It Takes “Alternative Math” to Claim That Redistribution Is Futile: The unequal distribution of costs and benefits across society is one of the hottest topics in the regulatory arena—and one that, regretfully, has sparked fundamentally flawed arguments, threatening to distort and obscure much-needed discussion about redistributive policies. ...
Although all policies have redistributive effects, some ideologies are viscerally, even militantly, opposed to government interventions that benefit the poor, whether by intention or even as a side effect of an otherwise sound policy. ...
In a recent New York Times op-ed, University of Illinois at Chicago Professor Deirdre McCloskey exemplifies this type of argument, in conspicuously misguided fashion. In her column, McCloskey offers a litany of reasons as to why progressive taxation and other policies aimed at redistributing benefits to the poor are ill-advised. At the core of the essay, McCloskey makes the empirical assertion that such policies cannot actually make much of a difference in any event.
Unfortunately, the basic mathematics of McCloskey’s claim are mangled. She may not prefer that we seek progressive tax and regulatory policies, but her claim that these policies do not “uplift the poor very much” is erroneous. That the Times has decided not to correct her error—even in the face of an email exchange in which the author herself acknowledged her mistake—may be an example of how tempting it is to ascribe black-and-white factual issues to the realm of “healthy controversy.” ...
As with many of the toxic myths about regulation—that, for example, it is responsible for destroying countless jobs while failing to create any new ones in the process, or that it relies on gross exaggerations of risk and plays to irrational public fears—we are lost without the ability to distinguish between ideological responses to facts and ideological twisting of facts into nonsense. ...
It does, however run into a problem – that there’s no obvious benefit to deregulation. ... You might think this is counter-intuitive. Common sense says that if firms can easily fire people then workers’ incentives to work hard are sharpened by a greater fear of the sack, whilst companies can more easily adjust their workforce to changes in market conditions. These mechanisms, however, are offset by others, for example:
- If people fear the sack, they’ll not invest in job-specific skills but rather in general ones that make them attractive to future employers. They might also spend less time working and more time looking for a new job.
- A lack of protection will encourage people to change jobs more often, as it’s better to jump than be pushed. This can reduce productivity, simply because new workers often take time to adapt to their new company’s clients, IT systems and to new colleagues.
- If firms know they can fire at will they’ll devote less effort to screening or training, and so there might be worse matches between jobs and workers.
Deregulation might be good for bad employers who want to be petty tyrants, but it has no obvious aggregate benefit. I don’t say this in the hope of changing anybody’s mind. As Jonathan Swift said, “it is useless to attempt to reason a man out of a thing he was never reasoned into.” And as Nick points out, Brexiters are a cult that’s immune to reason. But things are true whether or not you believe them.
Q: The neoclassical theory of the firm does not consider political engagement by corporations. How big of an omission do you think this is?
The problems in expanding the theory of the firm to consider political engagements are considerable. Of course, political engagement by firms can be viewed as merely rent-seeking. Unavoidably, this produces waste... (and possibly also corrupt[s] the political system).
But before one jumps to the conclusion that therefore corporations should be denied the right to influence political decisions in the interests of efficiency, more must be considered. For example, this week, over one hundred public corporations, most of them high-tech firms, filed a brief opposing the legality of the executive order signed by President Trump barring various immigrants.1) This can be viewed as collective action by firms in defense of capitalism and the free flow of goods and services. Those opposed to firms lobbying regulatory agencies would probably approve this defense by corporations of human rights. Nor was this case unique. Corporations, like Apple, Facebook, and Google, have regularly defended human rights.
What this implies is that any absolute, prophylactic rule against political engagement may be undesirable. How then should we distinguish between “good” and “bad” political engagements by corporations? One approach might be to refine the rules of corporate governance and give shareholders greater rights in the process. To the extent that shareholders are diversified, they should rationally oppose rent-seeking by competing firms, as such activity just raises the costs for both sides.
Conversely, however, in concentrated industries where collusion is more likely than competition, diversified shareholders might rationally support rent-seeking (and even reduced competition) by the firms in which they invest. Some empirical evidence suggests that investors in the highly concentrated airline industry have behaved this way. Hence, stronger corporate governance may supply a partial answer sometimes, but hardly always. At best, it can add transparency to the process, thereby making rent-seeking less feasible.
Theorists of the firm who wish to restrict political engagements by firms face a serious problem that they have not yet recognized: at least in the United States, corporate political engagement may be protected by the First Amendment. This means that reforms such as disclosure are possible (and, I think, desirable), but stricter, prophylactic rules are probably not. ...
No surprises, except perhaps the dissent by Neel Kashkari -- the Fed "decided to raise the target range for the federal funds rate to 3/4 to 1 percent," with indications of more rate increases to come:
Press Release, Release Date: March 15, 2017: Information received since the Federal Open Market Committee met in February indicates that the labor market has continued to strengthen and that economic activity has continued to expand at a moderate pace. Job gains remained solid and the unemployment rate was little changed in recent months. Household spending has continued to rise moderately while business fixed investment appears to have firmed somewhat. Inflation has increased in recent quarters, moving close to the Committee's 2 percent longer-run objective; excluding energy and food prices, inflation was little changed and continued to run somewhat below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 3/4 to 1 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; Jerome H. Powell; and Daniel K. Tarullo. Voting against the action was Neel Kashkari, who preferred at this meeting to maintain the existing target range for the federal funds rate.
Populism and the Politics of Health: What’s next on health care? Truly, I have no idea. The AHCA is a real stinker... But ... starting off the Trump legislative era with the crashing and burning of Obamacare repeal would deeply damage Trump... So they will pull out all the stops.
But why are Republicans having so much trouble? Health reform is hard... But there’s a more fundamental issue: who is being served?
Obamacare helped a large number of people at the expense of a small, affluent minority: basically, taxes on 2% of the population to cover a lot of people and assure coverage to many more. Trumpcare would reverse that, hurting a lot of people (many of whom voted Trump) so as to cut taxes for a handful of wealthy people. That’s a difference that goes beyond political strategy. ...
And yet, and yet: Trump did in fact win over white working-class voters, who thought they were voting for a populist...
This ties in with an important recent piece by Zack Beauchamp on the striking degree to which left-wing economics fails, in practice, to counter right-wing populism... Why?
The answer, presumably, is that what we call populism is really in large degree white identity politics, which can’t be addressed by promising universal benefits. Among other things, these “populist” voters now live in a media bubble, getting their news from sources that play to their identity-politics desires, which means that even if you offer them a better deal, they won’t hear about it or believe it if told. For sure many if not most of those who gained health coverage thanks to Obamacare have no idea that’s what happened.
That said, taking the benefits away would probably get their attention, and maybe even open their eyes to the extent to which they are suffering to provide tax cuts to the rich. ...
... Trumpism is faux populism that appeals to white identity but actually serves plutocrats. That fundamental contradiction is now out in the open.
Public capital, private capital: The present economic debate is over-determined by two realities which, moreover, are connected as we sometimes tend to forget. On one hand we have the steady rise in public debt and, on the other, the prosperity of privately owned wealth. The figures for the level of public debt are well known; almost everywhere the level approaches or exceeds 100% of national income ... as compared with barely 30% in the 1970s. ...
During the post-war boom (the Trente Glorieuses) public assets were very considerable (approximately 100-150% of national income, as a result of a very large public sector, a consequence of post-war nationalisations), and significantly higher than public debt...
The most recent data available for 2015-2016 shows that net public capital has become negative in the United States, Japan and the United Kingdom. In all these countries, the sale of the total public assets would not be sufficient to repay the debt. In France and in Germany net public capital is only just positive.
But this does not mean that rich countries have become poor: it is their governments which have become poor, which is very different. ... The fact remains that private capital grew much faster than the decline in public capital, and that rich countries themselves hold even a little more...
Why be so pessimistic in the face of such prosperity? Simply because the ideological and political balance of power is such that public authorities are not able to make the main beneficiaries of globalisation contribute their fair share. The perception of this impossibility of a fair tax sustains the flight towards the debt. ...
Historically, major changes in the structure of property ownership often come together with profound political changes. We see this with the French Revolution, the American Civil War, the Euro-World Wars in the 20th century and the Libération in France. The nationalist forces at work today could lead to a return to national currencies and inflation, which would promote a chaotic redistribution of resources, at the expense of severe social stress and an ethnicisation of political conflicts. In the face of this fatal risk to which the present status quo could lead, there is only one solution. We must chart a democratic pathway out of the impasse and organise the necessary redistribution of resources within the framework of the rule of law.
Shifting Dots, bt Tim Duy: The Federal Reserve begins its two-day meeting today. The outcome of the meeting is no longer in debate. A 25bp rate hike is widely expected after a round of Fedspeak in the week prior to the blackout period and the February employment report. More important now is what signal the Fed sends with the statement, the press conference, and the dots. I anticipate the overall message to signal general confidence in the economic outlook while reinforcing the idea that the Fed is neither behind the curve nor intends to fall behind the curve. The combination will give the Fed room to tighten policy at a gradual pace. I think that four hikes this year would still be considered gradual from the Fed's perspective. After all, the expectation of four hikes a year was considered gradual at the beginning of 2016. Not sure why it shouldn't be considered gradual now.
At the end of last year, the Fed's median interest rate projection anticipated 75bp of rate hikes in each of 2017 and 2018. That translated into my 2017 baseline of two rate hikes with an option on a third, basically including a bias to account for the fact that the Fed's forecast has fallen short in recent years. If economic conditions were such, however, that the Fed pulled forward the first hike to March, I said that my expectation would shift to a baseline of three with an option on four. What that means, in effect, that I expect the dots to shift upward to reflect an anticipation of four rate hikes in 2017.
With March likely, will the dots move as I expect? Not everyone thinks so. Morgan Stanley, for instance, expects the dots will show higher rates in 2018 and 2019 instead. Via Business Insider:
So why do I think it is more likely than not that the Fed raise the dots for 2017? Consider first the projections for output growth, unemployment, and inflation. Those should play directly into the rate hike forecast in a systematic fashion. So it you think the odds favor some combination of a higher expect growth gap (the difference between actual and longer run output growth), a lower than anticipated unemployment gap (the difference between actual and longer run unemployment), and a higher inflation forecast, then you should anticipate the dots will shift upward.
In practice, of course, these estimates depend in part on the Fed's estimate of potential growth and the natural rate of unemployment. I don't think either has likely change, so the relevant factors should be the forecasts of the actual variables. Overall, I think it reasonable to believe that at least one, and likely two factors will point to higher rates.
Second, the Fed clearly believes that the balance of risks has tilted at least to completely balanced if not toward the upside. External risks have waned, incoming data both soft and now, with the employment report, hard have been solid, and Fed officials are captured by the allure of fiscal stimulus. FOMC participants whose rate forecasts incorporated a heavy downside risk (reasonable given what happened in 2016) will likely pull their rate forecasts up in a sigh of relief. In essence, these members will believe that without pulling forward rate hikes, they will be in danger of overshooting their targets.
Third, the financial markets were particularly buoyant in recent months even as expectations of tighter policy intensified. I think some FOMC members - yes, New York Federal Reserve President William Dudley, I am looking at you - will want to push back on those easier conditions in the name of financial stability. So that argues for pulling rate hikes forward.
Fourth, estimates of the longer-run natural rate could rise. I don't anticipate this, as I don't see they have evidence to suggest this is the case, but I did not anticipate the small bump upward in the neutral rate estimates in the December Summary of Economic Projections.
Altogether then I see more reasons likely to raise the 2017 rate projections than to hold them steady. Hence my expectations for the dots to nudge upward. Basically, it just puts the Fed back to where they started in 2016, expect with more cause to believe it will actually work out this time.
Of course, the rate projection is not a promise, and given recent history I tend to shade down my expectation from what the Fed projects. Hence my three with an option on four. I also am not entirely sure how they will integrate balance sheet reduction with rate hikes? Do they announce a balance sheet reduction at the same meeting they raise rates? Or do they pass on a rate hike to announce a balance sheet reduction? It seems like they would what to avoid the latter because it would equate the balance sheet tool with a rate hike a little too directly. Instead, I expect they would want everyone to think the balance sheet reduction is no big deal. So that argues for both at say the September meeting and that then places an option on the December meeting. If would be nice to have better guidance on this issue.
I tend to think the balance sheet issue is another reason to front load hikes in 2017 if possible. Then they have room to pause in 2018 if balance sheet reduction is a bit sloppier than anticipated.
Bottom Line: I see more reasons that not that the Fed will push up its 2017 rate hike projections. Lots of different factors - external, data flow, fiscal stimulus, and financial conditions - to say that with the economy hovering near potential output, the time is right to make a slightly faster move toward the neutral rate. Indeed, I have a hard time seeing why they would pull forward a rate hike if they weren't trying to create room for an additional hike this year. Note that this would really be just moving the ball down the field a bit quicker, not changing the goal posts - the estimate of the neutral rate. A higher estimate of the neutral rate would be much more hawkish than just quickening the pace slightly to that rate.
Then came the first employment report of the Trump administration, which at 235,000 jobs added looked very much like a continuation of the previous trend. And the administration claimed credit: Job numbers, Mr. Trump’s press secretary declared, “may have been phony in the past, but it’s very real now.”
Reporters laughed — and should be ashamed of themselves... For it really wasn’t a joke. America is now governed by a president and party that ... want everyone to accept that reality is whatever they say it is.
So we’re just supposed to believe the president if he says, falsely, that his inauguration crowd was the biggest ever; if he claims, ludicrously, that millions of votes were cast illegally for his opponent; if he insists, with no evidence, that his predecessor tapped his phones.
And it’s not just about serving one man’s vanity..., this attitude can hurt millions of people, consider ... health care reform.
Obamacare has led to a sharp decline in the number of Americans without health insurance. ... Republicans, however, are in denial about recent gains. ...
And as for the likely impacts of Trumpcare — well, they literally don’t want to know. ...Republicans rammed Trumpcare through key committees, literally in the dead of night, without waiting for the C.B.O. score — and they have been pre-emptively denouncing the budget office, which is likely to find that the bill would cause millions to lose health coverage. ...
The C.B.O., in other words, is in the same position as the news media, which Mr. Trump has declared “enemies of the people” — not, whatever he may say, because they get things wrong, but because they dare to challenge him on anything. ...
And much, perhaps most, of his party is happy to go along, accepting even the most bizarre conspiracy theories. For example, a huge majority of Republicans believe Mr. Trump’s basically insane charges about being wiretapped by President Obama.
So don’t make the mistake of dismissing the assault on the Congressional Budget Office as some kind of technical dispute. It’s part of a much bigger struggle, in which what’s really at stake is whether ignorance is strength, whether the man in the White House is the sole arbiter of truth.
“It is the general social consensus, clearly, that the laissez-faire solution for medicine is intolerable.” – Kenneth Arrow, 1963.
As Republicans struggle to find an acceptable replacement for Obamacare, a task that does not yet appear to be complete given the growing opposition to their recent proposal, they would do well to remember the words of the person who invented healthcare economics, Kenneth Arrow.
Professor Arrow, a Nobel Prize-winning economist who recently passed away at the age of 95, argued that the market for healthcare is not like other markets for several reasons. ...
Green Light, by Tim Duy: If there was truly any potential impediment to a rate hike from the Fed this week, it would have come from a weak employment report. The employment report was decidedly not weak. Instead, it finished paving the way to a Fed rate hike. Not enough yet, however, to justify a dramatic acceleration in the pace of future rate hikes, implying only a 25bp upward nudge in the Fed's rate projections for 2017.
Nonfarm payroll growth came in above expected at 235k:
The number may have been boosted by mild weather in February. Still, the underlying pace of growth in recent months is around 200k/month. This is faster than the Fed expects necessary to hold unemployment steady after the cyclical boost to labor force participation plays out. So far, however, labor supply continues to respond. Labor force participation edged up during the month, leaving the decline in the unemployment rate a modest 0.1 percentage points to 4.7 percent. This is just a touch below the Fed's estimate of NAIRU.
Underemployment numbers to continue to improve, as the Fed expects:
The economy is at something of a sweet spot, with job growth strong enough to prod along continued healing of the labor market but slow enough that the Fed can continue to remove accommodation at a gradual pace.
Wage growth rebounded in February, continuing to hover in the 2.5-3 percent range:
Should we be expecting much faster wage growth? Probably not. It strikes me that we are closing in on pre-recession rates:
If inflation rises to two percent (and here I am thinking core inflation), and wages rise with it, that adds about 30bp which pushes wage growth a bit above three percent. Note also, real wage growth was likely a touch higher prior to the recession, but not much:
And this needs to be taken in context of falling productivity growth over the past two decades:
So in order to expect substantially faster wage growth, we need to expect substantially higher productivity growth or substantially higher inflation. The Fed is betting against the former and actively tries to contain the latter. Indeed, on the latter they are only looking to get another 30bp or so. Which suggests to me that a meaningful acceleration of wages at this point would be interpreted by the Fed as evidence they had overshot the full employment mandate and needed to tighten policy more aggressively to contain inflationary pressures. But we are not there yet.
Bottom Line: Looks like the Fed knew what it was doing by signaling a rate hike in recent weeks. The earlier than expected rate hike should correspond to a bump up in this week's "dots." Some participants with two dots will switch to three, some with three to four. I expect the median rate hike projection of Fed participants will be four, which I translate into a baseline case this year of three with an option on four. The Fed will want to front load these hikes to stay ahead of the curve, which means March, June, and September if the data allows. Then December if needed. Data as of yet does not suggest a need by itself to step up the pace of hikes even more quickly. Watch the longer-run rate forecast. A rise in the end game dots would have much more hawkish implications than just a small acceleration in the near-term pace of hikes.
Luca Benati, Robert Lucas, Juan Pablo Nicolini, and Warren E. Weber:
Long-run money demand redux: Most economists and central bankers no longer consider money supply measures to be useful for conducting monetary policy. One reason is the alleged instability of the relationship between monetary aggregates. This column uses data from 32 countries and spanning up to 100 years to argue that the long-run demand for money is alive and well. Results show a remarkable stability in long run money demand, both within and across countries. Nonetheless, short-run departures can be large and persistent, and further research is needed.
Over the last three decades, most economists and central bankers have come to doubt the usefulness of money supply measures for conducting monetary policy, and have turned to macroeconomic models in which monetary aggregates have no role.
What was the main reason behind this move away from monetary aggregates? In our view, it was the alleged disappearance, starting from the early 1980s, of any previously identified stable relationship between monetary aggregates, GDP, and interest rates. For the US, for example, researchers such as Friedman and Kuttner (1992) have documented the breakdown during those years of any stable long-run demand for several alternative monetary aggregates. By the same token, in the Eurozone, the ECB’s so-called monetary pillar (a reference value for the annual growth rate of M3 derived from a money demand equation) has come to be seen as too unreliable to be of any use at all.
There is a clear sense in which this move away from monetary aggregates has left monetary policy untroubled. Over the same decades, there was a surge in the number of central banks that were explicitly or implicitly following inflation-targeting policies in which the monetary policy instrument was the short-term interest rate. And the result has clearly been remarkable – inflation has been defeated. This has been the case for developed economies that saw their inflation rates climb to two digits for a few years in the late 1970s and early 1980s, for emerging economies that experienced hyperinflation during the same years, and for everything in between. In 2015, with a yearly inflation rate of around 30%, Argentina had one of the highest inflation rates in the world – a rate that, ironically, would have been one of the lowest in Latin America in the 1980s.
In this column, we first review recent work on the long-run demand for money, and argue that it is alive and well. We then explain why we believe that this finding may contribute to the monetary policy debate. ...
The AHCA’s mandate replacement doesn’t make sense to me: ...The Republicans hate the individual mandate. I get that. I don’t necessarily understand their rationale, but I accept it. They also, however, understand the need for some sort of carrot/stick to get healthy people to buy insurance so that we don’t get adverse selection and see the private insurance market enter a death spiral. So they need to replace it.
We have discussed this before. There are many ways to solve this adverse selection problem without a mandate. ...
Moreover, the incentive is totally in the wrong direction. The individual mandate punishes those who don’t buy insurance – every year. As long as I remain uninsured, I will be penalized. I will be hit again and again, until I buy insurance. That’s a stick.
The new AHCA penalty works in the opposite direction. Once I’m out of the market, I’m left alone. It’s not until I re-enter that I’m hit with the penalty. The longer I stay out, the longer I avoid the pain. It’s an inducement to remain uninsured.
We know what needs to happen to reduce adverse selection. We need to make the carrots and/or sticks stronger. This seems to do the opposite. I don’t get it.
Given the rhetoric Republicans have used over the past seven years to attack health reform, you might have expected them to do away with the whole structure of the Affordable Care Act — deregulate, de-subsidize and let the magic of the free market do its thing. This would have been devastating for the 20 million Americans who gained coverage thanks to the act, but at least it would have been ideologically consistent.
But Republican leaders weren’t willing to bite that bullet. What they came up with instead was a dog’s breakfast that conservatives are, with some justice, calling Obamacare 2.0. But a better designation would be Obamacare 0.5, because it’s a half-baked plan that accepts the logic and broad outline of the Affordable Care Act while catastrophically weakening key provisions. If enacted, the bill would almost surely lead to a death spiral of soaring premiums and collapsing coverage. ...
How could House Republicans ... have produced such a monstrosity? Two reasons.
First, the G.O.P.’s policy-making and policy analysis capacity has been downgraded to the point of worthlessness. There are real conservative policy experts, but the party doesn’t want them, perhaps because their very competence makes them ideologically unreliable... Basically, facts and serious analysis are the modern right’s enemies; policy is left to hacks who can’t get even the simplest things right.
Second, Republicans seem to have been undone by their reverse-Robin-Hood urges. You can’t make something like Obamacare work without giving lower-income families enough support that insurance becomes affordable. But the modern G.O.P. always wants to comfort the comfortable and afflict the afflicted; so the bill ends up throwing away the taxes on the rich that help pay for subsidies, and redirects the subsidies themselves away from those who need them to those who don’t.
Given the sick joke of a health plan, you might ask what happened to all those proclamations that Obamacare was a terrible, no good system that Republicans would immediately replace with something far better — not to mention Donald Trump’s promises of “insurance for everybody” and “great health care.”
But the answer, of course, is that they were all lying, all along — and they still are. On this, at least, Republican unity remains impressively intact.
There has been extensive writing about the power and scope of corporations going back at least to Edward Mason and Carl Kaysen. In a chapter I wrote,1) I explored the role of large corporations in terms of their impact on factors other than the product market. Echoing Kaysen I emphasized location, employment, product line choices, vendors that because of their scale and scope give firms powers far beyond those conceived in the neo-classical model and unconstrained by traditional notions of price competition. The neo-classical model simply does not comprehend the modern corporation.
But if we are talking about a theory carefully constructed on a set of axioms, the theory really can’t consider political engagements. The essence of the neo-classical theory is the constraint on choice imposed by given and widely shared technology and competitive markets for resources and vendors. Political engagement derives from and is focused on seeking monopolistic power. The various theories of monopolistic competition are instructive but fall far short of the standard sought by neoclassical theory. ...
Employment Report Ahead, by Tim Duy: Arguably, the Fed took the mystery out of this next FOMC meeting by fairly clearly signaling a rate hike is coming. What could hold them back at this point? Only a complete disaster of an employment report. And today's ADP number suggests that's very, very unlikely. Indeed, if the ADP number translates into a blowout employment report, the Fed probably didn't need to signal as aggressively as they did about this next meeting. The data would have brought market expectations to the same place.
Calculated Risk provides a preview of the February employment report, concluding that he will take the "over" on the current forecast of a 195k gain in nonfarm payrolls within a range of 162k to 220k. I concur. Feeding recent data into my quick and dirty forecasting model suggests a gain of 273k for the month:
That said, I would not put too much emphasis on the point forecast itself. The change in payrolls is notoriously difficult to forecast. Almost a fool's game. That said, I do read this as a signal that there is substantial upside risk to the consensus forecast.
As important, if not more, is the unemployment rate and wage growth. A large gain in payrolls suggests a drop in the unemployment rate unless labor force responds positively. The Fed expects that as the recovery progresses, growth in the labor force will slow as demographic effects dominate cyclical effects. If this happens before job growth slows, the unemployment rate will decrease sharply and the Fed will undershoot the natural rate of unemployment. Faster wage growth would help confirm such an undershoot.
Bottom Line: A surge in hiring coupled with a decline in unemployment would be a red flag for the Fed. If that happens, expect the Fed to be more aggressive this year. It will give them more reason to front load rate hikes, and, if repeated in the next employment report, would open up the possibility of a May hike. Monetary policy is not on a preset course, and gradualism is not a promise, only an expectation.
I first encountered Karl Polanyi as an undergraduate, in a course on comparative politics. “The Great Transformation” was on the course syllabus, sitting somewhat awkwardly amidst more standard political science fare. The assigned reading, on the Speenhamland system and the reform of the Poor Laws in Britain made little impression on me at first. But over the years, I found myself coming back to the central arguments of the book: the embeddedness of a market economy in a broader set of social arrangements, the rejection of an autonomous economic sphere, the folly of treating markets as self-stabilizing. ...
1. Study reports results which reinforce the dominant, politically correct, narrative. 2. Study is widely cited in other academic work, lionized in the popular press, and used to advance real world agendas. 3. Study fails to replicate, but no one (except a few careful and independent thinkers) notices.
#1 is spot-on for economics. Woe be to she who bucks the dominant narrative. In economics, something else happens. Following the study, there are 20 piggy-back papers which test for the same results on other data. The original authors typically get to referee these papers, so if you're a young researcher looking for a publication, look no further. You've just guaranteed yourself the rarest of gifts -- a friendly referee who will likely go to bat for you. Just make sure your results are similar to theirs. If not, you might want to shelve your project, or else try 100 other specifications until you get something that "works". One trick I learned: You can bury a robustness check which overturns the main results deep in the paper, and your referee who is emotionally invested in the benchmark result for sure won't read that far. ...
Most researchers in Economics go their entire careers without criticizing anyone else in their field, except as an anonymous referee, where they tend to let out their pent-up aggression. Journals shy away from publishing comment papers, as I found out first-hand. In fact, much if not a majority of the papers published in top economics journals are probably wrong, and yet the field soldiers on like a drunken sailor. Often, many people "in the know" realize that many big papers have fatal flaws, but have every incentive not to point this out and create enemies, or to waste their time writing up something which journals don't really want to publish (the editor doesn't want to piss a colleague off either). As a result, many of these false results end up getting taught to generations of students. Indeed, I was taught a number of these flawed papers as both an undergraduate and a grad student.
A Plan Set Up To Fail: So now we know what Republicans have to offer as an Obamacare replacement. Let me try to avoid value judgments for a few minutes, and describe what seems to have happened here.
The structure of the Affordable Care Act comes out of a straightforward analysis of the logic of coverage. ...
And the result has been a sharp decline in the number of uninsured, with costs coming in well below expectations. Roughly speaking, 20 million Americans gained coverage at a cost of around 0.6 percent of GDP.
Republicans have nonetheless denounced the law as a monstrosity, and promised to replace it with something totally different and far better. Which makes what they’ve actually come up … interesting.
For the GOP proposal basically accepts the logic of Obamacare. ... Conservatives calling the plan Obamacare 2.0 definitely have a point.
But a better designation would be Obamacare 0.5, because it’s really about replacing relatively solid pillars with half-measures, severely and probably fatally weakening the whole structure.
First, the individual mandate – already too weak, so that too many healthy people opt out – is replaced by a penalty imposed if and only if the uninsured decide to enter the market later. This wouldn’t do much.
Second, the ACA subsidies, which are linked both to income and to the cost of insurance, are replaced by flat tax credits which would be worth much less to lower-income Americans, the very people most likely to need help buying insurance.
Taken together, these moves would almost surely lead to a death spiral. Healthy individuals, especially low-income households no longer receiving adequate aid, would opt out, worsening the risk pool. Premiums would soar – without the cushion created by the current, price-linked subsidy formula — leading more healthy people to exit. In much of the country, the individual markets would probably collapse.
The House leadership seems to realize all of this; that’s why it reportedly plans to rush the bill through committee before CBO even gets a chance to score it.
It’s an amazing spectacle. Obviously, Republicans backed themselves into a corner: after all those years denouncing Obamacare, they felt they had to do something, but in fact had no good ideas about what to offer as a replacement. So they went with really bad ideas instead.
Kevin Drum notes one reason why the bill is structured as it is:
I'm pretty sure the bill doesn't include any of the following:
-No tort reform. ...
-No insurance sales across state lines. ...
-No change to the essential benefits required of all health care plans. ...
-Obamacare is chockablock with regulations of all kinds, including incentives to reduce costs and rules about how doctors are paid. These appear to be intact under the Republican bill.
Why is this? If you look carefully, you'll see what these things all have in common: they don't directly affect the federal budget, which means they can't be passed via reconciliation. They have to be passed in a separate bill under regular order, which means Democrats can filibuster them. Republicans don't have 60 votes in the Senate to overcome a filibuster, so they can't do any of this stuff.
Republicans can starve the subsidies to make Obamacare virtually useless for the poor, but they can't repeal the entire law. The result of such a partial repeal is likely to be such obvious chaos that they'll be lucky to get their bill passed in the House, let alone the Senate. There are bound to be at least three senators who just aren't willing to clap loudly and pretend that everything is OK. It's very hard to see a path to passage for this bill.
"They have no idea how to turn their slogans into actual legislation
A Party Not Ready to Govern, by Paul Krugman, NY Times: According to Politico, a Trump confidante says that the man in the Oval Office — or more often at Mar-a-Lago — is “tired of everyone thinking his presidency is screwed up.” Pro tip: The best way to combat perceptions that you’re screwing up is, you know, to stop screwing up.
But he can’t, of course. And it’s not just a personal problem.
It goes without saying that Donald Trump is the least qualified individual, temperamentally or intellectually, ever installed in the White House. ... Thanks, Comey.
But the broader Republican quagmire — the party’s failure so far to make significant progress toward any of its policy promises — isn’t just about Mr. Trump’s inadequacies. The whole party, it turns out, has been faking it for years. Its leaders’ rhetoric was empty; they have no idea how to turn their slogans into actual legislation, because they’ve never bothered to understand how anything important works.
Take the two lead items in the congressional G.O.P.’s agenda: undoing the Affordable Care Act and reforming corporate taxes. In each case Republicans seem utterly shocked to find themselves facing reality.
The story of Obamacare repeal would be funny if the health care — and, in many cases, the lives — of millions of Americans weren’t at stake. ...
Then there’s corporate tax reform — an issue where the plan being advanced by Paul Ryan ... is actually not too bad, at least in principle. ...
But Mr. Ryan has failed spectacularly to make his case either to colleagues or to powerful interest groups. Why? As best I can tell, it’s because he himself doesn’t understand the point of the reform. ...
At this point, then, major Republican initiatives are bogged down for reasons that have nothing to do with the personality flaws of the tweeter in chief, and everything to do with the broader, more fundamental fecklessness of his party.
Does this mean that nothing substantive will happen on the policy front? Not necessarily. Republicans may decide to ram through a health plan that causes mass suffering, and hope to blame it on Mr. Obama. They may give up on anything resembling a principled tax reform, and just throw a few trillion dollars at rich people instead.
But whatever the eventual outcome, what we’re witnessing is what happens when a party that gave up hard thinking in favor of empty sloganeering ends up in charge of actual policy. And it’s not a pretty sight.
Deconstructing President Trump's jobless numbers: In Donald Trump’s address to Congress last week, he discussed the economy and the policies he intends to pursue. “We must honestly acknowledge the circumstances we inherited [from the Obama administration],” he said. “Ninety-four million Americans are out of the labor force.”
Let’s honestly examine this claim and whether it accurately portrays the circumstances the president inherited. ...
Robots are wealth creators and taxing them is illogical: I usually agree with Bill Gates on matters of public policy and admire his emphasis on the combined power of markets and technology. But I think he went seriously astray in a recent interview when he proposed, without apparent irony, a tax on robots to cushion worker dislocation and limit inequality. ....
Goodbye Spin, Hello Raw Dishonesty, by Paul Krugman, Commentary, NY Times: The latest big buzz is about Jeff Sessions, the attorney general. It turns out that he lied during his confirmation hearings, denying that he had met with Russian officials during the 2016 campaign. In fact, he met twice with the Russian ambassador, who is widely reported to also be a key spymaster. ...
At this point it’s easier to list the Trump officials who haven’t been caught lying under oath than those who have. This is not an accident.
Critics ... used to complain, with justification, about politicians’ addiction to spin —...presenting their actions in a much better light than they deserved. But all indications are that the age of spin is over. It has been replaced by an era of raw, shameless dishonesty.
In part, of course, the pervasiveness of lies reflects the character of the man at the top: No president, or for that matter major U.S. political figure of any kind, has ever lied as freely and frequently as Donald Trump. ...
And the question is, who’s going to stop him?
The moral vacuity of Republicans in Congress, and the unlikelihood that they’ll act as any check on the president, becomes clearer with each passing day. Even the real possibility that we’re facing subversion by agents of a foreign power, and that top officials are part of the story, doesn’t seem to faze them as long as they can get tax cuts for the rich and benefit cuts for the poor.
Meanwhile, Republican ... voters, who are the real arbiters when polarized and/or gerrymandered districts make the general election irrelevant for many politicians, live in a Fox News bubble...
And what about the Fourth Estate? Will it let us down, too?
To be fair, the first weeks of the Trump administration have in important ways been glory days for journalism; one must honor the ... reporters who have been ferreting out the secrets this authoritarian-minded clique is so determined to keep.
But then you watch something like the way much of the news media responded to Mr. Trump’s congressional address, and you feel despair. It was a speech filled with falsehoods and vile policy proposals, but read calmly off the teleprompter — and suddenly everyone was declaring the liar in chief “presidential.”
The point is that if that’s all it takes to exonerate the most dishonest man ever to hold high office in America, we’re doomed. Let’s hope it doesn’t happen again.
A self-fulfilling expectations led recession?: The only two lectures on Oxford’s core undergraduate macro course that I still teach, and which I have just taught, are the last two on fiscal policy. I use the privilege of the last lecture to end on a reflective note. I acknowledge that macro rightly got a lot of stick by largely ignoring the role of finance, but I also point out that the poor recovery has involved a vindication of the core macro model: austerity is a bad idea at the ZLB, QE was not inflationary and interest rates on government debt did not rise but fell.
So far so familiar. But I end by showing them my this chart.
And I say that we really have no idea why there has been no recovery from the Great Recession, so there are plenty of mysteries left in macro..., something similar has happened in most places. I think it is a suitable note of humility (and perhaps inspiration) on which to end the course.
A mechanical way to explain what has happened is to bend the trend: to suggest that technical progress has been slowing down for some time. ... I have been highly skeptical about that story...
However another explanation that I have always wondered about and which others are beginning to explore is that perhaps we remain in an extended period of demand deficiency. Keynesian theory is very suggestive that such a possibility could occur. Suppose that firms and consumers came to believe that the output gap was currently zero when it is not, and that they erroneously believed that the recession caused a step change both in potential GDP but also possibly its growth rate. Suppose also that unemployed workers priced themselves into jobs by cutting their (real) wage or disappearing by no longer looking for work. ...
In that situation, how do we know that we are suffering from demand deficiency? The traditional answer in macroeconomics is nominal deflation: falling wages and prices. But because workers have already priced themselves into jobs, nothing more will come from the wages route. So why would firms cut prices?
If the pre-crisis trend still applies, it means that there are a large number of innovations waiting to be embodied in new investment. ...
But suppose the innovations are just not profitable enough to generate an increase in profits that would justify undertaking the investment, even though borrowing costs are low. Maybe a far more dependable motivator for embodied technical progress to take place is the need to satisfy an expanding market. The firm needs to install new capacity to satisfy growing demand for its product, and then it is obvious to investment in equipment that embodies new innovations. The accelerator remains a very successful empirical model of investment. (On both points, see this discussion by Caballero.) But if beliefs are such that the market is not going to expand that much, because firms believe the economy is ‘at trend’ and trend growth has now become pretty small, then the need to invest to meet an expanding market largely goes away.
This idea goes right back to Keynes and animal spirits of course. ...
It is this possibility which is the reason that I have always argued central banks and governments should have been much more ambitious about demand stimulation after the Great Recession. As I and others have pointed out, you do not have to attach a very high probability to the scenario that demand will create supply before it justifies a policy of ‘testing the water’ by letting the economy run hot. Every time I look at the data above, I ask whether we have brought this on ourselves by a combination of destructive austerity and timidity.
Kenneth Arrow, 1921-2017: Professor Kenneth Arrow died on February 21, 2017, at the age of 95. He was widely regarded (along with Paul Samuelson and John Hicks) as one of the three greatest economists of the 20th century. He also happened to be my favorite economist of all time.
What was the question? Briefly, it was well known from the so-called Condorcet paradox that majority voting could produce nasty cycles in choices, even when the individual preferences involved in that voting process were perfectly reasonable. That led to the question: was there any political system that could “reasonably” aggregate individual preferences? Now think about the question for a second: we know what majority voting is, but there is in principle an infinity of other systems. How could one ever formulate such a problem, let alone attempt to answer it? The very formulation — as axioms placed on an abstract mapping that connected individual preferences to their social counterpart — was sheer genius. But the apparatus was not only beautiful: it could also speak. It argued that under the minimal desiderata placed on the aggregator, there was no way of putting together individual preferences into a satisfactory social ordering; one that was cycle-free. ...
More on Dudley, by Tim Duy: Following up on my piece this morning at Bloomberg, it is worth going into a little deeper detail on New York Federal Reserve President William Dudley’s comments. I think in this interview Dudley is doing a good job explaining policy in terms of the forecast. That is something the Fed needs to keep pushing. It doesn’t sound like the forecast or the risks have moved sufficiently to change the number of rate hikes expected this year. But he sure seems to be leaning toward pulling forward those hikes.
The CNN interview starts hawkish. What does “fairly soon” mean? According to Dudley:
President Dudley: I think it means what it says. It doesn't say it's a week, a month, a couple months. Fairly soon means in the relatively near future…
Quest: And that's obviously fairly soon, which implies sooner rather than later?
Dudley: I think that's fair.
March is sooner than June. May is sooner than June. March is sooner than May. June is sooner than December. Compared to last year, the next rate hike will certainly come sooner in the year. But given the context Dudley must be aware of how his comments would be received.
On the forecast Dudley says:
We've basically been saying that if the economy continues on the trajectory that it's on, slightly above-trend growth, gradually rising inflation, we're going to continue to remove monetary policy accommodation. So let's look at what we've actually gotten. It seems to me that most of the data we've seen over the last couple months is very much consistent with the economy continuing to grow at an above-trend pace, job gains remain pretty sturdy, inflation has actually drifted up a little bit as energy prices have increased. So we're very much on the trajectory that we said -- that we thought we'd be on and we said if we were on that trajectory we're going to gradually remove accommodation.
This is how I how been viewing the situation. The forecast seems pretty much intact, so there seems to be little reason to pull policy hikes forward. But then he adds:
What else have we seen? We've also seen things that should make us even more confident that this is going to continue in the future. After the election we've seen very large increases in household and business confidence, we've seen very buoyant financial markets -- the stock market is up, credit spreads are narrow. And we have the expectation that fiscal policy will probably move in a more stimulative direction. So, put it all together, I think the case for monetary policy tightening has become a lot more compelling.
Three issues are on the top of his mind – confidence measures, easier financial conditions, and fiscal policy. Arguable, these all distill down to expectations of stimultive fiscal policy. While none of these have yet translated into hard data, they have raised the probability of upside risk to the forecast. Indeed, he says this explicitly:
But we do know that fiscal policy is going to move in a more stimulative direction. So what that says to me is that the risks to the outlook are now starting to tilt to the upside. So while I haven't really built it into my GDP forecast, when I think about the balance of risks -- up or down in terms of economic activity -- I think the fiscal side tends to push things -- the risks to the upside.
And raising that upside risk thus makes the case for a preemptive rate hike more compelling.
All of this sounds like a strong push for March. As the interview continues on, however, he seems to walk back his own outlook:
Quest: But you can't wait for it to happen, can you? I mean the whole question of monetary lag. I know you've got to think about many of these policies not coming into force until 2018, but you have to plan now.
Dudley: Well, look, I think monetary policy is pursued on the basis on the economic outlook. Fiscal policy outlook obviously affects that -- the trajectory of GDP, unemployment and inflation. So that's a factor weighing on us but the fact that we have so little specifics yet about what's going to happen -- it's got to wind its way through Congress -- means I don't put a lot of weight on it in terms of my modal forecast. I just think it makes the risks to the outlook a little bit tilted to the upside at this point.
But Dudley said earlier that the case for policy tightening was “a lot more compelling.” So how does a “little bit tilted to the upside” translate to “a lot more compelling?”
What about financial conditions? Surely that demands an immediate response.
Quest: Into this difficult area we have the financial markets. They're on a tear. I mean today could be the 13th record high, we could be in record territory, you know the numbers better than myself. You can't wait for the fiscal plans completely until next year, but you have to take into account what's happening in the markets at the moment, don't you?
Dudley: Well, financial conditions are very important in terms of how they influence economic activity. So if the stock market is up, credit spreads are narrow, financial conditions are more buoyant, that's going to tend to make the economy stronger. The important thing for us, though, is not to overreact to every little movement in the stock market. It's got to be something that lasts for a period of time for it to actually affect household and business behavior. So if the stock market goes up, and then goes right back down, it's not going to have much consequence for the economic outlook. But if it goes up and stays up, then that's going to support, presumably, consumption through higher household wealth.
It important not to “overreact” because there is a lag between the stock market and the real economy. Stocks could head back down. Maybe the Trump rally will fade (but maybe it is less about Trump and more about cyclical improvement). In that case, it would not affect the outlook and thus shouldn’t influence the Fed’s policy decision.
But those confidence surveys, that’s the ticket, right? Well, maybe not:
Quest: What do you believe you're seeing at the moment?
Dudley: Well, there's no question that animal spirits have been unleashed a bit post the election. Stock market is up a lot. Household and business confidence have increased significantly. There's a survey of small businesses that showed a very large increase in December and sustained that increase in January. So, there's no question that sentiment has improved quite markedly post the election.
Quest: That -- animal spirits or whatever you want to call it -- that market influence. It transmits itself around to the entire economy, doesn't it?
Dudley: Well, we would expect to have some consequence for economic activity. But we'll have to see if that actually -- one if the confidence is sustained, and whether it actually materializes in terms of increases in spending. I would say so far we haven't seen much effect of the improvement in confidence actually leading into greater spending. I think the economy is still on about a 2% GDP track, which about what it's been over the last year or so.
So sentiment is a lot better, but it might not hold and even if it does it needs to be felt in the real economy to change the forecast.
Notice that in all three case he emphasizes that those factors have yet to change his forecast. And he downplays the likelihood of those points even translating into something that might change his forecast. So why then does he lead with the case for rate hikes is “a lot more compelling?” It doesn’t sound like it about the number of hikes for him, at least not yet. It is about the timing of the hikes. It seems to have less to do with the forecast itself and more to do with his desire to take preemptive action.
Bottom Line: When I read the interview, it is hard for me to see that he has a strong conviction for drawing forward the rate hike to March. It seems odd to do so if he sees no change in the forecast and downplays the impact of the upside risks. If he does want to move in March, it tells me then it has little to do with either factor and is entirely about staying ahead of the curve. It is about the need for a preemptive rate hike. If his forecast is for three hikes and he wants to hike in March, then his patience has ended and he wants those hikes frontloaded. If for FOMC participants as a whole the forecast has yet to change much, then it is possible that the even if they raise in March, the median projection of three rate hikes this year remains steady.
Reigns of Error: The death of Kenneth Arrow has led lots of people to swap stories about their interactions with him. Larry Blume has posted several of these on facebook, including the following response to my own contribution (quoted with permission):
This story is not at all surprising; Ken read everything. I think I mentioned elsewhere that my last conversation with Ken, this past June, concerned The Theory of Moral Sentiments. He and Amartya Sen were taking turns quoting from it, from memory... I could recognize the quotes, but not respond in kind. Once in a conversation about Nash equilibrium and rational expectations, Ken wondered if I had read Merton on expectations - not Robert Jr.: https://www.jstor.org/stable/4609267. He also had a good stock of Shakespeare to call on.
The link is to a 1948 paper by the great sociologist Robert K. Merton (father of the Nobel-winning economist). Reading anything at all by Merton is an excellent use of one's time, so I went through this paper. It's extraordinary. Not only does Merton provide a very clear account of equilibrium beliefs, but goes on to point out that even when these beliefs are correct in a narrow sense, they can hold in place an incorrect understanding of the social world. To translate this into the contemporary language of economics, Merton points out that the play of equilibrium strategies can go hand in hand with a deeply erroneous understanding of the game.
Merton begins with an account of a Depression-era bank run that perfectly captures the multiple equilibrium logic he has in mind:
It is the year 1932. The Last National Bank is a flourishing institution. A large part of its resources is liquid without being watered. Cartwright Millingville has ample reason to be proud of the banking institution over which he presides. Until Black Wednesday. As he enters his bank, he notices that business is unusually brisk. A little odd, that, since the men at the A.M.O.K. steel plant and the K.O.M.A. mattress factory are not usually paid until Saturday. Yet here are two dozen men, obviously from the factories, queued up in front of the tellers' cages. As he turns into his private office, the president muses rather compassionately: "Hope they haven't been laid off in midweek. They should be in the shop at this hour."
But speculations of this sort have never made for a thriving bank, and Millingville turns to the pile of documents upon his desk. His precise signature is affixed to fewer than a score of papers when he is disturbed by the absence of something familiar and the intrusion of something alien. The low discreet hum of bank business has given way to a strange and annoying stridency of many voices. A situation has been defined as real. And that is the beginning of what ends as Black Wednesday -- the last Wednesday, it might be noted, of the Last National Bank.
You can see why Arrow saw in this a precursor to the concept of Nash equilibrium, the existence of which would be established just two years later. There are also echoes here of the Diamond and Dybvig model of bank runs, in which the multiple equilibrium nature of the problem finds formal expression.
But Merton doesn't stop there, he considers how the people expressing the described behavior interpret the situation they are in. And here he observes an important disparity between the manner in which the situation is viewed by the the participants themselves, as compared with its interpretation from the analytical viewpoint of the social scientist:
The self-fulfilling prophecy is, in the beginning, a false definition of the situation evoking a new behavior which makes the originally false conception come true. The specious validity of the self-fulfilling prophecy perpetuates a reign of error. For the prophet will cite the actual course of events as proof that he was right from the very beginning. (Yet we know that Millingville's bank was solvent, that it would have survived for many years had not the misleading rumor created the very conditions of its own fulfillment.) Such are the perversities of social logic.
So beliefs are correct in one sense, but at sharp variance with reality in another. Such "reigns of error" are not something we economists pay much attention to, with one very notable exception.
In his book The Anatomy of Racial Inequality Glenn Loury discusses the manner in which negative stereotypes about a group can become self-fulfilling through the incentive effects that the stereotypes themselves create. This is the phenomenon of statistical discrimination, introduced into the economics literature by none other than Kenneth Arrow. Like Merton, however, Loury is not content to simply identify the kinds of behaviors consistent with equilibrium beliefs. He wants to know how people with these beliefs will interpret the behaviors. And here he deploys the idea of biased social cognition, which can give rise to essentialist causal misattributions..
That is, behavior arising in equilibrium through the operation of incentives can be interpreted by casual observers as being a consequence of deep differences in character. And this has enormous consequences, since biased social cognitions can "cause some situations to appear anomalous, disquieting, contrary to expectation, worthy of further investigation, inconsistent with the natural order of things---while other situations appear normal, about right, in keeping with what one might expect, consistent with the social world as we know it."
Loury has argued elsewhere that the level of mass incarceration currently prevailing in the United States could not possibly be sustained were it not for its racial character. As long as essentialist interpretations of incentive-driven actions continue to be widespread, such high levels of confinement will not be seen as anomalous or disquieting, and will not give rise to urgent calls for action.
The economic method, for all its flaws, has one very important virtue: it shines a bright light on interests and incentives, and in doing so can challenge essentialist interpretations of social reality. But if this potential is to be realized, it is important to focus not just on the characterization of equilibrium behavior, but also on the reigns of error that distort our mental models of the underlying game.
You are reading this because of the long, steady decline in nominal and real interest rates on all kinds of safe investments, such as US Treasury securities. The decline has created a world in which, as economist Alvin Hansen put it when he saw a similar situation in 1938, we see “sick recoveries… die in their infancy and depressions… feed on themselves and leave a hard and seemingly immovable core of unemployment…” In other words, a world of secular stagnation. Harvard Professor Kenneth Rogoff thinks this is a passing phase—that nobody will talk about secular stagnation in nine years. Perhaps. But the balance of probabilities is the other way. Financial markets do not expect this problem to go away for at least a generation.
Eight reinforcing factors have driven and continue to drive this long-term reduction in safe interest rates:...
The natural response to this secular stagnation is for governments to adopt much more expansionary tax and spending (fiscal) policies. When interest rates are low and expected to remain low, all kinds of government investments—from bridges to basic research—become extraordinarily attractive in benefit-cost terms, and government debt levels should rise to take advantage of low borrowing costs and provide investors the safe saving vehicles (government bonds) they value. ..
Critics of Summers’s secular stagnation thesis miss the point. Each seems to focus on one of the eight factors driving the decline in interest rates and then say that factor either will end soon or is healthy for some contrarian reason.
Since the turn of the century, the North Atlantic economies have lost a decade of what we used to think of as normal economic growth, with secular stagnation the major contributor. Only if we do something about it is it likely that in nine years we will no longer be talking about secular stagnation.
John Taylor provides a couterargument (I chose to highlight one over the other based upon my agreement with the arguments):
Studying advanced mathematics: the potential boost to women’s career prospects: The university gender gap has been reversed in many countries in recent years, with greater participation among young women than among young men. Yet women remain underrepresented in high-powered and highly paid careers as chief executives and, more generally, in finance and business, and in science, technology, engineering and mathematics (STEM) fields.
Our research assesses three potential explanations for this inequality:
First, are the labour market rewards for advanced mathematical skills lower for women than for men?
Second, are women less talented than men in terms of mathematical abilities?
Third, does the way we promote and teach mathematics in schools drive away talented young women?
The answers to these questions are: no, no, and yes! In particular, we show that restrictive course bundling in high school constitutes a barrier for the mathematical talents of young women. ...
Why Dodd-Frank’s orderly liquidation authority should be preserved: The collapse of the investment bank Lehman Brothers in September 2008 was perhaps the defining event of the financial crisis. Lehman’s bankruptcy, followed by the near-collapse (save for government intervention) of the insurance company AIG, greatly intensified the fear and panic in markets, bringing the financial system and the economy to the brink of the abyss.
These events, including the government’s response, remain controversial. What should not be controversial is that ordinary bankruptcy procedures were entirely inadequate for the situation. The bankruptcy judge in the Lehman case—required, by law, to focus narrowly on adjudicating creditors’ claims against the company—had neither the tools nor the mandate to try to mitigate the effects of the failure on the financial system or the economy. The Fed, FDIC, and Treasury used the powers available to them, often in ad hoc ways, to try to preserve broader stability. But these agencies likewise lacked a framework for dealing systematically with failing financial giants.
The architects of the Dodd-Frank Act, which reformed financial regulation after the crisis, recognized that—in order to make the financial system safer and eliminate future taxpayer-funded bailouts—a better approach was needed. The first two sections, or titles, of the bill aimed to do just that. Title I extended the ordinary bankruptcy framework to better accommodate the complexities of large, interconnected financial firms. It also required large bank holding companies to submit to their regulators plans for how they could be successfully resolved in a crisis (“living wills”). ...
Jumping ahead to the conclusion:
...Conclusion Recent experience has taught us that the uncontrolled collapse of a systemically important financial firm can do enormous damage to the broader financial system and the economy. The Dodd-Frank Act modified bankruptcy law to better accommodate large, complex financial firms, but also wisely provided a backstop framework—the Orderly Liquidation Authority of Title II—that can be invoked when overall financial stability is at stake. Critically, the OLA draws on the expertise and planning of the FDIC and the Fed. The OLA is not a bailout mechanism, since all losses are borne by the private sector. The government can provide temporary liquidity under OLA (as it probably would have to do under Title I, as well), but not permanent capital. Taxpayers are fully protected.
To be sure, controversies remain over how effective in even a Title II resolution would be in the context of a significant financial crisis. Still, drawing in particular on the FDIC’s decades of experience in dealing with failing banks, a good bit of progress has been made. The tools provided by Title II are a significant advance over what was available during the recent crisis.
Have we ended bailouts? Current lawmakers can’t bind future legislators, and we can’t guarantee that a future administration and Congress, fearful of the economic consequences of a building financial crisis, won’t authorize a financial bailout. But the best way to reduce the odds of that happening is to have in place a set of procedures to deal with failing financial firms that those responsible for preserving financial stability expect to be effective. That’s what the OLA is intended to provide.
"...an outraged populace can and must push back...":
The Uses of Outrage, by Paul Krugman, NY Times: ...Mr. Trump is clearly a would-be autocrat, and other Republicans are his willing enablers. Does anyone doubt it? And given this reality, it’s completely reasonable to worry that America will go the route of other nations, like Hungary, which remain democracies on paper but have become authoritarian states in practice.
How does this happen? A crucial part of the story is that the emerging autocracy uses the power of the state to intimidate and co-opt civil society — institutions outside the government proper. The media are bullied and bribed into becoming de facto propaganda organs of the ruling clique. Businesses are pressured to reward the clique’s friends and punish its enemies. Independent public figures are pushed into collaboration or silence. Sound familiar?
But an outraged populace can and must push back, using the power of disapproval to counter the influence of a corrupted government.
This means supporting news organizations that do their job and shunning those that act as agents of the regime. It means patronizing businesses that defend our values and not those willing to go along with undermining them. It means letting public figures, however nonpolitical their professions, know that people care about the stands they take, or don’t. For these are not normal times, and many things that would be acceptable in a less fraught situation aren’t O.K. now.
For example, it is not O.K. for newspapers to publish he-said-she-said pieces that paper over administration lies, let alone beat-sweetening puff pieces about Trump allies. It’s not O.K. for businesses to supply Mr. Trump with photo ops claiming undeserved credit for job creation — or for business leaders to serve on “advisory” panels that are really just another kind of photo op.
It’s not even O.K. to go golfing with the president, saying that it’s about showing respect for the office, not the man. Sorry, but when the office is held by someone trying to undermine the Constitution, doing anything that normalizes him and lends him respectability is a political act.
I’m sure many readers would rather live in a nation in which more of life could be separated from politics. So would I! But civil society is under assault from political forces, so that defending it is, necessarily, political. And justified outrage must fuel that defense. When neither the president nor his allies in Congress show any sign of respecting basic American values, an aroused public that’s willing to take names is all we have.