Tuesday, March 11, 2014

Links for 3-11-14

    Posted by on Tuesday, March 11, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (77)

    Monday, March 10, 2014

    'The Social Insurance State, Economic Problems of the North Atlantic, Redistribution, and the Lesser Depression'

    Brad DeLong:

    The Social Insurance State, Economic Problems of the North Atlantic, Redistribution, and the Lesser Depression, by Brad DeLong: ... I was told over and over again, the economic problems of the north Atlantic in the 1970s and 1980s–the productivity growth slowdown in the inflation of the 1970s–were the result of an overly-large welfare state produced by an overly-democratic government. Both of these, the argument went, needed to be fixed.

    This never seemed to me to make quantitative sense…

    The growth of welfare–or rather social-insurance–states in the post-World War II period had not produced an explosion of debt or a “fiscal crisis” of the state in any sense: debt-to-GDP ratios were, rather, at historic lows. The inflation of the 1970s had other causes than a government that didn’t want to pay its bills...

    Similarly, the argument that the high taxes needed to finance the social-insurance state were discouraging entrepreneurship and enterprise was nowheresville: those same high marginal tax rates had not discouraged entrepreneurship and enterprise in the 1950s and 1960s, had they?

    The argument seemed to be:

    1. Inflation is a bad thing.
    2. The productivity growth slowdown is a bad thing.
    3. The social insurance state is a bad thing.

    They must be connected!

    Never mind that what short- and medium-run fiscal problems we had were the deliberate creation of a Republican Party faction that thought very large deficits were politically useful. And never mind that what long-run fiscal problems we had were due to that same deliberate creation and to our failure to develop a plan for national health insurance that would keep our projected spending on medical care within our means. Rational argument was powerless against the belief that all bad things must have some common roots and common links.

    And now I find the same current of thought is back: the financial crisis of 2007-2009 and our Lesser Depression of 2008-whenever must, the argument goes, be due not to bad deregulation that produced a financial house of cards and made our economy dependent on it and to failures of policymakers to understand what was necessary to restore aggregate demand but, rather, to the fact that our tax and transfer systems are too progressive. ...

    Paul Krugman writes:

     ... Overall, the data offer no reason to believe that the economic crisis has something to do with the welfare state…

      Posted by on Monday, March 10, 2014 at 11:31 AM in Economics | Permalink  Comments (59)

      Paul Krugman: Liberty, Equality, Efficiency

      Reducing inequality "would probably increase, not reduce, economic growth":

      Liberty, Equality, Efficiency, by Paul Krugman, Commentary, NY Times: Most people, if pressed on the subject, would probably agree that extreme income inequality is a bad thing... But what can be done about it?
      The standard answer in American politics is, “Not much.” Almost 40 years ago Arthur Okun ... published a classic book titled “Equality and Efficiency: The Big Tradeoff,” arguing that redistributing income from the rich to the poor takes a toll on economic growth. Okun’s book set the terms for almost all the debate that followed: liberals might argue that the efficiency costs of redistribution were small, while conservatives argued that they were large, but everybody knew that doing anything to reduce inequality would have at least some negative impact on G.D.P.
      But it appears that what everyone knew isn’t true. Taking action to reduce the extreme inequality of 21st-century America would probably increase, not reduce, economic growth.
      Let’s start with the evidence..., does reducing inequality through redistribution hurt economic growth? Not according to two landmark studies by economists at the International Monetary Fund...
      In short, Okun’s big trade-off doesn’t seem to be a trade-off at all. ...
      At this point someone is sure to say ... that we should seek equality of opportunity, not equality of outcomes. That may sound good...; but for those with any reality sense, it’s a cruel joke. Almost 40 percent of American children live in poverty or near-poverty. Do you really think they have the same access to education and jobs as the children of the affluent?
      In fact, low-income children are much less likely to complete college than their affluent counterparts, with the gap widening rapidly. And this isn’t just bad for those unlucky enough to be born to the wrong parents; it represents a huge and growing waste of human potential — a waste that surely acts as a powerful if invisible drag on economic growth.
      Now, I don’t want to claim that addressing income inequality would help everyone. The very affluent would lose more from higher taxes than they gained from better economic growth. But it’s pretty clear that taking on inequality would be good, not just for the poor, but for the middle class...
      In short, what’s good for the 1 percent isn’t good for America. And we don’t have to keep living in a new Gilded Age if we don’t want to.

        Posted by on Monday, March 10, 2014 at 12:24 AM in Economics, Income Distribution | Permalink  Comments (58)

        Links for 3-10-14

          Posted by on Monday, March 10, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (81)

          Sunday, March 09, 2014

          'The Federal Reserve and Wealth Inequality'

          From the new blog by Atif Mian and Amir Sufi:

          The Federal Reserve and Wealth Inequality: The Federal Reserve has a well-defined dual-mandate: stabilize prices and maximize employment. However, in trying to achieve these objectives, the Fed can inadvertently favor some segments of the population more than others. This was indeed the case from the perspective of households’ net worth position during the Great Recession. ...
          When the economy slows down and there is a sharp decline in house prices, it is ... debtors’ net worth that is most heavily impacted, and from a recovery standpoint it is the debtors’ net worth that is in most need of repair...
          The Federal Reserve may help in boosting the net worth position of households. But does it boost household net worth where it is needed the most? Unfortunately, quite the opposite is true. The Fed directly controls short term interest rates, and hence has the strongest and quickest influence on bond prices. Bond prices are inversely related to interest rates... Those holding long term bonds profited handsomely from the decline in interest rates.
          Unfortunately for the macro-economy, the gains in long-term bonds were a unique benefit to creditors. Debtors with a levered claim on house prices remained stuck. This was one of the great limitations of how effective the Federal Reserve could be in the midst of the Great Recession.
          Many have placed much blame on the Federal Reserve for increasing wealth inequality. That is unfair — it is not the Fed’s fault that only the very rich hold bonds and other financial assets. But it is true that a by-product of looser monetary policy is a rise in wealth inequality–the Fed was unable during the Great Recession to boost the net worth of debtors.

            Posted by on Sunday, March 9, 2014 at 01:54 PM in Economics, Income Distribution, Monetary Policy | Permalink  Comments (30)

            Links for 3-09-14

              Posted by on Sunday, March 9, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (96)

              Saturday, March 08, 2014

              A Top-Heavy Focus on Income Inequality?

              This was *not* my favorite article of the day:

              A Top-Heavy Focus on Income Inequality, by Sendhil Mullainathan, Commentary, NY Times: I worry about growing income inequality. But I worry even more that the discussion is too narrowly focused. I worry that our outrage at the top 1 percent is distracting us from the problem that we should really care about: how to create opportunities and ensure a reasonable standard of living for the bottom 20 percent.
              Our passion about the widening disparity in wealth and income is easy to understand. After all, studies often find that unequal incomes reduce happiness. Of course they do: Jealousy and envy are strong emotions. ...

                Posted by on Saturday, March 8, 2014 at 03:36 PM in Economics, Income Distribution | Permalink  Comments (64)

                Links for 3-08-14

                  Posted by on Saturday, March 8, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (113)

                  Friday, March 07, 2014

                  Fed Watch: Upward Grind in Labor Markets Continues

                  Tim Duy:

                  Upward Grind in Labor Markets Continues, by Tim Duy: The employment report for February modestly beat expectations with a nonfarm payroll gain of 175k, leaving the recent trends pretty much intact:


                  Did the labor market shake off the impact of a cold and snowy winter? No. Aggregate hours worked turned over during the winter, sending the year-over-year gains southward as well:


                  Looks like the weather was less about hiring, and more about people not being able to get to their jobs.
                  The unemployment rate edged up:


                  I suspect we are seeing something like we saw in late 2011 when the unemployment rate fell sharply and then moved sideways for a few months. If there is less excess slack in the labor market than Fed doves believe we should soon be seeing greater upward pressures on wages. Hints of this emerge in the acceleration of wage gains for production and nonsupervisory workers:


                  Note that this comes even as the number of long-term unemployed rose. I think there is a very real possibility - as was suspected long ago would happen - that persistently high cyclical unemployment we saw during the recession and its aftermath has evolved into structural unemployment. Former Federal Reserve Chair Ben Bernanke in 2012:
                  I also discussed long-term unemployment today, arguing that cyclical rather than structural factors are likely the primary source of its substantial increase during the recession. If this assessment is correct, then accommodative policies to support the economic recovery will help address this problem as well. We must watch long-term unemployment especially carefully, however. Even if the primary cause of high long-term unemployment is insufficient aggregate demand, if progress in reducing unemployment is too slow, the long-term unemployed will see their skills and labor force attachment atrophy further, possibly converting a cyclical problem into a structural one.
                  More structural unemployment combined with evidence that the fall in labor force participation is increasingly attributable to retirement suggests less labor market slack. Fed officials will be watching this issue very closely. It is the most likely reason we would expect to see the expected date of the first rate hike moved forward in 2015. (For more on the structural/cyclical issue, I recommend Cardiff Garcia here).
                  We will see commentators ignore the production and nonsupervisory series in favor of the all employees series. The latter has yet to turn upward as aggressively as the former. The all employees series, however, has a much shorter history. Federal Reserve policymakers will be more comfortable with the longer and familiar production and nonsupervisory workers series. Moreover, I doubt they believe we should expect meaningful and persistent deviations between the two series over time. After all, if the wages of your lowest paid employees are rising, it is reasonable to believe that it is only a matter of time before that same trend hits your better paid employees.
                  Bottom Line: The employment report indicates ongoing slow and steady improvement in the economy sufficient to generate consistent job growth and drive the unemployment rate lower. The report has no implications for tapering because tapering is on a preset course (New York Fed President William Dudley confirmed what was long suspected yesterday). This one report by itself also says little about the first rate increase - still mid to late 2015. But watch the wage growth numbers and listen to the reaction of Fed officials. In my opinion, this is a key factor in the timing of rate policy. Traditionally, the start tightening prior or near to an acceleration in wages. The longer they stay still as unemployment falls and wage growth rises, the more nervous they will become that they are falling behind the curve. And they especially don't want to fall behind the curve given the size of their balance sheet. They talk a good game, but I think they are more worried about unwinding that balance sheet then they claim in public.

                    Posted by on Friday, March 7, 2014 at 10:43 AM in Economics, Fed Watch, Monetary Policy, Unemployment | Permalink  Comments (29)

                    'Economy Adds 175,000 Jobs in February, Despite Bad Weather'

                    Dean Baker on the jobs report for February:

                    Economy Adds 175,000 Jobs in February, Despite Bad Weather: Unemployment in construction is lower than in the pre-boom years.
                    The establishment survey showed the economy added 175,000 jobs in February, in spite of the unusually harsh weather on much of the country. With modest upward revisions to the prior two months' data, this brings the 3-month average to 129,000. While this is considerably weaker than the fall months, weather has undoubtedly played a role in slowing job creation. (In contrast to the prior two months, February’s weather was unusually harsh.)
                    The mix of jobs in February was somewhat peculiar with the professional and business services category accounting for more than half of the total (79,000 jobs). This was driven in part by an unusual jump in accounting bookkeeping services of 15,700 jobs, which partially offset a decline of 30,800 reported in December. While the more skilled portion of this sector (computer and management services) has been showing healthy growth, growth in the less skilled portion has been especially strong. Temp agencies added 24,400 jobs in February and 227,700 over the last year. Services to buildings (e.g. custodians) added 11,400 jobs last month and 66,700 (3.6 percent) over the last year.


                    Manufacturing employment has slowed to a crawl. The sector added 6,000 jobs, with downward revisions bringing the three month average to just 6,300. There were downward revisions to retail with a loss of 4,100 jobs following a loss of 22,600 in January. In addition to the weather, this likely reflects changed seasonal hiring patterns.
                    Health care employment remains on a slower track, with the sector adding 9,500 jobs in February bringing the three month average to 5,900. The government sector added 13,000 jobs, with gains at the state and local level offsetting the loss of 6,800 jobs. Non-postal federal employment is now down by 72,900 (3.5 percent) over the last year.
                    The motion picture industry lost 14,100 jobs in February. Employment is down by 56,600 (15.5 percent) over the year, hitting its lowest level since June of 1995. Construction continued its upswing in spite of the weather adding 15,000 jobs. Unemployment in the sector is actually below pre-boom levels, with the unemployment rate averaging 12.6 percent in January and February compared with 14.0 percent for the same months in 2003.
                    The average hourly wage for all workers increased at a 2.3 percent annual rate in the last three months compared with the prior three. Interestingly, wages for production and non-supervisory workers rose somewhat more rapidly, growing at a 3.3 percent pace over this period. This implies that less educated workers seem to be doing somewhat better in the current economy, the opposite of the skills shortage view that is widely being promoted.
                    The household survey showed the unemployment rate sliding up to 6.7 percent. The big losers for the month were African American men, who saw a jump in their unemployment rate from 12.0 percent to 12.9 percent, the same as the January 2013 level. The EPOP for African American men is now 58.0, down more than 8.0 percentage points from pre-recession peaks. These numbers are erratic, but the general trend here has not been good.
                    By education level the big losers were those with college degrees who saw their unemployment rise from 3.2 percent to 3.4 percent. This compares to a pre-recession of level of just 2.0 percent. The number of workers involuntarily working part time fell by 59,000 in February, the lowest level since October of 2008. As happened in 2013 the duration measures of unemployment rose in February after falling sharply in January. This is explained by the shortening of benefit duration at the start of the year which leads many workers to drop out of the labor force. The percent of unemployment attributable to job leavers edged down to 7.8 percent, well below the average for 2013 and not much above the low of 5.5 percent at the trough. (By comparison, the pre-recession levels were close to 12.0 percent.) This doesn’t show confidence in the strength of the labor market.
                    It is difficult to determine the impact of the weather, but it is likely that we will continue to see a moderate pace of improvement in the job market in the months ahead. The recent wage growth is good, but still may prove anomalous.

                      Posted by on Friday, March 7, 2014 at 08:08 AM in Economics, Unemployment | Permalink  Comments (14)

                      Paul Krugman: The Hammock Fallacy

                      We don't do enough to help people escape poverty:

                      The Hammock Fallacy, by Paul Krugman, Commentary, NY Times: Hypocrisy is the tribute vice pays to virtue. So when you see something like the current scramble by Republicans to declare their deep concern for America’s poor, it’s a good sign, indicating a positive change in social norms. Goodbye, sneering at the 47 percent; hello, fake compassion.
                      And the big new poverty report from the House Budget Committee, led by Representative Paul Ryan, offers additional reasons for optimism. Mr. Ryan used to rely on “scholarship” from places like the Heritage Foundation. ... This time, however, Mr. Ryan is citing a lot of actual social science research.
                      Unfortunately, the research he cites doesn’t actually support his assertions. Even more important, his whole premise about why poverty persists is demonstrably wrong.
                      To understand where the new report is coming from,... recall something Mr. Ryan said two years ago: “We don’t want to turn the safety net into a hammock that lulls able-bodied people to lives of dependency and complacency, that drains them of their will and their incentive to make the most of their lives.” ...
                      What does scholarly research on antipoverty programs actually say? ... Mr. Ryan would have us believe that the “hammock” created by the social safety net is the reason so many Americans remain trapped in poverty. But the evidence says nothing of the kind.
                      After all, if generous aid ... perpetuates poverty, the United States — which treats its poor far more harshly than other rich countries, and induces them to work much longer hours — should lead the West in social mobility... In fact,... America has less social mobility...
                      And there’s no puzzle why: it’s hard for young people to get ahead when they suffer from poor nutrition, inadequate medical care, and lack of access to good education. The antipoverty programs that we have actually do a lot to help people rise. For example, Americans who received early access to food stamps were healthier and more productive... But we don’t do enough... The reason so many Americans remain trapped in poverty isn’t that the government helps them too much; it’s that it helps them too little.
                      Which brings us back to the hypocrisy issue. It is, in a way, nice to see the likes of Mr. Ryan at least talking about the need to help the poor. But somehow their notion of aiding the poor involves slashing benefits while cutting taxes on the rich. Funny how that works.

                        Posted by on Friday, March 7, 2014 at 12:33 AM in Economics, Income Distribution, Social Insurance | Permalink  Comments (62)

                        Fed Watch: Unemployment, Wages, Inflation, and Fed Policy

                        Tim Duy:

                        Unemployment, Wages, Inflation, and Fed Policy, by Tim Duy: I apologize if that was a misleading title.  This post is not a grand, unifying theory of macroeconomics.  It is instead a quick take on two posts floating around today.  The first is Paul Krugman's admonishment to the Federal Reserve against raising interest rates before wages rise:
                        So far, no clear sign that wage growth is accelerating. Even more important, however, wages are growing much more slowly now than they were before the crisis. There is no argument I can think of for not wanting wage growth to get at least back to pre-crisis levels before tightening. In fact, given that we’ve now seen just how dangerous the “lowflation” trap is, we should be aiming for a significantly higher underlying rate of growth in wages and prices than we previously thought appropriate.
                        I don't think that you should be surprised if the Federal Reserve starts raising rates well before wage growth returns to pre-crisis rates.  I think you should be very surprised if the Fed were to do as Krugman suggests.  Historically, the Fed tightens before wages growth accelerates much beyond 2%:


                        As I have noted earlier, wage growth tends to accelerate as unemployment approaches 6 percent, and so if you wanted to be ahead of inflation, they would be thinking about the first rate hike in the 6.0-6.5% range.  That 6.5% threshold was not pulled out of thin air.  
                        The second point is that the tightening cycle is usually topping out when wage growth is in the 4.0-4.5% range.  One interpretation is that the Fed continues to tighten policy to prevent workers from gaining too much of an upper-hand, thereby contributing to growing wage inequality.  Of course, I doubt they see it that way.  They see it as tightening monetary conditions to hold inflation in check.  Either way, the end is the same.  It would represent a very significant departure from past policy if the Fed waited until wage growth was at pre-recession rates before they tightened policy or if they allow conditions to remains sufficiently loose for wage growth to eventually rise above pre-recession rates.
                        If you want the Fed to make such a departure, start laying the groundwork soon.  The best I can offer is my expectation that Fed Chair Janet Yellen is more inclined than the average policymaker to wait until wages actually rise before acting.  I have trouble believing that even she would wait until wage growth accelerates to pre-recession trends.
                        Second, the Washington Post's Ylan Mui has this:
                        But a funny thing happens once unemployment hits 6.5 percent: The behavior of inflation starts to become random, as illustrated in this chart by HSBC chief U.S. economist Kevin Logan.


                        The black line represents the average annual unemployment rate for the past 30 years. You can see that in all but two cases (both of which were temporary shocks), inflation declined when the jobless rate was above 6.5 percent. But when unemployment rate fell below that point, inflation was almost as likely to increase as it was to decrease. In other words, what happens to inflation below the Fed’s threshold is anybody’s guess.
                        I would take issue with the idea that inflation behavior becomes "random" at unemployment rates below 6.5%.  You need to consider this kind of chart in the context of expected inflation and expected policy.  If inflation expectations are stable, and if the Federal Reserve provides policy to ensure that stability, you would expect random errors around expected inflation.  Couple this with downward nominal wage rigidities, and you should expect the same even under circumstances of high unemployment.  Here is my version of the same chart:


                        The data is monthly.  This y-axis is the change in inflation from a year ago, where inflation is measured as the year-over-year change in core-pce.  Unsurprisingly, since 2000, changes in core-inflation vary around zero.  Stable and low inflation expectations.  During periods of the 1970's and 1980's you see the impact of unstable expectations as the relationship circles all over the place.  But you also see the general pattern of disinflation since the early 1980's with the downward sloping relationship and many inflation observations, even at low unemployment rates, below zero.
                        Now it is fairly easy to put both of these posts together.  The Fed, wanting to ensure stable inflation expectations, begins raising interest rates well before wage rates begin rising.  This is turn controls the growth of actual inflation so that inflation rates do not rise as unemployment falls further.  The deviations of inflation from expectations are then just noise.  But actual inflation is not "random."  It is the result of specific monetary policy.
                        Bottom Line:  If the Fed follows historical behavior, they will beginning tightening before wages rise and in an environment of low inflation such that inflation remains stable even as unemployment falls.  In other words, in recent history that have not exhibited a tendency to overshoot.  Explicit overshooting would represent a very significant shift in the Fed's modus operandi

                          Posted by on Friday, March 7, 2014 at 12:24 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (15)

                          Links for 3-07-14

                            Posted by on Friday, March 7, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (61)

                            Thursday, March 06, 2014

                            Fed Watch: Tapering is Sooo 2013

                            Tim Duy:

                            Tapering is Sooo 2013, by Tim Duy: New York Federal Reserve President William Dudley had a sit down with the Wall Street Journal in which he provides some key insights into Fed thinking. First, regarding the tepid pace of data, it's the weather:
                            Mr. Dudley said that he still expects, "the economy should do better" relative to last year, growing at around 3% this year.
                            He said, however, it appears very likely that harsh weather slowed economic growth in the first quarter to under a 2% annual rate.
                            See also this Wall Street Journal report on weak February retail sales. As expected, the Fed will dismiss soft numbers as an artifact of the cold. (although I think the acceleration at the end of 2013 was less than meets the eye to begin with). That means the pace of tapering is not going to change at the next meeting. But guess what? Tapering is not really data dependent in any event. It is more appropriately described as "outlier dependent":
                            "If the economy decided it was going to grow at 5% or the economy decided it wasn't going to grow at all, those would be the kind of changes in the outlook that I think would warrant changing the pace of taper," Mr. Dudley said Thursday.
                            How this is really any different from a fixed time-line is beyond me. If the range of acceptable outcomes to justify tapering is anywhere between 0 and 5% growth, the FOMC statement can be reduced by simply admitting that asset purchases are on a preset course. As I have said many times, the Fed wants out of the asset purchase business. It's all about interest rates now:
                            Mr. Dudley affirmed that nothing's changed when it comes to the short-term interest rate outlook. He said "we have a long time to go before we have to think about raising short-term interest rates."
                            Sometime in 2015. The weaker the data, the deeper into 2015 is the first rate hike, all else equal.
                            Finally, look for changes in the next FOMC statement to reflect what has been true for some time:
                            The 6.5% marker "is already a little bit obsolete in the sense we are really close to it," Mr. Dudley said. The level is "not really providing a lot of value in terms of our communications."
                            The meeting later this month would be a "a reasonable time to revamp (the) statement to take out that 6.5% threshold," he said. The Fed has amended its guidance to say rates could stay near zero well past that point as long as inflation remains in check.
                            The 6.5% marker is not a "little" obsolete. It is a "lot" obsolete. It became obsolete the minute the Fed made clear it was irrelevant as they had no intention of raising rates at that point. The are not going to replace it with another numerical guide. It will be replaced with qualitative, and ultimately discretionary, guidance.
                            Meanwhile, Dallas Federal Reserve President Richard Fisher made clear his view that asset bubbles are brewing left and right:
                            ...there are increasing signs quantitative easing has overstayed its welcome: Market distortions and acting on bad incentives are becoming more pervasive.
                            Stock market metrics such as price to projected forward earnings, price-to-sales ratios and market capitalization as a percentage of GDP are at eye-popping levels not seen since the dot-com boom of the late 1990s. In the words of James Mackintosh, writer of the Financial Timescolumn “The Short View,” a not insignificant number of stocks in the S&P 500 have valuations “that rely on belief in a financial fairy.” Margin debt is pushing up against all-time records. And, in the bond market, narrow spreads between corporate and Treasury debt reflect lower risk premia on top of already abnormally low nominal yields. We must monitor these indicators very carefully so as to ensure that the ghost of “irrational exuberance” does not haunt us again.
                            Interestingly, former Federal Reserve Chairman Alan Greenspan writes today that such bubbles are just part of the territory:
                            Successful financial policy, in my experience, ironically spawns the emergence of bubbles. There was never anything resembling financial euphoria, or the bubbles it creates, in the old Soviet Union, nor is there in today’s North Korea. At the Federal Reserve during my tenure, we often joked that our greatest fear was that policy might be too successful. Achieving an underlying stable rate of growth and low inflation appears to have been a necessary and sufficient condition for the emergence of a bubble. We would conclude with mock seriousness that optimum monetary policy for bubble prevention was to create destabilizing inflation.
                            There is much of interest in the Greenspan piece (including his claims that the 1994 tightening was an attempt to derail the bubble of the 1990s) and little time to take it up now. As if on cue, the Federal Reserve release the latest flow of funds data. Check out net worth:


                            Approaching the high seen in the last asset price bubble. Doesn't mean it can't go higher.
                            Tomorrow is employment report day. The general expectation is that weather played a starring role in depressing job growth while the ACA had a supporting role. Consensus is for 150k gain in payrolls with forecasts ranging from 80k to 203k. My recent track record has been a little (lot) shaky on this number of late, but maybe third time is a charm. Usual caveats apply about the insanity of forecasting a heavily revised rounding error of the massive monthly churn in the labor market. I will take the under this month and am looking for a gain of 118k:


                            More interesting will be the unemployment rate (what is the impact of the end of extended benefits?) and wage growth (are we seeing any yet?).

                            Bottom Line: Barring the outlier outcomes of either recession or explosive growth, tapering is on autopilot. Rate guidance is now qualitative and actual policy is discretionary. Incoming data is interesting for what it says about the timing of the first rate hike. So far, though, it is not telling us much given the Fed's belief that weak data is largely weather related. The degree to which asset bubbles are a concern varies greatly accross Fed officials but the general consensus is that such concerns are of second or third order magnitude compared to missing on both sides of the dual mandate.

                              Posted by on Thursday, March 6, 2014 at 03:32 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (7)

                              'Redistribution, Inequality, and Sustainable Growth: Reconsidering the Evidence'

                              A nice summary of some research that I've highlighted before:

                              Redistribution, inequality, and sustainable growth: Reconsidering the evidence, by Jonathan D Ostry, Andrew Berg, and Charalambos Tsangarides, Vox EU: Rising income inequality looms high on the global policy agenda, reflecting not only fears of its pernicious social and political effects (including questions about the consistency of extreme inequality with democratic governance), but also its economic implications. While positive incentives are surely needed to reward work and innovation, excessive inequality is likely to undercut growth – for example by undermining access to health and education, causing investment-reducing political and economic instability, and thwarting the social consensus required to adjust in the face of major shocks.

                              Understandably, economists have been trying to understand better the links between rising inequality and the fragility of economic growth. Recent narratives include how inequality intensified the leverage and financial cycle, sowing the seeds of crisis (Rajan 2010), or how political-economy factors – especially the influence of the rich – allowed financial excess to balloon ahead of the crisis (Stiglitz 2012).

                              But what is the role of policy – and in particular fiscal redistribution – in bringing about greater equality? Conventional wisdom suggests that redistribution would in itself be bad for growth, but by reducing inequality, it might conceivably help growth. Looking at past experience, we find scant evidence that typical efforts to redistribute have on average had an adverse effect on growth. Moreover, faster and more durable growth seems to have followed the associated reduction in inequality.

                              Disentangling the effects of inequality and redistribution on growth

                              In earlier work (Berg and Ostry 2011), we documented a robust medium-run relationship between equality and the sustainability of growth. We did not, however, have much to say on whether this relationship justifies efforts to redistribute.

                              Indeed, many argue that redistribution undermines growth, and even that efforts to redistribute to address high inequality are the source of the correlation between inequality and low growth. If this is right, then taxes and transfers may be precisely the wrong remedy – a cure that may be worse than the disease itself.

                              The literature on this score remains controversial. A number of papers (e.g. Benabou 2000) point out that some policies that are redistributive – e.g. public investments in infrastructure, spending on health and education, and social insurance provision – may be both pro-growth and pro-equality. Others are more supportive of a fundamental tradeoff between redistribution and growth, as argued by Okun (1975) when he referred to the efficiency ‘leaks’ that come with efforts to reduce inequality.

                              In a new paper (Ostry et al. 2014), we ask what the historical data say about the relationship between inequality, redistribution, and growth. In particular, what is the evidence about the macroeconomic effects of redistributive policies – both directly on growth, and indirectly as they reduce inequality, which in turn affects growth?

                              To disentangle the channels, we make use of a new cross-country dataset that carefully distinguishes net (post-tax and transfers) inequality from market (pre-tax and transfers) inequality, and allows us to calculate redistributive transfers for a large number of countries over time – covering both advanced and developing countries. We analyse the behaviour of average growth during five-year periods, as well as the sustainability and duration of growth.

                              Our key questions are empirical. How big is the ‘big tradeoff’? How does the direct (in Okun’s view negative) effect of redistribution compare to its indirect and apparently positive effect through reduced inequality?

                              Some striking results on the links between redistribution, inequality, and growth

                              First, we continue to find that inequality is a robust and powerful determinant both of the pace of medium-term growth and of the duration of growth spells, even controlling for the size of redistributive transfers.

                              Thus, it would still be a mistake to focus on growth and let inequality take care of itself, if only because the resulting growth may be low and unsustainable. Inequality and unsustainable growth may be two sides of the same coin.

                              Second, there is remarkably little evidence in the historical data used in our paper of adverse effects of fiscal redistribution on growth.

                              The average redistribution, and the associated reduction in inequality, seem to be robustly associated with higher and more durable growth. We find some mixed signs that very large redistributions may have direct negative effects on growth duration, such that the overall effect – including the positive effect on growth through lower inequality – is roughly growth-neutral.


                              These findings may suggest that countries that have carried out redistributive policies have actually designed those policies in a reasonably efficient way. However, it does not mean of course that countries wishing to enhance the redistributive role of fiscal policy should not pay attention to efficiency considerations. This is especially important for countries with weak governance and administrative capacity, where developing tax and spending instruments that can allow governments to undertake redistribution efficiently are of the essence. A forthcoming paper by the IMF will delve into these fiscal issues.

                              Of course, we should also be cautious about drawing definitive policy implications from cross-country regression analysis alone. We know from history and first principles that after some point redistribution will be destructive to growth, and that beyond some point extreme equality also cannot be conducive to growth. Causality is difficult to establish with full confidence, and we also know that different sorts of policies are likely to have different effects in different countries at different times.

                              Bottom line

                              The conclusion that emerges from the historical macroeconomic data used in this paper is that, on average across countries and over time, the things that governments have typically done to redistribute do not seem to have led to bad growth outcomes. Quite apart from ethical, political, or broader social considerations, the resulting equality seems to have helped support faster and more durable growth.

                              To put it simply, we find little evidence of a ‘big tradeoff’ between redistribution and growth. Inaction in the face of high inequality thus seems unlikely to be warranted in many cases.


                              Benabou, R (2000), “Unequal Societies: Income Distribution and the Social Contract”, The American Economic Review, 90(1): 96–129.

                              Berg, A, J D Ostry, and J Zettelmeyer (2012), “What Makes Growth Sustained?”, Journal of Development Economics, 98(2): 149–166.

                              Berg, A and J D Ostry (2011), “Inequality and Unsustainable Growth: Two Sides of the Same Coin?”, IMF Staff Discussion Note 11/08.

                              Okun, A M (1975), Equality and Efficiency: the Big Trade-Off, Washington: Brookings Institution Press.

                              Ostry, J D, A Berg, and C G Tsangarides (2014), “Redistribution, Inequality, and Growth”, IMF Staff Discussion Note 14/02.

                              Rajan, R (2010), Fault Lines: How Hidden Fractures Still Threaten the World Economy, Princeton: Princeton University Press.

                              Stiglitz, J (2012), The Price of Inequality: How Today's Divided Society Endangers Our Future, W W Norton & Company.

                                Posted by on Thursday, March 6, 2014 at 11:01 AM in Economics, Income Distribution | Permalink  Comments (36)

                                'Why DRM'ed Coffee-Pods May be Just the Awful Stupidity We Need'

                                Speaking of anti-competitive behavior, here's Cory Doctorow:

                                Why DRM'ed coffee-pods may be just the awful stupidity we need, by Cory Doctorow: I've been thinking about the news that Keurig has added "DRM" to its pod coffee-makers since the story first started doing the rounds a couple of days ago. I've come to the conclusion that while the errand is a foolish one, and the company deserves nothing but contempt for such an anti-competitive move, that there might be a silver lining to this cloud. As I've written recently, there's not a lot of case-law on Section 1201 of the Digital Millennium Copyright Act (DMCA), the law that prohibits "circumventing...effective means of access control" to copyrighted works. In the past, we've seen printer companies and garage door opener manufacturers claim that the software in their devices was a "copyrighted work" and that anyone who made a spare part for their products was thus violating 1201. But that was 10 years ago, and it's been a while since there was someone stupid and greedy enough to try that defense.
                                I think Keurig might just be that stupid, greedy company. The reason they're adding "DRM" to their coffee pods is that they don't think that they make the obviously best product at the best price, but want to be able to force their customers to buy from them anyway. So when, inevitably, their system is cracked by a competitor who puts better coffee at a lower price into the pods, Keurig strikes me as the kind of company that might just sue. And not only sue, but keep on suing, even after they get their asses handed to them by successive courts. With any luck, they'll make some new appellate-level caselaw in a circuit where there's a lot of startups -- maybe by bringing a case against some spunky Research Triangle types in the Fourth Circuit.
                                Now, this is risky. Hard cases made bad law. A judge in a circuit where copyright claims are rarely heard might just buy the idea of copyright covering pods of coffee. The rebel forces that Keurig sues might be idiots (remember Aimster?). But of all the DRM Death Stars to be unveiled, Keurig's is a pretty good candidate for Battle Station Most Likely to Have a Convenient Thermal Exhaust Port.

                                [Boing Boing is licensed under a Creative Commons License permitting non-commercial sharing with attribution.]

                                  Posted by on Thursday, March 6, 2014 at 08:40 AM in Economics, Market Failure, Regulation | Permalink  Comments (6)

                                  'Did Robert Bork Understate the Competitive Impact of Mergers?'

                                  I have argued again and again that we aren't concerned enough about the concentration of economic power:

                                  Did Robert Bork Understate the Competitive Impact of Mergers? Evidence from Consummated Mergers, by Orley C. Ashenfelter, Daniel Hosken, and Matthew C. Weinberg, NBER: In The Antitrust Paradox, Robert Bork viewed most mergers as either competitively neutral or efficiency enhancing. In his view, only mergers creating a dominant firm or monopoly were likely to harm consumers. Bork was especially skeptical of oligopoly concerns resulting from mergers. In this paper, we provide a critique of Bork’s views on merger policy from The Antitrust Paradox. Many of Bork’s recommendations have been implemented over time and have improved merger analysis. Bork’s proposed horizontal merger policy, however, was too permissive. In particular, the empirical record shows that mergers in oligopolistic markets can raise consumer prices.

                                    Posted by on Thursday, March 6, 2014 at 08:38 AM in Economics, Market Failure, Regulation | Permalink  Comments (8)

                                    Links for 3-06-14

                                      Posted by on Thursday, March 6, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (57)

                                      Wednesday, March 05, 2014

                                      Fed Watch: A Lackluster Start to the New Year

                                      Tim Duy:

                                      A Lackluster Start to the New Year, by Tim Duy: Incoming data has tended to disappoint. While weather impacts are taking part of the blame, I tend to think that part of the blame should fall on overly optimistic interpretations of data patterns at the end of 2013. In particular, the recently downwardly revised GDP numbers were less than spectacular abstracting away from inventory effects:


                                      Looking at real final sales, I see slow and steady, or even a modest softening, not magic acceleration. Similarly, aggregate hours worked never signaled a dramatic change in the pace of activity (unless, of course, one suspected productivity was exploding):


                                      Slow and steady is also the underlying message of the most recent Beige Book:
                                      Reports from most of the twelve Federal Reserve Districts indicated that economic conditions continued to expand from January to early February. Eight Districts reported improved levels of activity, but in most cases the increases were characterized as modest to moderate. New York and Philadelphia experienced a slight decline in activity, which was mostly attributed to the unusually severe weather experienced in those regions. Growth slowed in Chicago, and Kansas City reported that conditions remained stable during the reporting period. The outlook among most Districts remained optimistic.
                                      Also note that domestic demand will appear disappointing as long as trade is supporting the GDP numbers:


                                      The swing in the contributions from net exports means that a smaller increase in domestic demand is necessary to boost overall GDP.
                                      The latest data disappointments were the weak ADP report suggesting a just 139k private sector NFP gain in March and a similarly weak reading on the service side of the economy from ISM. Bill McBride notes that the ADP is not exactly a great predictor of the preliminary employment numbers. Very true. At the same time, however, they are generally consistent with the underlying trend in labor markets over time. As such I do not discount them entirely. In this case, the ADP report may also be confirming the softness seen in the ISM services report, particularly in the employment component:


                                      One important anecdote:

                                      • "The Affordable Care Act is creating significant financial uncertainty to healthcare organizations. With little warning, the negative impact on revenue has been unprecedented." (Health Care & Social Assistance)
                                      See also Matthew Boesler at Business Insider. I think this was already evident in the pace of health care hiring, which has slowed to a crawl:


                                      There will be two ways to view this story. In the near-term, it will be a negative given the constant support the sector has provided for employment over time. In the long-term, this might be an optimistic sign that the focus of the industry is turning aggressively toward achieving productivity gains. Higher productivity is an important to containing health care costs (it has been estimated that productivity growth was negative between 1990 and 2010), but will depress the demand for labor in the sector. This process may already be under way.
                                      Inflation remains below target:


                                      Headline inflation has edged up, but remains well below 2%, and core inflation does not show signs of acceleration:


                                      My baseline expectation for monetary policy is that recent softer data makes little difference in the tapering plans. The Fed wants out of asset purchases and can always fall back on the "progress toward goals" excuse to pull the plug on the program. Moreover, as I said earlier this week, I believe Fed officials will become increasingly nervous about the inflation outlook as unemployment approaches 6%. They want to be done with asset purchases before they have to worry about raising rates. Weak data, particularly if it passes through to the unemployment rate, will have more of an impact on the timing and pace of interest rate hikes than tapering. With this in mind, it is not surprising that rates have sagged since the beginning of the year:


                                      Monetary policymakers anticipate the first rate hike will be sometime in 2015. The exact timing is dependent on the evolution of activity and the fear of overshooting. At the moment, the Fed's expectation of around 3% growth looks optimistic. But even the sub-par growth to date has been enough to drive down unemployment. This opens the door to the possibility that the Fed raises interest rates despite sub-par growth. This depends, however, in a large part on Federal Reserve Chair Janet Yellen's opinion. In today's swearing-in ceremony, Yellen said:
                                      I will also continue the work of helping repair the damage done by the financial crisis to the economy. Too many Americans still can't find a job or are forced to work part-time. The goals set by Congress for the Federal Reserve are clear: maximum employment and stable prices. It is equally clear that the economy continues to operate considerably short of these objectives. I promise to do all that I can, working with my fellow policymakers, to achieve the very important goals Congress has assigned to the Federal Reserve.
                                      That sounds like she is not worried about overshooting in the least. My suspicion is that she will need to see real evidence that labor market slack has evaporated in the form of faster wage growth before she begins to worry of overshooting. This suggests Yellen's expectation of the first rate hike is deeper in 2015 than some of her colleagues.
                                      Bottom Line: Data disappointment in part is driven by excessive optimism. In any event, data are not sufficiently disappointing to derail the Fed's tapering plans. Unless activity lurches sharply downward, I think the tapering process is pretty much on autopilot. It is now all about interest rates.

                                        Posted by on Wednesday, March 5, 2014 at 12:57 PM in Economics | Permalink  Comments (15)

                                        'The New Paul Ryan Report on Poverty and Safety Net Programs'

                                        What do you think of Tyler Cowen's comments on the Ryan poverty report?

                                        The new Paul Ryan report on poverty and safety net programs: I read much of the document last night, here are a few comments...

                                        I found myself in agreement with much of what he says.

                                          Posted by on Wednesday, March 5, 2014 at 09:47 AM in Economics, Politics, Social Insurance | Permalink  Comments (69)

                                          'Global Interest Rates and Growth (r-g)'

                                          Antonio Fatas looks at the relationship between growth and intereest rates:

                                          Global interest rates and growth (r-g): The difference between interest rate and growth rates appears as an important parameter in many macroeconomic models. It is also a key variable to assess the sustainability of public finances: higher interest rates make the cost of carrying over debt higher while high growth rates help keep the debt to GDP ratio under control.

                                          In a recent post Floyd Norris criticizes the assumptions used by the US Congressional Budget Office for its fiscal projections because they are assuming lower growth rates ahead but a return to "normal" interest rates. The point that Norris makes is that we tend to think that interest rates and growth rates are correlated, so if growth is going to be much lower going forward we should also forecast lower interest rates (and this will make the fiscal outlook look more positive).

                                          Paul Krugman initially supports Floyd Norris' arguments but later, after checking the data, he realizes that growth and interest rates are not that correlated. ...
                                          But ... Norris and Krugman are looking at interest rates and growth in the context of one economy (the US)..., given the global nature of capital markets the relationship between interest rates and growth (if any) should only be present at the global level. What happens if we look at the  differential between interest rates and growth for the world? ...
                                          As in the US data, the relationship between interest rates and growth rates has varied over the past decades. ...
                                          In summary, given that interest rates are determined by global conditions, anything could happen when comparing them to growth rates for a given country (of course if the country is large enough to influence global variables then national and global conditions are correlated). The right way to look at these two variables is at the world level. But the empirical evidence confirms that, even if we look at a global level, one cannot rule out future scenarios of movements in interest rates and growth rates in opposite directions (they still need to be justified in terms of the global dynamics of investment and saving, but they are possible).

                                          [I left out his supporting evidence.]

                                            Posted by on Wednesday, March 5, 2014 at 09:38 AM in Economics | Permalink  Comments (17)

                                            Links for 3-05-14

                                              Posted by on Wednesday, March 5, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (70)

                                              Tuesday, March 04, 2014

                                              'The Real Poverty Trap'

                                              Paul Krugman:

                                              The Real Poverty Trap: Earlier I noted that the new Ryan poverty report makes some big claims about the poverty trap, and cites a lot of research — but the research doesn’t actually support the claims. It occurs to me, however, that the whole Ryan approach is false in a deeper sense as well.
                                              How so? Well, Ryan et al — conservatives in general — claim to care deeply about opportunity, about giving those not born into affluence the ability to rise. And they claim that their hostility to welfare-state programs reflects their assessment that these programs actually reduce opportunity, creating a poverty trap. ...
                                              In fact, the evidence suggests that welfare-state programs enhance social mobility, thanks to little things like children of the poor having adequate nutrition and medical care. And conversely, of course, when such programs are absent or inadequate, the poor find themselves in a trap they often can’t escape, not because they lack the incentive, but because they lack the resources. ...
                                              So the whole poverty trap line is a falsehood wrapped in a fallacy...

                                                Posted by on Tuesday, March 4, 2014 at 01:43 PM in Economics, Income Distribution, Politics, Social Security | Permalink  Comments (48)

                                                'Will MOOCs Lead to the Democratisation of education?'

                                                Some theoretical results on MOOCs:

                                                Will MOOCs lead to the democratisation of education?, by Joshua Gans: With all the recent discussion of how hard it is for journalists to read academic articles, I thought I’d provide a little service here and ‘translate’ the recent NBER working paper by Daron Acemoglu, David Laibson and John List, “Equalizing Superstars” for a general audience. The paper contains a ‘light’ general equilibrium model that may be difficult for some to parse.
                                                The paper is interested in what the effect of MOOCs or, in general, web-based teaching options would be on educational outcomes around the world, the distribution of those outcomes and the wages of teachers. ...

                                                  Posted by on Tuesday, March 4, 2014 at 11:52 AM in Academic Papers, Economics, Technology, Universities | Permalink  Comments (6)

                                                  Fed Watch: Fed Talk Shifts to Higher Rates

                                                  Tim Duy:

                                                  Fed Talk Shifts to Higher Rates, by Tim Duy: First off, sorry for the limited blogging of recent weeks. In the weeds at the office and the time to complete my winter to-do list before spring break is growing short.
                                                  With the end of asset purchases in sight (and assuming activity does not lurch downward) Fed officials will increasingly turn the discussion toward raising interest rates. It is not as if the anticipated time line has been any secret. The Fed's forecasts clearly show an expectation of higher rates in 2015 with the exact timing and pace of that tightening dependent upon each participant's growth and inflation forecast. Fed officials would want to clearly telegraph such a move well in advance. Hence they will pivot from talk of sustained low rates to raising rates. Of course, we would expect hawks to be first in line, as they have been. For instance, Philadelphia Federal Reserve President said last week (via the Wall Street Journal):
                                                  “Most formulations of standard, simple policy rules suggest that the federal funds rate should rise very soon–if not already,” Mr. Plosser told a conference sponsored by the University of Chicago‘s Booth School of Business.
                                                  Such warnings from Plosser are not new. More notable is San Fransisco Federal Reserve President John Williams' interview with Robin Harding at the Financial Times. Williams is generally seen as a dove, but he was also was one of the first to telegraph the end of asset purchases. Williams on the forecast:
                                                  In his own economic forecast, Mr Williams said, the Fed will raise interest rates in the middle of next year with the unemployment rate at about 6 per cent, inflation at 1.5 per cent and “everything moving in the right direction”.
                                                  “At that point if we don’t start to adjust monetary policy there’d be a risk of overshooting,” he said. “You don’t wait until you’re at full employment before you start to raise interest rates from zero.”
                                                  There is a lot to think about in those two paragraphs. First is a forecast of 6% unemployment 15 months or so from now. Given the rapid drop in the unemployment rate, it is completely believable that we reach 6% before asset purchases are predicted to end later this year. Given Williams' forecast, this suggests to me that the risk here is a more rapid tapering or earlier rate hike. The second is the idea of raising rates when inflation is only 1.5%. This to me suggests that Williams is expecting to reach the 2% target from below, not above. This seems clear from the next point: Williams wants to take the possibility of overshooting off the table.
                                                  Note that Williams' position differs greatly from that of Chicago Federal Reserve President Charles Evans. From a speech last week:
                                                  A slow glide toward our goals from large imbalances risks being stymied along the way and is more likely to fail if adverse shocks hit beforehand. The surest and quickest way to get to the objective is to be willing to overshoot in a manageable fashion. With regard to our inflation objective, we need to repeatedly state clearly that our 2 percent objective is not a ceiling for inflation. Our “balanced approach” to reducing imbalances clearly indicates our symmetric attitudes toward our 2 percent inflation objective.
                                                  Evans is obviously willing to overshoot, where Williams is not. Whether the consensus sides with Williams or Evans is critical to the timing of the first rate hike. If the consensus is set on hitting the inflation target from below, then we have have to consider the Fed's own forecasts as suspect. They will find themselves moving sooner than they expect.
                                                  I would say, however, it is widely believed, on the basis of her "optimal control" analysis, that Federal Reserve Chair Janet Yellen leans toward Evans. Any suggestion that Yellen leans toward Williams on the overshooting question would be notable.
                                                  Regarding asset purchases, Williams joins the chorus indicating the bar to change is high:
                                                  Mr Williams said it would take a “substantial change in the outlook” before he was willing to revisit the Fed’s plan to slow purchases by $10bn at each meeting, and despite some weak data, that has not yet happened. “We haven’t really changed our basic outlook for the economy.”...
                                                  ...Mr Williams said that as long as average monthly jobs growth stays well above 100,000 then unemployment will continue to come down. “What would worry you is if you don’t have an explanation for why it’s weaker and you get multiple months below that,” he said.
                                                  I don't think this should come as a surprise. The Fed has been looking to get out of the asset purchase business since the beginning of 2013. The end is now in sight, and only the most disconcerting of data will change that. They may say they are data dependent (Williams of course adds that he could envision circumstances in which the Fed slow or even reverse tapering), but the reality is they have a bias against asset purchases.
                                                  The desire to exit asset purchases only increases as the unemployment rate falls. I think that Joe Weisenthal is on the money here when he points out that economists are gravitating toward the idea the the changes in the labor market are largely structural. In other words, as St. Louis Federal Reserve puts it (via the Wall Street Journal):
                                                  “I think that unemployment is really sending the right signal about the labor market” and the decline in the labor force participation rate is largely a demographic issue that will play out over a long time horizon, he said.
                                                  I think that Fed officials have long seen the risk that this might be true, which is one factor that biases them against asset purchases. Increasing, though, I suspect they do not see is as a risk, but as reality. Again, the consequence is that rates might be rising sooner than Fed officials currently anticipate. It is worth repeating this chart:


                                                  In the past, wage growth accelerates as unemployment hits 6%. With unemployment well above 6%, it was difficult to conclusively say much one way or another about the exact amount of slack in the labor market as there was certainly enough slack to keep wage growth in check. If the unemployment rate is no longer the appropriate indicator of labor market slack, then we should not expect to see upward wage pressure as 6% looms. If that pressure does emerge, then I think we learn something about the amount of slack. From the Fed's point of view, if they see wage growth, they will suspect their isn't much. Wage growth will raise concerns about unit labor costs, which will in turn raise concerns about inflation.
                                                  Weisenthal, however, adds:
                                                  The view from the left is basically: Even if the labor market is getting tight (which they deny), the Fed should press hard on the gas pedal, so that employers start to employ the long-term unemployed.
                                                  And that might be the proper path, and if there's anyone who has the stomach to engage in the strategy, it's probably Janet Yellen.
                                                  Once again, this implies that Yellen is willing to risk overshooting. Her views on overshooting are critical to the evolution of policy at this point.
                                                  Bottom Line: Put aside the possibility of an international crisis-fueled collapse in activity. The Fed's baseline view is that economic growth continues this year at a pace sufficient to end the asset purchase program. The Fed will resist changing that plan for any minor stumble in activity. The pace of job creation itself might not be that critical; it simply needs to be fast enough to lower unemployment to justify continuing the taper. Moreover, we are reaching a point where the Fed will need to decide to what extent it will risk overshooting. That was never really a risk of overshooting above 6% unemployment. Soon it will be an interesting question. The timing of the first rate hike and the subsequent tightening is dependent upon the consensus on overshooting. If wage growth starts to accelerate, the Fed's focus will shift from fears of too much to too little slack. If they are concerned about overshooting, they will need to accelerate the tightening time line. Where Yellen ultimately falls on the issue is critical.

                                                    Posted by on Tuesday, March 4, 2014 at 12:24 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (19)

                                                    Links for 3-04-14

                                                      Posted by on Tuesday, March 4, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (63)

                                                      Monday, March 03, 2014

                                                      'Fed Tapering News and Emerging Markets'

                                                      How much did Fed tapering affect emerging markets?:

                                                      Fed Tapering News and Emerging Markets, by Fernanda Nechio, FRBSF Economic Letter: In the wake of the global financial crisis and recession of 2007–09, the Federal Reserve carried out a series of large-scale purchases of government and asset-backed securities to lower longer-term interest rates and provide additional stimulus to the economy. Following then-Chairman Ben Bernanke’s May 22, 2013, congressional testimony about the possibility that the Federal Reserve would begin scaling back these purchases—a reduction widely known as tapering—some financial market participants revised their beliefs about when the central bank would begin normalizing its highly accommodative monetary policy. Market participants moved forward the dates they expected the Fed to start reducing its large-scale asset purchases as well as the dates when they expected it to start raising the federal funds rate, its short-term policy interest rate (Bauer and Rudebusch 2013).
                                                      These changes in policy expectations led to reductions in market participants’ tolerance for risk and in particular to a downward reassessment of the probable returns from investing in emerging market economies. Following the global financial crisis, advanced economies put in place exceptionally easy monetary policy. During this period, many emerging market economies had received large waves of capital inflows. By contrast, after Chairman Bernanke’s testimony, many emerging market economies in Asia and Latin America experienced sharp capital flow reversals.
                                                      However, the distribution of these capital movements was not uniform. Patterns of capital outflows appeared to be related to a country’s macroeconomic fundamentals. Those in turn reflected to some degree the policies a country pursued during the years that followed the global financial crisis. This Economic Letter assesses how recent emerging market capital movements are related to a country’s economic situation. In particular, countries with larger external and internal imbalances during the low interest rate period faced larger currency depreciations when interest rate expectations for advanced economies tightened. ...

                                                        Posted by on Monday, March 3, 2014 at 11:26 AM in Development, Economics, Monetary Policy | Permalink  Comments (4)

                                                        'Trimmed Mean PCE Inflation Rate'

                                                        Following up on the post below this one, from the Dallas Fed today:

                                                        Trimmed Mean PCE Inflation Rate: The Trimmed Mean PCE inflation rate is an alternative measure of core inflation in the price index for personal consumption expenditures (PCE). It is calculated by staff at the Dallas Fed, using data from the Bureau of Economic Analysis (BEA).

                                                        January 2014

                                                        The Trimmed Mean PCE inflation rate for January was an annualized 0.6 percent. According to the BEA, the overall PCE inflation rate for January was 1.2 percent, annualized, while the inflation rate for PCE excluding food and energy was 1.1 percent.

                                                        The tables below present data on the Trimmed Mean PCE inflation rate and, for comparison, the overall PCE inflation and the inflation rate for PCE excluding food and energy. The tables give annualized one-month, six-month and 12-month inflation rates.

                                                        One-month PCE inflation, annual rate
                                                          Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14
                                                        PCE 1.2 1.3 0.6 0.8 2.0 1.2
                                                        PCE excluding food & energy 1.3 1.1 1.4 1.4 1.0 1.1
                                                        Trimmed Mean PCE 1.3 1.8 1.6 1.4 1.2 0.6


                                                        Six-month PCE inflation, annual rate
                                                          Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14
                                                        PCE 0.6 1.0 1.6 1.6 1.2 1.2
                                                        PCE excluding food & energy 1.0 1.1 1.4 1.4 1.2 1.2
                                                        Trimmed Mean PCE 1.2 1.3 1.6 1.6 1.5 1.3


                                                        12-month PCE inflation
                                                          Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14
                                                        PCE 1.1 0.9 0.8 1.0 1.1 1.2
                                                        PCE excluding food & energy 1.2 1.2 1.1 1.2 1.2 1.1
                                                        Trimmed Mean PCE 1.3 1.3 1.4 1.4 1.4 1.3
                                                        NOTE: These data are subject to revision

                                                        The following chart plots the evolution of the distribution of price increases in the monthly component data over the past year. The chart shows the percentage of components each month, weighted by their shares in total spending, for which prices grew between 0 and 2 percent (at an annual rate); between 2 and 3 percent; between 3 and 5 percent; between 5 and 10 percent; and more than 10 percent.

                                                        Evolution of the distribution of component price increases

                                                          Posted by on Monday, March 3, 2014 at 09:52 AM in Economics, Inflation, Monetary Policy | Permalink  Comments (4)

                                                          Paul Krugman: The Inflation Obsession

                                                          Why has the Fed been so concerned about inflation?

                                                          The Inflation Obsession, by Paul Krugman, Commentary, NY Times: Recently the Federal Reserve released transcripts of its monetary policy meetings during the fateful year of 2008. And boy, are they discouraging reading. ... The economy was plunging, yet all many people at the Fed wanted to talk about was inflation. ...
                                                          Historians of the Great Depression have long marveled at the folly of policy discussion at the time. For example, the Bank of England, faced with a devastating deflationary spiral, kept obsessing over the imagined threat of inflation. ... But it turns out that modern monetary officials facing financial crisis were just as obsessed with the wrong thing as their predecessors three generations before.
                                                          And it wasn’t just a bad call in 2008..., inflation obsession has persisted, year after year, even as events have refuted its supposed justifications. And this tells us that something more than bad analysis is at work. At a fundamental level, it’s political.
                                                          This is fairly obvious... The overall picture is that most conservatives are inflation obsessives, and nearly all inflation obsessives are conservative.
                                                          Why...? In part it reflects the belief that the government should never seek to mitigate economic pain, because the private sector always knows best. ...
                                                          The flip side of this antigovernment attitude is the conviction that any attempt to boost the economy, whether fiscal or monetary, must produce disastrous results — Zimbabwe, here we come! And this conviction is so strong that it persists no matter how wrong it has been, year after year.
                                                          Finally, all this ties in with a predilection for acting tough and inflicting punishment whatever the economic conditions. ...William Keegan once described this as “sado-monetarism,” and it’s very much alive today.
                                                          Does any of this matter? It’s true that the Fed hasn’t surrendered to the sado-monetarists. Notably, it didn’t panic in 2011, when another blip in gasoline prices briefly raised the headline rate of inflation, and Republicans began inveighing against the “debasement” of the dollar.
                                                          But I’d argue that the clamor from inflation obsessives has intimidated the Fed, which might otherwise have done more. And it has also been part of a general climate of opposition to anything that might address our continuing jobs crisis.
                                                          As I suggested, we used to marvel at the wrongheadedness of policy makers during the Great Depression. But when the Great Recession struck, and we were given a chance to do better, we ended up repeating all the same mistakes.

                                                            Posted by on Monday, March 3, 2014 at 12:33 AM in Economics, Inflation, Monetary Policy | Permalink  Comments (67)

                                                            Links for 3-03-14

                                                              Posted by on Monday, March 3, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (86)

                                                              Sunday, March 02, 2014

                                                              Four Components of AD Relative to the Business Cycle Peak

                                                              Via Brad DeLong:


                                                                Posted by on Sunday, March 2, 2014 at 02:10 PM in Economics | Permalink  Comments (6)

                                                                'In Search of a Stable Electronic Currency'

                                                                Robert Shiller:

                                                                In Search of a Stable Electronic Currency, by Robert Shiller, Commentary, NY Times: ... Bitcoin’s future is very much in doubt. Yet whatever becomes of it, something good can arise from its innovations... I believe that electronic forms of money could give us better pricing, contracting and risk management. ...
                                                                Bitcoin has been focused on the wrong classical functions of money, as a medium of exchange and a store of value. ... It would be much better to focus on another classical function: money as a unit of account...
                                                                This has already begun to happen. ... For example, since 1967 in Chile, an inflation-indexed unit of account called the unidad de fomento (U.F.), meaning unit of development, has been widely used. Financial exchanges are made in pesos, according to a U.F.-peso rate posted on the website valoruf.cl. One multiplies the U.F. price by the exchange rate to arrive at the amount owed today in pesos. In this way, it is natural and easy to set inflation-indexed prices, and Chile is much more effectively inflation-indexed than other countries are. ...
                                                                With electronic software in the background, we can ... move beyond just one new unit of account to a whole system of them...
                                                                Bitcoin has been a bubble. But the legacy of the Bitcoin experience should be that we move toward a system of stable economic units of measurement — a system empowered by sophisticated mechanisms of electronic payment.

                                                                  Posted by on Sunday, March 2, 2014 at 12:24 AM in Economics, Financial System | Permalink  Comments (23)

                                                                  Links for 3-02-14

                                                                    Posted by on Sunday, March 2, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (70)

                                                                    Saturday, March 01, 2014

                                                                    'Whither the Euro?'

                                                                    Kevin O'Rourke:

                                                                    Whither the Euro?, by Kevin O’Rourke: The euro area economy is in a terrible mess.
                                                                    In December 2013 euro area GDP was still 3 percent lower than in the first quarter of 2008, in stark contrast with the United States, where GDP was 6 percent higher. GDP was 8 percent below its precrisis level in Ireland, 9 percent below in Italy, and 12 percent below in Greece. Euro area unemployment exceeds 12 percent—and is about 16 percent in Portugal, 17 percent in Cyprus, and 27 percent in Spain and Greece.
                                                                    Europeans are so used to these numbers that they no longer find them shocking, which is profoundly disturbing. These are not minor details, blemishing an otherwise impeccable record, but evidence of a dismal policy failure.
                                                                    The euro is a bad idea, which was pointed out two decades ago when the currency was being devised. The currency area is too large and diverse—and given the need for periodic real exchange rate adjustments, the anti-inflation mandate of the European Central Bank (ECB) is too restrictive. Labor mobility between member countries is too limited to make migration from bust to boom regions a viable adjustment option. And there are virtually no fiscal mechanisms to transfer resources across regions in the event of shocks that hit parts of the currency area harder than others. ...[more]...

                                                                      Posted by on Saturday, March 1, 2014 at 06:43 AM in Economics, International Finance | Permalink  Comments (27)

                                                                      Links for 3-01-14

                                                                        Posted by on Saturday, March 1, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (107)

                                                                        Friday, February 28, 2014

                                                                        'The Real Reason Nobody Reads Academics'

                                                                        Appreciate the mention:

                                                                        The Real Reason Nobody Reads Academics, by Ezra Klein: New York Times columnist Nicholas Kristof recently ignited a bit of a firestorm with a column asking why academics are irrelevant to public debates. I’d turn the question around: Why aren’t journalists better at taking advantage of academic expertise?
                                                                        The most efficient arrangement would have academics communicate directly with the public. Thankfully for journalists, they don’t. ... It would be a disaster for our profession if academics became good at communicating what they know.
                                                                        The relationship between academics and journalists should be a happy symbiosis. The two sides are perfectly designed, in strengths and weaknesses, to support each other. ...
                                                                        The good news is the chasm is closing. Academics have increasingly turned to the blogosphere, opening a window on academic conversations that were formerly out of view. In political science, for instance, the Monkey Cage is a minor miracle. In economics, Mark Thoma at the Economist’s View is tireless in tracking discussion across the profession.
                                                                        Still, it would be better if academics didn’t have to blog, or know a blogger, to get their work in front of interested audiences. That would require a new model for disseminating academic work -- one that gets beyond the samizdat system used for working papers on the one hand, and the rigid journal publication system on the other. If academia was easier to keep up with, I think a lot of academics would be surprised to learn how many journalists care about their work, and I think a lot of journalists would be happy to find how much academic research can do for their stories.

                                                                          Posted by on Friday, February 28, 2014 at 12:36 PM in Economics, Press | Permalink  Comments (37)

                                                                          'Death of a Statistic'

                                                                          Tim Taylor:

                                                                          Death of a Statistic, by Tim Taylor: OK, I know that only a very small group of people actually care about government statistics. I know I'm a weirdo.  I accept it. But data is not the plural of anecdote, as the saying goes. If you care about deciphering real-world economic patterns, you need statistical evidence. Thus, it's unpleasant news to see the press release from the US Bureau of Labor Statistics reporting that, because its budget has been cut by $21 million down to $592 million, it will cut back on the International Price Program and on the Quarterly Census of Employment and Wages.

                                                                          I know, serious MEGO, right? (MEGO--My Eyes Glaze Over.)

                                                                          But as Susan Houseman and Carol Corrado explain, the change means the end of the export price program, which calculates price levels for U.S. exports, and thus allows economists "to understand trends in real trade balances, the competitiveness of U.S. industries, and the impact of exchange rate movements. It is highly unusual for a statistical agency to cut a so-called principal federal economic indicator." As BLS notes: "The Quarterly Census of Employment and Wages (QCEW) program publishes a quarterly count of employment and wages reported by employers covering 98 percent of U.S. jobs, available at the county, MSA [Metropolitan Statistical Area], state and national levels by industry." The survey is being reduced in scope and frequency, not eliminated. If you don't think that a deeper and detailed understanding of employment and wages is all that important, maybe cutting back funding for this survey seems like a good idea.

                                                                          These changes seem part of series of sneaky little unpleasant cuts. Last year, the Bureau of Labor Statistics saved a whopping $2 million by cutting the International Labor Comparisons program, which produced a wide array of labor market and economic data produced with a common conceptual framework, so that one could meaningfully compare, say, "unemployment" across different countries. And of course, some of us are still mourning the decision of the U.S. Census Bureau in 2012 to save $3 million per year by ending the U.S. Statistical Abstract, which for since 1878  had provided a useful summary and reference work for locating a wide array of government statistics.

                                                                          The amounts of money saved with these kinds of cuts is tiny by federal government standards, and the costs of not having high-quality statistics can be severe. ...

                                                                          I wish I had some way to dramatize the foolishness and loss of these decisions to trim back on government statistics. ...

                                                                          It won't do to blame these kinds of cutbacks in the statistics program on the big budget battles, because in the context of the $3.8 trillion federal budget this year, a few tens of millions are pocket change. These cuts could easily be reversed by trimming back on the outside conference budgets of larger agencies. But all statistics do is offer facts that might get in the way of what you already know is true. Who needs the aggravation?

                                                                          Yes, no sense letting actual facts get in the way of what people just know is true...

                                                                            Posted by on Friday, February 28, 2014 at 07:22 AM in Economics | Permalink  Comments (26)

                                                                            Paul Krugman: No Big Deal

                                                                            It's not clear that the Trans-Pacific Partnership is a good idea:

                                                                            No Big Deal, by Paul Krugman, Commentary, NY Times: Everyone knows that the Obama administration’s domestic economic agenda is stalled in the face of scorched-earth opposition from Republicans. And that’s a bad thing: The U.S. economy would be in much better shape if Obama administration proposals like the American Jobs Act had become law.
                                                                            It’s less well known that the administration’s international economic agenda is also stalled, for very different reasons. In particular,... the proposed Trans-Pacific Partnership, or T.P.P. — doesn’t seem to be making much progress...
                                                                            And you know what? That’s O.K. It’s far from clear that the T.P.P. is a good idea. ... I am in general a free trader, but I’ll be undismayed and even a bit relieved if the T.P.P. just fades away. ...
                                                                            There’s a lot of hype about T.P.P. .... Supporters like to talk about the fact that the countries at the negotiating table comprise around 40 percent of the world economy, which they imply means that the agreement would be hugely significant. But trade among these players is already fairly free, so the T.P.P. wouldn’t make that much difference.
                                                                            Meanwhile, opponents portray the T.P.P. as a huge plot, suggesting that it would destroy national sovereignty and transfer all the power to corporations. This, too, is hugely overblown. ...
                                                                            What the T.P.P. would do, however, is increase the ability of certain corporations to assert control over intellectual property. Again, think drug patents and movie rights.
                                                                            Is this a good thing from a global point of view? Doubtful. ... True, temporary monopolies are, in fact, how we reward new ideas; but arguing that we need even more monopolization is very dubious — and has nothing at all to do with classical arguments for free trade. ...
                                                                            In short, there isn’t a compelling case for this deal... Nor does there seem to be anything like a political consensus in favor, abroad or at home. ...
                                                                            So what I wonder is why the president is pushing the T.P.P. at all. ... My guess is that we’re looking at a combination of Beltway conventional wisdom — Very Serious People always support entitlement cuts and trade deals — and officials caught in a 1990s time warp, still living in the days when New Democrats tried to prove that they weren’t old-style liberals by going all in for globalization. ...
                                                                            So don’t cry for T.P.P. If the big trade deal comes to nothing, as seems likely, it will be, well, no big deal.

                                                                              Posted by on Friday, February 28, 2014 at 12:03 AM in Economics, International Trade | Permalink  Comments (45)

                                                                              Links for 2-28-14

                                                                                Posted by on Friday, February 28, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (73)

                                                                                Thursday, February 27, 2014

                                                                                Brief Note

                                                                                Traveling today ...

                                                                                  Posted by on Thursday, February 27, 2014 at 10:20 AM in Economics | Permalink  Comments (3)

                                                                                  'Little Evidence of a 'Big Tradeoff' Between Redistribution and Growth'

                                                                                  Redistribution does not appear to hinder economic growth:

                                                                                  Treating Inequality with Redistribution: Is the Cure Worse than the Disease?, by Jonathan D. Ostry and Andrew Berg: Rising income inequality looms high on the global policy agenda, reflecting not only fears of its pernicious social and political effects, (including questions about the consistency of extreme inequality with democratic governance), but also the economic implications. While positive incentives are surely needed to reward work and innovation, excessive inequality is likely to undercut growth, for example by undermining access to health and education, causing investment-reducing political and economic instability, and thwarting the social consensus required to adjust in the face of major shocks.
                                                                                  Understandably, economists have been trying to understand better the links between rising inequality and the fragility of economic growth. Recent narratives include how inequality intensified the leverage and financial cycle, sowing the seeds of crisis; or how political-economy factors, especially the influence of the rich, allowed financial excess to balloon ahead of the crisis.
                                                                                  But what is the role of policy, and in particular fiscal redistribution to bring about greater equality? Conventional wisdom would seem to suggest that redistribution would in itself be bad for growth but, conceivably, by engendering greater equality, might help growth. Looking at past experience, we find scant evidence that typical efforts to redistribute have on average had an adverse effect on growth. And faster and more durable growth seems to have followed the associated reduction in inequality. ...
                                                                                  To put it simply, we find little evidence of a “big tradeoff” between redistribution and growth. Inaction in the face of high inequality thus seems unlikely to be warranted in many cases.

                                                                                    Posted by on Thursday, February 27, 2014 at 12:33 AM in Economics, Income Distribution | Permalink  Comments (38)

                                                                                    The Obama Stimulus

                                                                                    Jeff Frankel says the stimulus worked:

                                                                                    Guest Contribution: “The Obama Stimulus and the 5-Year Anniversary of Market Turnaround”, econbrowser: Commentators are taking note of the five-year anniversary of the fiscal stimulus that President Obama enacted during his first month in office. Those who don’t like Obama are still asking “if the fiscal stimulus was so great, why didn’t it work?” ... Listening to these arguments, one would think that no effect of the Obama stimulus could be seen by the naked eye in the U.S. economic statistics of 2009. Nothing could be further from the truth. ...
                                                                                    If one judges by the economic statistics, the effect could not have been much more immediate, whether one looks at job loss, GDP, or financial market indicators. Look at the graphs below. ...
                                                                                    Of course there are always a lot of things going on. One cannot say for sure what was the effect of the Obama stimulus. And one can debate why the pace of the expansion slowed after 2010 (my own prime culprit is the switch to fiscal austerity). But whether looking at indicators of economic activity, the labor market, or the financial markets, one cannot say that the fiscal stimulus of February 2009 had no apparent impact in the graphs.

                                                                                      Posted by on Thursday, February 27, 2014 at 12:24 AM in Economics, Fiscal Policy | Permalink  Comments (45)

                                                                                      Links for 2-27-14

                                                                                        Posted by on Thursday, February 27, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (71)

                                                                                        'The Pattern of Job Creation and Destruction by Firm Age and Size'

                                                                                        What age and size firms have the highest net job creation rates?

                                                                                        The Pattern of Job Creation and Destruction by Firm Age and Size, by John Robertson and Ellyn Terry, macroblog: A recent Wall Street Journal blog post caught our attention. In particular, the following claim:
                                                                                        It’s not size that matters—at least when it comes to job creation. The age of the company is a bigger factor.
                                                                                        This observation is something we have also been thinking a lot about over the past few years (see for example, here, here, and here).
                                                                                        The following chart shows the average job-creation rate of expanding firms and the average job-destruction rates of shrinking firms from 1987 to 2011, broken out by various age and size categories:
                                                                                        In the chart, the colors represent age categories, and the sizes of the dot represent size categories. So, for example, the biggest blue dot in the far northeast quadrant shows the average rate of job creation and destruction for firms that are very young and very large. The tiny blue dot in the far east region of the chart represents the average rate of job creation and destruction for firms that are very young and very small. If an age-size dot is above the 45-degree line, then average net job creation of that firm size-age combination is positive—that is, more jobs are created than destroyed at those firms. (Note that the chart excludes firms less than one year old because, by definition in the data, they can have only job creation.)
                                                                                        The chart shows two things. First, the rate of job creation and destruction tends to decline with firm age. Younger firms of all sizes tend to have higher job-creation (and job-destruction) rates than their older counterparts. That is, the blue dots tend to lie above the green dots, and the green dots tend to be above the orange dots.
                                                                                        The second feature is that the rate of job creation at larger firms of all ages tends to exceed the rate of job destruction, whereas small firms tend to destroy more jobs than they create, on net. That is, the larger dots tend to lie above the 45-degree line, but the smaller dots are below the 45-degree line. ...
                                                                                        Apart from new firms, it seems that the combination of youth (between one and ten years old) and size (more than 250 employees) has tended to yield the highest rate

                                                                                          Posted by on Thursday, February 27, 2014 at 12:03 AM in Economics, Unemployment | Permalink  Comments (5)

                                                                                          Wednesday, February 26, 2014

                                                                                          Links for 2-26-14

                                                                                           A bit late with these today:

                                                                                            Posted by on Wednesday, February 26, 2014 at 10:25 AM in Economics, Links | Permalink  Comments (24)

                                                                                            Fed Watch: Tarullo on Monetary Policy and Financial Stability

                                                                                            Tim Duy is helping to fill the void -- thanks Tim:

                                                                                            Tarullo on Monetary Policy and Financial Stability, by Tim Duy: Federal Reserve Governor Daniel Tarullo tackled the issue of financial stability in a speech that I think is well worth the time to read. The starting point is that many lessons have been learned over the past two cycles, including the perils of ignoring financial stability issues. But how should such concerns be incorporated into the policymaking process? Tarullo:

                                                                                            While few today would take the pre-crisis view common among central bankers that financial stability should not be an explicit concern of monetary policy, there is considerable disagreement over--among other things--the weight that financial stability concerns should carry compared with traditional monetary policy goals of price stability and maximum employment.

                                                                                            Tarullo begins with a brief overview of the financial crisis and the Fed's response, declaring partial victory:

                                                                                            ...while the recovery has been frustratingly slow and remains incomplete, there has been real progress, despite the fact that in the past couple of years a restrictive fiscal policy has been working at cross-purposes to monetary policy, and that balance sheet repair and financial strains in Europe have made it more difficult for the economy to muster much self-sustaining momentum.

                                                                                            As Tarullo notes, the Fed's actions have not come without backlash. Of much focus is the size of the balance sheet, and the likelihood of unwinding the resulting liquidity should inflation rear its head. Tarullo quickly dismisses this concern as no longer of major concern given the expansion of the Fed's toolkit. He turns his attention toward bigger game:

                                                                                            The area of concern about recent monetary policy that I want to address at greater length relates to financial stability. The worry is that the actual extended period of low interest rates, along with expectations fostered by forward guidance of continued low rates, may be incentivizing financial market actors to take on additional risks to boost margins, thereby contributing to unsustainable increases in asset prices and a consequent buildup of systemic vulnerabilities. Indeed, in the years preceding the crisis, a few prescient observers swam against the tide of conventional wisdom to argue that a sustained period of low rates was inducing investors to "reach for yield" and thereby endangering the financial system.

                                                                                            Policymakers currently anticipate the Fed will hold interest rates near zero into 2015, followed by only a gradual path of tightening. The concern is that such a long period of low rates will spawn an asset bubble, or bubbles, similar to the process that many feel fueled the housing boom last decade. The eventual unwinding of any bubbles would likely be unpleasant. But, presumably, the period of low rates occurred for a reason - to support economic activity. Therein lies the conundrum for policymakers:

                                                                                            The very accommodative monetary policy that contributed to the restoration of financial stability could, if maintained long enough in the face of slow recovery in the real economy, eventually sow the seeds of renewed financial instability. Yet removal of accommodation could choke off the recovery just as it seems poised to gain at least a bit more momentum.

                                                                                            So how can the Federal Reserve protect against financial instability? Tarullo here makes a point I think the Fed will frequently reiterate:

                                                                                            As a preliminary matter, it is important to note that incorporating financial stability considerations into monetary policy decisions need not imply the creation of an additional mandate for monetary policy. The potentially huge effect on price stability and employment associated with bouts of serious financial instability gives ample justification.

                                                                                            By addressing financial instability risks, they are attempting to minimize deviations in inflation and unemployment. In effect, they might slow the pace of activity on the upside in return for minimizing the downside. This, however, is easier said then done, as it is difficult to sell delaying progress on the real problems of low inflation and high unemployment to fight against a phantom downturn:

                                                                                            Of course, this preliminary observation underscores the fact that the identification of systemic risks, especially those based on the putative emergence of asset bubbles, is not a straightforward exercise. The eventual impact of the bursting of the pre-crisis housing bubble on financial stability went famously underdiagnosed by policymakers and many private analysts. But there would be considerable economic downside in reacting with policy measures each time a case could be made that a bubble was developing.

                                                                                            The Fed is actively paying attention to markets in the search for stability risks. Tarullo reports the outcome of the Fed's new macroprudential efforts:

                                                                                            At present, our monitoring does find some evidence of increased duration and credit risk, but the increases appear relatively moderate to date--particularly at the largest banks and life insurers. Moreover, valuations for broad categories of assets such as real estate and corporate equities remain within historical norms, suggesting that valuation pressures, if present, are confined to narrower segments of assets. For example, valuations do appear stretched for farmland, although recent data are suggesting some slowing, and for the equity prices of some small technology firms.

                                                                                            No broad-based concerns such as the equity surge of the 1990s or the housing boom of the 2000s. Just pockets of issues here and there. That said, all is not perfect:

                                                                                            Still, there are areas where investors appear to have been very sanguine regarding certain types of exposure and modest in their demands for compensation to assume such risk. High-yield corporate bond and leveraged loan funds, for instance, have seen strong inflows, reflecting greater investor appetite for risky corporate credits, while underwriting standards have deteriorated, raising the possibility of large losses going forward.

                                                                                            Weak underwriting for risky, leveraged assets that investors seem eager to acquire for unusually little reward. This is the kind of situation, especially with leveraged assets, that will repeatedly gain the Fed's attention going forward. What action has the Fed taken? Tarullo:

                                                                                            In these circumstances, it has to date seemed appropriate to rely on supervisory responses. For example, in the face of substantial growth in the volume of leveraged lending and the deterioration in underwriting standards, the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation issued updated guidance on leverage lending in March 2013. This guidance outlined principles related to safe and sound leveraged lending activities, including the expectation that banks and thrifts originate leveraged loans using prudent underwriting standards regardless of their intent to hold or distribute them.

                                                                                            In addition, the Federal Reserve, alongside other regulators, has been working with the firms we supervise to increase their resilience to possible interest rate shocks...Our analysis to this point (undertaken outside of our annual stress test program) suggests that banking firms are capitalized to withstand the losses in asset valuations that would arise from large spikes in rates, which, moreover, would see an offset from the increase in the value of bank deposit franchises. This finding is consistent with the lack of widespread stress during the period of May through June 2013 when interest rates increased considerably. The next set of stress-test results, which we will release next month, will provide further insight on this point, both to regulators and to markets.

                                                                                            Some enhanced guidance and additional stress tests. I think it would be reasonable to describe this response as underwhelming. Would "additional guidance" have deterred lending activity during the housing bubble? I somehow doubt it. Indeed, Tarullo has his doubts:

                                                                                            While ad hoc supervisory action aimed at specific lending or risks is surely a useful tool, it has its limitations. First, it is a bit too soon to judge precisely how effective these supervisory actions--such as last year's leveraged lending guidance--have been. Second, even if they prove effective in containing discrete excesses, it is not clear that the somewhat deliberate supervisory process would be adequate to deal with a more pervasive reach for yield affecting many areas of credit extension. Third, and perhaps most important, the extent to which supervisory practice can either lean against the wind or increase the overall resiliency of the financial system is limited by the fact that it applies only to prudentially regulated firms. This circumstance creates an incentive for intermediation activities to migrate outside of the regulated sector.

                                                                                            The last point is critical. Increased regulatory activity might just push more activity into the shadow banking realm. There the threat of financial instability might increase exponentially, but without a regulator as a backstop. I think this issue will tend to restrain the Fed's interest in heavy-handed regulatory activity.

                                                                                            Tarullo follows with a discussing of time-varying policies, citing the example of increased loan-to-value requirements for mortgages as lending accelerates. This is an area to watch, as Tarullo sees value in this approach:

                                                                                            ...I would devote particular attention to policies that can act as the rough equivalent of an increase in interest rates for particular sources of funding. Such policies would be more responsive to problems that were building quickly because of certain kinds of credit, without regard to whether they were being deployed in one or many sectors of the economy...

                                                                                            Such policies could slow the progress of an asset bubble and, as Tarullo points out, provide additional time for policymakers to determine if the situation requires a change in overall monetary policy. Ultimately, however, Tarullo is a realist. He doesn't intent to put all his eggs in the macroprudential basket:

                                                                                            The foregoing discussion has considered the ways in which existing supervisory authority and new forms of macroprudential authority may allow monetary policymakers to avoid, or at least defer, raising interest rates to contain growing systemic risks under circumstances in which policy is falling well short of achieving one or both elements of the dual mandate. However, as has doubtless been apparent, I believe these alternative policy instruments have real limitations.

                                                                                            As he later says, this means that the Fed should not take the direct monetary policy action "off the table" when it comes to addressing financial instability. What does that mean for policy in the near term? Tarullo:

                                                                                            As I noted earlier, I do not think that at present we are confronted with a situation that would warrant a change in the monetary policy we have been pursuing...

                                                                                            Not terribly surprising. After all, given that policymakers expect a long period of low rates, they obviously are not expecting sufficient financial instability to justify changing that outcome. But expect more talk about the topic:

                                                                                            ...But for that very reason, now is a good time to consider these issues more actively. One useful step would be development of a framework that would allow us to make a more analytic, less instinctual judgment on the potential tradeoffs between enhanced financial stability and reduced economic activity. This will be an intellectually challenging exercise, but in itself does not entail any changes in policy.

                                                                                            Bottom Line: The Fed continues to explore the role of monetary policy in addressing asset bubbles. But engaging such concerns head on with tighter policy remains a secondary option. The first option is a variety of macroprudential tools. Moreover, policymakers believe they have the time to explore such tools, much as they have had time to consider managing their expanded balance sheet. They will also remain cautious to act out fear of increasing the risk of instability by driving activity out from under their purview. At this point, my gut reaction is that by the time the Fed feels they are left with no other option but to tighten policy to limit financial instability risks, the damage will already have been done.

                                                                                              Posted by on Wednesday, February 26, 2014 at 06:36 AM in Economics, Fed Watch, Monetary Policy, Regulation | Permalink  Comments (12)

                                                                                              Tuesday, February 25, 2014

                                                                                              Legal Scholarship and Monetary Policy

                                                                                              This will be good for my monetary theory and policy class:

                                                                                              ...should scholars refrain from writing about legal issues in macroeconomics, specifically monetary policy?

                                                                                              One thinks of monetary policy decisions—whether or not to raise interest rates, purchase billions of dollars of securities on the secondary market ("quantitative easing"), devalue or change a currency—as fundamentally driven by political and economic factors, not law. And of course they are. But the law has a lot to say about them and their consequences, and legal scholarship has been pretty quiet on this.

                                                                                              Some concrete examples of the types of questions I’m talking about would be:

                                                                                              • Pursuant to its dual mandate (to maintain price stability and full employment), what kinds of measures can the Federal Reserve legally undertake for the purpose of promoting full employment?  More generally, what are the Fed’s legal constraints?
                                                                                              • What recognition should American courts extend to an attempt by a departing Eurozone member state to redenominate its sovereign debt into a new currency?

                                                                                              When it comes to issues like these, it is probably even more true than usual that law defines the boundaries of policy. Legal constraints in the context of U.S. monetary policy appear fairly robust even in times of crisis. For example, policymakers themselves often cite law as a major constraint when speaking of the tools available to the Federal Reserve in combating unemployment and deflation post-2008. Leading economics commentators do too. Yet commentary on “Fed law” is grossly underdeveloped..., legal academics have largely left commentary on the Fed and macroeconomics to the econ crowd....

                                                                                              [There's quite a bit more in the full post.]

                                                                                                Posted by on Tuesday, February 25, 2014 at 09:22 PM in Economics, Monetary Policy | Permalink  Comments (9)

                                                                                                Links for 2-25-14

                                                                                                 I don't know if these are really early, or really late.

                                                                                                  Posted by on Tuesday, February 25, 2014 at 01:18 PM in Economics, Links | Permalink  Comments (62)

                                                                                                  Monday, February 24, 2014

                                                                                                  Links for 2-25-14

                                                                                                  Thanks to Tim Duy for the links tonight:

                                                                                                  Labor Department Weighs Cutting Data on Import and Export Prices to Save Money - Real Time Economics
                                                                                                  The Great Recession! It's Right Behind You! - Free Exchange
                                                                                                  Federal Reserve Appoints Portland Business Leader Charles Wilhoite to Western Economic Advisory Council - Oregonian
                                                                                                  A Model of the Safe Asset Mechanism (SAM): Safety Traps and Economic Policy - NBER
                                                                                                  What is the Stance of Monetary Policy - macroblog
                                                                                                  Fracking Boom Leaves Texans Under a Toxic Cloud - Bloomberg
                                                                                                  Dallas Fed's Fisher Wants to Continue Reducing Bond Purchases - Real Time Economics
                                                                                                  You Won't Have Broadband Competition Without Regulation - Felix Salmon
                                                                                                  Has Monetary Cooperation Broken Down? - PIEE
                                                                                                  Why the Euro Inflation Number is Worse Than it Looks - Financial Times
                                                                                                  My Quiz for Wannabe Keynesians - Roger Farmer
                                                                                                  Global Growth After the G20 Summit - Gavyn Davies/Financial Times
                                                                                                  Where a Higher Minimum Wage Hasn't Killed Jobs - Bloomberg
                                                                                                  State Hiring Credits and Recent Job Growth - San Francisco Federal Reserve

                                                                                                    Posted by on Monday, February 24, 2014 at 10:36 PM in Economics, Links | Permalink  Comments (92)

                                                                                                    Apologies To Everyone

                                                                                                    Apologies to everyone.

                                                                                                    My life is in shambles.

                                                                                                    Today was really hard.

                                                                                                    I'll be back as soon as I can, but for now I need to heal.

                                                                                                      Posted by on Monday, February 24, 2014 at 07:13 PM in Economics | Permalink  Comments (93)