- Minimum Wage and Job Loss: Seattle Study Is Not the Last Word - NYTimes
- The Problem With Trump's Steel Tariffs - Annie Lowrey
- Buyer beware - American Economic Association
- In Conversation: Robert Solow - Equitable Growth
- Asymmetric policies - Stumbling and Mumbling
- Yes, Financial Crises Do Bring Hangovers - Justin Fox
- Modelling the Macroprudential Balancing Act - Bank Underground
- Capital accumulation, private property, and inequality in China - VoxEU
- The Cycles of Cities - Tim Taylor
- Redlining Never Went Away - Noah Smith
- Growth and volatility before and after the Global Crisis - VoxEU
Thursday, July 20, 2017
This ridiculous Republican propaganda is exactly why we need the CBO: Tuesday I wrote about the GOP’s systematic efforts to discredit and disempower any independent voice — media, the Congressional Budget Office, the Office of Government Ethics — that tries to hold government accountable.
Today we have a great example of the ridiculous propaganda that Republicans expect the public to swallow in the absence of such independent critics and scorekeepers.
The Washington Examiner has gotten its hands on a Trump administration “analysis” (I use that word loosely) of the Consumer Freedom Amendment, a proposal from Sen. Ted Cruz (R-Tex.). ...
Talk to literally any economist, including conservative ones, and you’ll learn that this idea would lead to adverse selection, a huge spike in premiums for sick people..., a proliferation of mini-med junk plans that cover virtually nothing..., and a possible death spiral. A more detailed explanation of this phenomenon is here. ...
Contrary to the predictions of economists everywhere, the HHS propaganda document claims that the Cruz amendment would cause insurance coverage to go up and premiums to fall. Astoundingly, even premiums for people in the Obamacare-compliant plans — which, again, economic theory suggests would get stuck with only the very sickest, most expensive Americans — would allegedly decline relative to current law. ...
This is garbage, and exactly why we need nonpartisan scorekeepers like the CBO. ...
Wednesday, July 19, 2017
- The Healthcare Debacle: The Roles of Ignorance and Evil - Paul Krugman
- The economics of BBC pay - Stumbling and Mumbling
- Should Labour triangulate over Brexit? - mainly macro
- How will households react to the real income squeeze? - Bank Underground
- Japan's ‘glass ceiling’ and ‘sticky floor’ - VoxEU
- Global Value Chains and Productivity - Tim Taylor
- Facts, frictions & "mainstream" economics - Stumbling and Mumbling
- Credit misallocation during the European financial crisis - VoxEU
- The Economic Constraints on China’s Geostrategic Ambitions - Brad Setser
Tuesday, July 18, 2017
This Expansion Will End in a Fizzle, Not a Bang: The Fed is growing increasingly concerned that this expansion will end like the last two, with a collapse in asset prices that brings down the economy. That concern will lead the central bank down the path of excessive tightening. Worse, that logic misses a key point. In both of the last two cycles, there was a sizable imbalance in the economy that extended beyond financial assets themselves. So far, the current environment lacks such an imbalance. That suggests the expansion ends with more of a fizzle than a bang. ...[Continued at Bloomberg Prophets]...
Monday, July 17, 2017
I have a new column:
Here’s Why We’re Not Prepared for the Next Recession: When will the next recession hit the economy? Nobody knows for sure, but we can be certain that sooner or later the economy will experience another downturn. When that happens, will monetary and fiscal policymakers have the ability to respond effectively?
The inevitability of another recession is evident in a graph of the unemployment rate. ...
- Slow productivity growth may not be the 'new normal' for the US - VoxEU
- The Pricing Answer to Traffic Congestion - Tim Taylor
- On BBC bias - Stumbling and Mumbling
- Why Do Cities Become Unaffordable? - Robert J. Shiller
- The Cyclical Sensitivity in Estimates of Potential Output - NBER
- The OBR’s risk assessment lacks context - mainly macro
- Cost of living and per capita incomes in U.S. cities - FRED Blog
- An Open Letter to the Honorable Randal K. Quarles - Cecchetti & Schoenholtz
- Can temporary affirmative action policies have lasting effects? - AEA
- Monetary Policy for a central bank with no balance sheet - Nick Rowe
- The Stock Market Is Doing About the Same as Always – Kevin Drum
- Ted Cruz’s Giant Leap Into The Known - Paul Krugman
Saturday, July 15, 2017
How to Think Like an Economist (If, That Is, You Wish to...): I have long had a "thinking like an economist" lecture in the can. But I very rarely give it. It seems to me that it is important stuff—that people really should know it before they begin studying economics, because it would make studying economics much easier. But it also seems to me—usually—that it is pointless to give it at the start of a course to newBs: they just won't understand it. And it also seems to me—usually—that it is also pointless to give it to students at the end of their college years: they either understand it already, or it is too late.
By continuity that would seem to imply that there is an optimal point in the college curriculum to teach this stuff. But is that true?
What do you think?
+ + + +
Every new subject requires new patterns of thought; every intellectual discipline calls for new ways of thinking about the world. After all, that is what makes it a discipline: a discipline that allows people to think about a subject in some new way. Economics is no exception.
In a way, learning an intellectual discipline like economics is similar to learning a new language or being initiated into a club. Economists’ way of thinking allows us to see the economy more sharply and clearly than we could in other ways. (Of course, it can also cause us to miss certain relationships that are hard to quantify or hard to think of as purchases and sales; that is why economics is not the only social science, and we need sociologists, political scientists, historians, psychologists, and anthropologists as well.) In this chapter we will survey the intellectual landmarks of economists’ system of thought, in order to help you orient yourself in the mental landscape of economics.
Economics: What Kind of Discipline Is It? ...
- Kenneth Arrow Commemoration - Larry Summers
- The New Climate Of Treason - Paul Krugman
- What’s Wrong with the Price-Specie-Flow Mechanism, Part II - David Glasner
- So Many Critics of Economics Miss What It Gets Right - Noah Smith
- Incentives, effort, and performance in higher education - VoxEU
- The US Labor Market is Still Losing Ground Relative to Trend - Douglas Campbell
- Trumponomics philosophy: it doesn’t suck enough to be poor - C. Rampell
- Follow the Balance of Payments Breakevens of the Oil Exporters - Brad Setser
- On contradictory risk attitudes - Stumbling and Mumbling
- Why German wages need to rise - mainly macro
- Y2K Everyday? - Digitopoly
- FedViews - FRBSF
Friday, July 14, 2017
"the last act in a long con":
The Cruelty and Fraudulence of Mitch McConnell’s Health Bill, by Paul Krugman, NY Times: A few days ago the tweeter in chief demanded that Congress enact “a beautiful new HealthCare bill” before it goes into recess. But now we’ve seen Mitch McConnell’s latest version of health “reform,” and “beautiful” is hardly the word for it. In fact, it’s surpassingly ugly, intellectually and morally. Previous iterations of Trumpcare were terrible, but this one is, incredibly, even worse. ...
The most important change in the bill ... is the way it would effectively gut protection for people with pre-existing medical conditions. The Affordable Care Act put minimum standards on the kinds of policies insurers were allowed to offer; the new Senate bill gives in to demands by Ted Cruz that insurers be allowed to offer skimpy plans that cover very little, with very high deductibles that would make them useless to most people.
The effects of this change would be disastrous. Don’t take my word for it: It’s what the insurers themselves say. ...
Or to put it another way, this bill would send insurance markets into a classic death spiral. Republicans have been predicting such a spiral for years, but keep being wrong: ...Obamacare ... is stabilizing, and doing pretty well in states that support it. But this bill would effectively sabotage all that progress.
And let’s be clear: Many of the victims of this sabotage would be members of the white working class, people who voted for Donald Trump in the belief that he really meant it when he promised that there would be no cuts to Medicaid and that everyone would get better, cheaper insurance. So why ... is there even a chance that it might become law?
The main answer, I’d argue, is that ... conservative ideology always denied the proposition that people are entitled to health care; the Republican elite considered and still considers people on Medicaid, in particular, “takers” who are effectively stealing from the deserving rich.
And the conservative view has always been that Americans have health insurance that is too good, that they should pay more in deductibles and co-pays, giving them “skin in the game,” and thus an incentive to control costs.
So what we’re seeing here is supposed to be the last act in a long con, the moment when the fraudsters cash in, and their victims discover how completely they’ve been fooled. The only question is whether they’ll really get away with it. We’ll find out very soon.
- The US Treasury’s missed opportunity - VoxEU
- Cross-Border Spillovers of Balance Sheet Normalization - Lael Brainard
- Charter schools do more than teach to the test - Microeconomic Insights
- Does arbitrage always improve market efficiency? - Microeconomic Insights
- Children’s well-being, black student loan debt - Brookings
Thursday, July 13, 2017
- Takers and Fakers - Paul Krugman
- Table Russia, Focus on Health Care - The New York Times
- Retracing the history of UK banking - Bank Underground
- Western Civilization and Presidential Hypocrisy - Larry Summers
- Endogenous growth and lack of recovery from the Global Crisis - VoxEU
- The measurement and understanding of economic inequality - Robert Solow
- More Evidence for the 'Self-Induced Paralysis' Thesis - Douglas L. Campbell
- Inevitability of the need for economic growth—the nth time - globalinequality
- Comparing Companies to Nations - EconoSpeak
- Chinese modernization c. 1930 - Understanding Society
- An Update on Labor Force Participation - macroblog
- We Don’t Need No Education - Paul Krugman
- The Bandwidth for the KPSS Test - Dave Giles
- Refugees in Germany - IGM Forum
- The danger of dismissing market failures - Brookings
- Rooftop Solar Is No Match for Crony Capitalism - Noah Smith
- Tally Sticks and the Fundamentals of Money - Tim Taylor
Wednesday, July 12, 2017
How Market Power Leads to Corporate Political Influence, by Asher Schechter: Neoclassical economic theory assumes that firms have no power to influence the rules of the game. A new paper by Luigi Zingales argues: This is true only in competitive product markets. When firms have market power, they will seek and obtain political influence and vice versa.
In 2016, the advocacy group Global Justice Now published a report showing that 69 of the world’s largest 100 economic entities are now corporations, not governments. With annual revenues of $485.9 billion, Walmart topped all but nine countries. As the world’s corporations continue to grow bigger and more profitable, so does the power and influence they wield: multinational corporations employ vast armies of lobbyists, lawyers, and PR people across borders and continents, and they have more than enough resources to capture regulators and elected representatives the world over.
Yet, the prevailing economic definition views firms as merely “a nexus of contracts” with “no power of fiat, no authority, no disciplinary action any different in the slightest degree from ordinary market contracting between two people.” How is it possible to reconcile these two views? A new paper by Luigi Zingales (Faculty Director of the Stigler Center and one of the editors of this blog) tries to bridge this gap.
The Medici vicious circle
The neoclassical model of the firm, notes Zingales, is a reasonable description of firms operating in highly competitive markets, where firms have little incentives and fewer resources to distort the rules of the game. Little incentives because in a neoclassical framework firms are relatively small, and thus the costs of these activities tend to exceed their share of the benefits. Fewer resources, because a competitive market does not provide firms with abnormal profits to spend in lobbying activities.
The opposite is true in concentrated markets, where firms enjoy sufficiently high profits to spend in lobbying activity. Some market power is particularly important to gain political influence when cash bribes are relatively rare, writes Zingales. In such an environment, firms gain political power through promises of future benefits. Only if firms have significant market power do they have rents to allocate. At the same time, firms’ promises of future rents are credible only to the extent that firms are expected to be around in the future, a prospect greatly enhanced by the existence of some barrier to entry in the markets in which they operate. Thus, firms can gain political power only when they have significant market power. ...
Why recessions followed by austerity can have a persistent impact: Economics students are taught from an early age that in the short run aggregate demand matters, but in the long run output is determined from the supply side. A better way of putting it is that supply adjusts to demand in the short run, but demand adjusts to supply in the long run. A key part of that conceptualisation is that long run supply is independent of short run movements in demand (booms or recessions). It is a simple conceptualisation that has been extremely useful in the past. Just look at the UK data shown in this post: despite oil crises, monetarism and the ERM recessions, UK output per capita appeared to come back to an underlying 2.25% trend after WWII.
Except not any more: we are currently more than 15% below that trend and since Brexit that gap is growing larger every quarter. Across most advanced countries, it appears that the global financial crisis (GFC) has changed the trend in underlying growth. You will find plenty of stories and papers that try to explain this as a downturn in the growth of supply caused by slower technical progress that both predated the GFC and that is independent of the recession caused by it.
In a previous post I looked at recent empirical evidence that told a different story: that the recession that followed the GFC appears to be having a permanent impact on output. You can tell this story in two ways. The first is that, on this occasion for some reason, supply had adjusted to lower demand. The second is that we are still in a situation where demand is below supply. ... [explains] ...
All this shows that there is no absence of ideas about how a great recession and a slow recovery could have lasting effects. If there is a problem, it is more that the simple conceptualisation that I talked about at the beginning of this post has too great a grip on the way many people think. If any of the mechanisms I have talked about are important, then it means that the folly of austerity has had an impact that could last for at least a decade rather than just a few years.
- The myth of the German jobs miracle - Matthew Klein
- How do credit supply shocks affect the real economy? - Mian, Sufi, Verner
- Cross-Border Spillovers of Balance Sheet Normalization - Lael Brainard
- Does the Journal System Distort Scientific Research? - Miles Kimball
- Young Men Give Up Work for Video Games? Be Skeptical - Noah Smith
- Trump’s Security Vision Leaves Little Room for Plowshares - Eduardo Porter
- The Fed Gets Optimistic About Inflation - Narayana Kocherlakota
- The unhappiness of the US working class - Brookings
- The CICE comedy - Le blog de Thomas Piketty
- Arm's-Length International Trade - Tim Taylor
- Responding to Urban Decline - FRB Richmond
- A New Puzzle à la Fama - Econbrowser
- Inflation Target - IGM Forum
Tuesday, July 11, 2017
- Why Single-Payer Health Care Saves Money - Robert Frank
- Formerly True Theories - Paul Krugman
- Trump Nominates Randal Quarles to Oversee Wall Street Banks - NYTimes
- The secular rise in personality traits - VoxEU
- Global value chains shed new light on trade - Brookings Institution
- What’s Holding Back Business Formation? - FRBSF
- The New Abnormal in Monetary Policy - Nouriel Roubini
- Impact of Macro Surprises Changed After Zero Lower Bound - Dallasfed.org
- Dealing with Imperfect Instruments III - Marc Bellemare
- On Matthew effects - Stumbling and Mumbling
- How the Fed Changes the Size of Its Balance Sheet - Liberty Street
- Populism and the Economics of Globalization - NBER
- Measuring the impact of austerity - mainly macro
- How Healthy is the Global Financial System? - Mohamed A. El-Erian
Monday, July 10, 2017
There are three good reasons why Republicans, in their quest to fund tax cuts for the wealthy, can't find an alternative to Obamacare that avoids "a huge rise in the number of uninsured":
Three Legs Good, No Legs Bad, by Paul Krugman, NY Times: Will 50 Republican senators be willing to inflict grievous harm on their constituents in the name of party loyalty? I have no idea.
But this seems like a good moment to review why Republicans can’t come up with a non-disastrous alternative to Obamacare...
Suppose you want to make health coverage available to everyone..., the Affordable Care Act went for ... the so-called three-legged stool.
It starts by requiring that insurers offer the same plans, at the same prices, to everyone... This deals with the problem of pre-existing conditions. On its own, however, this would lead to a “death spiral”: healthy people would wait until they got sick to sign up, so those who did sign up would be relatively unhealthy, driving up premiums, which would in turn drive out more healthy people, and so on.
So insurance regulation has to be accompanied by the individual mandate, a requirement that people sign up for insurance, even if they’re currently healthy. And the insurance must meet minimum standards: Buying a cheap policy that barely covers anything is functionally the same as not buying insurance at all.
But what if people can’t afford insurance? The third leg of the stool is subsidies ... for those with lower incomes. For those with the lowest incomes, the subsidy is 100 percent, and takes the form of an expansion of Medicaid.
The key point is that all three legs of this stool are necessary...
Republicans ... ideas involve sawing off one or more legs of that three-legged stool.
First, they’re dead set on repealing the individual mandate...
Second, they’re determined to slash subsidies — including making savage cuts to Medicaid — in order to free up money ... to cut taxes on the wealthy. The result would be a drastic rise in net premiums for most families.
Finally, we’re now hearing a lot about the Cruz amendment, which would let insurers offer bare-bones plans with minimal coverage and high deductibles. These would be useless to people with pre-existing conditions, who would find themselves segregated into a high-cost market — effectively sawing off the third leg of the stool.
So which parts of their plan would Republicans have to abandon to avoid a huge rise in the number of uninsured? The answer is, all of them.
After all these years of denouncing Obamacare, then, Republicans have no idea how to do better. Or, actually, they have no ideas at all.
June Employment Report Recap, by Tim Duy: A generally upbeat June 2017 employment report supports the Fed's case for additional monetary tightening, most likely in the form of balance sheet action in September followed up by a 25bp rate hike in December. Moreover, the solid pace of job growth will encourage the Fed to maintain 2018 policy projections as well. Although the unemployment rate ticked up, ongoing job growth at this pace will eventually push it back down. Weak wage growth continues to restrain the Fed from accelerating the pace of easing; the tepid pace of wage gains suggests the Fed's estimates of full employment remain too high.
Nonfarm payrolls rose by 22sk in June, above expectations. Moreover, both April and May were revised higher. The three month and twelve month paces are just below 200k. Job growth continues to slow, but the rate of decline is very shallow:
Looking into the future, temporary help payrolls continues to climb after the transitory slowdown in 2015:
This typically indicates sustained broad job growth in future months. Further evidence of a solid job market is visible in the accelerating of aggregate hours worked:
Payroll growth remains above the roughly 100k the Fed believes is necessary to hold the unemployment rate constant once demographic impacts outweigh cyclical impacts on labor force growth. For June, however, the unemployment rate ticked up on the back of higher labor force participation:
Still, the Fed won't take much relief in the gain. For all intents and purposes, labor force participation has been move sideways since 2014:
The monthly variance so far has been just noise.
Despite low unemployment, wage growth remains anemic:
One would have expected a pickup in wage growth if the economy were indeed operating substantially beyond full employment. This gives the Fed something to think about in the latter half of this year - they don't want to choke out growth too quickly if the natural rate of unemployment is in fact much lower than current estimates. Still, concern that wage growth will soon spike if their estimates are correct encourage most Fed policymakers to keep their foot gently on the brake.
Bottom Line: Even as weak wage growth couples with soft inflation to raise a bit of caution among central bankers, the overall tenor of the labor markets remains sufficient for the Fed to maintain its tightening bias. They really need softer job numbers to thrown in the towel on their expected policy path for 2017 and 2018.
- Trump’s behavior is the biggest threat to U.S. national security - Larry Summers
- When Was The Golden Age Of Conservative Intellectuals? - Paul Krugman
- The crisis of positive-sum capitalism - Stumbling and Mumbling
- Ben Bernanke, in Denial? "When Growth is Not Enough" - Douglas L. Campbell
- The Liberal Conscience (Bertrand Russell Edition) - Roger E. A. Farmer
- On the Identification of Network Connectedness - No Hesitations
- Collective bargaining in OECD countries - VoxEU
- Mending the Gap? - Economic Principals
- Against Charisma - mainly macro
- Wage Growth Slows Sharply - Dean Baker
Saturday, July 08, 2017
"Why is there such an enormous gulf between what economists know and what they say in public?":
What Economics Models Really Say A Review of Economics Rules: The Rights and Wrongs of the Dismal Science by Dani Rodrik (Norton, 2015) Peter Turchin University of Connecticut Seshat: Global History Databank: [This work is made available under the terms of the Creative Commons Attribution 4.0 license, http://creativecommons.org/licenses/by/4.0/ ]
The blurb on the jacket of Economics Rules says, “In this sharp, masterful book, Dani Rodrik, a leading critic from within, takes a close look at economics to examine when it falls short and when it works, to give a surprisingly upbeat account of the discipline.” I heartily agree with nearly all of this, with the exception of the “upbeat” part. As I will explain toward the end of this review, my view of economics, and, especially, of the role that economists play in public policy, is much more critical.
A central theme in the book is the role of mathematical models in economics. Formal models in economics and other social sciences are often disparaged. According to the critics (who include some economists, many other social scientists, and the overwhelming majority of historians), models oversimplify complex reality, employ unrealistic assumptions, and deny “agency” to human beings.
Rodrik rejects this critique. According to him, mathematical models— “simplifications designed to show how specific mechanisms work by isolating them from other, confounding effects”—are the true strength of economics. A simplified description of reality is not a shortcoming, it’s the essence of a good model.
My own training was in mathematical biology, and as a graduate student during the 1980s I saw the tail end of the “Math Wars” in ecology. By the 1990s the war was won, and any respectable department of ecology and evolution had to have on faculty at least one modeler. Today, the great majority of ecologists agree that a science cannot become a Science until and unless it develops a well-articulated body of mathematical theory.
In the social sciences, different disciplines made this transition at different times, with economics leading the pack and laggards, like history, undergoing this transition only now (hence cliodynamics—“history as science”; it’s worth noting that most American historians consider history not as a social science, but as one of the humanities).
I was, thus, a bit bemused to read Rodrik’s defense of mathematical models (haven’t economists resolved the Math Wars already?). But it’s an excellent defense—all aspiring cliodynamicists should read Economics Rules, if only for this reason.
The list of reasons why we need mathematical models in a scientific discipline is familiar to all who have extensive experience in modeling (and for those who don’t have such experience, I suggest you read Chapters 1 and 2 of Economics Rules). Models clarify the logic of hypotheses, ensure that predictions indeed follow from the premises, open our eyes to counterintuitive possibilities, suggest how predictions could be tested, and enable accumulation of knowledge. The advantage of clarity that mathematical models offer scientists is nicely illustrated in the following quote from Economics Rules: “We still have endless debates today about what Karl Marx, John Maynard Keynes, or Joseph Schumpeter really meant. … By contrast, no ink has ever been spilled over what Paul Samuelson, Joe Stiglitz, or Ken Arrow had in mind when they developed the theories that won them their Nobel.” The difference? The first three formulated their theories largely in verbal form, while the latter three developed mathematical models.
The value of the book, however, is in more than just weighing in on the usefulness of mathematical models. As Rodrik notes early in the book, “economics is by and large the only social science that remains almost entirely impenetrable to those who have not undertaken the requisite apprenticeship in graduate school.” And economics is “impenetrable” not because of mathematical models, at least not to someone trained in mathematical natural sciences (the math is universal), but because economists have developed an entirely distinct jargon that sets them apart from other disciplines and creates artificial barriers to understanding the many truly worthwhile insights from economics models.
Because I have not “undertaken the requisite apprenticeship”, I found very useful Rodrik’s explanations of the insights generated by such classic models in economics as the First Fundamental Theorem of Welfare Economics, the Principle of Comparative Advantage, and the General Theory of Second Best. Particularly illuminating were the discussion of what happens to the fundamental result of a model when we start systematically relaxing various assumptions on which it depends. This part of the book, together with the references that Rodrik provides, could serve as a basis for an excellent mini-course on what economics theory really tells us.
And a general take-home message that emerges from this discussion is that if we want to understand Big Questions—when do markets work or fail, what makes economies grow, and what are the effects of deficit spending—there is not one fundamental model, “the Model”. Instead, we need to study an array of models, each telling a partial story.
So far so good. But Rodrik, in my opinion, goes too far in denying the value of general theory. At one point he writes, “society does not have fundamental laws— at least, not quite in the same way that nature does.” And: “the same theory of evolution applies in both Northern and Southern Hemispheres,” but “economic models are different.”
Not really. Let’s take the theory of evolution. It’s not a single model. It’s a theoretical framework that includes hundreds, perhaps thousands of special case models, each telling only a partial story. To give an example, textbooks on evolutionary theory often start with a single-locus two-allele model (which gives us the famous Hardy-Weinberg Equilibrium). But you will need different models for haploid organisms (such as bacteria, who have a single unpaired chromosome), or for organisms reproducing asexually; and yet another set of models for phenotypic selection. Despite such diversity of modeling approaches, there is a theoretical unity in evolutionary biology. In particular, the conceptual framework of evolutionary theory provides a set of guidelines for the theoreticians on which model to use in which context.
And I don’t see how the situation is different in economics (and, more generally, social sciences). Yes, there is a multiplicity of models in economics, but you can’t just select one randomly (or worse, “cherry pick” among the results to suit your ideological agenda). There are rules for choosing appropriate models, and Rodrik devotes Chapter 3 of his book to explaining general principles of model selection in economics. In other words, theoretical frameworks are not simply compendia of models, they also include model selection rules (and a few other things).
Rodrik, thus, sells short the potential for general theory in social sciences. Naturally, economics, in particular, does not have such an elaborate, well-articulated, and empirically validated theoretical framework as evolutionary biology (and evolutionary biology, in turn, lags behind many subdisciplines of physics). But who is to say that economics will not develop to the same level in the future? We’ll see if we live long enough.
Let’s now shift gears and talk about Chapter 5, “When Economists Go Wrong.” To make the following discussion concrete, I will focus on a particular theoretical result in economics, the Principle of Comparative Advantage, and what this principle implies for trade policy. In popular press, of course, comparative advantage is always used as a justification for advocating free trade. Rodrik does an admirable job explaining why, under many conditions, free trade can lead to really negative consequences for economies and populations of countries that open themselves to international competition. For example, there is strategic behavior. A country may choose to protect its domestic industry with high tariffs and subsidize its exports in order to gain market share. Perhaps its leaders don’t understand the Principle of Comparative Advantage, not having the benefit of apprenticeship in economics. Or perhaps they care more about their country's long-term survival in an anarchic international environment than about making immediate profit.
In one particularly revealing passage in the book, Rodrik writes,
consider how opening up trade—one of the key items of the Washington Consensus—was supposed to work. As barriers to imports were slashed, firms that were unable to compete internationally would shrink or close down, releasing their resources (workers, capital, managers) to be employed in other parts of the economy. More efficient, internationally competitive sectors, meanwhile, would expand, absorbing those resources and setting the stage for more rapid economic growth. In Latin American and African countries that adopted this strategy, the first part of this prediction largely materialized, but not the second. Manufacturing firms, previously protected by import barriers, took a big hit. But the expansion of new, export-oriented activities based on modern technologies lagged. Workers flooded less productive, informal service sectors such as petty trading instead. Overall productivity suffered. [italics are mine]
Washington Consensus outcomes in Latin America and Africa stand in sharp contrast with the experience of Asian countries. … Instead of liberalizing imports early on, South Korea, Taiwan, and later China all began their export push by directly subsidizing homegrown manufacturing. … All of them undertook industrial policies to nurture new manufacturing sectors and reduce their economies’ dependence on natural resources.
As Rodrik correctly stresses, these cases do not prove that standard economics is wrong. In short, “someone who advocates free trade because it will benefit everyone probably does not understand how comparative advantage really works.”
Models that were developed for “the way markets really work—or fail to work—in low-income settings with few firms, high barriers to entry, poor information, and malfunctioning institutions, these alternative models proved indispensable”—by telling us why countries that followed the Washington Consensus failed, and those who threw it to the wind succeeded.
But then how does one explain that nearly all economists—96 percent— strongly agree with the following statement: “Free trade improves the productive efficiency and offers consumers better choices, and in the long run these gains are much larger than any effects on unemployment” (Politicians Should Listen to Economists on Free Trade, by Bryan Riley, The Heritage Foundation, Feb.1, 2013; this was from a survey conducted by the University of Chicago’s Booth School of Business).
Rodrik argues that “the problem has to do more with the way economists present themselves in public than with the substance of the discipline.” “In public, the tendency is to close ranks and support free markets and free trade.”
But why is there such an enormous gulf between what economists know and what they say in public? One possible explanation is that policies, such as free trade, while often harming broad swaths of populations, tend to benefit narrow segments of economic elites. Perhaps the critics from the left (and a few “heterodox economists”) are right when they charge that economists speak what the powers-that-be want us to hear.
Whatever the explanation, I cannot agree that Rodrik’s book gives us “a surprisingly upbeat account of the discipline.” Economics may be a vibrant discipline, but most of the richness of its insights is hidden in academic publications behind the shield of specialist jargon, impenetrable to those who have not taken the requisite apprenticeship. And by closing ranks and unconditionally supporting free markets and free trade, economists have failed us, the general public. This is why we need more books like Economics Rules—so that we can find out what economics models really tell us.
- Can Investigative Journalism Overcome the Rational Ignorance? - ProMarket
- The difficult school-to-work transition for high-school dropouts - VoxEU
- What’s Wrong with the Price-Specie-Flow Mechanism? Part I - Uneasy Money
- Sibling spillovers - VoxEU
- A Legal Setback for the Fed - George Selgin
- The spanning hypothesis and risk premia in long-term bonds - VoxEU
- Capital inflows: The good, the bad, and the bubbly - VoxEU
- Risk, return, and skill in the portfolios of the wealthy - VoxEU
- Government Policy and Labor Productivity - Stanley Fischer
Friday, July 07, 2017
A Solid Employment Report: The headline jobs number was above expectations, and there were combined upward revisions to the previous two months. And the unemployment increased slightly.
In June, the year-over-year change was 2.24 million jobs. This is decent year-over-year job growth.
Note that June has been the strongest month for job growth over the three previous years, followed by July and November. This is the 4th consecutive solid job gain in June: 304 thousand in June 2014, 206 in June 2015, 297 thousand in June 2016, and now 222 thousand in June 2017. ...
Conservatives "keep scaling new heights of dishonesty in their attempt to sell their reverse-Robin Hood agenda":
Attack of the Republican Decepticons, by Paul Krugman, NY Times: Does anyone remember the “reformicons”? A couple of years back there was much talk about a new generation of Republicans who would ... move their party off its cruel and mindless agenda of tax cuts for the rich and pain for the poor, bringing back the intellectual seriousness that supposedly used to characterize the conservative movement.
But the rise of the reformicons never happened. What we got instead was the (further) rise of the decepticons..., conservatives who keep scaling new heights of dishonesty in their attempt to sell their reverse-Robin Hood agenda.
Consider ... Republican leaders’ strategy on health care..., here are a few low points. ...
Despite encountering some significant problems, the Affordable Care Act has ... extended health insurance to millions of Americans... And these numbers translate into dramatic positive impacts on real lives. ...
How do Republicans argue against this success? You can get a good overview by looking at the Twitter feed of Tom Price,... secretary of health and human services...
First, he points to the fact that fewer people than expected have signed up on the exchanges ... and portrays this as a sign of dire failure. But a lot of this shortfall is the result of good news: Fewer employers than predicted chose to drop coverage and shift their workers onto exchange plans. ...
Second, he points to the 28 million U.S. residents who remain uninsured... But nobody expected Obamacare to cover everyone... And you have to wonder how Price can look himself in the mirror ... when his own party’s plans would vastly increase the number of uninsured.
Which brings us to Republicans’ efforts to obscure the nature of their own plans. ...
On one side, they claim that a cut is not a cut, because dollar spending on Medicaid would still rise over time. ...
On the other side ... senior Republicans ... dismiss declines in the number of people with coverage as no big deal, because they would represent voluntary choices not to buy insurance.
How is this supposed to apply to the 15 million people the C.B.O. predicts would lose Medicaid? ...
Political spin used to have its limits: Politicians who wanted to be taken seriously wouldn’t go around claiming that up is down and black is white.
Yet today’s Republicans hardly ever do anything else. It’s not just Donald Trump: The whole G.O.P. has become a post-truth party. And I see no sign that it will ever improve.
Thursday, July 06, 2017
Employment Report Coming Up, by Tim Duy: The BLS will release the June employment report tomorrow. Wall Street is looking for an NFP gain of 170k. That sounds about right to me:
There may be an upside surprise if the May number was low due to new college graduates not yet on the payroll during the survey week.
The Fed believes this pace of job growth would be consistent with further downward pressure on the unemployment rate, keeping them stuck between concerns they will overheat the economy by undershooting the natural rate of unemployment and that pesky low inflation number. With that in mind, Wall Street anticipates the unemployment rate holds steady at 4.3%, which would likely only provide temporary relief for the Fed. They would be more willing to slow the pace of rate hikes if the unemployment rate held steady and the pace of job growth slowed to something closer to 100k per month. If that happens by the end of the year and inflation remains tepid, I anticipate the Fed would pull back on rate hike expectations for 2018.
That said, my baseline expectation is that economic growth proves sufficient to place further downward pressure on unemployment, leaving the Fed stuck in their current conundrum.
Last but not least, the Fed will be carefully watching measures of wage growth. Wage growth softened in recent months, suggesting that the goal of full employment remains elusive. That said, some of that weakness might be the delayed impact of flattening unemployment in 2016. Hence, the impact of lower unemployment this year on unemployment might still lie ahead. Firming to accelerating wage growth would signal to the Fed that the economy is indeed at full employment as many policymakers suspect. Such confirmation would enable them to dig in their heels on expected rate hikes.
- Voter Data Request Is Illegal, not Just Controversial - Regulatory Review
- Someday Congress Won't Raise the Debt Ceiling - Narayana Kocherlakota
- The Case for Housing Finance Reform - Jerome Powell
- Austerity Confusion, or why the Tories are trapped by austerity - mainly macro
- A review of labor market conditions - FRED Blog
- Who fears losing their job to AI and robots: Japanese survey data - VoxEU
- Foreign banks and the international transmission of monetary policy - VoxEU
- Never mind the flatness of the observed Phillips Curve - Nick Rowe
- A New Deal for the 21st Century - Yanis Varoufakis
- Money tree economics - Stumbling and Mumbling
- Fed Officials Are Divided Over When to Reduce Its Debt Holdings - NYTimes
- Freedom of Information Request - Jayson Lusk
- Transition to clean technology - VoxEU
- Growing, shrinking, and long-run economic performance - VoxEU
Wednesday, July 05, 2017
- Public Spheres for the Trump Age - J. Bradford DeLong
- The Global Growth Slump: Causes and Consequences - FRBSF
- The IMF’s Flexible Credit Line - Capital Ebbs and Flows
- Why Not Taxation and Representation? - Tim Taylor
- Morphogenesis and social norms - Understanding Society
- On the joint evolution of institutions and culture - VoxEU
Monday, July 03, 2017
"If we start breaking those rules, others will too":
Oh! What a Lovely Trade War, by Paul Krugmn, NYTimes: ...Axios reports that the White House believes that Trump’s base “likes the idea” of a trade war, and “will love the fight.”
Yep, that’s a great way to make policy.
O.K., so what’s complicated about trade policy?
First, a lot of modern trade is in intermediate goods — stuff that is used to make other stuff. A tariff on steel helps steel producers, but it hurts downstream steel consumers like the auto industry. So even the direct impact of protectionism on jobs is unclear.
Then there are the indirect effects, which mean that any job gains in an industry protected by tariffs must be compared with job losses elsewhere. Normally, in fact, trade and trade policy have little if any effect on total employment. They affect what kinds of jobs we have; but the total number, not so much. ...
Then there’s the response of other countries. International trade is governed by rules — rules America helped put in place. If we start breaking those rules, others will too...
And it’s foolish to imagine that America would “win” such a war. ... Anyway, trade isn’t about winning and losing: it generally makes both sides of the deal richer, and a trade war usually hurts all the countries involved.
I’m not making a purist case for free trade here. Rapid growth in globalization has hurt some American workers, and an import surge after 2000 disrupted industries and communities. But a Trumpist trade war would only exacerbate the damage, for a couple of reasons.
One is that globalization has already happened, and U.S. industries are now embedded in a web of international transactions. So a trade war would disrupt communities the same way that rising trade did in the past. There’s an old joke about a motorist who runs over a pedestrian, then tries to fix the damage by backing up — running over the victim a second time. Trumpist trade policy would be like that.
Also, the tariffs now being proposed would boost capital-intensive industries that employ relatively few workers per dollar of sales; these tariffs would, if anything, further tilt the distribution of income against labor.
So will Trump actually go through with this? He might. ...
Trump’s promises on trade, while unorthodox, were just as fraudulent as his promises on health care. In this area, as in, well, everything, he has no idea what he’s talking about. And his ignorance-based policy won’t end well.
I am here today and tomorrow:
Applications of Behavioural Economics, and Multiple Equilibrium Models to Macroeconomic Policy
Conference 3-4 July 2017 at the Bank of England
Monday 03 July
09:00 - 09:35 Introduction and Welcome
Victoria Saporta, Executive Director, Bank of England
09:35 - 10:30: Keynote Address: Do Low Interest Rates Punish Savers’?
James Bullard, President, FRB of St. Louis
10:30 - 11:25 Endogenous Regime Shifts in a New Keynesian Model with a Time varying Natural Rate of Interest
Kevin Lansing, FRB of San Francisco
Discussant: Giovanni Ricco, University of Warwick
11:25 - 11:55 Tea Break
11:55 - 12:50 Animal spirits in a monetary model
Konstantin Platonov, University of California Los Angeles
Discussant: Stephanie Schmitt-Grohé, Columbia University
12:50 - 14:00 Lunch
14:00 - 14:55 A Behavioral New Keynesian Model
Xavier Gabaix, Harvard University
Discussant: Martin Ellison, University of Oxford
14:55 - 15:50 Informative social interactions
Hector Calvo, Pardo University of Southampton
Discussant: Nora Wegner, Bank of England
15:50 - 16:20 Tea Break
16:20 - 17:15 History Dependence in UK Housing Market
Philippe Bracke, Bank of England
Discussant: Alan Taylor, University of California
17:15 - 18:10 Macroprudential policy in an agent based model of the UK housing market
Arzu Uluc, Bank of England
Discussant: Paolo Gelain, Norges Bank
18:30 Networking Reception
19:30 Dinner (By Invitation Only)
Speaker: Andy Haldane, Chief Economist, Bank of England
Tuesday 04 July
09:30 - 10:25 U.S. Monetary Policy in the Post-war Period
Giovanni Nicoló, University of California Los Angeles
Discussant: Ana Galvao, University of Warwick
10:25 - 11:20 The Inverted Leading Indicator Property and Redistribution Effect of the Interest Rate, Patrick Pintus, University of Aix-Marseile and Banque de France
Discussant: Kaushik Mitra, University of Birmingham
11:20 - 11:50 Tea Break
11:50 - 12:45 Systemic Bank Panics in Financial Networks
Zhen Zhou, Tsinghua University
Discussant: Sujit Kapadia, Bank of England
12:45 - 13:45 Lunch
13:45 - 14:40 Divergent Risk Attitudes and Endogenous Collateral Constraints
Ester Faia, University of Frankfurt
Discussant: Daisuke Ikeda, Bank of England
14:40 - 15:35 Expectations, Stagnation and Fiscal Policy
George Evans, University of Oregon
Discussant: Thomas Hintermaier, University of Bonn
15:35 - 16:05 Tea Break
16:05 - 17:00 Inflation targets and the zero lower bound in a behavioural macroeconomic model
Paul De Grauwe, London School of Economics
Discussant: Laura Povoledo, University of the West of England
17:00 - 17:05 Introduction
Roger Farmer, University of Warwick and Research Director: NIESR
17:05 - 18:00 Keynote Address: Forward Guidance when Planning Horizons are Finite
Michael Woodford, Columbia University
18:00 Conference Closes
Sunday, July 02, 2017
- Trump and the Truth About Climate Change- Joseph Stiglitz
- Are we in a new inflation regime? - Econbrowser
- The simplicity of views regarding civil conflicts - Branko Milanovic
- The future of the techno-market economy - Understanding Society
- The deterrence effect of whistleblowing - VoxEU
- Automation and jobs - John Cochrane
- Monopoly/monopsony power and hungriness for sales/purchases - Nick Rowe
- A completely pointless amendment - mainly macro
- On the measuring and mis-measuring of Chinese growth - VoxEU
- The Return of Peasant Mentality? - Dietrich Vollrath
- "Information Is a Public Good" - ProMarket
- The Role of Central Bank Lending Facilities in Monetary Policy - Liberty Street
Friday, June 30, 2017
What's the driving force behind the Republican's "ugly health plan":
Understanding Republican Cruelty, by Paul Krugman, NY Times: The basics of Republican health legislation ... are easy to describe: Take health insurance away from tens of millions, make it much worse and far more expensive for millions more, and use the money thus saved to cut taxes on the wealthy. ...
The puzzle ... is why the party is pushing this harsh, morally indefensible agenda.
Think about it. Losing health coverage is a nightmare, especially if you’re older, have health problems and/or lack the financial resources to cope if illness strikes. ...
Meanwhile, taxes that fall mainly on a tiny, wealthy minority would be reduced or eliminated. These cuts would be big in dollar terms, but because the rich are already so rich, the savings would make very little difference to their lives. ...
Which brings me back to my question: Why would anyone want to do this?
I won’t pretend to have a full answer, but I think there are two big drivers — actually, two big lies — behind Republican cruelty on health care and beyond.
First..., Republicans spent almost the entire Obama administration railing against the imaginary horrors of the Affordable Care Act — death panels! — repealing Obamacare was bound to be their first priority.
Once the prospect of repeal became real, however, Republicans had to face the fact that Obamacare, far from being the failure they portrayed, has done what it was supposed to do...
So one way to understand this ugly health plan is that Republicans, through their political opportunism and dishonesty, boxed themselves into a position that makes them seem cruel and immoral — because they are.
Yet that’s surely not the whole story, because Obamacare isn’t the only social insurance program that does great good yet faces incessant right-wing attack. Food stamps, unemployment insurance, disability benefits all get the same treatment. Why?
As with Obamacare, this story began with a politically convenient lie — the pretense ... that social safety net programs just reward lazy people who don’t want to work. And we all know which people in particular were supposed to be on the take.
Now, this was never true..., some of the biggest beneficiaries of these safety net programs are members of the Trump-supporting white working class. ...
So what will happen to this monstrous bill? I have no idea. Whether it passes or not, however, remember this moment. For this is what modern Republicans do; this is who they are.
- Thoughts on Improving Academic Journals - Douglas Campbell
- Selecting for groupthink - Stumbling and Mumbling
- Economists and the Euro: for the record - mainly macro
- The hype, reality, and causes of the global trade slowdown - VoxEU
- Macro Model Comparison Research Takes Off - John Taylor
- Markups in a monopolistically competitive macroeconomy - Nick Rowe
- The Future of Countercyclical Regulation - The Regulatory Review
- Monetary policy, credit, and economic activity in developing countries - VoxEU
- The E.U.’s Antitrust Fine Against Google - Adam Davidson
Thursday, June 29, 2017
- Incomplete Contracts (Video) - Oliver Hart
- Political Interests Play a Major Role in Bank Bailouts- ProMarket
- Who Does Business Represent? - Ricardo Hausmann
- Wind Power a Growing Force in Oil Country - Dallas Fed
- A “dark side” to the commodity boom in Africa - AEA
- Comments on Profit and Capital - EconoSpeak
- Market Liquidity after the Financial Crisis - Liberty Street Economics
- Spillovers of Fiscal Consolidations in the Euro Area - Unassuming Economist
Wednesday, June 28, 2017
Daniel Carroll and Nick Hoffman of the Cleveland Fed:
New Data on Wealth Mobility and Their Impact on Models of Inequality: Wealth inequality, the unequal distribution of assets across households, has been rising for decades. However, this statistic alone gives an incomplete picture of the inequality of households’ economic experiences and opportunities. A fuller understanding comes from also knowing how much movement within the distribution households experience over time. For instance, is it likely that someone with low wealth today will be a wealthy person at some point in the future, or are they rigidly stuck at the bottom? In other words, a fuller understanding of households’ economic opportunity comes from a combination of data on both wealth inequality and wealth mobility.
This Commentary explores the topic of wealth mobility in the United States during the past three decades (see Carroll and Chen 2016 for similar work on income inequality and mobility). Examining supplemental data from the Panel Study of Income Dynamics (PSID), which track families’ wealth over time, we calculate changes in relative wealth mobility; that is, how likely families are to move up or down the wealth distribution, relative to one another. We find that wealth mobility has declined since the 1980s, a trend that is robust to a wide range of measures. Finally, we identify savings behaviors that are associated with more mobile families. Such behaviors may explain the disparity between observed levels of mobility and the levels predicted by the standard model used to study inequality. ...
Conclusion Wealth mobility depends on luck and household choices. It is a reflection of households’ opportunities as well as their responses to those opportunities. Panel data from the past 30 years show a decline in wealth mobility across several measures. It appears that families are less likely to change wealth quintiles over time, while those that do move are less likely to move very far. The reasons for these trends are not fully known, but increasing wealth inequality has contributed to the decline. Families that do make large movements through the wealth distribution appear to be more likely to own some form of a risky asset, as compared to families that do not make large movements.
Why libertarians should read Marx: Kristian Niemietz says he can’t be bothered to read Marx. Can I try and convince him otherwise?
For one thing, I suspect libertarians like him would be surprised by a lot of Marx. There’s astonishingly little in Marx about a centrally planned economy: if you want an argument for central planning, you should read that hero of the right, Ronald Coase instead (pdf). Marx was admiring of capitalism in some respects. It has, he wrote, given “an immense development to commerce” and has “accomplished wonders far surpassing Egyptian pyramids, Roman aqueducts, and Gothic cathedrals.” And I think you’d be surprised by just how much attention Marx paid to the facts: once you get past the first few chapters, there’s massive empirical work in Capital volume I*. And there are many differences between Marx and social democrats – not least of them being that Marx was no statist.
What’s more, many of the ideas associated with Marx were largely elaborations of his predecessors: Paul Samuelson called him a “minor post-Ricardian”. The labour theory of value, the interest in the division of income between classes and the idea of a falling rate of profit are all as Ricardian as Marxian. (The falling rate of profit (pdf) might be a good explanation for our recent slow growth and lack of capital spending, but let that pass).
I reckon there are three reasons libertarians should read Marx.
One is that Marx saw economics as a historical process. For him, one of the big questions was: “where did that come from?” ...
A second reason for libertarians to read Marx lies in his view of the relationship between property rights and technical progress...
A third reason to read Marx lies in his attitudes to freedom. ...
In short, then, libertarians should read Marx because he poses them some questions which should sharpen their thinking. How can we defend property rights at the same time as defending a system which came into being by denying those rights? What material conditions are necessary for people to support freedom? How will new technologies shape our beliefs? Do current market structures (which are of course determined by the state) really maximize development? If not, how can they change? Do actually-existing markets merely enhance formal freedom, or are they conducive to the substantive freedom that Marx wanted? Can they be made more conducive? Are markets really a realm of freedom, or a means through which some exploit and oppress others? And so on.
If you look past tribal caricatures, perhaps libertarian thinking will be enriched by a consideration of Marx’s work.
* You should start Capital vol I at chapter 10, and read the first nine chapters last.
- An Assessment of Financial Stability in the United States - Stanley Fischer
- China’s WTO entry benefits US consumers - VoxEU
- Sociology of life expectations - Understanding Society
- When Cutting Access to Health Care, There’s a Price to Pay - NYTimes
- When capturing the middle ground works or fails - mainly macro
Tuesday, June 27, 2017
- When Growth is not Enough - Ben S. Bernanke
- Unemployment insurance and reservation wages - VoxEU
- Has the Dollar Become More Sensitive to Interest Rates? - FRBSF
- CBO: Senate Bill Would Raise Premiums, Deductibles, or Both for Most - CBPP
- Assessing Global Imbalances: The Nuts and Bolts – Maurice Obstfeld
Monday, June 26, 2017
From the AEA research highlights:
An empirical turn in economics research: Over the past few decades, economists have increasingly been cited in the press and sought by Congress to give testimony on the issues of the day. This could be due in part to the increasingly empirical nature of economics research.
Aided by internet connections that allow datasets to be assembled from disparate sources and cheap computing power to crunch the numbers, economists are more and more often turning to real-world data to complement and test theoretical models.
This trend was documented in a 2013 article from the Journal of Economic Literature...
In the spirit of empirical inquiry, the authors of a study appearing in the May issue of the American Economic Review: Papers & Proceedings used machine learning techniques to expand this analysis to a much larger set of 135,000 papers published across 80 academic journals cited frequently in the American Economic Review. ...
The ... prevalence of empirical work as determined by the authors’ model has been rising across fields since 1980. The authors note that the empirical turn is not a result of certain more empirical fields overtaking other more theoretical ones, but instead every field becoming more empirically-minded.
Will Macron’s Marchers take power?: With over 350 seats, the MPs elected on the « La république en marche » (LREM) ticket will have an overwhelming majority in the Assemblée Nationale (Parliament). Will they use it to be in the forefront of reform and renewal of French politics? Or will they simply play a passive role, rubber stamping and obediently voting the texts that the government sends them?
It happens that they will shortly be faced with their first real-life test with the question of deduction of income tax at source. The government wishes to postpone the implementation until 2019, perhaps forever, for reasons which are totally opportunist and unjustified. This big step backwards is bad news for the alleged intention to reform and modernise the French fiscal and social system proclaimed by the new government (a general intention that is unfortunately rather vague once we enter into the details: see What reforms for France), and leads us to fear the worst for what is to come. Now, contrary to what has been stated, the government cannot take this sort of decision without a vote in Parliament which should therefore take place in the coming days or weeks.
There are two possibilities. Either the LREM MP’s force the government to maintain this crucial reform and its application as from January 2018, as was already voted by the outgoing Parliament in the autumn of 2016 in the context of the 2017 Finance Act. It will then be clear that the new MP’s are ready to play their role fully in future reforms and oppose the executive when necessary. The other option is to follow in the steps of the conservatism of the government, which, unfortunately, seems to be the most likely outcome. This would alert us to the fact that with this new majority and this new authority we are dealing with reformers who are mere paper tigers. ...
Alex Haberis, Richard Harrison and Matt Waldron at Bank Underground:
The Forward Guidance Paradox: In textbook models of monetary policy, a promise to hold interest rates lower in the future has very powerful effects on economic activity and inflation today. This result relies on: a) a strong link between expected future policy rates and current activity; b) a belief that the policymaker will make good on the promise. We draw on analysis from our Staff Working Paper and show that there is a tension between (a) and (b) that creates a paradox: the stronger the expectations channel, the less likely it is that people will believe the promise in the first place. As a result, forward guidance promises in these models are much less powerful than standard analysis suggests. ...
- What Was the Industrial Revolution? - NBER
- Recent Developments in Cointegration - Dave Giles
- The falling elasticity of global trade to economic activity - VoxEU
- Low Productivity Growth: The Capital Formation Link - Liberty Street Economics
- Understanding Income Risk: New Insights from Big Data - FRB Minneapolis
- How to Ensure the Crisis Provision of Safe Assets - Cecchetti & Schoenholtz
- The Disappointing Recovery of Output after 2009 - NBER
- The Challenge of Electrifying Africa - Tim Taylor
- On political salience - Stumbling and Mumbling
- The Positive Side of More Jobs Regulation - Justin Fox
- Composition effect in Canadian earnings and education - Stephen Gordon
Sunday, June 25, 2017
From Vox EU:
W. Arthur Lewis and the tradeoffs of economics and economists, by Ravi Kanbur, VoxEU: There is nothing new under the sun. The passionate political economy discourses of today consume us entirely. But they are in fact perennials, broaching the fundamental questions of economic policy that have ruled supreme since economics gained an independence of sorts from moral philosophy 250 years ago.1 The nature of market failure, the case for government intervention on grounds of efficiency and equity, and the interplay between economic and political forces are some of the tracks on which discourses have run for generations. The life and work of W. Arthur Lewis, winner of the 1979 Nobel Prize in economics, is a testament to the tradeoffs of economics, and of economists.
Arthur Lewis was born in the British West Indies in 1915. He won a scholarship to study at the London School of Economics, graduating with first class honours in 1937.2 And yet Lewis’s path was not entirely smooth. Even at the LSE, an institution founded by Fabian socialists, he faced the racism that he also met in the streets of London. When he was considered for a temporary one year appointment at the LSE in 1938, the Director of the LSE wrote to the Board of Governors that: “The appointments committee is, as I said, quite unanimous but recognise that the appointment of a coloured man may possibly be open to some criticism. Normally, such appointments do not require confirmation of the Governors but on this occasion I said that I should before taking action submit the matter to you” (Tignor 2006: 21).3
Lewis became involved with the burgeoning decolonisation movement in Britain, and consorted with the likes of C L R James, George Padmore, Eric Williams, and Paul Robeson. The 1930s and 1940s were a period of ferment not just on the decolonisation front. Economic policy in general was under discussion and dispute. From Cambridge, John Maynard Keynes had excited a generation of students with his critiques of ‘the Treasury View’ in the face of massive and persistent unemployment. Arthur Lewis was Keynesian in macroeconomic matters, but also more interventionist in microeconomic and structural policy. This set him against Sydney Caine, an influential official in the Colonial Office, in the work of the Colonial Economic Advisory Committee, on which Lewis served. Lewis described Caine as “a religious devotee of laissez-faire, and his headship of the Economic Department at this juncture is fatal” (Mine 2006).
In 1951, Kwame Nkrumah won a sweeping victory in the elections in the British colony of the Gold Coast (soon to become the independent country of Ghana) and in 1952 Lewis was invited by Nkrumah to write a report on industrialisation (Lewis 1953).4 At this very time, Lewis was fashioning his Nobel Prize winning argument on ‘surplus labour’, which he argued was the state of affairs in the West Indies, in Egypt, and in India (Lewis 1954). In these situations, the main brake on development was inadequate investment in manufacturing, and to the extent that this investment was held back by market failures in the manufacturing sector, the government should intervene to address them.
However, Lewis’s thrust in his report was that the Gold Coast, unlike India, did not present a situation of surplus labour. Rather, it was one of labour shortages given the large amount of land available in agriculture. In this situation the way of releasing labour for manufacturing, without pushing up wages so much that investment would be choked off, was to increase agricultural productivity. In labour shortage economies, that would have been priority number one. The Gold Coast industrialisation report revealed the evolving balance of Arthur Lewis as the economist. Identify the nature of the market failure first, then design the intervention.
Arthur Lewis was present in Accra for the celebrations when the Gold Coast became Ghana on 6 March 1957.5 But he was to return in October of 1957 for a fateful stint as the government’s chief economic adviser, at the invitation of Kwame Nkrumah. His 15 months as resident adviser in Ghana were tumultuous. There were some policy areas in which he sided with the government and Nkrumah. Perhaps the most famous of these is his general agreement that the surpluses from the cocoa price boom should be collected by the government and used for development purposes rather than passed through to cocoa farmers, a view very different from positions being advanced by Bauer (1954) at that time. However, in the main Lewis clashed with Nkrumah, especially on various ‘white elephant’ projects that were being considered and approved, many of them in the name of industrialisation.
The letters of this time provide a real insight into the clash between the economist and the politician. After a series of attempts by Lewis to intervene in the drafting on the Five Year Plan, his verdict on the plan was that it made “inadequate provision for some essential services while according the highest priority to a number of second importance….Alas, the main reason for this lack of balance is that the plan contains too many schemes on which the Prime Minister is insisting for ‘political reasons’” (Tignore 2006: 167). Nkrumah’s responses to Lewis were to be expected from a man who had famously said “seek ye the political kingdom first”. In an exchange that brought to a head Lewis’s decision to leave his post as economic adviser, Nkrumah emphasised “political decisions which I consider I must take. The advice you have given me, sound though it may be, is essentially from the economic point of view, and I have told you, on many occasions, that I cannot always follow this advice as I am a politician and must gamble on the future” (Tignor 2006: 173).
How can one explain the seeming contradictions in Lewis? On the one hand was the critic of laissez-faire economic policies, whom the radical anti-colonialists expected to be on their side. On the other was the economist who acted as a check on the extreme statist interventions proposed by this same tendency in economic policy discourse, arguing against heavy state subsidy to industry on purely economic grounds, even leaving aside its propensity for corruption and use as political patronage.
As a student, Lewis must have read John Maynard Keynes’s clarion call in his essay “The End of Laissez Faire” (Keynes 1926).6 This was, seemingly, a call to abandon the tenets of 19th century economic liberalism in favour of a more interventionist credo – “let us clear from the ground the metaphysical or general principles upon which, from time to time, laissez-faire has been founded” (Keynes 1926: 287-8). This is Keynes presaging the Lewis of the 1930s and 1940s railing against Sydney Caine and his laissez-fair policies for the colonies. And yet in the same essay Keynes hints at a different world view, a more nuanced perspective on state intervention:
“We cannot therefore settle on abstract grounds, but must handle on its merits in detail what Burke termed ʹone of the finest problems in legislation, namely, to determine what the State ought to take upon itself to direct by the public wisdom, and what it ought to leave, with as little interference as possible, to individual exertion’” (p. 288-91).
How like Lewis, or rather how like the economist Lewis became in Ghana.7 I have argued elsewhere that Edmund Burke’s question is the eternal question of political economy and accounts for the cycles of thought in economics (Kanbur 2016). This is what allowed Lewis to support some industrial intervention in his first report on the Gold Coast, while at the same time asserting the primacy of agricultural development. It is what allowed him to support substantial taxation of cocoa while at the same time railing at the (economic and political) misuse of the funds so raised. That was Arthur Lewis in Ghana, but it was Arthur Lewis all along. It has also been political economy all along, and will continue to be so.
Aryeetey, E, and R Kanbur (eds.), The Economy of Ghana Sixty Years After Independence, Oxford: Oxford University Press.
Bauer, P (1954), West African Trade: A Study of Competition, Oligarchy, and Monopoly in a Changing Economy, Cambridge University Press.
Kanbur, R (2016), “The End of Laissez Faire, The End of History and The Structure of Scientific Revolutions”, Challenge, 59 (1), 35-46.
Kanbur, R (2017), “W. Arthur Lewis and the Roots of Ghanaian Economic Policy”, In E Aryeetey and R Kanbur (eds.) The Economy of Ghana Sixty Years After Independence, Oxford: Oxford University Press.
Keynes, J M (1926), “The End of Laissez-Faire”, in The Collected Writings of John Maynard Keynes, Volume IX, Essays in Persuasion, Royal Economic Society, Palgrave MacMillan, 1972.
Lewis, W A (1953), Report on Industrialization of the Gold Coast, Accra.
Lewis, W A (1954), “Economic Development with Unlimited Supplies of Labour”, Manchester School, 22 (2), 139-191.
Mine, Y (2006), “The Political Element in the Works of W. Arthur Lewis: The 1954 Lewis Model and African Development”, The Developing Economies, XLVI-3, 329-355.
Tignor, R L (2006), W. Arthur Lewis and the Birth of Development Economics, Princeton University Press.
 The conventional dating for this is of course the publication of Adam Smith’s Wealth of Nations in 1776.
 I draw liberally on the comprehensive and excellent biography by Tignor (2006).
 Tignor (2006: 37) also recounts the story of how, despite his by then brilliant academic qualifications, his appointment to a Chair at Liverpool was blocked for reasons of “other considerations than high academic standing.” Finally, however, he did get his Chair, the Stanley Jevons Chair at the University of Manchester in 1948.
 Lewis’s transmittal letter on the report, written to Minister of Commerce and Industry K A Gbedemah and dated 5th June, 1953, notes the details of the assignment: “I have the honour to transmit herewith my Report on industrialization and economic policy, which I was commissioned to write by letter No. MCI/C,16/SF.3/18 from your Ministry, dated November 29, 1952. I visited the Gold Coast from December 15th, 1952, to January 4th, 1953, and travelled extensively in the country, covering about 1,800 miles by road and by air. I had the opportunity of visiting many industrial establishments, and I discussed the subject with as many persons as possible in the time available.” (Lewis, 1953, p. i).
 For an assessment of Ghana’s economy in the sixty years since independence, see Aryeetey and Kanbur (2017).
 For an assessment of this essay in the broader context of the evolution of economic thought, see Kanbur (2016).
 Tignor (2006) and Kanbur (2017) further discuss Lewis’s post-Ghana life and work.
- Working but poor - Lane Kenworthy
- 'Magical' warfare technologies and the persistence of false beliefs - VoxEU
- A case against austerity - Stumbling and Mumbling
- Brexiteers versus Economists one year on - mainly macro
- Financial constraints and nominal rigidities - VoxEU
- Central Clearing and Liquidity - Jerome H. Powell
- Unit Roots & Structural Breaks - Dave Giles
- The Credit Crisis and the crisis in UK politics - Tim Johnson
- Tobacco Taxes in Low- and Middle-Income Countries - Tim Taylor
Friday, June 23, 2017
Pure Class Warfare, With Extra Contempt: The Senate version of Trumpcare – the Better Care Reconciliation Act – is out. The substance is terrible: tens of millions of people will experience financial distress if this passes, and tens if not hundreds of thousands will die premature deaths, all for the sake of tax cuts for a handful of wealthy people. What’s even more amazing is that Republicans are making almost no effort to justify this massive upward redistribution of income. They’re doing it because they can, because they believe that the tribalism of their voters is strong enough that they will continue to support politicians who are ruining their lives.
In this sense – and in only this sense – what we’re seeing now is a departure from previous Republican practice.
In the past, laws that would take from the poor and working class while giving to the rich came with excuses. Tax cuts, their sponsors declared, would unleash market dynamism and make everyone more prosperous. Deregulation would increase efficiency and lower prices. It was all voodoo; the promises never came true. But at least there was some pretense of working for the common good.
Now we have none of this. This bill does nothing to reduce health care costs. It does nothing to improve the functioning of health insurance markets – in fact, it will send them into death spirals by reducing subsidies and eliminating the individual mandate. There is nothing at all in the bill that will make health care more affordable for those currently having trouble paying for it. And it will gradually squeeze Medicaid, eventually destroying any possibility of insurance for millions. ...
But Republican leaders believe that their voters are tribal enough, sufficiently walled off from information, that they’ll ignore the attack on their lives and keep voting R – indeed, that as they lose health care, get hit with crushing out-of-pocket bills, see their friends and neighbors face ruin, they’ll blame it on Democrats.
I wish I were sure that this belief was false.
In Long Run, There’s No Such Thing as an Einstein Investor, NY Times: There are no easy answers in investing. It is tempting to replicate a successful strategy — one created by an outstanding investor, like Warren Buffett, or through in-depth statistical analysis of the wisdom of crowds — and such approaches can actually work for long periods.
But paint-by-number portfolios won’t succeed forever. And without deep expertise, it makes little sense to veer much from a simple market portfolio — one that seeks to match the overall performance of the market, and not beat it.
These reflections are prompted by the television series “Genius” (based on the Walter Isaacson biography “Einstein: His Life and Universe”)... The series also inspired me to reread Einstein’s own popularization of his theories, in the book “Relativity: The Special and General Theory.”...
- Conversation: David Weil - Equitable Growth
- Development Effects of the Extractive Colonial Economy - A Fine Theorem
- Shedding (night-time) light on the local resource curse - VoxEU
- Cyber attacks: An economic policy challenge - VoxEU
- The Story of Robert Keayne, Protocapitalist - Tim Taylor
- The lack of demand for equality - Stumbling and Mumbling
- Capitalism Can Thrive Without Cooking the Planet - Bloomberg
- Health insurance competition - Microeconomic Insights
- The rise (and fall?) of the cost of education - FRED Blog
- Explanation and critical realism - Understanding Society
Thursday, June 22, 2017
Fed's Labor Market Forecasts Don't Make Sense, by Tim Duy: The Federal Reserve’s unemployment forecast doesn’t add up. It is neither consistent with the median of policy makers’ growth forecasts nor consistent with Chair Janet Yellen’s description of labor market strength. Hence, central bankers will likely find unemployment undershooting their forecast in the second half of 2017. That will keep the central bank in a hawkish mood even if lackluster inflation continues. ...Continued at Bloomberg Prophets...
- Why you should never use the Hodrick-Prescott filter - VoxEU
- Is the Fed being misguided by the Phillips curve? - Equitable Growth
- Intergenerational mobility and preferences for redistribution - VoxEU
- Low Interest Rates and Bank Profits - Liberty Street Economics
- Price manipulation in the Bitcoin ecosystem - VoxEU
- Free markets need equality - Stumbling and Mumbling
- The Wrong Kind of Entrepreneurs Flourish in America - Bloomberg
- UK monetary policy: you cannot be serious? - mainly macro
- Deficits - IGM Forum
Wednesday, June 21, 2017
From the Federal Reserve Bank of Richmond:
Does the Fed Have a Financial Stability Mandate?, by Renee Haltom and John A. Weinberg, FRB Richmond: The 2007–08 financial crisis and the Fed's unprecedented response raised new questions about the Fed's role in maintaining the stability of the U.S. financial system.
Central banks have a natural role in financial stability for several reasons. First, monetary policy affects financial conditions in ways that can contribute to either stability or instability; erratic policy or volatile inflation could be destabilizing, for instance. Second, they obtain and develop insights useful for financial stability policy through the course of their other functions. Third, financial conditions are among the broad set of factors considered by central banks in assessing the state of the economy and the appropriate stance of monetary policy.
But for many central banks, the full scope of what they're expected to do in support of financial stability — the extent to which they have an explicit or implicit financial stability mandate — is ambiguous. This is important because a central bank's policy actions and its responses to developments in the economy and financial markets are shaped by its understanding of its mandate. So the nature of the mandate matters for economic outcomes, market expectations (the ex ante "rules of the game"), and accountability.
One reason this issue is inherently challenging is that there is no single definition of "financial stability." Most recent discussions focus on banking crises like the 2007–08 financial crisis, which tend to feature failures of large or many financial institutions, cascading losses, and government interventions. But central banks also have played a role in other types of financial market disturbances, for example, sharp asset price declines (like the Fed's liquidity assurances after the 1987 stock market crash), sovereign debt crises (like the European Central Bank's role in the recent eurozone crisis), and currency crises (like the Fed's role in Mexico's 1994 bailout).
This challenge is clear in the breadth of a definition for financial stability offered in the latest Purposes and Functions publication from the Board of Governors of the Federal Reserve System: "A financial system is considered stable when financial institutions — banks, savings and loans, and other financial product and service providers — and financial markets are able to provide households, communities, and businesses with the resources, services, and products they need to invest, grow, and participate in a well-functioning economy." The publication further states that a financial system ought to have the ability to do so "even in an otherwise stressed economic environment."1
This Economic Brief takes a descriptive look at the Fed's role in financial stability, including how that role has changed over time, and raises some fundamental questions. ...
(Starts at 7:00 min. The sound is a bit buzzy.)
Tuesday, June 20, 2017
Unions in Decline: Some International Comparisons: Union membership and clout has been dropping in the US economy for decades. But it's not just a US phenomenon: a similar drop is happening in many high-income countries. The OECD Employment Outlook 2017 discussed the evidence in "Chapter 4: Collective Bargaining in a Changing World of Work."
Here are a couple of illustrative figures. ...
The OECD chapter provides a more detailed discussion... But several overall patterns seem clear.
1) Labor union power is weaker just about everywhere.
2) The extent of labor union power varies considerably across countries, many of which have roughly similar income levels. This pattern suggests that existence of unions, one way or another, may be less important for economic outcomes than the way in which those unions function. The chapter notes the importance of "peaceful and cooperative industrial relations," which can emerge--or not--from varying patterns of unionization.
3) In the next few decades, the big-picture question for union workers, and indeed for all workers, is how to adjust their workplace skills and tasks so that they remain valued contributors in an economy characterized by new technologies and global ties. Workers need political representation--whether in the form of unions or in some other form--that goes beyond arguing for near-term pay raises, and considers the difficult problem of how to raise the chances for sustained pay raises and secure jobs into the future.