Thursday, January 19, 2017
Wednesday, January 18, 2017
Greg Ip met the call well before I did, in a remarkable essay.
But I will give my own two cents. Be warned, this isn’t a short post. Frankly it is an article disguised as a post. I added the subheadings to make it a bit easier on the eye. ...
The Goals of Monetary Policy and How We Pursue Them: ...it's fair to say, the economy is near maximum employment and inflation is moving toward our goal. The unemployment rate is less than 5 percent, roughly back to where it was before the recession. And, over the past seven years, the economy has added about 15-1/2 million net new jobs. Although inflation has been running below our 2 percent objective for quite some time, we have seen it start inching back toward 2 percent last year as the job market continued to improve and as the effects of a big drop in oil prices faded. Last month, at our most recent meeting, we took account of the considerable progress the economy has made by modestly increasing our short-term interest rate target by 1/4 percentage point to a range of 1/2 to 3/4 percent. It was the second such step--the first came a year earlier--and reflects our confidence the economy will continue to improve.
Now, many of you would love to know exactly when the next rate increase is coming and how high rates will rise. The simple truth is, I can't tell you because it will depend on how the economy actually evolves over coming months. The economy is vast and vastly complex, and its path can take surprising twists and turns. What I can tell you is what we expect--along with a very large caveat that our interest rate expectations will change as our outlook for the economy changes. That said, as of last month, I and most of my colleagues--the other members of the Fed Board in Washington and the presidents of the 12 regional Federal Reserve Banks--were expecting to increase our federal funds rate target a few times a year until, by the end of 2019, it is close to our estimate of its longer-run neutral rate of 3 percent. ...
John Fernald, senior research advisor at the Federal Reserve Bank of San Francisco, stated his views on the current economy and the outlook as of January 12, 2017.
Recent data confirm that the economy has picked up from its modest pace of the first half of 2016. Indeed, in the third quarter of 2016 GDP growth was revised up from an annualized rate of 3.2% to 3.5%. This rapid pace in part reflected transitory factors such as inventory accumulation and agricultural exports. Going forward, GDP growth is likely to remain for some time a bit above its long-run trend of 1½% to 1¾%. The fundamentals of consumer spending remain healthy, including solid income growth and strong household balance sheets. And business capital spending is poised to rebound from its weak pace of the past several years.
Employment gains remain solid. Nonfarm payroll employment rose by 156,000 jobs in December. Unusually cold weather in many parts of the country appear to have held down those job gains somewhat. However, even without controlling for weather, the pace of gains remains well above the “breakeven” level needed to absorb new entrants to the labor force, which we estimate at roughly 80,000 new jobs on average per month.
The labor market remains near its sustainable, full employment level. The unemployment rate in December ticked up to 4.7%, a touch below our estimate of the natural rate of unemployment of 5%. The December unemployment rate was the lowest end-of-year rate since 2006.
Inflation remains below the Federal Reserve’s 2% objective, but has been gradually increasing towards the target rate since early 2016. Overall consumer prices, as measured by the price index for personal consumer expenditures, were 1.4% higher in November than a year earlier. Core consumer prices, which strip out volatile movements in energy and food prices, were 1.6% higher. With a tight labor market and the waning effects of past energy price declines, we expect overall and core consumer price inflation to run just a shade below 2% this year.
Interest rates have risen sharply since the election in early November. In addition, the Federal Open Market Committee as widely expected raised its target for the federal funds rate at its December meeting. At the post-meeting press conference, Federal Reserve Chair Yellen noted that the decision to raise the fed funds target was “a reflection of the confidence we have in the progress the economy has made and our judgment that progress will continue.”
There is considerable uncertainty about the scope of policy changes that might be implemented under the incoming administration and about their effects on the Federal Reserve’s dual-mandate objectives of maximum employment and price stability. Of particular focus are possible changes in Federal tax and spending policy.
Federal revenues fell short of federal outlays in 2015, leaving a deficit of about 2½% of GDP. There are conflicting political pressures that could influence the path of future government spending. On the one hand, there is some desire to restrain spending in order to keep the budget deficit down. On the other hand, there is some desire to increase military and infrastructure spending, while an aging population will put upward pressure on Social Security and Medicare spending.
Federal spending as a share of GDP typically goes up in recessions and stabilizes or falls in expansions. That was particularly true in the past decade. The Great Recession of 2007-09 lowered GDP deeply, and, to help cushion the downturn, the government increased spending under the 2009 American Recovery and Reinvestment Act. Since 2010, the spending share has fallen as the economy has grown and the temporary stimulus package ended. In addition, budget caps implemented in 2011 have constrained spending. Given the competing political pressures, our forecast assumes that the path of overall federal spending remains unchanged although there may be shifts in composition.
Federal revenue as a share of GDP typically goes down in recessions and rises in expansions. For example, with a progressive tax system, the average tax rate falls when income falls. As with spending, this pattern was especially pronounced in the Great Recession. Revenues as a share of GDP are currently close to their average levels over the past few decades. Our forecast assumes that there will be reductions in individual and corporate taxes amounting to about 1 percent of GDP.
All else equal, tax cuts boost household and business income. Although the details of the tax cut matter, a plausible estimate is that desired spending may rise by perhaps 0.6 percent of GDP. (Households and businesses will try to save the rest.) However, because the economy already is near full employment, this increase in desired spending likely will be dampened somewhat by higher interest rates and a stronger dollar. On balance, we expect that tax cuts will raise the level of GDP by a total of about 0.4%. Since it is likely to take time for the legislation to be passed and for the increase in spending to occur, we expect that tax changes will boost our growth forecast by 0.1% to 0.2% for the next few years.
The views expressed are those of the author, with input from the forecasting staff of the Federal Reserve Bank of San Francisco. They are not intended to represent the views of others within the Bank or within the Federal Reserve System.
- Long live populism! - Thomas Piketty
- Fake Economics and the media - mainly macro
- The Discount Rate for the Social Cost of Carbon - RegBlog
- Monetary Policy in a Time of Uncertainty - Lael Brainard
- Evolving Consumer Behavior - Bill Dudley
- Shilling for Bitcoins - Uneasy Money
- Ending too big to fail - VoxEU
- Finance and growth: The direction of causality - VoxEU
- Royal Economic Society Webcasts on Econometrics - Dave Giles
- China’s Reserves Fell by Around $45 Billion in December - Brad Setser
- Signals intelligence and the management of military competition - Understanding Society
- The Evolution of Medicaid and Health Financing Reform - Tim Taylor
- On Brexit over-optimism - Stumbling and Mumbling
Tuesday, January 17, 2017
Dean Baker at INET:
The Economics of the Affordable Care Act: The Affordable Care Act (ACA), which President-elect Donald Trump and the Republican-controlled Congress have vowed to repeal, was crafted to overcome two basic problems in the provision of health care... First, the costs are incredibly skewed, with just 10 percent of patients accounting for almost two thirds of the nation’s healthcare spending. The other problem is asymmetric information: Patients have far more knowledge about the state of their own health than insurers do. This means that the people with the largest costs are the ones most likely to sign up for insurance. These two problems make it impossible to get to universal coverage under a purely market-based system. ...
Covering the least costly 90 percent of patients is manageable, but the cost of covering the least healthy 10 percent is exorbitant. ...
The ACA gets around this problem by requiring that everyone buy insurance — a mandate that allows people with serious health problems to get insurance at a reasonably affordable price. Since many people cannot afford an insurance policy even if it’s based on average costs, the ACA also provided subsidies to low and moderate income people. It pays for the subsidies primarily through a tax on the wealthiest households, those with incomes over $200,000.
Thus far, the ACA has actually worked better than expected in most respects. ...
Insofar as the ACA has run into problems, those have been attributable to too few healthy people in the health care exchanges, and too little competition among insurers. Many commentators have wrongly blamed the problem in the exchanges on a failure of young healthy people to sign up for insurance. This is not the cause of the problem, since more people are getting insured than had been projected. The reason fewer healthy people are showing up on the exchanges is that fewer employers dropped insurance than had been projected. ... By continuing to provide insurance for their workers despite the ACA, employers are effectively keeping healthy people out of the exchanges.
The other problem with the exchanges has been limited competition, as many insurers have dropped out after the first few years. The loss of competition has meant higher prices. ...
One way to make insurance more affordable would be to reduce the costs of the health care system as a whole. Americans pay twice as much per person as people in other wealthy countries, with few obvious benefits in terms of outcomes. But such cost cutting would mean reducing the incomes of drug companies, doctors, and insurance companies — the big winners under the current system. It seems unlikely the Republicans will go this route. They are more likely to restore a version of the pre-ACA situation, in which many more people are uninsured and most workers know that their insurance is only as secure as their job.
No Agricultural Economist Was Harmed–Let Alone Interviewed–During the Making of this Article: This past weekend, the New York Times ran an article about the kinds of food SNAP recipients purchase, based on a new USDA report.
Here is how the NYT article began:
What do households on food stamps buy at the grocery store?
The answer was largely a mystery until now. The United States Department of Agriculture, which oversees the $74 billion food stamp program called SNAP, has published a detailed report that provides a glimpse into the shopping cart of the typical household that receives food stamps.
The findings show that the No. 1 purchases by SNAP households are soft drinks, which accounted for 5 percent of the dollars they spent on food. The category of “sweetened beverages,” which includes fruit juices, energy drinks and sweetened teas, accounted for almost 10 percent of the dollars they spent on food.
Had the NYT’s intention been to provide arguments to those who wish to dismantle SNAP–a program which, in 2014, provided an average of $125 to spend on food to 46.5 million Americans with low or no income; that’s one in seven Americans–it wouldn’t have done a better job. This is especially given that title: “In the Shopping Cart of a Food Stamp Household: Lots of Soda.”
My Twitter feed came alive with (justified) criticism of the article. My University of Minnesota colleague Joe Soss wrote a long response on his Facebook page which should be read in full to appreciate just how bad the NYT reporting was, part of which reads as follows:
The story hammers away at the idea that “the No.1 purchases by SNAP households are soft drinks, which account for about 10 percent of the dollars they spend on food.” Milk is No. 1 among non-SNAP households, we’re told, not soft drinks. At the start of the article, [NYT reporter Anahad] O’Connor frames these and other alleged facts with a quote that tells readers what SNAP really is: “SNAP is a multibillion-dollar taxpayer subsidy of the soda industry.” The story doubles down on this misleading image of the program by ending with a discussion of how the big soda companies lobby to keep the SNAP funds flowing — and with a quote asserting, “This is the first time we’ve had confirmation that this massive taxpayer program is promoting all the wrong kinds of foods.”
I want to be clear here: This is bullshit. It’s a political hack job on a program that helps millions of Americans feed themselves, and we should all be outraged that the NYT has disguised it as a piece of factual news reporting on its front page …
But what does the USDA report actually say? … Spoiler Alert: The report does not say that SNAP changes what people buy at the grocery–and that includes encouraging them to buy soda–and the report’s findings differ considerably from the portrayal Anahad O’Connor presents in the NYT … Here are the top three items in the report’s own summary of its major findings, reported in an attention-grabbing, color-shaded box:
1. There were no major differences in the expenditure patterns of SNAP and non-SNAP households, no matter how the data were categorized. Similar to most American households: ...
Later, the report adds these bullet points to its summary, in a separate “pay attention” box:
4. Overall, there were few differences between SNAP and non-SNAP household expenditures by USDA Food Pattern categories. Expenditure shares for each of the USDA Food Patter categories (dairy, fruits, grains, oils, protein foods, solid fats and added sugars (SoFAS), and vegetables) varied by no more than 3 cents per dollar when comparing SNAP and non-SNAP households.
...Most of the other comments I read regarding the NYT article were to the effect of: “Who is the NYT to tell poor people what they can and cannot spend their money on?,” as though one being poor necessarily implies that one is morally inferior, and so one needs to get told by Wealthy, Educated White Liberals (WEWLs) what one can and cannot buy. ...
I also find paternalism appalling,* no matter which side it comes from. It is especially appalling when said paternalism strongly hints at the idea that the poor are somehow morally deficient. The left gets up in arms when the right talks about mandatory drug tests for welfare recipients; this is no different. ...
And here is another thing about that NYT article: There are many, many agricultural economists who have done high-quality work on SNAP that steers clear from cheap advocacy. In no particular order: Parke Wilde at Tufts; Shelly Ver Ploeg at USDA’s Economic Research Service; my grad-school colleague Chad Meyerhoefer at Lehigh; Minnesota alum Travis Smith, now at UGA; my erstwhile colleague Tim Beatty; Craig Gundersen at Illinois; and so on, and so forth.
Were any of them interviewed in the article? Of course not. I mean, why would you talk to anyone over in icky flyover country? Why would you slum it at state schools? Instead, the reporter chose to go full TED Talk on the reader, remain comfortably ensconced in area code 212, and go with… Marion Nestle who, faisant flèche de tout bois, chose to use the report’s finding to attack her favorite bête noire: Big Bad Ag. Quoth Nestle:
“… SNAP is a multibillion-dollar taxpayer subsidy of the soda industry,” said Marion Nestle, a professor of nutrition, food studies and public health at New York University. “It’s pretty shocking.”
No. What is shocking is that an article which I would not have published when I was editor of my college’s newspaper not only gets published in but makes the front page of the New York Times, supposedly one of the last bastions of Real Journalism in this era of fake news and filter bubbles. ...
- Public Infrastructure Investment in the National Interest - Larry Summers
- Some Economics for Martin Luther King Jr. Day - Tim Taylor
- Inequality as feudalism - Stumbling and Mumbling
- Trump and Gorbachev - Branko Milanovic
- The Trump Deficit - Kenneth Rogoff
- How Geographic Boundaries Determine the Social Cost of Carbon - RegBlog
- The wisdom of the crowds and the consensus forecast - OECD Insights
- Dealing with Imperfect Instruments - Marc Bellemare
- Getting Past the Globalization Bogeyman - Angus Deaton
- Exit, Tweets and Loyalty - Digitopoly
- GDP-linked Bonds: A Primer - Cecchetti & Schoenholtz
Monday, January 16, 2017
I have a new column:
Blind Trust in Donald Trump Could Be Costly: Donald Trump has refused to divest himself of his business interests before being inaugurated as president and has instead said he would hand control over to his sons. However, as the director of the Office of Government Ethics, Walter Shaub, Jr., said in a letter last December, a point he reiterated after Trump announced his plan to turn control over to his sons last week, “Transferring operational control of a company to one's children would not constitute the establishment of a qualified blind trust, nor would it eliminate conflicts of interest."
In response, Trump argues that his numerous conflicts of interest won’t affect his decisions as president. But there have already been instances where meetings with foreign leaders had a clear connection to his business pursuits, his nominations for important government positions show a strong bias toward favoring business interests, and his proposed legislative agenda, while touted as a populist, contains the standard Republican pro-business slate of policies. The stage is set for those coming into power to use their government offices to enrich themselves, and if they do, it has the potential to undermine US competitiveness and reduce long-term economic growth. ...
- Measuring the economic effects of uncertainty - James Hamilton
- The Unhealthy Return to Individual Responsibility in Health Policy - RegBlog
- Blanchard joins calls to use Structural Econometric Models - mainly macro
- The surprising prevalence of surprises in export specialisation - VoxEU
- Cracks in the anti-behavioral dam? - Noahpinion
- What's a Macro Model Good For? - Stephen Williamson
- The macro-economics of US border taxes - Gavyn Davies
- Review of "The Curse of Cash" - Stephen Williamson
Sunday, January 15, 2017
Saturday, January 14, 2017
The Case Against Cutting Top Marginal Tax Rates: For some people, cutting income tax rates is an evergreen strategy for expanding the economy. If you cut income taxes, the argument goes, people will work more. Under this logic, cutting the top marginal tax rates is good for everyone because these households work more, which increases the size of the economy. There’s one simple problem with this argument: High-income workers already work a lot. ...
Workers with higher family incomes tend to put in the longest hours already...
It seems unlikely that there is much room to improve here, which suggests a limited upside to cutting top marginal income tax rates. In contrast, employment rates and hours worked for the lowest income has much more room to improve. This suggests that cutting taxes and even subsidizing employment would be better focused on low-income workers.
Even if there was room to work more, it's not at all clear that tax cuts would motivate more effort. And on the demand side, the tax cuts would not impact aggregate demand as much as they would for lower income households.
Ben Bernanke has a longish post about fiscal policy in the
CaligulaTrump era. It’s not the most entertaining read; perhaps because of the political fraughtness of the moment, Bernanke has reverted a bit to Fedspeak. But there’s some solid insight, a lot of it pretty much in line with what I have been saying.
Notably, Bernanke, like yours truly, argues that the fiscal-stimulus case for deficit spending has gotten much weaker, but there’s still a case for borrowing to build infrastructure...
But he gently expresses doubt that this kind of thing is actually going to happen...
Let me be less gentle: there will be no significant public investment program, for two reasons.
First, Congressional Republicans have no interest in such a program. They’re hell-bent on depriving millions of health care and cutting taxes at the top; they aren’t even talking about public investment...
But this then raises the obvious question: who really believes that this crew is going to come up with a serious plan? Trump has no policy shop, nor does he show any intention of creating one; he’s too busy tweeting about perceived insults from celebrities, and he’s creating a cabinet of people who know nothing about their responsibilities. Any substantive policy actions will be devised and turned into legislation by Congressional Republicans who, again, have zero interest in a public investment program.
So investors betting on a big infrastructure push are almost surely deluding themselves. We may see some conspicuous privatizations, especially if they come with naming opportunities: maybe putting in new light fixtures will let him rename Hoover Dam as Trump Dam? But little or no real investment is coming.
- A New Era of Price Discrimination? - Tim Taylor
- On defences and attacks on economics - Stumbling and Mumbling
- Distinguish Between Cons. and Exp. When Testing the PIH - Everyday Economist
- The Duke summer History of Economic Thought Institute - Tyler Cowen
- Vintage Years in Econometrics - The 1970's - Dave Giles
- Regulating International Cyberwarfare - RegBlog
- Will we forget the lessons of 2008 so soon? - Seattle Times
- Miles on Haldane on Economics in Crises - mainly macro
- Decoupling of Emissions and GDP - The Unassuming Economist
- Bitesize: More on the bond-equity correlation - Bank Underground
Friday, January 13, 2017
The Fed and fiscal policy: Markets have responded strongly to Donald Trump’s election victory, pushing up equities, longer-term interest rates, and the dollar. While many factors influence asset prices, expectations of a much more expansionary fiscal policy under the new administration—higher spending, lower taxes, and larger deficits—appear to be an important driver of the recent market moves.
The Federal Reserve’s reaction to prospective fiscal policy changes has been much more cautious than that of the markets, however. Janet Yellen in December described the central bank as operating under a “cloud of uncertainty,” and the forecasts of Fed policymakers released after the December FOMC meeting showed little change in either their economic outlooks or their interest-rate projections for the next few years. How does the Fed take fiscal policy into account in its planning? What explains the large difference between the reactions of the Fed and the markets to the change in fiscal prospects since the election? I’ll discuss these questions in this post, concluding that the Fed’s cautious response to the possible fiscal shift makes sense, given what we know so far. ...
Repeal and hope to blame the Democrats:
Donald Trump’s Medical Delusions, by Paul Krugman, NY Times: ...Some Republicans appear to be realizing that their long con on Obamacare has reached its limit. Chanting “repeal and replace” may have worked as a political strategy, but coming up with a conservative replacement for the Affordable Care Act — one that doesn’t take away coverage from tens of millions of Americans — isn’t easy. In fact, it’s impossible.
But it seems that nobody told Mr. Trump. In Wednesday’s news conference, he asserted that he would submit a replacement plan, “probably the same day” as Obamacare’s repeal — “could be the same hour” — that will be “far less expensive and far better”; also, with much lower deductibles.
This is crazy, on multiple levels.
The truth is that even if Republicans were settled on the broad outlines of a health care plan — the way Democrats were when President Obama took office — turning such an outline into real legislation is a time-consuming process.
In any case, however, the G.O.P. has spent seven years denouncing the Affordable Care Act without ever producing even the ghost of an alternative. That’s not going to change in the next few weeks, or ever. For the anti-Obamacare campaign has always been based on lies that can’t survive actual repeal. ...
Republicans don’t have a health care plan, but they do have a philosophy — and it’s all about less. Less regulation, so that insurers can turn you down if you have a pre-existing condition. Less government support, so if you can’t afford coverage, too bad. And less coverage in general: Republican ideas about cost control are all about “skin in the game,” requiring people to pay more out of pocket (which somehow doesn’t stop them from complaining about high deductibles).
Implementing this philosophy would deliver a big windfall to the wealthy, who would get a huge tax cut from Obamacare repeal...
But the idea that it would lead to big cost savings over all is pure fantasy, and it would have a devastating effect on the millions who have gained coverage during the Obama years.
As I said, it looks as if some Republicans realize this. They may go ahead with repeal-but-don’t-replace anyway, but they’ll probably do it because they believe they can find some way to blame Democrats for the ensuing disaster.
Mr. Trump, on the other hand, gives every impression of having no idea whatsoever what the issues are. But then, is there any area of policy where he does?
Me, at MoneyWatch:
Making America's risk of a financial crisis great again: In the decades prior to the financial crisis, the U.S. underwent a period of financial deregulation under the assumption that market forces would prevent financial institutions from taking excessive risk. In particular, the shadow banking system -- financial institutions that don’t operate as traditional banks -- was lightly regulated.
However, as Alan Greenspan admitted in testimony on Capital Hill after the financial crisis, that assumption turned out to be wrong. The traditional banking sector, which is highly regulated, weathered the storm fairly well, but the shadow banking system came crashing down -- and brought the economy with it.
Nevertheless, Republicans are determined to roll back financial regulation, particularly measures implemented under the Dodd-Frank financial reform package passed in the aftermath of the financial crisis. I believe that’s a mistake. ...
- Trump Before Trump - Barry Eichengreen
- Trump’s Economic Policies: Pro-Business, Not Pro-Market - Luigi Zingales
- Making America Great Again Isn’t Just About Money and Power - Robert Shiller
- Milton Friedman's Cherished Theory Is Laid to Rest - Noah Smith
- Kocherlakota’s argument for fiscal expansion - mainly macro
- Jared Bernstein Interviews Jason Furman - Vox
- Confusion about the lender of last resort - VoxEU
- Helicopter money: Loved, not spent - VoxEU
Thursday, January 12, 2017
More from the CEA:
US tariffs are an arbitrary and regressive tax, by Jason Furman, Katheryn Russ, Jay Shambaugh, VoxEU: Tariffs – taxes on imported goods – likely impose a heavier burden on lower-income households, as these households generally spend more on traded goods as a share of expenditure/income and because of the higher level of tariffs placed on some key consumer goods. This column estimates the tariff burden by income group and by family structure using a new dataset constructed by matching of granular data on trade and consumer spending. The findings suggest that tariffs function as a regressive tax that weighs most heavily on women and single parents. ...
- The U.S. Needs More Manufactured Exports - Brad Setser
- WID.world: a new global database on inequality - Thomas Piketty
- From economic crisis to crisis in economics - Andy Haldane
- Andy Haldane is wrong: there is no crisis in economics - David Miles
- Congestion on the Last Mile - Digitopoly
- Baby, it's cold outside ... - macromom
- Tribal Warfare in Economics Is a Thing of the Past - Noah Smith
- Why Most Economists Are So Worried About Trump - The New York Times
- Path dependency in formation of academic disciplines - Understanding Society
- Under Trump, AT&T-Time Warner Merger Hangs in the Balance - RegBlog
- An Economist’s Case for Open Borders - Dissent Magazine
- Credit Market Arbitrage and Regulatory Leverage - Liberty Street
- The Trouble with Paul Romer - Stephen Williamson
- On wage ratio policies - Stumbling and Mumbling
Wednesday, January 11, 2017
From the CEA (I will miss the Obama CEA):
Assessing the State of the Economy in Real Time using Headline Economic Indicators: Measuring the position of the U.S. economy in real time is difficult, both because there is no single comprehensive indicator of the state of the economy and because the many existing measures that do exist capture different aspects of the economy and are subject to frequent (and large) revisions. This issue brief presents new analysis by the Council of Economic Advisers on how to best weight different preliminary headline measures in assessing the state of the U.S. economy in real time. The analysis finds that employment growth is best measured solely using data from the payroll survey and ignoring estimates of changes in employment levels from the household survey altogether. It also finds that, in understanding the current state of the economy, data on both employment growth and output growth are useful — with substantially more weight, roughly two -thirds or more , given to headline estimates of employment growth and less weight, roughly one -third or less , given to headline estimates of output growth. ...
John Laidler at the NBER Digest:
The Earnings Gap between Black and White Men: Since the end of slavery a century and a half ago, differences between the earnings of black and white Americans have been a reality of the U.S. labor market. Among working men, this gap narrowed sharply between 1940 and 1970 and has remained largely stable ever since. In Divergent Paths: Structural Change, Economic Rank, and the Evolution of Black-White Earnings Differences, 1940-2014, (NBER Working Paper No. 22797), Patrick Bayer and Kerwin Kofi Charles point out that focusing only on those who are employed fails to account for the growing numbers of men who are not working for a number of reasons. This group includes those who are unemployed, disabled, or no longer searching for work, as well as the rising number of individuals who are incarcerated.
Among working men, "the median earnings gap between blacks and white fell by almost 60 percent from 1940 to 1980 (with large decreases in the 1940s and 1960s) but has been essentially flat ever since, remaining in the 35-40 percent range in every sample from 1980-2014," the researchers report. But when they consider the entire population of men, they find that the earnings gap has actually widened substantially in recent decades. In 2010, the gap in the population as a whole was comparable to that in 1950.
Their analysis, which focuses on the black-white earnings differences among prime-aged men from 1940 through the Great Recession, "points to the incredible lack of progress and, in many cases, regress in closing the gaps in labor market outcomes for black and white men."
The findings are most striking among median- and low-income blacks, whose position relative to median-income whites changed little in the seven-decade study period. In 1940, the earnings of a median-income black earner fell at the 24th percentile of the earnings distribution for whites. At the time of the Great Recession, the comparable black earners' earnings fall at the 27th percentile of the earnings distribution for whites—only a slight improvement in rank over the entire 75-year study period.
In contrast, a black earner at the 90th percentile of the distribution for African Americans saw progress relative to the earnings of whites. In 1940, the earnings of the 90th percentile black were comparable to those of the median white, but by the late 2000s, this earnings level had risen to the 75th percentile in the white earnings distribution.
The racial earnings gap around the median narrowed from 1940-70, due largely to broad economic forces which reduced the income disparities among all workers. But since then, the relative gains made by low-skilled blacks through improved education have been countered by the growing overall connection between education and economic rank, the researchers find. "Racial convergence in educational attainment would have led to strong positional gains for black men at the median and below, except that these men faced strong structural headwinds from the simultaneously rising returns to education, both in terms of wages and in the probability of employment," the researchers find.
By contrast, high-skilled black men have moved closer to their white counterparts in income, which the researchers suggest has been due to more-equal access to quality higher education and high-skilled occupations.
"While the entire economy has experienced a marked increase in earnings inequality, this increase has been even more dramatic for black men," the researchers find, "with those at the top continuing to make clear gains within the earnings distribution, and those at the bottom being especially harmed by the era of mass incarceration and the failing job market for men with low skills." The impact of rising incarceration is particularly striking: The incarceration rate tripled for black men between 1980 and 2010, from 2.6 percent to 8.3 percent of the population. The rate quintupled for white men, but remained much lower, at 1.5 percent of the population.
The researchers conclude that education "has played a subtle but extremely important role in the evolution of the racial earnings gap," both fueling and stalling progress.
- Black Lives Matter - Tyler Cowen
- Trump’s Defective Industrial Policy - Dani Rodrik
- Monetary Policy and Inequality - Cleveland Fed
- New models for macroeconomic policy - VoxEU
- Nobel Laureates on inequality: Rents and Antitrust - ProMarket
- Business concentration and labor’s share of income - Nick Bunker
- "Here's what really caused the housing crisis" - Calculated Risk
- Irrationality in the boardroom - Stumbling and Mumbling
- Economists Contemplate Life on the Outs - Justin Fox
- Obama’s Economic Record: An Assessment - John Cassidy
Tuesday, January 10, 2017
Me, at MoneyWatch:
Here's what really caused the housing crisis: One story of the housing crisis goes like this: Government programs that helped low-income households purchase houses led to widespread defaults on the subprime loans they held, sparking the entire the financial meltdown.
For example, Lawrence Kudlow and Stephen Moore, both of whom have been named as economic advisers to Donald Trump, argue that the financial crisis and recession were caused by policies Bill Clinton implemented that were designed to stop discrimination in housing loans, known as “red-lining,” in poor areas. In particular, they argue that the Community Reinvestment Act (CRA), legislated in 1977, is to blame:
“Under Clinton’s Housing and Urban Development (HUD) secretary, Andrew Cuomo, Community Reinvestment Act regulators gave banks higher ratings for home loans made in ‘credit-deprived’ areas. Banks were effectively rewarded for throwing out sound underwriting standards and writing loans to those who were at high risk of defaulting.What’s more, in the Clinton push to issue home loans to lower income borrowers, Fannie Mae and Freddie Mac made a common practice to virtually end credit documentation, low credit scores were disregarded, and income and job history was also thrown aside. The phrase “subprime” became commonplace. What an understatement. … Tragically, when prices fell, lower-income folks who really could not afford these mortgages under normal credit standards, suffered massive foreclosures and personal bankruptcies.”
However..., that isn’t what happened. ...
There Will Be No Obamacare Replacement: You may be surprised at the evident panic now seizing Republicans, who finally — thanks to James Comey and Vladimir Putin — are in a position to do what they always wanted, and kill Obamacare. How can it be that they’re not ready with a replacement plan?
That is, you may be surprised if you spent the entire Obama era paying no attention to the substantive policy issues — which is a pretty good description of the Republicans, now that you think about it.
From the beginning, those of us who did think it through realized that anything like universal coverage could only be achieved in one of two ways: single payer, which was not going to be politically possible, or a three-legged stool of regulation, mandates, and subsidies. Here’s how I put it exactly 7 years ago...
It’s actually amazing how thoroughly the right turned a blind eye to this logic, and some — maybe even a majority — are still in denial. But this is as ironclad a policy argument as I’ve ever seen; and it means that you can’t tamper with the basic structure without throwing tens of millions of people out of coverage. You can’t even scale back the spending very much — Obamacare is somewhat underfunded as is.
Will they decide to go ahead anyway, and risk opening the eyes of working-class voters to the way they’ve been scammed? I have no idea. But if Republicans do end up paying a big political price for their willful policy ignorance, it couldn’t happen to more deserving people.
I just noticed that today's links didn't post (and are now lost). So this will be a long list:
- Who Will Donald Trump Turn Out To Be? - Brad DeLong
- Of productivity in France and in Germany - Thomas Piketty
- Countering public opposition to immigration - VoxEU
- Brexit as identity politics - Stumbling and Mumbling
- Monopsony Takes Center Stage - ProMarket
- Trumpian Uncertainty - Joseph Stiglitz
- Leaders vs followers? - John Cochrane
- The causes of mortgage default - VoxEU
- Tony Atkinson - Frances Woolley
- Two Trade Variables To Watch in 2017 - Brad Setser
- Under the Big (ASSA) Top - Economic Principals
- The Folly of Trumponomics - Simon Johnson
- Pareto, Taleb and the tails of income distributions - Branko Milanovic
- Should data should be treated as a public good? - Richard Green
- All of Machine Learning in One Expression - No Hesitations
- Thoughts on Proposed Corporate Tax Reform - Cecchetti & Schoenholtz
- Sometimes It's Hard to Explain Market Failures - Noah Smith
- Why John Taylor Shouldn't Lead the Federal Reserve - Hale Stewart
- The future of central bank independence - VoxEU
- Transfer Pricing and the Destination Based Cash Flow Tax - EconoSpeak
- When is a Dummy Variable Not a Dummy Variable? - Dave Giles
- China and the Fed: how different this time? - Gavyn Davies
- Tough on the causes of immigration - mainly macro
Monday, January 09, 2017
Narrative Economics and the Laffer Curve: Robert Shiller delivered the Presidential Address for the American Economic Association on the subject of "Narrative Economics" in Chicago on January 7, 2017. A preliminary version of the underlying paper, together with slides from the presentation, is available here.
Shiller's broad point was that the key distinguishing trait of human beings may be that we organize what we know in the form of stories. He argues:
"Some have suggested that it is stories that most distinguish us from animals, and even that our species be called Homo narrans (Fisher 1984) or Homo narrator (Gould 1994) or Homo narrativus (Ferrand and Weil 2001) depending on whose Latin we use. Might this be a more accurate description than Homo sapiens, i.e., wise man? Or might we say "narrative is intelligence" (Lo, 2007), with all of its limitations? It is more flattering to think of ourselves as Homo sapiens, but not necessarily more accurate."
Shiller goes on to make a case that narratives play a role in economic activity: for example, the way people act during the steep recession of 1920-21 and the Great Depression, as well as in the Great Recession and the most recent election. To me, one of his themes is that economist should seek to bring the narratives of these times that economic actors were telling themselves into their actual analysis by applying epidemiology models to examine actual spread of narratives, rather than bewailing narratives as a sort of unfair complication for the purity of our economic models.
Near the start, Shiller offers the Laffer Curve as an example of a narrative that had some lasting force. For those not familiar with the story, here's how Shiller tells it (footnotes omitted):
Let us consider as an example the narrative epidemic associated with the Laffer curve, a diagram created by economist Arthur Laffer ... The story of the Laffer curve did not go viral in 1974, the reputed date when Laffer first introduced it. Its contagion is explained by a literary innovation that was first published in a 1978 article in National Affairs by Jude Wanniski, an editorial writer for the Wall Street Journal. Wanniski wrote the colorful story about Laffer sharing a steak dinner at the Two Continents [restaurant] in Washington D.C. in 1974 with top White House powers Dick Cheney [at the time, a Deputy Assistant to President Ford, later to be Vice President] and Donald Rumsfeld (at the time Chief of Staff to President Ford, later to be Secretary of Defense]. Laffer drew his curve on a napkin at the restaurant table. When news about the "curve drawn on a napkin" came out, with Wanniski's help, the story surprisingly went viral, so much that it is now commemorated. A napkin with the Laffer curve can be seen at the National Museum of American History ...
Why did this story go viral? Laffer himself said after the Wanniski story exploded that he himself could not remember the event, which had taken place four years earlier. But Wanniski was a journalist who sensed that he had the elements of a good story. The key idea as Wanniski presented it is, indeed, punchy: At a zero-percent tax rate, the government collects no revenue. At a 100% tax rate the government would also collect no revenue, because people will not work if all the income is taken. Between the two extremes, the curve, relating tax revenue to tax rate, must have an inverted U shape. ...
Here is a notion of economic efficiency easy enough for anyone to understand. Wanniski suggested, without any data, that we are on the inefficient side of the Laffer curve. Laffer's genius was in narratives, not data collection. The drawing of the Laffer curve seems to suggest that cutting tax rates would produce a huge windfall in national income. To most quantitatively-inclined people unfamiliar with economics, this explanation of economic inefficiency was a striking concept, contagious enough to go viral, even though economists, even though economists protested that we are not actually on the inefficient side of the Laffer Curve (Mirowski 1982). It is apparently impossible to capture why it is doubtful that we are on the inefficient side of the Laffer curve in so punch a manner that it has the ability to stifle the epidemic. Years later Laffer did refer broadly to the apparent effects of historic tax cuts (Laffer 2004); but in 1978 the narrative dominated. To tell the story really well one must set the scene at the fancy restaurant, with powerful Washington people and the napkin.
Here an image of what must be one of history's best-known napkins from the National Museum of American History, which reports that the exhibit was "made" on September 14, 1974, and measures 38.1 cm x 38.1 cm x .3175 cm, and was a gift from Patricia Koyce Wanniski:
Did Laffer really pull out a pen and start writing on a cloth napkin at a fancy restaurant, so that Jude Wanniski could take the napkin away with him? The website of the Laffer Center at the Pacific Research Institute describes it this way:
"As to Wanniski’s recollection of the story, Dr. Laffer has said that he cannot remember the details, but he does recall that the restaurant where they ate used cloth napkins and his mother had taught him not to desecrate nice things. He notes, however, that it could well be true because he used the so-called Laffer Curve all the time in classroom lectures and to anyone else who would listen."
In the mid-1980s, when I was working as an editorial writer for the San Jose Mercury News in California, I interviewed Laffer when he was running for a US Senate seat. He was energy personified and talked a blue streak, and I can easily imagine him writing on cloth napkins in a restaurant. When remembering the event 40 years later in 2014, Dick Cheney said:
It was late afternoon, sort of the-end-of-the-day kind of thing. As I recall, it was a round table. I remember a white tablecloth and white linen napkins because that’s what [Laffer] drew the curve on. It was just one of those events that stuck in my mind, because it’s not every day you see somebody whip out a Sharpie and mark up the cloth napkin at the dinner table. I remember it well, because I can’t recall anybody else drawing on a cloth napkin.
The point of Shiller's talk is that while a homo sapiens discussion of the empirical evidence behind the Laffer curve can be interesting in its own way, understanding the political and cultural impulse behind tax-cutting from the late 1970s up to the present requires genuine intellectual opennees to a homo narrativus explanation--that is, an understanding of what narratives have force at certain times, how such narratives come into being, why the narratives are powerful, and how the narratives affect various forms of economic behavior.
My own sense is that homo sapiens can be a slippery character in drawing conclusions. Homo sapiens likes to protest that all conclusions come from a dispassionate consideration of the evidence. But again and again, you will observe that when a certain homo sapiens agrees with the main thrust of a certain narrative, the supposedly dispassionate consideration of evidence involves compiling every factoid and theory in support, as well as denigrating those who believe otherwise as liars and fools; conversely, when a different homo sapiens disagrees with the main thrust of certain narrative, the supposedly dispassionate consideration of the evidence involves compiling every factoid and theory in opposition, and again denigrating those who believe otherwise as liars and fools. Homo sapiens often brandishes facts and theories as a nearly transparent cover for the homo narrativus within.
Republicans are planning to "blow up the deficit mainly by cutting taxes on the wealthy":
Deficits Matter Again, by Paul Krugman, NY Times: Not long ago prominent Republicans like Paul Ryan ... liked to warn in apocalyptic terms about the dangers of budget deficits, declaring that a Greek-style crisis was just around the corner. But ... tax cuts ... would, according to their own estimates, add $9 trillion in debt over the next decade. Hey, no problem. ...
All that posturing about the deficit was obvious flimflam, whose purpose was to hobble a Democratic president... But running big deficits is no longer harmless, let alone desirable.
The way it was: Eight years ago, with the economy in free fall, I wrote that we had entered an era of “depression economics,” in which the usual rules of economic policy no longer applied... In particular, deficit spending was essential to support the economy, and attempts to balance the budget would be destructive.
This diagnosis ... was ... always conditional, applying only to an economy far from full employment. That was the kind of economy President Obama inherited; but the Trump-Putin administration will, instead, come into power at a time when full employment has been more or less restored. ...
What changes once we’re close to full employment? Basically, government borrowing once again competes with the private sector for a limited amount of money. This means that deficit spending no longer provides much if any economic boost, because it drives up interest rates and “crowds out” private investment.
Now, government borrowing can still be justified if it serves an important purpose..., infrastructure is still a very good idea... But while candidate Trump talked about increasing public investment, there’s no sign at all that congressional Republicans are going to make such investment a priority.
No, they’re going to blow up the deficit mainly by cutting taxes on the wealthy. And that won’t do anything significant to boost the economy or create jobs. In fact, by crowding out investment it will somewhat reduce long-term economic growth. Meanwhile, it will make the rich richer, even as cuts in social spending make the poor poorer and undermine security for the middle class. But that, of course, is the intention. ...
But back to deficits: the crucial point is not that Republicans were hypocritical. It is, instead, that their hypocrisy made us poorer. They screamed about the evils of debt at a time when bigger deficits would have done a lot of good, and are about to blow up deficits at a time when they will do harm.
Sunday, January 08, 2017
Who Will Donald Trump Turn Out To Be?: We have very little indication of what policies Donald Trump will try to follow or even what kind of president he will be. The U.S. press corps did an extraordinarily execrable job in covering the rise of Trump--even worse than it usually does. Even the most sophisticated of audiences--those interested in asset prices and how they are affected by government policies--have very little insight into Trump's views or those of his key associates.
Will Donald Trump turn out to be the equivalent of Ronald Reagan--someone who comes into office from the world of celebrity with a great many unfixed policy intuitions, but no consistent plan? Will he turn out to be the equivalent of Silvio Berlusconi, who regards the presidency as an opportunity to wreak his kleptocratic will on the country? Or will he turn out to be someone worse than Berlusconi?
I would say that Trump could be any of four figures...
Marshall Steinbaum at ProMarket:
Monopsony Takes Center Stage: In October, the Council of Economic Advisors released a report about monopsony in the labor market. That alone was rather astonishing—employer power and its consequences for labor market outcomes has been a distinctly minority concern in the economics profession for quite a while, notwithstanding mounting evidence of its importance coming from a number of subfields.
For that agenda to gain a hearing at the apex of economic policy-making is evidence of the shifting ground in matters of public economic debate. It is also reminiscent of the last time inequality was so high: then, as now, it sparked a sea change in the economics profession, including both the mainstreaming of labor exploitation as a subject of economic research and the founding of the American Economic Association. ...
- The Shock of the Normal - Paul Krugman
- The Obama Jobs Record - Dean Baker
- Jagger's Theorem - Dave Giles' Blog
- The Economics of Fake News - Matt Kahn
- Ikea Transfer Pricing - EconoSpeak
- Unemployment insurance and employment during the Great Recession - VoxEU
- Women in competitive environments: Evidence from expert chess - VoxEU
- Implications of Bank of England comparing itself to the MetOffice - Tim Johnson
- The Major Potential Impact of a Corporate Tax Overhaul - The New York Times
Saturday, January 07, 2017
- Macrohypocrisy - Paul Krugman
- Bias Against Less Wealthy Families: Mutual Fund Managers - Tim Taylor
- Labor Market Monopsonies and the Decline of the Labor Share - ProMarket
- Race May be Pseudo-Science, But Economists Ignore it at their Peril - INET
- Linking the best and worst of global trends - Roger Myerson
- Real Exchange Rate Shocks and Manufacturing Workers - Econbrowser
- Explaining the Almon Distributed Lag Model - Dave Giles
- Federalism and Progressive Resistance in America - Tyson and Mendonca
- College or the Stock Market, or College and the Stock Market? - FEDS Notes
- Eight Years of Labor Market Progress and the Employment Situation - CEA
- Macro Musings Podcast: Ylan Mui - David Beckworth
- The U.S. Needs More Colleges - Noah Smith
Friday, January 06, 2017
Don't let Trump distract you from his real agenda:
The Age of Fake Policy, by Paul Krugman, NY Times: On Thursday, at a rough estimate, 75,000 Americans were laid off or fired by their employers. Some of those workers will find good new jobs, but many will end up earning less, and some will remain unemployed for months or years.
If that sounds terrible to you..., I’m just assuming that Thursday was a normal day in the job market. ... In an average month, there are 1.5 million “involuntary” job separations (as opposed to voluntary quits), or 75,000 per working day. Hence my number. ...
Real policy ... involves large sums of money and affects broad swathes of the economy. Repealing the Affordable Care Act ... would certainly qualify.
Consider, by contrast, the story that dominated several news cycles a few weeks ago: Donald Trump’s intervention to stop Carrier from moving jobs to Mexico. Some reports say that 800 U.S. jobs were saved; others suggest that the company will simply replace workers with machines. But even accepting the most positive spin, for every worker whose job was saved in that deal, around a hundred others lost their jobs the same day. ...
This was fake policy — a show intended to impress the rubes, not to achieve real results.
The same goes for the hyping of Ford’s decision to add 700 jobs in Michigan...
The incoming administration’s incentive to engage in fake policy is obvious... Mr. Trump won overwhelming support from white working-class voters, who believed that he was on their side. Yet his real policy agenda, aside from the looming trade war, is standard-issue modern Republicanism: huge tax cuts for billionaires and savage cuts to public programs, including those essential to many Trump voters. ...
Still, none of this would work without the complicity of the news media. ...
Sorry, folks, but headlines that repeat Trump claims about jobs saved, without conveying the essential fakeness of those claims, are a betrayal of journalism. This is true even if ... the articles eventually, quite a few paragraphs in, get around to debunking the hype: many if not most readers will take the headline as validation of the claim.
And it’s even worse if headlines inspired by fake policy crowd out coverage of real policy.
It is, I suppose, possible that fake policy will eventually produce a media backlash — that news organizations will begin treating stunts like the Carrier episode with the ridicule they deserve. But nothing we’ve seen so far inspires optimism.
Solid Employment Report Keeps Fed On Track, by Tim Duy: The labor market finished out the year on a solid note. Solid, not spectacular, and largely consistent with the Fed's expectations. Consequently, the final employment report for 2016 should not impact the Fed's median forecast for 75bp of rate hikes in 2017.
Payrolls rose 156k in December and jobs gains the previous two months were revised upwards by 19k. While good numbers, job growth continues to slow:
Since January 2015, the 12-month moving average of monthly job growth slowed from 262k to 180k. Still, that remains greater than the pace necessary to hold the unemployment rate constant once the demographic impacts again dominate the cyclical factors (Federal Reserve Vice Chair Stanley Fischer estimates that number to be 65k-115k). But the economy continues to trend toward that pace.
Supported by an increase labor force participation, the unemployment rate ticked up to 4.7%, holding just below the Fed's estimate of the natural rate of unemployment:
Measures of underemployment are now again showing signs of improvement, albeit the pace of improvement has slowed along with the pace of job growth:
The pace of wage growth accelerated to 2.9%, the highest rates since 2009:
Overall, the report should win hearts and minds on Constitution Ave. The economy looks to be tracking exactly where the Fed expects it to go, with job growth slowing sufficiently such that the unemployment rate holds steady just below full employment. Such a situation would allow for continued improvement in measures of underemployment while maintaining healthy but not excessive pressure on wage growth. In contrast, recall the concerns about about undershooting the natural rate of unemployment that surfaced during the December FOMC meeting. From the minutes:
...In discussing the possible implications of a more significant undershooting of the longer-run normal rate, many participants emphasized that, as the economic outlook evolved, timely adjustments to monetary policy could be required to achieve and maintain both the Committee's maximum-employment and inflation objectives....Several members noted that if the labor market appeared to be tightening significantly more than expected, it might become necessary to adjust the Committee's communications about the expected path of the federal funds rate, consistent with the possibility that a less gradual pace of increases could become appropriate...
The economy is now at a point where a sudden boost in activity would prompt the Fed to accelerate the pace of rate increases. This employment report, however, suggests this isn't happening just yet.
One note of caution, though. Manufacturing employment rose in this latest report by 17k, the largest gain since January 2016. This comes on top of improved data from the manufacturing sector:
This serves as further evidence that the inventory correction process over the past year has run its course. Note also the improvement in the service sector in recent months:
This suggests to me that risks for growth and hence rates are currently weighted to the upside.
Bottom Line: A solid report largely consistent with expectations among monetary policymakers. Hence it should have little impact on interest rate forecasts for the coming year. But watch out for upside risks to the outlook; the economy gained some traction in the final months of 2016. It is reasonable to believe that traction will hold in 2017.
Little Change in Unemployment/Employment as Job Growth Slows: The Labor Department reported little change in the unemployment or employment rates in December, as job growth slowed slightly to 156,000 in the month. The unemployment rate edged up from 4.6 percent to 4.7 percent, but this is well within the margin of error of the survey. The overall employment-to-population ratio (EPOP) remained unchanged at 59.7 percent. The same is true for the EPOP for prime-age workers, which remained at 78.2 percent for the third consecutive month. This is more than 2 full percentage points below the pre-recession peak and almost four percentage points below the 2000 peak.
The December job growth was somewhat below the 180,000 average over the last year. Although the falloff is not an obvious cause for concern and the economy is clearly getting closer to full employment, there are aspects of the payroll survey that are disconcerting. ...
The average hourly wage is up by 2.9 percent both year-over-year and comparing the last three months with the prior three months. However, it is important to remember that compensation is being shifted from benefits to wages, so total compensation growth is slower.
It is also worth noting that average weekly hours are lagging, with the aggregate weekly hours index for December the same as the October level and just 1.0 percent above the year-ago level. This is not a pattern that would be expected in a tight labor market.
The other news in the household survey was generally positive. Involuntary part-time employment continues to edge down, while more people are choosing to work part-time. The number of people working part-time, for economic reasons, fell slightly to about 5,600,000 in December. It is now down by almost 2.2 million from December of 2013, before the key provisions of the Affordable Care Act (ACA) took effect. By contrast, the number of people choosing to work part-time has continued to rise, presumably because they no longer need to get insurance from their employer. It now stands just over 21,250,000, or more than 2.4 million above its pre-ACA level. The number of self-employed is up by 890,000 or just over 6.0 percent.
Less encouraging is a drop in the share of unemployment due to voluntary quits from 12.5 percent to 12.0 percent, although the share of long-term unemployment fell to 24.2 percent, a new low for the recovery.
By education levels, we continue to see the less educated improving relative to college grads. The EPOP for college grads actually fell 0.3 percentage points from 2015 to 2016. It is up by 0.4 percentage points for workers with just a high school degree.
On the whole, the December report indicates the labor market is continuing to strengthen as even the slower pace of job growth is certainly faster than the 80,000 to 90,000 per month we might expect from demographics. However, the decline in average hours over the last year strongly argues against the claim that the labor market is overly tight and that we need be concerned over building inflationary pressures.
- Wherein Hayek Agrees with DeLong - Uneasy Money
- Evolutionary dynamics, game theory and personal relations - MIT News
- Economists in an alienated society - Stumbling and Mumbling
- How Susceptible are Jobs to Computerization? - Frey and Osborne
- Discounting for Public Policy: on the merits of updating the discount rate - CEA
- Does Redistribution Increase Output? - Federal Reserve Bank of Richmond
- Labor regulations and firm growth - Microeconomic Insights
- 5 Economics Terms We All Should Use - Noah Smith
Thursday, January 05, 2017
Market Failure and Income Distribution: Notes for Economics in Two Lessons: For quite a while now, I’ve been working through my book-in-progress...
Thinking about the standard market failures (monopoly, externality and so on), I’ve come to the conclusion that I need to say more about the interaction between market failure and income distribution. I’ve already looked at the opportunity costs involved in income redistribution and predistribution, but different kinds of questions are coming up in relation to issues like monopoly, privatisation and for-profit provision of public services.
The discussion here and at my blog has been very helpful in stimulating my thoughts, but I need to do a lot more clarification. Some preliminary thoughts are over the fold: comments and criticism much appreciated...
- What If US Importers and Exporters are Largely the Same? - Tim Taylor
- Medicaid expansion boosts Michigan's economy, pays for itself - EurekAlert
- The economic impact of Brexit-induced reductions in migration - VoxEU
- Two Trade Policy Terms to Remember: VER and ERP - Econbrowser
- The Maker Movement can help with manufacturing renaissance - Brookings
- Corporations Need a New Reason to Be - Justin Fox
- Immigration & class struggle - Stumbling and Mumbling
- Managing Political Risk - ProMarket
- Reactionary Keynesianism revisited - mainly macro
- Passing of Anthony B. Atkinson - Thomas Piketty
- Stand Up for ObamaCare, CEOs - WSJ
Wednesday, January 04, 2017
The risk shift, revisited: Back in the late 2000s, two authors — the economics journalist Peter Gosselin and the political scientist Jacob Hacker — wrote books documenting what they both called “the risk shift.” The idea was that policy and social norms had changed in ways that shifted economic risk — invoked by retirement, illness, job stability and loss of income — from government and firms to individuals and families. The result was greater inequality and worse: greater insecurity among the many people on the wrong side of the risk shift. ...
Which begs the question: how could a significant (albeit minority) share of the electorate that’s increasingly exposed to and suffering from the long risk shift possibly elect leaders that threaten to exacerbate and hasten the shift? ...
Paul Schmelzing of Harvard University:
Venetians, Volcker and Value-at-Risk: 8 Centuries of Bond Market Reversals: The economist Eugen von Böhm-Bawerk once opined that “the cultural level of a nation is mirrored by its interest rate: the higher a people’s intelligence and moral strength, the lower the rate of interest”. But as rates reached their lowest level ever in 2016, investors rather worried about the “biggest bond market bubble in history” coming to a violent end. The sharp sell-off in global bonds following the US election seems to confirm their fears. Looking back over eight centuries of data, I find that the 2016 bull market was indeed one of the largest ever recorded. History suggests this reversal will be driven by inflation fundamentals, and leave investors worse off than the 1994 “bond massacre”.
Bond “bull markets” since 1285 ...
Luke Herrine at RegBlog:
The Department of Education’s Power to Cancel Student Debt: Something has to give on student loans. The $1.4 trillion in outstanding student loan debt has weakened the macroeconomy and has become a form of regressive taxation. In the process, an increasing number of individuals have had to defer starting a family, accept jobs that they do not want, and endure the significant psychological and physical burdens of heavy indebtedness.
Although there has been plenty of discussion surrounding these issues, with a specific focus on student loan interest rates and income-based repayment plans, little has been said about the U.S. Department of Education’s broad powers to outright cancel existing student loans. This series of four essays will discuss the most important of those powers, and why the Department’s authority has not been frequently discussed—much less invoked by the agency.
These issues will be examined through the lens of for-profit college students’ demands that the Department cancel their debts under a law mandating discharges in the case of school fraud. The essays in this series will reveal that despite the breadth of the Department’s debt-cancellation powers to discharge these debts, the Department has failed to employ its powers to their fullest extent—to the detriment of the many students who had been defrauded by their former institutions.
This is a problem, as the essays will explore, that largely stems from the fact that the Department views maximizing collection as its primary responsibility with respect to student debt. Accordingly, the Department has relied on questionable arguments about the limits of the Department’s powers, while pointing the finger at a dysfunctional Congress instead of acknowledging its responsibility to students—enabling the Obama Administration to maintain its image of cracking down on these for-profit schools and protecting defrauded students, while still fulfilling its budgetary prerogative.
After analyzing this saga, this series will conclude by addressing the Department’s broadest power: its discretionary compromise and settlement authority, which, if fully invoked—as it should be—could be used to discharge all outstanding student loans under the right political circumstances. The tremendous potential of this authority can only be implemented, however, if we reconsider the obligations of education officials to student debtors and vice versa. ...
Trump University comes to mind.
- The Hutchins Center Explains: Public investment - Brookings
- Chickens are intelligent, caring, and complex - EurekAlert!
- Rethinking Labor Mobility - Harold James
- Trump and the Chevy Cruze - EconoSpeak
- Dirty Money - Scientific American
- Following the Overseas Money - macroblog
- Three Takes on China to Start a New Year - Brad Setser
- China’s Growing Influence on Asian Financial Markets - Econbrowser
- Childhood poverty can rob adults of psychological health - EurekAlert!
- Unusual outcomes and uncertain times - VoxEU
- Sexual orientation and earnings - VoxEU
Tuesday, January 03, 2017
Trying to Remain Positive: With inauguration day in the United States just two weeks away, it is difficult to harbor optimism about what the Trump presidency will mean for this country and for the world in realms ranging from economic progress to national security to personal liberty... In the wake of the election, expectations are no better, including in the environmental realm... And since then, the President-elect’s announced nominations for key positions in the administration have probably eliminated whatever optimism some progressives may have been harboring.
Remarkably, the least worrisome development in regard to anticipated climate change policy may be the nomination of Rex Tillerson to become U.S. Secretary of State. Two months ago it would have been inconceivable to me that I would write this about the CEO of Exxon-Mobil taking over the State Department (and hence the international dimensions of U.S. climate change policy). But, think about the other likely candidates. And unlike many of the other top nominees, Mr. Tillerson is at least an adult, and – in the past (before the election) – he had led his company to reverse course and recognize the scientific reality of human-induced climate change (unlike the President-elect), support the use of a carbon tax when and if the U.S. puts in place a meaningful national climate policy, and characterize the Paris Climate Agreement as “an important step forward by world governments in addressing the serious risks of climate change.”
It’s fair to say that it is little more than damning with faint praise to characterize this pending appointment as “the least worrisome development in regard to climate change policy,” but the reality remains. ... Of course, whether Mr. Tillerson will maintain and persevere with his previously stated views on climate change is open to question. And if he does, can he succeed in influencing Oval Office policy when competing with Scott Pruitt, Trump’s pick to run EPA, not to mention Rick Perry, Trump’s bizarre choice to become Secretary of Energy?
In the face of all this (and much else), is it possible to offer any statement of optimism or at least hope? The answer may be found in the reality that U.S. policy – in many issue areas – consists of much more than the policies of the Federal government. In a variety of policy realms, the states play an exceptionally important role. One might not normally think about this in the context of addressing a global commons problem, such as climate change, but these are not normal times.
And so I will try to rescue myself from my current mental state – at least temporarily – by focusing today on policy developments in the State of California. To do this, I offer an op-ed I recently wrote with Professor Lawrence Goulder of Stanford University, which was published in the Sacramento Bee a week before the November election. Good policy developments at the state level are, of course, even more important now than they were then. ...
- Making of a black intellectual - Understanding Society
- Engels Rebuts Malthus - Tim Taylor
- When the Health Care Market Cannot Regulate Itself - RegBlog
- The Abandonment of Progress - Jean Pisani-Ferry
- “America First” and Global Conflict Next - Nouriel Roubini
- Global reflation continues into 2017 - Gavyn Davies
- Central Bank Independence: Growing Threats - Cecchetti & Schoenholtz
Monday, January 02, 2017
"This debacle didn’t come out of nowhere":
America Becomes a Stan, by Paul Krugman, NY Times: In 2015 the city of Ashgabat, the capital of Turkmenistan, was graced with a new public monument: a giant gold-plated sculpture portraying the country’s president on horseback. This may strike you as a bit excessive. But cults of personality are actually the norm in the “stans,” the Central Asian countries that emerged after the fall of the Soviet Union, all of which are ruled by strongmen who surround themselves with tiny cliques of wealthy crony capitalists.
Americans used to find the antics of these regimes, with their tinpot dictators, funny. But who’s laughing now?
We are, after all, about to hand over power to a man who has spent his whole adult life trying to build a cult of personality around himself; remember, his “charitable” foundation spent a lot of money buying a six-foot portrait of its founder. ... So we can expect lots of self-aggrandizement once he’s in office. I don’t think it will go as far as gold-plated statues, but really, who knows?
Meanwhile, with only a couple of weeks until Inauguration Day, Donald Trump has done nothing substantive to reduce the unprecedented — or, as he famously wrote on Twitter, “unpresidented” — conflicts of interest created by his business empire. Pretty clearly, he never will — in fact, he’s already in effect using political office to enrich himself...
This means that Mr. Trump will be in violation of the spirit, and arguably the letter, of the Constitution’s emoluments clause... But who’s going to hold him accountable? Some prominent Republicans are already suggesting that, rather than enforcing the ethics laws, Congress should simply change them to accommodate the great man.
And the corruption won’t be limited to the very top: The new administration seems set to bring blatant self-dealing into the center of our political system..., assembling a team of cronies, choosing billionaires with obvious, deep conflicts of interest for many key positions in his administration.
In short, America is rapidly turning into a stan. ...
But this debacle didn’t come out of nowhere...: an increasingly radical G.O.P., willing to do anything to gain and hold power, has been undermining our political culture for decades. ...
The only question now is whether the rot has gone so deep that nothing can stop America’s transformation into Trumpistan. One thing is for sure: It’s destructive as well as foolish to ignore the uncomfortable risk, and simply assume that it will all be O.K. It won’t.
- Can the blockchain kill fake news? - MacroMania
- Who is responsible when an article gets misread? - Noahpinion
- Pushing the Boundaries of Economics - Carola Binder
- Headquarter separation and multi-plant operation - VoxEU
- Why central bankers favour monetary policy inertia - VoxEU
- Some thoughts on UBI, jobs, and dignity - Noahpinion
- Get Used To It - Economic Principals
Saturday, December 31, 2016
2007 Krugman on Milton Friedman: As you read this direct Paul Krugman quote, do you hear this song in the background.
"What’s odd about Friedman’s absolutism on the virtues of markets and the vices of government is that in his work as an economist’s economist he was actually a model of restraint. As I pointed out earlier, he made great contributions to economic theory by emphasizing the role of individual rationality—but unlike some of his colleagues, he knew where to stop. Why didn’t he exhibit the same restraint in his role as a public intellectual?
The answer, I suspect, is that he got caught up in an essentially political role. Milton Friedman the great economist could and did acknowledge ambiguity. But Milton Friedman the great champion of free markets was expected to preach the true faith, not give voice to doubts. And he ended up playing the role his followers expected. As a result, over time the refreshing iconoclasm of his early career hardened into a rigid defense of what had become the new orthodoxy.
In the long run, great men are remembered for their strengths, not their weaknesses, and Milton Friedman was a very great man indeed—a man of intellectual courage who was one of the most important economic thinkers of all time, and possibly the most brilliant communicator of economic ideas to the general public that ever lived. But there’s a good case for arguing that Friedmanism, in the end, went too far, both as a doctrine and in its practical applications. When Friedman was beginning his career as a public intellectual, the times were ripe for a counterreformation against Keynesianism and all that went with it. But what the world needs now, I’d argue, is a counter-counterreformation."
- Rethinking how the housing crisis happened - MIT Sloan
- A (Keynesian) Change Is in the Air - Baseline Scenari
- Understand the Energy Department Before Closing It - Noah Smith
- Grand Hotel Abyss - Understanding Society
- Free Market for Education? Economists Generally Don’t Buy It - NYTimes
- The Econocracy: a review - Stumbling and Mumbling
- Trade Engagement? - Robin Hanson
- Will Dollar Strength Trigger Intervention in 2017? - Carmen Reinhart
- A Socialist Market Economy With Chinese Contradictions - Adair Turner
- Lessons From My Anxious Holiday Shopping - Mohamed El-Erian
Friday, December 30, 2016
A World at Risk: My last day as President of the Federal Reserve Bank of Minneapolis was on December 31, 2015. I began blogging on January 2, 2016... In my first post, I wrote that “economic policymakers can do better. Indeed, I increasingly believe that they must do better.” In my view, the global political events of 2016 show why I wrote those words.
That first post argued that macroeconomic policy remained much too tight around the developed world. It closed with the following warning and admonition:
“We are only beginning to see the impact of tight policy choices on our economies … Given these kinds of macroeconomic outcomes, it should not be surprising that we see increasing signs of social fracturing and disengagement in many developed countries.”
The process of “social fracturing and disengagement” to which I referred continued apace in 2016. In the UK, Britons voted to break away from the European Union. In the US, a political outsider used a platform of economic isolationism to defeat a string of establishment candidates from both major parties.
There will be elections in France and Germany in 2017. I expect large, and possibly decisive, repudiations of the political establishment in both votes.
Will policymakers begin to engage in the kind of fiscal/monetary easing that is needed to heal our economies and our societies? Possibly – there is talk from the incoming American administration of increases in government spending and tax cuts. But many elected officials (and professional economists) have also expressed strong opposition to these policy choices.
Those opponents should bear in mind that there are grave risks associated with overly tight macroeconomic policy and the accompanying shortfall of aggregate demand. As I wrote on January 8 of this year,
“Much of the world experienced a significant global demand shortfall throughout the 1930s … It is true that if we fast forward to 1950, the demand shortfall had been largely cured. Unfortunately, I suspect that the destruction associated with World War II was an important part of the “solution”. During the course of that War, over 50 million people were killed, and many others were injured severely. Much of the physical capital of Asia and Europe had been destroyed. The world didn’t put [its] “idle men and machines” to work - it destroyed them instead … the experience of the 1930s and 1940s is unfortunately suggestive of how the economic pressures of a global demand shortfall can give rise to highly adverse geo-political outcomes.”
Unfortunately, I see many more signs to support the possibility of “adverse geo-political outcomes” (to use my euphemism) than I did in early 2016.
So, as we enter 2017, the world needs easier fiscal and monetary policy in the form of more government debt, lower taxes (especially on investment), more infrastructure and lower interest rates. But this prescription has been the right one for at least eight years. We can only hope that we have not left the problem unattended for too long.
Improving How Job Markets Function: Active Labor Market Policies: A more fluid labor market is socially valuable, because it helps unemployment rates stay lower and offers broader opportunity. Also, employers who know that employees have decent and readily available outside options have better incentive to treat employees well. But most economists recognize that labor markets are full of "frictions," which is a catch-all term for the costs involved in making connections between willing workers and willing employers. (Indeed, the 2010 Nobel Prize in economics went to Peter A. Diamond, Dale T. Mortensen and Christopher A. Pissarides "for their analysis of markets with search frictions".) There's an old rule of thumb that one should expect a month of job search for every $10,000 you would like to earn, and even though that specific number is probably an unreliable guess, the comment makes the point that the time and information costs involved in finding a new job can be high. One of the very practical barriers for a lot of unemployed workers is a lack of information about available jobs, and a lack of experience in how to find the relevant information.
Active labor market policies are a government attempt to reduce these costs. In a December 2016 Issue Brief, the Council of Economic Advisers discusses the subject of "Active Labor Market Policies: Theory and Evidence for What Works." The CEA defines active labor market policies as "policies that promote participation in the labor force and help workers match to employment opportunities. These programs include employment services, job search assistance, job training programs, and employment subsidies. But the empirical evidence also finds that not all approaches to supporting employment and earnings are equally successful, with some programs having substantial benefits relative to their costs while others do not."
As I have pointed out here before, US spending on active labor market policies (as a share of GDP) is considerably less than most other high-income countries. Here's a figure from the CEA:
Moreover, even this low US level has been on a generally downward trend for several decades:
Of course, the hard-headed question is whether active labor market policies work--and whether some work better than others. The CEA report cites an array of evidence on this point (for readability, the quotations that follow omit citations and footnotes).
On offering job search assistance and requiring participation from those receiving government benefits: "While job search assistance leads to faster employment, there is little evidence that it affects wages. Job search programs may also yield other benefits. When job search is required of recipients of unemployment insurance (UI), research shows that reemployment assistance typically saves the government several hundred dollars per participant in UI benefits by reducing time to reemployment ..."
On offering job training for various groups: "Job training programs focusing on economically disadvantaged adults, typically those with low earnings or levels of education, consistently yield significant positive effects on employment outcomes. Recent evidence comes from evaluations of WIA [Workforce Investment Act] training programs for disadvantaged adults ... these training programs increased quarterly earnings between $500 and $800 (in the range of 10 to 25 percent increases) for workers by three years after receiving training, in addition to positive employment effects. ... Sectoral training, one specific type of training program that focuses on training workers for jobs in particular industries and which typically develops and implements training programs in partnership with employers, is an especially promising avenue for disadvantaged workers. ... In one successful example of training leading to positive results for mid-career workers ... when dislocated workers obtain training in the form of community college coursework, the equivalent of one academic year of courses translates into increases in long-term earnings of between seven and ten percent. They also find that these effects are more pronounced when coursework is concentrated on quantitative courses."
On employment subsidies for hiring workers: "While effective at encouraging employment, an important consideration for employment subsidies is that they be designed and administered in ways that mitigate two potential drawbacks: The first is that some portion of their value may be captured by firms who would have hired such workers in any event. A second is that targeted employer-based subsidies may lead to stigmatization of the targeted group among potential employers." I've written before on "What Do We Know about Subsidized Employment Programs?" (April 25, 2016), and noted that there are a couple of large-scale studies underway that should provide fuller evidence here.
Just to be clear, not all the evidence on active labor market policies is positive. The design and context of active labor market policies matters. But in my reading, the evidence is certainly strong enough to support additional large-scale experimentation with these policies, which can be designed in a way to facilitate a later evaluation of the results.
Finally, I'll add that the main focus of the CEA report is on US-based evidence about active labor policies, but an array of international evidence is also available. For a literature review, interested readers might begin with a literature review paper by David Card, Jochen Kluve and Andrea Weber What Works? A Meta Analysis of Recent Active Labor Market Program Evaluations," published by the German Institute for the Study of Labor (IZA Discussion Paper No. 9236, July 2015).