Category Archive for: Economics [Return to Main]

Friday, September 22, 2017

Links for 09-22-17

Paul Krugman: Cruelty, Incompetence and Lies

"the evasions and lies we’re seeing on this bill have been standard G.O.P. operating procedure for years":

Cruelty, Incompetence and Lies, by Paul Krugman: Graham-Cassidy, the health bill the Senate may vote on next week, is stunningly cruel. It’s also incompetently drafted: The bill’s sponsors clearly had no idea what they were doing... Furthermore, their efforts to sell the bill involve obvious, blatant lies.
Nonetheless, the bill could pass. And that says a lot about today’s Republican Party, none of it good. ...
Did Graham-Cassidy’s sponsors know what they were doing when putting this bill together? Almost surely not, or they wouldn’t have produced something that everyone, and I mean everyone, who knows anything about health care warns would cause chaos.
It’s not just progressives: The American Medical Association, the insurance industry and Blue Cross/Blue Shield have all warned that markets would be destabilized and millions would lose coverage. ...
Lindsey Graham, Bill Cassidy, and the bill’s other sponsors have responded to these critiques the old-fashioned way — with lies.
Both Cassidy and Graham insist that their bill would continue to protect Americans with pre-existing conditions — a claim that will come as news to the A.M.A., Blue Cross and everyone else who has read the bill...
Cassidy has also circulated a spreadsheet that purports to show most states actually getting increased funding under his bill. ... Independent analyses find that most states would, in fact, experience serious cuts... — and everyone would face huge cuts after 2027.
So we’re looking at an incompetently drafted bill that would hurt millions of people, whose sponsors are trying to sell it with transparently false claims. How is it that this bill might nonetheless pass the Senate?
One answer is that Republicans are desperate to destroy President Barack Obama’s legacy ... no matter how many American lives they ruin...
Another answer is that most Republican legislators neither know nor care about policy substance. ... Vox asked a number of G.O.P. senators to explain what Graham-Cassidy does; the answers ranged from incoherence to belligerence to belligerent incoherence.
I’d add that the evasions and lies we’re seeing on this bill have been standard G.O.P. operating procedure for years. ... Graham-Cassidy isn’t an aberration; it’s more like the distilled essence of everything wrong with modern Republicans.
Will this awful bill become law? I have no idea. But even if the handful of Republican senators who retain some conscience block it — we’re looking at you, John McCain — the underlying sickness of the G.O.P. will remain.
It’s sort of a pre-existing condition, and it’s poisoning America.

Wednesday, September 20, 2017

Links for 09-20-17

FOMC statement

No change in the target range for the federal funds rate, balance sheet unwinding to begin in October:

Federal Reserve issues FOMC statement: Information received since the Federal Open Market Committee met in July indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have remained solid in recent months, and the unemployment rate has stayed low. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters. On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined this year and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Hurricanes Harvey, Irma, and Maria have devastated many communities, inflicting severe hardship. Storm-related disruptions and rebuilding will affect economic activity in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term. Consequently, the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Higher prices for gasoline and some other items in the aftermath of the hurricanes will likely boost inflation temporarily; apart from that effect, inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee's 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.
In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
In October, the Committee will initiate the balance sheet normalization program described in the June 2017 Addendum to the Committee's Policy Normalization Principles and Plans.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; Neel Kashkari; and Jerome H. Powell.

Tuesday, September 19, 2017

Pessimism and the ZLB

Links for 09-19-17

Fed Would Surprise Markets If It Stays Hawkish

Tim Duy:

Fed Would Surprise Markets If It Stays Hawkish, by Tim Duy: The Federal Reserve meeting this week will likely end with unchanged policy rates and the initiation of balance-sheet normalization. Market participants widely expect these outcomes, so they will come as no surprise. The real action in this meeting will come from the Fed’s description of the economy, the quarterly economic projections and Chair Janet Yellen’s press conference. The totality of the commentary should lean dovish as the Fed expresses concerns about the inflation outlook. The surprise would be a Fed that still leans more heavily toward the hawkish side of policy spectrum. ...[Continued at Bloomberg Prophets]...

Monday, September 18, 2017

Links for 09-18-17

Paul Krugman: Complacency Could Kill Health Care

"there is a real chance that Graham-Cassidy ... will ... become law, because not enough people are taking it seriously":

Complacency Could Kill Health Care, by Paul Krugman, NY Times: ...last year far too many people were complacent; they assumed that Trump couldn’t possibly become president, so they felt free to engage in trivial pursuits. Then they woke up to find that the inconceivable had happened.
Is something similar about to go down with health care?
Republican attempts to destroy Obamacare have repeatedly failed, and for very good reason. Their attacks on the Affordable Care Act were always based on lies, and they have never come up with a decent alternative. ...
The sponsors of the Graham-Cassidy bill now working its way toward a Senate vote claim to be offering a moderate approach that preserves the good things about Obamacare. In other words, they are maintaining the G.O.P. norm of lying both about the content of Obamacare and about what would replace it.
In reality, Graham-Cassidy is the opposite of moderate. It contains, in exaggerated and almost caricature form, all the elements that made previous Republican proposals so cruel and destructive. ... It would eliminate the individual mandate, undermine if not effectively eliminate protection for people with pre-existing conditions, and slash funding for subsidies and Medicaid. There are a few additional twists, but they’re all bad...
Yet there is a real chance that Graham-Cassidy ... will nonetheless become law, because not enough people are taking it seriously. ...
The main reason Republican leaders couldn’t do that on previous health bills was public outrage and activism. Letters and phone calls, demonstrators and crowds at town halls, made it clear that many Americans were aware of the stakes, and that politicians who voted to take health care away from millions would be held accountable.
Now, however, the news cycle has moved on, taking public attention with it. Many progressives have already begun taking Obamacare’s achievements for granted, and are moving on from protest against right-wing schemes to dreams of single-payer. Unfortunately, that’s exactly the kind of environment in which swing senators, no longer in the spotlight, might be bribed or bullied into voting for a truly terrible bill.
The good news is that for technical reasons of parliamentary procedure, Graham-Cassidy has to pass by the end of this month, or not at all. The bad news is that such passage is a real possibility.
So if you care about preserving the huge gains the A.C.A. has brought, make your voice heard. Otherwise we may wake up to another terrible morning after.

Indeterminacy, the Belief Function and Reinventing IS-LM

Roger Farmer:

Indeterminacy, the Belief Function and Reinventing IS-LM: This is my final post featuring research presented at the conference on Applications of Behavioural Economics and Multiple Equilibrium Models to Macroeconomics Policy Conference held at the Bank of England on July 3rd and 4th 2017.
Today I will talk about the work of two of my graduate students and co-authors, Giovanni Nicolò and Konstantin Platonov. Both of them gave presentations at the conference. ...
Giovanni’s research is on the empirics of models with multiple equilibria and sunspots. ...
The final conference paper that I will discuss in this series, “Animal Spirits in a Monetary Economy”, was co-authored by myself and Konstantin Platonov. Konstantin presented our paper at the conference and we wrote about our work for VOX here.
I have been critical of the IS-LM model in several of my posts. My paper with Konstantin  fixes some of the more salient problems of IS-LM by reintroducing two key ideas from Keynes. 1. The confidence fairy is real. 2. If confidence remains depressed, high unemployment can exist forever.  Our Vox piece presents the key findings of the paper in simple language. ...

Sunday, September 17, 2017

Links for 09-17-17

Friday, September 15, 2017

Links for 09-15-17

Paul Krugman: Politicians, Promises, and Getting Real

Paul Krugman:

Politicians, Promises, and Getting Real, by Paul Krugman, NY Times: On Wednesday Donald Trump demanded that Congress move quickly to enact his tax reform plan. But so far he has not, in fact, offered any such plan...
Meanwhile, 17 Senate Democrats ... have signed on to Bernie Sanders’s call for expanding Medicare to cover the whole population. So far, however, Sanders hasn’t produced either an estimate of how much that would cost or a specific proposal about how to pay for it.
I don’t mean to suggest that these cases are comparable: The distinctive Trumpian mix of ignorance and fraudulence has no counterpart among Democrats. Still, both stories raise the question of how much ... policy clarity matters for politicians’ ability to win elections and ... govern.
About elections: The fact that Trump is in the White House suggests that politicians can get away with telling voters just about anything that sounds good. ...
On the other hand, the ignominious failure of Trumpcare shows that reality sometimes does matter. ... Once the public realized that tens of millions would lose coverage..., there was a huge backlash...
The story of tax reform ... is starting to look a bit similar. ...
In fact, Trump himself seems to be experiencing cognitive dissonance. “The rich will not be gaining at all with this plan,” he declared Wednesday. ... Is he oblivious, lying, or both? ...
The contrast between what he’s claiming and anything Republicans in Congress will be willing to support is so great as to practically invite ridicule and another popular backlash. ...
But is the push for single-payer health care taking Democrats down a similar path?
Unlike just about everything Trump and company are proposing, Medicare for all is a substantively good idea. Yet actually making it happen would probably mean ... a serious political backlash. For one..., it would require a substantial increase in taxes. For another, it would mean telling scores of millions of Americans who get health coverage though their employers, and are generally satisfied..., that they need to give it up and accept something different. ...
Democrats could eventually find themselves facing a Trumpcare-type debacle, unable either to implement their unrealistic vision or to let it go.
The point is that while unrealistic promises may not hurt you in elections, they can become a big problem when you try to govern. Having a vision for the future is good, but being real about the difficulties is also good. Democrats, take heed.

Fed May Have Too Much Faith in Inflation Forecasts

Tim Duy:

Fed May Have Too Much Faith in Inflation Forecasts, by Tim Duy: Despite a low unemployment rate, inflation slowed this year, confounding central bankers who set in motion a tightening cycle on the expectation of firming prices. This leaves the Federal Reserve stuck in a quandary. Either transitory factors restrain inflation only temporarily, or perhaps expectations sink below the Fed’s 2 percent target. If the former, the central bank can continue along the current path of gradual rate hikes. The majority of monetary policy makers lean in this direction. But if the latter, sticking to the current plan risks excessive slowing and even recession. It is the type of policy mistake we should fear in the mature stages of a business cycle... ...[Continued at Bloomberg Prophets]...

Thursday, September 14, 2017

Links for 09-14-17

Tuesday, September 12, 2017

Links for 09-012-17

Monday, September 11, 2017

Paul Krugman: Conspiracies, Corruption and Climate

"Why are U.S. conservatives so willing to disbelieve science and buy into tinfoil-hat conspiracy theories":

Conspiracies, Corruption and Climate, by Paul Krugman, NY Times: After the devastation wreaked by Harvey on Houston — devastation that was right in line with meteorologists’ predictions — you might have expected everyone to take heed when the same experts warned about the danger posed by Hurricane Irma. But you would have been wrong.
On Tuesday, Rush Limbaugh accused weather scientists of inventing Irma’s threat for political and financial reasons: “There is a desire to advance this climate change agenda, and hurricanes are one of the fastest and best ways to do it,” he declared, adding that “fear and panic” help sell batteries, bottled water, and TV advertising.
He evacuated his Palm Beach mansion soon afterward.
In a way, we should be grateful to Limbaugh for at least raising the subject of climate change and its relationship to hurricanes..., it’s a topic the Trump administration is trying desperately to avoid. ...
So what should we learn from Limbaugh’s outburst? ... The important point is that he’s not an outlier..., denying science while attacking scientists as politically motivated and venal is standard operating procedure on the American right. ...
And thanks to Trump’s electoral victory, know-nothing, anti-science conservatives are now running the U.S. government. ... Almost every senior figure in the Trump administration dealing with the environment or energy is both an establishment Republican and a denier of climate change and of scientific evidence in general. ...
All of these scientists, they insist, motivated by peer pressure and financial rewards, are falsifying data and suppressing contrary views.
This is crazy talk. But it’s utterly mainstream on the modern right, among pundits ... and politicians alike.
Why are U.S. conservatives so willing to disbelieve science and buy into tinfoil-hat conspiracy theories about scientists? Part of the answer is that they’re engaged in projection: That’s the way things work in their world. ... Today’s right-wing intellectual universe, such as it is, is dominated by hired guns who are essentially propagandists rather than researchers.
And right-wing politicians harass and persecute actual researchers whose conclusions they don’t like — an effort that has been vastly empowered now that Trump is in power. ...
The bottom line is that we are now ruled by people who are completely alienated not just from the scientific community, but from the scientific idea — the notion that objective assessment of evidence is the way to understand the world. And this willful ignorance is deeply frightening. Indeed, it may end up destroying civilization.

Behavioural New-Keynesian Macroeconomics

Roger Farmer:

Behavioural New-Keynesian Macroeconomics: This is my penultimate post featuring research presented at the conference on Applications of Behavioural Economics and Multiple Equilibrium Models to Macroeconomics Policy Conference held at the Bank of England on July 3rd and 4th 2017.
Today’s post features two single authored papers: one by Xavier Gabaix and one by Michael Woodford. ...
Xavier has an exciting research agenda that combines ideas from psychology and economics. He is a prolific author who has worked on topics in finance, macroeconomics and behavioural economics.
In Xavier’s own words, “economists usually assume that people know how the economy works. This is a bit strange since economists don’t even know how the economy works”. ...
At the conference Xavier presented a paper related to this research agenda, “A Behavioral New Keynesian Model”...
Michael Woodford was one of our two keynote speakers...  Michael is one of the founders, and a long-time proponent, of New-Keynesian economics. ...
Michael addresses the question of forward guidance and specifically how central bank announcements will affect the economy when people are forward-looking but not infinitely forward looking. His goal, like Xavier’s, is to fix New Keynesian economics. ...

Links for 09-11-17

Saturday, September 09, 2017

Paul Krugman: Dreamers, Liars and Bad Economics

"Trump and company tell a lot of lies about economics":

Dreamers, Liars and Bad Economics, by Paul Krugman, NY Times: Does it matter that Jeff Sessions, the attorney general, tried to justify Donald Trump’s immigration cruelty with junk economics?
It’s definitely not the main issue. Trump’s decision to rescind the Deferred Action for Childhood Arrivals policy is, above all else, immoral. The 800,000 beneficiaries of DACA — the so-called Dreamers — have done nothing wrong; they came to the United States illegally, but not of their own volition, because they were children at the time.
They are, according to all available data, an exemplary segment of our population: hard-working young people, many seeking to improve themselves through higher education. They’re committed to the values of their home — because America is their home.
To yank the rug out from under the Dreamers ... is a cruel betrayal. ...
Still, Sessions chose to put economics front and center in his statement, declaring that DACA, which allows the Dreamers to work legally, has “denied jobs to hundreds of thousands of Americans by allowing those same jobs to go to illegal aliens.” That’s just false...
Trump and company tell a lot of lies about economics (and everything else). ...
The truth is that letting the Dreamers work legally helps the U.S. economy; pushing them out or into the shadows is bad for everyone except racists.
To understand why, you need to realize that America, like other advanced economies, is facing a double-barreled demographic challenge thanks to declining fertility.
On one side, an aging population means fewer workers paying taxes to support Social Security and Medicare. Demography is the main reason long-run forecasts suggest problems for Social Security, and an important reason for concerns about Medicare. Driving out young workers who will pay into the system for many decades is a way to make these problems worse.
On the other side, declining growth in the working-age population reduces the returns to private investment, increasing the risk of prolonged slumps like the one that followed the 2008 financial crisis.
It’s not an accident that Japan, which has low fertility and is deeply hostile to immigration, began experiencing persistent deflation and stagnation a decade before the rest of the world. Destroying DACA makes America more like Japan. Why would we want to do that? ...
In short, letting Dreamers work is all economic upside for the rest of our nation, with no downside unless you have something against people with brown skin and Hispanic surnames. Which is, of course, what this is all really about.

Links for 09-010-17

Friday, September 08, 2017

Fed Watch: Fed Round-Up For September 7, 2017

Tim Duy:

Fed Round-Up For September 7, 2017, by Tim Duy: Federal Reserve hawks were on the march today, laying the groundwork for an additional rate hike this year despite weak inflation. 
First off, Cleveland Federal Reserve President Loretta Mester (voter next year), reiterated the "it's only temporary story" regarding inflation:
In assessing where we are relative to the inflation goal, it’s always a good idea to look through temporary movements in the numbers, both those above and those below our goal, and focus on where inflation is going on a sustained basis. For example, when assessing the underlying trend in inflation, we should look through a temporary increase in gasoline prices stemming from disruptions caused by Hurricane Harvey. Similarly, some of the weakness in recent inflation reports reflects special factors, like the drop in the prices of prescription drugs and cell phone service plans earlier in the year. It may take a couple more months for these factors to work themselves through, but these types of price declines aren’t signaling a general downward trend in consumer prices from weak demand. Instead, they reflect supply-side factors and relative price changes.
She did give a nod to Federal Reserve Governor Lael Brainard's argument that maybe trend inflation has fallen:
At the same time, we need to recognize that weak inflation numbers, no matter what the source, can become a problem if they start to undermine the public’s expectations about future inflation. If inflation expectations were to become unanchored and began steadily declining, it would be much more difficult to raise inflation back to the Fed’s goal.
But she doesn't buy it:
I don’t expect the economy to get to that point, and my current assessment is that inflation will remain below our goal for somewhat longer but that the conditions remain in place for inflation to gradually return over the next year or so to our symmetric goal of 2 percent on a sustained basis. These conditions include growth that’s expected to be at or slightly above trend, continued strength in the labor market, and reasonably stable inflation expectations.
On the inflation forecast, this is interesting:
We need to recognize that there are risks around any inflation projection—both upside risks, considering the current and future expected strength in labor markets, and downside risks, given the softness in recent inflation readings. In fact, inflation is difficult to forecast: based on historical forecast errors over the past 20 years, the 70 percent confidence range for forecasts of PCE inflation one year ahead is plus or minus 1 percentage point, and a significant portion of the variation in inflation rates comes from idiosyncratic factors that can’t be forecasted. Indeed, since the 1990s, assuming that inflation will return to 2 percent over the next one to two years has been one of the most accurate forecasts. In the recent period, this is perhaps a testament to the importance of well-anchored inflation expectations and of the FOMC’s commitment to its 2 percent symmetric inflation goal. In any case, I will be scrutinizing incoming data on inflation and inflation expectations and the reports from my business contacts to help me assess the inflation outlook.
Since 1990, a 2 percent forecast has worked more than not, so lets just stick with that as the baseline for policy? By that logic, since the great recession, a 1.75% forecast has worked more than not, a testament to the Fed's one-sided inflation target and falling inflation expectations. I am not buying into her inflation forecast story yet.
Regardless, Mester's commitment to the faith on the inflation forecast means that as of now, she is probably sticking with the current rate path, including a December hike.
Meanwhile, FOMC heavyweight New York Federal Reserve William Dudley stuck to his guns as well tonight. His basic outlook:
Overall, the economy remains on a trajectory of slightly above-trend growth, which is gradually tightening the U.S. labor market.  Over time, this should support a rise in wage growth.  When combined with a firmer import price trend—partly reflecting recent depreciation of the dollar—and the fading of effects from a number of temporary, idiosyncratic factors, that causes me to expect inflation will rise and stabilize around the FOMC’s 2 percent objective over the medium term.  In response, the Fed will likely continue to remove monetary policy accommodation gradually.  But, the upward trajectory of the policy rate path should continue to be shallow, in part because the level of short-term interest rates consistent with keeping the economy on a sustainable long-run growth path is likely to be considerably lower than it was in prior business cycles. 
Dudley, however, will continue watching the inflation numbers, looking for this story:
If it turns out that structural changes have played a significant role, I would generally view this as a positive, rather than negative, development.  It would imply that the U.S. economy could operate at a higher level of labor resource utilization without generating a troublesome large rise in inflation.  More people could be put to work on a sustainable basis, enabling them to gain opportunities not just to earn greater income, but also to develop their skills and grow their human capital.
This opens up a downward revision of estimates of the natural rate of unemployment. Still, he thinks the Fed should continue hiking rates, in part due to easing financial conditions:
This judgment is supported by the fact that financial conditions have eased, rather than tightened, even as the Fed has raised its short-term interest rate target range by 75 basis points since last December. 
Yep, this is an expected response from Dudley. So is his pushback on inflation concerns:
 In addition, the long and variable lags between monetary policy adjustments and their impact on the economy imply that the FOMC may need to remove accommodation even when inflation is below its goal.  In particular, if the unemployment rate were already below its longer-run natural rate, as may be the case currently, the impact on wage growth and price inflation would still likely take some time to become evident. 
But, OMG, he follows up with this:
This would be particularly true if inflation expectations were well-anchored at or slightly below our 2 percent objective, as is the case currently. 

Brainard strikes again! But notice that HE SEES IT AS MORE LIKELY THAT INFLATION EXPECTATIONS ARE BELOW THAN ABOVE TARGET! One would think this would give him a bit more concern before pushing forward with more rate hikes, but no.

Fundamentally, Dudley wants to keep hiking as long as financial conditions keep easing. 
That's enough on Fed speakers for now. Time to return to yesterday's topic of new Fed appointees. This from Bloomberg:
The White House is considering at least a half-dozen candidates to be the next head of the Federal Reserve, including economists, executives with banking experience and other business people, according to three people familiar with the matter.
The breadth of the search goes against the narrative that has taken hold in Washington and on Wall Street that the Fed chair nomination is a two-horse race between National Economic Council Director Gary Cohn and current Fed Chair Janet Yellen, whose term expires in February.
Some of the other possible contenders include former Fed Governor Kevin Warsh, Columbia University economist Glenn Hubbard and Stanford University professor John Taylor, one of the people familiar said. Lawrence Lindsey, a former economic adviser to President George W. Bush, has been discussed. Former US Bancorp CEO Richard Davis and John Allison, the former CEO of BB&T Corp., have also been considered.
This doesn't sound good for Yellen. Sounds like a wide-open field that will keep us guessing for weeks. 
Separately, on the data front, we get this from Commerce, via Reuters:
The U.S. economy probably grew faster than reported in the second quarter, with data on Thursday suggesting stronger consumer spending than previously estimated. 
The quarterly services survey, or QSS, from the Commerce Department implied consumer spending increased more briskly than the 3.3 percent annualized rate reported last week in its second estimate of gross domestic product.
The Fed forecasts are based on more modest growth numbers. Stronger growth numbers will tilt them toward further rate hikes.
On the other hand, the anecdotal evidence via the Beige Book was less optimistic. In that read of the economy, activity was only modest to moderate with limited wage and inflation pressures. That said, I tend to believe that data trumps anecdotal evidence when it comes to policy.
Bottom Line: Hawks are still pushing for additional rate hikes, holding to the story that low inflation is all about transitory factors. This I think remains the dominant position on the FOMC. For what its worth, market participants do not believe this is how it will play out. The odds of a December rate hike are now hovering around 25%. Markets participants are not seeing the same story as most central bankers. Something's gotta give.

Links for 09-08-17

Thursday, September 07, 2017

Fed Watch: The Times They Are A-Changin'

Tim Duy:

The Times They Are A-Changin' , by Tim Duy: The Federal Reserve is now destined to get a dramatic makeover in the next few months. That is assuming that the Trump administration carves some time out of their busy schedule of managing chaos to nominate more governors. And the Senate finds the time to confirm those nominations.
Until the time the administration and Senate get their acts together, the balance of power at the Federal Reserve will shift to the regional presidents. And that could put monetary policy on a less certain course over the next year as doves on the FOMC are replaced with hawks and the Board lacks sufficient person-power to hold a steady line.
The Board of Governors of the Federal Reserve is supposed to have seven members. At the beginning of the Trump era, two spots were open. Then former Governor Daniel Tarullo resigned. That left four members and three openings.
Today we learned that Vice Chair Stanley Fischer will soon depart, on or around October 13 of this year. The stated explanation for his departure is "personal reasons." I fear this means a serious health issue. If so, my thoughts and prayers go out to him and his family.
That leaves three members and four openings. To give a sense of what this means operationally for the Fed, take a gander at the Board Committee assignments:

FedCommittees

Federal Reserve Governor Lael Brainard is serving on SEVEN committees! Federal Reserve Governor Jerome Powell is on FIVE. You might think he is slacking, but he is the chair of those committees. Fischer currently has four assignments. Unless we get some new governors soon, Brainard and Powell will have to step it up a bit more to cover for him. I am thinking they are overworked. Just a bit.
Hats off to Brainard and Powell. Committee work is some of my least favorite work.
Who am I kidding? It is my least favorite work.
So now we are down to three governors and five regional presidents on the FOMC. At least in theory, this means the regional presidents can roll the governors on policy votes. Which means I have to start taking the presidents a little more seriously. Because in all honestly when the Board is fully staffed, that is where the power resides. And there is only so much time in the day to read speeches. The presidents talk a lot (but will the come speak at my events in Portland, a little hop from San Francisco - noooo), the governors too little.
Moreover, the Board generally offers a certain consistency of thought across years, whereas the regional presidents on the FOMC rotate. So next year, for example, the torch will pass from the dovish Minneapolis and Chicago Presidents Neal Kashkari and Charles Evans to the more hawkish San Francisco and Cleveland Presidents John Williams and Loretta Mester. Also added will be the still-to-be-announced Richmond Federal Reserve President, a hawkish spot in recent years.
The tide might turn on the hawks this year though, as it is easy to tell a story where Chair Yellen, Powell, Philadelphia President Patrick Harker, and New York President William Dudley all support a December rate hike while Brainard, Kashkari, Evans, and Dallas President Robert Kaplan oppose. What fun would that meeting be?
Of course, Randy Quarles is waiting in the wings for Senate confirmation, so perhaps he would tip the balance to the hawkish side. Marvin Goodfriend is rumored for another open position, but has yet to be nominated (I can see both hawk and dove in his record, but I am thinking he will lean hawkish). So it may be that by the beginning of the year the voting power will tip back to the Board, backed by a fairly hawkish rotation of presidents. So if the doves want to take a longer pause before hiking rates again, they need to ensure Yellen is on their side going into the end of the year.
Speaking of Yellen, a decision on the Chair will soon need to be made. Yellen term expires in February of next year. Trump has toyed with the financial press by claiming she is in the running. I hope this is true, but Trump appears more interested in wiping the slate clean of Obama appointees than anything else. And she would be the pro-regulatory fly in the ointment, opposing Trump's preferred deregulatory agenda. So I can't get on board the Yellen train just yet.
White House economic advisor Gary Cohn had been thought to be in the front-running for the spot, but the latest word is that he tanked that opportunity with his frank (but belated) criticism of Trump's handling of the Charlotsville incident. What a way to go - catching it on one end for not speaking out soon enough and then, after already having lost that battle, grows a conscience and then catches it on the other end. Long story short, the White House is scrambling for a new name - and now need to get a replacement for Fischer (who could have stayed after his term as Vice Chair ended).
The Washington Post is reporting that Powell could be up for the job. That would be a good pick in my opinion. Former Governor Keven Warsh is also reportedly in the running. He has something few can match: Trump's childhood friend Ron Lauder is Warsh's father-in-law. It's not what you know, it's who you know. My feelings about Warsh are not warm.
Also, to add a bit more excitement into the mix, Yellen can stay on as Governor even if she is not the chair. Would she stay? Maybe not. Maybe. No chair has stayed since Mariner Eccles. Maybe it is a good time for one to stick around a few more years.
Bottom Line: Phew. I think that is the current state of play. Many potentially significant changes happening at the Fed over the next several months, and it is hard to predict how it will all end. All we know for now is a reported debt-ceiling deal removes the final potential obstacle to balance sheet reduction this month. That first step of unwinding the quantitative easing of the crisis years has wide support at the Fed; central bankers would like to get it underway before leadership changes begin in earnest.

Wednesday, September 06, 2017

Fed Watch: Can She Do It Again?

Tim Duy:

Can She Do It Again?, by Tim Duy: In the fall of 2015, Federal Reserve Governor Lael Brainard began building the intellectual framework to slow the pace of rate increases. Not soon enough to stop the rate hike of December that year, but the rest of the Fed soon fell in line, and the projected four rate hikes in 2016 became only one actual hike, a hike delayed until December of 2016.
Can she shift the focus of the FOMC again? She made a valiant effort today. But will her colleagues get on board as they did last time?  A key issue: he doesn't have the downtrend in the economy and financial markets of 2016 to back her up.
 Brainard begins by acknowledging the problem facing the Federal Reserve:
The labor market continues to bring more Americans off the sidelines and into productive employment, which is a very welcome development. Nonetheless, there is a notable disconnect between signs that the economy is in the neighborhood of full employment and a string of lower-than-projected inflation readings, especially since inflation has come in stubbornly below target for five years. 
The US economy is in the midst of what could easily become a record breaking expansion. Labor markets have shown dramatic improvement in that time as steady job growth pushed the economy into the range of full employment. Moreover, the outlook remains bright:
There has been a noteworthy pickup in business investment this year compared with last year. Investment in the equipment and intellectual property category has risen at an annual rate of 6 percent so far this year after remaining roughly flat last year. The latest data on orders and shipments of capital equipment suggest that solid growth will likely continue in the second half of the year. In addition, oil drilling had rebounded this year after dropping sharply last year, although Hurricane Harvey creates uncertainty about drilling in coming months. While lackluster consumer spending was one of the key reasons for the weak increase in first-quarter gross domestic product (GDP), growth in personal consumption expenditures (PCE) bounced back strongly in the second quarter, and recent readings on retail sales suggest another solid increase in consumer spending this quarter.
And, as Brainard notes, even if the anticipated fiscal stimulus has failed to materialize, the economy has been supported by a global upturn in growth as well. Sure, Hurricane Harvey may dent the short-term numbers, the medium term picture is solid.
But all is not well:
In contrast, what is troubling is five straight years in which inflation fell short of our target despite a sharp improvement in resource utilization. 
Brainard runs through the usual suspects offered as explanations for the inflation numbers - import prices, resource utilization, and transitory factors - and finds them all wanting. So what's going on? Brainard turns her attention to a fundamental element of the Fed's inflation model:
...In many of the models economists use to analyze inflation, a key feature is "underlying," or trend, inflation, which is believed to anchor the rate of inflation over a fairly long horizon. Underlying inflation can be thought of as the slow-moving trend that exerts a strong pull on wage and price setting and is often viewed as related to some notion of longer-run inflation expectations.
There is no single highly reliable measure of that underlying trend or the closely associated notion of longer-run inflation expectations. Nonetheless, a variety of measures suggest underlying trend inflation may currently be lower than it was before the crisis, contributing to the ongoing shortfall of inflation from our objective...
This is a big deal. Brainard suggests that inflation expectations are not anchored at 2 percent. And they have not become unanchored to the upside as so many of her colleagues fear will happen if they do not act preemptively. Expectations are unanchored to the downside.
Why are expectations falling? Brainard posits that perhaps households and firms are reacting to the persistent undershooting in recent years. She also relates this to low neutral interest rates, noting that the resulting lack of conventional monetary policy power increases the episodes of below target inflation, further entrenching low inflation expectations.
Now comes the tricky part. How should policymakers respond? Can low unemployment do the job? This is interesting:
Given the flatness of the Phillips curve, it could take a considerable undershooting of the natural rate of unemployment to achieve our inflation objective if we were to rely on resource utilization alone. 
For all these reasons, achieving our inflation target on a sustainable basis is likely to require a firming in longer-run inflation expectations--that is, the underlying trend. The key question in my mind is how to achieve an improvement in longer-run inflation expectations to a level that will allow us to achieve our inflation objective. The persistent failure to meet our inflation objective should push us to think broadly about diagnoses and solutions.
It is not enough to just force down unemployment. Policymakers need to match such a policy with a commitment mechanism that pulls up inflation expectations. And that mechanism likely includes explicit overshooting of the inflation target
She highlights this point in the context of setting rates. Brainard believes the neutral rate is low and likely to stay low (this will be exacerbated by the balance sheet run off). Consequently, the Fed might reach the neutral level of the federal funds rate in very short order. That means they need to be cautious moving forward, and should adjust down the expected path of tightening accordingly. Moreover, central bankers need to match the policy with a stronger goal:
To the extent that the neutral rate remains low relative to its historical value, there is a high premium on guiding inflation back up to target so as to retain space to buffer adverse shocks with conventional policy. In this regard, I believe it is important to be clear that we would be comfortable with inflation moving modestly above our target for a time
But will Brainard's colleagues listen as they did in 2016? At that point the economic conditions appeared fragile as the impact of the oil price crash filtered through the manufacturing sector. Moreover, financial conditions had tightened with a period of higher corporate yield spreads, declining equity prices, and a strong dollar. The opposite is true now - not only does the economy look healthier, but financial conditions have loosened despite Fed tightening. So I am not yet convinced she can carry the day. But this is undoubtedly a space worth watching.
Bottom Line: Brainard is making a push to slow the pace of rate hikes. I am not sure she will be as successful as her last effort to change the course of policy. But she still has two important takeaways for investors. First, if you think interest rates will rise sharply, think again. The neutral rate of interest is too low to expect much more tightening - we need much faster growth to justify a higher estimate of the neutral rate. Second, assuming she is right and the Fed doesn't take her advice, her colleagues are positioning themselves for a substantial policy error that would both bring the expansion to an end sooner than later and further entrench disinflationary expectations. And that would only make the Fed's job harder in the future.

Links for 09-06-17

Tuesday, September 05, 2017

Fed Watch: Mediocre To Solid Data Flow, But Weak Inflation Still Key

Tim Duy:

Mediocre To Solid Data Flow, But Weak Inflation Still Key, by Tim Duy: The data flow is generally supportive of additional Fed action, surely enough to allow the Fed to move forward with balance sheet action later this month. But what about another rate hike? That remains an open question as low inflation remains an obstacle to further rate hikes for a sizable faction within the Fed.
The employment report disappointed with job growth of 156k, shy of expectations for 180k. Previous months were revised downward. Looking through the monthly volatility, the report does little to change the basic story that job growth continues the slow downward trend that began in 2015: 

Con0917

Mediocre, but not disastrous. A key issue for the Fed is where does this slowdown stop? If they were reasonably confident job growth would soon stabilize around 100k a month, then the pressure for additional rate hikes would ease substantially. For the Fed that figure would be sufficient to bring stability to the unemployment rate. For now, though, it looks like the current pace of job growth is likely to bring further declines in the unemployment rate:

Con0917

In other words, the recent stability in unemployment around 4.3-4.4% is only temporary. A significant faction of the Fed will worry that additional declines in unemployment will signal that the economy is operating beyond full employment, placing inflation stability at risk. Hence that faction will press for additional pre-emptive tightening.
That said, tepid wage growth calls into question the Fed's current estimates of full employment:

Con0917

I think that going forward the Fed will essentially split the difference by edging down estimates of full employment while remaining concerned that the pace of job growth still exceeds that required for inflation stability over the medium-term. On net, that leaves December still open for a rate hike. More on that later.
In the meantime, it looks like the manufacturing sector continues to shake off the 2015-6 doldrums. The latest ISM report was strong:

Con0917

To be sure, a slowdown in auto sales will weigh on manufacturing in the months ahead. That said, Hurricane Harvey wiped out a half a million vehicles in Texas, so that throws some needed support to that sector going forward. 
Overall, consumer spending looks solid, continuing to hold the pace of the last 18 months:

Con0917

Not the best of the cycle, but not the worst either. Something that might be expected in a more mature phase of the cycle, which is probably about right. And within a reasonable margin of error of what might be expected given consumer sentiment numbers:

Con0917

 And then there is inflation. Or, more accurately there isn't inflation, at least any to be concerned about:

Con0917

It is fairly clear that the disinflation this year is more persistent than the Fed would like to believe. It seems like too many one-sided errors to be just coincidence. Truth be told, looking at that chart makes me think that inflation expectations are anchored around 1.75% rather than the Fed's target of 2%. I don't think the Fed thinks that, but I also don't think it is an unreasonable idea either.
Bottom Line: So where does this leave us? The Fed continues to be caught between the push of the generally positive momentum of the US economy and the pull of the surprise weakness on the wage/inflation front. Luckily for them, they don't need to decide between the two until December. Their next move is to start reducing the balance sheet - they want to have that process underway before any leadership changes next year. Moreover, they would like to ensure the process begins smoothly before returning to the issue of rate hikes. My expectations about December are, not surprisingly, data dependent. If the current mix of activity continues - generally upward momentum suggestive of actual or forecasted declines in unemployment, coupled with what the Fed will view as fairly easy financial conditions (watch the dollar!) - the Fed will hike in December even if inflation remains tepid. I think the Fed will need to see more evidence of slowing in the real economy before they cease rate hikes - I suspect they will see the economy as operating to close to full employment to risk the potential inflationary consequences of delaying additional rate hikes.

Monday, September 04, 2017

Paul Krugman: Why Can’t We Get Cities Right?

"It’s not hard to see what we should be doing":

Why Can’t We Get Cities Right?, by Paul Krugman, NY Times: The waters are receding in Houston, and so, inevitably, is national interest. But Harvey will leave a huge amount of wreckage behind, some of it invisible. In particular, we don’t yet know just how much poison has been released by flooding of chemical plants, waste dumps, and more. But it’s a good bet that more people will eventually die from the toxins Harvey leaves behind than were killed during the storm itself. ...
...Harvey was an epic disaster. And it was a disaster brought on, in large part, by ... rampant, unregulated development. ...
So is Houston’s disaster a lesson in the importance of urban land-use regulation, of not letting developers build whatever they want, wherever they want? Yes, but.
To understand that “but,” consider the different kind of disaster taking place in San Francisco. Where Houston has long been famous for its virtual absence of regulations on building, greater San Francisco is famous for its NIMBYism — that is, the power of “not in my backyard” sentiment to prevent new housing construction. The Bay Area economy has boomed in recent years, mainly thanks to Silicon Valley; but very few new housing units have been added.
The result has been soaring rents and home prices..., so why not have more tall buildings?
But politics has blocked that kind of construction, and the result is housing that’s out of reach for ordinary working families. ...
Houston and San Francisco are extreme cases, but not that extreme. ...
Why can’t we get urban policy right? It’s not hard to see what we should be doing. We should have regulation that prevents clear hazards, like exploding chemical plants in the middle of residential neighborhoods, preserves a fair amount of open land, but allows housing construction.
In particular, we should encourage construction that takes advantage of the most effective mass transit technology yet devised: the elevator.
In practice, however, policy all too often ends up being captured by interest groups. ...
Can America break out of these political traps? Maybe. In blue states where cities build too little, there’s a growing political movement calling for more housing supply. Until now, there’s been much less evidence of second thoughts about unmanaged development in red states, but Harvey may serve as a wake-up call.
One thing is clear: How we manage urban land is a really important issue, with huge impacts on American lives.

DACA

The University of Oregon's statement on DACA:

Members of the University of Oregon community,

President Trump this week is expected to make changes to the Deferred Action for Childhood Arrivals immigration policy, also known as DACA. I join hundreds of university leaders as well as local, state, federal, and business leaders in strongly urging President Trump to continue this program. I also write to let our students know that we support them, and to provide information about where our students and their families can go for assistance, should the need arise. 

In a world full of ambiguities, there is no ambiguity for me about the importance of continuing DACA. My view of morality dictates that young people, many of whom were brought here as infants or toddlers, must be allowed to remain in the United States to learn, work, and make a life for themselves. The United States is their home. To uproot them would be wrong. Period.

But the argument for DACA doesn’t just rest on principles of morality; it is also good for our country. One of the reasons the United States became the greatest nation in the world is because it was founded, built, and shaped by immigrants. Millions and millions of people, including all of my grandparents, risked everything to come to the United States to escape religious, ethnic, and political oppression or to seek out a better life for their children. The very act of coming here showed grit and determination, the willingness to assume risk, and courage—just the skills necessary to build our nation.

The future of our nation’s economic prosperity also depends upon embracing immigrants and making sure that they are educated to become productive citizens and positive contributors to the economy. Birthrates are declining among our country’s native-born, and immigrants currently make up about 13 percent of the workforce. To uproot young immigrants from their schools and jobs or to force them into the shadows is the equivalent of shooting ourselves in our collective feet.

Regardless of what happens in our nation’s capital, I want to again make very clear that the University of Oregon supports every student, regardless of immigration status. Every person on our campus is valued and welcomed because of and not despite their diversity of thought, race, culture, background, religion, gender identity, sexual orientation, and birthplace. Our many differences enrich this institution’s learning environment, enhance the student experience, and are essential to our mission of teaching, research, and service.

As is currently our practice, the UO will continue to protect the privacy of students, follow the law, and treat every member of campus with respect and inclusion. This means: 

  • The University of Oregon will not facilitate immigration enforcement on our campus without legal compulsion, such as in the form of a warrant or a clear demonstration of exigent circumstances such as the imminent risk to the health or safety of others;
  • The University of Oregon Police Department will not act on behalf of federal officials in enforcing immigration laws;
  • The University of Oregon will not share with immigration enforcement any information on the immigration status of students unless required by court order.

The university is reaching out directly to students who may be impacted by the president’s decision to provide them with information about support and services. Several important points of contact and sources of information will continue to be updated as needed in the coming days and weeks:

  • For current information on the status of DACA and frequently asked questions about immigration issues, please see the Immigration FAQ webpage.
  • Justine Carpenter, director of Multicultural and Identity-Based Support Services, is the campus point-person in support of undocumented and DACA students, and students of mixed-status families. Carpenter is located in the Office of the Dean of Students and can be reached at 541-346-1123 or justcarp@uoregon.edu 
  • For additional information on the UO's support for DACA students, please visit the UO DREAMers Workgroup website.
  • Should an immigration official ask for information about a UO student, employee, or visiting scholar, please immediately contact the Office of the General Counsel at 541-346-3082 or gcounsel@uoregon.edu.

In the coming weeks and months, I urge everyone in our community to reach out and embrace those students who now face the uncertainty of knowing whether they will be able to remain in the United States. As I have repeated on many occasions—we are a family. Families take care of each other, and we will do everything in our power to ensure that all of our students are supported.

Thank you.

Michael H. Schill President and Professor of Law

Links for 09-04-17

Friday, September 01, 2017

Job Growth Slows in August

Dean Baker:

Job Growth Slows in August: Weakness in wage growth and drop in prime-age EPOPs shows slack in labor market.

The Bureau of Labor Statistics reported that the economy added 156,000 jobs in August, somewhat less than most economists had expected. This figure, combined with downward revisions of 41,000 to the prior two months data, brought the average over the last three months to 185,000. The household survey also showed some evidence of weakness with the unemployment rate edging up to 4.4 percent and the employment-to-population ratio (EPOP) falling back 0.1 percentage point to 60.1 percent.

Perhaps more noteworthy was a drop of 0.3 percentage points in the EPOP of prime-age (ages 25 to 54) workers to 78.4 percent. The EPOP for both prime-age men and women dropped by 0.3 percentage points. ...

Other data in the household survey were mostly positive. The number of people involuntarily working part-time fell by 27,000, it is now only slightly larger as a share of the workforce than before the recession. The number of people choosing to work part-time increased by 187,000, reaching a new high. This number has increased by more than 2.6 million since the end of the 2013 when the Affordable Care Act took effect. It indicates that many people are taking advantage of the opportunity to get insurance outside of employment and therefore opting to work part-time.
The percentage of people who are unemployed because they quit their jobs increased to 11.3 percent, but this is still 1.2 percentage points below the peak for the recovery reached last November. One peculiar item in the August report was a big drop in the number of people who are multiple job holders, especially among women. This number, which is not seasonally adjusted, is down 0.4 percentage points from its year-ago level for women and now stands at 4.8 percent of employed women. (It is 4.3 percent for employed men.) This could mean that fewer women feel they need to work more than one job, or it could just be an anomaly that will be reversed in future months.

Wage growth continues to be moderate, with the average hourly wage up 2.5 percent over the last year. The annual rate of increase in the average hourly wage, comparing the last three months with the prior three months, is also 2.5 percent. As a result of the weak growth in the hourly wage and a modest decline in the length of the average workweek, average weekly earnings actually fell slightly in the month. ...

On the whole, this is a mixed report. The rate of job growth is respectable but certainly should not raise concerns about being too rapid, especially given continued weakness in wage growth. And the drop in prime-age EPOPs indicates the labor market still has considerable slack.

See also: Calculated Risk, Jared Bernstein.

Links for 09-01-17

Thursday, August 31, 2017

Monopoly Rents and Corporate Taxation

Paul Krugman:

Monopoly Rents and Corporate Taxation (Wonkish): At one level it’s hard to take the Trump administration’s tax “reform” push seriously. A guy gets elected as a populist and his first two big proposals are (a) taking away health insurance from millions (b) cutting corporate taxes. Wow.
Furthermore, Trump is invincibly ignorant on taxes (and everything else) — he keeps declaring that America is the highest taxed nation in the world, which is nearly the opposite of the truth among advanced countries. And his allies in Congress aren’t ignorant, but they’re liars: Paul Ryan is the master of mystery meat, of promising to raise and save trillions in unspecified ways.
But there is an actual interesting question here, even if we shouldn’t give any credence to Republican answers. Who does, in fact, pay the corporate profit tax? Does it fall on corporations, and hence eventually on their shareholders? Or is the ultimate incidence mainly on wages, as the administration claims?

Skipping forward to the punchline:

...much corporate taxation probably doesn’t fall on returns to physical capital, but rather on monopoly rents. ... As long as the local source of profit is some kind of monopoly rent, corporate tax incidence is going to fall on shareholders, not workers. ...
And there’s a lot of reason to believe that market power is an increasingly big deal. ...
This changes the narrative, doesn’t it? Instead of focusing on rising capital mobility as a reason profits taxes might fall on workers, maybe we should focus on rising market power as a reason why profits taxes fall on capitalists.
The point for now is that when someone tells you that changes in the world have made old-style corporate taxes obsolete, be skeptical. Some changes in the world may have made profit taxation a better idea than ever.

Raghuram Rajan: Populist Nationalism Is “the First Step Toward Crony Capitalism”

Asher Schechter at ProMarket discusses Raghuram Rajan's views on the rise of populist nationalism:

Raghuram Rajan: Populist Nationalism Is “the First Step Toward Crony Capitalism”: The wave of populist nationalism that has been sweeping through Western democracies in the past two years is “a cry for help from communities who have seen growth bypass them.”
So said Raghuram Rajan, the former governor of the Reserve Bank of India, during a keynote address he gave at the Stigler Center’s conference on the political economy of finance that took place in June. 
Rajan, a professor of finance at the University of Chicago Booth School of Business, spoke about the “concentrated and devastating” impact of technology and trade on blue-collar communities in areas like the Midwest, the anger toward “totally discredited” elites following the 2008 financial crisis, and the subsequent rise of populist nationalism, seen as a way to restore a sense of community via exclusion.
In his talk, Rajan focused on three questions related to current populist discontent: 1. Why is anger focused on trade? 2. Why now? 3. Why do so many voters turn to far-right nationalist movements?
“Pointing fingers at these communities and telling them they don’t understand is not the right answer,” he warned. “In many ways, the kind of angst that we see in industrial countries today is similar to the bleak times [of] the 1920s and 1930s. Most people in industrial countries used to believe that their children would have a better future than their already pleasant present. Today this is no longer true.” ...

There's quite a bit more. I don't agree with everything he (Raghuram) says, but thought it might provoke discussion.

Is Poor Health Hindering Economic Growth?

Ellyn Terry at the Atlanta Fed's macroblog:

Is Poor Health Hindering Economic Growth?: It is well known that poor health is bad for an individual's income, partially because it can lower the propensity to participate in the labor market. In fact, 5.4 percent of prime-age individuals (those 25–54 years old) reported being too sick or disabled to work in the second quarter of 2017. This is the most commonly cited reason prime-age men do not want a job, and for prime-age women, it is the second most often cited reason behind family responsibilities (see the chart). (Throughout this article, I use the measure "not wanting a job because of poor health or disability" as a proxy for serious health problems.)

In addition to being prevalent, the share of the prime-age population citing poor health or disability as the main reason for not wanting a job has increased significantly during the past two decades and tends to be higher among those with less education (see the chart).

Yet by some standards, the health of Americans is improving. For example, compared to two decades ago the average American is living two years longer, and the likelihood of dying from cancer or cardiovascular disease has fallen. These specific outcomes, however, may have more to do with improvements in the treatment of chronic disease (and the resulting reduction in mortality rates) than improvements in the incidence of health problems.
Another puzzle—which is perhaps also a clue—is the considerable variation across states in the rates of being too sick or disabled to work. For example, people living in Mississippi, Alabama, Kentucky, or West Virginia in 2016 were more than three times likelier to indicate being too sick or disabled to work than residents of Utah, North Dakota, Iowa, or Minnesota (see the maps below).
This cross-state variation is useful because it allows state-by-state comparisons of the prevalence of specific health problems. Among a list of more than 30 health indicators, the two factors that most correlate with the share of a state's population too sick or disabled to work were high blood pressure (a correlation of 0.86) and diabetes (a correlation of 0.83). Both of these conditions are associated with risk factors such as family history, race, inactivity, poor diet, and obesity. Both of these health issues have increased significantly on a national basis in recent years.

So how might poor health hinder economic growth? Health factors accounts for a significant part of the decline in labor force participation since at least the late 1990s. After controlling for demographic changes, the share of people too sick or disabled to work is about 1.6 percentage points higher today than it was two decades ago (see the interactive charts on our website). Other things equal, if this trend reversed itself during the next year, it could increase the workforce by up to 4 million people, and add around 2.6 percentage points to gross domestic product (calculated using our Labor Market Sliders).
Of course, such a sudden and large reversal in health is highly unlikely. Nonetheless, significant improvements to the health of the working-age population would help lessen the drag on growth of the labor supply coming from an aging population. Public policy efforts centered on both prevention and treatment of work-impeding health conditions could play an important role in bolstering the nation's workforce.

Wednesday, August 30, 2017

A Better Way to Elect Presidents (Video) - Eric Maskin

The systems that most countries use to elect presidents are deeply flawed. In particular, candidates A and B may each be more popular than C (in the sense that either would beat C in a head-to-head contest), but nevertheless each may lose to C if they both run. The systems therefore fail to reflect voters’ preferences adequately. In this lecture, I will illustrate this point with examples from U.S. and French political history. I will also propose an election system that is far superior to the current ones.

Links for 08-30-17

Tuesday, August 29, 2017

Links for 08-29-17

Yellen's Odds of Being Reappointed Get Slimmer

Tim Duy:

Yellen's Odds of Being Reappointed Get Slimmer: The Federal Reserve Bank of Kansas City’s annual Jackson Hole conference offered little direct insight into the path of monetary policy for this year and next. But that doesn’t mean it was a nonevent. Perhaps the biggest takeaway is that the already small odds of Chair Janet Yellen being reappointed by the Trump administration when her term ends in February just got a lot slimmer. ...Continued at Bloomberg Prophets...

Monday, August 28, 2017

Links for 08-28-17

Short Sharp Shocks

Roger Farmer:

Short Sharp Shocks: This is week four of my posts featuring research presented at the conference on Applications of Behavioural Economics, and Multiple Equilibrium Models to Macroeconomics Policy Conference held at the Bank of England on July 3rd and 4th 2017.
Today’s memo features two economists working on models of multiple equilibria from different perspectives. George Evans is a pioneer in models of adaptive learning, a topic he has worked on for more than thirty years. George presented his joint work with Seppo Honkapohja, Deputy Governor of the Bank of Finland, and Kaushik Mitra, Professor of Economics at the University of Birmingham. Patrick Pintus, a Researcher at the Banque de France, presented a co-authored paper with Yi Wen, an Assistant Vice-President at the Federal Reserve Bank of St. Louis and Xiaochuan Xing from Yale University.  ...
George Evans began his work on adaptive learning in his Ph.D. dissertation at Berkeley in the early 1980s. When the rest of the profession was swept up by the rational expectations revolution, George persevered with the important idea that perfectly correct beliefs about the future cannot be plucked from the air, they must be learned. For an introduction to George’s work, I highly recommend the book co-authored with his long-time co-author, Seppo Honkapohja.
The paper of Evans, Honkapohja and Mitra (EHM), begins with a theme we met in post two where I discussed the fact that the standard New Keynesian model, in which the central bank follows a Taylor Rule, has two steady state equilibria. ...
Evans, Honkapohja and Mitra (EHM) build on this idea by adding a theory of adaptive learning. I am often asked how my own work on the belief function is related to George’s work on adaptive learning. They are very closely linked. ...
Previous work has shown that, in the basic New-Keynesian model, the upper steady state is stable under adaptive learning but the lower steady state is not. They modify the basic model by adding the assumption that the rate at which prices and output can fall has a lower bound. They show that this assumption implies that there exists a third steady state in which recessions can be persistent and deep. ...
George and his co-authors use their analysis to argue that a large fiscal intervention, a short-sharp shock, can knock the economy out of region C and back into region A. Readers of this blog will know that I have expressed scepticism of that idea in the past, largely because I am not a big fan of the basic NK model. However, this is the most convincing rationale in favour of a large fiscal stimulus that I have yet seen. ... If you are a young researcher who is thinking of working in macroeconomic theory and policy, consider working on models of expectations formation. 
Next, I will turn to the work of Patrick Pintus, Yi Wen and Xiaochuan Xing (PWX). ...
PWX take up a puzzle that has long been known to plague the equilibrium real business cycle (RBC) model that has dominated macroeconomic theory for more than thirty years. That model predicts that when interest rates are high, the economy will soon enter an expansion. The reality is different. High interest rates are an omen that a recession is coming down the road. What are the features of the real world that are missed by the classical RBC paradigm? ...

Sunday, August 27, 2017

Links for 08-27-17

Friday, August 25, 2017

New Conditions for Monetary and Fiscal Policy?

Links for 08-25-17

Paul Krugman: Trump and Pruitt, Making America Polluted Again

"Don’t say that the administration’s agenda is stalled":

Trump and Pruitt, Making America Polluted Again, by Paul Krugman, NY Times: Efforts to kill Obamacare have failed, at least for now. Tax “reform” — which really means big tax cuts for the rich — faces doubtful prospects. ...
So many observers are asking whether Trump can restart his stalled agenda. But that turns out to be a bad question...
First, Trump doesn’t really have an agenda beyond “winning.” He has instincts and prejudices, but no interest in the details, or even the broad outlines, of policy...
Which brings me to my second point: While the legislative agenda does indeed appear stalled, a lot of what those interest groups want doesn’t require legislation, and is anything but stalled. This is especially true for environmental policy, where decisions about how to interpret and enforce laws ... can have a huge impact.
So Trump’s true legacy may well be defined not by the laws he does or more likely doesn’t pass, but by his decision to put Scott Pruitt in charge of the Environmental Protection Agency.
As Oklahoma’s attorney general, Pruitt effectively acted as a servant, not of the public, but of polluting industries. That’s not an accusation; it’s confirmed by his own email trail. ...
Pruitt can do a lot of harm without changing the law. He can, for example, reverse the ban on a pesticide that the E.P.A.’s own scientists say may damage children’s nervous systems. Or he can move to scrap a rule that would limit heavy-metal contamination from power-plant wastewater.
And he can cripple enforcement of the rules he doesn’t undo simply by working with Trump to starve his own agency of personnel and funds. The Trump budget released in May ... was an indication of priorities — and it called for cutting funding for the E.P.A. by 31 percent, more than any other agency.
Individually, no one of these actions is likely to be treated as front-page news... Cumulatively, however, they will kill or cripple large numbers of Americans — for that is what pollution does, even if the damage is gradual and sometimes invisible.
By the way, if you’re wondering whether an anti-environmental agenda will at least be good for job creation, the answer is no... This agenda will, however, be worth billions to certain campaign donors.
So don’t say that the administration’s agenda is stalled. Some parts are, but other parts are moving right along. When it comes to environmental policy, Trump will definitely change America — and his legacy will literally be toxic.

The Market Is Behaving Much Like It Did in the Past

Tim Duy:

The Market Is Behaving Much Like It Did in the Past: The prevailing wisdom these days is that markets are behaving in inexplicable ways.
I have a different view. If the market means U.S. equities, the behavior since the Federal Reserve began this tightening cycle has been very consistent with the behavior of past cycles. It's not sure all that complicated -- it’s about consistent economic growth -- and I am pretty sure fighting it is a losing bet. ...Continued at Bloomberg Prophets...

Agent-Based Models and Loss Aversion in the UK Housing Market

Roger Farmer:

Agent-Based Models and Loss Aversion in the UK Housing Market: This is my third post featuring research presented at the conference on Applications of Behavioural Economics, and Multiple Equilibrium Models to Macroeconomics Policy Conference held at the Bank of England on July 3rd and 4th 2017.
Last week I featured two US central bankers, Jim Bullard, President of the St Louis Fed and Kevin Lansing, a Research Advisor at the Federal Reserve Bank of San Francisco. This week’s post features two papers on the housing market, presented by two researchers at the Bank of England; Arzu Uluc and Philippe Bracke. One of these papers uses an Agent Based-Modelling approach to study the effects of macroprudential policy in the housing market. The other is a large-scale empirical study which finds significant evidence against the hypothesis that we are all perfectly rational. Homo Economicus and Femina Economica display more subtle behaviour than simple neo-classical models admit. 
Let’s begin with a fascinating paper co-authored by Philippe Bracke and Silvana Tenreyo. ...

Thursday, August 24, 2017

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Fed Has Good Reason to Expect Faster Wage Growth

Tim Duy:

Fed Has Good Reason to Expect Faster Wage Growth: Federal Reserve officials must think that something soon has to give in this economy. The current equilibrium, characterized by low inflation, low unemployment, low wage growth and high corporate profit margins, isn’t sustainable indefinitely, but they don’t know how or when it will crack. ...Continued at Bloomberg Prophets...

Monday, August 21, 2017

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