- Remembrance of Forecasts Past - Paul Krugman
- Why Isn't the Whole World Developed? - Dietrich Vollrath
- What We've Learned About Unconventional Policy - Narayana Kocherlakota
- The CRISPR patent battle: A case of big money shaping science - LA Times
- 1930s Germany can teach us about banking regulation - Bank Underground
- Job characteristics and offshoring: Evidence from Germany - VoxEU
- The Long Depression and the Panic of 1873 - Liberty Street
- Introducing the Refined Labor Market Spider Chart - macroblog
- Conflicting Economic Indicators Challenge Fed - NYTimes
- Manufacturing Sector Resilience…So Far - Econbrowser
- Ed Morrissey Should Really Stop Writing About Economics - Bonddad
- American productivity growth during the Great Depression - VoxEU
- The Life of US Workers 100 Years Ago - Tim Taylor
- Institutions and social networks - VoxEU
Saturday, February 06, 2016
Friday, February 05, 2016
Solid Jobs Report Keeps Fed In Play, by Tim Duy: Just when you think it's safe to jump in the water, reality strikes. While I still think that the Fed passes in March, the solid jobs report is just what is takes to keep the Fed in the game. Back it up with another such report in March and a stronger inflation signal in one of the upcoming price reports and you set the stage for a divisive battle at the next FOMC meeting.
Nonfarm payrolls grew by 151k, below consensus but within a reasonable range of estimates. The twelve-month moving average reveals a very modest slowing of job growth over the year:
The jobs numbers in the context of data Federal Reserve Chair Janet Yellen pervasively identified as what to watch:
Notably, wage growth has accelerated over the past year, suggesting that the Fed's estimate of NAIRU is within range of reality:
Prior to the 2001 recession, wage growth typically accelerated at unemployment approached 6%. Now it looks like 5% is the magic number:
I suspect the the employment cost index will soon follow the wage numbers higher:
There are no signals of recession in this data. For those who will complain that it is lagging data, I suggest watching the temporary employment component:
Temporary hiring should flatten out as the cycle matures, and you can arguably see the beginning of that process. If you squint, that is. Even so, the process evolved over a two year period before the last recession struck. Even if the seeds of recession were sown this January, we wouldn't expect recession until 2017 at the earliest. Still not by base case; using history as a guide I have a recession penciled in for 2018. (Short story: economy is in later stages of a business cycle, Fed resumes tightening later this year and pushes it too far by middle of 2017. In a perfect world the Fed could moderate the pace of activity to hold unemployment near NAIRU for an extended period of time. That, however, has proven to be a challenge for the Fed in the past.)
Bottom Line: This jobs report complicates the Fed's decision making process. They are stuck with instability in the financial markets as the economy reaches full employment. They are concerned that in the absence of temporary factors, inflation will quickly jump higher if the economy continues on this trajectory. While they would like unemployment to settle somewhat below NAIRU to eliminate lingering underemployment, they don't want it to settle far below NAIRU. They don't believe they can easily tap the breaks to lift unemployment higher. Recession is almost guaranteed to follow. Hence they would like to be able to rates rates gradually to feel their way around the darkness in which the true value of NAIRU lies. They fear that if they delay additional tightening, they will pass the point of no return in which they are forced to abandon their doctrine of gradualism. The Fed's policy challenge just became a little bit harder today.
The left's attack on Obamacare could be harmful:
Who Hates Obamacare?, by Paul Krugman, Commentary, NY Times: ...the Affordable Care Act is already doing enormous good. ... Why, then, do we hear not just conservatives but also many progressives trashing President Obama’s biggest policy achievement?
Part of the answer is that Bernie Sanders has chosen to make re-litigating reform, and trying for single-payer, a centerpiece of his presidential campaign. So some Sanders supporters have taken to attacking Obamacare as a failed system. ... And some of these critiques have merit. Others don’t.
Let’s start with the good critiques...
The number of uninsured Americans has dropped sharply... But millions are still uncovered, and in some cases high deductibles make coverage less useful than it should be.
This isn’t inherent in a non-single-payer system: Other countries with Obamacare-type systems, like the Netherlands and Switzerland, do have near-universal coverage even though they rely on private insurers. But Obamacare as currently constituted doesn’t seem likely to get there, perhaps because it’s somewhat underfunded.
Meanwhile, although cost control is looking better than even reform advocates expected, America’s health care remains much more expensive than anyone else’s.
So yes, there are real issues with Obamacare. The question is how to address those issues in a politically feasible way.
But a lot of what I hear from the left is not so much a complaint about how the reform falls short as outrage that private insurers get to play any role. The idea seems to be that any role for the profit motive taints the whole effort.
That is, however, a really bad critique..., the fact that some insurers are making money from reform (and their profits are not ... all that large) isn’t a reason to oppose that reform. The point is to help the uninsured, not to punish or demonize insurance companies.
And speaking of demonization: One unpleasant, ugly side of this debate has been the tendency of some Sanders supporters, and sometimes the campaign itself, to suggest that anyone raising questions about the senator’s proposals must be a corrupt tool of vested interests. ...
And let’s be clear: This kind of thing can do real harm. The truth is that whomever the Democrats nominate, the general election is mainly going to be a referendum on whether we preserve the real if incomplete progress we’ve made on health, financial reform and the environment. The last thing progressives should be doing is trash-talking that progress and impugning the motives of people who are fundamentally on their side.
Job Growth Slows in January, Unemployment Falls to 4.9 Percent, by Dean Baker: The Labor Department reported the economy added 151,000 jobs in January, in line with some economists' expectations. There were largely offsetting revisions to the prior two months data leaving the average change over the last three months at 231,000. The household survey showed a jump in employment that both lowered the unemployment rate to 4.9 percent and also raised the employment-to-population ratio (EPOP) to 59.6 percent. This is the highest EPOP of the recovery, but it is still more than 3 percentage points below the pre-recession level. ...
There was a large 12 cent jump in the average hourly wage in January, but this followed a month in which there was no reported rise at all. Over the last three months the wage has risen at a 2.5 percent annual rate compared to the prior three months, the same as its pace over the last year. There is little basis for the belief that wage growth is accelerating. The Employment Cost Index for the fourth quarter showed no uptick at all in the pace of compensation growth, with wage growth in the private sector actually slowing slightly. ...
The overall picture in this report is mixed. The sharp slowing in job growth was to be expected, given the slow growth reported in the economy. The labor market is still not tight enough to produce healthy wage growth. With many downside risks to growth, 2016 may not be a good year for workers.
- Rubio For The Rich - Paul Krugman
- Obama proposes a $10/barrel fee on oil to fund clean transportation - Vox
- Keynes on "Ruthless Truth-Telling"--and the IMF Connection - Tim Taylor
- GDP doesn’t tell the whole story about economic growth - Jeff Sachs
- The full employment productivity multiplier - The Washington Post
- How Do Central Bank Balance Sheets Change During Crises? - Liberty Street
- Immigration, crime & jobs - Stumbling and Mumbling
- A 2016 recession would be different - Antonio Fatas
Thursday, February 04, 2016
Dovish Actions Require Dovish Talk (To Be Effective): The Federal Open Market Committee (FOMC) has bought a lot of assets and kept interest rates extraordinarily low for the past eight years. Yet, all of this stimulus has accomplished surprisingly little (for example, inflation and inflation expectations remain below target and are expected to do so for years to come). Does that experience mean that we should give up on monetary policy as a useful way to stimulate aggregate demand?
My answer is no. I argue that, over the past seven years, the FOMC's has consistently talked hawkish while acting dovish. This communications approach has weakened the effectiveness of policy choices, probably in a significant way. Future monetary policy stimulus can be considerably more effective if the FOMC is much more transparent about its willingness to support the economy - that is, about its true dovishness.
My starting point is that households and businesses don’t make their decisions about spending based on the current fed funds rate - which, is after all, a one-day interest rate. Rather, spending decisions are based on longer-term yields. Those longer-term yields depend on market participants’ beliefs about how monetary policy will evolve over the next few years. Those beliefs are a product of both FOMC actions and FOMC communications.
In December 2008, the FOMC lowered the fed funds rate target range to 0 to a quarter percent. It did not raise the target range until December 2015, when the unemployment rate had fallen back down to 5%. But - with the benefit of hindsight - a shocking amount of this eight years’ worth of unprecedented stimulus was wasted, because it was largely unanticipated by financial markets. (Full disclosure: I took part in FOMC meetings from November 2009 through October 2015, and it could certainly be argued that I was part of the problem that I describe until September 2012.)
I’ll illustrate my basic point in the most extreme way that I can. In November 2009, the Committee’s statement said that the fed funds rate might be raised after “an extended period” - a term that was generally interpreted to mean “about six months”. Accordingly, as footnote 25 of this speech notes, private forecasters in the Blue Chip survey projected that the unemployment rate would be near 10 percent at the time of the first interest rate increase.
Now, suppose that the FOMC had communicated its true reaction function in November 2009 (or even as late as December 2012): as long as inflation was anticipated to be below 2% over the medium-term, the Committee would not raise the fed funds rate until the unemployment rate had fallen to 5% or below. We can’t know the impact of such communication with certainty. But most macroeconomic models would predict that this kind of statement would have put significant upward pressure on employment and prices. In other words: the models predict that if the FOMC had been willing to communicate its true willingness to support the economy, the Committee would have been able to (safely) raise rates much sooner.
I want to be clear: my point in this post is not to express regrets or recrimination over past “mistakes”. (It would have been good in 2009 to know what we know now, but we didn’t.) And my point is not that monetary policy is some kind of panacea. In the presence of a lower bound on nominal interest rates, expansionist fiscal policy would have been helpful in the past (and could be now too).
My point is this: we shouldn’t make judgements about the efficacy of future monetary policy stimulus based on the experience from the past seven years. Unfortunately, much of the potential impact of that lengthy stimulus campaign was vitiated by the FOMC’s generally hawkish communications.
In my view, the FOMC can deliver useful impetus to aggregate demand with its remaining tools. But it needs to communicate ahead of time about its true willingness and ability to support the economy. Without that prior communication, later attempts at stimulus are likely to prove in vain - and the Fed’s credibility may suffer further damage.
Robert Barro on China:
China’s growth prospects: ...it is not possible for the per capita growth rate to exceed 5% per year for very much longer.
China can be viewed as a convergence success story, in the sense that the strong economic growth over a sustained period led to a level of real per capita GDP that can be characterised as middle income. To put the Chinese accomplishment into international perspective, I calculated all the convergence success stories in the world based on reasonable criteria. Specifically, I looked first at countries that had at least doubled real per capita GDP since 1990. Within this group, I defined a middle-income success as having achieved a level of real per capita GDP in 2014 of at least $10,000. An upper-income success requires a level of at least $20,000 (the numbers are in 2011 US dollars and factor in international adjustments for changes in purchasing power).
With these criteria, the world’s middle-income convergence success stories comprise China, Costa Rica, Indonesia, Peru, Thailand, and Uruguay (Uruguay is a surprise, apparently boosted by dramatic migration of human capital out of Argentina.) The upper-income successes consist of Chile, Hong Kong, Ireland, Malaysia, Poland, Singapore, South Korea, and Taiwan.
A view that has gained recent popularity is the ‘middle-income trap’. According to this idea, the successful transition from low- to middle-income status is typically followed by barriers that impede a further transition to upper income. The data suggest that this trap is a myth. Moving from low- to middle-income status, as achieved recently by China, is difficult. Conditional on achieving middle-income status, the further transition to upper-income status is also difficult. However, there is no evidence that this second transition is harder than the first one.
As mentioned before, China’s growth rate of real per capita GDP has been remarkably high since around 1990, well above the rates predicted from international experience. Although I forecast that China’s per capita growth rate will decline soon from 7-8% per year to 3-4%, this lower growth rate is sufficient when sustained over two to three decades to transition from low- to middle-income status (which China has already accomplished) and then from middle- to high-income status (which China will probably achieve). Thus, although the likely future growth rates will be well below recent experience, they would actually be a great accomplishment.
Perhaps the biggest challenge is that the prospective per capita growth rates in China are well below the values of 5-6% per year implied by official forecasts. Thus, the future may bring political tensions in reconciling economic dreams with economic realities. Reducing the unrealistically optimistic growth expectations held inside and outside China’s government would reduce the risk of this tension and lower the temptation to achieve targets by manipulating the national-accounts data.
Jobs Day, by Tim Duy: The jobs report for January is upon us. I would like to say this one will receive special attention but they all receive special attention. Consensus forecast is for nonfarm payrolls to gain 188k, with a range of 170k-215k, while unemployment holds constant at 5%. Calculated Risk looks at five indicators and concludes:
Unfortunately none of the indicators above is very good at predicting the initial BLS employment report. However, based on these indicators, it appears job gains will be below consensus.
One of the indicators CR considers in consumer sentiment, which as CR says is influenced by factors other than the labor market, so I will discount it in what follows. A regression of the monthly change in nonfarm payrolls on the remaining indicators - monthly change in ADP payrolls (ADP), the ISM employment index for manufacturing (NAPMEI), the ISM employment index for nonmanfucturing (NMFEI), and the monthly change in initial jobless claims (CLAIMS2) - yields:
This is a quick and dirty regression, to be sure, and I would caveat it by saying that it is more accurately described as a model of the revised nonfarm payrolls number than the initial release. Note also that the coefficient on the manufacturing employment index is not significant. As CR says:
Note: Recently the ADP has been a better predictor for BLS reported manufacturing employment than the ISM survey.
With these caveats in mind, the one-step ahead forecasts are:
The point forecast for January is 202.64k, a tad higher than consensus, but the 95% confidence interval is wide at (48k to 357k). Which is a reminder that trying to predict monthly payrolls is something of a fool's errand. I would not be surprised by any outcome within the 68% confidence interval, or 123k to 280k. A significant miss relative to consensus should not be a surprise. It would still be within the range of recent outcomes.
The Fed will be watching for signs that the economy has slowed precipitously since the final quarter of 2015. They will also be watching the unemployment rate and underemployment indicators to assess remaining slack in the economy. Further declines in the unemployment rate will make them increasingly uneasy with holding steady even as financial markets suggest they should. Watch wages for confirmation that slack has or has not diminished. And, finally, for those on recession watch, ignore the headlines whether they be weak or strong and look at temporary help payrolls and signs that long-term unemployment is back on the rise. Both tend to be leading indicators, especially the former.
In other news, New York Fed President William Dudley was reported to have cooled on rate hikes:
"One thing I think we can say with more confidence is that financial conditions are considerably tighter than they were at the time of the December meeting," said Dudley, a permanent voter on the Federal Open Market Committee, the Fed's monetary policy arm."So if those financial conditions were to remain in place by the time we get to the March meeting, we would have to take that into consideration in terms of that monetary policy decision," he said.
While the Wall Street Journal reports that Fed Governor Lael Brainard reiterated her warnings from last year:
Her concern is that stresses in emerging markets including China and slow growth in developed economies could spill over to the U.S. “This translates into weaker exports, business investment and manufacturing in the United States, slower progress on hitting the inflation target, and financial tightening through the exchange rate and rising risk spreads on financial assets,” Ms. Brainard said Monday in response to questions from The Wall Street Journal.
“Recent developments reinforce the case for watchful waiting,” she said.
Both are clearly more cautious than Kansas City Fed Esther George. And more influential as well. I enjoyed this:
“I don’t think it served Janet Yellen well,” former Dallas Fed President Richard Fisher said in an interview of Ms. Brainard’s critique. “It’s the only time I’ve known her when she didn’t appear to be a team player,” he said of Ms. Brainard, with whom he worked in the Clinton administration.
Seriously? Fisher has the gall to criticize Brainard as not a team player? Google "fisher dallas dissent" and see what you get. A sample:
Being a team player isn't always what the Fed needs. Fisher obviously thought so when he was on the FOMC. Yet he insists Brainard be the team player he wasn't. Sad.
Separately, Goldman Sachs has erased their expectations of a rate hike in March, but left three more penciled-in for the rest of the year. Clearly in the "no recession" camp. I think that March is unlikely, as is a chance to "catch-up" in April. But I can make a story on the back of calm in financial markets and two strong employment reports that March comes back on the table. Not my baseline though.
Bottom Line: Fed mostly coming around to delaying the next rate hike. Would need to see a lot of change over just a few weeks to get them back on their original track. More than seems likely. Rest of the year? If you are in the "no recession" camp like me, you anticipate the Fed will resume hiking later this year. If you are in the "recession" camp, it's all over.
- Computer science meets economics - MIT News
- Half A Loaf, Financial Reform Edition - Paul Krugman
- Whatever happened to the General Theory - mainly macro
- Will our children really not know economic growth? - Larry Summers
- Winter 2016 Journal of Economic Perspectives Available Online - Tim Taylor
- Fed Should Clean Up Excess Reserves Rather Than Raise Rates - R1chard Koo
- Common Ground Between Left and Right Not Necessarily Shared - Dean Baker
- China's developmental resettlements - Understanding Society
- How Not to Stop Bank Wrongdoing - The New York Times
- Do venture capitalists matter? - MIT News
- The NYT needs a mathematics editor - Digitopoly
Wednesday, February 03, 2016
The beginning of a relatively long discussion:
The costs of inequality: When a fair shake isn’t, by Alvin Powell, Harvard Staff Writer: It’s a seemingly nondescript chart, buried in a Harvard Business School (HBS) professor’s academic paper.
A rectangle, divided into parts, depicts U.S. wealth for each fifth of the population. But it appears to show only three divisions. The bottom two, representing the accumulated wealth of 124 million people, are so small that they almost don’t even show up.
Other charts in other journals illustrate different aspects of American inequality. They might depict income, housing quality, rates of imprisonment, or levels of political influence, but they all look very much the same.
Perhaps most damning are those that reflect opportunity — whether involving education, health, race, or gender — because the inequity represented there belies our national identity. America, we believe, is a land where everyone gets a fair start and then rises or falls according to his or her own talent and industry. But if you’re poor, if you’re uneducated, if you’re black, if you’re Hispanic, if you’re a woman, there often is no fair start. ...
Resisting Change?, by Tim Duy: Monday Federal Reserve Vice Chair Stanley Fischer offered up a speech and lengthy discussion on recent monetary policy. It was both illuminating and frustrating at once. Although his confidence is fading, I also sense that he is resisting change. Fischer begins by reviewing the December decision:
Our decision in December was based on the substantial improvement in the labor market and the Committee's confidence that inflation would return to our 2 percent goal over the medium term. Employment growth last year averaged a solid 220,000 per month, and the unemployment rate declined from 5.6 percent to 5.0 percent over the course of 2015. Inflation ran well below our target last year, held down by the transitory effects of declines in crude oil prices and also in the prices of non-oil imports. Prices for these goods have fallen further and for longer than expected. Once these oil and import prices stop falling and level out, their effects on inflation will dissipate, which is why we expect that inflation will rise to 2 percent over the medium term, supported by a further strengthening in labor market conditions.
This covers familiar territory, as does his subsequent remarks the even after raising rates, policy remains accommodative:
I would note that our monetary policy remains accommodative after the small increase in the federal funds rate adopted in December. And my colleagues and I anticipate that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate, and that the federal funds rate is likely to remain, for some time, below the levels that we expect to prevail in the longer run.
This is the first source of my frustration, because his definition of "accommodative" depends upon a specific idea of the neutral Fed Funds rates. From the subsequent discussion:
Well, I think we have to wait to see precisely where this process will take us. We expect now that the numbers given in the survey, we can now make projections, the SEP of members of the FOMC, of somewhere around 3 ¼, 3, 3 ½ percent, which is on average a bit lower than in the past. But we’ll be data-dependent and we’ll see what happens. We don’t have to fix a rate that we’ll be at. We can indicate what members of the FOMC believe, which is what the number I’ve just given you is.
If you don't know the longer-run rate, how can you know how accommodative policy is? If the longer-run rate is close to 2 percent, then policy is less accommodative than you think it is. The endgame of policy is the dual employment/price stability mandate, not a specific level of interest rates.
The Fed's forecasts, however, have been foiled by oil and the dollar:
At our meeting last week, we left our target for the federal funds rate unchanged. Economic data over the intermeeting period suggested that improvement in labor market conditions continued even as economic growth slowed late last year. But further declines in oil prices and increases in the foreign exchange value of the dollar suggested that inflation would likely remain low for somewhat longer than had been previously expected before moving back to 2 percent.
This in and of itself would suggest a slower or delayed pace of rate hikes, but more on that later. As for market volatility and external events:
In addition, increased concern about the global outlook, particularly the ongoing structural adjustments in China and the effects of the declines in the prices of oil and other commodities on commodity exporting nations, appeared early this year to have triggered volatility in global asset markets. At this point, it is difficult to judge the likely implications of this volatility. If these developments lead to a persistent tightening of financial conditions, they could signal a slowing in the global economy that could affect growth and inflation in the United States. But we have seen similar periods of volatility in recent years that have left little permanent imprint on the economy.
This is unimpressive. Are we allowed to say that about Fischer? First, the likely implications of the volatility are straightforward. The decline in longer term yields signals the Fed is likely to be lower for longer. Second, it seems that Fischer does not acknowledge the Fed's role in minimizing the impact of similar bouts of volatility. They have responded by either easing via additional quantitative easing, or easing by delaying tightening (such as pushing back expectations of the taper or skipping their hoped-for September 2015 rate hike).
I find this distressing because when you fail to recognize your role, you set the stage for a policy error. They can't use the logic that they should hike in March because past volatility had no impact on growth when that same volatility actually changed their behavior and thus the economic outcomes. I guess they can use that logic, but they shouldn't.
So is March on the table still? I don't think they will have the inflation data to support such a move. But I can tell a story where they push ahead on the labor data alone. Back to Fischer:
As you know, in making our policy decisions, my FOMC colleagues and I spend considerable time assessing the incoming economic and financial information and its implications for the economic outlook. But we also must consider some other issues, two of which I would like to mention briefly today.
First, should we be concerned about the possibility of the unemployment rate falling somewhat below its longer-run normal level, as the most recent FOMC projections suggest? In my view, a modest overshoot of this sort would be appropriate in current circumstances for two reasons. First, other measures of labor market conditions--such as the fraction of workers with part-time employment who would prefer to work full time and the number of people out of the labor force who would like to work--indicate that more slack may remain in labor market than the unemployment rate alone would suggest. Second, with inflation currently well below 2 percent, a modest overshoot actually could be helpful in moving inflation back to 2 percent more rapidly.
The economy is currently operating near the Fed's estimate of the natural rate of unemployment. Upward pressure on wages is constant with that hypothesis. The Fed would like unemployment to drop further to dissipate lingering underemployment and put upward pressure on inflation. So their is room for additional declines in the unemployment rate. But:
Nonetheless, a persistent large overshoot of our employment mandate would risk an undesirable rise in inflation that might require a relatively abrupt policy tightening, which could inadvertently push the economy into recession. Monetary policy should aim to avoid such risks and keep the expansion on a sustainable track.
Here Fischer echoes the comments of New York Federal Reserve President William Dudley. Policymakers fear that they cannot allow unemployment to drift far below the natural rate because they do not believe they could just nudge it back higher without causing a recession. They can only glide into a sustainable path from above. Hence one can envision the Fed getting caught up in the employment data between now and March. That is two reports; if those reports suggest that labor markets remain strong, then the Fed will resist holding rates steady. At a minimum, it would certainly complicate the March meeting and sap my confidence that they stand pat. Indeed, one voting member is already working hard to downplay recent events. Today's speech by Kansas City Federal Reserve President Esther George:
While taking a signal from such volatility is warranted, monetary policy cannot respond to every blip in financial markets. Instead, a focus on economic fundamentals, such as labor markets and inflation, can help guard against monetary policy over- or under- reacting to swings in financial conditions. To a great extent, the recent bout of volatility is not all that unexpected, nor necessarily worrisome, given that the Fed’s low interest rate and bond- buying policies focused on boosting asset prices as a means of stimulating the real economy. As asset prices adjust to the shift in monetary policy, it is to be expected that the pricing of risk will realign to this different rate environment…
…The exact timing of each move, however, is subject to the economic environment. Because monetary policy affects the economy with lags, decisions must necessarily rely on forecasts and their associated risks — not waiting until desired objectives are realized.
If we wait for the data to provide complete confirmation before making a policy decision, we may well have waited too long. Likewise, policy may be faced with altering its trajectory if the economy’s progress points to a different outlook. But in the absence of any substantial shift in the outlook, my view is that the Committee should continue the gradual adjustment of moving rates higher to keep them aligned with economic activity and inflation. These actions are often difficult, but also necessary to keep growth in line with the economy’s long-run potential and to foster price stability.
An additional point: Watch for policymakers to downplay the inflation numbers as well. Back to George:
Finally, inflation has remained muted as a result of lower oil prices and the strong U.S. dollar. Recent movements in each of these have been quite large by historical standards. Yet, despite these headwinds, core measures of inflation have recently risen on a year-over-year basis. And although inflation rates over the past few years have hovered below the Fed’s goal of 2 percent, they have been positive and broadly consistent with price stability.
Note the "positive and broadly consistent" line. And Fischer:
And our view of progress is what the law calls maximum employment and what we call maximum sustainable employment, and a 2 percent inflation rate. And when we get there—we’re there—we’re very close to there on employment, and on inflation the core number that came out this morning was 1.4 percent. You know, that’s not 2 percent. It’s not in another universe. It’s not a negative number. But inflation’s been pretty stable, and we’d like it to go up.
Not in "another universe' from 2 percent. Not negative. Sure we'd like it to go up, but are we really worried about it? Doesn't sound like it to me.
Bottom Line: Fischer is clearly less confident than earlier this month when he claimed that market participants were underestimating the pace of rate hikes. The baseline of four hikes is clearly is doubt; see here for my five potential scenarios. Financial market participants have almost completely discounted any rate hikes this year. This is a recession scenario that I am not enamored with. That said, I suspect market volatility and lack of inflation data keep them on hold in March and maybe April even if the recession does not come to pass. However (although not my baseline), I can tell a story where they feel like the employment data forces their hand. Especially so if they continue to downplay the inflation numbers. A substantial part of their policy still appears directed by a pre-conceived notion of "normal" policy. This I think is the Fed's largest error; the fact that the yield curve stubbornly resists being pushed higher suggests that the Fed's estimates of the terminal fed funds rates is wildly optimistic. There appear to be limits to which the Fed can resist the global pull of zero (or lower) rates.
From the NBER:
How Successful Was the New Deal? The Microeconomic Impact of New Deal Spending and Lending Policies in the 1930s, by Price V. Fishback, NBER Working Paper No. 21925 Issued in January 2016: Abstract The New Deal during the 1930s was arguably the largest peace-time expansion in federal government activity in American history. Until recently there had been very little quantitative testing of the microeconomic impact of the wide variety of New Deal programs. Over the past decade scholars have developed new panel databases for counties, cities, and states and then used panel data methods on them to examine the examine the impact of New Deal spending and lending policies for the major New Deal programs. In most cases the identification of the effect comes from changes across time within the same geographic location after controlling for national shocks to the economy. Many of the studies also use instrumental variable methods to control for endogeneity. The studies find that public works and relief spending had state income multipliers of around one, increased consumption activity, attracted internal migration, reduced crime rates, and lowered several types of mortality. The farm programs typically aided large farm owners but eliminated opportunities for share croppers, tenants, and farm workers. The Home Owners’ Loan Corporation’s purchases and refinancing of troubled mortgages staved off drops in housing prices and home ownership rates at relatively low ex post cost to taxpayers. The Reconstruction Finance Corporation’s loans to banks and railroads appear to have had little positive impact, although the banks were aided when the RFC took ownership stakes.
(I couldn't find an open link.)
- Iowa As A Media Focal Point - Paul Krugman
- The End of the New Normal? - Mohamed A. El-Erian
- The Great Escape from China - Kenneth Rogoff
- The nature and effectiveness of central-bank communication - VoxEU
- Young College Graduate Migration by State - Oregon Office of Economic Analysis
- Counterparties and Collateral Requirements for Monetary Policy - Liberty Street
- OECD tax agreement improves transparency, US doesn't sign - Kenneth Thomas
- You can’t have helicopter money and high interest rates, Adair - longandvariable
- Ownership,Trade and Equilibrium: Locke, Graunt and Gracian - EconoSpeak
- February Econometrics Reading List - Dave Giles
- Post-Iowa Notes - Paul Krugman
- Clubs and the WTO - VoxEU
Tuesday, February 02, 2016
Not much out there to excerpt and blog, so I threw down a few thoughts for you to tear apart:
I hear frequently that economics needs to change, and it has, at least in the questions we ask. Twenty years go, the dominant conversation in economics was about the wonder of markets. We needed to free the banking system from regulations so it could do its important job of turning saving into productive investment unfettered by government interference. Trade barriers needed to come down to make everyone better off. There was little need to worry about monopoly power, markets are contestable and the problem will take care of itself. Unions simply get in the way of our innovative, dynamic economy and needed to be broken so the market could do its thing and make everyone better off. Inequality was a good thing, it created the right incentives for people to work hard and try to get ahead, and the markets would ensure that everyone, from CEOs on down, would be paid according to their contribution to society. The problem wasn't that the markets somehow distributed goods unfairly, or at least in a way that is at odds with marginal productivity theory, it was that some workers lacked the training to reap higher rewards. We simply needed to prepare people better to compete in modern, global markets, there was nothing fundamentally wrong with markets themselves. The move toward market fundamentalism wasn't limited to Republicans, Democrats joined in too.
That view is changing. Inequality has burst onto the economics research scene. Is rising inequality an inevitable feature of capitalism? Does the system reward people fairly? Can inequality actually inhibit economic growth? Not so long ago, the profession ignored these questions. Similarly for the financial sector. The profession has moved from singing the praises of the financial system and its ability to channel savings into the most productive investments to asking whether the financial sector produces as much value for society as was claimed in the past. We now ask whether banks are too big and powerful, whereas in the past that size was praised as a sign of how super-sized banks can do super-sized things for the economy, and compete with banks around the world. We have gone from saying that the shadow banking system can self regulate as it provides important financial services to homeowners and businesses to asking what types of regulation would be best. Economists used to pretty much ignore the financial sector altogether. It was a black box that simply turned S (saving) into I (investment), and did so efficiently, and there was no need to get into the details. Our modern financial system couldn't crash like those antiquated systems that were around during and before the Great Depression. There was no need to include it in our macro models, at least not in any detail, or even ask questions about what might happen if there was a financial crisis.
There are other changes too. Economists now question whether markets reward labor according to changes in productivity. Why is it that wages have stagnated even as worker productivity has gone up? Is it because bargaining power is asymmetric in labor markets, with firms having the advantage? What's the best way to elevate the working class? In the past, an argument was made that the best way to help everyone is to cut taxes for the wealthy, and all the great things they would do with the extra money and the incentives that tax cuts bring would trickle down and help the working class. That didn't happen and although there are still echoes of this argument on the political right, the questions have certainly changed. Much of the current research agenda in economics is devoted to understanding why wage income has stagnated for most people, and how to fix it. We've moved beyond "technology is the problem and better education is the answer" to asking whether the market system itself, and the market failures that come with it (including political influence over policy), has something to do with this outcome.
Fiscal policy is another example of change within the profession. Twenty years ago, nobody, well hardly anyone, was doing research on the impact of fiscal policy and its use as a countercyclical policy instrument. All of the focus was on monetary policy. Fiscal policy would only be needed in a severe recession, and that wouldn't happen in our modern economy, and in any case it wouldn't work (not everyone believed fiscal policy was ineffective, but many did). That has changed. Fiscal policy is now an integral component of many modern DSGE models, and -- surprise -- the models do not tell us fiscal policy is ineffective. Quite the opposite, it works well in deep recessions (though near full employment its effectiveness wanes).
Monetary policy has also come under scrutiny. In the past, the Taylor rule was praised as responsible for the Great Moderation. We had discovered the key to a stable economy. But the Great Recession changed that. We now wonder if other policy rules might serve as a better guidepost (e.g. nominal GDP targeting), we ask about negative interest rates, unconventional policy, all sorts of questions that were hardly asked or even imagined not so long ago. We wonder about regulation of the financial sector, and how to do it correctly (in the past, it was about how to remove regulations correctly).
I don't mean to suggest that economics is now on the right track. The old guard is still there, and still influential. But it's hard to deny that the questions we are asking have gone through a considerable evolution since the onset of the recession, and when questions change, new models and new tools are developed to answer them. The models do not come first -- models aren't built in search of questions, models are built to answer questions -- and the fact that we are asking new (and in my view much better) questions is a sign of further change to come.
In case you want to talk about the primaries, here's something to get you started:
Post-Iowa Notes, by Paul Krugman: ...Sanders is tapping into something that moves a lot of Democrats, and which Clinton needs to try for as well. Can she?
Certainly taking a harder line on the corruption of our politics by big money is important — and no, giving some paid speeches doesn’t disqualify her from making that case. (Cue furious attack from the Bernie bros.) Substantively, her financial reform ideas are as tough as his, just different in focus. What is true, though, is that simply by having been in the world of movers and shakers for so long, Clinton can’t project the kind of purity that someone who has been an outsider (even while sitting in the Senate) can manage.
The bigger problem, though, to my mind at least, is the ability to deliver a message of dramatic uplift, the promise that electing your favorite candidate will cause a dramatic change in the world. How do you do that if your reality sense tells you that only incremental progress is possible, at least for now? You probably can’t. (I’m pretty bad at the uplift thing myself). To be blunt, I think Sanders is selling an illusion, but it’s an illusion many people want to believe in, and there’s no easy way to counter that.
In the end, again, Clinton’s tell-it-like-it-is approach will probably be enough to clinch the nomination. And then she’ll be in a very different position, running as the champion of real if limited progress against, well, look at those top three on the other side.
- Are US Stocks Overvalued? - Blanchard and Gagnon
- US immigration’s electoral impact: New evidence - VoxEU
- Prices, markups and trade reform - Microeconomic Insights
- Interview with Narayana Kocherlakota - Cecchetti & Schoenholtz
- The Potential Power of Negative Nominal Rates - Narayana Kocherlakota
- Bending the Global CO2 Concentration Curve? - Environmental and Urban
- The Fed Did Not Make A Mistake In December - David Beckworth
- ‘Metrics Monday: Statistical vs. Economic Significance - Marc Bellemare
- Elements of a Monetary Policy Implementation Framework - Liberty Street
- Nevada’s Solar Bait-and-Switch - The New York Times
- Cash [demand] rules everything around us - Equitable Growth
- Recent Monetary Policy - Stanley Fischer
- Louis CK does it again - Digitopoly
- Cracks in the Wall – LaborEcon
- Economics of Free Parking - Tim Taylor
Monday, February 01, 2016
I don't have anything to post presently, so let me ask:
What are your predictions for the outcome of the Iowa caucuses tonight?
Changes in Labor Participation and Household Income, by Robert Hall and Nicolas Petrosky-Nadeau, FRBSF Economic Letter: For most people, active participation in the labor market is socially desirable for several reasons. One major benefit is the set of skills and abilities a person gains on the job. Long periods out of employment can mean a worker loses valuable skills. In terms of the overall labor force, this loss is compounded, lowering the accumulation of human capital and negatively affecting economic growth in the long run. As such, a decline in labor force participation, particularly among workers in their prime, is a significant concern for policymakers.
Over the past 15 years, the labor force participation (LFP) rate in the United States has fallen significantly. Various factors have contributed to this decline, including the aging of the population (Daly et al., 2013) and changes in welfare programs (Burkhauser and Daly, 2013). In this Economic Letter, we look at another potential contribution, the changing relationship between household income and the decision to participate in the labor force.
Measuring labor force participation
People are considered “in the labor force” if they are employed or have actively looked for work in the past four weeks, according to the Bureau of Labor Statistics definition of unemployment. Following this definition, we study labor market participation and how it relates to household income using data from the Survey of Income and Program Participation (SIPP). Administered by the Census Bureau since 1983, the SIPP was created to remedy shortcomings in existing survey data on household incomes and benefit-program participation, such as the March Income Supplement to the Current Population Survey. The SIPP collects detailed information on a person’s labor force activities, a wide range of demographic data, the receipt of cash and in-kind income, and participation in government programs.
Comparisons of LFP rates over time need to control for the ever-changing demographic characteristics of the U.S. population, such as age, educational attainment, and race and ethnicity. For example, aggregate participation may decline if a certain group—say, individuals over age 55, who are less likely to be working—gain greater prominence in the overall population. In this case, we would observe a decline in overall participation even if there had been no change in each individual’s propensity to be in the labor market.
We use a probability model to determine the likelihood that an individual with a specific set of demographic characteristics will participate in the labor market. Crucially, this allows us to compare the behavior of similar individuals at different points in time. The factors we include are age and sex, household structure (at least two individuals in the household over age 25), education (less than high school, high school, college, or post-graduate), and race and ethnicity (white, black, Hispanic/Latino, Asian, or other). All LFP rates we report in this Letter control for these demographic characteristics.
The LFP rate for people between the ages of 25 and 54 was 83.8% in 2004, then dropped to 81.2% by 2013. This 2.6 percentage point decline has persisted well beyond the end of the Great Recession and has caught the attention of policymakers, particularly because it concerns workers in their prime who are usually active participants in the labor market.
Measuring household income
Each individual in the SIPP is associated with a household, and the survey provides a detailed account of the household’s monthly income. Households are then ranked according to income level, and divided evenly into four quartiles across the range of the household income distribution. In 2013, households in the lowest 25% of the income distribution, or the first quartile, had an average monthly income of less than $1,770. The median total household monthly income was $3,430. At the top of the distribution, the lower bound for being in the highest 25% of households, or the fourth quartile, was a monthly income of $5,993.
Earnings from work are typically the main source of income for a household regardless of its position within the household income distribution. Other sources are property income and various support programs such as social security, veteran benefits, and public assistance. On average in 2013, the upper-level households derived about 96% of their monthly income from working. For households in the poorest quartile, earnings made up about 62% of monthly income, while another 23% came from unemployment compensation, social security, supplemental social security, and food stamps.
Labor force participation and household income
We sort prime-age individuals according to their household’s position in the income distribution. The probability of participating in the labor market for those in the poorest households in 2013 was just 61.5%, compared with 81.2% for all 25- to 54-year-olds (see Table 1). Further up the household income distribution, individuals are more likely to actively participate in the labor market—in the top quartile, the participation rate was 89.9% in 2013.
Labor force participation among prime-age workers across household income distributions
Looking back in time, we see that the decline in the LFP rate of prime-age workers is unevenly spread across the income distribution. The poorest quartile had the smallest change since 2004, falling 0.8 percentage point. The second quartile fell 2.4 points, while the third quartile reported the largest drop with 3.2 points. Participation also fell 2.0 percentage points for households in the fourth quartile.
Figure 1 shows how much each household income quartile contributed to the 2.6 percentage point overall decline in LFP among workers ages 25 to 54 since 2004. Each quartile’s contribution is the sum of two numbers. The first is the change in the probability that an individual living in a particular household income bracket will participate in the labor market. The second is the change in household size over time, which raises or lowers the number of people in a household income grouping. For instance, the poorest quartile saw a small decline in individual participation rates. At the same time there was a modest increase in the average number of people living in these households. Taken together, the poorest quartile added 0.7 percentage point to the total participation rate between 2004 and 2013 (red line). Likewise, the second quartile (yellow line) added 0.4 percentage point.
Changes in labor participation among prime-age workers
Total and contribution by quartiles of household income distribution
Note: Numbers to right of lines show percentage point changes to total and quartile contributions, 2004–13.
By contrast, individuals in the two highest income quartiles have increasingly remained out of the labor force during this time frame. Individuals in the fourth quartile (green line) accounted for 1.6 of the 2.6 percentage point decline in total participation since 2004, while those in the third quartile (blue line) contributed the most to the decline, a full 2.1 percentage points. By this measure, virtually all of the decline in labor market participation among 25- to 54-year-olds can be attributed to the higher-income half of American households.
Participation among younger and older workers
We can also extend this analysis to the remaining age groups: young people under age 25 and older workers age 55 and over. Doing so will allow us to examine the contribution of each group to the decline in the LFP of the working-age population, that is, all individuals over age 16. Indeed, the LFP of the working-age population dropped 4.8 percentage points over this period, from 67.2% in 2004 to 62.4% in 2013.
As a first step, Figure 2 depicts the total decline in labor force participation and the contribution from each of the three age groups between 2004 and 2013.
Contribution by age group to changes in labor participation
Source: Authors’ calculations based on the SIPP.
The decline among young workers from 61.8% participation in 2004 to 52.2% in 2013 is striking. Although young workers represent only 16% of the overall working-age population, the 9.6 percentage point decline of the young pulled the aggregate rate down by 2.0 percentage points (light blue line). The pattern of young workers’ participation across the household income distribution, shown in panel A of Figure 3, is similar to that of prime-age workers. Young workers in the highest-income households contributed the largest drop, 3.8 percentage points, while those in the lowest-income households contributed only 0.8 percentage point to the decline for their age group.
Change in labor force participation by household income quartile
Note: Numbers to right of lines show percentage point changes to total and quartile contributions, 2004–13.
The LFP rate of those over age 55 differs from what we have seen for the other age groups in two respects. First, their likelihood of being in the labor market has increased 3.1 percentage points; together with their increased share of the population, these conditions pushed the aggregate LFP rate up 2.3 percentage points, as shown by the dark blue line in Figure 2. Second, we do not find the same household income pattern among older workers as we found for the other age groups. Rather, panel B of Figure 3 shows that individuals in the highest-income households provided the bulk of the increase in labor force participation.
To get a clearer view of the factors underlying the decline in labor force participation, this Letter has examined how work trends have changed across different age groups and income levels. Our findings suggest that the decline in participation among people of prime working age has been concentrated in higher-income households. A similar pattern appears among younger workers, between the ages of 16 and 24. However, this has not been the case among older workers. Workers over the age of 55, particularly those in households at the top of the income distribution, have been increasingly participating in the labor force. Further research should help understand the underlying reasons for these diverging trends across household incomes.
Burkhauser, Richard, and Mary C. Daly. 2013. “The Changing Role of Disabled Children Benefits.” FRBSF Economic Letter 2013-25 (September 3).
Daly, Mary C., Early Elias, Bart Hobijn, and Òscar Jordà. 2012. “Will the Jobless Rate Drop Take a Break?” FRBSF Economic Letter 2012-37 (December 17).
[Opinions expressed in FRBSF Economic Letter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System.]
"We can have an energy revolution even if the crazies retain control of the House":
Wind, Sun and Fire, by Paul Krugman, Commentary, NY Times: So what’s really at stake in this year’s election? Well, among other things, the fate of the planet.
Last year was the hottest on record..., climate change just keeps getting scarier; it is, by far, the most important policy issue facing America and the world. ...
Most people who think about the issue at all probably imagine that achieving a drastic reduction in greenhouse gas emissions would necessarily involve big economic sacrifices. This view is required orthodoxy on the right, where it forms a sort of second line of defense against action, just in case denial of climate science and witch hunts against climate scientists don’t do the trick. ...
But things are actually much more hopeful than that, thanks to remarkable technological progress in renewable energy.
The numbers are really stunning..., the cost of electricity generation using wind power fell 61 percent from 2009 to 2015, while the cost of solar power fell 82 percent. These numbers ... put the cost of renewable energy into a range where it’s competitive with fossil fuels. ...
So what will it take to achieve a large-scale shift from fossil fuels to renewables, a shift to sun and wind instead of fire? Financial incentives, and they don’t have to be all that huge. Tax credits for renewables that were part of the Obama stimulus plan, and were extended under the recent budget deal, have already done a lot to accelerate the energy revolution. The Environmental Protection Agency’s Clean Power Plan, which if implemented will create strong incentives to move away from coal, will do much more.
And none of this will require new legislation; we can have an energy revolution even if the crazies retain control of the House.
Now, skeptics may point out that even if all these good things happen, they won’t be enough...
But I’d argue that the kind of progress now within reach could produce a tipping point, in the right direction. Once renewable energy becomes an obvious success and, yes, a powerful interest group, anti-environmentalism will start to lose its political grip. And an energy revolution in America would let us take the lead in global action.
Salvation from climate catastrophe is, in short, something we can realistically hope to see happen, with no political miracle necessary. But failure is also a very real possibility. Everything is hanging in the balance.
- Pre-Iowa Notes - Paul Krugman
- Bank of Japan tries another flavour of QE - Gavyn Davies
- What Data Can Do to Fight Poverty - The New York Times
- Identifying prisoners of the middle-income trap - VoxEU
- Can the WTO Take a Lesson from the Paris - Robert Stavins
- One Story You Won’t be Reading in The New Yorker - Economic Principals
- Central Banking by Process of Elimination - Stephen Williamson
- Shrinking VAR's Toward Theory? - No Hesitations
- Financial structure and growth revisited - Vox EU
Sunday, January 31, 2016
Highlighting something from yesterday's links:
Freedom: Three Varieties and a Caveat, by Peter Dorman, Econospeak: What follows is a very brief summary of an appendix in my micro textbook that addresses the libertarian case for free markets. It was triggered by the comment of Tyler Cowen that the left needs more Mill.
There are three kinds of freedom, each valid. The first is negative freedom, “freedom from”, which means simply freedom from external coercion. This is what underlies the libertarian attachment to free markets. The second is positive freedom, “freedom to”, which seeks to provide people the means to realize their (feasible) objectives. Traditionally the left has seized on this notion to justify redistributive institutions and policies. The third is “inner freedom”, freedom from habit, custom, and unreflected assumptions, which was the core message of German idealism, English and French Romanticism and American Transcendentalism (and, at its best, rock and roll).
In a perfect world we would bask in all three of them. Unfortunately, each makes demands on the others, and there is no universal criterion for striking a balance. The first step toward a reasonable politics of freedom, however, is to simply recognize that no one conception is sufficient by itself.
Finally, it’s important to recognize that freedom, according to any interpretation, is always limited by obligation. In particular, we have obligations toward children, the very old or disabled and others who depend on us for the necessities of life. One way collective action can widen the domain of freedom is by helping us to meet these responsibilities more efficiently. Consider, for instance, how public education and pension systems (like Social Security) widen the scope for parents and children of their elderly parents to be freer in other aspects of their lives.
- Freedom: Three Varieties and a Caveat - EconoSpeak
- How to Re-Evaluate the FOMC's Goals and Strategies - Narayana Kocherlakota
- Internet access, voting patterns and government policy - VoxEU
- Smith's Wedge: The Invisible Mishandling - Ziliak, Barbour
- My review of Robert Gordon's *Rise and Fall of American Growth* - Tyler Cowen
- Replacing dual employment protection with a single labour contract - VoxEU
Saturday, January 30, 2016
5 to 4: On Friday, the Policy Board of the Bank of Japan decided to lower its deposit rate into negative territory for the first time. The vote was five to four. In this post, I argue that US monetary policy would be stronger if the Federal Open Market Committee (FOMC) were willing to issue statements and take actions that were supported by such narrow margins.
As is well-known, the FOMC operates by consensus. No decision has had more than three No votes in at least twenty-five years. There has not been a No vote by a governor in ten years, and there has not been more than one No vote by a governor at a meeting in over twenty years. (See this great article by Thornton and Wheelock for a deeper review.)
This decision framework is not statutory. Rather, it is a Committee norm. The norm is buttressed by Fed watchers and the media, who often refer approvingly to the absence of dissents at a meeting. (Even today, this FT article refers to the lack of dissents at the December 2015 meeting as being a sign of a successful liftoff.)
This tradition of consensus has three main deficiencies.
First, consensus creates a strong status quo bias that reduces the sensitivity of monetary policy to incoming data. The current Committee norms imply that it requires a super-majority of the FOMC to implement a change in direction. Without that super-majority, the Committee tends to stick to its prior course. This automatically makes monetary policy relatively insensitive to incoming information.
Second, the tradition of consensus opens up the possibility that relatively small minorities of FOMC voters can have a disproportionate influence on monetary policy decisions. For example, the above history suggests that the FOMC is following a practice under which all decisions need near-unanimous support from the governors. If so, it becomes theoretically possible for a bloc of one or two governors to exercise veto rights over changes in the direction of monetary policy.
Finally, and perhaps most troublingly, the desire/need for consensus tends to strip collective Committee statements of their clarity. (See a recent Wall Street Journal op-ed by Charles Plosser for a similar concern.) For example, here’s how the current FOMC statement describes the conditionality of the path for the fed funds rate:
“In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.”
This length of this list of conditioning variables helps create consensus, but it also serves to reduce the public’s understanding of the overall FOMC strategy. This uncertainty can be a drag on the effectiveness of policy.
Bold policy moves often engender significant disagreement. Policy-making bodies must have cultures that can allow those decisions to get made, despite that disagreement. Clearly, the Policy Board of the BOJ has that kind of culture. I worry that the FOMC, with its emphasis on consensus, does not.
I’ll write more about the potential economic importance of the BOJ’s move in a later post. For now, I’ll simply say that, given the challenges facing the global economy, I applaud Governor Kuroda’s willingness to lead the BOJ in this new direction.
Daron Acemoglu, Ufuk Akcigit, and William Kerr:
Networks and macroeconomic shocks, , VoxEU: How shocks reverberate throughout the economy has been a central question in macroeconomics. This column suggests that input-output linkages can play an important role in this issue. Supply-side (productivity) shocks impact the industry itself and those consuming its goods, while a demand-side shock affects the industry and its suppliers. The authors also find that the initial impact of an industry shock can be substantially amplified due to input-output linkages.
How shocks propagate through the economy and contribute to fluctuations has been one of the central questions of macroeconomics. We argue that a major mechanism for such propagation is input-output linkages. Through input-output chains, shocks to one industry can influence ‘downstream’ industries that buy inputs from the affected industry, as well as ‘upstream’ industries that produce inputs for the affected industry. These interlinkages can propagate and potentially amplify the initial shock to further firms and industries not directly affected, influencing the macro economy to a much greater extent than the original shock could do on its own.
The significance of the idea that a shock to one firm or disaggregated industry could be a major contributor to economic fluctuations was downplayed in Lucas’ (1977) famous essay on business cycles. Lucas suggested that due to the law of large numbers, idiosyncratic shocks to individual firms should cancel each other out when considering the economy in the aggregate, and therefore the broader impact should not be substantial. Recent research, however, has questioned this perspective. For example, Gabaix (2011) shows that when the firm size distribution has very fat tails, the power of the law of large numbers is diminished and shocks to large firms can overwhelm parallel shocks to small firms, allowing such shocks to have a substantial impact on the economy at large. Acemoglu et al. (2012) show how microeconomic shocks can be at the root of macroeconomic fluctuations when the input-output structure of an economy exhibits sufficient asymmetry in the role of some disaggregated industries as (major) suppliers to others.
In Acemoglu et al. (2016), we empirically document the role of input-output linkages as a mechanism for the transmission of industry-level shocks to the rest of the economy. Our approach differs from previous research in two primary ways.
- First, whereas much prior work has focused on the medium-term implications of such network effects (e.g. over more than a decade), we emphasise the influence of these networks on short-term business cycles (e.g. over 1-3 years).
- Second, we begin to separate types of shocks to the economy and the differences in how they propagate.
We build a model that predicts that supply-side (e.g. productivity, innovation) shocks primarily propagate downstream, whereas demand-side shocks (e.g. trade, government spending) propagate upstream. For example, a productivity shock to the tire industry will tend to strongly affect the downstream automobile industry, while a shock to government spending in the car industry will reverberate upstream to the tire industry. We then demonstrate these findings empirically using four historical examples of industry-level shocks, two on the demand side and two on the supply side, and confirm the predictions of the model.
Model and prediction
We model an economy building on Long and Plosser (1983) and Acemoglu et al. (2012), in which each firm produces goods that are either consumed by other firms as inputs or sold in the final goods sector. The model predicts that supply-side (productivity) shocks impact the industry itself and those consuming its goods, while a demand-side shock affects the industry and its suppliers. The total impact of these shocks – taking into account that customers of customers will be also affected in response to supply-side shocks, and suppliers of suppliers will also be affected in response to demand-side shocks – is conveniently summarised by the Leontief inverse that played a central role in traditional input-output analysis.
The intuition behind the asymmetry in propagation for supply versus demand shocks relates to the Cobb-Douglas form of the production function and preferences. If productivity in a given industry is lowered by a shock, firms in that industry will produce fewer goods and the price of their goods will rise. Due to the Cobb-Douglas structure, these effects cancel each other out for upstream firms, leaving them unaffected, while downstream firms feel the increase in prices and consequently lower their overall production. On the other hand, if demand in a certain industry increases, firms in that industry increase production, necessitating a corresponding increase in input production by upstream firms. Because of constant returns to scale, however, the increased demand does not affect prices, and so downstream firms are not changed.
We also incorporate into the model geographic spillovers, showing that shocks in a particular industry will also influence industries that tend to be concentrated in the same area, as shown empirically by Autor et al. (2013) and Mian and Sufi (2014). The idea is that a shock to the first industry will influence local demand generally, and therefore will change demand, output, and employment for other local producers.
We test the model’s prediction by examining the implications of four shocks: changes in imports from China; changes in federal government spending; total factor productivity (TFP) shocks; and productivity shocks coming from foreign industry patents. The first two are demand-side shocks; the latter two affect the supply side. For each of these shocks, we show the effects on directly impacted industries as well as upstream and downstream effects. Our core industry-level data is taken from the NBER-CES Manufacturing Industry Database for the years 1991-2009, while input-output linkages were drawn from the Bureau of Economic Analysis’ 1992 Input-Output Matrix and the 1991 County Business Patterns Database.
For brevity we focus here on the first example, where changes in imports from China influence the demand in affected industries. Of course, rising import penetration in the US for a given industry could be endogenous and connected to other factors, such as sagging US productivity growth. We therefore instrument import penetration from China to the US with rising trade from China to eight non-US countries relative to the industry’s market size in the US, following Autor et al. (2013) and Acemoglu et al. (2015). Chinese imports to other countries can be taken as exogenous metrics of the rise of China in trade over the last two decades.
The empirics confirm the predictions of our model. A one standard-deviation increase in imports from China reduces the affected industry’s value added growth by 3.4%, while a similar shock to consumers of that industry’s products leads to a 7.6% decline.
- In other words, the upstream effect is nearly twice as large as the effect on the directly hit industry in a basic regression.
- Downstream effects, on the other hand, are of opposite sign and do not change in a statistically significant manner, confirming the model’s prediction.
Figure 1 shows the impulse response function when our framework is adjusted to allow for lags and measure multipliers. Again, a one standard-deviation shock to value added through trade produces network effects that are much greater than the own effects on the industry.
- We calculate that the effect of a shock to one industry on the entire economy is over six times as large as the effect on the industry itself, due to input-output linkages.
Similar effects are found for employment, and the findings are shown to be robust under many different specification checks.
Figure 1. Response to one SD value-add shock from Chinese imports
The other three shocks – changes in government spending, TFP shocks and foreign patenting shocks – also broadly support the model’s predictions, with the first leading to upstream effects and the latter two leading to downstream effects. Similarly, extensions quantify that geographical proximity facilitates the propagation of the shocks, particularly those on the demand side.
Shocks to particular industries can reverberate throughout the economy through networks of firms or industries that supply each other with inputs. Our work shows that these shocks are indeed powerfully transmitted through the input-output chain of the economy, and their initial impact can be substantially amplified. These findings open the way to a systematic investigation of the role of input-output linkages in underpinning rapid expansions and deep recessions, especially once we move away from simple, fully competitive models of the macro economy.
Acemoglu, D, U Akcigit, and W Kerr (2016), “Networks and the Macroeconomy: An Empirical Exploration”, NBER Macroeconomics Annual, forthcoming. NBER Working Paper 21344.
Acemoglu, D, V Carvalho, A Ozdaglar, and Al Tahbaz-Salehi (2012), “The Network Origins of Aggregate Fluctuations”, Econometrica, 80:5, 1977-2016.
Acemoglu, D, D Autor, D Dorn, G Hanson, and B Price (2015), “Import Competition and the Great U.S. Employment Sag of the 2000s”, Journal of Labor Economics, 34(S1), S141-S198.
Autor, D, D Dorn, and G Hanson (2013), “The China Syndrome: Local Labor Market Effects of Import Competition in the United States”, American Economic Review, 103:6, 2121-2168.
Gabaix, X (2011), “The Granular Origins of Aggregate Fluctuations”, Econometrica, 79, 733-772.
Long, J and C Plosser (1983), “Real Business Cycles”, Journal of Political Economy, 91:1, 39-69.
Lucas, R (1977), “Understanding Business Cycles”, Carnegie Rochester Conference Series on Public Policy, 5, 7-29.
Mian, A and A Sufi (2014), “What Explains the 2007-2009 Drop in Employment”, Econometrica, 82:6, 2197-2223.
- The Persistence of Technology - Dietrich Vollrath
- My Classified Life - Paul Krugman
- The U.S. is not in a recession - Econbrowser
- A Renewable Feast - Paul Krugman
- Elizabeth Warren: One Way to Rebuild Our Institutions - Elizabeth Warren
- The Job Market for Recent College Graduates - Liberty Street Economics
- Financial Risks: Views from the Office of Financial Research - Tim Taylor
- Shrinking Labor Market Opportunities for the Disabled? - macroblog
- Tiered negative interest rates and required reserves - Nick Rowe
- Uncertainty and macroprudential tools - Bank Underground
- Economic Growth Isn't Everything - Noah Smith
- The Anti-Fed Two-Step - Paul Krugman
- Vaccines, drugs, and Zipf distributions - VoxEU
Friday, January 29, 2016
"...we find evidence of a significant amount of downward nominal wage rigidity in the United States":
Fallick, Bruce C., Michael Lettau, and William L. Wascher (2016). “Downward Nominal Wage Rigidity in the United States During and After the Great Recession,” Finance and Economics Discussion Series 2016-001. Washington: Board of Governors of the Federal Reserve System: Abstract Rigidity in wages has long been thought to impede the functioning of labor markets. One recent strand of the research on wage flexibility in the United States and elsewhere has focused on the possibility of downward nominal wage rigidity and what implications such rigidity might have for the macroeconomy at low levels of inflation. The Great Recession of 2008 - 09, during which the unemployment rate topped 10 percent and price deflation was at times seen as a distinct possibility, along with the subsequent slow recovery and persistently low inflation, has added to the relevance of this line of inquiry. In this paper, we use establishment - level data from a nationally representative establishment - based compensation survey collected by the Bureau of Labor Statistics to investigate the extent to which downward nominal wage rigidity is present i n U.S. labor markets. We use several distinct methods proposed in the literature to test for downward nominal wage rigidity, and to assess whether such rigidity is more severe at low rates of inflation and in the presence of negative economic shocks than in more normal economic times. Like earlier studies, we find evidence of a significant amount of downward nominal wage rigidity in the United States. We find no evidence that the high degree of labor market distress during the Great Recession reduced the amount of downward nominal wage rigidity a nd some evidence that operative rigidity may have increased during that period.
Where does all the "political ugliness" come from, and what does it mean for Democrats?:
Plutocrats and Prejudice, by Paul Krugman, Commentary, NY Times: Every time you think that our political discourse can’t get any worse, it does. ... But where is all the nastiness coming from?
Well, there’s debate about that — and it’s a debate that is at the heart of the Democratic contest. ...
To oversimplify a bit — but only, I think, a bit — the Sanders view is that money is the root of all evil. Or more specifically, the corrupting influence of big money, of the 1 percent and the corporate elite, is the overarching source of the political ugliness...
The Clinton view, on the other hand, seems to be that money is the root of some evil, maybe a lot of evil, but it isn’t the whole story. Instead, racism, sexism and other forms of prejudice are powerful forces in their own right. ...
As you might guess, I’m on the many-evils side of this debate. ... But ... the question for progressives is what all of this says about political strategy.
If the ugliness in American politics is all, or almost all, about the influence of big money, then working-class voters who support the right are victims of false consciousness. And it might — might — be possible for a candidate preaching economic populism to break through this false consciousness ... by making a sufficiently strong case that he’s on their side. ...
On the other hand, if the divisions in American politics aren’t just about money, if they reflect deep-seated prejudices that progressives simply can’t appease, such visions of radical change are naïve. And I believe that they are.
That doesn’t say that movement toward progressive goals is impossible — America is becoming both more diverse and more tolerant over time. Look, for example, at how quickly opposition to gay marriage has gone from a reliable vote-getter for the right to a Republican liability.
But there’s still a lot of real prejudice out there, and probably enough so that political revolution from the left is off the table. Instead, it’s going to be a hard slog at best.
Is this an unacceptably downbeat vision? Not to my eyes. After all, one reason the right has gone so berserk is that the Obama years have in fact been marked by significant if incomplete progressive victories, on health policy, taxes, financial reform and the environment. And isn’t there something noble, even inspiring, about fighting the good fight, year after year, and gradually making things better?
"The overall picture of the economy going into 2016 is one of weak growth, albeit with little risk of recession":
Consumption Growth Keeps GDP Positive in Fourth Quarter 2015: Productivity growth will be near zero for 2015.
The economy grew 0.7 percent in the 4th quarter, bringing its rate for the full year (4th quarter to 4th quarter) to 1.8 percent. That is a substantial slowing from the 2.5 percent rates of the prior two years.
By far the major component boosting growth was consumption, which grew at a 2.2 percent annual rate, driven largely by continued strong growth in durable goods consumption, which grew at a 4.3 percent annual rate. Consumption of services grew at 2.0 percent annual rate and non-durables grew at just a 1.5 percent rate.
Housing was also a big contributor to growth, expanding at an 8.1 percent annual rate and adding 0.27 percentage points to growth. Housing growth has averaged 8.5 percent over the last seven quarters. While this component is likely to continue to grow in 2016, the pace will probably be somewhat slower.
Investment and trade were both big negatives in the quarter. The trade deficit, measured in constant dollars, increased by $20.4 billion in the quarter, subtracting 0.47 percentage points from growth. The trade deficit is likely to continue to grow in 2016 as the dollar has risen further and we probably have still not felt the full effects of the prior increase.
Spending on equipment and non-residential structures both fell in the quarter, subtracting 0.3 percentage points from growth. Equipment spending has been hard hit both due to the impact of the trade deficit on manufacturing and also due to the collapse of investment in energy related sectors. There has been some overbuilding in office buildings and retail space which could be a drag on non-residential construction in 2016.
Another factor depressing growth in the quarter was the slowing of inventory investment, which subtracted 0.45 percentage points from growth. The growth in final demand in the fourth quarter was 1.2 percent.
The government sector added modestly to growth, with a 2.7 percent increase in federal spending slightly offsetting a 0.6 percent fall in state and local spending. Both figures are slightly anomalous (federal spending is growing more slowly and state and local spending is growing), but the net impact on growth of 0.12 percentage points is roughly what we can expect in future quarters.
Health care spending continues to be very much under control. Spending on health care services, which accounts for the overwhelming majority of total health care spending, rose at a 5.2 percent nominal rate in the fourth quarter. This brings the increase over the last year to 4.8 percent.
Inflation continues to be nowhere in sight. The core PCE grew at just a 1.2 percent annual rate in the quarter, bringing the increase for the year to 1.4 percent, well below the Fed's 2.0 percent target.
Non-farm business value-added grew at just a 0.1 percent annual rate. Given the strong growth in employment over the last three months of 2015, this implies that productivity growth will be negative for the quarter and barely positive for the year as a whole.
One of the striking aspects of the recovery had been the sharp and completely unpredicted collapse of productivity growth. This has been a positive in that employment growth would have been near zero if productivity growth had remained in a range of 1.5–2.0 percent over the last five years. On the other hand, if productivity growth remains stuck at the slow pace of the last five years, it will impose a serious limit on the ability to raise living standards.
A possible explanation is that the weak labor market itself is acting as a drag on productivity as workers are forced to take low-paying, low-productivity jobs. We will only know if this is true if the labor market tightens enough to give workers more bargaining power and the ability to move to higher paying jobs.
The overall picture of the economy going into 2016 is one of weak growth, albeit with little risk of recession. Consumption growth is likely to remain moderate, especially if energy prices stay low. Investment is likely to be a small negative in 2016 as is trade. However, residential construction and government spending will both be modest positives. The biggest risk is that a set of bad events elsewhere in the world could cause the trade deficit to deteriorate further.
- Economics in the Age of Abundance - Brad DeLong
- Bank of Japan to Lower Interest Rate Below Zero - NYTimes
- Single Payer Trouble - Paul Krugman
- Paul Krugman, Bernie Sanders and Medicare for All - Dean Baker
- Confusion About the Financial Crisis Won't Die - Barry Ritholtz
- What’s happened to U.S. housing inequality? - Equitable Growth
- Is Ted Cruz Right About the Fed and the Great Recession? - Mike Konczal
- Against Multiple Regression--And Experiments Have Issues, Too - Tim Taylor
- Sanders, Corbyn and the financial crisis - mainly macro
- Back to the 60's Phillips Curve? - Robert Waldmann
- Wage Moderation and Productivity in Europe - INET
- Long-term effects of job training on human capital - VoxEU
- Why Measure GDP? - askblog
Thursday, January 28, 2016
Migration’s economic positives and negatives: I was always a strong believer that geography determines one’s worldview. (I think it is de Gaulle who is credited for saying that “history is applied geography”.) When you spend one month in Europe traveling to various places, you just cannot avoid the biggest issue in Europe today: migration. So let me go briefly over some key issues (again). ...
To an economist, it is clear that most (not all; I will come to that later) economic arguments are strongly in favor of migration. ...
It must be a force for the good and if there are problems or objections to it, they must stem from extra-economic reasons like social cohesion, preference for a given cultural homogeneity, xenophobia and the like.
However, I think that this is not so simple. There may be also some negative economic effects to consider. I see three of them.
First, the effect of cultural or religion heterogeneity on economic policy formulation. ...
Second, cultural differences may lead to the erosion of the welfare state. ...
Third, migration might have important negative effects on the emitting countries. ...
We have, I think, to take into account also the negative economic effects of migration. I do not think that the three effects I listed here (and perhaps there could be others) are sufficiently strong to negate the positive economic effects. But they cannot be entirely disregarded or ignored either.
We desperately need major tax reform! Or maybe not…: It is an article of faith in national politics that the reform of the federal tax code is what’s standing between us and faster growth, higher productivity, better jobs, and whatever other good outcome you want to ascribe to this endeavor. ...
The changes in the Federal tax code since 1986, including the substantial increases to the EITC and CTC…boosted the aftertax income of households in the first two quintiles of the income distribution by about seven percent without even counting any benefits from the additional labor force participation... These gains are an order of magnitude larger than the estimated gains from fundamental tax reform, which are generally measured in the tenths of a percent.
So, let’s stop being distracted by the “fundamental reform fairy,” and pursue incremental reforms:
— Close the carried interest loophole that privileges the earnings of investment fund managers. ...
— Block corporate tax inversions, where U.S. companies merge with overseas companies just to move their tax mailbox to a low tax country.
— End the “step-up basis” provision by which the wealthy can pass capital gains on to their heirs tax free.
— Stop incentivizing multinationals to keep, or at least book, their profits overseas by letting companies repatriate their foreign earnings after paying a minimum tax (the Obama administration suggest a 19 percent minimum rate).
— Increase the EITC for childless adults, who now get very little from it, an idea supported by both Obama and House Speaker Paul Ryan (R).
Above, I called these “tweaks” as opposed to major reforms. Though the contrast is apt, it’s the wrong word, as any such changes are hugely heavy lifts. But heavy lifts are at least in the realm of the possible. And that’s the right realm to be in if we actually want to improve our tax code.
- China’s Bumpy New Normal - Joseph E. Stiglitz
- Health Wonks and Bernie Bros - Paul Krugman
- Jobs Are Under Attack, But Not by Robots - Robert Gordon
- Are Economists in Denial About What's Driving Inequality? - INET
- Environment vs. Economy: A Shift in American Opinion - Tim Taylor
- Economists Get Closer to Spotting Recessions - Noah Smith
- Subprime Reasoning on Housing - The New York Times
- Fiscal cost of refugees in Europe - VoxEU
- Downside Inflation Risk - Carola Binder
- Twitter needed strategy - Digitopoly
- The Global Economy’s Marshmallow Test - Jeffrey Sachs
- Why GDP fails as a measure of well-being - CBS News
- Why GDP fails as a measure... period - EconoSpeak
Wednesday, January 27, 2016
William Gale, Aaron Krupkin and Kim Rueben in the Milken Institute Review:
There is No Reason to Believe that Tax Cuts are an Elixir for Economic Growth: Many folks, and from time to time, majorities in Congress, apparently believe that the cure for what ails the economy is lower taxes – in particular, lower tax rates for high-income earners. Now this enthusiasm has spread to state governments that are led by conservatives, offering new tests of a proposition that has generated scant evidence of success elsewhere.
Failure of this idea at the federal level does not necessarily imply that tax cuts would fail to increase output and jobs at the state level. For one thing, lower taxes in one state might lure existing businesses (and jobs) from other states, even if they yield no overall increase in employment or output. But it’s also worth noting that the stakes are higher for the states. Washington can finance shortfalls in revenue by selling bonds to the public or by borrowing from the Federal Reserve – in effect, printing money. States are far more constrained by the skepticism of the private credit markets or constitutional prohibitions against deficit finance, or both. Thus, any failure of supply-side economics to work its magic could force punishing cuts in state programs. ...
At the core of supply-side economics is Arthur Laffer’s back-of-the napkin curve illustrating the undeniable reality that, at some point, higher tax rates will lead to lower revenues as well as fewer jobs and slower growth. But this does not imply there are many realworld examples of tax rates so high that cutting them would have much impact on jobs or growth. That has been amply demonstrated at the national level, where tax cuts have eroded revenue without discernible effect on economic activity.
The states have no good reasons to believe that tax cuts will bring the desired manna. Yet some continue to erode their tax bases in the name of business growth in an era in which few states can afford to cut critical services (that businesses care about) ranging from education to infrastructure repair. Some ideas live on and on, no matter how much evidence accumulates against them. States that accept them as gospel anyway do so at their peril.
It is true that much of the weakness in the nowcast is identified by economic variables that relate to the industrial sector. But these variables have, in the past, been very closely correlated with activity in the economy as a whole, and are therefore usually among the best indicators of overall activity. It is dangerous to ignore weakness in these industrial variables that persists for a long period, which is what is happening now....The full model, including the industrial sector data, estimates that the recession probability has been hovering around 15-20 per cent (above right graph), no longer an entirely negligible risk. If the weak industrial data are excluded, on the grounds that they are “transitory” – a word often used by Fed officials – then the recession probability drops to about 10 per cent.
He adds this picture:
Recession odds of just 10% would hardly be worth getting out of bed for. So how much weight should we be placing on the manufacturing data? I often see claims that manufacturing is already in recession. And Andrew Levin, former advisor to Federal Reserve Chair Janet Yellen, places much weight on the industrial production slowdown:
Unfortunately, the latest economic data underscore the risk that the economy may now be heading into another recession. Last Friday, the Federal Reserve Board reported that its index of industrial production sank further in December and was down 1.8% from a year earlier. Indeed, as shown in the accompanying chart, this pace of contraction has only occurred during prior recessionary periods. In some instances, the fall in industrial output was a harbinger at the onset of a recession. In other episodes, the industrial sector had been booming previously and turned downward after a recession was already underway. But since 1970 there has never been a case where the industrial sector shrank nearly 2 percent on a 12-month basis and the broader economy was left unscathed.
I think it is important to be very cautious with this aggregate data. What makes a recession a recession is that the decline in activity is felt widely throughout the economy. From the National Bureau of Economic Research:
During a recession, a significant decline in economic activity spreads across the economy and can last from a few months to more than a year.
With this in mind, I direct you to my fellow Oregon economist Josh Lehner, who correctly notes that in comparison to past recessions, the decline in manufacturing activity is not well disbursed across the sector. My version of Josh's chart:
The point is that during a recession, the vast majority of manufacturing industries (or all!) are declining. We are nowhere near that point. In other words, even manufacturing - arguably the most distressed sector of the US economy - is not recession. And if manufacturing is not even in recession, it is difficult to see that the US economy is in recession. Or even nearing it.
Initial unemployment claims across states tells a similar story:
In this version, I count the sates experiencing a 5% or greater change in year-over-year unemployment claims (I used 5% to account for the fact that as the cycle matures, claims will flatten out for more states and thus you would expect a wider dispersion of marginally higher claims). As is evident, recessions are characterized by rising claims across a wide swath of sates. In other words, a recession in Texas does not a US recession make. Note also that the economy can experience a fairly widespread increase in claims but not a recession. See 1995. Which means that while I think initial claims is an excellent leading indicator, it by itself is not infallible.
Aside from the recession risk, there is another important aspect of Davies's chart - discounting manufacturing, it indicates growth of just 2% in the US. This is fairly close with the Federal Reserve's estimate of potential growth, and I suspect that is the direction we will be heading by the end of the year if not sooner. Key sources of growth, such as autos, multifamily housing, and technology, that helped propel the economy closer to fully employment are likely leveling off. If so, that means the economy is at an inflection point as it transitions back to trend. The Fed expects that process will require addition tightening. The financial markets aren't so confident.
Bottom Line: The lack of widespread economic weakness across the economy indicates that the US is not currently in recession. It is not even evident manufacturing is in recession. If the economy were heading into recession, expect the dispersion of weakness will spread further across the economy, both geographically and sectorally.
- The Anti-Fiscal Bubble - Paul Krugman
- Goodbye, Golden Age of Growth - Robert Gordon
- The Latest Fad: Asymmetric Inflation Targeting - David Beckworth
- China’s capital flight and US monetary policy - VoxEU
- The economic losers are in revolt against the elites - Martin Wolf
- Free Trade With China Wasn't Such a Great Idea - Noah Smith
- The Dollar Keeps Rising, for Good or Evil - The New York Times
- Estimating Equilibrium in Health Insurance Exchanges - A Fine Theorem
- The Pause that Refreshes - Jon Faust
- Interview with Larry Summers - TIE
- Potemkin Ideologies - Paul Krugman
Tuesday, January 26, 2016
The Five Scenarios Now Facing the Federal Reserve: Federal Reserve policymakers are likely enjoying this month about as much as market participants are.
Central bankers at the Fed don’t like fast-moving markets to begin with, and they especially won’t like the implication that their supposedly inconsequential 25-basis-point interest rate hike in December was a mistake. The only saving grace for the Fed is that January was off the table for a rate hike anyway, so the volatility on Wall Street will have little impact on this week’s policy outcome, due to be announced on Wednesday... Continue reading at Bloomberg ...
You Say You Want a Revolution?, by Mark A. Thoma: What, exactly, does Democratic presidential candidate Bernie Sanders have in mind when he asks on his website if we are “Ready to Start a Political Revolution?” He has proclaimed unabashedly that he is a socialist, a statement that has raised eyebrows about his electability. He wants to turn us into the Soviet Union!! Is that what he has in mind?
Far from it. He has qualified his statements to make it clear that he is a democratic socialist, but that term fails to convey what he really has in mind, or at least I think it does. ...
This is from Peter Dizikes at MIT News:
Reality check in the factory: When the globalization of manufacturing took flight a few decades ago, the problem of industrial workplace safety also became fully globalized. As many scholars, human-rights advocates, and labor leaders have observed, that challenge consists of more than just persuading developing nations to create labor laws — it is also a matter of enforcing those labor laws.
Indeed, enforcement may be the greater challenge, as new factories continue to spread across vast distances in Asia, Central America, and other regions. Problems include unsafe buildings, inhumane hours, pollution, unpaid wages, and more. A common enforcement scenario today involves an underfunded regulatory agency with a small staff, and hundreds of potential cases to examine. Where do regulators even begin?
Matthew Amengual, an assistant professor at the MIT Sloan School of Management, started investigating that question on the ground in Argentina nearly a decade ago — talking to regulators, union bosses, firm managers, and key players with knowledge about labor conditions. Over time, he interviewed hundreds of people, watched inspections occur, and catalogued Argentina’s intricate regulatory politics as deeply as any outside observer has.
What Amengual found surprised him. A large thread within political science theory, drawing from the German sociologist Max Weber, holds that states can best enforce labor laws when they act as politically neutral arbiters of regulations. But such neutral arbiters largely did not exist in Argentina. There, many regulators only learned where to find malfeasance by working closely with non-neutral parties, say, union leaders, or immigrant groups. The process of regulation needed to be politicized to happen at all.
In other cases, active regulators came from the ranks of business managers who were using their knowledge to clean up their own industries. None of this was textbook political science theory. But it was how things worked. ...
A “watershed moment” in Amengual’s research occurred in the Argentine province of Cordoba, when an inspector he knew met up with a union leader representing metal workers. Soon the two of them, and Amengual, were driving off in the union leader’s car to a factory.
‘The labor unions have all kinds of information and resources that allow the inspectors to do their jobs,” Amengual says. In Cordoba, he notes, the regulators “didn’t even have cars to be able to go out and do the inspections. They didn’t have time. They didn’t have strong training.”
But the regulators did have information they could act on, courtesy of the unions — and so they did. Enforcement would not have been possible otherwise.
That said, while regulators were busy inspecting the metal industry, they were less watchful over small-scale brickmakers, an industry where many kinds of violations may have been even more abundant, but which lacked union organizing.
“You have enforcement, but it’s happening where the unions are present, not [always] where it’s most needed,” Amengual says.
It wasn’t just labor advocates driving regulation, however. Surprisingly, in the province of Tucuman, where sugar mills that produced ethanol were polluting the water, the move toward legal compliance occurred thanks in part to business managers who joined the government and pushed firms to meet environmental regulations.
The government hired regulators “right out of industry, they gave them short-term contracts, and some of them went right back into industry afterwards,” Amengual says. “It was a recipe for disaster, according to [political science theory]. But those were the guys who were actually doing something to enforce environmental laws.”
How could that happen? Amengual attributes it partly to the presence of environmental groups, in conjunction with the gradual increase in regulators’ ability to assess the pollution problems. “Industry actually wanted regulators between it and the social movement pressure,” Amengual observes.
In turn, Amengual says, he would like political scientists and policymakers alike to recognize these realities of regulation. Instead of regarding politicized enforcement as a tainted form of state action, he thinks, people should realize that labor regulations are always going to be political. The question is how to let the politics spur enforcement, while not totally capturing the process.
“If this is the way policies are being enforced in much of the world, it does matter,” Amengual asserts. “I don’t think Argentina is unique.” ...
- How a (Bayesian) Hawk Can Quickly Turn Into a Dove - Narayana Kocherlakota
- Hotbeds of genius and innovation depend on key ingredients - PBS NewsHour
- Paul Krugman Reviews ‘The Rise and Fall of American Growth’ - NYTimes
- Potential supply, the output gap and inflation - Bank Underground
- Can Margin Requirements Improve Resilience? - Cecchetti & Schoenholtz
- John Taylor on auditing all the world’s Feds - longandvariable
- The Price Americans Pay for Slow Growth - Noah Smith
- ‘Metrics Monday: Type III Errors - Marc Bellemare
- Family welfare cultures: evidence from Norway - Microeconomic Insights
- Balance Sheet Recession That Never Happened: Australia - David Beckworth
- Bernie, Hillary, Barack, and Change - Paul Krugman
- NAWRU VI Arbitrary Restrictions on Paramaters - Angry Bear
- Under-investment in Public Clubs - Nick Rowe
- Europe’s migration crisis of 2016 - VoxEU
- Delusions of Moderation - Paul Krugman
- The corporate savings glut - Nick Bunker
- Attention and saliency on the internet - VoxEU
Monday, January 25, 2016
George Borjas is blogging again:
Hello World (again): About 10 years ago, I had a blog that ran for about a year or so. It quickly began to consume too much of my time, and I realized that I could not be a heavy blogger and a full-time researcher at the same time. So I stopped blogging after a while.
Immigration is back big time. I’ve been dragged into a public debate over some work I did last summer. And I have a book coming out in the fall that hopes to clarify many of the issues in the immigration debate.
So I’m going to try blogging one more time. I’ve learned my lesson; I don’t expect to be blogging daily. But I suspect that the book will provoke some reactions–and the election is coming up as well. So come summer/fall I may be hanging around here more than just a bit.
Today, he revisits the Mariel boat lift:
On Mariel: A couple of readers of early drafts of We Wanted Workers made some comments last spring that planted an idea in my head: perhaps it was time to revisit Mariel and see what we could learn from that supply shock with the hindsight of 25-years worth of additional research. ...
I then spent the entire summer working time-and-a-half on my Mariel paper. The paper went through several rounds. I got a lot of feedback from many friends who read early drafts. And I even did something that I had never done before: I hired someone to replicate the entire exercise from scratch just to make sure it was right!
The paper came out as an NBER working paper in September 2015. At least in my corner of the universe, it created a disturbance in the force reminiscent of the destruction of Alderaan, leading to a debate in the past few weeks (here’s the Peri-Yasenov criticism) and to my writing a follow-up paper showing that the critics are wrong. ... And here is a popular piece I published in National Review that summarizes my take on what is going on.
The critics harp on the fact that my sample of prime-age, non-Hispanic working men is small (which it is, as I explicitly noted in my original paper). But they ignore that I report many statistical tests showing the post-1980 wage drop in Miami to be statistically significant, despite the small samples.
Even worse, the only way to make sure your lying eyes see the “right” wage trend is to enlarge the sample in ways that are, at best, questionable and, most likely, just plain wrong. ...
After everything is said and done, it surely seems as if something happened to the low-skill labor market in Miami after 1980, and that something depressed low-skill wages for several years. This fact has a really interesting implication. Suppose that the Mariel natural experiment is giving us the correct estimate of the wage depression. We may then be severely understating the economic gains from immigration.
The Volcanic Core Fueling the 2016 Election: ...as I talked with ... people, I kept hearing the same refrains. They wanted to end “crony capitalism.” They detested “corporate welfare,” such as the Wall Street bailout.
They wanted to prevent the big banks from extorting us ever again. Close tax loopholes for hedge-fund partners. Stop the drug companies and health insurers from ripping off American consumers. End trade treaties that sell out American workers. Get big money out of politics.
Somewhere in all this I came to see the volcanic core of what’s fueling this election.
If you’re one of the tens of millions of Americans who are working harder than ever but getting nowhere, and who understand that the political-economic system is rigged against you and in favor of the rich and powerful, what are you going to do?
Either you’re going to be attracted to an authoritarian son-of-a-bitch who promises to make America great again by keeping out people different from you and creating “great” jobs in America, who sounds like he won’t let anything or anybody stand in his way, and who’s so rich he can’t be bought off.
Or you’ll go for a political activist who tells it like it is, who has lived by his convictions for fifty years, who won’t take a dime of money from big corporations or Wall Street or the very rich, and who is leading a grass-roots “political revolution” to regain control over our democracy and economy.
In other words, either a dictator who promises to wrest power back to the people, or a movement leader who asks us to join together to wrest power back to the people.
You don’t care about the details of proposed policies and programs.
You just want a system that works for you.
The "poisonous interaction between ideology and race":
Michigan’s Great Stink, by Paul Krugman, Commentary, NY Times: ...Modern politicians, no matter how conservative, understand that public health is an essential government role. Right? No, wrong — as illustrated by the disaster in Flint, Mich.
What we know so far is that in 2014 the city’s emergency manager — appointed by Rick Snyder, the state’s Republican governor — decided to switch to an unsafe water source, with lead contamination and more, in order to save money. And it’s becoming increasingly clear that state officials knew that they were damaging public health...
This story ... would be a horrifying outrage even if it were an accident or an isolated instance of bad policy. But it isn’t. ...
In the modern world, much government spending goes to social insurance programs — things like Social Security, Medicare and so on, that are supposed to protect citizens from the misfortunes of life. Such spending is the subject of fierce political debate, and understandably so. ...
There should, however, be much less debate about spending on ... public goods — things that benefit everyone and can’t be provided by the private sector. ...
Yet ... hard-line conservatives have ... sought to cut social insurance spending on the poor. ... But what we also see is extreme penny pinching on public goods. ...
Nor are we talking only about a handful of cases. Public construction spending as a share of national income has fallen sharply... And this includes sharp cuts in spending on water supply.
So are we just talking about the effects of ideology? Didn’t Flint find itself in the cross hairs of austerity because it’s a poor, mostly African-American city? Yes, that’s definitely part of what happened — it would be hard to imagine something similar happening to Grosse Pointe.
But these really aren’t separate stories. What we see in Flint is an all too typically American situation of (literally) poisonous interaction between ideology and race, in which small-government extremists are empowered by the sense of too many voters that good government is simply a giveaway to Those People.
Now what? Mr. Snyder has finally expressed some contrition, although he’s still withholding much of the information we need to fully understand what happened. And meanwhile we are, inevitably, being told that we shouldn’t make the poisoning of Flint a partisan issue.
But you can’t understand what happened in Flint, and what will happen in many other places if current trends continue, without understanding the ideology that made the disaster possible.
- German exports and the Eurozone - mainly macro
- US slowdown is now a headache for the Fed - Gavyn Davies
- Goodfriend and King misreport stance of the minority - Lars Svensson
- Graphing the English-speaking university curriculum - Understanding Society
- How Strong is the Evidence for Hysteresis? - Robert Waldmann
- Book Review: "Economics Rules" - Noahpinion
- The German minotaur - longandvariable
- Against Krugman - Economic Principals
- Rethinking College Admissions - The New York Times
- Labour supply responses of lottery winners - VoxEU
Sunday, January 24, 2016
Banks' Influence on Congressional “Reforms” of the Fed: Senator Sanders’ December 23 NYT op-ed expressed concern about what he perceived to be an undue influence of the financial sector on the Federal Reserve. In my last post, I explained how the Fed could allay these concerns through greater transparency about the role of the Board of Governors. In this post, I elaborate on what I see as a much bigger problem: the financial sector’s influence on Congress as it seeks to “reform” the Fed.
Here’s an example of what I mean. Last year, Congress amended Section 10.1 of the Federal Reserve Act. That section now requires a person who is experienced with community banks to be on the Board of Governors. There is no other explicit sectoral requirement of this kind in the Act.
How should one interpret this new statutory requirement? The issue is not whether it is often beneficial to have a Board member who has prior experience with community banks. I fully agree that it is. But that’s true of many other sectors in the US economy. So why is Congress picking this particular sector as being one that needs to be represented on the Board?
Unfortunately, the answer is clear to me (as I suspect that it will be to anyone who fills this new slot): Congress wants the Fed to tilt supervision, regulation, and monetary policy to be more favorable to community banks. This interpretation is consistent with the fact that the passage of this statutory change came after six years of lobbying from the Independent Community Bankers of America.
This statutory preference for community banks is disturbing. It’s true that community banks are often located on Main Street. But the interests of community banks are absolutely not the same as the interests of Main Street.
In terms of supervision and regulation: lax supervision and regulation increases the probability of bank failure. Bank failures impose a cost on the FDIC which is, ultimately, backstopped by the taxpayer. Community banks operating in the interests of their shareholders should not - and don’t - fully internalize these taxpayer costs. Accordingly, community banks systematically favor less supervision and regulation than would be in the public interest.
In terms of monetary policy, the profits that banks derive from many of their products are positively correlated with the overall level of interest rates in the economy. For this reason, community bankers typically favor higher interest rates than is in the general public interest. (Of course, this preference is shared by larger financial institutions for similar reasons.)
In writing the above, I’m not intending to be critical of community banks. They’re private businesses. No one should expect the interests of a given private business to coincide with the general public interest.
The problem is with Congress. Congress is supposed to act in the interest of the public. But this law is not in the public interest. Instead, it is a rather clear attempt to influence the Fed so that it acts more in the interest of (part of) the financial sector.
In his op-ed, Senator Sanders says that he wants to reform the Fed so that “the foxes would no longer guard the henhouse”. The first step in this agenda should be to repeal the recent amendment to section 10.1 of the Federal Reserve Act. This step will not be easy to accomplish. The amendment passed with overwhelming support from both parties in both Houses of Congress.
Can lower oil prices cause a recession?: ...A drop in oil prices means less money in the hands of oil producers but more money in the hands of oil consumers. Currently the U.S. is importing about 5.1 million barrels a day more than we’re exporting of crude oil and petroleum products. At $100 a barrel, that had been a net drain on the U.S. economy of $190 billion each year. That drain that will now be cut by more than half by falling oil prices.
We usually see consumers spend their extra income right away, whereas it takes more time for producers to alter their spending plans. As a result, even if the U.S. was not a net importer of oil, we might still expect to see a short-run positive stimulus from dropping oil prices. ... The conclusion I draw ... is that each consumer spent more than they would have if oil prices had not fallen, but that there were other macro headwinds at the same time that were offsetting some of the positive stimulus of falling oil prices.
In any case, we’ve now had plenty of time for cuts in spending by U.S. oil producers to start to have an economic effect of their own. If there’s an increase in spending by consumers of $1 and a decrease in spending by producers of $1, it’s not really a net wash for the economy. The reason is that the consumers are spending their money in different places and on different items than the producers are cutting. There is a lot of specialized labor and capital that’s involved in oil extraction that can’t move costlessly to some other sector when the oil patch goes sour. ...
And of course we’re talking here not just about the people who work in the oil industry itself but all the other industries and services that sell to the oil sector and more in turn who sell to these suppliers. ...
There are thus some reasons why a decrease in oil prices would be a boost to the U.S. economy and other reasons why it could even be a drag. A number of studies have looked at the effects of oil price decreases and concluded that these have little or no net positive effect on U.S. real GDP growth...
Saturday, January 23, 2016
- How Stories Drive the Stock Market - Robert Shiller
- A note on the ethics of nudges - Vox EU
- Shadow Banking is Key to Financial Reform - Mike Konczal
- The geography of the foreign exchange market - VoxEU
- Discounting climate change investments - Vox EU
- Firm reorganization and firm productivity - VoxEU
- Low Oil Prices Lead To Low, Stock Prices? - EconoSpeak
- Sincerity - the subjective rationality of markets - Tim Johnson
- Philanthropy, American Style - Tim Taylor
- Dean Baker’s Libertarian Socialism - askblog
- When Will the Candidates Talk About the Economy? - NYTimes
- What happened to UK corporate debt? - Bank Underground
- How school children respond to exam pressure - VoxEU
Friday, January 22, 2016
Curious what you think of this proposal from Dean Baker:
A Progressive Way to End Corporate Taxes, by Dean Baker, NY Times: Just about every American chief executive has the same dream: to get out from under the corporate income tax. ...
Suppose that, instead of taxing corporate profits, we required companies to turn over an amount of stock, in the form of nonvoting shares, to the government. ...
The shares would be nontransferable, except in the case of mergers or buyouts, but they otherwise would be treated just like any other shares. If the company paid a dividend to its other stockholders, then it would pay the same per share dividend to the government. If it bought back 10 percent of its shares, then it would buy back 10 percent of the government’s shares at the same price. In the event of a takeover, the buyer would have to pay the same per-share price to the government as it did to the holders of other shares.
This way, there is no way for a corporation to escape its liability. A portion of whatever profit it makes will automatically go to the government. It also eliminates the enormous cost and waste associated with complying with or avoiding the corporate income tax... And federal revenues will go up, because companies will have incentive to do what is most profitable, not what minimizes their tax liability. ...
Ideally, replacing the income tax with stock issuance would be mandatory. But it could be done on an optional basis. ...
The switch from a corporate income tax to ownership of shares wouldn’t be good news for the tax avoidance industry, or for leading tax-avoiding corporations. But it would be a huge gain for just about everyone else.
The view of the economy from the SF Fed:
FRBSF FedViews: The Current Economy and the Outlook: Mark Spiegel, vice president at the Federal Reserve Bank of San Francisco, stated his views on the current economy and the outlook as of January 14, 2016.
- Real GDP has grown at an average annual rate of 2.2% over the first three quarters of 2015. However, a number of recent indicators suggest weaker growth in the fourth quarter, including declines in construction and existing home sales, as well as weaker manufacturing data and a sharp decline in inventory buildup.
- Despite the fourth quarter weakness, we expect real GDP to rebound in the first quarter of 2016, due to inventory payback and continued consumption strengths, and grow at an average annual rate of around 2¼% over the year as a whole.
- The labor market continues to surprise on the upside. The December payroll report was very strong, as the U.S. economy added 292,000 jobs and figures for October and November were revised upwards sharply. The six-month moving average remains well above 200,000 jobs per month, portending continued labor market tightening.
- The unemployment rate held steady in December at 5.0%, as increased labor force participation accompanied the growth in payroll employment. This suggests that some workers who were classified as out of the labor force have resumed searching for jobs, presumably due to improved expectations about chances for finding employment. As a result of the strong pace of job creation, we expect the unemployment rate to decline later this year to levels below the long-run natural rate of about 5%.
- Inflation remains substantially below the Federal Open Market Committee’s stated 2% target. Oil prices have decreased dramatically, with West Texas Intermediate oil falling below $30 a barrel. Other commodity prices have fallen sharply as well. In addition, the broad trade-weighted value of the dollar has continued to rise, also putting downward pressure on import prices and inflation.
- We project that headline inflation in 2016 will come in between 1% and 1¼% and rise gradually towards the 2% target as the effects of transitory shocks to energy prices and the exchange rate dissipate and as improving labor market conditions strengthen wage growth.
- The FOMC “lifted off” after its December 2015 meeting, raising the federal funds rate target range from 0–25 to 25–50 basis points. This policy change was accompanied by only mild financial market volatility, with muted movements in market yields before and after the announcement date. This suggests that the Federal Reserve successfully prepared financial markets for the liftoff announcement through its prior statements and communications.
- Yields on emerging market securities, as measured by the Emerging Market Bond Index (EMBI), also demonstrated little volatility immediately after the FOMC announcement.
- More recently, U.S. financial market volatility as measured by the VIX rate has turned up, largely because of concerns about financial volatility overseas, particularly in China. Chinese equity markets enjoyed a strong rally between the fall of 2014 and the summer of 2015, with values more than doubling. However, after a sharp selloff in the latter half of 2015, the Chinese government intervened in a variety of forms to stabilize equity prices. These efforts appeared to be temporarily successful, but prices resumed their downturn near the end of 2015 in response to additional weak news about Chinese economic fundamentals, particularly in its manufacturing sector. Technical factors, such as the on-off use of “circuit breakers” to limit sharp price changes, also appear to have exacerbated equity market volatility. Since the beginning of 2016, China’s stock market is down around 15%, more than erasing the overall gains in 2015.
- Another source of concern for Chinese investors has been the value of the renminbi. In August 2015, Chinese policymakers surprised markets with a devaluation of the renminbi against the dollar of approximately 4% and allowed greater flexibility in the exchange rate. The currency subsequently stabilized, but renewed depreciation of the renminbi occurred with the December 11 announcement that China would begin pegging its currency to a broad basket of currencies.
- The continued appreciation of the dollar against the renminbi and other currencies poses a downside risk to the U.S. inflation outlook.
- Fudging hell: Are results in top journals to be trusted? - The Economist
- Global Economy Can’t Withstand Four 2016 Fed Hikes - Larry Summers
- It’s Time to Make a Hard U-Turn- Narayana Kocherlakota
- Two serious mistakes in the Goodfriend and King review - Lars Svensson
- Updating Paul Krugman, "Evolution Groupie" - Evonomics
- The dead hand of austerity; left and right - mainly macro
- The Dead Hand of Austerity; Left and Right - Brad DeLong
- Workplace surveillance - Stumbling and Mumbling
- Expecting less inflation - Tyler Cowen
- Immigrants and homeownership - Vox EU
- Flooded cities - VoxEU