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Tuesday, April 25, 2017

Links for 04-25-17

    Posted by on Tuesday, April 25, 2017 at 12:06 AM Permalink  Comments (1) 


    Monday, April 24, 2017

    Paul Krugman: Zombies of Voodoo Economics

     "Because it offers a rationale for lower taxes on the wealthy":

    Zombies of Voodoo Economics, by Paul Krugman, NY Times: According to many reports, Donald Trump is getting frantic as his administration nears the 100-day mark. It’s an arbitrary line in the sand, but one he himself touted in many pre-inauguration boasts. And it will be an occasion for numerous articles detailing how little of substance he has actually accomplished. ...
    Mr. Trump sold himself to voters as unorthodox as well as effective. He was going to be a different kind of president, a consummate deal-maker who would transcend the usual ideological divide. His supporters should therefore be dismayed, not just by his failure to actually close any deals, but by the fact that he evidently has no new ideas to offer, just the same old snake oil the right has been peddling for decades.
    We saw that on Trumpcare... And now we’re seeing it on taxes. ... Whatever the details, Trumptax will be a big exercise in fantasy economics.
    How do we know this? Last week Stephen Mnuchin, the Treasury secretary, told a financial industry audience that “the plan will pay for itself with growth.” And we all know what that means..., history offers not a shred of support for faith in the pro-growth effects of tax cuts..., supply-side economics is a classic example of a zombie doctrine: a view that should have been killed by the evidence long ago... Why, then, does it persist? Because it offers a rationale for lower taxes on the wealthy...
    Still, Donald Trump was supposed to be different. Guess what: he isn’t.
    To be fair, it’s not clear whether Mr. Trump really believes in right-wing economic orthodoxy. He may just be looking for something, anything, he can call a win — and it’s a lot easier to come up with a tax reform plan if you don’t try to make things add up, if you just assume that extra growth and the revenue it brings will materialize out of thin air.
    We might also note that a man who insists that he won the popular vote he lost, who insists that crime is at a record high when it’s at a record low, doesn’t need a fancy doctrine to claim that his budget adds up when it doesn’t.
    Still, the fact is that the Trump agenda so far is absolutely indistinguishable from what one might have expected from, say, Ted Cruz. It’s just voodoo with extra bad math. Was that what his supporters expected?

      Posted by on Monday, April 24, 2017 at 07:32 AM in Economics, Politics, Taxes | Permalink  Comments (210) 


      Links for 04-24-17

        Posted by on Monday, April 24, 2017 at 12:06 AM Permalink  Comments (80) 


        Saturday, April 22, 2017

        Links for 04-22-17

          Posted by on Saturday, April 22, 2017 at 12:06 AM Permalink  Comments (109) 


          Friday, April 21, 2017

          Do Changes in the Economic Landscape Require a New Policy Framework?

          I am here today:

          AGENDA
          8:45 a.m. Welcoming Remarks and Introduction: John C. Williams, President, Federal Reserve Bank of San Francisco
          9:00 a.m. Speaker: Lawrence H. Summers, Harvard University
          Interviewer: David Wessel, Brookings Institution
          10:30 a.m. Robert E. Hall, Stanford UniversitUnderstanding the Decline in the Safe Real Interest Rate
          Discussant: Martin S. Eichenbaum, Northwestern University
          11:30 a.m. Pierre Olivier Gourinchas, University of California, Berkeley, Hélène Rey, London Business School Global Real Rates: a long-run approach
          Discussant: Linda L. Tesar, University of Michigan
          1:30 p.m. Gauti B. Eggertsson, Brown University, Neil R. Mehrotra, Brown University, Jacob A. Robbins, Brown University, A Quantitative Model of Secular Stagnation
          Discussant: Andrea Ferrero, Oxford University
          2:30 p.m. Noëmie Lisack, Bank of England, Rana Sajedi, Bank of England, Gregory Thwaites, Bank of England, Why Are Real Interest Rates So Low? The role of demographics
          Discussant: Ṣebnem Kalemli-Özcan, University of Maryland
          4:00 p.m. Moderator: Alan M. Taylor, University of California, Davis, Donald L. Kohn, Brookings Institution, Lawrence Schrembi, Bank of Canada, Sayuri Shirai, Asian Development Bank Institute
          Monetary Policy in the 21st century: Lessons from Asia, Europe, and America. A panel discussion

           

            Posted by on Friday, April 21, 2017 at 09:08 AM Permalink  Comments (85) 


            Trump's Tax Cut Plan Will... Pay... For... Itself!

            Kevin Drum:

            Trump's Tax Cut Plan Will... Pay... For... Itself!: ...Treasury Secretary Steven Mnuchin said ... tax cuts ... would come close to recouping all of the lost revenue from the dramatic rate reductions.... “The plan will pay for itself with growth,” Mnuchin said at an event hosted by the Institute of International Finance.
            ...here's a chart showing income tax receipts following the five most recent big changes to tax rates. You can decide for yourself if tax cuts pay for themselves or if tax increases tank the economy.

            Blog_tax_cuts_1981_2016_3

              Posted by on Friday, April 21, 2017 at 07:41 AM Permalink  Comments (35) 


              Paul Krugman: The Balloon, the Box and Health Care

              If they persist in trying to fit the balloon in the box, eventually it will pop:

              The Balloon, the Box and Health Care, by Paul Krugman, NY Times: Imagine a man who for some reason is determined to stuff a balloon into a box — a box that, aside from being the wrong shape, just isn’t big enough. He starts working at one corner, pushing the balloon into position. But then he realizes that the air he’s squeezed out at one end has caused the balloon to expand elsewhere. So he tries at the opposite corner, but this undoes his original work.
              If he’s stupid or obsessive enough, he can spend a long time at this exercise, trying it from various different angles, and maybe even briefly convince himself that he’s making progress. But he’s kidding himself: No matter what he does, the balloon isn’t going to fit in that box.
              Now you understand what’s happening to G.O.P. efforts to repeal and replace the Affordable Care Act.
              Republicans have spent many years denouncing Obamacare as a terrible, horrible, no good law and insisting that they can do much better. They successfully convinced many voters that they could preserve the good stuff — the dramatic expansion of coverage that has brought the percentage of Americans without health insurance to a record low — while reducing premiums, shrinking deductibles and, of course, doing away with the taxes on high incomes that pay for the program.
              Those promises basically define the box into which they’re trying to stuff health care. ...
              Again and again, we read news reports to the effect that Republicans are closing in on a plan that will break the political deadlock..., the latest idea being floated, they’ll let insurance companies raise premiums on people with pre-existing conditions and compensate by creating special high-risk pools! ...
              And because the task Republicans have set for themselves is basically impossible, their ongoing debacle over health care isn’t about political tactics or leadership..., this thing just can’t work. ...
              All of this raises the obvious question: If Republicans never had a plausible alternative to Obamacare, if this debacle was so inevitable, what was the constant refrain of “repeal and replace” all about?
              The answer, surely, is that it began as a cynical ploy; at first, the Republicans hoped to kill health reform before it really got started. And now they’ve trapped themselves: They can’t admit that they have no ideas without, in effect, admitting that they were lying all along.
              And the result is that they just keep trying to stuff the balloon into that box.

                Posted by on Friday, April 21, 2017 at 07:23 AM in Economics, Health Care, Politics | Permalink  Comments (260) 


                Links for 04-21-17

                  Posted by on Friday, April 21, 2017 at 12:06 AM Permalink  Comments (70) 


                  Thursday, April 20, 2017

                  GE2017: Why Economic Facts will be Ignored Once Again

                  Simon Wren-Lewis:

                  GE2017: Why economic facts will be ignored once again: In 2015, the Conservatives spun the line that Labour profligacy had messed up the economy, and they had no choice but to clear up the mess. In short, austerity was Labour’s fault. As Labour chose not to challenge this narrative, almost all the media and half the voters assumed it must be true. The reality was the complete opposite. The rising deficit was a consequence of the global financial crisis, not Labour profligacy. Doing something about it should and could have been delayed until the recovery was underway. By acting prematurely, Osborne delayed the recovery and lost the average UK household resources worth thousands of pounds. The story that we had to cut now because of the markets was completely false. ...
                  The 2015 General Election was the first recent occasion that the economic facts were ignored. The second was of course the EU referendum. ...
                  A critical issue during the referendum was a belief that immigration had reduced the access of UK natives to public services. Economists know that is simply wrong for the economy as a whole, and if it happens locally it is because the government has pocketed the taxes immigrants pay. But the media did little to inform voters of why it is wrong, and I suspect this is why most of those voting Leave believed they would be no worse off in the long run outside the EU. ...
                  Brexit may not have led to the immediate economic downturn that some expected, but the Brexit depreciation has brought to a halt the short period during of rising real wages. The economic pain that economists said would follow any vote to leave is starting to happen. ...
                  As far as economics is concerned GE2017 is likely to be nothing more than a combination of GE2015 and the EU referendum. The economy has not got any better than in 2015, and is about to get worse, but mediamacro will let Conservatives insist that the economy is strong. ... The exchange rate has fallen and real wages have stopped rising, but we will still be told this is just Project Fear and the consensus among economists will get ignored once again. So, for the third time, we will have a vote where economics is critical but economic facts will be largely ignored. ...
                  As inflation rises and real wages fall the facts may be changing, but the narrative survives.
                  Narratives are a way people can try to understand things they know little about, and most people know little about economics or politics. Mediamacro is a set of narratives. Project fear is a narrative. The right and the ideologues are very good at selling narratives, and they have a media machine to invent them, road test them and spread them. The left and the realists have none of those things, and are hopeless at it anyway because they know reality is more complex than most narratives. That is why they have lost two elections, and look like losing a third big time.

                    Posted by on Thursday, April 20, 2017 at 09:25 AM in Economics, Politics | Permalink  Comments (53) 


                    Links for 04-20-17

                      Posted by on Thursday, April 20, 2017 at 12:06 AM in Economics, Links | Permalink  Comments (182) 


                      Wednesday, April 19, 2017

                      The Fed’s Inflation Goal: What Does the Public Know?

                      "Lately, various Committee members ... and Chair Yellen ... have discussed the symmetry about the Committee's inflation target. Our evidence suggests that the message may not have quite sunk in yet."

                      Or perhaps the message did sink in, but wasn't believed.

                      This is from Dave Altig, Nicholas Parker, and Brent Meyer at the Altlanta Fed's macroblog:

                      The Fed’s Inflation Goal: What Does the Public Know?: The Federal Open Market Committee (FOMC) has had an explicit inflation target of 2 percent since January 25, 2012. In its statement announcing the target, the FOMC said, "Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances."
                      If communicating this goal to the public enhances the effectiveness of monetary policy, one natural question is whether the public is aware of this 2 percent target. We've posed this question a few times to our Business Inflation Expectations Panel, which is a set of roughly 450 private, nonfarm firms in the Southeast. These firms range in size from large corporations to owner operators.
                      Last week, we asked them again. Specifically, the question is:
                      What annual rate of inflation do you think the Federal Reserve is aiming for over the long run?
                      Unsurprisingly, to us at least—and maybe to you if you're a regular macroblog reader—the typical respondent answered 2 percent (the same answer our panel gave us in 2015 and back in 2011). At a minimum, southeastern firms appear to have gotten and retained the message.
                      So, why the blog post? Careful Fed watchers noticed the inclusion of a modifier to describe the 2 percent objective in the March 2017 FOMC statement (emphasis added): "The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal." And especially eagle-eyed Fed watchers will remember that the Committee amended its statement of longer-run goals in January 2016, clarifying that its inflation objective is indeed symmetric.
                      The idea behind a symmetric inflation target is that the central bank views both overshooting and falling short of the 2 percent target as equally bad. As then Minneapolis Fed President Kocherlakota stated in 2014, "Without symmetry, inflation might spend considerably more time below 2 percent than above 2 percent. Inflation persistently below the 2 percent target could create doubts in households and businesses about whether the FOMC is truly aiming for 2 percent inflation, or some lower number."
                      Do such doubts actually exist? In a follow-up to our question about the numerical target, in the latest survey we asked our panel whether they thought the Fed was more, less, or equally likely to tolerate inflation below or above its target. The following chart depicts the responses.

                      One in five respondents believes the Federal Reserve is more likely to accept inflation above its target, while nearly 40 percent believe it is more likely to accept inflation below its target. Twenty-five percent of firms believe the Federal Reserve is equally likely to accept inflation above or below its target. The remainder of respondents were unsure. This pattern was similar across firm sizes and industries.
                      In other words, more firms see the inflation target as a threshold (or ceiling) that the Fed is averse to crossing than see it as a symmetric target.
                      Lately, various Committee members (here, here, and in Chair Yellen's latest press conference at the 42-minute mark) have discussed the symmetry about the Committee's inflation target. Our evidence suggests that the message may not have quite sunk in yet.

                        Posted by on Wednesday, April 19, 2017 at 11:35 AM Permalink  Comments (11) 


                        Krugman: Elizabeth Warren Lays Out the Reasons Democrats Should Keep Fighting

                        Paul Krugman reviews This is Our Fight: The Battle to Save America’s Middle Class, By Elizabeth Warren, Metropolitan Books/Henry Holt & Company:

                        Elizabeth Warren Lays Out the Reasons Democrats Should Keep Fighting: ...Elizabeth Warren ... brings an edge to her advocacy that many Democrats have shied away from... Even the Obama administration, while doing much more to fight inequality than many realize, balked at making inequality reduction an explicit goal.
                        Furthermore, Warren comes down forcefully on the left side of an ongoing debate over both the causes of inequality and the ways it can be reduced.
                        One view, which was dominant even among Democratic-leaning economists in the 1990s, saw rising inequality mainly as a result of ineluctable market forces. Technology, in particular... Given this view, even liberals generally favored free-market policies. ...
                        The alternative view, which Warren clearly endorses, is all for taxing the rich and strengthening the safety net, but it also argues that public policy can do a lot to increase workers’ bargaining power — and that inequality has soared in large part because policy has, in fact, gone the other way.
                        This view has gained much more prominence over the past couple of decades, mainly because it’s now backed by a lot of evidence...
                        But why has actual policy gone the other way? ...
                        Consider ... West Virginia, where Obamacare cut the number of uninsured by about 60 percent, where minimum wage hikes and revived unions could do wonders for workers in health care and social services, the state’s largest industry. That is, it’s a perfect example of a state that would benefit hugely from an enlightened-populist agenda.
                        But last November West Virginia went almost three-to-one for a very unenlightened populist...
                        But maybe it’s a matter of time, and what Democrats need right now is a reason to keep fighting. And that’s something Warren’s muscular, unapologetic book definitely offers. It’s an important contribution, even if it isn’t the last word.

                          Posted by on Wednesday, April 19, 2017 at 09:09 AM in Economics, Politics | Permalink  Comments (103) 


                          Supply-side, trickle-down nonsense on the NYT oped page

                          Jared Bernstein:

                          Supply-side, trickle-down nonsense on the NYT oped page: There’s a robust debate to be had as to why the NYT published this op-ed on the alleged economic benefits of trickle-down tax cuts, as virtually every paragraph touts an alternative fact. It is the opinion page, I guess, and the authors advise (or at least advised) the president, so I can see why it’s there. But it does require debunking, so thanks NYT, for some make work.
                          Here’s much of the article’s text, followed by my comments in italics:

                          A few of the comments:

                          ... Here we have the first in a series of trickle-down claims. The alleged sequencing is: cut taxes of business and the wealthy, they invest more, that raises profits and productivity, and the benefits trickle down to the middle class. Every link in that chain is broken: tax cuts, even on investment income, do not correlate with greater investment, and they certainly are uncorrelated with faster productivity growth. Businesses already receive very favorable tax treatment on their investments; in fact, their tax burden on debt-financed investments can be negative. No question, tax cuts raise after-tax profitability, but absent much more worker bargaining power, those profits stay in the pockets of those at the top of the income scale. ...
                          Here we have the “money” ‘graf: the straight-up claim that trickle down tax cuts will boost the earnings of the working class, which will help offset their cost—the Laffer curve in action. I guess I should give the authors credit for adding “if we are right,” though I’ll give you very long odds that the editors insisted on this addition. Because there’s no reason to ask if they’re right. They’re not, with the latest exhibit being the state of Kansas, an “experiment” derived by some of these very authors.
                          BTW, I’ve endorsed my friend Kevin Hassett for his new job as a voice of economic reason in this administration. But I’ve been careful to note this flaw in his work and his thinking. In fact, the study they reference here has been thoroughly debunked in various places. ...
                          Again with the urgency, and “trust us, folks, it’s not the zillionaires for whom our hearts bleed—it’s ‘jobs and the economy.’” Not to mention the stock market, which is getting “jittery” over the possibility that Trump won’t deliver a tax plan like the one these guys wrote, which delivers fully half of its goodies to the top 1 percent (or even better, the Ryan plan, which, once fully phased in, delivers 99 percent of its cuts to the top 1 percent).
                          Puh-lease. How stupid do these people think we are (rhetorical question!)? Their simple scheme—Trump wins, the rich get big tax cut—has turned out to be harder to pull off than they’d hoped. That’s a feature, not a bug, of our current political moment, even if it means we have to read a WSJ oped in the NYT.

                            Posted by on Wednesday, April 19, 2017 at 07:57 AM in Economics, Taxes | Permalink  Comments (40) 


                            Links for 04-19-17

                              Posted by on Wednesday, April 19, 2017 at 12:06 AM in Economics, Links | Permalink  Comments (160) 


                              Tuesday, April 18, 2017

                              Fed Watch: Autos Drag Down Industrial Production, Housing Solid

                              Tim Duy:

                              Autos Drag Down Industrial Production, Housing Solid, by Tim Duy: The Federal Reserve released March industrial production data today. Overall production was up 0.5% supported by a big jump in utilities. Despite the headline gains, it was something of a mixed message. First, the dispersion of weakness was the lowest since 2014:

                              Ipsector0317

                              It looks like with the rebound in energy prices and related production activity, the industrial side of the economy has turned a corner. On a softer note, manufacturing activity tumbled:

                              Ipman0317

                              This was fairly disappointing considering the long run of solid growth beginning in the second half of last year. Slowing motor vehicle production took a bite out of the numbers. Specifically, autos, not trucks:

                              Ipmotors0317

                              That chart makes it fairly clear that Americans prefer big vehicles to small ones. Overall motor vehicle sales are probably past their peak, and we can expect this source of weakness in industrial production to persist until sales settle into a new level. Note that motor vehicle output contributed 0.14 and 0.06 percentage points to overall growth in 2015 and 2016 respectively. That gives some sense of the magnitude of the opposite effect on growth this year - noticeable, but small.
                              Housing starts were below expectations, but February was revised upwards. Overall, a solid start to the year:

                              Starts0317

                              I don't see any reason to believe the uptrend in single family has broken, but multifamily is likely near cycle highs. For more on housing see Calculated Risk here and here.
                              Yesterday Federal Reserve Governor Stanley Fisher gave remarks on central bank communication. Of more immediate relevancy were his comments on balance sheet adjustment. Specifically, he doesn't see it as having a disruptive impact:
                              My tentative conclusion from market responses to the limited amount of discussion of the process of reducing the size of our balance sheet that has taken place so far is that we appear less likely to face major market disturbances now than we did in the case of the taper tantrum. But, of course, as we continue to discuss and eventually implement policies to reduce our balance sheet, we will have to continue to monitor market developments and expectations carefully.
                              Separately, Kansas City Federal Reserve President Esther George argued for continued rate hikes despite choppy data:
                              Overall, I am encouraged by the start of the normalization process and want to see it continue. Resisting the temptation to react to near-term fluctuations in the data will be necessary. Looking ahead, we should expect inflation to move up and down around 2 percent. A modest decline in inflation or an overshoot may not necessarily warrant the monetary policy normalization process to slow or accelerate. Such attempts at monetary fine-tuning can easily backfire, so a more forward looking view of inflation is needed.
                              And as part of that process she would like to see balance sheet reduction placed on auto pilot mode:
                              Balance sheet adjustments will need to be gradual and smooth, which is an approach that carries the least risk in terms of a strategy to normalize its size. Importantly, once the process begins, it should continue without reconsideration at each subsequent FOMC meeting. In other words, the process should be on autopilot and not necessarily vary with moderate movements in the economic data. To do otherwise would amount to using the balance sheet as an active tool of policy outside of periods of severe financial or economic stress, and would increase uncertainty rather than reduce it.
                              She also argues against deliberately overshooting the inflation rate. Her key reason is an often forgotten point. Not all goods and services have the same inflation rate, and a higher overall inflation rate may exacerbate inflation differences across the economy. Those differences would be expected to force a restructuring of the economy that could be costly. Her example is that housing costs may accelerate even faster if the Fed were to push for above target inflation:
                              Such concentration and persistently rising prices in one area suggests the economy is struggling to reallocate resources. For housing, it could reflect several factors such as tight lending standards faced by home builders and scarcity of skilled craftsmen needed to construct homes. I expect the market to eventually solve for, or at least adapt to, such factors. Using monetary policy however to compensate for them could easily end up hurting the population the policy is intended to help.
                              So count George as a "no" when it comes to any discussion of raising the Fed's inflation target.
                              Meanwhile, the Trump trade in bonds is reversing course; ten year yields are below 2.2 percent as I write. Also, odds of a Fed rate hike in June have fallen below 50 percent. Market participants are reasonably starting to think that the normalization process may take a bit longer than the Fed anticipates. It will be interesting to see if the Fed agrees. I expect that on average Fedspeak will stick with a fairly hawkish story as policymakers largely dismiss the choppy data of late. We will see if any of George's colleagues share her conviction that policy should not react to recent noise. I tend to think it is a small group, but I argued that Federal Reserve Chair Yellen sounded fairly complacent about the economy last week. Given that the Fed doesn't like to surprise, expect policymakers to speak out forcefully if they feel market participants just don't get it.

                                Posted by on Tuesday, April 18, 2017 at 11:59 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (10) 


                                Monetary Policy Medicine: Large Effects from Small Doses?

                                An FRBSF Economic Letter from  ÒscarJordà, Moritz Schularick, and Alan M. Taylor:

                                Monetary Policy Medicine: Large Effects from Small Doses?: Making sure the economy operates at full employment without triggering inflation is tricky. Price stability can conflict with supporting a thriving economy. Choosing the right dose of monetary policy thus requires understanding how interest rates affect general economic activity and prices separately. Not surprisingly, few questions in economics have received as much attention.
                                Medical researchers consider randomized trials the gold standard in testing alternative treatments. In this Economic Letter, we adapt this approach to measure the efficacy of interest rates in achieving economic goals. Using historical economic data, we extend a traditional economic approach of controlling for domestic factors with a novel strategy that compares data from different external institutional arrangements, our randomized trials. Our findings suggest that interest rate effects may have been previously undermeasured. This has important implications now that some central banks are preparing for a sustained tightening of monetary policy after years of near-zero interest rates.
                                Randomized trials in practice
                                When the central bank raises interest rates, inflation and economic activity usually slow down—aggregate demand is being reined in. While researchers have come up with numerous theories to explain why this might happen, precisely measuring this tradeoff is considerably more difficult. Unlike the natural sciences, economics must rely on observational rather than experimental data.
                                Sinclair Lewis explained experimental data eloquently:
                                When a physician boasted of his success with this drug or that electric cabinet, Gottlieb always snorted, “Where was your control? How many cases did you have under identical conditions, and how many of them did not get the treatment?” – Arrowsmith, 1925
                                Central banks do not have the luxury of running such randomized experiments—they do not roll the dice when conducting monetary policy. Inflation and output reflect monetary policy as well as the factors that determined that policy to begin with. Just as umbrellas do not make it rain, if central banks cut interest rates when the economy slows it does not mean that accommodative monetary policy causes recessions.
                                Economists typically measure the effects of monetary policy with a variety of statistical methods that share a common thread: They control as much as possible for the information that the central bank might have used in choosing interest rates. Any remaining variation in interest rates is considered random. That is, interest rate adjustments that differ from predictions based on available information are like quasi-random experiments. We call this leftover variation in interest rates controlled variation.
                                The correlation of inflation and output over time with this quasi-random controlled variation in interest rates can provide a measure of the causal effect of monetary policy. For this empirical strategy to succeed, however, one has to make sure that no relevant information is left out, which is a tall order. Unobserved factors can make this type of measurement fraught, justifying the popularity of the randomized controlled trial in the sciences.
                                In experimental settings, random assignment into treated and control groups forms the basis of randomized controlled trials such as those described by Sinclair Lewis. While advanced economies have not randomly entered into various monetary and trade arrangements, some of these arrangements, like the euro zone, can provide a setting for an alternative type of monetary experiment. Economies that fix their exchange rate but allow capital to move freely across borders effectively relinquish control of domestic monetary policy. In such situations, monetary policy may not respond to domestic conditions and hence may produce quasi-random variation in interest rates that is less sensitive to unobserved factors.
                                We take advantage of this observation, extending the traditional approach of controlling for domestic factors with a novel strategy that explores what happens to economies that have historically pegged exchange rates while allowing unfettered capital movement. While the United States does not have a pegged exchange rate, we discuss direct implications for U.S. monetary policy later.
                                Quasi-random monetary experiments
                                Over the history of modern finance, advanced economies have managed exchange rate policies in a variety of ways. Sometimes they have allowed market forces to determine the exchange rate, generally called floating exchange rate regimes—or “floats” for brevity. At other times, countries we will call “pegs” have pegged the exchange rate to another currency. Examples of peg arrangements include the classical gold standard era that ended with World War I; the Bretton Woods era that began after World War II and ended around 1973; and, the European Monetary System in the 1970s up to when the euro was rolled out in 1999.
                                Two countries that peg the exchange rate and allow capital to move freely must have the same short-term safe interest rate. Otherwise an investor could borrow funds in one country for less than the return offered by the other without bearing any risk—a sure way to make unlimited profit. The absence of such risk-free arbitrage essentially robs local central banks of their autonomy by forcing interest rates to equalize across borders with those set by the center country’s central bank. The mechanism just described is often referred to as the trilemma in international finance (see, for example, Obstfeld, Shambaugh, and Taylor 2005).
                                In a recent paper (Jordà, Schularick, and Taylor 2017), we take advantage of this phenomenon to single out episodes in which interest rates fluctuated for reasons unrelated to the domestic outlook and direct decisions by the home-country central bank. We use such episodes to calculate how interest rates affect output and inflation. These episodes are our quasi-random monetary trials. We call variation in interest rates due to these episodes peg variation.
                                In particular, we rely on annual data for 17 advanced economies including the United States since 1870. In our sample, countries have moved in and out of exchange rate arrangements over time. We start by focusing on the sample for country-year pairs for pegs. We find that there is a difference between controls that use only observable information and those that add information on the variation in interest rates caused by the peg. This finding can improve our understanding of the effects of monetary policy.
                                Interest rates are a powerful lever
                                If using observables for the control is sufficient, the measured response of output and inflation to interest rates using either controlled variation or peg variation should be equivalent. If there are omitted factors, any differences will arise when using controlled variation. And in that case, variation due to the peg offers a more reliable guide. Just to be sure, we also include as controls information on GDP, inflation, and several other macroeconomic conditions.
                                Figures 1 and 2 suggest there is cause for concern when focusing on measures based on controlled-variation. Using post-World War II data, Figure 1 shows the response of inflation-adjusted GDP per capita in response to a 1 percentage point increase in short-term interest rates in year 0 calculated two different ways. The green line uses the traditional controlled variation approach, while the red line uses the peg variation approach surrounded by a gray 90% confidence band. There is a stark difference between the two approaches. In the first case, interest rates barely cause a ripple, whereas in the second, real GDP per capita is about 2% lower in year 4 than it was at the start.

                                Figure 1
                                Cumulative response of real GDP per capita

                                G12017-09-1

                                Note: Response to 1 percentage point increase in interest rates in year 0; gray shading shows 90% confidence band.

                                A similar picture emerges in Figure 2. The measured response of prices using controlled variation in interest rates is muted—prices are about 0.5% lower by year 4 relative to year 0. The same response calculated with peg variation is estimated to be nearly 2%. In other words, assuming a constant rate of price decline, inflation is about 0.4 percentage point per year lower.

                                Figure 2
                                Cumulative response of consumer price index level

                                G22017-09-2

                                Note: Response to 1 percentage point increase in interest rates in year 0; gray shading shows 90% confidence band.
                                The different paths in the figures suggest that the traditional controlled variation approach undermeasures the macroeconomic impact of changes in interest rates. One possible explanation is that interest rates follow different paths after year 0 under each type of measurement approach.
                                Figure 3 shows that interest rate paths clearly differ somewhat between the two approaches. Measures based on peg variation indicate that interest rates go up further in year 1 but then come down very quickly. The path using controlled variation is more persistent and would tend to have a longer-lasting effect on output and prices, which clearly contradicts the actual pattern seen in Figures 1 and 2.

                                Figure 3
                                Cumulative response of short-term interest rates

                                G32017-09-3

                                Note: Response to 1 percentage point increase in interest rates in year 0; gray shading shows 90% confidence band.
                                Checking the reliability of the results
                                What else could explain the stark differences in the figures? The first thing to check is whether there are differences between peg and float economies that would make their responses to interest rates fundamentally different. Although measures of peg variation are unavailable for floats, Jordà, Schularick, and Taylor (2017) find that controlled variation measures for both pegs and floats are, in fact, very similar, so the explanation must lie elsewhere.
                                Peg variation may reflect spillover effects from trade channels or other mechanisms that distort measures of the response to interest rates. Jordà, Schularick, and Taylor (2017) find that, if anything, spillover effects would tend to increase the differences.
                                Finally, our estimates are very similar to those reported in other research, including Romer and Romer (2004) and Cloyne and Hürtgen (2016). This line of research tries to avoid the pitfalls of the controlled variation approach using staff forecast errors from the Federal Reserve and the Bank of England, respectively, to identify exogenous changes in policy rates.
                                Conclusion
                                We do not have a definitive measure of how interest rates affect economic activity and inflation. However, along with other recent research, we find that interest rates have stronger effects on the macroeconomy than previously understood. Although the monetary experiments we use to calculate the response to interest rate changes rely on countries that peg—by contrast, the United States allows its exchange rate to freely float—there are good reasons to think that the U.S. economy responds to interest rate changes no differently. Our sample is made up of advanced economies that have institutional characteristics similar to the United States and whose economies respond much the same way as ours when using controlled variation. Without delving into the timing or path of monetary strategy more deeply, our research suggests that even a modest tightening cycle can have a substantial restraining effect on both inflation and economic activity.
                                References
                                Cloyne, James S., and Patrick Hürtgen. 2016. “The Macroeconomic Effects of Monetary Policy: A New Measure for the United Kingdom.” American Economic Journal: Macroeconomics 8(4), pp. 75–102.
                                Jordà, Òscar, Moritz Schularick, and Alan M. Taylor. 2017. “Large and State-Dependent Effects of Quasi-Random Monetary Experiments.” FRB San Francisco Working Paper 2017-02.
                                Lewis, Sinclair. 1925. Arrowsmith. New York: Harcourt, Brace & Company.
                                Obstfeld, Maurice, Jay C. Shambaugh, and Alan M. Taylor. 2005. “The Trilemma in History: Tradeoffs Among Exchange Rates, Monetary Policies, and Capital Mobility.” Review of Economics and Statistics 87(3), pp. 423–438.
                                Romer, Christina D., and David H. Romer. 2004. “A New Measure of Monetary Shocks: Derivation and Implications.” American Economic Review 94(4), pp. 1,055–1,084.
                                Opinions expressed in FRBSF Economic Letter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System.

                                  Posted by on Tuesday, April 18, 2017 at 12:15 AM in Economics, Monetary Policy | Permalink  Comments (39) 


                                  Links for 04-18-17

                                    Posted by on Tuesday, April 18, 2017 at 12:06 AM in Economics, Links | Permalink  Comments (176) 


                                    Monday, April 17, 2017

                                    Fed Watch: Fed Looking Forward to the Second Quarter

                                    Tim Duy:

                                    Fed Looking Forward to the Second Quarter, by Tim Duy: First quarter growth is likely to fall flat - at least that is the signal from numerous forecasters and the Atlanta Fed. But what does it mean for Fed policy? Probably not much for now. It will leave policymakers a little cautious as we head toward the June FOMC meeting (May seems most likely a off the table for policy action). But mostly the Fed will be watching incoming data from the end of the first quarter and the beginning of the second. If the data flow picks up over the next couple of months, they will likely move forward with a June hike. They seem to be in a "what, me worry?" frame of mind.
                                    Retail sales stumbled in March, following up on a revised decline in February as well. Motor vehicle sales are partly to blame; we have likely seen the peak in car sales for this cycle and are settling into a lower pace of activity going forward. Lower gas prices and sluggish sales at building supply stores contributed to the fall as well. Stripping out the more volatile components, however, suggests a bit more stability in sales than suggested by the headline numbers:

                                    Retailsales0317

                                    March inflation came in lower than expected, with a surprise hit to core:

                                    Corecpi0317

                                    Ocular econometrics suggests the March print is something of an outlier - the first monthly decrease since 2010. A big 7 percent decline in cellular service prices played a roll, as did falling used car and apparel prices. While I anticipate a rebound in April, this kind of print will help keep the Fed's inflation forecast intact thus preventing them from stepping up the pace of tightening. Watch how this plays through to core-PCE inflation. As a reminder, that was running hot in the first two months of the year:

                                    PCEb033117

                                    In another sign that the Fed's inflation metrics will remain contained, the PPI for health services remained subdued in March:

                                    Ppihealth0317

                                    The New York Federal Reserve issued its survey of inflation expectations for February. Interesting split between the high and low numeracy groups:

                                    Infexp0317

                                    The low numeracy group tends to be more volatile, so I anticipate it will revert back in the next month.
                                    How will any of this matter for the Fed? First, remember that the Fed started dismissing first quarter data at the March FOMC meeting. From the minutes:
                                    Participants generally saw the incoming economic information as consistent, overall, with their expectations and indicated that their views about the economic outlook had changed little since the January-February FOMC meeting. Al­though GDP appeared to be expanding relatively slowly in the current quarter, that development seemed primarily to reflect temporary factors, possibly including residual seasonality.
                                    Hence I don't think they will be surprised by a weak GDP number; they will be surprised if that weakness looks to be carrying forward into the second quarter.
                                    Second, I think the same goes for inflation. For the moment, I think that the decline in unemployment to 4.5% will weigh more heavily on their decisions than a weak inflation number. Still, I believe that if inflation looks to be tracking below their forecasts, they will eventually reduce their estimate of the natural rate. Just not right away.
                                    Third, I think this take on Federal Reserve Chair Janet Yellen's talk last week from Marc Chandler is accurate:
                                    We had detected a shift in the Fed’s stance that we characterized as looking for data to confirm the recovery to now looking for opportunities to normalize conditions. Yellen sees similarly. She said the Fed has shifted from “a post-crisis exercise of healing” to now trying to sustain the economic progress.
                                    The Fed is not living in the crisis anymore. Policymakers no longer worry about trying to boost the pace of activity. The economy is, by their estimates, near full employment with growth is near potential growth. In this framework, a normal economy demands a more normal monetary policy. Policymakers are thinking that the expansion will be eight years old this summer with a good chance that this could turn into the longest running US economic expansion on record. They generally believe that preemptive but gradual rate hikes offer the best chance of expanding the expansion to ten years and beyond. Hence I tend to think their bias is to continue along the current policy path, which suggests they will continue to sound hawkish relative to what recent data would suggest.
                                    Bottom Line: Fed likely to dismiss recent data as unrepresentative of underlying economic trends.

                                      Posted by on Monday, April 17, 2017 at 10:57 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (29) 


                                      U.S. Exporters Could Face High Tariffs without NAFTA

                                      Mary Amiti and Caroline Freund atthe NY Fed's Liberty Street Economics:

                                      U.S. Exporters Could Face High Tariffs without NAFTA: An underappreciated benefit of the North American Free Trade Agreement (NAFTA) is the protection it offers U.S. exporters from extreme tariff uncertainty in Mexico. U.S. exporters have not only gained greater tariff preferences under NAFTA than Mexican exporters gained in the United States, they have also been exempt from potential tariff hikes facing other exporters. Mexico’s bound tariff rates—the maximum tariff rate a World Trade Organization (WTO) member can impose—are very high and far exceed U.S. bound rates. Without NAFTA, there is a risk that tariffs on U.S. exports to Mexico could reach their bound rates, which average 35 percent. In contrast, U.S. bound rates average only 4 percent. At the very least, U.S. exporters would be subject to a higher level of policy uncertainty without the trade agreement. ...

                                        Posted by on Monday, April 17, 2017 at 05:59 AM in Economics, International Trade | Permalink  Comments (20) 


                                        Paul Krugman: Why Don’t All Jobs Matter?

                                        "Why aren’t promises to save service jobs as much a staple of political posturing as promises to save mining and manufacturing jobs?":

                                        Why Don’t All Jobs Matter?, by Paul Krugman, NY Times: President Trump is still promising to bring back coal jobs. But the underlying reasons for coal employment’s decline — automation, falling electricity demand, cheap natural gas, technological progress in wind and solar — won’t go away. ...
                                        Why does public discussion of job loss focus so intensely on mining and manufacturing, while virtually ignoring the big declines in some service sectors ... in the face of internet competition...?
                                        Overall, department stores employ a third fewer people now than they did in 2001. That’s half a million traditional jobs gone — about eighteen times as many jobs as were lost in coal mining over the same period. And retailing isn’t the only service industry that has been hit hard by changing technology. ...
                                        So why aren’t promises to save service jobs as much a staple of political posturing as promises to save mining and manufacturing jobs?
                                        One answer might be that mines and factories sometimes act as anchors of local economies, so that their closing can devastate a community... And there’s something to that...
                                        A different ... reason ... involves the need for villains. Demagogues can tell coal miners that liberals took away their jobs with environmental regulations. They can tell industrial workers that their jobs were taken away by nasty foreigners. And they can promise to bring the jobs back by making America polluted again, by getting tough on trade, and so on. These are false promises, but they play well with some audiences.
                                        By contrast, it’s really hard to blame either liberals or foreigners for, say, the decline of Sears. ...
                                        Finally, it’s hard to escape the sense that manufacturing and especially mining get special consideration because ... their workers are a lot more likely to be male and significantly whiter...
                                        While we can’t stop job losses from happening..., we can limit the human damage when they do happen. We can guarantee health care and adequate retirement income... We can provide aid to the newly unemployed. And we can act to keep the overall economy strong — which means doing things like investing in infrastructure and education, not cutting taxes on rich people and hoping the benefits trickle down.
                                        I don’t want to sound unsympathetic to miners and industrial workers. Yes, their jobs matter. But all jobs matter. And while we can’t ensure that any particular job endures, we can and should ensure that a decent life endures even when a job doesn’t.

                                          Posted by on Monday, April 17, 2017 at 05:41 AM Permalink  Comments (185) 


                                          Sunday, April 16, 2017

                                          Links for 04-16-17

                                            Posted by on Sunday, April 16, 2017 at 12:06 AM in Economics, Links | Permalink  Comments (144) 


                                            Saturday, April 15, 2017

                                            "The Sense That the System Is Rigged Relates Directly to Governments’ Failure to Address Inequality and Concentration"

                                            From a ProMarket interview with Anat Admati:

                                            ... Q: The World Economic Forum has called for “reimagining” and “reforming” capitalism. To what extent is this need for reform the result of disruption brought by technological change, globalization, and immigration and to what extent is it the effect of rent-seeking and regulatory capture?
                                            The impact of technological change, globalization, and immigration on society depends on how the relevant institutions manage these developments. Capitalism has worked poorly in recent years because governments mishandled the challenges of technological change and globalization, and that failure is related to rent-seeking and regulatory capture. The elites who engage with each other through the World Economic Forum and elsewhere can become out of touch and blind to reality; you can see the problem from Steve Schwarzman of Blackstone saying in Davos in 2016 that he found public anger “astonishing.”
                                            Acemoglu and Robinson argued in Why Nations Fail: The Origins of Power, Prosperity, and Poverty that “man-made political and economic institutions… underlie economic success (or lack of it).” Technological developments have highlighted the immense power associated with controlling information. The business of investigative reporting is in a crisis. Corporations often play off governments, shopping jurisdictions and making bargains. For capitalism to work, the relevant institutions must work effectively and avoid excessive rent extraction. The governance challenge of the global economy is daunting.
                                            Here are a few examples...
                                            Q: Some people describe Donald Trump’s economic policies as “corporatism.” Are you more worried by Trump’s interference in the market economy or by companies’ ability to subvert markets’ rules? ...

                                              Posted by on Saturday, April 15, 2017 at 05:14 AM in Economics | Permalink  Comments (40) 


                                              Links for 04-15-17

                                                Posted by on Saturday, April 15, 2017 at 12:06 AM in Economics, Links | Permalink  Comments (98) 


                                                Friday, April 14, 2017

                                                Paul Krugman: Can Trump Take Health Care Hostage?

                                                With the extent to which Trump is cashing in on his presidency, I suppose we could say the buck stops at the White House. Trump doesn't seem to understand that's true more broadly:

                                                Can Trump Take Health Care Hostage?, by Paul Krugman, NY Times: Three weeks have passed since the Trumpcare debacle. After eight years spent denouncing the Affordable Care Act, the G.O.P. finally found itself in a position to do what it had promised, and deliver something better. But it couldn’t.
                                                And Republicans, President Trump very much included, had nobody but themselves to blame. ...
                                                But Mr. Trump, as you may have noticed, isn’t big on accepting responsibility for his failures. Instead, he has decided to blame Democrats for not cooperating in the destruction of their proudest achievement in decades. And on Wednesday, in an interview with The Wall Street Journal, he openly threatened to sabotage health care for millions if the opposition party doesn’t give him what he wants. ...
                                                It’s a nasty political tactic. It’s also remarkably stupid.
                                                The nastiness should be obvious, but let’s spell it out. Mr. Trump is trying to bully Democrats by threatening to hurt millions of innocent bystanders — ordinary American families who have gained coverage thanks to health reform. ...
                                                Why does Mr. Trump even imagine that this threat might work? Implicitly, he’s saying that hurting innocent people doesn’t bother him as much as it bothers his opponents. Actually, this is probably true...
                                                What makes Mr. Trump’s tactic stupid as well as nasty is the reality that Democrats have no incentive whatsoever to give in. ...
                                                Maybe Mr. Trump believes that he could somehow shift the blame for the devastation he has threatened to wreak onto Democrats. “See, there’s the death spiral I predicted!” But that probably wouldn’t work even if he hadn’t effectively proclaimed his own guilt in advance. Voters tend to blame whoever holds the White House for bad things, and in this case they’d be right: ...
                                                So the Trump health care threat is, as I said, stupid as well as nasty. And it’s hard to believe that it will be carried out.
                                                But here’s the thing: Even if Mr. Trump wimps out, as he is doing on so many other issues, he may already have done much of the threatened damage. Insurers are deciding right now whether to participate in the 2018 Obamacare exchanges. Mr. Trump’s tough talk is creating a lot of uncertainty, which in itself may undermine coverage for many Americans.
                                                There is, of course, a good chance that Mr. Trump doesn’t understand any of this. Unfortunately, when you’re in the White House, what you don’t know can hurt a lot of people.

                                                  Posted by on Friday, April 14, 2017 at 04:05 AM in Economics, Health Care, Politics | Permalink  Comments (138) 


                                                  Links for 04-14-17

                                                    Posted by on Friday, April 14, 2017 at 12:06 AM in Economics, Links | Permalink  Comments (140) 


                                                    Thursday, April 13, 2017

                                                    The Zero Lower Bound on Interest Rates: How Should the Fed Respond?

                                                    Ben Bernanke:

                                                    ...the Fed and other central banks cannot ignore the risks created by a low level of “normal” interest rates, which in turn limit the scope for interest-rate cuts. A wide-ranging discussion of alternative policy approaches would thus be welcome. Although raising the inflation target is one of the options that should be considered, that approach has significant drawbacks. Fortunately, there are promising policy options that may be able to mitigate the effects of the zero lower bound on interest rates without forcing the public to accept a permanently higher rate of inflation. Two such options (which are related, and could be combined) are price-level targeting and a “make-up” approach, under which the central bank commits to compensating for “missing” monetary ease after the economy leaves the zero lower bound.

                                                    Much more here: The zero lower bound on interest rates: How should the Fed respond? (link fixed).

                                                      Posted by on Thursday, April 13, 2017 at 06:59 AM in Economics, Monetary Policy | Permalink  Comments (68) 


                                                      Tax Reforms and Top Incomes

                                                      Enrico Rubolino and Daniel Waldenström at VoxEU:

                                                      Tax reforms and top incomes: The link between tax progressivity and the income distribution is the subject of intense debate. This column presents new evidence from tax reforms during the 1980s and 1990s to examine how reduced progressivity affects top income shares. Reduced progressivity boosted top incomes, particularly for those in the top 0.1% of earners. Income tax changes are a plausible candidate for explaining the recent surge in income inequality. ...
                                                      Tax reforms did not increase the size of the cake
                                                      Tax progressivity was reduced in the 1980s on the argument that there would be a positive impact on economic activity and efficiency (Auerbach and Slemrod 1997, Gale and Samswick 2014). Therefore it could be that the estimated boost in top shares reflects new resources created in top groups, rather than a redistribution of incomes away from the bottom and middle. We evaluate this hypothesis..., this analysis does not show large real income responses to reductions in progressivity. ...
                                                      Taxation and inequality
                                                      Our findings suggest that tax progressivity changes influence pre-tax income inequality. Focusing on large, progressivity-reducing tax reforms in the 1980s and 1990s, we show that they had a positive, increasing effect on top income shares in all the countries we studied. ...

                                                        Posted by on Thursday, April 13, 2017 at 12:15 AM in Economics, Income Distribution, Taxes | Permalink  Comments (29) 


                                                        Links for 04-13-17

                                                          Posted by on Thursday, April 13, 2017 at 12:06 AM in Economics, Links | Permalink  Comments (119) 


                                                          Wednesday, April 12, 2017

                                                          The End of China’s Export Juggernaut

                                                          Thomas Klitgaard and Harry Wheeler at the NY Fed's Liberty Street Economics blog:

                                                          The End of China’s Export Juggernaut: China has been an exporting juggernaut for decades. In the United States, this has meant a dramatic increase in China’s share of imports and a ballooning bilateral trade deficit. Gaining sales in the United States at the expense of other countries, Chinese goods rose from only 2 percent of U.S. non-oil imports in 1990 to 8 percent in 2000 and 17 percent in 2010. But these steady gains in U.S. import share have stopped in recent years, with China even losing ground to other countries in some categories of goods. One explanation for this shift is that Chinese firms now have to directly compete against manufacturers in high-skill developed countries while also fending off competition from lower-wage countries, such as Vietnam. This inability to make additional gains at the expense of other countries means that exports don’t contribute as much to China’s overall growth as they used to.
                                                          Taking the U.S. Market by Storm—And Then, Not so Much
                                                          The United States had a merchandise trade deficit of $350 billion with China in 2016, accounting for roughly half of the overall U.S. trade deficit. The import growth of goods from China has been impressive, with imports from China growing at an annual rate of 14 percent since 1990, while total U.S. imports were growing at an annual rate of only 6 percent. That is, China has had great success in selling to the United States by taking market share away from other countries.
                                                          A breakdown of U.S. imports into the four largest categories, accounting for roughly two-thirds of the total, demonstrates the source of this success. As seen in the chart below, China’s import shares for apparel, electronics, electric machinery, and non-electric machinery were all fairly high in 2002, the beginning of the data series used here, and continued to increase. In 2002, China accounted for 25 percent of all U.S. apparel imports and 15 percent of all electronics imports. By 2010, these shares were up to 50 percent and 40 percent, respectively. Market-share increases in general machinery and electrical machinery were less dramatic but still substantial over this period, rising by 8 percentage points (to 15 percent) and 11 percentage points (to 35 percent), respectively.

                                                          China's Share of U.S. Imports

                                                           

                                                          So which countries were losing market share during this period? In apparel, Mexico’s share of U.S. imports dropped by 7 percentage points and Hong Kong’s slipped by 6 percentage points from 2002 to 2010. South Korea and Taiwan had smaller losses in market share over the same horizon. Japan was the main loser of U.S. import share for other major manufactured goods. For electronics, Japan’s U.S. share fell by 7 percentage points, while 2-percentage-point share declines were reported for South Korea, Singapore, Taiwan, and Canada. For electrical equipment, Japan lost 7 percentage points of the U.S. market, with Germany, the United Kingdom, and Taiwan also losing market share. For non-electric machinery, China’s gains were largely at the expense of goods produced in Japan.
                                                          Around 2010, China’s ability to gain market share from other imports faltered. The import share for Chinese apparel has dropped over the past five years, while the share for electronics, by far the largest of the four categories, declined last year. China’s share of the U.S. electric machinery market is showing tentative signs of falling and its gains in the non-electric machinery category have ended.
                                                          Limits to China Increasing Its Market Share
                                                          It is not a complete surprise that Chinese goods would eventually peak as a share of U.S. imports. To keep increasing their share of the U.S. import market, Chinese firms would need to gain sales by competing more directly against manufacturers in Europe, Japan, and other advanced economies. China would also need to successfully compete against other developing countries with lower labor costs. Indeed, China has been ceding market share to Vietnam for electronics and electrical machinery, while India and Bangladesh have been making gains in apparel. It may be the case that assembly operations are moving from China to lower-wage countries, repeating the process that previously benefited China.
                                                          The challenge for China is that its exports to the United States are now only growing as fast as total U.S. imports since its goods are no longer displacing those from other countries. From 2000 to 2010, U.S. imports from China grew at a 20 percent annualized rate. From 2010 to 2016, the rate of growth dropped to 4 percent. This slowdown has also hit China’s exports (in U.S. dollars) to the rest of the world, which slowed from a 21 percent annual growth rate in the 2000-10 period to 5 percent since 2010.
                                                          Measuring the Impact of Slower Export Growth Is a Challenge
                                                          When evaluating the slowdown in China’s exports, it is important to recognize that trade data measure the value of goods that arrive from a particular country, not that country’s contribution to the item’s value. For example, if a U.S. import from China is largely made of components produced in Japan and assembled in China, then the import data would significantly overstate the revenue that ended up in China from that sale. Cross-border supply chains are motivated, in part, by differences in labor costs, with components manufactured using high-wage labor and the assembly of these parts done in low-wage countries. This processing of components into final goods has been an important attribute of Chinese exports. The chart below shows that exports of such goods peaked in 2000 at almost 60 percent of China’s total exports. So, to the extent that China’s export growth figures reflect trade in processed goods, they overstate the domestic gains China has realized from these export sales when taken at face value.

                                                           

                                                          China: Processing Exports Share of Total Exports

                                                           

                                                          More recently, however, the data show a significant decrease in China’s processing trade amid an overall slowdown in export growth. Processing exports fell to 50 percent of China’s total exports in 2010 and then declined rapidly, hitting 35 percent in early 2017. This transformation partly reflects rising wages in China (as the skill level of its workers increases) and the related migration of assembly operations from China to lower-wage countries. A positive take on these developments is that each dollar of exports now has a larger positive impact on domestic income. The negative take is that China’s much more modest export performance is, in part, due to the loss of processing exports that would have otherwise been a source of income.
                                                          Challenge for China
                                                          Exports have been a great boost to China’s economic development, with rapid increases in foreign sales helping to transform the economy into a major producer of the world’s manufactured goods. The slowdown in export growth in recent years has been substantial and highlights the difficulties of trying to compete in foreign markets against both high- and low-wage countries. One of the consequences of the end of China’s export boom is that it puts more pressure on domestic demand to sustain the country’s rate of growth.

                                                          Disclaimer
                                                          The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

                                                            Posted by on Wednesday, April 12, 2017 at 09:29 AM in China, Economics, International Trade | Permalink  Comments (42) 


                                                            How Big a Problem is the Zero Lower Bound on Interest Rates?

                                                            Ben Bernanke:

                                                            How big a problem is the zero lower bound on interest rates?: If inflation is too low or unemployment too high, the Fed normally responds by pushing down short-term interest rates to boost spending. However, the scope for rate cuts is  limited by the fact that interest rates cannot fall (much) below zero, as people always have the option of holding cash, which pays zero interest, rather than negative-yielding assets.[1] When short-term interest rates reach zero, further monetary easing becomes difficult and may require unconventional monetary policy, such as large-scale asset purchases (quantitative easing).
                                                            Before 2008, most economists viewed this zero lower bound (ZLB) on short-term interest rates as unlikely to be relevant very often and thus not a serious constraint on monetary policy. (Japan had been dealing with the ZLB for several decades but was seen as a special case.) However, in 2008 the Fed responded to the worsening economic crisis by cutting its policy rate nearly to zero, where it remained until late 2015. Although the Fed was able to further ease monetary policy after 2008 through unconventional methods, the ZLB constraint greatly complicated the Fed’s task.
                                                            How big a problem is the ZLB likely to be in the future? ...

                                                              Posted by on Wednesday, April 12, 2017 at 07:48 AM in Economics, Monetary Policy | Permalink  Comments (84) 


                                                              Links for 04-12-17

                                                                Posted by on Wednesday, April 12, 2017 at 12:06 AM in Economics, Links | Permalink  Comments (111) 


                                                                Tuesday, April 11, 2017

                                                                Links for 04-11-17

                                                                  Posted by on Tuesday, April 11, 2017 at 12:06 AM in Economics, Links | Permalink  Comments (171) 


                                                                  Fed Watch: Solid Employment Report

                                                                  Tim Duy:

                                                                  Solid Employment Report, by Tim Duy: Labor markets were generally solid in March, with nothing by itself to dissuade the Fed from its current path. We should be watching for the Fed reaction to the decline in the unemployment rate, assuming it persists in the coming months. Could be dovish if the Fed lowers its estimate of the natural rate. Could be hawkish if they see a higher risk of undershooting the natural rate.
                                                                  Nonfarm payroll growth slowed to 98k:

                                                                  NfpA0317

                                                                  While this was below expectations, it wasn't a surprise. My interpretation is that most analysts expected downside risk to the estimates based on cold weather in March. No reason to think the basic underlying trend of solid but slowing declining job growth.
                                                                  The unemployment rate dipped to a cycle low of 4.5% and stands below the Federal Reserve's longer run unemployment projection:

                                                                  NfpB0317

                                                                  This will raise some eyebrows at the Federal Reserve. The median FOMC participant forecast 4.5% for December. So we are a little ahead of schedule on that. Does this mean the economy is poised to overheat? The wage numbers do not support that hypothesis:

                                                                  NfpC0317

                                                                  Wage growth flattened out in recent months, suggesting the economy is not yet in danger of overheating. Policymakers will be closely watching this dynamic and, more importantly, the path of inflation, between now and the next meeting. If inflation looks to be overshooting the forecast, the Fed may conclude that weak wage growth reflects low productivity rather than slack in the economy. That would be hawkish. Keep an eye on this space.
                                                                  While the headline jobs growth numbers disappointed, note that the forward looking indicator temporary help payrolls remains on an uptrend:

                                                                  NfpD0317

                                                                  In some ways this feels like 1995-96, with a temporary slowdown followed by a sustained period of solid growth.
                                                                  The back-to-back declines in retail trade reflected the ongoing stress in that sector:

                                                                  RetailB0317

                                                                  Note too slowing wage growth in retail trade:

                                                                  RetailC0317

                                                                  As of the last JOLTS report, the dynamics in retail trade employment are not driven by layoffs, but by a hiring slowdown:

                                                                  RetailA0317

                                                                  Looks like both quits and hirings rolled over in recent months. What is interesting is that the due to the labor churn in the sector, a slowdown in hiring alone can have significant impact on the net job growth without relying on mass layoffs - at least not yet. Notice that discharges and layoffs in the sector are down from 2015. Still, the decline in the level of quits reflects employee worries about the state of the industry - they don't see it quite as easy to find a new job as they did in 2015.
                                                                  One data point that doesn't seem to fit with the story of an industry in decline is the level of job openings:

                                                                  RetailD0317

                                                                  If the sector is experiencing a truly apocalyptic event, we would expect job openings to roll over. How will the Fed view this story? Most likely as industry specific and not indicative of the broader economy but they will attempting to gauge the resulting slack, if any, in labor markets.
                                                                  Bottom Line: Employment report was in line with (diminished) expectations. Most important for monetary policy was the decline in the unemployment rate. But absent more data, the exact implication could be either dovish or hawkish. Until the fog on that issues clears, expect the Fed to stick to its story: More tightening is coming, but at a gradual pace.

                                                                    Posted by on Tuesday, April 11, 2017 at 12:06 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (5) 


                                                                    Monday, April 10, 2017

                                                                    Blanchard: On the Need for (At Least) Five Classes of Macro Models

                                                                    Olivier Blanchard:

                                                                    On the Need for (At Least) Five Classes of Macro Models: One of the best pieces of advice Rudi Dornbusch gave me was: Never talk about methodology. Just do it. Yet, I shall disobey and take the plunge.
                                                                    The reason and the background for this blog is a project started by David Vines about DSGEs, how they performed in the crisis, and how they could be improved.[1] Needled by his opinions, I wrote a PIIE Policy Brief. Then, in answer to the comments to the brief, I wrote a PIIE RealTime blog. And yet a third, another blog, each time hopefully a little wiser. I thought I was done, but David organized a one-day conference on the topic, from which I learned a lot and which has led me to write my final (?) piece on the topic.
                                                                    This piece has a simple theme: We need different types of macro models. One type is not better than the other. They are all needed, and indeed they should all interact. Such remarks would be trivial and superfluous if that proposition were widely accepted, and there were no wars of religion. But it is not, and there are.
                                                                    Here is my attempt at typology, distinguishing between five types. (I limit myself to general equilibrium models. Much of macro must, however, be about building the individual pieces, constructing partial equilibrium models, and examining the corresponding empirical micro and macro evidence, pieces on which the general equilibrium models must then build.) In doing so, I shall, with apologies, repeat some of what was in the previous blogs. ...

                                                                      Posted by on Monday, April 10, 2017 at 12:56 PM in Economics, Macroeconomics, Methodology | Permalink  Comments (6) 


                                                                      Paul Krugman: Publicity Stunts Aren’t Policy

                                                                      All hat and no cattle:

                                                                      Publicity Stunts Aren’t Policy, by Paul Krugman, NY Times: Does anyone still remember the Carrier deal? Back in December President-elect Donald Trump announced, triumphantly, that he had reached a deal ... to keep 1,100 jobs in America rather than moving them to Mexico. And the media spent days celebrating the achievement. ...
                                                                      Around 75,000 U.S. workers are laid off or fired every working day, so a few hundred here or there hardly matter.... Whatever Mr. Trump did or didn’t achieve with Carrier, the real question was whether he would take steps to make a lasting difference.
                                                                      So far..., there isn’t even the vague outline of a real Trumpist jobs policy. And corporations and investors seem to have decided that ... Mr. Trump is a paper tiger in practice. ...
                                                                      In other words, showy actions that win a news cycle or two are no substitute for actual, coherent policies. Indeed, their main lasting effect can be to squander a government’s credibility. Which brings us to last week’s missile strike on Syria.
                                                                      The attack instantly transformed news coverage of the Trump administration. Suddenly stories about infighting and dysfunction were replaced with screaming headlines about the president’s toughness...
                                                                      But outside ... the news cycle, how much did the strike actually accomplish? A few hours after the attack, Syrian warplanes were taking off from the same airfield, and airstrikes resumed on the town where use of poison gas provoked Mr. Trump into action. ...
                                                                      In fact, if last week’s action was the end of the story, the eventual effect may well be to strengthen the Assad regime — Look, they stood up to a superpower! — and weaken American credibility. ...
                                                                      The media reaction ... showed that many pundits and news organizations have learned nothing from past failures. ...
                                                                      The U.S. fired off some missiles, and ... Mr. Trump “became president.” Aside from everything else, think about the incentives this creates. The Trump administration now knows that it can always crowd out reporting about its scandals and failures by bombing someone. ...
                                                                      Real leadership means devising and carrying out sustained policies that make the world a better place. Publicity stunts may generate a few days of favorable media coverage, but they end up making America weaker, not stronger, because they show the world that we have a government that can’t follow through.
                                                                      And has anyone seen a sign, any sign, that Mr. Trump is ready to provide real leadership in that sense? I haven’t.

                                                                        Posted by on Monday, April 10, 2017 at 02:34 AM in Economics, Policy, Politics | Permalink  Comments (156) 


                                                                        The Fed, the Reality of Tax Cuts Reality, and Donald Trump

                                                                        I have a new column:

                                                                        The Fed, the Reality of Tax Cuts Reality, and Donald Trump: For many years, Republicans argued that tax cuts for the wealthy pay for themselves. Cutting taxes on the wealthy, according to Republicans, allows them to keep a larger share of anything new they create and this leads to new economic activity and new innovation – so much that the resulting increase in economic growth and tax revenue fully offsets the budgetary effects of the tax cuts. Everyone is better off as income “trickled down” from the top.
                                                                        What actually happened is that the tax cuts had very little, if any, impact on economic growth. Deficits went up, and somehow income never trickled down – if anything, it trickled up. Today, Republicans are less likely to argue that tax cuts pay for themselves, though you still hear it, but they still insist tax cuts for the wealthy magically increase economic growth and offset much of the revenue loss.
                                                                        But even in the very unlikely case that Trump’s proposed tax cuts are successful (beyond increasing the income of the wealthy which many argue is the true goal), the economic growth rates Trump has promised are unlikely to be attained. ...

                                                                          Posted by on Monday, April 10, 2017 at 02:25 AM in Economics, Monetary Policy, Politics, Taxes | Permalink  Comments (33) 


                                                                          Links for 04-10-17

                                                                            Posted by on Monday, April 10, 2017 at 12:06 AM Permalink  Comments (65) 


                                                                            Sunday, April 09, 2017

                                                                            Why People Prefer Unequal Societies

                                                                            People prefer fair inequality:

                                                                            Why people prefer unequal societies, by Christina Starmans , Mark Sheskin  & Paul Bloom, Nature Human Behaviour 1, Article number: 0082 (2017): Abstract There is immense concern about economic inequality, both among the scholarly community and in the general public, and many insist that equality is an important social goal. However, when people are asked about the ideal distribution of wealth in their country, they actually prefer unequal societies. We suggest that these two phenomena can be reconciled by noticing that, despite appearances to the contrary, there is no evidence that people are bothered by economic inequality itself. Rather, they are bothered by something that is often confounded with inequality: economic unfairness. Drawing upon laboratory studies, cross-cultural research, and experiments with babies and young children, we argue that humans naturally favour fair distributions, not equal ones, and that when fairness and equality clash, people prefer fair inequality over unfair equality. Both psychological research and decisions by policymakers would benefit from more clearly distinguishing inequality from unfairness. ...

                                                                              Posted by on Sunday, April 9, 2017 at 10:51 AM in Economics, Income Distribution | Permalink  Comments (51) 


                                                                              Saturday, April 08, 2017

                                                                              Links for 04-08-17

                                                                                Posted by on Saturday, April 8, 2017 at 12:06 AM in Economics, Links | Permalink  Comments (228) 


                                                                                Friday, April 07, 2017

                                                                                Paul Krugman: The Bad, the Worse and the Ugly

                                                                                Donald Trump is ugly:

                                                                                The Bad, the Worse and the Ugly, by Paul Krugman, NY Times: This week’s New York Times interview with Donald Trump was horrifying, yet curiously unsurprising. Yes, the world’s most powerful man is lazy, ignorant, dishonest and vindictive. But we knew that already.
                                                                                In fact, the most revealing thing in the interview may be Mr. Trump’s defense of Bill O’Reilly, accused of sexual predation and abuse of power: “He’s a good person.” This, I’d argue, tells us more about both the man from Mar-a-Lago and the motivations of his base than his ramblings about infrastructure and trade.
                                                                                First, however, here’s a question: How much difference has it made, really, that Donald Trump rather than a conventional Republican sits in the White House?
                                                                                The Trump administration is, by all accounts, a mess. ... Yet Mr. Trump’s first great policy and political debacle — the ignominious collapse of the effort to kill Obamacare — owed almost nothing to executive dysfunction. Repeal-and-replace ... failed because Republicans have been lying about health care for eight years. ...
                                                                                Similar considerations apply on other fronts. Tax reform looks like a bust ...
                                                                                What about areas where Mr. Trump sometimes sounds very different from ordinary Republicans, like infrastructure? ... [G]iven what we heard in the interview ... it’s clear that the administration has no actual infrastructure plan...
                                                                                True, there are some places where Mr. Trump does seem likely to have a big impact — most notably, in crippling environmental policy. But that’s what any Republican would have done...
                                                                                So Trumpist governance in practice so far is turning out to be just Republican governance with (much) worse management. Which brings me back to the original question: Does the appalling character of the man on top matter?
                                                                                I think it does. The substance of Trump policy may not be that distinctive in practice. But style matters, too, because it shapes the broader political climate. And what Trumpism has brought is a new sense of empowerment to the ugliest aspects of American politics. ...
                                                                                One way to think about Fox News in general, and Mr. O’Reilly in particular, is that they provide a safe space for people who want an affirmation that their uglier impulses are, in fact, justified and perfectly O.K. And one way to think about the Trump White House is that it’s attempting to expand that safe space to include the nation as a whole.
                                                                                And the big question about Trumpism — bigger, arguably, than the legislative agenda — is whether unapologetic ugliness is a winning political strategy.

                                                                                  Posted by on Friday, April 7, 2017 at 02:43 AM in Economics, Politics | Permalink  Comments (159) 


                                                                                  Fed Watch: Fed Likely To Discount Weakness in March Employment Report

                                                                                  Tim Duy:

                                                                                  Fed Likely To Discount Weakness in March Employment Report, Tim Duy: It seems that we are conditioned for a disappointing jobs report tomorrow. Although the ADP report came in strong, we have mixed signals from the employment components of the ISM reports, with the employment index up in manufacturing but down in the much bigger service sector. In addition, weather may be a factor - did warm weather goose the January and February numbers and now we will see payback due to a cold March? I expect that the Fed will be expecting the latter. The minutes suggest they are already primed for weaker first quarter numbers to begin with:
                                                                                  Participants generally saw the incoming economic information as consistent, overall, with their expectations and indicated that their views about the economic outlook had changed little since the January-February FOMC meeting. Al­though GDP appeared to be expanding relatively slowly in the current quarter, that development seemed primarily to reflect temporary factors, possibly including residual seasonality.
                                                                                  They would probably write off a weak headline payrolls numbers as a reflection of just another temporary factor. Of course, that also means they will embrace a solid number. It's kind of a heads they win, tails you lose situation for the Fed.
                                                                                  Consensus is looking for 175k on the payrolls in a range of 125k to 202k. This sounds reasonable; my estimate is 190k within a wider range of 106k to 275k:

                                                                                  Nfpfor0317

                                                                                  Variance on these estimates, however, is notoriously high. My inclination is to expect the actual print to be more likely below and above 190k.
                                                                                  Assuming a weak read of payrolls that is written off to weather, the rest of the report is more important. The Fed maintains a laser sharp focus on signs unemployment is significantly undershooting the natural rate. Consensus expects the rate to hold at 4.7%. A drop would raise eyebrows at the Fed. An increase in the participation rate, however, would be welcome news that they can maintain a gradual pace of tightening. And wages of course will help guide them as they assess their distance from the natural rate.
                                                                                  Bottom Line: Unless the report is a complete disaster, I would expect the Fed is poised to look though any weakness. But that means a strong report will grab their attention.

                                                                                    Posted by on Friday, April 7, 2017 at 12:15 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (9) 


                                                                                    Links for 04-07-17

                                                                                      Posted by on Friday, April 7, 2017 at 12:06 AM in Economics, Links | Permalink  Comments (41) 


                                                                                      Thursday, April 06, 2017

                                                                                      Fed Watch: Lots To Chew On In The FOMC Minutes

                                                                                      Tim Duy:

                                                                                      Lots To Chew On In The FOMC Minutes, by Tim Duy: The minutes of the March FOMC meeting confirmed that the Fed remains poised to tighten policy further, first via raising the federal funds rate followed by action to reduce the balance sheet later in the year. It appears most likely that the Fed will see the latter as a substitute for the former. That means rate hikes would perhaps be on hold during the start of 2018 as the Fed assesses the efficacy of its actions. To be sure, however, the pace and mix of tightening remain data dependent. With the Fed in general agreement that the economy is near full employment, an uptick in either the pace of growth or inflation concerns will prompt the Fed begin murmuring about an accelerated the pace of tightening.
                                                                                      The Fed tackled balance sheet strategy early in the meeting. On timing, the policymakers thought thought it soon be upon us:
                                                                                      Provided that the economy continued to perform about as expected, most participants anticipated that gradual increases in the federal funds rate would continue and judged that a change to the Committee's reinvestment policy would likely be appropriate later this year.
                                                                                      Now place that prediction in the context of this discussion from the committee action portion of the minutes:
                                                                                      Members generally noted that the increase in the target range did not reflect changes in their assessments of the economic outlook or the appropriate path of the federal funds rate, adding that the increase was consistent with the gradual pace of removal of accommodation that was anticipated in December, when the Committee last raised the target range.
                                                                                      The median rate projection in March held at a total of three hikes for 2017. The Fed believes that the March rate hike was consistent with the gradual pace of policy removal as anticipated in December. Assume then that the economy continues to stay the course, holding generally in line with the Fed's forecasts. Suppose that means the current pace of tightening holds as well.
                                                                                      A continuation of the current pace of tightening - one action per quarter - would put rate hikes in June and September. At that point, the target range in 1.25-1.5%. That is roughly halfway to the currently anticipated neutral rate. Then the normalization of rate policy would be well underway, and then, in December, the Fed switches gears to balance sheet reduction. Later this year, as stated in the minutes.
                                                                                      That suggests that "gradual" means policy action once a quarter. (Remember the Fed began 2016 thinking four hikes? I think once a quarter seems about right to them.) If so, and they still intend a total of three rates hikes and balance sheet action for 2018, it implies they think, reasonably, that action on balance sheet reduction is a substitute for rate hikes. And, furthermore, that the balance sheet forecast is implicitly built into the median rate forecast. If not for having to deal with the balance sheet, I suspect the median forecast for 2017 would be 4 rate hikes.
                                                                                      That gets you through 2017. What about 2018? They probably have in mind that the phasing out of reinvestments could take six months, though this has not yet been decided. Back to the minutes:
                                                                                      An approach that phased out reinvestments was seen as reducing the risks of triggering financial market volatility or of potentially sending misleading signals about the Committee's policy intentions while only modestly slowing reductions in the Committee's securities holdings. An approach that ended reinvestments all at once, however, was generally viewed as easier to communicate while allowing for somewhat swifter normalization of the size of the balance sheet.
                                                                                      The Fed could go cold turkey on reinvestments, option 2, but I suspect will choose to ease into balance sheet reduction, option 1. Less chance of disrupting financial markets. That would mean policy action at the second meeting of 2018 to get reinvestment strategy on its final path, followed up quarterly rate hikes after that.
                                                                                      Assuming this is the schedule they have in mind, policymakers expect to tighten policy once per quarter for the next two years, trading off between rate hikes and balance sheet policy. The risk, however is that balance sheet reduction takes longer than expected, or it more disruptive than expected, thus reducing the scope for rate hikes in 2018. Time will tell on that one.
                                                                                      The Fed, however, could step up the pace of action. On the mandates:
                                                                                      Nearly all participants judged that the U.S. economy was operating at or near maximum employment. In contrast, participants held different views regarding prospects for the attainment of the Committee's inflation goal.
                                                                                      Inflation continues to be the sticking point. If inflationary pressures were more visible, the Fed would be acting more aggressively. Watch this space, and core-PCE inflation in particular. It picked up in January and February. If that continues into March and April, the Fed will worry that they have pushed "gradual" as far as it will go. Watching employment, however, is a bit more tricky. For now, I expect the Fed to get nervous of a significant undershoot if the unemployment rate dips much further. Persistent low inflation, however, could yield a decrease in the Fed's estimate of the natural rate of unemployment.
                                                                                      Finally, note this:
                                                                                      In their discussion of recent developments in financial markets, participants noted that financial conditions remained accommodative despite the rise in longer-term interest rates in recent months and continued to support the expansion of economic activity. Many participants discussed the implications of the rise in equity prices over the past few months, with several of them citing it as contributing to an easing of financial conditions. A few participants attributed the recent equity price appreciation to expectations for corporate tax cuts or to increased risk tolerance among investors rather than to expectations of stronger economic growth. Some participants viewed equity prices as quite high relative to standard valuation measures. It was observed that prices of other risk assets, such as emerging market stocks, high-yield corporate bonds, and commercial real estate, had also risen significantly in recent months. In contrast, prices of farmland reportedly had edged lower, in part because low commodity prices continued to weigh on farm income. Still, farmland valuations were said to remain quite high as gauged by standard benchmarks such as rent-to-price ratios.
                                                                                      Fed officials aren't growing nervous about just equities. They are seeing high prices across a wide range of risky assets. If it was just one asset class, they might conclude that it doesn't pose systemic risk for the US economy. Or they might conclude that macro prudential policies were sufficient to maintain financial stability. But a wide range of assets might require a more blunt tool - like higher rates. Another space to watch. Where this space gets messy is the tendency of equity prices to remain high even as the Fed tightens - a pattern which may induce the Fed to tighten much more aggressively than they should.
                                                                                      Bottom Line: The Fed clearly anticipates more tightening, likely at a pace of one action per quarter between interest rates and balance sheet. My interpretation of the minutes is that with the economy near full employment and assuming asset prices stay high, it wouldn't take much movement on the labor market or inflation expectations to make Fed officials sufficiently nervous that you begin to hear more about stepping up the pace of tightening.

                                                                                        Posted by on Thursday, April 6, 2017 at 05:49 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (31) 


                                                                                        A Right-Wing Case for Taxing Private Schools

                                                                                        Chris Dillow:

                                                                                        A right-wing case for taxing private schools: Sensible right-wingers should support Labour's plan to impose VAT on private schools.
                                                                                        Let’s start from the fact that Labour wants to “bash the rich”, and you’ll not convince them otherwise. The question therefore is whether to do this by taxing their incomes or taxing their spending. Yes, Labour will probably do both – but more of one should mean less of the other.
                                                                                        To the extent that VAT on school fees means lower top tax rates than would otherwise be the case, the right should welcome this. They believe that high top tax rates reduce the labour supply and increase tax-dodging – Laffer curves and all that. By contrast, the behavioural effect of VAT on private schools is small: the IFS has estimated a price elasticity of demand for them of only around -0.26. From the right’s point of view, therefore VAT is more likely to raise revenues and less likely to deter productive activity than higher top income taxes. In fact, it might even incentivize hard work, as parents will have to work harder to afford school fees.
                                                                                        Yes, the move would hurt hard-working families who are struggling to pay the fees. But income taxes hurt hard-workers too. The solution to this is to shift taxes onto land. But nobody wants to deny Englishmen their god-given right to get something for nothing by watching their house prices rise.
                                                                                        What's more, zero-rating school fees introduces a distortion into the tax system. It means these are cheaper relative to (say) cars or holidays than they’d be in a free market system. If you think the free market price system is a good signal of relative costs and benefits, you’ll want to remove this distortion.
                                                                                        Worse still, our current VAT operates as a form of protectionism. In making schools cheaper relative to BMWs than they’d be in a free market, it encourages consumers to shift their spending towards a domestic business. ...
                                                                                        This raises the question: what might be the justification for giving private schools a tax break? One argument would be that they have positive externalities. They take pupils out of the state sector and so reduce the cost of state education. And their top-quality education provides us with the great leaders who have made our politics, media and businesses who have made us the envy of the world.
                                                                                        But if you’re a free marketeer, you’ll see this as a dangerous slippery slope. Yes, private schools reduce the expense to the tax-payer. But equally, people who eat healthily reduce the burden on the NHS. So why not tax fatty and sugary foods more heavily that healthy ones? But free marketeers are opposed to the latter. By the same logic, however, they should oppose the tax break for private schools. We could go further. People who obey the law save tax-payers the expense of police and prisons. So why not give a tax break for things that help people stay out of trouble, such as games consoles that keep youngsters indoors rather than out on the streets?
                                                                                        Once you start seeing positive externalities in private schools, you’ll soon see them everywhere. That’s a licence to intervene everywhere.
                                                                                        Right-wingers, therefore, should welcome Corbyn’s plan. ... Being on the right doesn’t mean having to defend all privilege. Does it?

                                                                                          Posted by on Thursday, April 6, 2017 at 05:43 AM Permalink  Comments (5) 


                                                                                          Links for 04-06-17

                                                                                            Posted by on Thursday, April 6, 2017 at 12:06 AM in Economics, Links | Permalink  Comments (94) 


                                                                                            Wednesday, April 05, 2017

                                                                                            Why Regulators Should Focus on Bankers’ Incentives

                                                                                            Charles Goodhart:

                                                                                            Why regulators should focus on bankers’ incentives: Last autumn, Charles Goodhart gave a special lecture at the Bank. In this guest post he argues that regulators should focus more on the incentives of individual decision makers.
                                                                                            The incentive for those in any institution is to justify and extol the virtues of the decisions that they have taken. Criticisms of current regulatory measures are more likely to come from outsiders, perhaps especially from academics, (with tenure), who can play the fool to the regulatory king. I offer some thoughts here from that perspective. I contend that the regulatory failures that led to the crisis and the shortcomings of regulation since are largely derived from a failure to identify the persons responsible for bad decisions. Banks cannot take decisions, exhibit behavior, or have feelings – but individuals can. The solution lies in reforming the governance set-up and realigning incentives faced by banks’ management. ...
                                                                                            There are two questions that need reconsideration. The first relates to the scope of responsibility for outcomes in a hierarchical institution; the second relates to the downside that those responsible should face when failure or bad behavior occurs. ...

                                                                                            He concludes with:

                                                                                            If a bank CEO knew that his own family’s fortunes would remain at risk throughout his subsequent lifetime for any failure of an employee’s behavior during his period in office, it would do more to improve banking ‘culture’ than any set of sermons and required oaths of good behavior. The root of the problem is the bad behavior of bankers, not of banks, who are incapable of behavior, for good or ill. The regulatory framework should be refocused towards the latter, with a focus on reforming incentives.

                                                                                              Posted by on Wednesday, April 5, 2017 at 05:34 AM in Economics, Financial System, Regulation | Permalink  Comments (25) 


                                                                                              How Do People Find Jobs?

                                                                                              R. Jason Faberman, Andreas I. Mueller, Ayşegül Şahin, Rachel Schuh, and Giorgio Topa at the NY Fed's Liberty Street Economics:

                                                                                              How Do People Find Jobs?: Most people find themselves looking for work at some point in their adult lives. But what brings employers and job seekers together? And does searching for a new job while unemployed lead to different outcomes
                                                                                               than searching while employed? Little is known about the job search process for unemployed workers. Even less is known about the search process and outcomes for currently employed workers—so‑called “on‑the‑job” search. This Liberty Street Economics post aims to shed light on these questions and to draw some conclusions for our understanding of labor market dynamics more generally.
                                                                                              The New York Fed has been fielding a labor market supplement to its Survey of Consumer Expectations every October since 2013. The supplement focuses on the job search process for all individuals, regardless of their employment status. The questions cover search behavior (for instance, what methods respondents used to look for jobs, the time spent searching for work, the number and type of contacts with employers, and job interviews), as well as the nature, number, and characteristics of any job offers received. Pooling together three successive waves of the survey supplement yields data on about 2,300 employed workers, 165 unemployed workers, and 430 respondents who are classified as being out of the labor force, all between eighteen and sixty-four years of age. Labor force status is defined using the Bureau of Labor Statistics definition: Specifically, individuals are classified as unemployed if they are not currently employed, actively looked for work in the last four weeks, and are available to start work within the next seven days. Workers on temporary layoff are also classified as unemployed.
                                                                                              How Do People Look for Jobs?
                                                                                              The table below describes the “extensive margin” of job search, by labor force status: That is, how many people actively searched for work in the last four weeks, regardless of how much effort they put into it. We employ various definitions to measure active search. The first definition is based on whether respondents report having used at least one job search method out of a comprehensive list of possible methods, which includes applying for jobs, looking at job postings online or elsewhere, sending out resumes, and contacting employers, employment agencies, former coworkers, or other professional contacts. The second definition focuses on those who applied to at least one job posting. The final definition is a measure based on whether respondents spent any time searching for jobs in the last seven days.

                                                                                              How Do People Find Jobs?

                                                                                               The most surprising finding is that search is common among employed workers. Depending on the specific measure used, roughly one in five or one in four employed
                                                                                               workers actively looked for work during the four weeks preceding the survey. Almost all of the unemployed actively searched—a predictable finding, given the definition of unemployment. (The only exceptions come from those on temporary layoff.) A small fraction of respondents who were not in the labor force also searched. These are respondents who searched but were not available to start work in the next seven days and were therefore classified as out of the labor force.
                                                                                              Let us now turn to the “intensive margin” of job search: Conditional on having actively searched, how intensively did people in our survey look for jobs? Here we employ two measures: one is a measure of hours spent searching in the last seven days; the other is the number of job applications sent out (either online or through other means) in the last four weeks. We also further distinguish the employed by their “extensive margin”—that is, by whether or not they are actively looking for work. The table below reports the results. The main finding is that unemployed job seekers search harder than the employed. On average, the unemployed spend 8.4 hours per week searching, compared with 1.2 hours for the employed, and send out 8.1 applications per month, compared with 1.2 for the employed. If we focus on employed workers actively looking for work, we find that their search effort is still only about half that of the unemployed.

                                                                                              How Do People Find Jobs?

                                                                                               What Works?
                                                                                              So far, we have focused on what people do to look for work. But how effective is their search? To answer this question, we have to look at the outcomes of their efforts. Here we consider two measures, both computed over the preceding four weeks: the number of employers who contacted our respondents about a job opening, and the number of actual job offers received. We can summarize the results as follows (see the table below): First, even though unemployed workers search about seven times as hard as the employed (as illustrated in the table just above), they only generate about twice the number of offers. Thus, searching while unemployed is much less effective in generating offers than searching while on the job. Second, employed workers actively looking for work receive the greatest number of employer contacts and job offers. So, again, searching while employed seems to have the highest return in terms of generating new offers. Third, even those employed workers who are not looking for new work receive a substantial number of employer contacts and offers. This finding illustrates the importance of informal contacts and recruiting. Informal contacts can include networking at industry events; conversations with friends, present or former coworkers, or business associates; and unsolicited contacts by employers, recruiters, or headhunters.

                                                                                              How Do People Find Jobs?

                                                                                               These results are summarized in a slightly different way in the table below. Unemployed workers make up about 7 percent of our sample. They send out 40 percent of the total applications in the sample, but receive only about 16 percent of the total offers. By comparison, those employed and actively looking for work make up about 20 percent of the sample but receive almost half of all offers. Further, the employed not looking for work receive about one‑fourth of all the offers in our sample—more than the unemployed! They also receive more than half of all the unsolicited offers in our sample. These findings again point to the importance of informal contacts and recruiting in labor market churning.

                                                                                              How Do People Find Jobs?

                                                                                              Conclusion
                                                                                              We have found that “on‑the‑job” search is common among employed workers, and that the job search process is more effective for currently employed workers than for the unemployed. In the paper cited as the source of our table estimates, we also show that offers received by employed workers are better than those received by the unemployed, both in terms of the wage associated with them and in terms of their nonwage benefits. This is true even after controlling for detailed worker characteristics and prior work history.
                                                                                              What are the broader implications of these findings for our understanding of labor market dynamics? We know that job-to-job transitions are an important component of new hires, and an important driver of wage growth in the economy. Voluntary quits (typically followed by a transition to a new job) have been described by Chair Janet Yellen as an important marker of the health of the labor market. By highlighting the importance and pervasiveness of on‑the‑job search, we have provided some evidence on the search mechanisms that underlie voluntary quits and job‑to‑job transitions. By tracking these search processes over time we can gain further insights into the likely evolution of these important labor market markers going forward.
                                                                                              ______________
                                                                                              Disclaimer The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

                                                                                                Posted by on Wednesday, April 5, 2017 at 05:31 AM in Economics, Monetary Policy, Unemployment | Permalink  Comments (16) 


                                                                                                Links for 04-05-17

                                                                                                  Posted by on Wednesday, April 5, 2017 at 12:06 AM in Economics, Links | Permalink  Comments (191) 


                                                                                                  Tuesday, April 04, 2017

                                                                                                  Departing Thoughts

                                                                                                  Federal Reserve Governor Daniel K. Tarullo: 

                                                                                                  Departing Thoughts: Tomorrow is my last day at the Federal Reserve. So in this, my final official speech, it seems appropriate to offer a broad perspective on how financial regulation changed after the crisis. In a moment, I shall offer a few thoughts along these lines. Then I am going to address in some detail the capital requirements we have put in place, including our stress testing program. Eight years at the Federal Reserve has only reinforced my belief that strong capital requirements are central to a safe and stable financial system. It is important for the public to understand why this is so, especially at a moment when there is so much talk of changes to financial regulation. ...

                                                                                                    Posted by on Tuesday, April 4, 2017 at 01:43 PM in Economics, Monetary Policy, Regulation | Permalink  Comments (15) 


                                                                                                    The Myth That the Estate Tax Threatens Small Farms

                                                                                                    This is from Chloe Cho of the CBPP:

                                                                                                    The Myth That the Estate Tax Threatens Small Farms: Ahead of tomorrow’s House Agriculture Committee hearing on tax reform, a group of agricultural trade associations have called for repealing the estate tax on inherited wealth, arguing that “all too often at the time of death, farming and ranching families are forced to sell off land, farm equipment, parts of the operation or take out loans” due to the tax. Their arguments miss the mark.  Only 50 small farm and small business estates in the entire country will pay any estate tax in 2017 (see chart), and they’ll owe less than 6 percent of their value in tax, on average, the Tax Policy Center estimates

                                                                                                    4-4-17estatetax

                                                                                                    ...Moreover, most farmers and business owners with estates large enough to owe the tax have sufficient liquid assets ... to pay the tax without having to touch other assets or liquidate their farm and business, a 2005 Congressional Budget Office (CBO) study found. Today’s estate tax rules are even more generous than those CBO assumed. ...
                                                                                                    While doing next to nothing for family farms, repeal would provide a windfall to the wealthiest 0.2 percent of estates — the only ones large enough to pay the tax.  A repeal proposal recently reintroduced in the Senate would provide the 0.2 percent of wealthiest estates with an average tax cut of more than $3 million in 2017.  Roughly 330 estates worth more than $50 million would get more than $20 million apiece in tax cuts, the Joint Committee on Taxation estimates.  The proposal would also cost $269 billion over the decade, expanding deficits and adding to pressure for cuts in federal programs.

                                                                                                      Posted by on Tuesday, April 4, 2017 at 01:28 PM in Economics, Politics, Taxes | Permalink  Comments (25)