Category Archive for: Economics [Return to Main]

Friday, October 21, 2016

Neoliberalism and Austerity

Simon Wren-Lewis:

Neoliberalism and austerity: I like to treat neoliberalism not as some kind of coherent political philosophy, but more as a set of interconnected ideas that have become commonplace in much of our discourse. That the private sector entrepreneur is the wealth creator, and the state typically just gets in their way. That what is good for business is good for the economy, even when it increases monopoly power or involves rent seeking. Interference in business or the market, by governments or unions, is always bad. And so on. ...
I do not think austerity could have happened on the scale that it did without this dominance of this neoliberal ethos. Mark Blyth has described austerity as the biggest bait and switch in history. It took two forms. In one the financial crisis, caused by an under regulated financial sector lending too much, led to bank bailouts that increased public sector debt. This leads to an outcry about public debt, rather than the financial sector. In the other the financial crisis causes a deep recession which - as it always does - creates a large budget deficit. Spending like drunken sailors goes the cry, we must have austerity now.
In both cases the nature of what was going on was pretty obvious to anyone who bothered to find out the facts. That so few did so, which meant that the media largely went with the austerity narrative, can be partly explained by a neoliberal ethos. Having spent years seeing the big banks lauded as wealth creating titans, it was difficult for many to comprehend that their basic business model was fundamentally flawed and required a huge implicit state subsidy. On the other hand they found it much easier to imagine that past minor indiscretions by governments were the cause of a full blown debt crisis. ...
While in this sense austerity might have been a useful distraction from the problems with neoliberalism made clear by the financial crisis, I think a more important political motive was that it appeared to enable the more rapid accomplishment of a key neoliberal goal: shrinking the state. It is no coincidence that austerity typically involved cuts in spending rather than higher taxes... In that sense too austerity goes naturally with neoliberalism. ...
An interesting question is whether the same applies to right wing governments in the UK and US that used immigration/race as a tactic for winning power. We now know for sure, with both Brexit and Trump, how destructive and dangerous that tactic can be. As even the neoliberal fantasists who voted Leave are finding out, Brexit is a major setback for neoliberalism. Not only is it directly bad for business, it involves (for both trade and migration) a large increase in bureaucratic interference in market processes. To the extent she wants to take us back to the 1950s, Theresa May’s brand of conservatism may be very different from Margaret Thatcher’s neoliberal philosophy.

Paul Krugman: Why Hillary Wins

 "Maybe Mrs. Clinton is winning because she possesses some fundamental political strengths":

Why Hillary Wins, by Paul Krugman, NY Times: Hillary Clinton is a terrible candidate. Hey, that’s what pundits have been saying ever since this endless campaign began. You have to go back to Al Gore in 2000 to find a politician who faced as much jeering from the news media...
Strange to say, however, Mrs. Clinton won the Democratic nomination fairly easily, and now, having pummeled her opponent in three successive debates, is an overwhelming favorite to win in November, probably by a wide margin. How is that possible?
The usual suspects are already coalescing around an answer..., she just got lucky. If only the Republicans hadn’t nominated Donald Trump, the story goes, she’d be losing badly.
But here’s a contrarian thought: Maybe Mrs. Clinton is winning because she possesses some fundamental political strengths — strengths that fall into many pundits’ blind spots. ...
When political commentators praise political talent, what they seem to have in mind is the ability of a candidate to match one of a very limited set of archetypes: the heroic leader, the back-slapping regular guy you’d like to have a beer with, the soaring orator. Mrs. Clinton is none of these things...
Yet the person tens of millions of viewers saw in this fall’s debates was hugely impressive all the same: self-possessed, almost preternaturally calm under pressure, deeply prepared, clearly in command of policy issues. ...
Oh, and the strengths she showed in the debates are also strengths that would serve her well as president. ... And maybe ordinary citizens noticed the same thing; maybe obvious competence and poise in stressful situations can add up to a kind of star quality, even if it doesn’t fit conventional notions of charisma.
Furthermore, there’s one thing Mrs. Clinton brought to this campaign that no establishment Republican could have matched: She truly cares about her signature issues, and believes in the solutions she’s pushing.
I know, we’re supposed to see her as coldly ambitious and calculating, and on some issues — like macroeconomics — she does sound a bit bloodless, even when she clearly understands the subject and is talking good sense. But when she’s talking about women’s rights, or racial injustice, or support for families, her commitment, even passion, are obvious. She’s genuine, in a way nobody in the other party can be.
So let’s dispel with this fiction that Hillary Clinton is only where she is through a random stroke of good luck. She’s a formidable figure, and has been all along.

Links for 10-21-16

Thursday, October 20, 2016

A Tale of Two Stagnations

Noah Smith:

A Tale of Two Stagnations: The term "secular stagnation," coined by economists in the 1930s and recently popularized by Larry Summers, has become a catch-all description for long-term economic pessimism. But it's gotten confused with a very different idea -- the technological stagnation hypothesis, proposed by economist Robert Gordon (and by Bloomberg View's Tyler Cowen). These are two very different ideas. Both would lead to slow growth in the long term, but they imply different causes and different remedies. ...

Links for 10-20-16

Wednesday, October 19, 2016

No, U.S. Manufacturing Isn't Really Booming

Justin Fox:

No, U.S. Manufacturing Isn't Really Booming:...[Is]American manufacturing .. in decline? An answer frequently offered by wonky economics journalists is that, no, U.S. manufacturing output has actually kept growing. ...

There's a catch, though. As economist Susan N. Houseman of the W.E. Upjohn Institute for Employment Research ... points out, about half of the growth in U.S. manufacturing output since 1997 has been in just one sector: computer and electronics manufacturing.

If it weren't for computers and electronics (which includes semiconductors), manufacturing output would still be well below its 2008 peak and only 21 percent higher than in 1997...

The ... way those computers-and-electronics numbers are arrived at is worthy of a closer look. ... Without adjusting for deflation, value added in computer and electronics manufacturing is up 45 percent since 1997. With the adjustments, it's up 699 percent! What's happening here is that the Bureau of Economic Analysis has been trying to account for vast improvements in ... quality... Writes Houseman:

Such quality adjustment ... can make the numbers difficult to interpret..., figures that exclude this industry ... arguably provide a clearer picture of trends in manufacturing output.

As it stands now, those trends don't look impressive. U.S. manufacturing output has held up a lot better than manufacturing employment. But it definitely isn't booming.

Are Americans Better Off Than They Were a Decade or Two Ago?

Ben Bernanke and Peter Olson:

Are Americans better off than they were a decade or two ago?: Economically speaking, are we better off than we were ten years ago? Twenty years ago? When asked such questions, Americans seem undecided, almost schizophrenic, with large majorities saying the country is heading “in the wrong direction,” even as they tell pollsters that they are optimistic about their personal financial situations and the medium-term economic outlook.
In their thirst for evidence on this issue, commentators seized on the recent report by the Bureau of the Census, which found that real median household income rose by 5.2 percent in 2015, as showing that “the middle class has finally gotten a raise.” Unfortunately, that conclusion puts too much weight on a useful, but flawed and incomplete, statistic. Among the more significant problems with the Census’s measure are that: 1) it excludes taxes, transfers, and non-monetary compensation like employer-provided health insurance; and 2) it is based on surveys rather than more-complete tax and administrative data, with the result that it has been surprisingly inconsistent with the official national income numbers in recent years. Even if precisely measured, data on income exclude important determinants of economic well-being, such as the hours of work needed to earn that income.
While thinking about the question, we came across a recently published article by Charles Jones and Peter Klenow, which proposes an interesting new measure of economic welfare. While by no means perfect, it is considerably more comprehensive than median income, taking into account not only growth in per capita consumption but also changes in working time, life expectancy, and inequality. Moreover, as the authors demonstrate, it can be used to assess economic performance both across countries and over time. In this post we’ll report some of their results, and extend part of their analysis (which ends before the Great Recession) through 2015.[1]
The bottom line: According to this metric, Americans enjoy a high level of economic welfare relative to most other countries, and the level of Americans’ well-being has continued to improve over the past few decades despite the severe disruptions of the last one. However, the rate of improvement has slowed noticeably in recent years, consistent with the growing sense of dissatisfaction evident in polls and politics. ...

Links for 10-19-16

Tuesday, October 18, 2016

Yellen Poses Important Post-Great Recession Macroeconomic Questions

Nick Bunker:

Yellen poses important post-Great Recession macroeconomic questions: Last week at a Federal Reserve Bank of Boston conference, Federal Reserve Chair Janet Yellen gave a speech on macroeconomics research in the wake of the Great Recession. She ... lists four areas for research, but let’s look more closely at the first two groups of questions that she elevates.
The first is the influence of aggregate demand on aggregate supply. As Yellen notes, the traditional way of thinking about this relationship would be that demand, a short-run phenomenon, has no significant effect of aggregate supply, which determines long-run economic growth. The potential growth rate of an economy is determined by aggregate supply...
Yellen points to research that increasingly finds so called hysteresis effects in the macroeconomy. Hysteresis, a term borrowed from physics, is the idea that short-run shocks to the economy can alter its long-term trend. One example of hysteresis is workers who lose jobs in recessions and then aren’t drawn back into the labor market bur rather are permanently locked out... Interesting new research argues that hysteresis may affect not just the labor supply but also the rate of productivity growth.
If hysteresis is prevalent in the economy, then U.S. policymakers need to rethink their fiscal and monetary policy priorities. The effects of hysteresis may mean that economic recoveries need to run longer and hotter than previous thought in order to get workers back into the labor market or allow other resources to get back into full use.
The other set of open research questions that Yellen raises is the influence of “heterogeneity” on aggregate demand. In many models of the macroeconomy, households are characterized by a representative agent... In short, they are assumed to be homogeneous. As Yellen notes in her speech, overall home equity remained positive after the bursting of the housing bubble, so a representative agent would have maintained positive equity in their home.
Yet a wealth of research in the wake of the Great Recession finds that millions of households whose mortgages were “underwater” and didn’t have positive wealth—a big reason for the severity of the downturn. Ignoring this heterogeneity in the housing market and its effects on economic inequality seems like something modern macroeconomics needs to resolve. Economists are increasingly moving in this direction, but even more movement would very helpful.
Yellen raises other areas of inquiry in her speech, including better understanding how the financial system is linked to the real economy and how the dynamics of inflation are determined. ... As Paul Krugman has noted several times over the past several years, the Great Recession doesn’t seem to have provoked the same rethink of macroeconomics compared to the Great Depression, which ushered in Keynesianism, and the stagflation of the 1970s, which led to the ascendance of new classical economics. The U.S. economy is similarly dealing with a “new normal.” Macroeconomics needs to respond this reality.

Fed Watch: Are Yellen and Fischer Really Worlds Apart?

Tim Duy:

Are Yellen and Fischer Really Worlds Apart?, by Tim Duy: This from Bloomberg surprised me:

Michael Gapen, chief U.S. economist at Barclays Plc in New York, said Fischer’s comments “reflect an ongoing divergence of opinion” at the central bank. Fischer “doesn’t see much room for running the economy hot” while Yellen’s views “seem to provide a wide-open door to do that. You have a chair and a vice chair who see policy differently right now,” he said.

I don't think there exists a yawning gap between Federal Reserve Vice-Chair Fischer and Federal Reserve Vice Chair Yellen. The perception of this gap stems in part from what I think was an aggressive reading of Yellen's speech last week. The line in question:

If we assume that hysteresis is in fact present to some degree after deep recessions, the natural next question is to ask whether it might be possible to reverse these adverse supply-side effects by temporarily running a "high-pressure economy," with robust aggregate demand and a tight labor market.

Is this a call for a "high-pressure economy"? My interpretation is somewhat more muted. Note that this was posed as a potential research question, along with three others, that macroeconomists should pursue in the wake of the Great Recession:

The Influence of Demand on Aggregate Supply
The first question I would like to pose concerns the distinction between aggregate supply and aggregate demand: Are there circumstances in which changes in aggregate demand can have an appreciable, persistent effect on aggregate supply?

My second question asks whether individual differences within broad groups of actors in the economy can influence aggregate economic outcomes--in particular, what effect does such heterogeneity have on aggregate demand?

Financial Linkages to the Real Economy
My third question concerns a key issue for monetary policy and macroeconomics that is less directly addressed by this conference: How does the financial sector interact with the broader economy?

Inflation Dynamics
My fourth question goes to the heart of monetary policy: What determines inflation?

She does not actually say that the Fed should run a high pressure economy. Nor should this be seen as a defense of current policy because this is decidedly not a high pressure economy. Instead, Yellen argues we need more research on the topic to understand the costs and benefits of such a policy approach:

More research is needed, however, to better understand the influence of movements in aggregate demand on aggregate supply. From a policy perspective, we of course need to bear in mind that an accommodative monetary stance, if maintained too long, could have costs that exceed the benefits by increasing the risk of financial instability or undermining price stability. More generally, the benefits and potential costs of pursuing such a strategy remain hard to quantify, and other policies might be better suited to address damage to the supply side of the economy.

Now, to be sure, she is willing to delay rate hikes to explore the possibility of drawing more supply from the labor market. From the press conference:

But with labor market slack being taken up at a somewhat slower pace than in previous years, scope for some further improvement in the labor market remaining, and inflation continuing to run below our 2 percent target, we chose to wait for further evidence of continued progress toward our objectives.

Does this mean the economy is a running at a high pressure? Later in the conference:

And that is some news that we’ve received in recent months, that the labor market does have that potential to have people come back in without the unemployment rate coming down. So we’re not seeing strong pressures on utilization suggesting overheating, and my assessment would be, based on this evidence, that the economy has a little more room to run than might have been previously thought.

One reason Yellen is willing to delay rate hikes is because the economy is not overheating. Again, this is not a high pressure economy - and if it was, she would not be so willing to delay rate hikes. Indeed, willingness to accept a high pressure economy suggests that Yellen has abandoned preemptive policy. But:

So I think the notion that monetary policy operates with long and variable lags—that statement is due to Milton Friedman, and it is one of the essential things to understand about monetary policy, and it has not fundamentally changed at all. And that is why I believe we have to be forward looking, and I’m not in favor of a “whites of their eyes” sort of approach. We need to operate based on forecasts.

Compare this with Fischer, via the same Bloomberg story:

“If you go below the full employment rate, or peoples’ estimates of full employment, by a couple of tenths of percentage points, I don’t think there’s any danger in that,” Fischer said Monday in response to questions at an Economic Club of New York lunch. “But saying we should keep going until the inflation rate shows us we’re wrong, then you’re going to change too late.”

Then, back to Yellen:

One is the risk that the economy runs too hot, that unemploy—the labor market tightens too much, that unemployment falls to a very low level, that we need to tighten policy in a less gradual way than would be ideal, and in the course of doing that, because that is a very difficult thing to accomplish, to gently create a bit more slack in the labor market, we could cause a recession in the process.

So you get the idea. There is nothing here to suggest that Yellen looks to generate a high pressure economy. She holds the commonly held view within the Fed that policy makers need to prevent the unemployment rate from sinking too low because they cannot just nudge the rate higher. If anything, with the unemployment rate dancing on the edge of Fed estimates of the natural rate, she would almost certainly react to an acceleration in activity with an acceleration in the pace of rate hikes. So too would Fischer. But with growth around 2 percent per tracking estimates, labor force participation rising to meet job growth, and inflation below target, we do not have a high pressure economy and hence the need for immediate rate hikes dissipates. Yellen will let it play out a bit longer. But if the labor force participation rate stalls out and unemployment starts heading back down, Yellen would become nervous that the Fed is poised to fall behind the curve.

Bottom Line: The key debate within the Fed at the moment centers around the need for preemptive rate hikes. The hawks prefer more preemption, the doves favor less. Federal Reserve Lael Brainard pulled the FOMC to the dovish camp, primarily through her influence at Constitution Ave. Yellen is probably somewhat more sympathetic to Brainard than Fischer, but as I said last week, Fischer has moved substantially in Brainard's direction. It is really the presidents that are on the hawkish side of the aisle. There just isn't that much space between Yellen and Fischer at the moment.

Links for 10-18-16

Monday, October 17, 2016

How Clones Can Experience Unequal Economic Outcomes

Tim Taylor:

How Clones Can Experience Unequal Economic Outcomes: A certain amount of economic inequality is just luck. At the extreme, some people win the lottery, and others don't. But there is also the potential for more subtle kinds of luck, like two equally talented entrepreneurs, where one business happens to take off while the other doesn't. Or two equally talented workers who go to work for similar-looking companies, but one company takes off while the other craters. Richard Freeman discusses the research literature on why this final example might be significant enough to play a role in overall economic inequality in the US in his essay, "A Tale of Two Clones: A New Perspective on Inequality," just published by the Third Way think tank. Freeman sets the stage like this (footnotes omitted):
"[C]onsider two indistinguishable workers, you and your clone. By definition, you/clone have the same gender, ethnicity, years of schooling, family background, skills, etc. In 2006 you/clone graduated with identical academic records from the same university and obtained identical job offers from Facebook and MySpace. Not knowing any more about the future than the analysts who valued Facebook and MySpace roughly equally in the mid-2000s, you/clone flipped coins to decide which offer to accept: heads – Facebook; tails – MySpace. Clone’s coin came up heads. Yours came up tails. Ten years later, Clone is in the catbird’s seat in the job market — high pay, stock options, a secure future. You struggle. Back to university? Send job search letters to close friends? Ask distant acquaintances to help? The you/clone thought experiment may seem extreme, but recent research that I have conducted with colleagues finds that the earnings of workers with near-clone similarity in attributes diverged so much by the place they worked that rising inequality in pay among employers has become the major factor in the trend rise in inequality. ... The labor market has been dominated by economic forces that pull the wages of firms further apart from each other, motivating our analysis of the role of employers in increasing inequality." 
In other words, a lot of inequality is about where you work. The rise in equality is linked to differences across what firms are paying employees who appear to be similarly qualified. As Freeman acknowledges, this argument that this is a quantitatively important cause of rising inequality isn't ironclad at this point, but it's highly suggested in several ways of looking at the data: Freeman  writes:
"This implies that 86% ... of the trend increase in inequality [from 1977-2009] occurs among people with measurably the same skills, whereas just 14% of the trend increase comes from changes in earnings among workers with different skills. The big surprise in the exhibit is that the inequality of average earnings among establishments increased by the same 0.147 points [measuring variance of natural log of earnings, a standard measure of inequality of earnings] as did inequality among workers with the same characteristics. This suggests that all of the increase in inequality among similar workers comes from the increase in earnings at their workplaces." 
Or here is a figure suggesting a linkage from firm earnings to individual inequality of earnings. The blue line shows the change in individual earnings along the income distribution from 1992-2007. As one would expect, given the rise in inequality, those in the bottom percentiles of the income distribution do worse, while those in the top percentiles of the income distribution do better. But now, notice that the blue line for individual earnings almost matches the orange line for firm earnings. That is, there has also been widening inequality in firm earnings, with those at the bottom of the earnings distribution also seeing a decline from 1992-2007 and those at the top seeing an increase. Freeman also offers evidence that those who stayed at firms have seen their earnings change with the fortunes of the firm--thus contributing to overall inequality. As he writes; "In sum, changes in the distribution of earnings among establishments affect the change in earnings along the entire earnings distribution and the increased advantage of top earners compared to other workers."
What makes it possible for successful firms to pay workers more? The answer must be rooted in higher productivity for those firms. Indeed, productivity seems to be diverging across firms, too.
Indeed, as Freeman emphasizes, this figure shows that the equality of revenue per worker--a rough measure of productivity at the firm level--is diverging faster than inequality of wages across firms. Moreover, Freeman argues that a similar pattern of productivity divergence across firms is happening within each sector of the economy.
 Freeman's evidence is consistent with some other studies. For example, last year I pointed to an OECD report on The Future of Productivity, which argued that while cutting-edge frontier firms continue to see strong increases in productivity, the reason for slower overall rates of productivity is that other firms aren't keeping up.
Thinking about inequality between similar workers may alter how one thinks about public policies related to underlying determinants of inequality. For example, it may be important to think about how productivity gains diffuse across industries and how that process may have changed. I suspect there is also some element of geographical separation here, where firms in certain areas are seeing faster productivity and wage increases, and so thinking about mobility of people and firms across geographic areas may be important, too.

Paul Krugman: Their Dark Fantasies

"Why does the modern right hate America?":

Their Dark Fantasies, by Paul Krugman, NY Times: I’m a baby boomer, which means that I’m old enough to remember conservatives yelling “America — love it or leave it!” at people on the left who criticized racism and inequality. But that was a long time ago. These days, disdain for America — the America that actually exists, not an imaginary “real America” in which minorities and women know their place — is concentrated on the right..., you increasingly find prominent figures describing our society as a nightmarish dystopia.
This is obviously true for Donald Trump... In his vision of America — clearly derived largely from white supremacist and neo-Nazi sources — crime is running wild, inner cities are war zones, and hordes of violent immigrants are pouring across our open border. In reality, murder is at a historic low, we’re seeing a major urban revival and net immigration from Mexico is negative. But I’m only saying that because I’m part of the conspiracy.
Meanwhile, you find almost equally dark visions, just as much at odds with reality, among establishment Republicans, people like Paul Ryan...
...consider the portrait of America Mr. Ryan painted last week, in a speech to the College Republicans. For it was, in its own way, as out of touch with reality as the ranting of Donald Trump (whom Mr. Ryan never mentioned).
...Mr. Ryan claimed to be describing the future — what will happen if Hillary Clinton wins... According to him, it’s very grim. There will, he said, be “a gloom and grayness to things,” ruled by a “cold and unfeeling bureaucracy.” We will become a place “where passion — the very stuff of life itself — is extinguished.” And this is the kind of America Mrs. Clinton “will stop at nothing to have.”
...We have many problems, but we’re hardly living in a miasma of despair. ...Mr. Ryan’s vision of America looks nothing like reality. It is, however, completely familiar to anyone who read Ayn Rand’s “Atlas Shrugged” as a teenager. ...
So why does the modern right hate America? There’s not much overlap in substance between Mr. Trump’s fear-mongering and Mr. Ryan’s, but there’s a clear alignment of interests. The people Mr. Trump represents want to suppress and disenfranchise you-know-who; the big-money interests that support Ryan-style conservatism want to privatize and generally dismantle the social safety net, and they’re willing to do whatever it takes to get there.
The big question is whether trash-talking America can actually be a winning political strategy. We’ll soon find out.

Links for 10-17-16

Saturday, October 15, 2016

Links for 10-15-16

Friday, October 14, 2016

What’s Behind a Rise in Ethnic Nationalism? Maybe the Economy

Robert Shiller:

What’s Behind a Rise in Ethnic Nationalism? Maybe the Economy: Global economic weakness and a rise in inequality appear to be causing a disturbing growth in ethnic nationalism. ...
In the United States, despite his attempts to woo minority voters, Donald J. Trump appears to derive support from such sentiment. In Moscow, Vladimir V. Putin has used Russian nationalist sentiment to inspire many of his countrymen. And we see growing ethnic political parties inspired by national identity in countless other countries.
It is natural to ask whether something so broad might have a common cause, other than the obvious circumstantial causes like the gradual fading of memories about the horrors of ethnic conflict in World War II or the rise in this century of forms of violent ethnic terrorism.
Economics is my specialty, and I think economic factors may explain at least part of the trend. ...

Paul Krugman: The Clinton Agenda

The presidential race may be all but over, but many others are not -- your vote still matters:

The Clinton Agenda, by Paul Krugman, NY Times: It ain’t over until the portly gentleman screams, but it is ... highly likely that Hillary Clinton will win this election...
But what will our first female president actually be able to accomplish? That depends...
Consider, first, the effects of a minimal victory: Mrs. Clinton becomes president, but Republicans hold on to both houses of Congress.
Such a victory wouldn’t be meaningless. It would avert the nightmare of a Trump presidency, and it would also block the radical tax-cutting, privatizing agenda that Paul Ryan ... has made clear he will steamroll through if Mr. Trump somehow wins. But it would leave little room for positive action.
Things will be quite different if Democrats retake the Senate. ...
Now, even a Democratic Senate wouldn’t enable Mrs. Clinton to pass legislation in the face of an implacably obstructionist Republican majority in the House. It would, however, allow her to fill the Supreme Court seat left vacant by the death of Antonin Scalia.
Doing that would have huge consequences..., the most important ... the Clean Power Plan ... is currently on hold, thanks to a stay imposed by the Supreme Court. Democratic capture of the Senate would remove this roadblock. ... Quite simply, if Democrats take the Senate, we might take the minimum action needed to avoid catastrophe; if they don’t, we won’t.
What about the House? ... Until the last few days, the chances of flipping the House seemed low...
But a sufficiently big Clinton victory could change that, especially if suburban women desert a G.O.P. that has turned into the gropers-owned party. And that would let her pursue a much more expansive agenda.
There’s not much mystery about what that agenda would be. ... Broadly speaking, she would significantly strengthen the social safety net, especially for the very poor and children, with an emphasis on family-related issues like parental leave. Such programs would cost money...; she proposes, credibly, to raise that money with higher taxes on top incomes, so that the overall effect would be to reduce inequality.
Democratic control of the House would also open the door for large-scale infrastructure investment. ...
In any case, the bottom line is that if you’re thinking of staying home on Election Day because the outcome is assured, don’t. Barring the political equivalent of a meteor strike, Hillary Clinton will be our next president, but the size of her victory will determine what kind of president she can be.

Links for 10-14-16

Thursday, October 13, 2016

How Much Bigger Can the U.S. Labor Force Get?

Nick Bunker:

How much bigger can the U.S. labor force get?: The U.S. labor market continues to recover from the still lingering effects of the Great Recession, but the question on the minds of many economists and analysts is how long can the healing continue? Or, in other words, has the U.S. economy hit “full employment”...? Understanding trends in the labor force participation rate is key for answering this question. ...
Views on labor force participation today vary on the extent to which structural forces or cyclical effects from the Great Recession of 2007-2009 are still affecting the participation rate. Many economists and analysts point to the role of structural forces or trends that long predate the Great Recession. But the long-term trend that gets cited the most is the aging of the working population as the Baby Boomer generation reaches retirement. The estimates on the effects of aging can vary quite a bit, but an estimate by the White House’s Council of Economic Advisers puts about half of the decline in participation from 2007 to 2014 into the “aging” category. When it comes to a policy response, it’s hard to change the age distribution of the population...
The importance of structural forces and demographics might give an impression that labor force participation or other trends are immutable and have to simply be endured. Regardless of how much slack remains in the labor market..., several structural factors can be addressed through policy actions.
Consider a new paper by Princeton University economist and former Council of Economic Advisers chairman Alan Krueger. The paper takes a direct look at the labor force participation rate and tries to understand what is depressing participation for men and women who are in prime working ages of 25 to 54. When it comes to prime-age men, health problems seem to be a huge barrier to labor market participation. According to the paper, almost 50 percent of men in this age group are taking medicine to control pain, and about 40 percent of this group say health issues are preventing them from taking a job. This is structural force that is not directly related to the Great Recession, but it certainly is amenable to a policy response.
As Krueger notes, such a trend means increased health insurance may help this trend or policymakers may want to look at pain-management interventions. When it comes to trends for prime-age women, there’s research pointing to the importance of family-friendly policies, or rather the lack thereof. ... Policies that help provide childcare and paid family and medical leave seem likely to help push back against these trends... And paid leave may also help male employment by allowing workers to take time off for their own health problems.
Of course, there is still the possibility that cyclical forces are pushing down the labor force participation rate. ... The only way we’ll really know is if policymakers, especially at the Federal Reserve, continue to be patient and help the current recovery continue.

Links for 10-13-16

Wednesday, October 12, 2016

Why this Nobel Prize for Economics is So Well Deserved

Me, at MoneyWatch:

Why this Nobel prize for economics is so well deserved: Most people have probably never even heard of “contract theory,” but that’s the specialty that has won Finland’s Oliver Hart and Bengt Holmström this year’s Nobel prize in economics. And as the theory’s name implies, their work helps us understand the contractual relationships between, for example, workers and firms, shareholders and management, businesses and suppliers, and health insurance companies and their customers. 
When should workers be paid a bonus based on performance? What’s the best way to structure the contract specifying the terms for paying a bonus? Should managers have stock options as part of their contracts, or is some other arrangement preferable? When should insurance companies require co-payments, and what’s the best co-pay schedule?
Here’s a way to think about contract theory. ...

What Is the New Normal for U.S. Growth?

An FRBSF Economic Letter by John Fernald:

What Is the New Normal for U.S. Growth?: Economic growth during the recovery has been slower on average than its trend from before the Great Recession, prompting policymakers to ask if there is a “new normal” for U.S. GDP growth.
This Economic Letter argues that the new normal pace for GDP growth, in real (inflation-adjusted) terms, might plausibly fall in the range of 1½ to 1¾%. This estimate is based on trends in demographics, education, and productivity. The aging and retirement of the baby boom generation is expected to hold down employment growth relative to population growth. Further, educational attainment has plateaued, reducing the contribution of labor quality to productivity growth. The slower forecast for overall GDP growth assumes that, apart from these effects, productivity growth is relatively normal, if modest—in line with its pace for most of the period since 1973.
Subdued growth in the labor force
In thinking about prospects for economic growth, it is necessary to distinguish between the labor force and the larger population. Both are expected to grow at a relatively subdued pace; however, because of the aging of the population, the labor force is likely to grow even more slowly than the overall population.
Figure 1 shows that growth in the labor force has varied substantially over time and has often diverged from overall population growth. In the 1950s and 1960s, population (yellow line) grew more rapidly than the working-age population ages 15 to 64 (blue line) or the labor force (red line). In contrast, in the 1970s and 1980s, the labor force grew much more rapidly than the population as the baby boom generation reached working age and as female labor force participation rose. Those drivers of labor force growth largely subsided by the early 1990s. Since then, the labor force, working-age population, and overall population have all seen slower growth rates. Labor force participation fell sharply during the Great Recession, which held down labor force growth. But labor force growth has since rebounded to roughly the pace of the working-age population.

Figure 1
Slowing growth in working-age population and labor force

Slowing growth in working-age population and labor force

Source: Bureau of Labor Statistics, Bureau of Economic Analysis, Census Bureau, Congressional Budget Office (labor force projections).

Future labor force growth is likely to remain low for a couple of reasons. First, as shown in Figure 1, the population is now growing relatively slowly, and census projections expect that slow pace to continue. Second, these projections also suggest the working-age population will grow more slowly than the overall population, reflecting the aging of baby boomers. Of course, some of those older individuals will continue to work. Hence, the Congressional Budget Office (CBO) projects the labor force will grow about ½% per year (red dashed line) over the next decade—a little faster than the working-age population, but substantially slower than in the second half of the 20th century. I use their estimate as a basis for my assumption that hours worked will also grow at about ½% per year so that hours per worker do not change much.
Recent slow growth for productivity
Figure 2 shows growth in GDP per hour since 1947 broken into periods to reflect variation in productivity growth. This measure of productivity growth was very fast from 1947 to 1973 but much slower from 1973 to 1995. It returned to a fast pace from 1995 to 2004, but has slowed again since 2004. During the fast-growth periods, productivity growth averaged 2½ to 2¾%. During the slower periods, growth was only 1 to 1¼% and dropped dramatically lower in 2010–2015 (Fernald 2016 discusses this period).

Figure 2
Variation in productivity growth by trend period

Variation in productivity growth by trend period

Source: Bureau of Labor Statistics, Bureau of Economic Analysis.

Figure 2 is consistent with the view that the history of productivity growth has shifted between normal periods and exceptional ones (Gordon 2016, Fernald 2015, and David and Wright 2003). Unusually influential innovations—such as the steam engine, electric dynamo, internal combustion engine, and microprocessor—typically lead to a host of complementary innovations that boost productivity growth broadly for a time.
For example, productivity growth was exceptional before 1973, reflecting gains associated with such developments as electricity, the telephone, the internal combustion engine, and the Interstate Highway System (Fernald 1999). Those exceptional gains ran their course by the early 1970s, and productivity growth receded to a normal, modest pace.
Starting around 1995, productivity growth was again exceptional for eight or nine years. Considerable research highlighted how businesses throughout the economy used information technology (IT) to transform what and how they produced. After 2004, the low-hanging fruit of IT had been plucked. Productivity growth returned to a more normal, modest, and incremental pace—similar to that in 1973–95.
The past and future of GDP growth
GDP growth is the sum of growth in worker hours and GDP per hour. The blue line in Figure 3 shows how GDP growth fluctuated on average for each period mentioned in Figure 2. Before 2005, GDP growth since World War II was typically 3 to 4%. The dashed lines in the figure show two projections for future GDP. The higher estimate assumes productivity growth will return to its 1973–95 pace in the long run, while hours grow at the ½% per year pace projected by the CBO. In this scenario, GDP growth would average about 1¾%.

Figure 3
GDP scenarios with low labor force growth

GDP scenarios with low labor force growth

Note: Annual percent change averaged over periods from Figure 2.
Source: Bureau of Labor Statistics, Bureau of Economic Analysis, and author’s calculations.

But productivity growth could easily be lower than in the 1973–95 period for two main reasons. First, productivity has grown a little more slowly from 2004–15 than in the 1973–95 period—and much more slowly since 2010 (Figure 2). Second, and perhaps more importantly, future educational attainment will add less to productivity growth. In recent decades, educational attainment of younger individuals has plateaued. This reduces productivity growth via increases in labor quality, which measures the combined contribution of education and experience. Labor quality has added about 0.4 percentage points to annual productivity growth since 1973. However, by early next decade, labor quality will contribute only about 0.10 to 0.20 percentage points to annual productivity growth (Bosler et al. 2016).
On its own, then, reduced labor quality growth suggests marking down productivity and GDP projections by at least two-tenths of a percentage point and possibly more. The lower dashed line in Figure 3 shows future GDP growth assuming that productivity growth net of labor quality grows at its 1973–95 pace, while labor quality grows at the slower pace of 0.2%. By this projection, GDP growth per hour would be only a little above 1½%.
At first glance, a pace of 1½ to 1¾% seems very low relative to history. But the main reason for the slow pace is demographics: Growth in the 1973–95 period would have been equally slow had hours grown only ½% per year. The red line shows how fast GDP would have grown in that scenario, holding productivity growth at its actual historical pace by period but using the slower pace of growth for hours that the CBO expects in the future. For example, in the 1973–95 period, GDP grew at nearly a 3% pace. But if hours had grown only ½% per year, then GDP growth would have been about 1¾%.
The major source of uncertainty about the future concerns productivity growth rather than demographics. Historically, changes in trend productivity growth have been unpredictable and large. Looking ahead, another wave of the IT revolution from machine learning and robots could boost productivity growth. Or, as Fernald and Jones (2014) suggest, the rise of China, India, and other countries as centers of frontier research might lead to more innovation. In such a case, as Fernald (2016) discusses, the forecast here could reflect an extended pause before the next wave of transformative productivity growth. But, until such a development occurs, the most likely outcome is a continuation of slow productivity growth.
Once the economy recovers fully from the Great Recession, GDP growth is likely to be well below historical norms, plausibly in the range of 1½ to 1¾% per year. The preferred point estimate in Fernald (2016), who examines these issues in even more detail, is for 1.6% GDP growth. This forecast is consistent with productivity growth net of labor quality returning over the coming decade to its average pace from 1973–95, which is a bit faster than its pace since 2004. In the past we have seen long periods with comparably modest productivity growth. But we have not experienced such modest productivity growth combined with the types of changes in demographics and labor quality that researchers are expecting.
This slower pace of growth has numerous implications. For workers, it means slow growth in average wages and living standards. For businesses, it implies relatively modest growth in sales. For policymakers, it suggests a low “speed limit” for the economy and relatively modest growth in tax revenue. It also suggests a lower equilibrium or neutral rate of interest (Williams 2016).
Boosting productivity growth above this modest pace will depend primarily on whether the private sector can find new and improved ways of doing business. Still, policy changes may help. For example, policies to improve education and lifelong learning can help raise labor quality and, thereby, labor productivity. Improving infrastructure can complement private activities. Finally, providing more public funding for research and development can make new innovations more likely in the future (Jones and Williams, 1998).
John Fernald is a senior research advisor in the Economic Research Department of the Federal Reserve Bank of San Francisco.
Bosler, Canyon, Mary C. Daly, John G. Fernald, and Bart Hobijn. 2016. “The Outlook for U.S. Labor-Quality Growth.” FRB San Francisco Working Paper 2016-14.
David, Paul, and Gavin Wright. 2003. “General Purpose Technologies and Productivity Surges: Historical Reflections on the Future of the ICT Revolution.” In The Economic Future in Historical Perspective, eds. Paul A. David and Mark Thomas. Oxford: Oxford University Press.
Fernald, John G. 1999. “Roads to Prosperity? Assessing the Link between Public Capital and Productivity.” American Economic Review 89(3), pp. 619–638.
Fernald, John G. 2016. “Reassessing Longer-Run U.S. Growth: How Low?” FRB San Francisco Working Paper 2016-18.
Fernald, John G., and Charles I. Jones. 2014. “The Future of U.S. Economic Growth.” American Economic Review Papers and Proceedings 104(5, May), pp. 44–49.
Gordon, Robert. 2016. The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War. Princeton, NJ: Princeton University Press.
Jones, Charles I., and John C. Williams. 1998. “Measuring the Social Return to R&D.” Quarterly Journal of Economics 113(4), pp. 1119–1135.
Williams, John C. 2016. “Monetary Policy in a Low R-star World.” FRBSF Economic Letter 2016-23 (August 15).
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.

Links for 10-12-16

Tuesday, October 11, 2016

Ricardian Equivalence, Benchmark Models, and Academics Response to the Financial Crisis

Simon Wren-Lewis:

Ricardian Equivalence, benchmark models, and academics response to the financial crisis: In his further thoughts on DSGE models (or perhaps his response to those who took up his first thoughts), Olivier Blanchard says the following:

“For conditional forecasting, i.e. to look for example at the effects of changes in policy, more structural models are needed, but they must fit the data closely and do not need to be religious about micro foundations.”

He suggests that there is wide agreement about the above. I certainly agree, but I’m not sure most academic macroeconomists do. I think they might say that policy analysis done by academics should involve microfounded models. Microfounded models are, by definition, religious about microfoundations and do not fit the data closely. Academics are taught in grad school that all other models are flawed because of the Lucas critique, an argument which assumes that your microfounded model is correctly specified. ...

Let me be more specific. The core macromodel that many academics would write down involves two key behavioural relationships: a Phillips curve and an IS curve. The IS curve is purely forward looking: consumption depends on expected future consumption. It is derived from an infinitely lived representative consumer, which means Ricardian Equivalence holds in this model. As a result, in this benchmark model Ricardian Equivalence also holds. [1]

Ricardian Equivalence means that a bond financed tax cut (which will be followed by tax increases) has no impact on consumption or output. One stylised empirical fact that has been confirmed by study after study is that consumers do spend quite a large proportion of any tax cut. That they should do so is not some deep mystery, but may be traced back to the assumption that the intertemporal consumer is never credit constrained. In that particular sense academics’ core model does not fit Blanchard’s prescription that it should ‘“fit the data closely”.

Does this core model influence the way some academics think about policy? I have written how mainstream macroeconomics neglected before the financial crisis the importance that shifting credit conditions had on consumption, and speculated that this neglect owed something to the insistence on microfoundations. That links the methodology macroeconomists use, or more accurately their belief that other methodologies are unworthy, to policy failures (or at least inadequacy) associated with that crisis and its aftermath.

I wonder if the benchmark model also contributed to a resistance among many (not a majority, but a significant minority) to using fiscal stimulus when interest rates hit their lower bound. In the benchmark model increases in public spending still raise output, but some economists do worry about wasteful expenditures. For these economists tax cuts, particularly if aimed at those who are non-Ricardian, should be an attractive alternative means of stimulus, but if your benchmark model says they will have no effect, I wonder whether this (consciously or unconsciously) biases you against such measures.

In my view, the benchmark models that academic macroeconomists carry round in their head should be exactly the kind Blanchard describes: aggregate equations which are consistent with the data, and which may or may not be consistent with current microfoundations. They are the ‘useful models’ that Blanchard talked about... These core models should be under constant challenge from both partial equilibrium analysis, estimation in all its forms and analysis using microfoundations. But when push comes to shove, policy analysis should be done with models that are the best we have at meeting all those challenges, and not models with consistent microfoundations.

Notes on Brexit and the Pound

Paul Krugman:

Notes on Brexit and the Pound: The much-hyped severe Brexit recession does not, so far, seem to be materializing – which really shouldn’t be that much of a surprise, because as I warned, the actual economic case for such a recession was surprisingly weak. (Ouch! I just pulled a muscle while patting myself on the back!) But we are seeing a large drop in the pound, which has steepened as it becomes likely that this will indeed be a very hard Brexit. How should we think about this?
Originally, stories about a pound plunge were tied to that recession prediction... But the demand collapse doesn’t seem to be happening. So what is the story?
For now, at least, I’m coming at it from the trade side – especially trade in financial services. It seems to me that one way to think about this is in terms of the “home market effect,” an old story in trade but one that only got formalized in 1980. ...
In Britain’s case,... financial services ... are subject to both internal and external economies of scale, which tends to concentrate them in a handful of huge financial centers around the world... But now we face the prospect of seriously increased transaction costs between Britain and the rest of Europe, which creates an incentive to move those services away from the smaller economy (Britain) and into the larger (Europe). Britain therefore needs a weaker currency to offset this adverse impact.
Does this make Britain poorer? Yes. It’s not just the efficiency effect of barriers to trade, there’s also a terms-of-trade effect as the real exchange rate depreciates.
But it’s important to be aware that not everyone in Britain is equally affected..., weakening helps British manufacturing – and, maybe, the incomes of people who live far from the City and still depend directly or indirectly on manufacturing for their incomes. It’s not completely incidental that these were the parts of England (not Scotland!) that voted for Brexit.
Is there a policy moral here? Basically it is that a weaker pound shouldn’t be viewed as an additional cost from Brexit, it’s just part of the adjustment. And it would be a big mistake to prop up the pound: old notions of an equilibrium exchange rate no longer apply.

Links for 10-11-16

Monday, October 10, 2016

Paul Krugman: Predators in Arms

"The Trump-Ailes axis of abuse":

Predators in Arms, by Paul Krugman, NY Times: As many people are pointing out, Republicans now trying to distance themselves from Donald Trump need to explain why The Tape was a breaking point, when so many previous incidents weren’t. ...
Meanwhile, the Trump-Ailes axis of abuse raises another question: Is sexual predation by senior political figures — which Mr. Ailes certainly was, even if he pretended to be in the journalism business — a partisan phenomenon?
Just to be clear, I’m not talking about bad behavior in general... Yes, Bill Clinton had affairs; but there’s a world of difference between consensual sex, however inappropriate, and abuse of power to force those less powerful to accept your urges. ...
Take, for example, what ... was happening politically in 2006..., it looked as if Republicans might retain control of Congress despite public revulsion at the Bush administration. But then came the Foley scandal: ...Representative Mark Foley, had been sending sexually explicit messages to pages, and his party had failed to take any action despite warnings..., the scandal seems to have ... led to a Democratic wave.
But think about how much bigger that wave might have been if voters had known ... that Dennis Hastert, who had been speaker of the House since 1999, himself had a long history of molesting teenage boys.
Why do all these stories involve Republicans? One answer may be structural. The G.O.P. is, or was until this election, a monolithic, hierarchical institution, in which powerful men could cover up their sins much better than they could in the far looser Democratic coalition.
There is also, I’d suggest, an underlying cynicism... We’re talking about a party that has long exploited white backlash to mobilize working-class voters, while enacting policies that actually hurt those voters but benefit the wealthy. Anyone participating in that scam ... has to have the sense that politics is a sphere in which you can get away with a lot if you have the right connections. ...
Assuming that Mr. Trump loses, many Republicans will try to pretend that he was a complete outlier, unrepresentative of the party. But he isn’t. He won the nomination fair and square, chosen by voters who had a pretty good idea of who he was. He had solid establishment support until very late in the game. And his vices are, dare we say, very much in line with his party’s recent tradition.
Mr. Trump, in other words, isn’t so much an anomaly as he is a pure distillation of his party’s modern essence.

Fed Watch: Jobs Data Keeps Hawks Sidelined

Tim Duy:

Jobs Data Keeps Hawks Sidelined: Federal Reserve hawks face an array of labor market data that threatens a key pillar holding up their policy view. That pillar is the assertion that monthly nonfarm payroll growth over roughly 100k will soon force unemployment far below the natural rate, thus placing the US economy in grave danger from inflationary forces. By this view, the decline of unemployment long ago justified further rate hikes. Hawks failed to anticipate that the unemployment rate would flatten out at 5 percent despite steady payrolls growth. This outcome does not fit in their worldview. Fundamentally, they were supply-side pessimists. The recent strength in labor force growth suggests their pessimism was sorely misplaced and undermines their argument for immediate rate hikes. The key elements of the FOMC - the permanent voters - now stand as supply-side optimists and are prepared to hold rates at current levels through the next meeting, and perhaps even longer. A December rate hike is still not a foregone conclusion. 
In recent speeches, Federal Reserve Chair Stanley Fischer appears to be now fully under the sway of Fed doves. Fischer's take on the employment report, from his speech this weekend:
Despite the strong job growth, the unemployment rate, at 5 percent in September, has essentially moved sideways this year as individuals have come back into the labor market in response to better employment opportunities and higher wages. As a consequence, the labor force participation rate has edged up against a backdrop of a declining longer-run trend owing to aging of the population. This increase is a very welcome development.
Four charts deserve attention here. First, "strong job growth:


Second, the unemployment rate has "moved sideways":


Third: "higher wages":


Fourth "labor force participation has edged up":


Overall, the October employment report justified the FOMC's decision to hold rates steady in September. The reasoning, according to Fischer:
But with labor market slack being taken up at a somewhat slower pace than in previous years, scope for some further improvement in the labor market remaining, and inflation continuing to run below our 2 percent target, we chose to wait for further evidence of continued progress toward our objectives.
The Fed sees that demand-side policy triggers a supply side response, and consequently does not want to risk leaving millions in the ranks of the unemployed (and remaining workers with sub-optimal wage growth) with a premature tightening of policy. Moreover, the lack of substantial inflationary pressures continues to the bedevil the hawks. As Fischer notes, inflation expectations remain in check, or, if they have moved, have drifted down. And while inflation has indeed edged up in recent months, it remains below target:


And I would argue that much of the rise in inflation was attributable to January's gain:


Fischer also undercuts the hawks' argument that preemptive hikes are necessary because without them the Fed will fall behind the curve:
But since monetary policy is only modestly accommodative, there appears little risk of falling behind the curve in the near future, and gradual increases in the federal funds rate will likely be sufficient to get monetary policy to a neutral stance over the next few years.
The key is that he sees policy as only modestly accommodative - a view that follows the Fed's epiphany on the persistence of a low natural rate of interest. Hence no massive catch-up would be needed even if future conditions require a faster pace of rate hikes.
I suspect that the hawks, now derailed by the employment data, will further pivot toward financial stability as they argue for a more rapid reduction of financial accommodation. Here too, however, Fischer is prepared to meet them head on. From last week:
Let me briefly mention a second reason for worrying about ultralow interest rates: The transition to a world with a very low natural rate of interest may hurt financial stability by causing investors to reach for yield, and some financial institutions will find it harder to be profitable. On the whole, however, the evidence to date does not point to notable risks to financial stability stemming from ultralow interest rates. For instance, the financial sector has appeared resilient to recent episodes of market stress, supported by strong capital and liquidity positions.
Overall, sounds to me that Fischer now embraces the intellectual framework pushed for over a year by his colleague, Federal Reserve Governor Lael Brainard. This likely is true also of all the permanent voting members. Within the context to the Board's current framework, the hawkish Fed president can do little more than squawk.  
Bottom Line: A November rate hike remains dead. We have two labor reports until the December meeting. A continuation of recent trends would leave a rate hike at that meeting in doubt. Odds favor that meeting currently, but it is not a foregone conclusion. The doves are supply-side optimists. They want to let this rebound run for as long as possible. And remember, those closest to Federal Reserve Chair Janet Yellen are now those that inhabit the halls of Constitution Ave. Be wary of the words of hawkish Fed presidents; they have been very misleading this year. 

Links for 10-10-16

Sunday, October 09, 2016

This is Not a Time for Political Neutrality

Robert Stavins:

This is Not a Time for Political Neutrality: I have been writing essays at this blog for over seven years, and throughout that time, through perhaps 100 more-or-less-monthly essays, I have tried very hard to keep politics at bay, and to view each and every issue I discussed from a politically neutral, yet analytical economic perspective. But I find that I can no longer remain neutral.
Since before the summer, I had resolved to write today’s essay, but I decided to wait until one month before the November U.S. election to post it, simply because I thought this was the point in time when people would be paying most attention to the upcoming election but would not yet have completely made up their minds. In particular, I want to address this message to people who – like me – are political independents.
I have been teaching at Harvard for close to 30 years, and every year I take pride in the fact that at the conclusion of my 13-week course in environmental economics and policy, my students cannot say – on the basis of what I have said in lectures or what they have read in the assigned readings – whether I am a tree-hugging environmental advocate from the political left, or an industry apologist from the political right (actually, I am neither, although hostile voices in the blogosphere have sometimes wanted to peg me as being on the opposite of whatever extreme they occupy).
Likewise, I have remained bipartisan in politics, ever since I directed Project 88 more than 25 years ago for the bipartisan coalition of former Democratic Senator Timothy Wirth and the late Republican Senator John Heinz. Starting with the White House of President George H. W. Bush, and continuing with every administration – of both political parties – since then, I have worked on substantive matters of environmental and energy policy, in some cases closely and intensively, and in some cases indirectly and on the periphery.
Such professional bipartisanship and political neutrality have been important to me, and have been consistent with my voter registration, as I am officially registered as an independent (in Massachusetts, this goes by the designation of “unenrolled”).
So, over the years, I have voted for Democrats and I have voted for Republicans, for various offices ranging from the Mayor of my town to the President of my country. And in each and every one of those elections, although I preferred one of the two principal candidates (sometimes very strongly), in no case did I fear for the future of my community, my state, or my country if my candidate lost and the other candidate won.
This time is different. I fear for the United States and I fear for the world if Donald Trump is elected President. The time for my professional bipartisanship and political neutrality has ended – at least temporarily. And so I apologize to my readers for using this platform – An Economic View of the Environment – to express my broader, personal views on the upcoming election. This is a departure that I hope never again will be necessary. ...

Saturday, October 08, 2016

Links for 10-08-16

Friday, October 07, 2016

Paul Krugman: What About the Planet?

Why haven't we heard more about Clinton and Trump's positions on climate change?:

What About the Planet?, by Paul Krugman, NY Times: Our two major political parties are at odds on many issues, but nowhere is the gap bigger or more consequential than on climate.
If Hillary Clinton wins, she will move forward with the Obama administration’s combination of domestic clean-energy policies and international negotiation — a one-two punch that offers some hope of reining in greenhouse gas emissions before climate change turns into climate catastrophe.
If Donald Trump wins, the paranoid style in climate politics — the belief that global warming is a hoax perpetrated by a vast international conspiracy of scientists — will become official doctrine, and catastrophe will become all but inevitable. ...
So there is a huge, incredibly consequential divide on climate policy. Not only is there a vast gap between the parties and their candidates, but this gap arguably matters more for the future than any of their other disagreements. So why don’t we hear more about it?
I’m not saying that there has been no reporting on the partisan climate divide, but there has been nothing like, say, the drumbeat of stories about Mrs. Clinton’s email server. And it’s really stunning that in the three nationally televised forums we’ve had so far — the “commander in chief” forum involving Mrs. Clinton and Mr. Trump, the first presidential debate and the vice-presidential debate — the moderators have asked not a single question about climate. ...
And this blind spot matters a lot. Polling suggests that millennial voters, in particular, care a lot about environmental protection and renewable energy. But it also suggests that more than 40 percent of young voters believe that there is no difference between the candidates on these issues.
Yes, I know, people should be paying more attention — but this nonetheless tells us how easy it is for voters who rely on TV news or don’t read stories deep inside the paper to miss what should be a central issue in this campaign.
The good news is that there are still two debates to go, offering the opportunity to make some amends.
It’s time to end the blackout on climate change as an issue. It needs to be front and center — and questions must be accompanied by real-time fact-checking, not relegated to the limbo of he-said-she-said, because this is one of the issues where the truth often gets lost in a blizzard of lies.
There is, quite simply, no other issue this important, and letting it slide would be almost criminally irresponsible.

The Anti-Trust Election

I have a new column:

The Anti-Trust Election of 2016: A report on the “Benefits of Competition and Indicators of Market Power” from the White House Council of Economic Advisors documents that monopoly power has been increasing the last few decades, and it argues persuasively “that consumers and workers would benefit from additional policy actions by the government to promote competition within a variety of industries.” The report is part of an initiative by the Obama administration last spring to promote a “fair, efficient, and competitive marketplace” through stricter enforcement of antitrust regulations, and through other measures such as patent reform and the reform of occupational licensing. 

To those who believe more aggressive enforcement of antitrust laws is needed, and I am one of them, Hillary Clinton’s recent announcement of “A new commitment to promote competition, address excessive concentration and the abuse of economic power, and strengthen antitrust laws and enforcement” is an encouraging sign that if Clinton is elected the Obama administration’s initiative will not end when he leaves office. 

The presence of monopoly power harms the economy in several ways. ...

Donald Trump has promised to make deregulation one of the focal points of his presidency. If Trump is elected, the trend toward rising market concentration and all of the problems that come with it are likely to continue. We’ll hear the usual arguments about ineffective government and the magic of markets to justify ignoring the problem. If Clinton is elected, it’s unlikely that her administration would be active enough in antitrust enforcement for my taste. But at least she acknowledges that something needs to be done about this growing problem, and any movement toward more aggressive enforcement of antitrust regulation would be more than welcome.

Links for 10-07-16

Thursday, October 06, 2016

Did a Legal Ivory Sale Increase Smuggling and Poaching?

From the NBER Digest:

Did a Legal Ivory Sale Increase Smuggling and Poaching?: After the experimental 2008 sale, there was a discontinuous jump in the proportion of wild elephants poached and in seizures of contraband ivory leaving Africa.
Advocates of legalizing the purchase of goods sold in black markets argue that allowing legal trade will displace illegal buying and selling, reduce criminal activity, and permit greater control of the previously illegal goods. New research indicates that this is not always the case.
In Does Legalization Reduce Black Market Activity? Evidence from a Global Ivory Experiment and Elephant Poaching Data (NBER Working Paper No. 22314), Solomon Hsiang and Nitin Sekar show that the production of black market elephant ivory expanded by an estimated 66 percent following a one-time legal sale in 2008. Seizures of contraband ivory leaving African countries also increased, from 4.8 to 8.4 seizures per country per year. The weight of ivory in the seizures increased by an average of 335 kilograms per year.


In 1989, the Convention on the International Trade of Endangered Species (CITES) banned international trade in ivory in order to protect the wild African elephant. Individual countries continued to regulate their domestic ivory trade. Poaching slowed, and elephant populations began to recover. African governments kept stockpiles of ivory harvested from animals that died naturally.
Poaching began increasing again in the mid-1990s. Following a single legal sale from stockpiles to Japan in 1999, China and Japan requested the right to make an additional purchase. After years of debate, the governments of those countries were able to purchase 62 and 45 tons of legal ivory, respectively, at auction in 2008. The governments continue to resell that ivory in their domestic markets.
After the legal sale in 1999, CITES established the Monitoring the Illegal Killing of Elephants (MIKE) program at 79 sites in 40 countries in Africa and Asia. Preliminary data collection began in mid-2002. The Proportion of Illegally Killed Elephants (PIKE) Index is the fraction of "detected elephant carcasses that were illegally killed," a measure designed to correct for fluctuating elephant populations and field worker effort.
The researchers examine how poachers responded to the 2008 sale by studying annual PIKE data from 2003 to 2013. They find a clear discontinuous increase in the index after the 2008 sale. They cannot explain this increase with changes in natural elephant mortality rates, or with economic variables such as China's or Japan's per capita GDP, Chinese or Japanese trade with elephant range countries, measures of China's physical presence in range countries, or per capita GDP in PIKE-reporting countries.
The researchers conclude that the legal sale of ivory "triggered an increase in black market ivory production by increasing consumer demand and/or reducing the cost of supplying black market ivory." Supplier costs may be reduced if legalization of a product makes it more difficult to detect and monitor illegal provision of that product. Consumer demand may rise because legalization may reduce the stigma around a previously banned product.

Trump’s Mudslinging Puts the Fed in Danger

An editorial at the FT:

Trump’s mudslinging puts the Fed in danger: So many extraordinary accusations and denunciations emanate from Donald Trump... One of the more potentially damaging is the contention that the Federal Reserve is setting policy to ensure the election of his opponent, Hillary Clinton.
Political criticism of the US central bank has been going on for decades. ...
Yet it is offensive and absurd to suggest that Janet Yellen, the Fed chair, and her colleagues are deliberately trying to engineer the election of another Democratic president. At a time when the Fed has a low standing in the public mind, perhaps more disturbing than Mr Trump’s eccentric claims is that congressional Republicans, who should know better, are joining in. ...
It is beyond hope that Mr Trump will see sense and moderate his attacks. His fellow Republicans, unless they are ready to endanger one of the pillars of US economic stability, should resist the urge to follow his example.

Links for 10-06-16

Wednesday, October 05, 2016

Fed Watch: Hard To Say That November Is Really "Live"

Tim Duy:

Hard To Say That November Is Really "Live," by Tim Duy: If there is one thing that I am fairly sure that monetary policymakers hate, it is the idea that the outcomes of their meetings are preordained. November appears to be just such a meeting. To be sure, Fed hawks want to believe the meeting is "live." The sizable group that dissented - or would have dissented if they were voting members - likely sees the case for a rate hike in November as even more pressing than in September. Remember, it is all about preemptive policy action from that contingent. If you thought delay was bad in September, it must be worse in November. But the doves - including a powerful group of permanent voting members - will likely have none of it. From their point of view, the case for a rate hike is no more pressing in November than September. Indeed, according to the the dot-plot, at least three would be happy taking a pass in December as well. And, although they would be loathe to admit it, within the context of a risk management framework the timing of the election argues against a hike as well. As I see it, the best the hawks can hope for is a strong statement about December. The data would have to very quickly turn very strong to give the hawks an upper hand in November.

I did get a chuckle out of this last week:

The only way to reinforce the idea that November is a "live" meeting is to continue to hold out the hope of a rate hike. But unless the doves budge between now and November, a rate hike is not happening. And the doves aren't likely to budge anymore than the hawks. It's kind of a stalemate at the moment, and everyone knows it. So reinforcing the the idea that a hike is going to happen when it isn't is not really an effective communication strategy. It is not exactly good policy guidance.

Cleveland Federal Reserve President Loretta Master would also like you to believe November is "live." From Monday, via Bloomberg:

Federal Reserve Bank of Cleveland President Loretta Mester said the economy is ripe for an interest-rate increase and repeated that the Fed’s November meeting should be viewed as “live” for a policy decision, despite its proximity to the U.S. presidential election.

“I would expect that the case would remain compelling” for a rate hike when the Federal Open Market Committee gathers in Washington Nov. 1-2, the week before Americans head to the polls, she told Kathleen Hays in an interview on Bloomberg Television Monday. Mester added that politics wouldn’t affect the decision.

Of course she wants November to be "live." She wanted to hike rates at the last meeting. And I suspect she believes that unless the hawks can push up rate hike expectations to something closer to 50% (from the current 13% or so), they have no chance of pushing through a rate hike. Not that I think they have much of a chance even then. Seems that his amounts to trying to manipulate market expectations to obtain an advantage at the FOMC meeting. I sense this is what hawks have attempted more than once this year. In my opinion, this too is not a good communications strategy.

Like the outcome of the November meeting, Mester's dissent is also preordained.

Mester also repeats the "politics are irrelevant" story. And, broadly, I agree. I don't believe, for example, the Federal Reserve Chair Janet Yellen is holding rates low simply to help President Obama or enhance Hillary Clinton's election chances. That is ludicrous. So if you are saying that the Fed won't hike in November for those reasons, I think you are wrong.

But I am going to give some on this issue in another dimension. Elections are risk events, and a risk management strategy thus demands that they be considered when making policy. And we know that in fact the Federal Reserve considers elections when making policy. New York Times reporter Binyamin Appelbaum caught Yellen by surprise at the press conference with this question:

BINYAMIN APPELBAUM. Binya Appelbaum, the New York Times. In the run-up to the Brexit vote earlier this year, several Fed policymakers cited it as a reason that they were reluctant to raise rates in June because of the uncertainty associated with that vote. In the run-up to the presidential election, I have not heard any Fed policymaker give that as a reason that they might want to delay raising rates in November. Could you explain why the Fed regards Brexit as a greater danger to the American economy than the presidential election that’s actually happening here? And, second, there were three dissents at this meeting. Could you explain what the cause of disagreement was, what those policymakers thought?

CHAIR YELLEN. So we are very focused on evaluating, given the way the economy is operating, what is the right policy to foster our goals, and I’m not going to get into politics.

Appelbaum nailed that one - we can't credibly believe that the Brexit vote is a more relevant risk for the US economy than this presidential election. Yet the Fed is asking us to believe exactly that. If you can't comment on how US elections impact Fed policy, you shouldn't comment on how foreign elections impact Fed policy. Just chalk it up to "global economic uncertainty" and move one. The Fed really messed up by identifying the Brexit vote as a reason to hold rates steady.

This also doesn't seem like a win for the Fed's communication strategy. Live and learn.

Finally, when considering the risk management issues, don't let New York Federal Reserve President William Dudley's latest speech slip by you. He questions the effectiveness of unconventional monetary policy:

Given the initial novelty of unconventional monetary policy tools, central banks did not have a well-developed body of research to draw on to design the programs and calibrate their impact. While it will take time to build this body of work, research to date varies in terms of the estimated effectiveness of unconventional policy. Several studies indicate that the FOMC’s first asset purchase program helped to reduce long-term interest rates, while the subsequent programs had smaller though still significant effects on rates. However, Professor Summers, who is participating in our program, has recently questioned the effectiveness of the Fed’s asset purchase programs when financial markets are well-functioning.

And then he considers the implications for monetary policy (emphasis added):

There is a related concern given that the federal funds rate is still close to zero at this point in the expansion. While I’m on record as saying that expansions do not simply die of old age, some economists are concerned that the risk of a recession is increasing. As I indicated earlier, the FOMC was able to reduce the federal funds rate by more than 5 percentage points in an effort to offset the effects of the last recession. If another recession were to happen in the next few years, it is likely that the FOMC would be unable to respond with a cut of such magnitude. In this case, the effectiveness of unconventional monetary policy in providing accommodation would again become a central issue, as Chair Yellen discussed in her recent Jackson Hole speech. A risk management approach to monetary policy would suggest that the more concerned one is with the effectiveness of these policies at the zero lower bound, the more cautious one would be in the process of removing accommodation. So, even though we are now slightly off the zero lower bound, an assessment of the effectiveness of unconventional monetary policy has implications with respect to the current stance of monetary policy.

Recessions don't die of old age, that's true. But the fact that Dudley even mentions rising risks of recession among "some economists" is notable. And note the time horizon of his concerns - the next few years! He must have a tingle in the back of his head saying that we are closer to the end than the beginning, and we still don't have adequate policy room, nor can we get adequate policy room by hiking rates because that will only accelerate the onset of the next recession. So the only thing they can do is delay (although not clear why he should consider a rate hike wise at all if he concedes to recession concerns). Such an argument will continue to dominate over the preemptive strike argument (see Richmond Federal Reserve President Jeffrey Lacker for the extreme view on that point) in November.

My takeaways on Fed communications over the last week are thus:

  • If you are only going to hike once a year, it is difficult to see why that hike would come at a meeting without a press conference. Clearly, it is not as if the timing of that one hike is really all that critical. You just have to learn to live with the reality that it will be hard to describe all eight meetings a year as "live" when you hike in only one of them. Live with the fact that at least half will end up effectively as "dead." And guess what? You determined which were "dead" with the decision to only have a press conference at every other meeting.
  • Don't try to talk up a rate hike with the only purpose of keeping the drama surrounding the meeting alive. That is not helping market participants understand the factors driving policy.
  • Don't try to talk up the market odds of a meeting just to attempt to gain a tactical advantage at that meeting. That seems to me to be what Fed hawks have been doing this year. The doves just aren't buying the preemptive strike argument. And they won't if market odds for a meeting are 50% rather than 15%. Wait until December.
  • If US politics are off limits, then foreign politics need to be off limits. It is very hard to explain why US politics don't matter for policy when foreign politics do matter.

Bottom Line: I am hard pressed to see the way forward to a November rate hike. Seems that delay will still dominate over preemptive strikes in November.

The Slump in Undocumented Immigration to the United States

"Federico S. Mandelman, a research economist and associate policy adviser in the in the Atlanta Fed's research department, and Andrei Zlate, a senior financial economist in the Boston Fed's Risk and Policy Analysis Unit":

The Slump in Undocumented Immigration to the United States: Immigration is a challenging and often controversial topic. We have written some on the economic benefits and costs associated with the inflows of low-skilled (possibly undocumented) immigrant workers into the United States here and hereOff-site link. In this macroblog post, we discuss some interesting trends in undocumented immigration.
There are no official records of undocumented immigration flows into the United States. However, one crude proxy for this flow is the number of apprehensions at the U.S. border. As pointed out in Hanson (2006), the number of individuals arrested when attempting to cross the U.S.-Mexico border, provided by the Department of Homeland Security (DHS), is likely to be positively correlated with the flows of attempted illegal border crossings (see chart 1).

The apprehensions series displays spikes that coincide with well-known episodes of increased illegal immigration into the United States, such as after the financial crisis in Mexico in 1995 or during the U.S. housing boom in the early 2000s. Importantly, the series also shows a sharp decline in the flows of illegal immigration at the U.S.-Mexico border during the last recession, and those flows have remained at historically low levels since then.
A better proxy for illegal immigration from Mexico would adjust the number of apprehensions for the intensity of U.S. border enforcement (for example, the number of border patrol officers). The intuition is straightforward: for the same level of attempted illegal crossings, greater enforcement is likely to result in more apprehensions. Chart 2 shows the border patrol staffing levels as an indicator of enforcement intensity.

As the chart shows, the sharp decrease in apprehensions after the Great Recession occurred despite a remarkable increase in border enforcement, indicating that the decline in migration flows in recent years may have been even more abrupt than implied by the (unadjusted) border apprehensions shown in chart 1.
The measure of inflows shown in chart 1 is largely consistent with estimates of the stock of undocumented immigrants in the United States, such as those provided by a new study by the Pew Research Center based on data from the U.S. Census Bureau. After having peaked at 12.2 million in 2007, the stock of unauthorized immigrants fell during the Great Recession and remained stable afterwards, most recently at 11.1 million in 2014. Also, the composition of this stock has shifted since the Great Recession. Although the population of undocumented Mexican immigrants fell by more than one million from its 6.9 million peak in 2007, the number of undocumented immigrants from Asia, Central America, and sub-Saharan Africa remained relatively steady as of 2014 and even increased in some cases. For example, the population of unauthorized immigrants from India rose by about 130,000 between 2009 and 2014. However, a lot of this type of unauthorized immigration is a result of overstayed visas rather than from people crossing the border without a visa.
What do these numbers suggest about the future? It is likely that the flows of undocumented immigrant labor between Mexico and the United States reflect differences in demographic patterns and economic opportunities between the two economies. In the United States, the baby boom came to an abrupt halt in the 1960s, causing a notable slowdown in the native-born labor supply two decades later. In contrast, Mexico's fertility rate remained high for much longer, hovering at 6.7 births per woman in 1970 versus 2.5 in the United States (see chart 3).

Mexico's labor force expanded rapidly during the 1980s, which, juxtaposed with the Mexican economic slump of the early 1980s, unleashed a wave of Mexican migration to the United States (Hanson and McIntosh, 2010). Also encouraging this flow was the steady U.S. economic growth during the "Great Moderation" period from the mid-1980s up through 2007 (Bernanke, 2004). More recently, however, Mexico's fertility rate has fallen (as in some Central American economies), and economic growth there has mostly outpaced that of the United States. Therefore, it is perhaps not too surprising that demographic trends—along with greater enforcement—have caused the inflows of undocumented migration at the U.S.-Mexico border to slow in recent years. Shifts in demographic and economic factors across countries are likely to continue to influence undocumented immigration in the United States.
Note: The views expressed here are those of the authors and do not necessarily reflect the views of the Federal Reserve Banks of Atlanta or Boston.

Links for 10-05-16

Tuesday, October 04, 2016

Does the One Percent Deserve What it Gets?

Nancy Folbre:

Does the one percent deserve what it gets?: The rich are not like you and me. They contribute far more to society than everybody else, so argues Harvard University economist Gregory Mankiw in his essay “Defending the One Percent.” Mankiw’s praise for talented superstars such as Steven Jobs, J.K. Rowling, and Steven Spielberg quickly blooms into a more general argument that competitive labor markets pay workers what they deserve. This is music to the ears of high earners, and it sings to a very human desire to believe that the world is fair.
But this argument is based on neoclassical economic theories that define the domain of human choice in narrow terms, minimizing the effects of bad luck, bad markets, and bad inequalities that often predetermine market outcomes. Mankiw’s argument leaves room for corporate bad behavior defined in narrow terms as “gaming the system.” But what he most deplores is government meddling with the system.
Most economists do not explicitly endorse such views. But years of schooling in neoclassical economic theories predispose them to the view that perfectly competitive markets yield equitable as well as efficient outcomes. As a result, they often assess “rent seeking,” or efforts to get rich at someone else’s expense, by comparison with hypothetical market outcomes.
Rent seeking becomes just another name for interference with the magic meritocracy of the marketplace. From this perspective, efforts to increase the minimum wage can be considered just as unfair as efforts to challenge compensation practices for corporate chief executives and other well-heeled top managers.
Like neoclassical economic theory in general, this approach is too narrow. Competitive markets comprise a relatively small part of an economy dominated by large multinational corporations—marketplaces and firms that are embedded in a global environment of unpriced goods and services.
Efforts to get rich at someone else’s expense, which fall under the academic rubric of distributional conflict, are multidimensional. Forms of collective bargaining power based on citizenship, class, race and ethnicity, and gender, as well as other aspects of group identity, influence the resources that individuals bring to the labor market. They also influence the power that individuals possess to modify labor market outcomes.
Some of us contribute more than members of the top one percent to the economy, and some of us contribute less. None of us gets exactly what we deserve. One difference between the rich and us is that they have more money. They also enjoy—both as cause and effect—a lot more power.

Link to paper.

Why Are Politicians So Obsessed With Manufacturing?

Part of a much longer article by Binyamin Appelbaum:

Why Are Politicians So Obsessed With Manufacturing?: ...Trump has made the revival of American manufacturing a signature issue... Hillary Clinton has campaigned on a broader economic agenda, but when it came time to describe those plans, she chose a fac­tory outside Detroit as her backdrop.
Manufacturing retains its powerful hold on the American imagination for good reason. In the years after World War II, factory work created a broadly shared prosperity that helped make the American middle class. People without college degrees could buy a home, raise a family, buy a station wagon, take some nice vacations. It makes perfect sense that voters would want to return to those times.
From an economic perspective, however, there can be no revival of American manufacturing, because there has been no collapse. Because of automation, there are far fewer jobs in factories. But the value of stuff made in America reached a record high in the first quarter of 2016, even after adjusting for inflation. The present moment, in other words, is the most productive in the nation’s history.
Politicians of all persuasions have tried to turn back time through a wide range of programs best summarized as “throwing money at factory owners.” ... By and large, those strategies haven’t helped. ...
This myopic focus on factory jobs distracts from another, simpler way to help working Americans: Improve the conditions of the work they actually do. Fast-food servers scrape by on minimum wage; contract workers are denied benefits; child-care providers have no paid leave to spend with their own children. ...
In all likelihood, many more of Mr. Trump’s supporters are people who once worked in those kinds of jobs, or whose parents did. They are now caregivers, retail workers and customer-service representatives. When will they start to demand that candidates address the lives they actually lead?

Links for 10-04-16

Monday, October 03, 2016

Unemployment Insurance Generosity and Aggregate Employment

Arindrajit Dube, Chris Boone, Lucas Goodman, and Ethan Kaplan:

Unemployment Insurance Generosity and Aggregate Employment: Abstract We estimate the impact of unemployment insurance (UI) extensions on aggregate employment during the Great Recession. Using a border discontinuity design, we compare employment dynamics in border counties of states with longer maximum UI benefit duration to contiguous counties in states with shorter durations between 2007 and 2014. ... Using either the baseline or the “refined” border design, we find no statistically significant impact of increasing unemployment insurance generosity on aggregate employment. Similar results obtain from instrumental variables estimates that only use variation in UI benefit duration induced by national-level policy changes—namely the 2008 benefit extension and the subsequent 2014 expiration of the Emergency Unemployment Compensation program. Our point estimates vary in sign, but are uniformly small in magnitude and most are estimated with sufficient precision to rule out substantial impacts of the policy. Based on the confidence intervals of all of our preferred specifications, we can reject negative impacts on the employment-to-population ratio exceeding 1.2 percentage points from an increase in maximum UI benefit duration from 26 to 99 weeks. Our more precise estimates rule out decreases in excess of 0.5 percentage points from the policy expansion. Overall, our macro employment estimates from the UI benefit extention can be rationalized with a small, negative labor supply effect from the UI benefit expansion—as suggested by a number of recent studies—along with a moderately sized fiscal multiplier. 
Also, our results differ substantially from Hagedorn, Karahan, Manovskii and Mitman (2015) and Hagedorn, Manovskii and Mitman (2016)  despite employing apparently similar strategies. In an online Appendix, we compare our results to those papers and discuss in detail what accounts for the substantial differences in our respective estimates, and decompose the differences due to choice of dataset and specifications.

Here is the link to the paper:

Here is a link to a media advisory with a synopsis of the study:

The Facts of Economic Growth

One of the many "Facts of Economic Growth" in an 80 page paper from Charles I. Jones:

The Facts of Economic Growth: ... One of the most obvious and readily quantified measures of government involvement in the economy is taxes. It is easy to write down models in which governments that tax heavily reduce the long-run success of their economies. The facts, however, are not so clear.
Figure 33 shows the growth rate of real GDP per person in the United States since 1980 as well as the total government tax revenues (including state and local) as a share of GDP... The stunning fact that emerges from this graph is that taxes have increased enormously, from around 10 percent of GDP in 1929 to more than 30 percent of GDP at their peak in 2000. But as we already noted earlier, growth rates over the 20th century were remarkably stable — if anything, they were higher after 1950 than before.
Figure 34 shows a related fact by looking across the countries of the world: tax revenues as a share of GDP are positively correlated with economic success, not negatively correlated.
Of course, these are just simple correlations, and they have an obvious interpretation. Governments do not simply throw the tax revenue that they collect into the ocean. Instead, this revenue — at least to some extent — is used to fund the good purposes that governments serve: providing a stable rule of law, a judicial system, education, public health, highways, basic research, and so on. ...

Out of Prison, Out of Work

Justin Fox:

Out of Prison, Out of Work: ...A single variable -- having a criminal record -- is a key missing piece in explaining why work rates and LFPRs [labor-force participation rates] have collapsed much more dramatically in America than other affluent Western societies over the past two generations. This single variable also helps explain why the collapse has been so much greater for American men than women and why it has been so much more dramatic for African American men and men with low educational attainment...
[T]he great incarceration wave that began in the 1970s has produced millions of ex-convicts who are ill-prepared for jobs or are discriminated against by employers even when they are prepared. ...
This is on the one hand tragic: millions of American men who were imprisoned in the 1970s through 1990s have been thrust into a labor market that really doesn't want them. On the other hand, it is at least potentially fixable. Job displacement by technology is probably unstoppable, but how we punish crime is a public-policy choice. Incarceration rates have already been falling with the big declines in crime since the early 1990s, and the past few years have seen the growth of a bipartisan consensus (interrupted by the current presidential campaign, to be sure) that the U.S. throws too many people in prison for too long and doesn't do nearly enough to rehabilitate them. Prison and sentencing reform might actually be the country's best shot at thwarting that "linear trend" that would put a quarter of prime-age men out of work by 2050.

Paul Krugman: Trump’s Fellow Travelers

Don't waste your vote:

Trump’s Fellow Travelers, by Paul Krugman, NY Times: Donald Trump has just had an extraordinarily bad week, and Hillary Clinton an extraordinarily good one... But both Mrs. Clinton’s virtues and Mr. Trump’s vices have been obvious all along. How, then, did the race manage to get so close on the eve of the debate?
A lot of the answer, I’ve argued, lies in the behavior of the news media... But let us not let everyone else off the hook. Mr. Trump couldn’t have gotten as far as he has without the support, active or de facto, of many people who understand perfectly well ... what his election would mean, but have chosen not to take a stand.
Let’s start with the Republican political establishment, which is supporting Mr. Trump just as if he were a normal presidential nominee...
While almost all Republican officeholders have endorsed Mr. Trump, the same isn’t true of ... the G.O.P. intelligentsia..., policy experts, opinion writers, and so on. For the most part,... members of this group haven’t spoken up in support of this year’s Republican nominee. ...
But if you think that electing Mr. Trump would be a disaster, shouldn’t you be urging your fellow Americans to vote for his opponent, even if you don’t like her? After all, not voting for Mrs. Clinton — whether you don’t vote at all, or make a purely symbolic vote for a third-party candidate — is, in effect, giving half a vote to Mr. Trump.
To be fair, quite a few conservative intellectuals have accepted that logic, especially among foreign-policy types... But there have also been many who balked at doing the right thing...
And the response from sane Republican economists has been especially disappointing. Only charlatans and cranks have endorsed Mr. Trump, but only a handful have ... been willing to say that if keeping him out of the White House is important, you need to vote for Mrs. Clinton.
Finally, it’s dismaying to see the fecklessness of those on the left supporting third-party candidates. ... If polls are to be believed, something like a third of young voters intend to, in effect, opt out of this election. If they do, Mr. Trump might yet win.
In fact, the biggest danger from Mr. Trump’s terrible week is that it might encourage complacency and self-indulgence among voters who really, really wouldn’t want to see him in the White House. So remember: Your vote only counts if you cast it in a meaningful way.

Links for 10-03-16

Sunday, October 02, 2016

How Seriously Should We Take the New Keynesian Model?

Brad DeLong:

How Seriously Should We Take the New Keynesian Model?: Nick Rowe continues his long twilight struggle to try to take the New Keynesian-DSGE seriously, to understand what the model says, and to explain what is really going on in the New Keynesian DSGE model to the world. I said that I think this is a Sisyphean task. Let me expand on that here...

In the basic New Keynesian model, you see, the central bank “sets the nominal interest rate” and that, combined with the inflation rate, produces the real interest rate that people face when they use their Euler equation to decide how much less (or more) than their income they should spend. When the interest rate high, saving to spend later is expensive and so people do less of it and spend more now. When the interest rate is low, saving to spend later is cheap and so people do more of it and spend less now.

But how does the central bank “set the nominal interest rate” in practice? What does it physically (or, rather, financially) do?


In a normal IS-LM model, there are three commodities:

  1. currently-produced goods and services,
  2. bonds, and
  3. money.

In a normal IS-LM model, the central bank raises the interest rate by selling some of the bonds it has in its portfolio for cash and burns the cash it thus collects (for cash is, remember, nothing but a nominal liability of the central bank). It thus creates an excess supply (at the previous interest rate) for bonds and an excess demand (at the previous interest rate) for cash. Those wanting to hold more cash slow down their purchases of currently-produced goods and services (thus creating an excess supply of currently produced goods and services) and sell some of their bonds (thus decreasing the excess supply of bonds). Those wanting to hold fewer bonds sell bonds for cash. Thus the interest rate rises, the flow quantity of currently-produced goods and services falls, and the sticky price of currently-produced goods and services stays where it is. Adjustment continues until supply equals demand for both money and bonds at the new equilibrium interest rate and at a new flow quantity of currently produced goods and services.

In the New Keynesian model?…

Nick Rowe: Cheshire Cats and New Keynesian Central Banks:

How can money disappear from a New Keynesian model, but the Central Bank still set a nominal rate of interest and create a recession by setting it too high?…

Ignore what New Keynesians say about their own New Keynesian models and listen to me instead. I will tell you how it is possible…. The Cheshire Cat has disappeared, but its smile remains. And its smile (or frown) has real effects. The New Keynesian model is a model of a monetary exchange economy, not a barter economy. The rate of interest is the rate of interest paid on central bank money, not on bonds. Raising the interest rate paid on money creates an excess demand for money which creates a recession. Or it makes no sense at all.

I will take “it makes no sense at all” for $2000, Alex…

Either there is a normal money-supply money-demand sector behind the model, which is brought out whenever it is wanted but suppressed whenever it raises issues that the model builders want ignored, or it makes no sense at all…

Saturday, October 01, 2016

Links for 10-01-16