rate of innovation. I am interested in what caused that acceleration. ...
So to discover the causes of Britain’s unprecedented acceleration of innovation, I delved into just about every recorded activity, behaviour and experience of 677 innovators of the time. ...
After staring at my data for long enough, I began to notice a pattern. People went on to innovate if inventors had been among their teachers, colleagues, employers, employees, neighbours, friends, family, and acquaintances. And the more I looked, the more examples I found. Of the hundreds of inventors I studied, nearly all of them began to innovate after meeting inventors. Inspiration mattered - inventing seemed to spread from person to person.
But this wasn’t the spread of a particular technique, design or blueprint. It was the spread of a new approach - the very idea of inventing. ... Hundreds of people in Britain began to see room for for improvement everywhere. ...
So people became innovators because others inspired them with a mentality of improvement. But we need to explain why this mentality was so uniquely virulent in Britain in the period. There were epidemics of innovation in prior societies - the Dutch Golden Age, Song Dynasty China, the Renaissance. So why did it become endemic only in Britain?** I think there was something special about this particular strain of the mentality of improvement.
The vast majority (over 80%) actively tried to spread innovation. They published about it, lectured about it, funded it, and advised on it. They founded and joined societies devoted to spreading it further. ...
Innovators in Britain very rarely kept secrets. Even the 40% or so patent-holders very rarely sued for infringement; and they very rarely lobbied to extend them beyond the usual time limits. ...
Like any ideology, it had its disagreements. James Watt believed himself entitled to protect his patents from infringement... But ultimately, the vast majority of Britain’s inventors adhered to two commandments: improve, and pass it on.
Here, my thesis reaches its limits. I can’t explain why Britain was unique by looking at Britain alone. The ideological commitment to proselytising innovation seems a likely candidate to me because it was so widespread: nothing else came close to being as common. But I need to compare the experience of inventors in Britain with those in other societies where invention failed to accelerate. More on that later.
Posted by Mark Thoma on Friday, April 22, 2016 at 08:57 AM in Economics |
Putting a price on carbon is a fine idea. It's not the end-all be-all: What is the most important policy tool for fighting climate change? Ask just about any economist and the answer will be the same: a price on carbon emissions.
Not only is there a robust consensus among economists, but they have been remarkably successful in spreading the gospel to the wider world as well. Climate activists, wonks, funders, politicians, progressives, and even conservatives (the few who take climate seriously) all sing from the same hymnal. It has become conventional wisdom that a price on carbon is the sine qua non of serious climate policy.
But it is worth keeping carbon pricing in perspective. It has become invested with such symbolic significance that it is inspiring some unhelpful purism on policy and magical thinking on politics.
Slowing climate change will require a suite of policies, regulatory reforms, and investments. Carbon pricing will be an important part of that portfolio. But only a part. It is not the only legitimate climate policy, the one true sign of seriousness on global warming, or a substitute for the difficult and painstaking political work that will be required to transition to a sustainable energy system.
I have no interest in a carbon-pricing backlash. But maybe a sidelash — a reality check.
This post will be a two-parter. Tomorrow I'm going to get into politics, how it shapes carbon taxes, and what's to be done with the revenue.
But first, I want to take a step back. In this post, I'll have a quick look at why carbon pricing has become so central to climate economics and raise some questions about its primacy in policy and political circles. ...
Posted by Mark Thoma on Friday, April 22, 2016 at 07:30 AM in Economics, Environment |
"Alexander Hamilton knew better":
In Hamilton’s Debt, by Paul Krugman, NY Times: The Treasury Department picked an interesting moment to announce a revision in its plans to change the faces on America’s money. Plans to boot Alexander Hamilton off the $10 bill in favor of a woman have been shelved. Instead, Harriet Tubman ... will move onto the face of the $20 bill. ...
But let me leave the $20 bill alone and talk about how glad I am to see Hamilton retain his well-deserved honor. ... Hamilton proposed that the federal government assume and honor all of the debts individual states had run up during the Revolutionary War, imposing new tariffs on imported goods to raise the needed revenue. ...
But why did Hamilton want to take on those state debts? Partly to establish a national reputation as a reliable borrower, so that funds could be raised cheaply in the future. Partly, also, to give wealthy, influential investors a stake in the new federal government, thereby creating a powerful pro-federal constituency.
Beyond that, however, Hamilton argued that the existence of a significant, indeed fairly large national debt would be good for business. Why? Because ... bonds issued by the U.S. government would provide a safe, easily traded asset that the private sector could use as a store of value, as collateral for deals, and in general as a lubricant for business activity. As a result, the debt would become a “national blessing,” making the economy more productive.
This argument anticipates ... one of the hottest ideas in modern macroeconomics: the notion that we are suffering from a global “safe asset shortage.”...
As a result, investors have been bidding up the prices of government debt, leading to incredibly low interest rates. But it would be better for almost everyone, the story goes, if governments were to issue more debt, investing the proceeds in much-needed infrastructure even while providing the private sector with the collateral it needs to function. ...
Unfortunately, policy makers won’t do the right thing, largely because they keep listening to fiscal scolds — people who insist that public debt is a terrible thing even when borrowing costs almost nothing. ... Alexander Hamilton knew better.
Unfortunately, Hamilton isn’t around to help counter foolish debt phobia. But maybe reminding policy makers of his wisdom is one way to chip away at the wall of folly that still constrains policy. And having his face out there every time someone pulls out a ten can’t hurt, either.
Posted by Mark Thoma on Friday, April 22, 2016 at 06:47 AM in Economics |
Posted by Mark Thoma on Friday, April 22, 2016 at 12:06 AM in Economics, Links |
The Future of Work: Why Wages Aren’t Keeping Up: ... The suggestion I want to make is that one important reason for the failure of real wages to keep up with productivity is that the division of rent in industry has been shifting against the labor side for several decades. This is a hard hypothesis to test in the absence of direct measurement. But the decay of unions and collective bargaining, the explicit hardening of business attitudes, the popularity of right-to-work laws, and the fact that the wage lag seems to have begun at about the same time as the Reagan presidency all point in the same direction: the share of wages in national value added may have fallen because the social bargaining power of labor has diminished. This is not to say that international competition and the biased nature of new technology have no role to play, only that they are not the whole story. Internal social change and the division of rent matter too.
Now I would like to connect this hypothesis with another change taking place in the labor market. Lacking anything more euphonious, I will call it the casualization of labor. The proportion of part-time workers has been rising: both those who prefer it that way and those who would rather have a full-time job. So is the number of temporary workers... So are the numbers of workers on fixed-term contracts and independent contractors, many of whom are doing the same work as they once did as regular employees. These are all good-faith members of the labor force; they are employed but without what used to be thought of as a regular job.
This shift toward more casual labor interacts with the issue of the division of rents. Casual workers have little or no effective claim to the rent component of any firm’s value added. They have little identification with the firm, and they have correspondingly little bargaining power. Unions find them difficult to organize, for obvious reasons. If the division of corporate rents has indeed been shifting against labor, an increasingly casual work force will find it very hard to reverse that trend.
Posted by Mark Thoma on Thursday, April 21, 2016 at 07:02 AM in Economics, Income Distribution |
This is pretty funny:
A transcript of John Kasich’s interview with The Washington Post editorial board:
... CATHERINE RAMPELL, COLUMNIST: On the balanced budget question, you have positioned yourself as the sole candidate of fiscal responsibility based on your record in Ohio and previously in Congress, but arguably of all of the candidates still standing you have released the least details about budgeting, about taxes. You’re the only candidate that the Tax Foundation, Tax Policy Center, Committee for a Responsible [Federal] Budget have said they can’t score your tax plan because it’s too thin on details.
KASICH: Yes. Well,... look, I mean, we’re working through it. I’ve cut taxes in Ohio. It’s not confusing. I’m going to have a 28, 25 and 10 percent rate. We’re going to have an increase in the earned income tax credit.
RAMPELL: Yes, but that doesn’t lead to surpluses. That doesn’t lead to – ...
KASICH: Well, you get the surpluses three ways: ...Common sense regulations so you’re not crushing small business. ...
Two, lower taxes. ...
And the third thing is a fiscal plan. Now, I will tell you how we’ll run the fiscal plan. And I can lay out all – you’re going to send welfare and Medicaid and, you know, this job training and all that back to the states. ...
So it’s not that hard to budget. Entitlements? I’ve already talked about Social Security. You’re going to have to means test it and say if you’ve had, you know, significant income over your lifetime; and we’re trying to put the details to what that number is, you’ll get Social Security. You’ll get less and people that depend on it will get what they need.
RAMPELL: So to clarify, you’re saying you would balance through spending cuts?
KASICH: No, no, no. You get it through economic growth. That’s the way you get it. Economic growth. Our tax plan, all that projects 3.9 percent economic growth. It’s not some flimsy put-together – you know... I don’t put together smoke and mirrors ... it’s one of the reasons why I got in trouble with conservatives – I have never operated from a – one of these dynamic models. Okay? But there’s a legitimate amount of dynamic activity. And I just don’t get beyond what I think is a legitimate pale.
MARCUS: Well, but you have a tax cut that – as far as I can see though it’s been unscoreable for the reasons that Catherine says – that most closely approximates Jeb Bush’s. Jeb Bush’s tax cut was scored on a non-dynamic basis by the Tax Policy Center as costing about $6.8 trillion. ...
KASICH: Well, look, I would tell you that look at the plan and see how they project it. I believe that we have not overused dynamic scoring...– I think that what we’ve done is a set of reasonable assumptions. Now, who’s working on it? People like Kerry Knott, worked for [former congressman] Dick Armey. I mean, we got a lot of people looking at it. ...
MARCUS: So, but your path to balance, which doesn’t include Social Security ... rests on sustained economic growth rate approaching four percent, which ... has not really been seen in ... recent American history. So –
KASICH: You know why? Because they over-regulate, over-tax and blow up the budget. ... Tax cuts matter because I believe they provide economic growth. I don’t think you should make numbers up. ...
This part was amusing too:
TOM TOLES, EDITORIAL CARTOONIST: Do you support a market tax on carbon..., doesn’t it get to the problem in a significant way?
STROMBERG: So the economists are wrong on this, then?
KASICH: Well, which economists?
STROMBERG: Essentially all of them.
KASICH: Well no, I can get you an economist out of Ohio University, and he wouldn’t agree with these economists. ...
A bit later:
KASICH: ...Somebody comes to me and says, you know, some bunch of economists or scientists that say, “Look, this is a problem” — of course I’d listen to them. ...
Posted by Mark Thoma on Thursday, April 21, 2016 at 12:15 AM in Economics, Politics |
Posted by Mark Thoma on Thursday, April 21, 2016 at 12:06 AM in Economics, Links |
101 Boosterism: I see that @drvox is writing a big piece on carbon pricing – and agonizing over length and time. I don’t want to step on his forthcoming message, but what he’s said so far helped crystallize something I’ve meant to write about for a while, a phenomenon I’ll call “101 boosterism.”
The name is a takeoff on Noah Smith’s clever writing about “101ism”, in which economics writers present Econ 101 stuff about supply, demand, and how great markets are as gospel, ignoring the many ways in which economists have learned to qualify those conclusions in the face of market imperfections. His point is that while Econ 101 can be a very useful guide, it is sometimes (often) misleading when applied to the real world.
My point is somewhat different: even when Econ 101 is right, that doesn’t always mean that it’s important – certainly not that it’s the most important thing about a situation. In particular, economists may delight in talking about issues where 101 refutes naïve intuition, but that doesn’t at all mean that these are the crucial policy issues we face. ...
He goes on to talk about this in the context of international trade and carbon pricing (too hard to excerpt without leaving out important parts of his discussion).
Posted by Mark Thoma on Wednesday, April 20, 2016 at 11:51 AM in Econometrics, Environment, International Trade, Market Failure, Policy |
From Microeconomic Insights:
Did welfare reform lead some American families to work less?, by Patrick Kline (Berkeley), Melissa Tartari (Chicago): The landmark US welfare reform of 1996 provided strong incentives for poor women to work while receiving assistance – but it also provided incentives for some women to reduce their earnings to qualify for benefits. This research develops a new approach to detecting this ‘welfare opt-in’ effect and uses it to analyze data from a large randomized evaluation of welfare reform in Connecticut: the “Jobs First” program. The results reveal that the Jobs First program induced a substantial fraction of the women who were capable of lifting their families out of poverty without assistance to opt for welfare instead. ...
While our findings are specific to the sample of women in Connecticut’s Jobs First experiment, the welfare opt-in results indicate that sharp provisions for phasing out benefits can significantly depress the earnings of disadvantaged people even when the net effect of the program is to get more people working. These earnings reductions are inefficient insofar as they cost taxpayers money and trap low-skilled workers in jobs that they otherwise wouldn’t want.
An important question for policy-makers is whether these inefficiencies can be diminished by adopting smooth benefit phase in and phase out provisions such as those specified by the Earned Income Tax Credit (EITC). By phasing benefits out more gradually, such schemes replace a large distortion concentrated over a small number of relatively high earners with a small distortion spread over a larger number of people.
There are reasons to suspect that such a tradeoff could be worthwhile: economists often find disproportionately large behavioral responses to stronger incentives (Chetty, 2012). This could be because the program rules that generate strong incentives (for example, the Jobs First eligibility thresholds) are more salient or because households deem adjusting to weaker incentives to be ‘not worth the trouble’.
More research on these questions is necessary to inform the optimal design of welfare and other transfer programs.
Posted by Mark Thoma on Wednesday, April 20, 2016 at 07:25 AM in Economics, Policy |
Posted by Mark Thoma on Wednesday, April 20, 2016 at 12:06 AM in Economics, Links |
Concentration and Growth:
A whole raft of posts and articles (here, here, here, here) has shown up recently regarding “rent-seeking”. This is kind of a catch-all for increased concentration within industries, more lenient anti-trust enforcement, and the increasing share of corporate profits in output. This is then tied to the slowdown in wages over the last few decades, increasing inequality, and even to slower aggregate growth.
The arguments made by those doing the concentrating and profit-making is that they are promoting efficiency, productivity, and hence growth. Do we know whether concentration or rent-seeking would be good or bad?
I’m going to draw a lot on one of my professors in grad school, Peter Howitt, who along with Philippe Aghion is really one of the godfathers of studying competition and growth. ...
Posted by Mark Thoma on Tuesday, April 19, 2016 at 12:38 PM in Economics, Market Failure, Productivity |
From the NY Times editorial board:
Debunking Republican Health Care Myths: “Disaster.” “Incredible economic burden.” “The biggest job-killer in this country.”
Central to the presidential campaigns of Donald Trump and Ted Cruz has been the claim that the Affordable Care Act has been a complete failure, and that the only way to save the country from this scourge is to replace it with something they design.
It’s worth examining the big myths they are peddling about the Affordable Care Act and also their ill-conceived plans of what might replace it. ...
In inventing problems that don’t exist and proposing solutions that won’t help, Donald Trump and Ted Cruz show that they don’t care about helping Americans get health care, which has never been their interest. They want to trash the Affordable Care Act, and they’re willing to mislead the public any way they can.
Posted by Mark Thoma on Tuesday, April 19, 2016 at 07:41 AM in Economics, Health Care, Politics |
My latest column:
Reducing Long-Term Unemployment: Perfect is the Enemy of the Good: One of the most important economic challenges we face is reducing long-term unemployment. Presently, the percentage of people who have been searching for a job for more than 26 weeks is 26.7 percent. That’s down from the peak of 45.5 percent during the Great Recession, but long-term unemployment has been stuck around this percentage for the last 10 months and it is still higher than the previous post World War II peak of 24.9 percent in the early 1980s.
Long-term unemployment takes a considerable toll on individuals and their families, and it has broader social and economic consequences as well. Yet Congress has all but ignored this problem. Republican opposition to new initiatives of any sort is one reason for the inaction from Congress, but it’s also true that we do not know for sure which type of policy works best. That makes it difficult for those in Congress who do favor action to make a strong case in support of a particular program. ...
This brings up a more general problem with our willingness to try and solve important social problems. We seem to believe that every program the government tries must work with near perfection or it isn’t worth doing. If a social program helps a large number of people, but a few people take advantage of it, those people are used to undermine the program in the eyes of the public.
If we build a thousand bridges that serve important needs, but one of those is a “bridge to nowhere,” then infrastructure spending is a failure. If unemployment compensation and food stamps help a great number of people, but someone can be found who uses the programs as a way to avoid work, that becomes the focus. Of course we should try and fix the parts of any program that don’t work as intended, but we have to evaluate programs based upon their overall costs and benefits, not on isolated instances of failure.
The private sector would not meet the standard of perfection many people impose on the government. ...
Posted by Mark Thoma on Tuesday, April 19, 2016 at 07:05 AM in Economics, Fiscal Times, Unemployment |
Posted by Mark Thoma on Tuesday, April 19, 2016 at 12:06 AM in Economics, Links |
Mark Muro at Brookings:
Adjusting to economic shocks tougher than thought: The mathematical models of economic theory have always sacrificed a bit of on-the-ground accuracy for what has been assumed to be a larger measure of insight. Work on how local labor markets respond to shocks like mass layoff events and recessions is a case in point. While the near-term pain of these shocks has raised more and more questions, the conventional wisdom of a relatively benign “adjustment” period over the medium-term has largely survived. The general consensus: Workers and local economies will adjust. Dislocated workers will leave distressed regions and move to healthier ones. Jobless rates will revert to the mean.
Yet it now appears this consensus view of dislocation and recovery is breaking down.
In the last six months a burst of new empirical work—much of it focused on the region-by-region aftermath of the Great Recession—is shredding key aspects of the standard view and suggesting a much tougher path to adjustment for people and places.
Overall, the new research ... shows that the reality of adjustment is far from automatic, far from quick: ...
As to the upshot of this work, it’s increasingly clear that policymakers need to be thinking much more urgently about how to provide for and accelerate adjustment for the victims of economic shocks. ...
Posted by Mark Thoma on Monday, April 18, 2016 at 12:38 PM in Economics, Social Insurance |
Paul Krugman made similar points in 2012, but the part about secular stagnation is new:
Robber Baron Recessions, by Paul Krugman, NY Times: ...In recent years many economists, including people like Larry Summers and yours truly, have come to the conclusion that growing monopoly power is a big problem for the U.S. economy — and not just because it raises profits at the expense of wages. ...
The argument begins with a seeming paradox about overall corporate behavior. You see, profits are at near-record highs, thanks to a substantial decline in the percentage of G.D.P. going to workers. You might think that these high profits imply high rates of return to investment. But corporations themselves clearly don’t see it that way: their investment in plant, equipment, and technology ... hasn’t taken off...
How can this paradox be resolved? Well, suppose that those high corporate profits don’t represent returns on investment, but instead mainly reflect growing monopoly power. In that case many corporations would be in the position I just described...
And such an economy wouldn’t just be one in which workers don’t share the benefits of rising productivity; it would also tend to have trouble achieving or sustaining full employment. Why? Because when investment is weak despite low interest rates, the Federal Reserve will too often find its efforts to fight recessions coming up short. So lack of competition can contribute to “secular stagnation” ... But do we have direct evidence that such a decline in competition has actually happened? Yes, say a number of recent studies...
The obvious next question is why competition has declined. The answer can be summed up in two words: Ronald Reagan.
For Reagan didn’t just cut taxes and deregulate banks; his administration also turned sharply away from the longstanding U.S. tradition of reining in companies that become too dominant in their industries. A new doctrine, emphasizing the supposed efficiency gains from corporate consolidation, led to what those who have studied the issue often describe as the virtual end of antitrust enforcement. ...
On Friday the White House issued an executive order directing federal agencies to use whatever authority they have to “promote competition.” What this means in practice isn’t clear... But it may mark a turning point in governing philosophy, which could have large consequences if Democrats hold the presidency.
For we aren’t just living in a second Gilded Age, we’re also living in a second robber baron era. And only one party seems bothered by either of those observations.
Posted by Mark Thoma on Monday, April 18, 2016 at 01:37 AM in Economics, Income Distribution, Market Failure |
Posted by Mark Thoma on Monday, April 18, 2016 at 12:06 AM in Economics, Links |
Are We All Rent-Seeking Investors?, by Guy Rolnik: ...there is mounting evidence that the all-time high of the profits and margins of many sectors in the economy is not representing a healthy economy but rather the growing market power of many companies and their ability to raise prices.
Grullon, Larkin, and Michaely (2015) studied all the public firms traded on major exchanges in the United States between 1972 and 2014 and found that more than 90 percent of US industries have experienced an increase in concentration levels over the last two decades. They also found that firms in industries with the largest increase in product market concentration have enjoyed higher profit margins, positive abnormal stock returns, and more profitable M&A deals, suggesting that market power is becoming an important source of value. ... Overall they assert that the nature of US product markets has undergone a structural shift that has weakened competition. ...
...the first sets of questions should revolve around the idea that the bigger and more concentrated many companies and industries become, the more they will be able to entrench themselves, to build “moats” to insulate them from competition, to capture regulation, and to get favorable treatment from government or sometimes outright large public sector contracts.
If companies operating in the marketplace can influence prices and regulation, the theorem of profit maximization as a path to welfare maximizations falls flat. ...
The growing concentration of many industries in the United States raises many questions regarding US antitrust policy and the growing role of money in politics. Grullon, Larkin, and Michaely trace the growing concentration to lax antitrust policy. ...
In spite of the growing chatter on concentration, market prices, and political influence, it seems that these claims need more empirical studies before we can conclude ... that for S&P 500 firms these exceptional profits derived from undue market power are currently running at about $300 billion a year, equivalent to a third of taxed operating profits, or 1.7 percent of GDP.
Still, the growing anecdotal evidence from many industries and the persistence of high profits margins in the face of stagnant growth and growing inequality deserves serious consideration. One question may even loom larger: given that more and more Americans’ pensions and long-term savings today are invested in the stock market in defined contribution schemes, have we created a pension model that is based on growing sharer of investments in rent-seeking activities? Put another way, are we facing an economic model in which tens of millions of Americans’ pensions are relying on the ability of companies to extract rents from consumers and taxpayers? ...
Posted by Mark Thoma on Sunday, April 17, 2016 at 08:49 AM in Economics, Market Failure |
Posted by Mark Thoma on Sunday, April 17, 2016 at 12:06 AM in Economics, Links |
The Return of Elasticity Pessimism (Wonkish): I talked at the Council for European Studies conference in Philly last night, and was surprised by one aspect of the discussion. As you might expect if you’re into these things, my take on the euro was strongly informed by the theory of Optimum Currency Areas; I expected pushback. But I didn’t realize how many people now seem to believe that real exchange rates don’t matter for adjustment — that is, that even internal devaluation (downward adjustment of prices and wages relative to trading partners) isn’t necessary in the aftermath of unsustainable capital inflows.
It turns out ... that we’re seeing a significant revival of the “elasticity pessimism” widely prevalent during the post World War II “dollar shortage”. This was the belief that trade flows barely respond to price signals, and hence that devaluations don’t help alleviate imbalances. Now as then, the argument rests in large part on specific cases...
The difference is that in the late 1940s this kind of argument was deployed in support of more government intervention — keep those exchange controls in place, because devaluation won’t work — whereas now it’s being deployed as an argument against activism — never mind the euro, it’s all rigidities that must be cured with structural reform. ...
I guess I’m showing a strong preconception here — that done right, analysis will show that trade elasticities remain fairly large. Certainly willing to be proved wrong — but we need to do this carefully, because it’s really important for future policy.
Posted by Mark Thoma on Saturday, April 16, 2016 at 10:32 AM in Economics, International Finance |
Posted by Mark Thoma on Saturday, April 16, 2016 at 12:06 AM in Economics, Links |
I am here today and tomorrow:
National Bureau of Economic Research, Inc.
31st Annual Conference on Macroeconomics
Martin Eichenbaum and Jonathan Parker, Organizers
Royal Sonesta Hotel
Friday, April 15:
Jeffrey Campbell, Federal Reserve Bank of Chicago
Jonas Fisher, Federal Reserve Bank of Chicago
Alejandro Justiniano, Federal Reserve Bank of Chicago
Leonardo Melosi, Federal Reserve Bank of Chicago
Forward Guidance and Macroeconomic Outcomes Since the Financial Crisis
Narayana Kocherlakota, University of Rochester and NBER
Gauti B. Eggertsson, Brown University and NBER
Fernando Alvarez, University of Chicago and NBER
Francesco Lippi, Einaudi Institute for Economics and Finance
Juan Passadore, Einaudi Institute for Economics and Finance
Are State and Time Dependent Models Really Different?
John Leahy, University of Michigan and NBER
Greg Kaplan, Princeton University and NBER
12:30 pm Lunch Panel on Global Commodity Prices
James D. Hamilton, University of California at San Diego and NBER
Steven B. Kamin, Federal Reserve Board
Steven Strongin, Goldman Sachs
Paul Beaudry, University of British Columbia and NBER
Dana Galizia, Carleton University
Franck Portier, Toulouse School of Economics
Is the Macroeconomy Locally Unstable and Why Should We Care?
Laura Veldkamp, New York University and NBER
Ivan Werning, Massachusetts Institute of Technology and NBER
Òscar Jordà, Federal Reserve Bank of San Francisco
Moritz Schularick, University of Bonn
Alan M. Taylor, University of California at Davis and NBER
Macrofinancial History and the New Business Cycle Facts
Mark Gertler, New York University and NBER
Atif Mian, Princeton University and NBER
6:30 pm Dinner Speaker:
Lawrence Summers, Harvard University and NBER
Saturday, April 16:
Pierre-Olivier Gourinchas, University of California at Berkeley and NBER
Thomas Philippon, New York University and NBER
Dimitri Vayanos, London School of Economics and NBER
The Analytics of the Greek Crisis
Olivier Blanchard, Peterson Institute for International Economics and NBER
Markus Brunnermeier, Princeton University and NBER
Olivier Blanchard, Peterson Institute for International Economics and NBER
Christopher Erceg, Federal Reserve Board
Jesper Lindé, Sveriges Riksbank
Jump-Starting the Euro Area Recovery: Would a Rise in Core Fiscal Spending Help the Periphery?
Harald Uhlig, University of Chicago and NBER
Ricardo Reis, Columbia University and NBER
Forward Guidance and Macroeconomic Outcomes Since the Financial Crisis, by Jeffrey R. Campbell, Jonas D. M. Fisher, Alejandro Justiniano, and Leonardo Melosi: April 13, 2016 Abstract This paper studies the effects of FOMC forward guidance. We begin by using high frequency identification and direct measures of FOMC private information to show that puzzling responses of private sector forecasts to movements in federal funds futures rates on FOMC announcement days can be attributed almost entirely to Delphic forward guidance. However a large fraction of futures rates’ variability on announcement days remains unexplained leaving open the possibility that the FOMC has successfully communicated Odyssean guidance. We then examine whether the FOMC used Odyssean guidance to improve macroeconomic outcomes since the financial crisis. To this end we use an estimated medium-scale New Keynesian model to perform a counterfactual experiment for the period 2009:1–2014q4 in which we assume the FOMC did not employ any Odyssean guidance and instead followed its reaction function inherited from before the crisis as closely as possible while respecting the effective lower bound. We find that a purely rule-based policy would have delivered better outcomes in the years immediately following the crisis – forward guidance was counterproductive. However starting toward the end of 2011, after the Fed’s introduction of “calendar-based” communications, Odyssean guidance appears to have boosted real activity and moved inflation closer to target. We show that our results do not reflect Del Negro, Giannoni, and Patterson (2015)’s forward guidance puzzle.
Are State and Time dependent models really different?, Fernando Alvarez, Francesco Lippi Einaudi, Juan Passadore: April 13, 2016 FIRST DRAFT Abstract Yes, but only for large monetary shocks. In particular, we show that for a large class of models where shocks have continuous paths, the propagation of a monetary impulse is independent of the nature of the sticky price friction when shocks are small. The propagation of large shocks instead depends on the nature of the friction: the impulse response of inflation to monetary shocks is non-linear in state-dependent models, while it is independent of the shock size in time-dependent models. We use data on exchange rate devaluations and inflation for a panel of countries over 1974-2014 to test for the presence of state dependent decision rules. We find evidence of a non-linear effect of exchange rate changes on prices in the sample of flexible-exchange rate countries with low inflation. In particular, we find that large exchange rate changes have larger short term pass through, as implied by state dependent models.
Is the Macroeconomy Locally Unstable and Why Should We Care?, by Paul Beaudry, Dana Galizia, and Franck Portier: March 2016 Abstract In most modern macroeconomic models, the steady state (or balanced growth path) of the system is a local attractor, in the sense that, in the absence of shocks, the economy would converge to the steady state. In this paper, we examine whether the time series behavior of macroeconomic aggregates (especially labor market aggregates) is in fact supportive of this local-stability view of macroeconomic dynamics, or if it instead favors an alternative interpretation in which the macroeconomy may be better characterized as being locally unstable, with nonlinear deterministic forces capable of producing endogenous cyclical behavior. To do this, we extend a standard AR representation of the data to allow for smooth nonlinearities. Our main finding is that, even using a procedure that may have low power to detect local instability, the data provide intriguing support for the view that the macroeconomy may be locally unstable and involve limit-cycle forces. An interesting finding is that the degree of nonlinearity we detect in the data is small, but nevertheless enough to alter the description of macroeconomic behavior. We complete the paper with a discussion of the extent to which these two different views about the inherent dynamics of the macroeconomy may matter for policy.
Macrofinancial History and the New Business Cycle Facts. by Oscar Jordà, Moritz Schularick, and Alan M. Taylor: Abstract In the era of modern finance, a century-long near-stable ratio of credit to GDP gave way to increasing financialization and surging leverage in advanced economies in the last forty years. This “financial hockey stick” coincides with shifts in foundational macroeconomic relationships beyond the widely-noted return of macroeconomic fragility and crisis risk. Leverage is correlated with central business cycle moments. We document an extensive set of such moments based on a decade-long international and historical data collection effort. More financialized economies exhibit somewhat less real volatility but lower growth, more tail risk, and tighter real-real and real- financial correlations. International real and financial cycles also cohere more strongly. The new stylized facts we document should prove fertile ground for the development of a newer generation of macroeconomic models with a prominent role for financial factors.
The Analytics of the Greek Crisis, by Pierre-Olivier Gourinchas, Thomas Philippon, and Dimitri Vayanos: April 13, 2016 Abstract This paper presents an interim and analytical report on the Greek Crisis of 2010. The Greek crisis presents a number of important features that sets it apart from the typical sudden stop, sovereign default, or lending boom/bust episodes of the last quarter century. We provide an analytical account of the Greek crisis using a rich model designed to capture the main financial and macro linkages of a small open economy. Using the model to parse through the wreckage, we uncover the following main findings: (a) Greece experienced a more prolonged and severe decline in output per capita than almost any crisis on record since 1980; (b) the crisis was significantly backloaded, thanks to important financial assistance mechanisms; (c) a sizable share of the crisis was the consequence of the sudden stop that started in late 2009; (d) the severity of the crisis was compounded by elevated initial levels of exposure (external debt, public debt, domestic credit), vastly in excess of levels observed in typical emerging economies. In summary: Greece experienced a typical Emerging Market Sudden Stop crisis, with the initial exposure levels of an Advanced Economy
Jump-Starting the Euro Area Recovery: Would a Rise in Core Fiscal Spending Help the Periphery?, by Olivier Blanchard, Christopher J. Erceg, Jesper Linde: March 24, 2016 Abstract We show that a Öscal expansion by the core economies of the euro area would have a large and positive impact on periphery GDP assuming that policy rates remain low for a prolonged period. Under our preferred model specification, an expansion of core government spending equal to one percent of euro area GDP would boost periphery GDP around 1 percent in a liquidity trap lasting three years, nearly half as large as the effect on core GDP. Accordingly, under a standard ad hoc loss function involving output and inflation gaps, increasing core spending would generate substantial welfare improvements, especially in the periphery. The benefits are considerably smaller under a utility-based welfare measure, reflecting in part that higher net exports play a material role in raising periphery GDP.
Posted by Mark Thoma on Friday, April 15, 2016 at 09:00 AM in Academic Papers, Economics |