Category Archive for: Economics [Return to Main]

Wednesday, March 22, 2017

Fed Watch: Is Bank Lending A Concern?

Tim Duy:

Is Bank Lending A Concern?, by Tim Duy: I have seen some angst recently over declining growth in commercial bank lending. See, for example, the Wall Street Journal:
Bank loans across all categories are increasing 4.6% annually, the slowest pace since 2014, according to weekly Fed lending data from March 1. The trend is particularly marked in business loans, which are increasing 3.9% annually, a rate that is a nearly six-year low.
A number of factors are at play, including rising interest rates; bankers also said some business clients put borrowing on hold before the U.S. election and aren't confident enough to jump back in.
The slowdown is noteworthy because it is occurring when many metrics show the U.S. economy strengthening.
Looking at the weekly data, there does on the surface look to be some reason for concern:


These low rates of growth are rarely seen outside of recessions. Still, optical econometrics suggests this is more of a lagging than leading indicator. Moreover, we have another indicator that also exhibited behavior only seen in recessions. Spot the odd man out:


Recall a year ago when weak industrial production numbers raised recession concerns that proved unfounded. We could be seeing something similar in bank lending. Consider that industrial production might be a leading indicator for bank loans:


Here I focus on the post-1984 period (the Great Moderation). Optical econometrics again suggests to me that lending lags industrial production. To quantify that a bit more, I converted the data to log differences (multiplied by 100), and ran it through a 13 lag vector autoregression. Granger causality tests (the f-tests here) indicate that loans (DLOANS) do not cause (or are predictive of) industrial production (DIND):


Impulse response functions (in this case, the responses are converted to impacts on the levels of the variables) illustrate the dynamics of the system:


The impact of a shock to industrial production on commercial lending (lower left chart) is delayed six months and then builds gradually over the next 18 months. The impact of a shock to lending on industrial production (upper right chart) is negligible. Ordering of the variables does not affect these results. If I use the full sample (data begin 1947:1), both variables Granger cause each other, but the impact of loans on industrial production in the short-run is minimal and dies out in the long-run:


Bottom Line: The fall in commercial lending growth looks more consistent with a lagged impact from the industrial slowdown that weighed on the US economy last year than with a warning about future activity. Something to keep an eye on, to be sure, but if past history is a guide, it is more likely than not that lending will pick up over the next year.

What Contract Theory Teaches Us about Regulating Banks

Caterina Lepore, Caspar Siegert, and Quynh-Anh Vo at Bank Underground:

What can Nobel-winning contract theory teach us about regulating banks?: The 2016 Nobel Prize in economics has been awarded to Professors Oliver Hart and Bengt Holmström for their contributions to contract theory. The theory offers a wide range of real-life applications, from corporate governance to constitutional laws. And, as the post will hopefully convince you, contract theory is also helpful in regulating banks! To this end, we will unpack the outline of the theory and apply it to a number of real-world conundrums: How to pay banks’ chief executives and traders? How to fund a bank’s balance sheet? How to regulate banks?
What is Contract Theory? ...

Links for 03-22-06

Tuesday, March 21, 2017

The World's Easiest Chart to Make

In case you were wondering (any your probably weren't), from Kevin Drum:

Well, This Was the World's Easiest Chart to Make: CBPP has calculated how much tax money you'll save if Obamacare is repealed. Behold:


You know what really gets me? Even among the millionaires, repeal will only net them about $50,000. That's like finding spare change in the sofa cushions for this crowd. Is clawing back a few nickels and dimes really worth immiserating 20 million people?

How Money Made Us Modern

Patrick Kiger at National Geographic:

How Money Made Us Modern: About 9,500 years ago in the Mesopotamian region of Sumer, ancient accountants kept track of farmers’ crops and livestock by stacking small pieces of baked clay, almost like the tokens used in board games today. One piece might signify a bushel of grain, while another with a different shape might represent a farm animal or a jar of olive oil.
Those humble little ceramic shapes might not seem have much in common with today’s $100 bill, whose high-tech anti-counterfeiting features include a special security thread designed to turn pink when illuminated by ultraviolet light, let alone with credit-card swipes and online transactions that for many Americans are rapidly taking the place of cash.
But the roots of those modern modes of payment may lie in the Sumerians’ tokens. ...

Links for 03-21-06

Monday, March 20, 2017

Robots and Inequality: A Skeptic's Take

Douglas Campbell:

Robots and Inequality: A Skeptic's Take: Paul Krugman presents "Robot Geometry" based on Ryan Avent's "Productivity Paradox". It's more-or-less the skill-biased technological change hypothesis, repackaged. Technology makes workers more productive, which reduces demand for workers, as their effective supply increases. Workers still need to work, with a bad safety net, so they end up moving to low-productivity sectors with lower wages. Meanwhile, the low wages in these sectors makes it inefficient to invest in new technology.
My question: Are Reagan-Thatcher countries the only ones with robots? My image, perhaps it is wrong, is that plenty of robots operate in Japan and Germany too, and both countries are roughly just as technologically advanced as the US. But Japan and Germany haven't seen the same increase in inequality as the US and other Anglo countries after 1980 (graphs below). What can explain the dramatic differences in inequality across countries? Fairly blunt changes in labor market institutions, that's what. This goes back to Peter Temin's "Treaty of Detroit" paper and the oddly ignored series of papers by Piketty, Saez and coauthors which argues that changes in top marginal tax rates can largely explain the evolution of the Top 1% share of income across countries. (Actually, it goes back further -- people who work in Public Economics had "always" known that pre-tax income is sensitive to tax rates...) They also show that the story of inequality is really a story of incomes at the very top -- changes in other parts of the income distribution are far less dramatic. This evidence also is not suggestive of a story in which inequality is about the returns to skills, or computer usage, or the rise of trade with China. ...

The Demand for Education

One of the most rewarding parts of deciding to go online 12 years ago has little to do with the things I post here (the blog’s 12 year anniversary passed earlier this month, but I forgot until a day or two ago).

Amazingly, my YouTube class videos have had over 1,200,000 views. Even more surprising, the most popular are – by far, not even close – econometrics videos (just started a new series that will cover time series – something I’ve had a lot of requests for over the years, plus other things such as quasi-experimental techniques).

One time, at the AEA’s in Chicago, I was on my way to meet Noah Smith for the first time (at a Starbucks). As I was walking across a bridge to meet him I noticed someone running up behind me. It was a student on the market that year, and she had chased me down to tell me that the econometrics videos really helped her. I was quite amazed. I had no idea. I just posted the videos for my classes never thinking anyone else would watch.. She insisted on a picture together – I was embarrassed, but happy to comply at the same time.

At the same meeting, it happened again – another person in an elevator with the same story, and also wanted a picture. I have heard similar things many times over the years. Email about the videos from developing countries – where educational access is limited – has been especially nice. They come several times a week.

My videos are nothing special, they are just there. There is a huge, unmet demand for education, and not just the basics, technical things like econometrics. That’s what I have concluded.

Optimal Beliefs

From an interview of Jonathn Parker (the Robert C. Merton Professor of Finance at the Massachusetts Institute of Technology's Sloan School of Management) by the Richmond Fed:

...EF: In the paper, you consider some evolutionary arguments related to optimal expectations.
Parker: We were asked in the review process to think about why this might occur or how people might come to have these beliefs. In the paper, we have a couple of paragraphs that I think I'm still a little uncomfortable with, but the arguments run something like this: How might you get to optimal beliefs? You start out with an optimistic assessment of how easy something will be, and then you kind of think about it a little bit and if the costs of being wrong are significant, you start to downgrade your optimism. However, if you don't see any big costs, then you don't. So it suggests you approach decisions with natural optimism and then consider the consequences, and you bring beliefs back toward reality if you need to. In terms of evolution, people do lots of matching with friends, with colleagues, with potential spouses in which they project confidence about the value of matching with them, of working with them, of marrying them — and a credible, stronger belief in themselves may be useful in that process. That's not in the theory, per se, but these are stories that might help us (or a referee) believe that there's something there.
I think it's worth noting that one of the reasons I think this paper has been controversial (at least relative to our belief in the theory!) — it has gotten good citations, but it hasn't led to a lot of subsequent literature — is that it is a behavioral paper that contradicts a common belief among behavioral economists that the mistakes people make are potentially very large. Our model delivers exactly the reverse, which is that the mistakes people make are the ones that satisfy or generate these biases but do not cause or risk large negative payoffs. So it's behavioral economics that the behavioral economists don't like.
I don't think that every theory has to explain every behavior, but I also think our theory can incorporate situations in which there's an awfully large belief bias or in which things are extreme if one moves away from the particular frictionless, stationary, full-information environment that we studied for biases. It might be that there are explicit costs associated with moving beliefs away from rationality. This approach might also make the model more, not less, empirically useful. And the way we worked with optimal expectations theory, people are meta-smart — they know the true probabilities and work from those to these biased probabilities. There are situations where people may really not understand the truth at all.
Let me come at this a slightly different way. There's a set of behavioral models in which there is a belief bias and it is invariant to the costs and payoffs. And you see that pretty clearly rejected, I think, in the world and in labs. So our paper gets something right in terms of biases being disciplined by costs. The models in which biases are fixed and not responsive have the problem that people can be turned into money pumps and can make very severe errors in certain, regularly occurring states of the world. Some economists are very comfortable with the idea that people do regularly make major mistakes. Our paper lets people optimally tone down their optimistic bias and so rules out regular, really costly mistakes. But some people find that a bug and not a feature. ...

Market power in the U.S. economy today

Jonathan B. Baker at Equitable Growth:

Overview The U.S. economy has a “market power” problem, notwithstanding our strong and extensive antitrust institutions. The surprising conjunction of the exercise of market power with well-established antitrust norms, precedents, and enforcement institutions is the central paradox of U.S. competition policy today.
Market power in the U.S. economy today: As this policy brief explains, the harms from the exercise of firms’ market power may extend beyond individual markets affected to include slower overall economic growth and increased economic inequality. The implications for future economic productivity and welfare are troubling, but before detailing these consequences, it is necessary to understand why market power is a major issue despite well-established antitrust enforcement institutions and legal precedents. ...

Paul Krugman: America’s Epidemic of Infallibility

"...inability to engage in reflection and self-criticism is the mark of a tiny, shriveled soul...":

America’s Epidemic of Infallibility, by Paul Krugman, NY Times: ...American politics — at least on one side of the aisle — is suffering from an epidemic of infallibility, of powerful people who never, ever admit to making a mistake.
More than a decade ago I wrote that the Bush administration was suffering from a “mensch gap.” ... Nobody ... ever seemed willing to accept responsibility for policy failures...
Later, in the aftermath of the financial crisis, a similar inability to admit error was on display among many economic commentators.
Take, for example, the open letter a who’s who of conservatives sent to Ben Bernanke in 2010, warning that his policies could lead to “currency debasement and inflation.” They didn’t. But four years later, when ... contacted..., not one was willing to admit having been wrong.
By the way, press reports say that one of those signatories, Kevin Hassett — co-author of the 1999 book “Dow 36,000” — will be nominated as chairman of Mr. Trump’s Council of Economic Advisers. Another, David Malpass — the former chief economist at Bear Stearns, who declared on the eve of the financial crisis that “the economy is sturdy” — has been nominated as undersecretary of the Treasury for international affairs. They should fit right in. ...
What happened to us? Some of it surely has to do with ideology: When you’re committed to a fundamentally false narrative about government and the economy, as almost the whole Republican Party now is, facing up to facts becomes an act of political disloyalty. ...
But what’s going on with Mr. Trump and his inner circle seems to have less to do with ideology than with fragile egos. To admit having been wrong about anything, they seem to imagine, would brand them as losers and make them look small.
In reality, of course, inability to engage in reflection and self-criticism is the mark of a tiny, shriveled soul — but they’re not big enough to see that. ...
Many Americans no longer seem to understand what a leader is supposed to sound like, mistaking bombast and belligerence for real toughness.
Why? Is it celebrity culture? Is it working-class despair, channeled into a desire for people who spout easy slogans?
The truth is that I don’t know. But we can at least hope that watching Mr. Trump in action will be a learning experience — not for him, because he never learns anything, but for the body politic. And maybe, just maybe, we’ll eventually put a responsible adult back in the White House.

Links for 03-20-06

Sunday, March 19, 2017

''Why I Take Attacks on Muslims and Hispanics Very Personally''

Steven Durlauf (Willam F. Vilas Research Professor and Kenneth J. Arrow Professor of Economics at UW-Madison):

Why I Take Attacks on Muslims and Hispanics Very Personally: My paternal grandmother Sophia Ruderman Durlauf, was born in Dniepropetrovsk (then Ekaterinislav) Ukraine (then Russia), in 1899. When she was a little girl, she survived a pogrom in the now-forgotten village in which she was growing up. It was a close call; she was trampled by a Cossack’s horse and badly injured after disobeying her parents and somehow leaving the cubbyhole in which they had hidden her. Her family travelled to Minsk, from which her father left for America and sent for my grandmother and the rest of her family, arriving in 1906. Had her family stayed in Ukraine, it is very possible they would have died in the Holocaust.
My grandmother spoke perfect, accent free English. She told me, in her late 60’s, of her still vivid memories of being taunted for lack of English, and shared her recollections of all the anti-Semitic epithets she heard growing up in poverty in Manhattan. She was apparently a terrific student. But in her senior year of high school, she was told by her principal that she was too poor to go to college and that her responsibility was to get a job and support her family. These barriers did not stop her from having a rich and fascinating life, including taking night courses from Will Durant at the New School for Social Research (as it was then called) and working as a close secretary to Margaret Sanger, so she was present at the beginning of Planned Parenthood. And her grandchildren (my sister and me) have lived extraordinarily privileged lives and my father grew up in middle class comfort.
When my grandmother died, I helped my father clean out her house. I found hundreds of cancelled checks she had written over the years, carefully organized by type of bill. For checks made out to the government, she routinely wrote “Thank You” as the memo. When I asked my father why she did this, his answer was that she was saying “Thank you for asking me to pay my bill rather than smashing down the door to my home and taking anything you wanted.” For me, this lover of the United Nations and for that matter all other pieties of post WWII liberalism, was also the most patriotic person I have ever known.

Saturday, March 18, 2017

Links for 03-18-06

Friday, March 17, 2017

FRBSF: The Current Economy and the Outlook

From the FRBSF:

FRBSF FedViews: Fernanda Nechio, research advisor at the Federal Reserve Bank of San Francisco, stated her views on the current economy and the outlook as of March 9, 2017.
Real GDP grew at an annual pace of 1.9% in the fourth quarter of 2016, consistent with an ongoing moderate expansion. Going forward, we expect GDP growth to continue at a similar rate, between 1½% and 2% over the next couple of years.

Continued moderate economic growth

Recent employment gains remain solid. Nonfarm payroll employment in January rose by 227,000 jobs, partly due to a mild winter which boosted construction. Over the past six months, payroll gains have averaged around 190,000 jobs per month.

Recent employment growth is robust

The labor market remains near its sustainable, full employment level. January’s unemployment rate of 4.8% is close to 5%, our estimate of the natural rate of unemployment. If economic growth continues at its projected pace and monetary policy continues to normalize over the next 2 to 3 years, we expect unemployment to move gradually toward 5% over this period.

Economy is near full employment

Inflation has remained below the Federal Reserve’s 2% objective for several years, but has been gradually increasing towards the target rate since early 2016. Overall inflation in the twelve months through January, as measured by the price index for personal consumption expenditures was 1.9%, up from 1.6% in December, as energy prices accelerated. Core inflation, which excludes changes in food and energy prices, rose more gradually. The price index of core personal consumption expenditures was 1.7% higher than a year ago. Given the robust labor market conditions, we expect overall and core consumer price inflation to rise gradually to 2% over the next couple of years.

Inflation is rising toward target

Interest rates rose sharply in the weeks after the November 2016 election, but have stabilized in recent months. The Federal Reserve raised its Federal funds target rate by ¼ percentage point in December. Based on futures markets, financial market participants expect two or three more quarter-point increases in the target rate in 2017.

Interest rates are up since the election

U.S. trade policy is an important factor for our near-term outlook. New policies under consideration include the introduction of border adjustment taxes, changes to import tariffs, and renegotiations of existing trade agreements. These measures are intended to boost both U.S. exports and employment.
Exports of goods and services help support jobs in the United States. According to the Department of Commerce’s International Trade Administration, exports accounted for an estimated 11.5 million jobs in 2015. The relative importance of the export sector, however, varies substantially across states, with jobs related to exports of goods ranging from about 10% of total employment in Washington and Texas to near 0% in Colorado and New Mexico.

Export-related jobs vary across states...

The share of jobs related to exports also varies across industries. As of 2014, jobs related to exports accounted for 26% of jobs in the manufacturing sector, but only about 8% in the service sector.

...and across industries

Few goods or services can be classified as purely export- or import-related because of the role of global supply chains. For example, many domestically manufactured goods, such as airplanes, may be exported or sold domestically but also have an import content through their use of foreign-made materials and intermediate goods.
Imports are also important for supporting jobs. For example, the apparel and computer equipment sectors rely heavily on imported goods, but generate domestic jobs in transportation, retail, advertising, and financial and insurance services. To add further complexity, many U.S. imports start their product lives as American intellectual property, which are then modified and produced abroad, before being imported back into the United States. As these goods move through their different stages of production, they add U.S. jobs all along the product cycle.
The variation in the relative importance of imports and exports across states and industries poses a challenge in assessing the effects of trade policy changes on the overall U.S. economy. Possible changes in the value of the dollar and trade prices associated with these policy changes also complicate the outlook.

Policy effects vary within sectors as well

Some sectors, such as manufacturing, have increasingly relied on technology to increase production, at the cost of reducing the number of employed workers. Trade policy changes are unlikely to affect the long-run trend of a declining number of jobs in this sector.

        Manufacturing jobs affected by technology

The views expressed are those of the author, with input from the forecasting staff of the Federal Reserve Bank of San Francisco. They are not intended to represent the views of others within the Bank or within the Federal Reserve System.

Paul Krugman: Conservative Fantasies, Colliding With Reality

Talk is cheap:

Conservative Fantasies, Colliding With Reality, by Paul Krugman, NY Times: This week the Trump administration put out a budget blueprint — or more accurately, a “budget” blueprint. After all, real budgets detail where the money comes from and where it goes; this proclamation covers only around a third of federal spending, while saying nothing about revenues or projected deficits. ...
So what’s the point of the document? The administration presumably hopes that it will distract the public and the press from the ongoing debacle over health care. But it probably won’t. And in any case, this pseudo-budget embodies the same combination of meanspiritedness and fiscal fantasy that has turned the Republican effort to replace Obamacare into a train wreck.
Think ... about the vision of government ... that the right has been peddling for decades.
In this vision, much if not most government spending is a complete waste, doing nobody any good. The same is true of government regulations. And to the extent ... spending does help anyone, it’s Those People — lazy, undeserving types who just so happen to be a bit, well, darker than Real Americans.
This was the kind of thinking — or, perhaps, “thinking” — that underlay President Trump’s promise to replace Obamacare with something “far less expensive and far better.” After all, it’s a government program, so he assumed that it must be full of waste that a tough leader like him could eliminate.
Strange to say, however, Republicans turn out to have no ideas about how to make the program cheaper other than eliminating health insurance for 24 million people (and making coverage worse, with higher out-of-pocket spending, for those who remain).
And basically the same story applies at a broader level. Consider federal spending...: Outside defense it’s dominated by Social Security, Medicare and Medicaid — all programs that are crucial to tens of millions of Americans, many of them the white working-class voters who are the core of Trump support. Furthermore, most other government spending also serves purposes that are popular, important or (usually) both.
Given this reality..., what will happen if anti-big-government politicians ... put their agenda into practice? Voters will quickly get a lesson in what slashing spending really means — and they won’t be happy.
That’s basically the wall Obamacare repeal has just smashed into. ...
Republicans’ budget promises, like their health care promises, have been based on an essentially fraudulent picture of what’s really going on. And now the bill for these lies is coming due.

Links for 03-17-06

Thursday, March 16, 2017

America’s Two-Track Economy

Peter Dizikes at the MIT News Office:

America’s two-track economy: For many people in America, being middle class isn’t what it used to be.
Consider: In 1971, the U.S. middle class — with household incomes ranging from two-thirds to double the national median — accounted for almost 60 percent of total U.S. earnings. But in 2014, middle-class households earned just about 40 percent of the total national income. And, adjusted for inflation, the incomes of goods-producing workers have been flat since the mid-1970s.
“We have a fractured society,” says MIT economist Peter Temin. “The middle class is vanishing.”
Now Temin, the Elisha Gray II Professor Emeritus of Economics in MIT’s Department of Economics, has written a book exploring the topic. “The Vanishing Middle Class: Prejudice and Power in a Dual Economy,” published this month by MIT Press, examines the plight of middle-income earners and offers some prescriptions for changing our current state of affairs.
The “dual economy” in the book’s title also represents a bracing reflection of America’s class schism. Temin, a leading economic historian, draws the term from the work of Nobel Prize winner W. Arthur Lewis, who in the 1950s applied the model of a dual economy to developing countries. In many of those nations, Lewis contended, there was not a single economy but a two-track economy, with one part containing upwardly-mobile, skilled workers and the other part inhabited by subsistence workers.
Applied to the U.S. today, “The Lewis model actually works,” Temin says. “The economy can grow, but it detaches from the [subsistence] sector. Simple as it is, the Lewis model offers the benefit that a good economic model does, which is to clarify your thinking.”
In Temin’s terms, updated, America now features what he calls the “FTE sector” — people who work in finance, technology, and electronics — and “the low-wage sector.” Workers in the first sector tend to thrive; workers in the second sector usually struggle. Much of the book delves into how the U.S. has developed this way over the last 40 years, and how it might transform itself back into a country with one economy for all.
Headwinds for workers
As Temin sees it, there are multiple reasons for the decline in middle-class earning power. To cite one: The decline of unionization, he contends, has reduced the bargaining power available to middle class workers.
“In the [political and economic] turmoil of the ’70s and ’80s, the unions declined, and the institutions that had been keeping labor going along with rising productivity were destroyed,” Temin says. “It’s partly [due to] new technology, globalization, and public policy — it’s all of these things. What it did was disconnect wages from the growth in productivity.”
Indeed, from about 1945 until 1975, as Temin documents in the book, U.S. productivity gains and the wage gains of goods-producing workers tracked each other closely. But since 1975, productivity has roughly doubled, while those wages have stayed flat.
Where “The Vanishing Middle Class” moves well beyond a discussion of basic economic relations, however, is in Temin’s insistence that readers consider the interaction of racial politics and economics. As he puts it in the book, “Race plays an important part in discussions of politics related to inequality in the United States.”
To take one example: Again starting in the 1970s, incarceration policies led to an increasing proportion of African-Americans being jailed. Today, Temin notes, about one in three African-American men will serve jail time, which he calls “a very striking figure. You can see how that would just destroy the fabric of a community.” After all, those who become imprisoned see a significant reduction in their ability to obtain healthy incomes over their lifetimes.
For that matter, Temin observes, incarceration has expanded so dramatically it has affected the ability of society to pay for prisons, which may be a factor that limits their further growth. At the moment, he notes in the book, the U.S. states pay roughly $50 billion a year for prisons and roughly $75 billion annually to support higher education.
Temin contends in the book that a renewed focus on education is a principal way to distribute opportunities better throughout society.
“The link between the two parts of the modern dual economy is education, which provides a possible path that children of low-wage workers can take to move into the FTE sector,” Temin writes.
That begins with early-childhood education, which Temin calls “critically important” — although, he says, “in order to continue those benefits, [students] have to build on that foundation. That goes all the way up to college.”
And for students in challenging social and economic circumstances, Temin adds, what matters is not just the simple acquisition of knowledge but the classroom experiences that lead to, as he puts it, “Knowing how to think, how to get on with people, how to cooperate. All the social skills and social capital … [are] going to be critically important for kids in this environment.”
In the book Temin bluntly advocates for greater investment in public schools as well as public universities, saying that America’s “educational system was the wonder of the 20th century.” It still works very well, he notes, for kids at good public schools and for those college students who graduate without burdensome debt.
But for others, he notes, “We don’t have a path for the next generation to have what we expect for a middle-class life … [and] not everyone wants to finance it.”
“The Vanishing Middle Class” comes amid increasing scrutiny of class relations in the U.S., but at a time when the public discussion of the topic is still very much evolving. Gerald Jaynes, a professor in the departments of Economics and African American Studies at Yale University, calls Temin’s new book “a significant addition to the existing literature on inequality.”
Temin, for his part, hopes that by the end of “The Vanishing Middle Class,” readers will agree that a society paying for more education will have made a worthy investment.
“The people in this country are the resource we have,” Temin says. “If we maintain the character of our fellow citizens, that is really our national strength.”

The Fed's Bank Bailout

New research on the Fed's bank bailout during the financial crisis:

The fed's bank bailout, EurekAlert!:...While many Americans know the Fed for its role in making monetary policy, it serves another lesser-known but hugely important purpose: providing temporary, short-term funds to banks as a "lender of last resort."
During the financial crisis from 2007-09, the Fed took drastic steps to ensure that banks had access to liquidity so they could continue lending. ...
For the first time, new research from Washington University in St. Louis examines data from the crisis to show how the Fed can effectively assist banks in times of financial uncertainty. No matter the program or the bank size, this infusion of liquidity spurred lending that ultimately reached homes and businesses, thereby benefiting the economy, the researchers found in their analysis.
"Perhaps contrary to popular beliefs, our research shows that the Fed's actions were effective in encouraging banks to lend. This suggests that the credit crunch we witnessed could have been a lot worse in the absence of these facilities," said Jennifer Dlugosz, assistant professor of finance at Olin Business School, and a former economist at the Board of Governors of the Federal Reserve System. ...
During the course of their research, Dlugosz and her co-authors [Allen Berger, professor of banking and finance at the University of South Carolina, Lamont Black, assistant professor of finance at DePaul University, and Christa Bouwman, associate professor of finance at Texas A&M University] found a total of 20 percent of small U.S. banks and 62 percent of bigger U.S. banks -- more than 2,000 in all -- used the Discount Window or the Term Auction Facility at some point during the crisis. The access to liquidity increased bank lending of almost all types. Meanwhile, they found no evidence that banks were making riskier loans.
"We examined whether or not the Discount Window and the Term Auction Facility helped encourage banks to lend during the crisis," Dlugosz said. "We find that it did. It looks like one extra dollar in liquidity support from the Fed to a bank results in somewhere between 30 to 60 cents in additional lending by the bank, depending on its size.
"It wasn't obvious at the time whether this was going to work. ..."

What’s the Role of Experts in the Public Debate?

Jonathan Portes:

What’s the role of experts in the public debate?: What’s the role of experts in the public debate?  And how should the media (and politicians) use them?  I’m assuming we’re talking here primarily about economists and other social scientists, not physicists or biotechnologists – although they shouldn’t assume they’re immune either, as some of the debates around climate change or vaccines show..
I think we have three really important functions. ...
First, to explain our basic concepts and most important insights in plain English. ...
Second is to call bullshit.  [gives example] ... For better or worse, a large part of my job is in fact intellectual garbage disposal.
Third, perhaps most difficult and where the element of judgement comes in, is in synthesising the consensus of other experts on a difficult topic, where there may not be one right answer, on topics from the minimum wage to the pros and cons of grammar schools, putting it in context, and explaining why it does, or doesn’t, matter.  And this is perhaps where politicians and the public need us most.
I’m going to give a specific example...
That doesn’t mean experts – and economists in particular – don’t need to do much better. We need not to present forecasts as fact, and call out politicians – and yes, I’m thinking of George Osborne here – who present them as such. We need to explain what we know and what we don’t know. Experts shouldn’t make political choices. But you can’t – or at least you shouldn’t – make political choices without experts.

It Takes “Alternative Math” to Claim That Redistribution Is Futile

Adam M. Finkel at RegBlog:

It Takes “Alternative Math” to Claim That Redistribution Is Futile: The unequal distribution of costs and benefits across society is one of the hottest topics in the regulatory arena—and one that, regretfully, has sparked fundamentally flawed arguments, threatening to distort and obscure much-needed discussion about redistributive policies. ...
Although all policies have redistributive effects, some ideologies are viscerally, even militantly, opposed to government interventions that benefit the poor, whether by intention or even as a side effect of an otherwise sound policy. ...
In a recent New York Times op-ed, University of Illinois at Chicago Professor Deirdre McCloskey exemplifies this type of argument, in conspicuously misguided fashion. In her column, McCloskey offers a litany of reasons as to why progressive taxation and other policies aimed at redistributing benefits to the poor are ill-advised. At the core of the essay, McCloskey makes the empirical assertion that such policies cannot actually make much of a difference in any event.
Unfortunately, the basic mathematics of McCloskey’s claim are mangled. She may not prefer that we seek progressive tax and regulatory policies, but her claim that these policies do not “uplift the poor very much” is erroneous. That the Times has decided not to correct her error—even in the face of an email exchange in which the author herself acknowledged her mistake—may be an example of how tempting it is to ascribe black-and-white factual issues to the realm of “healthy controversy.” ...
As with many of the toxic myths about regulation—that, for example, it is responsible for destroying countless jobs while failing to create any new ones in the process, or that it relies on gross exaggerations of risk and plays to irrational public fears—we are lost without the ability to distinguish between ideological responses to facts and ideological twisting of facts into nonsense. ...

Links for 03-16-06

Wednesday, March 15, 2017

FOMC Press Conference March 15, 2017 (Video)

Deregulation Fantasies

Chris Dillow:

Deregulation fantasies: Several people on Twitter yesterday reminded us of Liam Fox’s vision of a deregulated labour market:

we must begin by deregulating the labour market. Political objections must be overridden. It is too difficult to hire and fire and too expensive to take on new employees.

This fits in with Tory fantasies of the post-Brexit UK being like Singapore.

It does, however run into a problem – that there’s no obvious benefit to deregulation. ... You might think this is counter-intuitive. Common sense says that if firms can easily fire people then workers’ incentives to work hard are sharpened by a greater fear of the sack, whilst companies can more easily adjust their workforce to changes in market conditions. These mechanisms, however, are offset by others, for example:

 - If people fear the sack, they’ll not invest in job-specific skills but rather in general ones that make them attractive to future employers. They might also spend less time working and more time looking for a new job.

 - A lack of protection will encourage people to change jobs more often, as it’s better to jump than be pushed. This can reduce productivity, simply because new workers often take time to adapt to their new company’s clients, IT systems and to new colleagues.

 - If firms know they can fire at will they’ll devote less effort to screening or training, and so there might be worse matches between jobs and workers.

Deregulation might be good for bad employers who want to be petty tyrants, but it has no obvious aggregate benefit. I don’t say this in the hope of changing anybody’s mind. As Jonathan Swift said, “it is useless to attempt to reason a man out of a thing he was never reasoned into.” And as Nick points out, Brexiters are a cult that’s immune to reason. But things are true whether or not you believe them.

The Neoclassical Theory of the Firm Does Not Consider Political Engagement

From an interview with John C. Coffee at ProMarket:

Q: The neoclassical theory of the firm does not consider political engagement by corporations. How big of an omission do you think this is?
The problems in expanding the theory of the firm to consider political engagements are considerable. Of course, political engagement by firms can be viewed as merely rent-seeking. Unavoidably, this produces waste... (and possibly also corrupt[s] the political system).
But before one jumps to the conclusion that therefore corporations should be denied the right to influence political decisions in the interests of efficiency, more must be considered. For example, this week, over one hundred public corporations, most of them high-tech firms, filed a brief opposing the legality of the executive order signed by President Trump barring various immigrants.1) This can be viewed as collective action by firms in defense of capitalism and the free flow of goods and services. Those opposed to firms lobbying regulatory agencies would probably approve this defense by corporations of human rights. Nor was this case unique. Corporations, like Apple, Facebook, and Google, have regularly defended human rights.
What this implies is that any absolute, prophylactic rule against political engagement may be undesirable. How then should we distinguish between “good” and “bad” political engagements by corporations? One approach might be to refine the rules of corporate governance and give shareholders greater rights in the process. To the extent that shareholders are diversified, they should rationally oppose rent-seeking by competing firms, as such activity just raises the costs for both sides.
Conversely, however, in concentrated industries where collusion is more likely than competition, diversified shareholders might rationally support rent-seeking (and even reduced competition) by the firms in which they invest. Some empirical evidence suggests that investors in the highly concentrated airline industry have behaved this way. Hence, stronger corporate governance may supply a partial answer sometimes, but hardly always. At best, it can add transparency to the process, thereby making rent-seeking less feasible.
Theorists of the firm who wish to restrict political engagements by firms face a serious problem that they have not yet recognized: at least in the United States, corporate political engagement may be protected by the First Amendment. This means that reforms such as disclosure are possible (and, I think, desirable), but stricter, prophylactic rules are probably not. ...

FOMC Raises the Target Range for the Federal Funds Rate

No surprises, except perhaps the dissent by Neel Kashkari -- the Fed "decided to raise the target range for the federal funds rate to 3/4 to 1 percent," with indications of more rate increases to come:

Press Release, Release Date: March 15, 2017: Information received since the Federal Open Market Committee met in February indicates that the labor market has continued to strengthen and that economic activity has continued to expand at a moderate pace. Job gains remained solid and the unemployment rate was little changed in recent months. Household spending has continued to rise moderately while business fixed investment appears to have firmed somewhat. Inflation has increased in recent quarters, moving close to the Committee's 2 percent longer-run objective; excluding energy and food prices, inflation was little changed and continued to run somewhat below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 3/4 to 1 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; Jerome H. Powell; and Daniel K. Tarullo. Voting against the action was Neel Kashkari, who preferred at this meeting to maintain the existing target range for the federal funds rate.

Links for 03-15-06

Tuesday, March 14, 2017

Populism and the Politics of Health

Paul Krugman:

Populism and the Politics of Health: What’s next on health care? Truly, I have no idea. The AHCA is a real stinker... But ... starting off the Trump legislative era with the crashing and burning of Obamacare repeal would deeply damage Trump... So they will pull out all the stops.
But why are Republicans having so much trouble? Health reform is hard... But there’s a more fundamental issue: who is being served?
Obamacare helped a large number of people at the expense of a small, affluent minority: basically, taxes on 2% of the population to cover a lot of people and assure coverage to many more. Trumpcare would reverse that, hurting a lot of people (many of whom voted Trump) so as to cut taxes for a handful of wealthy people. That’s a difference that goes beyond political strategy. ...
And yet, and yet: Trump did in fact win over white working-class voters, who thought they were voting for a populist...
This ties in with an important recent piece by Zack Beauchamp on the striking degree to which left-wing economics fails, in practice, to counter right-wing populism... Why?
The answer, presumably, is that what we call populism is really in large degree white identity politics, which can’t be addressed by promising universal benefits. Among other things, these “populist” voters now live in a media bubble, getting their news from sources that play to their identity-politics desires, which means that even if you offer them a better deal, they won’t hear about it or believe it if told. For sure many if not most of those who gained health coverage thanks to Obamacare have no idea that’s what happened.
That said, taking the benefits away would probably get their attention, and maybe even open their eyes to the extent to which they are suffering to provide tax cuts to the rich. ...
... Trumpism is faux populism that appeals to white identity but actually serves plutocrats. That fundamental contradiction is now out in the open.

Public Capital, Private Capital

Thomas Piketty:

Public capital, private capital: The present economic debate is over-determined by two realities which, moreover, are connected as we sometimes tend to forget. On one hand we have the steady rise in public debt and, on the other, the prosperity of privately owned wealth. The figures for the level of public debt are well known; almost everywhere the level approaches or exceeds 100% of national income ... as compared with barely 30% in the 1970s. ...
During the post-war boom (the Trente Glorieuses) public assets were very considerable (approximately 100-150% of national income, as a result of a very large public sector, a consequence of post-war nationalisations), and significantly higher than public debt...
The most recent data available for 2015-2016 shows that net public capital has become negative in the United States, Japan and the United Kingdom. In all these countries, the sale of the total public assets would not be sufficient to repay the debt. In France and in Germany net public capital is only just positive.
But this does not mean that rich countries have become poor: it is their governments which have become poor, which is very different. ... The fact remains that private capital grew much faster than the decline in public capital, and that rich countries themselves hold even a little more...
Why be so pessimistic in the face of such prosperity? Simply because the ideological and political balance of power is such that public authorities are not able to make the main beneficiaries of globalisation contribute their fair share. The perception of this impossibility of a fair tax sustains the flight towards the debt. ...
Historically, major changes in the structure of property ownership often come together with profound political changes. We see this with the French Revolution, the American Civil War, the Euro-World Wars in the 20th century and the Libération in France. The nationalist forces at work today could lead to a return to national currencies and inflation, which would promote a chaotic redistribution of resources, at the expense of severe social stress and an ethnicisation of political conflicts. In the face of this fatal risk to which the present status quo could lead, there is only one solution. We must chart a democratic pathway out of the impasse and organise the necessary redistribution of resources within the framework of the rule of law.

Fed Watch: Shifting Dots

Tim Duy:

Shifting Dots, bt Tim Duy: The Federal Reserve begins its two-day meeting today. The outcome of the meeting is no longer in debate. A 25bp rate hike is widely expected after a round of Fedspeak in the week prior to the blackout period and the February employment report. More important now is what signal the Fed sends with the statement, the press conference, and the dots. I anticipate the overall message to signal general confidence in the economic outlook while reinforcing the idea that the Fed is neither behind the curve nor intends to fall behind the curve. The combination will give the Fed room to tighten policy at a gradual pace. I think that four hikes this year would still be considered gradual from the Fed's perspective. After all, the expectation of four hikes a year was considered gradual at the beginning of 2016. Not sure why it shouldn't be considered gradual now. 
At the end of last year, the Fed's median interest rate projection anticipated 75bp of rate hikes in each of 2017 and 2018. That translated into my 2017 baseline of two rate hikes with an option on a third, basically including a bias to account for the fact that the Fed's forecast has fallen short in recent years. If economic conditions were such, however, that the Fed pulled forward the first hike to March, I said that my expectation would shift to a baseline of three with an option on four. What that means, in effect, that I expect the dots to shift upward to reflect an anticipation of four rate hikes in 2017.
With March likely, will the dots move as I expect? Not everyone thinks so. Morgan Stanley, for instance, expects the dots will show higher rates in 2018 and 2019 instead. Via Business Insider:


 So why do I think it is more likely than not that the Fed raise the dots for 2017? Consider first the projections for output growth, unemployment, and inflation. Those should play directly into the rate hike forecast in a systematic fashion. So it you think the odds favor some combination of a higher expect growth gap (the difference between actual and longer run output growth), a lower than anticipated unemployment gap (the difference between actual and longer run unemployment), and a higher inflation forecast, then you should anticipate the dots will shift upward. 
In practice, of course, these estimates depend in part on the Fed's estimate of potential growth and the natural rate of unemployment. I don't think either has likely change, so the relevant factors should be the forecasts of the actual variables. Overall, I think it reasonable to believe that at least one, and likely two factors will point to higher rates.
Second, the Fed clearly believes that the balance of risks has tilted at least to completely balanced if not toward the upside. External risks have waned, incoming data both soft and now, with the employment report, hard have been solid, and Fed officials are captured by the allure of fiscal stimulus. FOMC participants whose rate forecasts incorporated a heavy downside risk (reasonable given what happened in 2016) will likely pull their rate forecasts up in a sigh of relief. In essence, these members will believe that without pulling forward rate hikes, they will be in danger of overshooting their targets.
Third, the financial markets were particularly buoyant in recent months even as expectations of tighter policy intensified. I think some FOMC members - yes, New York Federal Reserve President William Dudley, I am looking at you - will want to push back on those easier conditions in the name of financial stability. So that argues for pulling rate hikes forward.
Fourth,  estimates of the longer-run natural rate could rise. I don't anticipate this, as I don't see they have evidence to suggest this is the case, but I did not anticipate the small bump upward in the neutral rate estimates in the December Summary of Economic Projections. 
Altogether then I see more reasons likely to raise the 2017 rate projections than to hold them steady. Hence my expectations for the dots to nudge upward. Basically, it just puts the Fed back to where they started in 2016, expect with more cause to believe it will actually work out this time.
Of course, the rate projection is not a promise, and given recent history I tend to shade down my expectation from what the Fed projects. Hence my three with an option on four. I also am not entirely sure how they will integrate balance sheet reduction with rate hikes? Do they announce a balance sheet reduction at the same meeting they raise rates? Or do they pass on a rate hike to announce a balance sheet reduction? It seems like they would what to avoid the latter because it would equate the balance sheet tool with a rate hike a little too directly. Instead, I expect they would want everyone to think the balance sheet reduction is no big deal. So that argues for both at say the September meeting and that then places an option on the December meeting. If would be nice to have better guidance on this issue.
I tend to think the balance sheet issue is another reason to front load hikes in 2017 if possible. Then they have room to pause in 2018 if balance sheet reduction is a bit sloppier than anticipated.
Bottom Line: I see more reasons that not that the Fed will push up its 2017 rate hike projections. Lots of different factors - external, data flow, fiscal stimulus, and financial conditions - to say that with the economy hovering near potential output, the time is right to make a slightly faster move toward the neutral rate. Indeed, I have a hard time seeing why they would pull forward a rate hike if they weren't trying to create room for an additional hike this year. Note that this would really be just moving the ball down the field a bit quicker, not changing the goal posts - the estimate of the neutral rate. A higher estimate of the neutral rate would be much more hawkish than just quickening the pace slightly to that rate. 

Links for 03-14-06

Monday, March 13, 2017

Life Expectancy and Health Expenditure

Life Expectancy and Health Expenditure per capita, 1970-2014
Source: Esteban Ortiz-Ospina and Max Roser, Financing Healthcare, 2017. Published online at


Life Expectancy and Health Expenditure per capita (2011 international dollars, PPP-adjusted), 2014
Sources: World Bank and authors' calculations.

More here: Improving U.S. Healthcare and Coverage - Cecchetti & Schoenholtz

Paul Krugman: Facts Are Enemies of the People

The "Trumphony" of falsehoods is harmful:

Facts Are Enemies of the People, by Paul Krugman, NY Times: The U.S. economy added 10.3 million jobs during President Obama’s second term, or 214,000 a month. This brought the official unemployment rate below 5 percent... But Donald Trump insisted that the good news on jobs was “phony,” that America was actually suffering from mass unemployment.
Then came the first employment report of the Trump administration, which at 235,000 jobs added looked very much like a continuation of the previous trend. And the administration claimed credit: Job numbers, Mr. Trump’s press secretary declared, “may have been phony in the past, but it’s very real now.”
Reporters laughed — and should be ashamed of themselves... For it really wasn’t a joke. America is now governed by a president and party that ... want everyone to accept that reality is whatever they say it is.
So we’re just supposed to believe the president if he says, falsely, that his inauguration crowd was the biggest ever; if he claims, ludicrously, that millions of votes were cast illegally for his opponent; if he insists, with no evidence, that his predecessor tapped his phones.
And it’s not just about serving one man’s vanity..., this attitude can hurt millions of people, consider ... health care reform.
Obamacare has led to a sharp decline in the number of Americans without health insurance. ... Republicans, however, are in denial about recent gains. ...
And as for the likely impacts of Trumpcare — well, they literally don’t want to know. ...Republicans rammed Trumpcare through key committees, literally in the dead of night, without waiting for the C.B.O. score — and they have been pre-emptively denouncing the budget office, which is likely to find that the bill would cause millions to lose health coverage. ...
The C.B.O., in other words, is in the same position as the news media, which Mr. Trump has declared “enemies of the people” — not, whatever he may say, because they get things wrong, but because they dare to challenge him on anything. ...
And much, perhaps most, of his party is happy to go along, accepting even the most bizarre conspiracy theories. For example, a huge majority of Republicans believe Mr. Trump’s basically insane charges about being wiretapped by President Obama.
So don’t make the mistake of dismissing the assault on the Congressional Budget Office as some kind of technical dispute. It’s part of a much bigger struggle, in which what’s really at stake is whether ignorance is strength, whether the man in the White House is the sole arbiter of truth.

Why the Republican Health Care Plan Is Destined to Fail

I have a new column:

Why the Republican Health Care Plan Is Destined to Fail:
It is the general social consensus, clearly, that the laissez-faire solution for medicine is intolerable.” – Kenneth Arrow, 1963.
As Republicans struggle to find an acceptable replacement for Obamacare, a task that does not yet appear to be complete given the growing opposition to their recent proposal, they would do well to remember the words of the person who invented healthcare economics, Kenneth Arrow.
Professor Arrow, a Nobel Prize-winning economist who recently passed away at the age of 95, argued that the market for healthcare is not like other markets for several reasons. ...

Fed Watch: Green Light


Green Light, by Tim Duy: If there was truly any potential impediment to a rate hike from the Fed this week, it would have come from a weak employment report. The employment report was decidedly not weak. Instead, it finished paving the way to a Fed rate hike. Not enough yet, however, to justify a dramatic acceleration in the pace of future rate hikes, implying only a 25bp upward nudge in the Fed's rate projections for 2017.
Nonfarm payroll growth came in above expected at 235k:


The number may have been boosted by mild weather in February. Still, the underlying pace of growth in recent months is around 200k/month. This is faster than the Fed expects necessary to hold unemployment steady after the cyclical boost to labor force participation plays out. So far, however, labor supply continues to respond. Labor force participation edged up during the month, leaving the decline in the unemployment rate a modest 0.1 percentage points to 4.7 percent. This is just a touch below the Fed's estimate of NAIRU.
Underemployment numbers to continue to improve, as the Fed expects:


The economy is at something of a sweet spot, with job growth strong enough to prod along continued healing of the labor market but slow enough that the Fed can continue to remove accommodation at a gradual pace.
Wage growth rebounded in February, continuing to hover in the 2.5-3 percent range:


Should we be expecting much faster wage growth? Probably not. It strikes me that we are closing in on pre-recession rates:


If inflation rises to two percent (and here I am thinking core inflation), and wages rise with it, that adds about 30bp which pushes wage growth a bit above three percent. Note also, real wage growth was likely a touch higher prior to the recession, but not much:


And this needs to be taken in context of falling productivity growth over the past two decades:


So in order to expect substantially faster wage growth, we need to expect substantially higher productivity growth or substantially higher inflation. The Fed is betting against the former and actively tries to contain the latter. Indeed, on the latter they are only looking to get another 30bp or so. Which suggests to me that a meaningful acceleration of wages at this point would be interpreted by the Fed as evidence they had overshot the full employment mandate and needed to tighten policy more aggressively to contain inflationary pressures. But we are not there yet.
Bottom Line: Looks like the Fed knew what it was doing by signaling a rate hike in recent weeks. The earlier than expected rate hike should correspond to a bump up in this week's "dots." Some participants with two dots will switch to three, some with three to four. I expect the median rate hike projection of Fed participants will be four, which I translate into a baseline case this year of three with an option on four. The Fed will want to front load these hikes to stay ahead of the curve, which means March, June, and September if the data allows. Then December if needed. Data as of yet does not suggest a need by itself to step up the pace of hikes even more quickly. Watch the longer-run rate forecast. A rise in the end game dots would have much more hawkish implications than just a small acceleration in the near-term pace of hikes.

Links for 03-13-06

Saturday, March 11, 2017

Long-Run Money Demand Redux

Luca Benati, Robert Lucas, Juan Pablo Nicolini, and Warren E. Weber:

Long-run money demand redux: Most economists and central bankers no longer consider money supply measures to be useful for conducting monetary policy. One reason is the alleged instability of the relationship between monetary aggregates. This column uses data from 32 countries and spanning up to 100 years to argue that the long-run demand for money is alive and well. Results show a remarkable stability in long run money demand, both within and across countries. Nonetheless, short-run departures can be large and persistent, and further research is needed.
Over the last three decades, most economists and central bankers have come to doubt the usefulness of money supply measures for conducting monetary policy, and have turned to macroeconomic models in which monetary aggregates have no role.
What was the main reason behind this move away from monetary aggregates? In our view, it was the alleged disappearance, starting from the early 1980s, of any previously identified stable relationship between monetary aggregates, GDP, and interest rates. For the US, for example, researchers such as Friedman and Kuttner (1992) have documented the breakdown during those years of any stable long-run demand for several alternative monetary aggregates. By the same token, in the Eurozone, the ECB’s so-called monetary pillar (a reference value for the annual growth rate of M3 derived from a money demand equation) has come to be seen as too unreliable to be of any use at all.
There is a clear sense in which this move away from monetary aggregates has left monetary policy untroubled. Over the same decades, there was a surge in the number of central banks that were explicitly or implicitly following inflation-targeting policies in which the monetary policy instrument was the short-term interest rate. And the result has clearly been remarkable – inflation has been defeated. This has been the case for developed economies that saw their inflation rates climb to two digits for a few years in the late 1970s and early 1980s, for emerging economies that experienced hyperinflation during the same years, and for everything in between. In 2015, with a yearly inflation rate of around 30%, Argentina had one of the highest inflation rates in the world – a rate that, ironically, would have been one of the lowest in Latin America in the 1980s.
In this column, we first review recent work on the long-run demand for money, and argue that it is alive and well. We then explain why we believe that this finding may contribute to the monetary policy debate. ...

Links for 03-11-06

Friday, March 10, 2017

The AHCA’s Mandate Replacement Doesn’t Make Sense

Aaron Carroll:

The AHCA’s mandate replacement doesn’t make sense to me: ...The Republicans hate the individual mandate. I get that. I don’t necessarily understand their rationale, but I accept it. They also, however, understand the need for some sort of carrot/stick to get healthy people to buy insurance so that we don’t get adverse selection and see the private insurance market enter a death spiral. So they need to replace it.
We have discussed this before. There are many ways to solve this adverse selection problem without a mandate. ...
Moreover, the incentive is totally in the wrong direction. The individual mandate punishes those who don’t buy insurance – every year. As long as I remain uninsured, I will be penalized. I will be hit again and again, until I buy insurance. That’s a stick.
The new AHCA penalty works in the opposite direction. Once I’m out of the market, I’m left alone. It’s not until I re-enter that I’m hit with the penalty. The longer I stay out, the longer I avoid the pain. It’s an inducement to remain uninsured.
We know what needs to happen to reduce adverse selection. We need to make the carrots and/or sticks stronger. This seems to do the opposite. I don’t get it.

Links for 03-10-06

Thursday, March 09, 2017

“Political Engagement by Corporations Derives from and is Focused on Seeking Monopolistic Power”

From ProMarket:

“Political Engagement by Corporations Derives from and is Focused on Seeking Monopolistic Power," Interview of Joseph Bower: ...Q: The neoclassical theory of the firm does not consider political engagement by corporations. How big of an omission do you think this is?
There has been extensive writing about the power and scope of corporations going back at least to Edward Mason and Carl Kaysen. In a chapter I wrote,1) I explored the role of large corporations in terms of their impact on factors other than the product market. Echoing Kaysen I emphasized location, employment, product line choices, vendors that because of their scale and scope give firms powers far beyond those conceived in the neo-classical model and unconstrained by traditional notions of price competition. The neo-classical model simply does not comprehend the modern corporation.
But if we are talking about a theory carefully constructed on a set of axioms, the theory really can’t consider political engagements. The essence of the neo-classical theory is the constraint on choice imposed by given and widely shared technology and competitive markets for resources and vendors. Political engagement derives from and is focused on seeking monopolistic power. The various theories of monopolistic competition are instructive but fall far short of the standard sought by neoclassical theory. ...

Links for 03-09-06

Wednesday, March 08, 2017

Fed Watch: Employment Report Ahead

Tim Duy:

Employment Report Ahead, by Tim Duy: Arguably, the Fed took the mystery out of this next FOMC meeting by fairly clearly signaling a rate hike is coming. What could hold them back at this point? Only a complete disaster of an employment report. And today's ADP number suggests that's very, very unlikely. Indeed, if the ADP number translates into a blowout employment report, the Fed probably didn't need to signal as aggressively as they did about this next meeting. The data would have brought market expectations to the same place. 

Calculated Risk provides a preview of the February employment report, concluding that he will take the "over" on the current forecast of a 195k gain in nonfarm payrolls within a range of 162k to 220k. I concur. Feeding recent data into my quick and dirty forecasting model suggests a gain of 273k for the month:


That said, I would not put too much emphasis on the point forecast itself. The change in payrolls is notoriously difficult to forecast. Almost a fool's game. That said, I do read this as a signal that there is substantial upside risk to the consensus forecast.

As important, if not more, is the unemployment rate and wage growth. A large gain in payrolls suggests a drop in the unemployment rate unless labor force responds positively. The Fed expects that as the recovery progresses, growth in the labor force will slow as demographic effects dominate cyclical effects. If this happens before job growth slows, the unemployment rate will decrease sharply and the Fed will undershoot the natural rate of unemployment. Faster wage growth would help confirm such an undershoot.

Bottom Line: A surge in hiring coupled with a decline in unemployment would be a red flag for the Fed. If that happens, expect the Fed to be more aggressive this year. It will give them more reason to front load rate hikes, and, if repeated in the next employment report, would open up the possibility of a May hike. Monetary policy is not on a preset course, and gradualism is not a promise, only an expectation.

A Foreword to Kari Polanyi Levitt

Dani Rodrik:

A Foreword to Kari Polanyi Levitt: I was recently asked to write a foreword to the Mexican edition of Kari Polanyi Levitt’s From the Great Transformation to the Great Financialization. Kari is Karl Polanyi's daughter, and the essays in her book -- part memoir, part intellectual history, part analysis of the global economy -- provide a wonderful Polanyi-esque perspective on our day. I happily accepted, and my Foreword is below.
I first encountered Karl Polanyi as an undergraduate, in a course on comparative politics. “The Great Transformation” was on the course syllabus, sitting somewhat awkwardly amidst more standard political science fare. The assigned reading, on the Speenhamland system and the reform of the Poor Laws in Britain made little impression on me at first. But over the years, I found myself coming back to the central arguments of the book: the embeddedness of a market economy in a broader set of social arrangements, the rejection of an autonomous economic sphere, the folly of treating markets as self-stabilizing. ...

Links for 03-08-06

Tuesday, March 07, 2017

On Perverse Incentives and Replication in Science

Douglas Campbell:

On Perverse Incentives and Replication in Science: Stephen Hsu has a nice blog post on this topic. He writes about this common pattern:

1. Study reports results which reinforce the dominant, politically correct, narrative.
2. Study is widely cited in other academic work, lionized in the popular press, and used to advance real world agendas.
3. Study fails to replicate, but no one (except a few careful and independent thinkers) notices.

#1 is spot-on for economics. Woe be to she who bucks the dominant narrative. In economics, something else happens. Following the study, there are 20 piggy-back papers which test for the same results on other data. The original authors typically get to referee these papers, so if you're a young researcher looking for a publication, look no further. You've just guaranteed yourself the rarest of gifts -- a friendly referee who will likely go to bat for you. Just make sure your results are similar to theirs. If not, you might want to shelve your project, or else try 100 other specifications until you get something that "works". One trick I learned: You can bury a robustness check which overturns the main results deep in the paper, and your referee who is emotionally invested in the benchmark result for sure won't read that far. ...

Most researchers in Economics go their entire careers without criticizing anyone else in their field, except as an anonymous referee, where they tend to let out their pent-up aggression. Journals shy away from publishing comment papers, as I found out first-hand. In fact, much if not a majority of the papers published in top economics journals are probably wrong, and yet the field soldiers on like a drunken sailor. Often, many people "in the know" realize that many big papers have fatal flaws, but have every incentive not to point this out and create enemies, or to waste their time writing up something which journals don't really want to publish (the editor doesn't want to piss a colleague off either). As a result, many of these false results end up getting taught to generations of students. Indeed, I was taught a number of these flawed papers as both an undergraduate and a grad student.

What can be done? ...

A Plan Set Up To Fail

Paul Krugman:

A Plan Set Up To Fail: So now we know what Republicans have to offer as an Obamacare replacement. Let me try to avoid value judgments for a few minutes, and describe what seems to have happened here.
The structure of the Affordable Care Act comes out of a straightforward analysis of the logic of coverage. ...
And the result has been a sharp decline in the number of uninsured, with costs coming in well below expectations. Roughly speaking, 20 million Americans gained coverage at a cost of around 0.6 percent of GDP.
Republicans have nonetheless denounced the law as a monstrosity, and promised to replace it with something totally different and far better. Which makes what they’ve actually come up … interesting.
For the GOP proposal basically accepts the logic of Obamacare. ... Conservatives calling the plan Obamacare 2.0 definitely have a point.
But a better designation would be Obamacare 0.5, because it’s really about replacing relatively solid pillars with half-measures, severely and probably fatally weakening the whole structure.
First, the individual mandate – already too weak, so that too many healthy people opt out – is replaced by a penalty imposed if and only if the uninsured decide to enter the market later. This wouldn’t do much.
Second, the ACA subsidies, which are linked both to income and to the cost of insurance, are replaced by flat tax credits which would be worth much less to lower-income Americans, the very people most likely to need help buying insurance.
Taken together, these moves would almost surely lead to a death spiral. Healthy individuals, especially low-income households no longer receiving adequate aid, would opt out, worsening the risk pool. Premiums would soar – without the cushion created by the current, price-linked subsidy formula — leading more healthy people to exit. In much of the country, the individual markets would probably collapse.
The House leadership seems to realize all of this; that’s why it reportedly plans to rush the bill through committee before CBO even gets a chance to score it.
It’s an amazing spectacle. Obviously, Republicans backed themselves into a corner: after all those years denouncing Obamacare, they felt they had to do something, but in fact had no good ideas about what to offer as a replacement. So they went with really bad ideas instead.

 Kevin Drum notes one reason why the bill is structured as it is:

The GOP Health Care Law Is Missing a Surprising Number of Tea Party Hobbyhorses: I was reading through the Republican health care bill last night, and it struck me that a lot of Republican hobbyhorses are missing. ...
I'm pretty sure the bill doesn't include any of the following:
-No tort reform. ...
-No insurance sales across state lines. ...
-No change to the essential benefits required of all health care plans. ...
-Obamacare is chockablock with regulations of all kinds, including incentives to reduce costs and rules about how doctors are paid. These appear to be intact under the Republican bill.
Why is this? If you look carefully, you'll see what these things all have in common: they don't directly affect the federal budget, which means they can't be passed via reconciliation. They have to be passed in a separate bill under regular order, which means Democrats can filibuster them. Republicans don't have 60 votes in the Senate to overcome a filibuster, so they can't do any of this stuff.
Republicans can starve the subsidies to make Obamacare virtually useless for the poor, but they can't repeal the entire law. The result of such a partial repeal is likely to be such obvious chaos that they'll be lucky to get their bill passed in the House, let alone the Senate. There are bound to be at least three senators who just aren't willing to clap loudly and pretend that everything is OK. It's very hard to see a path to passage for this bill.

Links for 03-07-06

Monday, March 06, 2017


The "Trumpdoesn'tcare" health care proposal has been released (calling it "Trumpcare" implies he, and the GOP, do care -- they don't). Here's Krugman's quick take on Twitter:

Paul Krugman: Can't do full analysis until tomorrow. But GOP now basically accepts logic of ACA - just determined to offer an inferior version

Paul Krugman: Philosophical case for free markets has been abandoned (because it's so obviously wrong here) Mean spiritedness is all that's left.

Paul Krugman: It's not Obamacare 2.0. It's Obamacare 0.5 - a half-assed attempt to preserve ACA successes without spending nearly enough money

Guess who does well, and who is hurt? More details here and here.

Paul Krugman: A Party Not Ready to Govern

"They have no idea how to turn their slogans into actual legislation

A Party Not Ready to Govern, by Paul Krugman, NY Times: According to Politico, a Trump confidante says that the man in the Oval Office — or more often at Mar-a-Lago — is “tired of everyone thinking his presidency is screwed up.” Pro tip: The best way to combat perceptions that you’re screwing up is, you know, to stop screwing up.
But he can’t, of course. And it’s not just a personal problem.
It goes without saying that Donald Trump is the least qualified individual, temperamentally or intellectually, ever installed in the White House. ... Thanks, Comey.
But the broader Republican quagmire — the party’s failure so far to make significant progress toward any of its policy promises — isn’t just about Mr. Trump’s inadequacies. The whole party, it turns out, has been faking it for years. Its leaders’ rhetoric was empty; they have no idea how to turn their slogans into actual legislation, because they’ve never bothered to understand how anything important works.
Take the two lead items in the congressional G.O.P.’s agenda: undoing the Affordable Care Act and reforming corporate taxes. In each case Republicans seem utterly shocked to find themselves facing reality.
The story of Obamacare repeal would be funny if the health care — and, in many cases, the lives — of millions of Americans weren’t at stake. ...
Then there’s corporate tax reform — an issue where the plan being advanced by Paul Ryan ... is actually not too bad, at least in principle. ...
But Mr. Ryan has failed spectacularly to make his case either to colleagues or to powerful interest groups. Why? As best I can tell, it’s because he himself doesn’t understand the point of the reform. ...
At this point, then, major Republican initiatives are bogged down for reasons that have nothing to do with the personality flaws of the tweeter in chief, and everything to do with the broader, more fundamental fecklessness of his party.
Does this mean that nothing substantive will happen on the policy front? Not necessarily. Republicans may decide to ram through a health plan that causes mass suffering, and hope to blame it on Mr. Obama. They may give up on anything resembling a principled tax reform, and just throw a few trillion dollars at rich people instead.
But whatever the eventual outcome, what we’re witnessing is what happens when a party that gave up hard thinking in favor of empty sloganeering ends up in charge of actual policy. And it’s not a pretty sight.