- Inequality made the Great Recession worse (especially for the poor) - VoxEU
- Health Care Services Depress Recent PCE Inflation Readings - Dallas Fed
- The Economics of the Grim Reaper - Roger Farmer
- Human Capital in the 21st Century - Alan Krueger
- The 2018Q4 FF Rate is Unlikelt To Be 4.75% or Higher - Brad DeLong
- Is The Dirty Little Secret of FX Intervention That It Works? - Brad Setser
- The limits to “whatever it takes”: Lessons from the gold standard - VoxEU
- Researchers discover machines can learn by simply observing - EurekAlert
- SEC and Revolving Doors - ProMarket
- Simple Monetary Policy Rules - Cleveland Fed
- Legal Access to Alcohol and Criminality - NBER
- Are we there yet? Are we there yet? – The Irish Economy
- What Aetna’s Withdrawal Means for Obamacare - James Surowiecki
- On Credible Cointegration Analyses - No Hesitations
- Adam Smith on Teaching and Incentives - Tim Taylor
- Development Concepts: Nonseparability - Marc Bellemare
- How Does Available Credit Affect Finding Jobs? - St. Louis Fed
- Heterodox economics, mainstream macro and the financial crisis - mainly macro
- The brain performs feats of math to make sense of the world - EurekAlert!
- Opportunities in Finance - Cecchetti & Schoenholtz
- Sims highlights fiscal dominance at Jackson Hole - Gavyn Davies
Tuesday, August 30, 2016
Monday, August 29, 2016
Disappointed by what came out of Jackson Hole: I had high hopes for the Federal Reserve’s annual Jackson Hole conference. The conference was billed as a forum that would look at new approaches to the conduct of monetary policy—something that I have been urging as necessary given secular stagnation risks and the sharp decline in the apparent neutral rate of interest. And Chair Yellen’s speech in a relatively academic setting provided an opportunity to signal that the Fed recognized that new realities required new approaches. ...
On balance though, I am disappointed by what came out of Jackson Hole... First, the near term policy signals were on the tightening side which I think will end up hurting both the Fed’s credibility and the economy. Second, the longer term discussion revealed what I regard as dangerous complacency about the efficacy of the existing tool box. Third, there was failure to seriously consider major changes in the current monetary policy framework. ...
The right signal to have sent in my view was very dovish. ...
Even if the September employment report is strong, I do not see a case for a September rate increase. There is no imminent danger of repeating the 1970s experience where inflation expectations ratcheted up leading to stagflation. If a greater than 1/3 chance of a rate increase in September was not in markets, the cost of credit for small business would be lower and mortgage rates would decline. Employers would be more confident about hiring. And pressures would be removed from emerging markets. The world economy would be more robust.
Complexity and Economic Policy, OECD Insights: ...Economic theory has... developed increasingly sophisticated models to justify the contention that individuals left to their own devices will self organise into a socially desirable state. However, in so doing, it has led us to a view of the economic system that is at odds with what has been happening in many other disciplines.
Although in fields such as statistical physics, ecology and social psychology it is now widely accepted that systems of interacting individuals will not have the sort of behaviour that corresponds to that of one average or typical particle or individual, this has not had much effect on economics. Whilst those disciplines moved on to study the emergence of non-linear dynamics as a result of the complex interaction between individuals, economists relentlessly insisted on basing their analysis on that of rational optimising individuals behaving as if they were acting in isolation. ...
Yet this paradigm is neither validated by empirical evidence nor does it have sound theoretical foundations. It has become an assumption. ...
As soon as one considers the economy as a complex adaptive system in which the aggregate behaviour emerges from the interaction between its components, no simple relation between the individual participant and the aggregate can be established. Because of all the interactions and the complicated feedbacks between the actions of the individuals and the behaviour of the system there will inevitably be “unforeseen consequences” of the actions taken by individuals, firms and governments. Not only the individuals themselves but the network that links them changes over time. The evolution of such systems is intrinsically difficult to predict, and for policymakers this means that assertions such as “this measure will cause that outcome” have to be replaced with “a number of outcomes are possible and our best estimates of the probabilities of those outcomes at the current point are…”. ...
...in trying to stabilise such systems it is an error to focus on one variable either to control the system or to inform us about its evolution. Single variables such as the interest rate do not permit sufficient flexibility for policy actions and single performance measures such as the unemployment rate or GDP convey too little information about the state of the economy.
Why are some states unwilling to help the poor?:
States of Cruelty, by Paul Krugman, NY Times: ...While many people are focused on national politics, with reason — one sociopath in the White House can ruin your whole day — many crucial decisions are taken at the state and local levels. If the people we elect to these offices are irresponsible, cruel, or both, they can do a lot of damage.
This is especially true when it comes to health care. Even before the Affordable Care Act went into effect, there was wide variation in state policies, especially toward the poor and near-poor. Medicaid has always been a joint federal-state program... States with consistently conservative governments generally offered benefits to as few people as the law allowed, sometimes only to adults with children in truly dire poverty. States with more liberal governments extended benefits much more widely. These policy differences were one main reason for a huge divergence in the percentage of the population without insurance, with Texas consistently coming in first in that dismal ranking.
And the gaps have only grown wider since Obamacare went into effect... This should be a no-brainer: If Washington is willing to provide health insurance to many of your state’s residents — and in so doing pump dollars into your state’s economy — why wouldn’t you say yes? But 19 states, Texas among them, are still refusing free money, denying health care to millions. ...
But why are states like Texas so dead-set against helping the unfortunate, even if the feds are willing to pick up the tab? ...
A large part of the answer, surely, is the usual one: It’s about race. Medicaid expansion disproportionately benefits nonwhite Americans; so does spending on public health more generally. And opposition to these programs is concentrated in states where voters in local elections don’t like the idea of helping neighbors who don’t look like them.
In the specific case of Planned Parenthood, this usual answer is overlaid with other, equally nasty issues, including — or so I’d say — a substantial infusion of misogyny.
But it doesn’t have to be this way. Most Americans are, I believe, far more generous than the politicians leading many of our states. The problem is that too many of us don’t vote in state and local elections, or realize how much cruelty is being carried out in our name. The point is that America would become a better place if more of us started paying attention to politics beyond the presidential race.
- The Fed on Facebook - Carola Binder
- On Fed Complacency - Paul Krugman
- Living in L.B.J.’s America - The New York Times
- Will America Get a Raise? - Federal Reserve Bank of Richmond
- Why It Makes Sense for an M.D. to Lead the World Bank - Paul Romer
- Central Bankers Hear Plea: Turn Focus to Government Spending - NYTimes
- Why the Fed should raise interest rates at its next meeting - Roger Farmer
- Do fully public central banks perform better? - CFE
- Snapshots of US Family Wealth - Tim Taylor
- Economic growth with stagnating median incomes - VoxEU
Sunday, August 28, 2016
Kevin O’Rourke at VoxEU:
Brexit: This backlash has been a long time coming: Editors' note: This column first appeared as a chapter in the VoxEU ebook, Brexit Beckons: Thinking ahead by leading economists, available to download free of charge here.
It has recently become commonplace to argue that globalisation can leave people behind, and that this can have severe political consequences. Since 23 June, this has even become conventional wisdom. While I welcome this belated acceptance of the blindingly obvious, I can't but help feeling a little frustrated, since this has been self-evident for many years now. What we are seeing, in part, is what happens to conventional wisdom when, all of a sudden, it finds that it can no longer dismiss as irrelevant something that had been staring it in the face for a long time.
The main point of my 1999 book with Jeff Williamson was that globalisation produces both winners and losers, and that this can lead to an anti-globalisation backlash (O'Rourke and Williamson 1999). We argued this based on late-19th century evidence. Then, the main losers from trade were European landowners, who found themselves competing with an elastic supply of cheap New World land. The result was that in Germany and France, Italy and Sweden, the move towards ever-freer trade that had been ongoing for several years was halted, and replaced by a shift towards protection that benefited not only agricultural interests, but industrial ones as well. Meanwhile, across the Atlantic, immigration restrictions were gradually tightened, as workers found themselves competing with European migrants coming from ever-poorer source countries.
While Jeff and I were firmly focused on economic history, we were writing with half an eye on the ‘trade and wages’ debate that was raging during the 1990s. There was an obvious potential parallel between 19th-century European landowners, newly exposed to competition with elastic supplies of New World land, and late 20th-century OECD unskilled workers, newly exposed to competition with elastic supplies of Asian, and especially Chinese, labour. In our concluding chapter, we wrote that:
"A focus of this book has been the political implications of globalization, and the lessons are sobering. Politicians, journalists, and market analysts have a tendency to extrapolate the immediate past into the indefinite future, and such thinking suggests that the world is irreversibly headed toward ever greater levels of economic integration. The historical record suggests the contrary… unless politicians worry about who gains and who loses, they may be forced by the electorate to stop efforts to strengthen global economy links, and perhaps even to dismantle them…The globalization experience of the Atlantic economy prior to the Great War speaks directly and eloquently to globalization debates today. Economists who base their views of globalization, convergence, inequality, and policy solely on the years since 1970 are making a great mistake. We hope that this book will help them to avoid that mistake— or remedy it."
This time it is not different
You may argue that the economic history of a century ago is irrelevant – after all, this time is different. But ever since the beginning of the present century, at the very latest, it has been obvious that the politics of globalisation today bears a family resemblance to that of 100 years ago.
- It was as long ago as 2001 that Kenneth Scheve and Matthew Slaughter published an article finding that Heckscher-Ohlin logic did a pretty good job of explaining American attitudes towards trade – lower-skilled workers were more protectionist (Scheve and Slaughter 2001: 267).
Later work extended this finding to the rest of the world.
- If the high skilled were more favourably inclined towards free trade in all countries, this would not be consistent with Heckscher-Ohlin theory, but that is not what the opinion survey evidence suggested – the Scheve-Slaughter finding held in rich countries, but not in poor ones (O'Rourke and Sinnott 2001: 157, Mayda and Rodrik 2005: 1393).
You may further argue that such political science evidence is irrelevant, or at least that conventional wisdom could be forgiven for ignoring it. But by the first decade of the 21st century, again at the very latest, it was clear that these forces could have tangible political effects.
- In 2005, a French referendum rejected the so-called 'Constitutional Treaty' by a convincing margin.
While the treaty itself was a technical document largely having to do with decision-making procedures inside the EU, the referendum campaign ended up becoming, to a very large extent, a debate about globalisation in its local, European manifestation.
Opponents of the treaty pointed to the outsourcing of jobs to cheap labour competitors in Eastern Europe, and to the famous Polish plumber. Predictably enough, professionals voted overwhelmingly in favour of the treaty, while blue-collar workers, clerical workers and farmers rejected it. The net result was a clear rejection of the treaty.
Lessons not learned
Shamefully, the response was to repackage the treaty, give it a new name, and push it through regardless – a shabby manoeuver that has done much to fuel Euroscepticism in France. There was of course no referendum on the Lisbon Treaty in that country, but there was in Ireland in 2008. Once again, a clear class divide opened up, with rich areas overwhelmingly supporting Lisbon, and poor areas overwhelmingly rejecting it. Survey evidence commissioned afterwards by the Irish government suggested that what canvassers on the doorsteps had found was indeed the case – hostility towards immigration in the poorer parts of Dublin was an important factor explaining the "No" vote there (O'Rourke 2008, Sinnott et al. 2010).
For a long time, conventional wisdom ignored these rather large straws in the wind – after all, the Irish could always be asked to vote again, while the French could always be told that they couldn't vote again. And so the show could go on. But now Brexit is happening, and the obvious cannot be ignored any longer.
Recent work suggests that exposure to Chinese import competition was a common factor in many British regions that voted to leave the EU (Colantone and Stanig 2016). If this finding survives the scholarly scrutiny that it deserves, it will hardly come as a surprise. But it is nevertheless crucial, since these are precisely the kinds of regions that are voting for the National Front in France. And unlike Britain, France is absolutely central to the European project.
What can be done? Great openness requires greater governments
This is where Dani Rodrik's finding that more open states had bigger governments in the late 20th century comes in (Rodrik 1998). Dani – who was long ago asking whether globalisation had gone too far (Rodrik 1997) – argues that markets expose workers to risk, and that government expenditure of various sorts can help protect them from those risks.
In a series of articles (e.g. Huberman and Meissner 2009) and a book (Huberman 2012), Michael Huberman showed that this correlation between states and markets was present before 1914 as well. Countries with more liberal trade policies tended to have more advanced social protections of various sorts, and this helped maintain political support for openness.
Anti-immigration sentiment was clearly crucial in delivering an anti-EU vote in England. And if you talk to ordinary people, it seems clear that competition for scarce public housing and other public services was one important factor behind this. But if the problem was a lack of services per capita, then there were two possible solutions:
- Reduce the number of 'capitas' by restricting immigration; or
- Increase the supply of services.
It is astonishing in retrospect how few people argued strongly for more services rather than fewer people.
Concluding remarks and possible solutions
If the Tories had really wanted to maintain support for the EU, investment in public services and public housing would have been the way to do it. If these had been elastically supplied, that would have muted the impression that there was a zero-sum competition between natives and immigrants. It wouldnít have satisfied the xenophobes, but not all anti-immigrant voters are xenophobes. But of course the Tories were never going to do that, at least not with George Osborne at the helm.
If the English want continued Single Market access, they will have to swallow continued labour mobility. There are complementary domestic policies that could help in making that politically feasible. We will have to wait and see what the English decide. But there are also lessons for the 27 remaining EU states (28 if, as I hope, Scotland remains a member). Too much market and too little state invites a backlash. Take the politics into account, and it becomes clear (as Dani Rodrik has often argued) that markets and states are complements, not substitutes.
Colantone, I. and P. Stanig (2016), "Brexit: Data Shows that Globalization Malaise, and not Immigration, Determined the Vote", Bocconi Knowledge, 12 July.
Huberman, M. (2012), Odd Couple: International Trade and Labor Standards in History, New Haven, CT: Yale University Press.
Huberman, M. and C. M. Meissner (2009), "New evidence on the rise of trade and social protection", VoxEU.org, 23 October.
Mayda, A. M. and D. Rodrik (2005), "Why are some people (and countries) more protectionist than others?", European Economic Review 49(6).
Rodrik, D. (1997), Has Globalization Gone Too Far?, Washington, DC: Peterson Institute for International Economics.
Rodrik, D. (1998), "Why do More Open Economies Have Bigger Governments?" Journal of Political Economy 106(5): 997-1032
O'Rourke, K. (2008), "The Irish "no" and the rich-poor/urban-rural divide", VoxEU.org, 14 June.
O'Rourke, K. and R. Sinnott (2001), "The Determinants of Individual Trade Policy Preferences: International Survey Evidence", Brookings Trade Forum.
O'Rourke, K. and J. Williamson (1999), Globalization and History: The Evolution of a Nineteenth-Century Atlantic Economy, Cambridge, MA: MIT Press.
F. Scheve, K. F. and M. J. Slaughter (2001), "What determines individual trade-policy preferences?", Journal of International Economics 54(2).
Sinnott, R., J. A. Elkink, K. H. O'Rourke and J. McBride (2010), "Attitudes and Behaviour in the Referendum on the Treary of Lisbon", report prepared for the Department of Foreign Affairs.
Saturday, August 27, 2016
- Germany's Drag - Paul Krugman
- The Fed's Monetary Policy Toolkit: Past, Present, and Future - Janet Yellen
- Yellen Says Case for a Fed Interest Rate Increase Has Grown Stronger - NYTimes
- Jackson Hole and Fed Communication - MacroMania
- We are All Neo-Fisherites - Stephen Williamson
- Corrections to the Global Temperature Record - Stochastic Trend
- Fed Policy: Negative Rates, Neo-Fisherian, or No Change - Tim Taylor
- The end of big trade deals - James Wimberley
- Brexit and other harbingers of a return to the dangers of the 1930s - VoxEU
- US Economy Grew at Tepid 1.1 Percent Pace in Spring - The New York Times
- “Can we love?” More on commodification - globalinequality
- ‘Commoditised’ services? - The Enlightened Economist
- Why we must have a second referendum - mainly macro
Friday, August 26, 2016
Today’s Inequality Could Easily Become Tomorrow’s Catastrophe: Economic inequality is already a concern, but it could become a nightmare in the decades ahead, and I fear that we are not well equipped to deal with it. ...
One way to judge the likely outcome is to look at what has happened in the past. ...Kenneth Scheve ... and David Stasavage ... looked at 20 countries over two centuries to see how societies have responded to the less fortunate. Their primary finding may seem disheartening: Taxes on the rich generally have not gone up when inequality and economic hardship has increased. ...
Professor Scheve and Professor Stasavage found that democratic countries have not consistently embraced more redistributive tax policies, and most people do not vote strictly in their narrow self-interest. ...
This is consistent with my own survey results, which focused on inheritance taxes. ... Taxing around a third of wealth, more or less, seemed fair to people. And perhaps it is reasonable, in the abstract, yet what will we do in the future if this degree of taxation won’t produce enough revenue to meaningfully help the very poor as well as the sagging middle class? ...
Angus Deaton..., commenting on what he called the “grotesque expansions in inequality of the past 30 years,” gave a pessimistic prediction: “Those who are doing well will organize to protect what they have, including in ways that benefit them at the expense of the majority. ” And Robert M. Solow ... said, “We are not good at large-scale redistribution of income.” ...
No one seems to have an effective plan to deal with the possibility of much more severe inequality, should it develop. ...
Despite past failures, we should not lose hope in our ability to improve the world. ...
What is Trump's pivot to crime all about?:
No, Donald Trump, America Isn’t a Hellhole, by Paul Krugman, NY Times: ...When the Trump campaign started, it was, at least nominally, about economics. Foreigners are stealing your jobs, the candidate declared, both through unfair trade and by coming here as immigrants. And he would make America great again with punitive tariffs and mass deportations.
But the story changed at the Republican convention. There was remarkably little economic discussion on display... Instead, the focus was all on law and order, on saving the nation from what the candidate described as a terrifying crime wave.
That theme has continued in recent weeks, with Mr. Trump’s “outreach” to minority voters. His notion of a pitch to these voters is to tell them how horrible their lives are, that they are facing “crime at levels that nobody has seen.” Even “war zones,” he says, are “safer than living in some of our inner cities.”
All of this is really strange — because nothing like this is actually happening. ...
Let’s talk specifically about violent crime. Consider, in particular, the murder rate... Homicides did shoot up between the early 1960s and the 1980s... Conservative writers assured us that soaring crime was the inevitable result of a collapse in traditional values...
But then a funny thing happened: The murder rate began falling, and falling, and falling. By 2014 it was ... back down to where it was half a century earlier. There was some rise in 2015, but so far ... it’s barely a blip in the long-run picture.
Basically, American cities are as safe as they’ve ever been...
So what is all of this about? The same thing everything in the Trump campaign is about: race.
I used scare quotes when talking about Mr. Trump’s racial “outreach” because it’s clear that the real purpose ... is to reassure squeamish whites that he isn’t as racist as he seems. But..: Even when he is trying to sound racially inclusive, his imagery is permeated by an “alt-right” sensibility that fundamentally sees nonwhites as subhuman. ... In the mental world he and those he listens to inhabit, blacks and other nonwhites are by definition shiftless burdens on society.
Which brings us back to the notion of America as a nightmarish dystopia. Taken literally, that’s nonsense. But today’s increasingly multiracial, multicultural society is a nightmare for people who want a white, Christian nation in which lesser breeds know their place. And those are the people Mr. Trump has brought out into the open.
- Trump’s Foreign Admirers - Ricardo Hausmann
- Newspapers in times of low advertising revenues - VoxEU
- Germany is Running a Fiscal Surplus in 2016 After All - Brad Setser
- The Fed Knows How to Hit Its Target - Bloomberg View
- Data Geeks Are Taking Over Economics - Bloomberg View
- The Allure of Catastrophe Bonds - Tim Taylor
- Evaluating research without knowing the results - The Washington Post
- A rant about markets - The Enlightened Economist
- St. Louis Fed's New Approach to Near-Term Projections - FRB St. Louis
- How the Federal Reserve can gird for the next crash - CBS News
Thursday, August 25, 2016
Why Do We Talk About “Helicopter Money”?: Why do we talk about “helicopter money”? We talk about helicopter money because we seek a tool for managing aggregate demand–for nudging the level of spending in an economy up to but not above the economy’s current sustainable productive potential–that is all of:
- Effective and successful–even in the very low interest rate world we appear to be in.
- Does not excite fears of an outsized central bank balance sheet–with its vague but truly-feared risks.
- Does not excite fears of an outsized government interest-bearing debt–with its very real and costly amortization burdens should interest rates rise.
- Keeps what ought to be a technocratic problem of public administration out of the mishegas that is modern partisan politics.
Right now the modal projection by participants in the Federal Reserve’s Open Market Committee meetings is that the U.S. Treasury Bill rate will top out at 3% this business cycle. It would be a brave meeting participant who would be confident that we would get there–if we would get there–with high probability before 2020. That does not provide enough room for the Federal Reserve to loosen policy by even the average amount of loosening seen in post-World War II recessions. Odds are standard open market operation-based interest rate tools will not be able to do the macroeconomic policy stabilization job when the next adverse shock hits the economy.
The last decade has taught us that quantitative easing on a scale large enough to rapidly return economies to full employment is one bridge if not more too far for central banks as they are currently constituted–if, that is, it is possible at all. The last decade has taught us that bond-funded expansionary fiscal policy on a scale large enough to rapidly return economies to full employment is at least several bridges too far for our political systems, at least as they are currently constituted.
If we do not now start planning for how to implement helicopter money when the next adverse shock comes, what will our plan be? As a candidate for a tool capable of doing all four of these things, helicopter money–giving the central bank the additional policy tool of printing up extra money and either mailing it out to households as checks or getting it into the hands of the public by buying extra useful stuff–is our last hope, and, if it is not our best hope, then I do not know what our best hope might be. ...
[The post also includes a list of links to other discussion of this topic.]
From Real Time Economics at the WSJ:
Economists Who’ve Advised Presidents Are No Fans of Donald Trump: Republican presidential nominee Donald Trump, who has broken with many of the GOP’s traditional positions on economic policy, garners no support from any of the White House economists who have advised U.S. presidents for the past half-century.
The Wall Street Journal this month reached out to all 45 surviving former members of the White House Council of Economic Advisers under the past eight presidents, going back to Richard Nixon, to get their views on this year’s presidential election.
Among 17 Republican appointees who responded to Journal inquiries, none said they supported Mr. Trump. ...
- Fed, Eager to Show It’s Listening, Welcomes Protesters - NYTimes
- Nitpicking on nominal GDP targeting - John Quiggin
- Whom Do the Federal Reserve Bank Boards Serve? - FRB Richmond
- What the Fed Chief's Next Message Should Be - Bloomberg View
- China’s Ever More Mysterious Tourism Numbers - Brad Setser
- Smoothing economic shocks in the Eurozone - VoxEU
- Alpha Banks, Beta Banks, and negative rates - Nick Rowe
- How Much Slack is Left in US Labor Markets? - Tim Taylor
- The Infrastructure Investment Debate - EconoSpeak
- Truthful lies - Stumbling and Mumbling
- Why Corbyn’s Brexit campaign matters - mainly macro
- Balancing bias and variance in behavioral studies - Bank Underground
Wednesday, August 24, 2016
Travel day. Not sure when I can post.
- The Fed and Lehman Brothers - Laurence Ball
- The Impact of Inequality on Social Capital - The Unassuming Economist
- The dirty little secret of central banking - The Washington Post
- Trump’s Fiscal Brainstorm: Cut Taxes for the Rich - Econbrowser
- Combatting External and Internal Regulatory Capture - ProMarket
- How domestic trade frictions shape welfare gains - VoxEU
- The Folly of Prudence, IMF Edition - Paul Krugman
- Recession Probabilities - FRB Cleveland
- The Illusion of Lagging Productivity - Bloomberg View
- Human footprint outpaced by population and economic growth - EurekAlert
- Precision versus bias in multiple choice exams - VoxEU
- Bonuses: here to stay - Stumbling and Mumbling
- On Blanchard - Robert Waldmann
- Minority rule: Migration, Brexit and Mandates - mainly macro
- Don't Lowball the Upside of Fixing Roads and Bridges - Bloomberg View
- Global and Local Housing Markets - The Unassuming Economist
Tuesday, August 23, 2016
David Halpern at Bank Underground:
It’s time to bring more realistic models of human behaviour into economic policy and regulation: The Centre for Central Banking Studies recently hosted their annual Chief Economists Workshop, whose theme was “What can policymakers learn from other disciplines”. In this guest post, one of the keynote speakers at the event, David Halpern, CEO of the Behavioural Insights Team, argues that insights from behavior science can improve the design and effectiveness of economic policy interventions.
Behavior science has had major impacts on policy in recent years. Introducing a more realistic model of human behavior – to replace the ‘rational’ utility-maximizer – has enabled policymakers to boost savings; increase tax payments; encourage healthier choices; reduce energy consumption; boost educational attendance; reduce crime; and increase charitable giving. But there remain important areas where its potential has yet to be realized, including macroeconomic policy and large areas of regulatory practice. Businesses, consumers, and even regulators are subject to similar systematic biases to other humans. These include overconfidence; being overly influenced by what others are doing; and being influenced by irrelevant information. The good news is that behavioral science offers the prospect of helping regulators address some of their most pressing issues. This includes: anticipating and addressing ‘animal spirits’ that drive bubbles or sentiment-driven slowdowns; reducing corrupt market practices; and encouraging financial products that are comprehensible to humans. ...[continue]...
IMF Cannot Quit Fiscal Consolidation (in Asian Surplus Countries): In theory, the IMF now wants current account surplus countries to rely more heavily on fiscal stimulus and less on monetary stimulus.
This shift makes sense in a world marked by low interest rates, the risk that surplus countries will export liquidity traps to deficit economies, and concerns about contagious secular stagnation. Fiscal expansion tends to lower the surplus of surplus countries and regions, while monetary expansion tends to increase surpluses.
And large external surpluses should be a concern in a world where imbalances in goods trade are once again quite large—though the goods surpluses now being chalked up in many Asian countries are partially offset by hard-to-track deficits in “intangibles” (to use an old term), notably China’s ongoing deficit in investment income and its ever-rising and ever-harder-to-track deficit in tourism.
In practice, though, the Fund seems to be having trouble actually advocating fiscal expansion in any major economy with a current account surplus.
Best I can tell, the Fund is encouraging fiscal consolidation in China, Japan, and the eurozone. These economies have a combined GDP of close to $30 trillion. The Fund, by contrast, is, perhaps, willing to encourage a tiny bit of fiscal expansion in Sweden (though that isn’t obvious from the 2015 staff report) and in Korea—countries with a combined GDP of $2 trillion.*
I previously have noted that the Fund is advocating a 2017 fiscal consolidation for the eurozone, as the consolidation the Fund advocates in France, Italy, and Spain would overwhelm the modest fiscal expansion the Fund proposed in the Netherlands (Germany would remain on the fiscal sidelines per the IMF’s recommendation).
The same seems to be true in East Asia’s main surplus economies. ...
Bottom line: if the Fund wants fiscal expansion in surplus countries to drive external rebalancing and reduce current account surpluses, it actually has to be willing to encourage major countries with large external surpluses to do fiscal expansion. Finding limited fiscal space in Sweden and perhaps Korea won’t do the trick. 20 or 30 basis points of fiscal expansion in small economies won’t move the global needle. Not if China, Japan, and the eurozone all lack fiscal space and all need to consolidate over time.
I have a new column:
Why We Need a Fiscal Policy Commission: During the Great Recession, monetary policymakers were aggressive and creative in their attempts to revive the economy. I wish they had been even more aggressive, and at times they were a bit slow to react due to excessive fear of inflation and the tendency to see recovery just around the corner, but their overall response to the crisis was commendable. Unfortunately, monetary policy alone was far from enough to give the economy the help it needed. Fiscal policy was needed too.
But fiscal policymakers let us down. ...
- What Do The Simple Folk Do? - Paul Krugman
- Lessons on inequality, labour markets, and conflict from the Gilded Age - VoxEU
- Negative Nominal Interest Rates (again) - Cecchetti & Schoenholtz
- Automation and Job Loss: Leontief in 1982 - Tim Taylor
- $3.2 Trillion (A Bit More) Isn’t Enough for China’s Reserves? - Brad Setser
- The Washington Post Wants To Cut Social Security Benefits (Again) - EconoSpeak
- The 5, 3, 2 problem at the Federal Reserve - The Washington Post
- Capitalism, neoliberalism & excellence - Chris Dillow
- Macro Musings Podcast: Doug Irwin - David Beckworth
- Danger!! Crazy Neo-Fisherians on the Loose!! - Stephen Williamson
- New Labour and neoliberalism - mainly macro
- Regulators as Validators - ProMarket
- How Do People Revise Their Inflation Expectations? - Liberty Street Economics
- It is not unfair to think of (nearly all) Brexiteers as racists - Crooked Timber
- Ramen noodles supplanting cigarettes as currency among prisoners - EurekAlert
Monday, August 22, 2016
"This election is likely to be decisive for the climate":
The Water Next Time, by Paul Krugman, NY Times: ...The governor of flood-ravaged Louisiana asked President Obama to postpone a personal visit while relief efforts were still underway. ... He made the same request to Donald Trump, declaring, reasonably, that while aid would be welcome, a visit for the sake of a photo op would not.
Sure enough, the G.O.P. candidate flew in, shook some hands, signed some autographs, and was filmed taking boxes of Play-Doh out of a truck. If he wrote a check, neither his campaign nor anyone else has mentioned it. Heckuva job, Donnie! ...
Let’s back up for a minute and talk about the real meaning of the Louisiana floods. In case you haven’t been keeping track, lately we’ve been setting global temperature records every month. ...
And one consequence of a warmer planet is more evaporation, more moisture in the air, and hence more disastrous floods. ... So a proliferation of disasters like the one in Louisiana is exactly what climate scientists have been warning us about.
What can be done? The bad news is that drastic action to reduce emissions of greenhouse gases is long overdue. The good news is that the technological and economic basis for such action has never looked better. In particular, renewable energy — wind and solar — has become much cheaper in recent years, and progress in energy storage looks increasingly likely to resolve the problem of intermittency (The sun doesn’t always shine, the wind doesn’t always blow.) ...
It probably won’t surprise you to hear that..., as with so many issues, Mr. Trump has gone deep down the rabbit hole, asserting not just that global warming is a hoax, but that it’s a hoax concocted by the Chinese to make America less competitive.
The thing is, he’s not alone in going down that rabbit hole..., Mr. Trump is squarely in the Republican mainstream. ...
In any case, this election is likely to be decisive for the climate, one way or another. President Obama has made some serious moves to address global warming, and there’s every reason to believe that Hillary Clinton would continue this push — using executive action if she faced a hostile Congress. Given the technological breakthroughs of the last few years, this push might just be enough to avert disaster. Donald Trump, on the other hand, would do everything in his power to trash the planet, with the enthusiastic support of his party. So which will it be? Stay tuned.
- Helicopter Money: missing the point - mainly macro
- The Gridlock Economy - Paul Krugman
- Remarks on the U.S. Economy - Stanley Fischer
- Human development, inequality and long working hours - VoxEU
- Ramen noodles supplanting cigarettes as currency for prisoners - EurekAlert
- Top Down, Bottom Up - Economic Principals
- Too systemic to fail - Econbrowser
- Equity is cheap for large financial institutions - VoxEU
- Brexit, economists and journalists - mainly macro
Saturday, August 20, 2016
- Slow Learners - Paul Krugman
- Eurozone stability still under threat of a ‘bad shock’ - VoxEU
- The Difficult Math of American Health Care - James Kwak
- Where Median Incomes Have Fallen the Most - Justin Fox
- Convert Carbon Dioxide from the Air to Methanol? - Tim Taylor
- Changes in Meat Consumption - Jayson Lusk
- The Political Economy of Trade - PIIE
- On arms races - Stumbling and Mumbling
- Managers are miscalibrated - VoxEU
- Nash equilibrium - The Economist
Friday, August 19, 2016
Hard truths for the IMF: It is to the IMF’s credit that they have an Independent Evaluation Office, and their recent report on the Eurozone crisis is highly critical of the IMF’s actions. The IMF’s own staff told them in 2010 that Greek debt could well not be sustainable, but the IMF gave in to European pressure not to restructure Greek debt. Instead the Troika went down the disastrous route of excessive austerity, and the IMF underestimated (unwittingly or because they had to) the impact that austerity would have. In the last few years we keep hearing about an ultimatum the IMF has given European leaders to agree to restructure this debt, and on each occasion the IMF appears to fold under pressure.
These repeated errors suggest a structural problem. Back in 2015, Poul Thomsen, who runs the IMF’s European department, said “we need to ensure that we treat our member states equally, that we apply our rules uniformly.” But that is exactly what the IMF has failed to do with the Eurozone and Greece.
As Barry Eichengreen writes..., it is not as if the IMF have had problems demanding commitments from regional bodies such as African or Caribbean monetary unions and central banks in the past. The problem is much more straightforward. He notes that European governments are large shareholders in the Fund, and that “the IMF is a predominantly European institution, with a European managing director, a heavily European staff, and a European culture.”
In other words we have something akin to regulatory capture. The IMF’s job is to be an impartial arbitrator between creditor and debtor, ensuring that the creditor takes appropriate losses for imprudent lending but also that the debtor adjusts its policies so they become sustainable. In the case of the Eurozone it has in effect sided with the creditors, and ruinous austerity has been the result of that.
The Fed’s Effect on Black Americans: The U.S. Federal Reserve appears to be paying more attention to how its policies affect black Americans. This is a wise move...
Imagine we’re in the midst of a severe recession. In deciding how aggressively to respond by lowering interest rates or buying assets, Fed officials must weigh the risk of unduly high inflation against the benefit of reducing unemployment. That benefit will be much greater for blacks..., any policy that reduces the overall unemployment rate by one percentage point ... reduces their unemployment rate by nearly two percentage points.
The differential impact also matters now, as the Fed contemplates removing stimulus. ...
The Fed rightly aims to pursue policies that are best for the economy as a whole. But I don’t believe that it will be seen as truly representative of all Americans unless it understands the differential impact of its policy choices on key demographic subgroups. It’s good to see from the minutes that the central bank is engaged in doing so.
The problems with Obamacare would be easy to fix, the real problem is Congress:
Obamacare Hits a Bump, by Paul Krugman, NY Times: More than two and half years have gone by since the Affordable Care Act, a.k.a. Obamacare, went fully into effect. Most of the news about health reform since then has been good, defying the dire predictions of right-wing doomsayers. But this week has brought some genuine bad news: The giant insurer Aetna announced that it would be pulling out of many of the “exchanges,” the special insurance markets the law established. ...
So what’s the problem?
Well, Obamacare is a system that relies on private insurance companies to provide much of its expanded coverage... And many of these private insurers are now finding themselves losing money, because previously uninsured Americans ... turn out to have been sicker and more in need of costly care than we realized. ...
The bad news mainly hits states that have small populations and/or have governments hostile to reform, where the exit of insurers may leave markets without adequate competition. That’s not the whole country, but it would be a significant setback.
But it would be quite easy to fix the system. It seems clear that subsidies for purchasing insurance, and in some cases for insurers themselves, should be somewhat bigger — an affordable proposition given that the program so far has come in under budget... There should also be a reinforced effort to ensure that healthy Americans buy insurance, as the law requires, rather than them waiting until they get sick. Such measures would go a long way toward getting things back on track.
Beyond all that, what about the public option?
The idea of allowing the government to offer a health plan directly to families was blocked in 2010 because private insurers didn’t want to face the competition. But if those insurers aren’t actually interested in providing insurance, why not let the government step in (as Hillary Clinton is in fact proposing)?
The trouble, of course, is Congress...
That said, there may still be room for action at the executive level. And I’m hearing suggestions that states may be able to offer their own public options; if these proved successful, they might gradually become the norm.
However this plays out, it’s important to realize that as far as anyone can tell, there’s nothing wrong with Obamacare that couldn’t be fairly easily fixed with a bit of bipartisan cooperation. The only thing that makes this hard is the blocking power of politicians who want reform to fail.
- A primer on helicopter money - VoxEU
- More Support for a Higher Inflation Target - Carola Binder
- A Thought Provoking Essay from Fed President Williams - Larry Summers
- Why slightly higher inflation might benefit the U.S. economy - Equitable Growth
- The Staying Power of Staggered Wage & Price Setting in Macro - John Taylor
- Growing importance of financial spillovers from emerging markets - VoxEU
- Preventing the next financial blowout - The Washington Post
- Why Critics Of Free Trade Are Talking China, Not NAFTA - FiveThirtyEight
- Divorce and children’s long-term outcomes - VoxEU
- Gender segregation at work - Equitable Growth
- What Would Clintonomics Bring? - WSJ
- The Political Economy of Trade - PIIE
- On job polarization - Stumbling and Mumbling
- Being an Ideologue Means Never Having to Say You're Wrong - Bloomberg View
- The U.S. Recovery Is Not What It Seems - Bloomberg View
- Competition implications of capital surcharges - Bank Underground
- Notables – Gender Matters
- The two insurgencies - globalinequality
Thursday, August 18, 2016
- The Unwinding of QE Has Begun - David Beckworth
- Recession Watch, August 2016 Updated - Econbrowser
- The Riddle of the Wall Street Brain Drain - Bloomberg View
- Brexit – Britain is paying the price for a badly designed choice - Richard Thaler
- China’s July Reserve Sales: Bigger, But Still Not That Big - Brad Setser
- Credible research designs for minimum wage studies - Equitable Growth
- On the Evils of Hodrick-Prescott Detrending - No Hesitations
- Why We're Still Arguing Whether QE Worked - Bloomberg View
- Uber vs coops - Stumbling and Mumbling
- Why are groceries more expensive in the bulk food section? - Frances Woolley
- A Closer Look at the Fed's Securities Lending Program - Liberty Street
- How America Grew -- and Grew Unequal - Eric Rauchway
- Financial Incentives and Disability Rates - Microeconomic Insights
- Dumping on (anti-)Dumping - Kids Prefer Cheese
- Racism + Sexism Explains 2/3 of Support for Trump - Economists for Hillary
- Brexit and Trump supporters - mainly macro
- Helicopter Money and the Reflux Problem - Uneasy Money
Wednesday, August 17, 2016
- A split euro is the solution for the single currency - Joseph Stiglitz
- Still Struggling to Make Sense of the 2016 U.S. Trade Data - Follow the Money
- “Massive New Study” Says Nothing About Economic Anxiety - Baseline Scenario
- Schools that obsess about standardized tests ruin them as measures - Vox
- An ancient Mayan Copernicus - EurekAlert
- Industrial policy need not be a dirty word - FT.com
- Oil's two-pronged price revolution changes everything - VoxEU
- “Balance Sheet Effects on Monetary and Financial Spillovers - Econbrowser
- What are Motivated Beliefs? - Tim Taylor
- A welfare state: good for savers - Stumbling and Mumbling
- Always Something Happening in August - PIIE
- Nominal Demand Ain't What It Used to Be - David Beckworth
- Fixing America's Roads Is a Great Opportunity - Noah Smith
- Forming strong bonds: dynamics in corporate bond markets - Bank Underground
- People’s Archive of Rural India (PARI) - Gender Matters
- Obama, Schelling, And No First Use Of Nuclear Weapons - EconoSpeak
Tuesday, August 16, 2016
A relatively long article by Raphaële Chappe at INET:
General Equilibrium Theory: Sound and Fury, Signifying Nothing?: Does general equilibrium theory sufficiently enhance our understanding of the economic process to make the entire exercise worthwhile, if we consider that other forms of thinking may have been ‘crowded out’ as a result of its being the ‘dominant discourse’? What, in the end, have we really learned from it? ...
Obama rescued the economy. Could he have done more?: ...Barack Obama took office Jan. 20, 2009, during the worst financial and economic crisis since World War II. By then, the Federal Reserve System had already acted to prevent the collapse of the banking system, and so the new president moved forward promptly to spur the depressed economy. The fiscal package he signed Feb. 17, 2009, allocated $787 billion — more than 5 percent of a year’s total U.S. income — ...aimed at stimulating economic activity. The money could have been better directed, so as to achieve greater impact, and in retrospect the amount was too small. But in the face of opposition from Republicans in Congress, Obama’s fiscal stimulus was about as much as any president could have done.
After pushing through the stimulus, however, the Obama administration entered a period of quietude on the economic front. Despite large Democratic majorities in both houses of Congress, there was no other significant economic legislation during the new president’s first 100 days. Nor in the 100 days following that, nor in the 100 days after that. ...
Instead, once the economic stimulus became law, the Obama domestic agenda shifted to health care. ... Raising the insured total to more than 90 percent of all Americans will likely stand as a historic achievement, but the cost was a diversion of the administration’s energy and attention from other economic problems badly in need of remedy.
The most pressing among them was, and remains, financial reform. Rather than advance its own set of proposals ... when the Democrats held a filibuster-proof supermajority in the Senate ... the administration largely left the matter to Congress. ...
Overall, if Dodd-Frank were merely one in a series of financial reform packages..., it would have been a laudable first step. But as the nation’s principal response to the worst financial crisis in two generations, it paled. Further, the specifics of many of the intended reforms were left to agency-level rulemaking exercises ... that, predictably, enabled industry lobbyists to blunt their force, if not thwart them altogether. ...
There's quite a bit more in the article.
Monday, August 15, 2016
Here is what I like and have found most useful about Dynamic Stochastic General Equilibrium (DSGE) models, also known as New Keynesian (NK), models. The original NK models were low dimensional – the simplest version reduces to a 3-equation model, while DSGE models are now typically much more elaborate. What I find attractive about these models can be stated in terms of the basic NK/DSGE model.
First, because it is a carefully developed, micro- founded model incorporating price frictions, the NK model makes it possible to incorporate in a disciplined way the various additional sectors, distortions, adjustment costs, and parametric detail found in many NK/DSGE models. Theoretically this is much more attractive than starting with a reduced form IS-LM model and adding features in an ad hoc way. (At the same time I still find ad hoc models useful, especially for teaching and informal policy analysis, and the IS-LM model is part of the macroeconomics cannon).
Second, and this is particularly important for my own research, the NK model makes explicit and gives a central role to expectations about future economic variables. The standard linearized three-equation NK model in output, inflation and interest rates has current output and inflation depending in a specified way on expected future output and inflation. The dependence of output on expected future output and future inflation comes through the household dynamic optimization condition, and the dependence of inflation on expected future inflation arises from the firm’s optimal pricing equation. The NK model thus places expectations of future economic variables front and center, and does so in a disciplined way.
Third, while the NK model is typically solved under rational expectations (RE), it can also be viewed as providing the temporary equilibrium framework for studying the system under relaxations of the RE hypothesis. I particularly favor replacing RE with boundedly rational adaptive learning and decision-making (AL). Incorporating AL is especially fruitful in cases where there are multiple RE solutions, and AL brings out many Keynesian features of the NK model that extend IS-LM. In general I have found micro-founded macro models of all types to be ideal for incorporating bounded rationality, which is most naturally formulated at the agent level.
Fourth, while the profession as a whole seemed to many of us slow to appreciate the implications of the NK model for policy during and following the financial crisis, this was not because the NK model was intrinsically defective (the neglect of financial frictions by most, though not all DSGE modelers, was also a deficiency in most textbook IS-LM models). This was really, I think, because many macro economists using NK models in 2007-8 did not fully appreciate the Keynesian mechanisms present in the model.
However, many of us were alert to the NK model fiscal policy implications during the crisis. For example, in Evans, Guse and Honkapohja (“Liquidity traps, learning and stagnation,” 2008, European Economic Review), using an NK model with multiple RE solutions because of the liquidity trap, we showed, using the AL approach to expectations, that when there is a very large negative expectations shock, fiscal as well as monetary stimulus may be needed, and indeed a temporary fiscal stimulus that is large enough and early enough may be critical for avoiding a severe recession or depression. Of course such an argument could have been made using extensions of the ad hoc IS-LM model, but my point is that this policy implication was ready to be found in the NK model, and the key results center on the primacy of expectations.
Finally, it should go without saying that NK/DSGE modeling should not be the one and only style. Most graduate-level core macro courses teach a wide range of macro models, and I see a diversity of innovations at the research frontier that will continue to keep macroeconomics vibrant and relevant.
- Why you should never use the Hodrick-Prescott filter - James Hamilton
- Do (local) housing demand curves slope up? - Nick Rowe
- The Generations of Economic Journalism - Economic Principals
- Has Labor Productivity Growth Fallen Permanently? - Roger Farmer
- What caused the Fed’s dovish turn? - Gavyn Davies
- Commodification - globalinequality
- John Kay on helicopter money - longandvariable
Saturday, August 13, 2016
- The State of Macro Is Sad (Wonkish) - Paul Krugman
- Blanchard on DSGE - mainly macro
- Hurdle Rates for Public Infrastructure and Private Investment - Brad DeLong
- Trump’s Misguided Embrace of Tax Cuts - NYTimes
- Cheap Talk And Nuclear War - EconoSpeak
- On randomization - Stumbling and Mumbling
- Everybody wants progress; nobody wants change - Paul Romer
- Why American Schools Are Even More Unequal Than We Thought - NYTimes
- Foot-Dragging on Volcker Rule Gives Banks’ Critics Ammunition - NYTimes
- Changes in the Treasury Repo Market after the Financial Crisis - Treasury
- Productivity and Models - Narayana Kocherlakota
- Of Psychopaths and Presidential Candidates - Scientific American
- The economics of SSHRC research grants IV - Stephen Gordon
- Ireland and Brexit - VoxEU
- Airing the IMF’s Dirty Laundry - Barry Eichengreen
- The Housing Bottom and Comparing Recoveries - Calculated Risk
- High-Tech Manufacturing Isn't Worth Much - Justin Fox
- The (Impossible) Repo Trinity - INET
Friday, August 12, 2016
How can Republicans support Trump?:
Pieces of Silver, by Paul Krugman, NY Times: By now, it’s obvious ... that Donald Trump is an ignorant, wildly dishonest, erratic, immature, bullying egomaniac. On the other hand, he’s a terrible person. But despite some high-profile defections, most senior figures in the Republican Party ... are still supporting him, threats of violence and all. Why?
One answer is that these were never men and women of principle. ...
Another answer is that ... the greatest risk facing many Republican politicians isn’t that of losing in the general election, it’s that of losing to an extremist primary challenger. This makes them afraid to cross Mr. Trump, whose ugliness channels the true feelings of the party’s base.
But there’s a third answer, which can be summarized in one number: 34..., the average federal tax rate for the top 1 percent in 2013.... And it’s up from just 28.2 in 2008, because President Obama allowed the high-end Bush tax cuts to expire and imposed new taxes to pay for a dramatic expansion of health coverage... Taxes on the really, really rich have gone up even more.
If Hillary Clinton wins, taxes on the elite will at minimum stay at this level, and may even go up significantly if Democrats do well enough ... to enable her to pass new legislation. ...
But if “populist” Donald Trump wins, taxes on the wealthy will go way down...
So if you’re wealthy, or you’re someone who has built a career by reliably serving the interests of the wealthy, the choice is clear — as long as you don’t care too much about stuff like shunning racism, preserving democracy and freedom of religion, or for that matter avoiding nuclear war, Mr. Trump is your guy..., it’s just an extension of the devil’s bargain the economic right has been making for decades, going all the way back to Nixon’s “Southern strategy.” ...
If this election goes the way it probably will, a few months from now those leading Republicans will be trying to pretend that they never really supported their party’s nominee, that in their hearts they always knew he was the wrong man.
But whatever doubts they may be feeling don’t excuse their actions, and in fact make them even less forgivable. For the fact is that right now, when it matters, they have decided that lower tax rates on the rich are sufficient payment for betraying American ideals and putting the republic as we know it in danger.
Thursday, August 11, 2016
- Hair Meets Heirs - Paul Krugman
- Female Prisoners in the United States - Gender Matters
- Immigration – the way forward - VoxEU
- My socialism - Stumbling and Mumbling
- Does Fiscal Stimulus Work? - FRB Cleveland
- The Great Productivity Puzzle - The New Yorker
- Demystifying Monetary Finance - Adair Turner
- What's Really Wrong With the Unemployment Rate - Justin Fox
- Reducing Economic Inequality through Democratic Worker-Ownership - TCF
- The Seattle minimum-wage is doing what it’s supposed to do - Jared Bernstein
- The Man Who Saved The World From Nuclear Holocaust - EconoSpeak
- Donald Trump: My Whole Life I've Been Greedy... - Eric Schoenberg
- The economics of SSHRC research grants - Stephen Gordon
- Is Support for Democracy Eroding? - Tim Taylor
- The Performance of Community Banks over Time - WhiteHouse.gov
Wednesday, August 10, 2016
- You can lower interest rates but can you raise inflation? - Antonio Fatas
- Points you may have missed on Trump’s ill-advised tax plan - Jared Bernstein
- Government Statistics May Be Wrong, But They're Not Manipulated - Justin Fox
- Currency Casus Belli? - Econbrowser
- The implications of Brexit for the City - VoxEU
- Brexit: a battle lost but who will fight the war? - mainly macro
- Immigrant entrepreneurship and employment growth - VoxEU
- Recent Developments in Consumer Credit Card Borrowing - Liberty Street
- Rents and the High Cost of High Finance: Q&A with Gerald Epstein - ProMarket
- Diamond Transfer Pricing and the Tax Rate in Dubai - EconoSpeak
- The economics of SSHRC research grants I - Stephen Gordon
- The FTC Will Not Leave Companies to Their Own Devices - RegBlog
- Transmitting liquidity shocks across borders - Bank Underground
Tuesday, August 09, 2016
Bosses pay: the right's problem: The High Pay Centre said yesterday that FTSE 100 CEOs’ pay rose 10% last year to an average of almost £5.5m. It’s obvious that the left should find this a problem. I want to suggest that it should also be a problem for the right too, for four reasons.
First, high CEO pay is due in at least part to a market failure. ...
Secondly, rising CEO pay, especially when accompanied by a degradation of “middle-class” jobs means we’re shifting from a bourgeois society to a “winner-take-all” one. This has potentially nasty cultural effects. ...
Thirdly, it’s possible – I put it no stronger than that – that high CEO pay is bad for overall productivity. ...
Finally, there’s a danger that rising inequality will produce a nasty backlash. ... Political instability is no friend of business or free markets. ...
My point here is a simple one. There are good reasons why Theresa May has spoken of the “irrational, unhealthy and growing gap” between bosses’ and workers’ pay. It’s because such a gap threatens the values and interests of many conservatives.
Many Marxists are relaxed about this; it just confirms our view that capitalism is a device through which the rich exploit others. Should rightists really also be relaxed? I mean, they can’t all be just hypocritical shills of the rich, can they?
(There is an explanation of each point in the full post.)
Murky Macroeconomics: ...I realized something not too flattering about myself: I’m feeling nostalgic for 2011 or so.
Why? It was, of course, a terrible time for much of the world, and especially for anyone without a job. But for ... an economist ... it was a time of wonderful intellectual clarity. Liquidity-trap macroeconomics ... had become the story of the day. And the basic message of the models — that everything changes when you hit the zero lower bound — was being overwhelmingly confirmed by experience.
The thing is, it was all beautifully hard-edged: a crisp boundary at zero, a sharp change in the impact of monetary and fiscal policy when you hit that boundary. And the predictions we made came out consistently right.
But now things have gotten a bit, well, murky. The zero lower bound is not, it turns out, quite as hard a boundary as we thought. ...I’d be surprised if any central bank is willing to go much if at all below minus one percent — but it turns out to be a sort of a fuzzy no-man’s-land rather than a line that cannot be crossed.
More important, probably, is the fact that two of the major advanced economies — the US and, believe it or not, Japan — are arguably quite close to full employment. We don’t know how close... But you can no longer argue that supply limits are no longer relevant.
Correspondingly, you can also no longer argue with confidence that there can be no crowding out, because the Fed won’t raise rates. You can argue that it shouldn’t — and I would — but we are maybe, possibly, on our way out of the liquidity trap.
So we’re not in the simple, depressed-economy world of 2011 anymore. But here’s the thing: we’re not in what we used to call a normal macroeconomic situation either. Maybe we’re close to full employment, but maybe not, and that’s with near-zero interest rates; also, it’s all too easy to imagine adverse shocks in the near future, and not at all clear how the Fed could or would respond. We are, if you like, half-out of the liquidity trap, with one foot on dry land — but the other foot is still hanging over the edge, and it wouldn’t take much to topple us right back in.
What I would argue is that in this murky, fragile situation we should be conducting policy largely as if we were still in the trap — because we badly need to get both feet firmly on dry land with some distance between us and the quicksand. ... But it’s not the crystalline case we used to be able to make.
Still, we need to deal with this murky situation right, which means embracing the uncertainty as part of the argument. Make murkiness great again!
The Failure of the Market for Presidential Candidates: Almost all economists believe in markets, and the tools economists use to analyze markets can be applied to a surprisingly large number of social interactions. Our attempts to use economics to examine questions that are traditionally the purview of sociology, psychology, and political science have not always been welcomed by those in other fields, and there’s no doubt that our methods are often applied naively without a full understanding of what researchers in other disciplines have learned. Nevertheless, I can’t help speculating on why the “market” for political candidates failed so spectacularly this year. ...
- Can Clinton or Trump Recapture Robust American Growth? - Robert Gordon
- Donald Trump Sells Out To Trickle-Down Economics - John Cassidy
- Trump agenda looks like more of the same - Dean Baker
- Stolper-Samuelson: An inconvenient iota of truth - The Economist
- ACA linked with better health care for low-income adults - EurekAlert!
- A Primer On Tax Deductions Versus Tax Credits - Jodi Beggs
- America’s Looming Debt Decision - Kenneth Rogoff
- Trump’s Economic Advisers and Me - Uneasy Money
- Brexit: Lessons from history - VoxEU
- A world without cash - John Cochrane
- Economics Without Math Is Trendy, But It Doesn't Add Up - Noah Smith
- Are European Stress Tests Stressful Enough? - Cecchetti & Schoenholtz
- Trump Claims US Has the Highest Corporate Tax Rate - EconoSpeak
- Grammar schools: the new Brexit - Stumbling and Mumbling
- Macro Musings Podcast: Jason Taylor - David Beckworth
- Use up-zoning, but don’t give it away - Richard Green
- A divided nation - mainly macro
- Variations in Agency Responses to Climate Change - RegBlog
- The Morale Effects of Pay Inequality - NBER
Monday, August 08, 2016
The Fed’s shifting perspective on the economy and its implications for monetary policy: ...The Federal Reserve has ... been revising its views on some key aspects of the economy, and that’s been affecting its outlook both for the economy and for monetary policy...
In short, over the past few years, and especially during the past 12 months, FOMC participants have significantly revised down their estimates of potential long-run U.S. economic growth, the long-run or “natural” rate of unemployment, and the long-run (“terminal”) value of the federal funds rate...
The two changes in participants’ views that have been most important in pushing the FOMC in a dovish direction are the downward revisions in the estimates of r* (the terminal funds rate) and u* (the natural unemployment rate). As mentioned, a lower value of r* implies that current policy is not as expansionary as thought. ... Likewise, the decline in estimated u* implies that bringing inflation up to the Fed’s target may well take a longer period of policy ease than previously believed. The downward revisions in estimated u* likely have also encouraged FOMC participants who see scope for further sustainable improvement in labor market conditions.
The downward revisions to estimates of y* have mixed implications for policy. On the one hand, lower potential output growth suggests that slow GDP growth may not be due primarily to inadequate monetary or fiscal policy support for aggregate demand, but rather reflects constraints on the supply side of the U.S. economy. ...
On the other hand, as mentioned earlier, the recent decline in productivity growth (and thus in potential output) has been both large and mostly unexpected. Some have hypothesized that this decline is not purely exogenous but has been influenced, to some extent, by short-term economic conditions. ... The ... possibility, that stronger economic growth today might have positive and lasting effects on the economy’s ability to grow, is for some an argument for erring on the side of more stimulative policies.
The bottom line is that, broadly speaking... The implications of these changes for policy are generally dovish, helping to explain the downward shifts in recent years in the Fed’s anticipated trajectory of rates. ...
What’s slowing growth? Sorry, conservatives: It’s not the size of governments: ... Let me telegraph the punchline: While overall growth has slowed in the United States in recent decades, it has also slowed in most other advanced economies. And governments in these economies have very different policy footprints, including taxes, social policy, and where they draw the line between the public and private sectors. This suggests there’s little in the way of correlation between the size of government and growth. So, when you hear the conservative mantras about “job-killing taxes” and “government spending that’s killing growth,” often with President Obama’s name sprinkled in there somewhere, be aware that it’s an ideological, not an empirical, claim. ...
We should be investing in infrastructure:
Time to Borrow, by Paul Krugman, NY Times: ...There are, of course, many ways our economic policy could be improved. But the most important thing we need is sharply increased public investment in everything from energy to transportation to wastewater treatment.
How should we pay for this investment? We shouldn’t — not now, or any time soon. Right now there is an overwhelming case for more government borrowing. ...
First, we have obvious, pressing needs for public investment in many areas. ... Meanwhile, the federal government can borrow at incredibly low interest rates: 10-year, inflation-protected bonds yielded just 0.09 percent on Friday. ...
Spending more now would mean a bigger economy later, which would mean more tax revenue..., probably be larger than any rise in future interest payments. And this analysis doesn’t even take into account the potential role of public investment in job creation...
So why aren’t we borrowing and investing? Here are some of the usual objections, and why they’re wrong.
We can’t borrow because we already have too much debt. ... But ... what matters is the comparison between the cost of servicing our debt and our ability to pay. And federal interest payments are only 1.3 percent of G.D.P., low by historical standards.
Borrowing costs ... might rise. Yes, maybe. But we’re talking about long-term borrowing that locks in today’s low rates. If 10 years isn’t long enough for you, how about 30-year, inflation-protected bonds? They’re only yielding 0.64 percent.
The government can’t do anything right. ... But to hold that view you have to turn your back on our own history: American greatness was in large part created by government investment or private investment shaped by public support, from the Erie Canal, to the transcontinental railroads, to the Interstate Highway System. ...
But will the next president be able to act...?
The good news is that elite discourse seems, finally, to be moving in the right direction. Five years ago the Beltway crowd was fixated on debt and deficits as the great evils. Today, not so much.
The bad news is that even if Hillary Clinton wins, she may well face the same kind of scorched-earth Republican opposition President Obama faced from day one. ... Will there be a strong enough Democratic wave to give Mrs. Clinton the ability to act?
But while the politics remain uncertain, it’s clear what we should be doing. It’s time for the federal government to borrow and invest.
- Growth and fairness aren’t a trade-off - Larry Summers
- Prudential Macro Policy - Paul Krugman
- More Employment Graphs - Calculated Risk
- What Was to Be Gained? - Economic Principals
- On causes of Brexit - Stumbling and Mumbling
- Can we trust Jeremy Corbyn over Europe? - mainly macro
- Spotlight: Rema Hanna – Gender Matters
Sunday, August 07, 2016
Friday, August 05, 2016
Employment Again Rises Sharply in July: The Labor Department reported the economy added 255,000 jobs in July. With the June number revised up to 292,000, the average for the last three months now stands at 190,000. The household survey also showed a positive picture, with employment rising by 420,000. With new people entering the labor force, the employment-to-population ratio (EPOP) edged up by 0.1 percentage point to 59.7 percent, while the unemployment rate remained unchanged at 4.9 percent.
The job gains in the establishment survey were broadly based. ...
Other news in the establishment survey was also positive. The length of the average workweek edged up by 0.1 hours leading to an increase in the index of aggregate weekly hours of 0.5 percent. There also is some evidence of more rapid wage growth. The year-over-year increase in the average hourly wage was 2.6 percent. The annual rate comparing the average for the last three months with the prior three months was 2.8 percent. If this continues, workers will be able to get back some of the share lost to profits in the downturn.
While the household survey is mostly positive, there are some aspects that continue to suggest labor market weakness. The duration measures of unemployment all increased in July, with the average duration of unemployment spells rising from 27.7 weeks to 28.1 weeks and the median from 10.3 weeks to 11.6 weeks. These durations are more consistent with a recession than a strong labor market.
Similarly, the number of people involuntarily working part-time rose slightly to 5.94 million. This followed a sharp drop in June, but it is nonetheless quite high for a labor market with an unemployment rate of 4.9 percent. Also, the percentage of unemployment due to voluntary job leavers remained at 10.7 percent. This compares with peaks of more than 12.0 percent before the recession and over 15.0 percent back in 2000.
One interesting note is that the least educated workers appear to be the biggest beneficiaries of recent job growth. The EPOP ratio for workers without high school degrees rose by 2.1 percentage points for the month and is 1.6 percentage points above its year ago level. The unemployment rate for this group is 1.9 percentage points below the year ago level. By contrast, the EPOP ratio for college grads is down by 0.5 percentage points from its year ago level while the unemployment rate is unchanged. The unemployment rate for workers with just a high school degree fell by 0.5 percentage points over the last year.
One positive item in this report is a sharp drop in black teen unemployment from 31.2 percent to 25.7 percent. These data are highly erratic, but the June level was a sharp reported rise from a low of 23.3 percent in February.
This is mostly a very positive report. In addition to the strong growth in jobs in the establishment survey, the household survey also showed a large jump in employment. The increase in hours, coupled with some evidence of more rapid wage growth, add to the positive picture. The labor market still has some way to go to fully recover, but it is making progress.
There's no reason for Democrats to change their agenda to attract Republicans fleeing from Trump:
No Right Turn, by Paul Krugman, NY Times: ...we’re finally seeing some prominent Republicans not just refusing to endorse Mr. Trump, but actually declaring their support for Mrs. Clinton. So how should she respond?
The obvious answer, you might think, is that she should keep doing what she is doing... But at least some commentators are calling on her to do something very different — to make a right turn, moving the Democratic agenda toward the preferences of those fleeing the sinking Republican ship. ...
I don’t think there’s much prospect that Mrs. Clinton will actually do that. But if by any chance she and those around her are tempted to take this recommendation seriously: Don’t.
First of all, let’s be clear about what she’s running on. It’s an unabashedly progressive program, but hardly extreme. ... And no, the program doesn’t need to be more “pro-growth.”
There’s absolutely no evidence that tax cuts for the rich and radical deregulation, which is what right-wingers mean when they talk about pro-growth policies, actually work, or that strengthening the social safety net does any harm. ...
It’s true that there are things we could do to boost the U.S. economy. The most important ... would be to ... expand public investment — which is something progressives support but conservatives oppose. So enough already with the notion that being on the center-left somehow means being anti-growth.
Now let’s talk about the politics.
The Trumpification of the G.O.P. didn’t come out of nowhere. On the contrary, it was the natural outcome of a cynical strategy: long ago, conservatives decided to harness racial resentment to sell right-wing economic policies to working-class whites, especially in the South. ...
So now the strategy that rightists had used to sell policies that were neither popular nor successful has blown up in their faces. And the Democratic response should be to adopt some of those policies? Say what? ...
Trumpism is basically a creation of the modern conservative movement, which used coded appeals to prejudice to make political gains, then found itself unable to rein in a candidate who skipped the coding.
If some conservatives find this too much and bolt the party, good for them, and they should be welcomed into the coalition of the sane. But they can’t expect policy concessions in return. When Dr. Frankenstein finally realizes that he has created a monster, he doesn’t get a reward. Mrs. Clinton and her party should stay the course.
- The Right Wants Glass-Steagall for the Wrong Reasons - Mike Konczal
- Donald Trump is the biggest threat to the recovery - Washington Post
- Labor Mobility in the United States - The Unassuming Economist
- The U.S. Can and Should Boost Growth - Narayana Kocherlakota
- The Greek crisis: An autopsy - VoxEU
- Renting in NOLA - Richard Green
- Sluggish Business Investment in the Euro Area - iMFdirect
- The Economic Consequences of Denying Teachers Tenure - American Prospect
- Inductive reasoning and the philosophy of science - Understanding Society
- Student loans and college quality - VoxEU
- The Global Tourism Industry - Tim Taylor
- A Look in the Mirror - The Grumpy Economist
- Okun’s Law: Fit at 55? - The Unassuming Economist
Thursday, August 04, 2016
If only someone had warned us: The title is pinched from a tweet by Tony Yates, who was one of many economists who did warn of the impact of Brexit. Of course we economists need to ask ourselves if and why our message was ignored, but that is no reason to stop us feeling angry that it happened. This post from the economist who did more than most to try and get the message across, John Van Reenen, expresses that anger better than I could.
What John’s work showed, backed up by similar analysis in the Treasury and elsewhere, is that Brexit would not just cause a short term economic downturn: cutting wages and increasing unemployment for just a year or two. By making it harder to trade with our immediate neighbours it will reduce UK trade overall, and the evidence suggests that this will permanently reduce people’s living standards. ...
The tricky thing to do now is know how much the current downturn is just a foretaste of that, and how much is something over and above that. To the extent that it is the latter, how much of that is offset by some short term benefit to exporters (before the impact of actual Brexit kicks in) as a result of the depreciation? That is initially the Bank of England’s problem.
Their response today, a cut of 0.25% plus more QE, tells us it is not just their problem. We are back at the lower bound for nominal interest rates, which is why the Bank is doing more QE. Because the impact of the QE is extremely uncertain, and in the absence of helicopter money, we now need fiscal action to back up this interest rate cut. ... When interest rates are at the lower bound, forget about the deficit and focus fiscal policy on avoiding a recession. As the Bank’s QE action makes clear, there is no good reason to delay this: it should happen now.
But Brexit was not the first time economists have been ignored. For some years now the clear consensus among academic economists is that, when rates are at their lower bound, you need fiscal stimulus. Although Conservatives have disowned 2015 Osborne austerity, they appear not to have backtracked on his 2010 version. If they do nothing now, we will know that they are wedded to pre-Keynesian 1930s economics.
- The Unbundled City - Paul Krugman
- Did Manufacturing Output Grow Faster than We Thought? - Dietrich Vollrath
- Update on Litmus Test Moments - Calculated Risk
- Economics: Singular currency - Jonathan Portes
- Is there a deficit of deficit hysteria? - Jared Bernstein
- Spotlight: Leah Boustan – Gender Matters
- Brexit Flu? – The Irish Economy
- In defence of Labour's fiscal rule - Stumbling and Mumbling
- Economic disadvantage and education inequality - Equitable Growth
- Summer 2016 Journal of Economic Perspectives - Tim Taylor
- Reluctance of Firms to Interview the Long-Term Unemployed - Liberty Street
- Who are Trump's economic advisers? - Economists for Hillary
- Professorial salaries and research performance - VoxEU
- Demand and Supply: Learning from the United States and Japan - Jason Furman
- Regulatory Capture is Not “Inevitable” - William Black