Wednesday, April 16, 2014

'Supply, Demand, and Unemployment Benefits'

When in need of a quick post, Paul Krugman is always a good source:

Supply, Demand, and Unemployment Benefits: Ben Casselman points out that we’ve had a sort of natural experiment in the alleged effects of unemployment benefits in reducing employment. Extended benefits were cancelled at the beginning of this year; have the long-term unemployed shown any tendency to find jobs faster? And the answer is no.
Let me ... ask, how was it, exactly, that reduced benefits were supposed to encourage employment in the first place?
Making the unemployed miserable arguably increases labor supply, as workers become ... more willing to take whatever job they can find. But the US labor market in 2014 isn’t constrained by supply, it’s constrained by demand: ...firms ... have no need for as many hours of work as workers are willing to give.
So make the long-term unemployed more desperate; so what? They can’t do anything to increase the amount of work demanded, and in fact their reduced purchasing power reduces labor demand.
You might imagine that the long-term unemployed, through their desperation, might take jobs away from existing workers — but ... there’s no evidence that this is happening. ...

    Posted by on Wednesday, April 16, 2014 at 10:42 AM in Economics, Politics, Social Insurance, Unemployment | Permalink  Comments (22)


    Yellen: Monetary Policy and the Economic Recovery

    Travel day today, so for now a quick repost of Janet Yellen's speech today, more later as I can:

    Monetary Policy and the Economic Recovery, by Janet Yellen, FRB: Nearly five years into the expansion that began after the financial crisis and the Great Recession, the recovery has come a long way. More than 8 million jobs have been added to nonfarm payrolls since 2009, almost the same number lost as a result of the recession. Led by a resurgent auto industry, manufacturing output has also nearly returned to its pre-recession peak. While the housing market still has far to go, it seems to have turned a corner.
    It is a sign of how far the economy has come that a return to full employment is, for the first time since the crisis, in the medium-term outlooks of many forecasters. It is a reminder of how far we have to go, however, that this long-awaited outcome is projected to be more than two years away.
    Today I will discuss how my colleagues on the Federal Open Market Committee (FOMC) and I view the state of the economy and how this view is likely to shape our efforts to promote a return to maximum employment in a context of price stability. I will start with the FOMC's outlook, which foresees a gradual return over the next two to three years of economic conditions consistent with its mandate.
    While monetary policy discussions naturally begin with a baseline outlook, the path of the economy is uncertain, and effective policy must respond to significant unexpected twists and turns the economy may take. My primary focus today will be on how the FOMC's monetary policy framework has evolved to best support the recovery through those twists and turns, and what this framework is likely to imply as the recovery progresses.
    The Current Economic Outlook
    The FOMC's current outlook for continued, moderate growth is little changed from last fall. In recent months, some indicators have been notably weak, requiring us to judge whether the data are signaling a material change in the outlook. The unusually harsh winter weather in much of the nation has complicated this judgment, but my FOMC colleagues and I generally believe that a significant part of the recent softness was weather related.
    The continued improvement in labor market conditions has been important in this judgment. The unemployment rate, at 6.7 percent, has fallen three-tenths of 1 percentage point since late last year. Broader measures of unemployment that include workers marginally attached to the labor force and those working part time for economic reasons have fallen a bit more than the headline unemployment rate, and labor force participation, which had been falling, has ticked up this year.
    Inflation, as measured by the price index for personal consumption expenditures, has slowed from an annual rate of about 2-1/2 percent in early 2012 to less than 1 percent in February of this year.1 This rate is well below the Committee's 2 percent longer-run objective. Many advanced economies are observing a similar softness in inflation.
    To some extent, the low rate of inflation seems due to influences that are likely to be temporary, including a deceleration in consumer energy prices and outright declines in core import prices in recent quarters. Longer-run inflation expectations have remained remarkably steady, however. We anticipate that, as the effects of transitory factors subside and as labor market gains continue, inflation will gradually move back toward 2 percent.
    In sum, the central tendency of FOMC participant projections for the unemployment rate at the end of 2016 is 5.2 to 5.6 percent, and for inflation the central tendency is 1.7 to 2 percent.2 If this forecast was to become reality, the economy would be approaching what my colleagues and I view as maximum employment and price stability for the first time in nearly a decade. I find this baseline outlook quite plausible.
    Of course, if the economy obediently followed our forecasts, the job of central bankers would be a lot easier and their speeches would be a lot shorter. Alas, the economy is often not so compliant, so I will ask your indulgence for a few more minutes.
    Three Big Questions for the FOMC
    Because the course of the economy is uncertain, monetary policymakers need to carefully watch for signs that it is diverging from the baseline outlook and then respond in a systematic way. Let me turn first to monitoring and discuss three questions I believe are likely to loom large in the FOMC's ongoing assessment of where we are on the path back to maximum employment and price stability.

    » Continue reading "Yellen: Monetary Policy and the Economic Recovery"

      Posted by on Wednesday, April 16, 2014 at 10:08 AM in Economics, Monetary Policy | Permalink  Comments (17)


      Links for 4-16-14

        Posted by on Wednesday, April 16, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (98)


        Tuesday, April 15, 2014

        'Rising Sun'

        Paul Krugman:

        Rising Sun: Joe Romm draws our attention to the third slice of the latest IPCC report on climate change, on the costs of mitigation; the panel finds that these costs aren’t that big — a few percent of GDP even by the end of the century, which means only a trivial hit to the growth rate. ...
        In fact, you should be optimistic...: the technological prospects for a low-emission economy have gotten dramatically better.
        It’s kind of odd how little attention the media give to the solar revolution, but this is really huge stuff:
        In fact, it’s possible that solar will displace coal even without special incentives. But we can’t count on that. What we do know is that it’s no longer remotely true that we need to keep burning coal to satisfy electricity demand. The way is open to a drastic reduction in emissions, at not very high cost.
        And that should make us optimistic about the future, right? I mean, all that stands in our way is prejudice, ignorance, and vested interests. Oh, wait.

          Posted by on Tuesday, April 15, 2014 at 01:29 PM in Economics, Environment, Politics | Permalink  Comments (32)


          Secular Stagnation? The Future Challenge for Economic Policy

          This is worth watching:

            Posted by on Tuesday, April 15, 2014 at 10:02 AM in Conferences, Economics, Video | Permalink  Comments (23)


            Links for 4-15-14

              Posted by on Tuesday, April 15, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (44)


              Monday, April 14, 2014

              FRBSF Economic Letter: How Important Are Hedge Funds in a Crisis?

              Another one that may be of interest:

              How Important Are Hedge Funds in a Crisis?, by Reint Gropp, FRBSF Economic Letter: Before the 2007–09 crisis, standard risk measurement methods substantially underestimated the threat to the financial system. One reason was that these methods didn’t account for how closely commercial banks, investment banks, hedge funds, and insurance companies were linked. As financial conditions worsened in one type of institution, the effects spread to others. A new method that more accurately accounts for these spillover effects suggests that hedge funds may have been central in generating systemic risk during the crisis.

                Posted by on Monday, April 14, 2014 at 10:19 AM in Economics, Financial System | Permalink  Comments (19)


                How Well Do Economists Predict Turning Points?

                This may be of interest:

                “There will be growth in the spring”: How well do economists predict turning points?, by Hites Ahir and Prakash Loungani: Forecasters have a poor reputation for predicting recessions. This column quantifies their ability to do so, and explores several reasons why both official and private forecasters may fail to call a recession before it happens.

                  Posted by on Monday, April 14, 2014 at 10:06 AM in Econometrics, Economics | Permalink  Comments (9)


                  Paul Krugman: Three Expensive Milliseconds

                   What is the "true cost of our bloated financial industry"?:

                  Three Expensive Milliseconds, by Paul Krugman, Commentary, NY Times: Four years ago ... Spread Networks finished boring its way through the Allegheny Mountains of Pennsylvania. Spread’s tunnel was ... a fiber-optic cable that would shave three milliseconds — three-thousandths of a second — off communication time between the futures markets of Chicago and the stock markets of New York. ...
                  Who cares about three milliseconds? The answer is, high-frequency traders, who make money by buying or selling stock a tiny fraction of a second faster than other players. ...
                  Think about it..., spending hundreds of millions of dollars to save three milliseconds looks like a huge waste. And that’s part of a much broader picture, in which society is devoting an ever-growing share of its resources to financial wheeling and dealing, while getting little or nothing in return.
                  How much waste are we talking about? A paper by Thomas Philippon of New York University puts it at several hundred billion dollars a year. ...
                  What are we getting in return for all that money? Not much, as far as anyone can tell. ...
                  But if our supersized financial sector isn’t making us either safer or more productive, what is it doing? One answer is that it’s playing small investors for suckers, causing them to waste huge sums in a vain effort to beat the market. Don’t take my word for it — that’s what the president of the American Finance Association declared in 2008. Another answer is that a lot of money is going to speculative activities that are privately profitable but socially unproductive. ...
                   It’s ... hard ... to see how the three-millisecond advantage conveyed by the Spread Networks tunnel makes modern America richer; yet that advantage was clearly worth it to the speculators.
                  In short, we’re giving huge sums to the financial industry while receiving little or nothing — maybe less than nothing — in return. Mr. Philippon puts the waste at 2 percent of G.D.P. Yet even that figure, I’d argue, understates the true cost of our bloated financial industry. For there is a clear correlation between the rise of modern finance and America’s return to Gilded Age levels of inequality.
                  So never mind the debate about exactly how much damage high-frequency trading does. It’s the whole financial industry, not just that piece, that’s undermining our economy and our society.

                    Posted by on Monday, April 14, 2014 at 01:36 AM in Economics, Financial System, Regulation | Permalink  Comments (115)


                    Links for 4-14-14

                      Posted by on Monday, April 14, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (62)


                      Sunday, April 13, 2014

                      'The Social and Moral Philosophy of the Minimum Wage'

                      More Delong -- Brad makes this point about value neutrality every once in awhile, it's one I sometimes forget in these discussions, so it's a nice reminder:

                      The Social and Moral Philosophy of the Minimum Wage: Matthew Yglesias is surprised that most economists favor raising the minimum wage: ...
                      ...at the University of Chicago's Booth School of Business found they supported a minimum-wage increase. They weren't sure, however, whether increases would create unemployment. Most said that, on balance, the benefits exceeded the costs...
                      But why should he be surprised? ...

                      One possibility is that Matthew has spent too much time listening to bad right-wing economists who are even worse philosophers--people who say things like: "We are economists, We talk only about efficiency, and so we talk about what maximizes real income per capita. If you want to introduce some other consideration and maximize something other than real income per capita, well then you are introducing interpersonal value comparisons into the problem and you should consult the philosopher or theologian. But we should agree at the start that it is maximizing real income per capita that is the efficient outcome."
                      The problem with this, of course, is that maximizing real income per capita does take a stand, and a very fictional your stand, on interpersonal value comparisons. To maximize real income per capita is to assert that each dollar at the margin--no matter how rich is the person that goes to--has the same effect on marginal utility, has the same effect on the greatest good of the greatest number. If we were, instead of maximizing real income per capita, to go about maximizing the geometric mean of real income we would be taking another stand: that utility was logarithmic in real income, so that each doubling of real income had the same effect on the greatest good of the greatest number no matter who that doubling went to or how rich they already were.
                      Both maximizing real income per capita and maximizing the geometric mean of real income are wrong, are not what we really want to do. ...
                      But if one wants a neutral place to start, it is surely less obnoxious to start from maximizing the geometric mean of real income than from maximizing real income per capita. And once one starts from there you need a very large disemployment effect--one that we simply see strong evidence against at the current level of the minimum wage--for an increase in the minimum wage to flunk any sensible benefit-cost calculation.

                        Posted by on Sunday, April 13, 2014 at 12:52 PM in Economics, Income Distribution | Permalink  Comments (72)


                        Notes and Finger Exercises on Thomas Piketty's "Capital in the Twenty-First Century"

                        Brad DeLong attempts to answer a question many people have been asking. Can the Summers claim of secular stagnation due to the real interest rate being too low be reconciled with Piketty's argument that the real interest rate is too high, high enough to generate rising inequality (larger than the growth rate of the economy)?:

                        Notes and Finger Exercises on Thomas Piketty's "Capital in the Twenty-First Century": When I look at Thomas Piketty's big book, I see one thing that he failed to do that I think he really should have done. A large part of the book is about the contrast between "r", the rate of return on wealth, and "g" the growth rate of the economy. However, there are four different r's. And in his book he failed to distinguish between them.

                        The four different r's are:

                        1. The real interest rate at which metropolitan governments can borrow: call this r1.
                        2. The real interest rate that is the actual average return on wealth in the society and economy: call this r2.
                        3. The real interest rate that is the average risky net rate of accumulation--what capital receives, minus the risk of confiscation or destruction or taxation, plus appreciation in valuation multiples, minus what is spent in order to keep the world in the appropriate social position: call this r3.
                        4. A measure of the extent to which capital and wealth serve as an effective claim on income independent of how much capital there is--a standardized measure of what the society and economy's return on wealth would be at some standardized ratio of wealth to annual income: say, 4: call this ρ.

                        These four r's are very different animals.

                        The first r, r1, is what Larry Summers is talking about when he talks about secular stagnation. When that r1 falls to a level equal to minus the rate of inflation, the economy is in big trouble. At that point, wealthholders would rather become coupon-clipping rentiers holding government bonds then invest in industry of any sort. Full employment can then be attained only via:

                        1. A bubble that produces unrealistic and unsustainable expectations of the profits from investing in industry.
                        2. The government borrowing money and buying stuff on a large scale.
                        3. A higher rate of trend inflation that relaxes the zero lower bound constraint on safe government debt interest rates. .

                        Larry Summers is worried that this is the dilemma we face: that we are in a world in which r1 is too low...

                        Thomas Piketty, by contrast, says that he is worried about the world in which r2 is too high.

                        But it is not r2 but rather r3 that he should be talking about. And r3--the average rate of accumulation--is r2 to which there are a good number of sociopolitical factors plus and minus.

                        Are Piketty and Summers Reconcilable?

                        We have a world in which some eminent economists (Larry Summers) say r1 is too low, and other eminent economists (Thomas Piketty) say r2 is too high. Can this compute?

                        Yes.

                        The difference between r1 and r2 is the risk premium. In a well-functioning market economy with well-functioning financial markets, there are powerful reasons to believe that this risk premium should be small: less than 1%-point per year. The fact the risk premium appears to me to be 7%-points per year today is a powerful evidence of the profound dysfunctionality of our financial markets, and of their failure to do their proper catallactic job. But that is a separate and largely independent discussion: that is a dysfunction of our modern market economy which is different from either the dysfunction feared by Summers or the dysfunction feared by Piketty. For the moment, simply note that it is perfectly possible for all three of these major dysfunctions to occur together.

                        What Does This Neoclassical Economist Say? Build a Mathematical Model

                        When a conventional American post-World War II neoclassical economist--somebody, that is, like me--tries to make analytical sense of Piketty's big book, he says:

                        Ring-ding-ding-ding-dingeringeding!

                        No, that's not it... He says something like:

                        Piketty talks a lot about eras, and about times when r--his r, r2--r2 > g, and wealth concentration and the wealth-to-annual income ratio is rising, and times when r2 < g, and wealth concentration and the wealth-to-annual-income ratio is falling. But how much? And in what periods, exactly? Let's see if we can do some finger exercise to figure it out. ...

                          Posted by on Sunday, April 13, 2014 at 10:51 AM in Economics, Income Distribution | Permalink  Comments (7)


                          Cyber War, Cyber Space: National Security and Privacy in the Global Economy

                          Information technologies and infrastructure play an increasingly important role in daily life. But at the same time, cyber security is becoming increasingly threatened. How does society deal with these conflicting challenges.

                          This keynote INET panel features speakers Steven Bellovin, Yvo Desmedt, Amir Hertzberg, and Bart Preneel, moderated by Thomas Ferguson.

                            Posted by on Sunday, April 13, 2014 at 08:19 AM in Conferences, Economics, Video | Permalink  Comments (0)


                            Links for 4-13-14

                              Posted by on Sunday, April 13, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (56)


                              Saturday, April 12, 2014

                              'Better Insurance Against Inequality'

                              Robert Shiller:

                              Better Insurance Against Inequality: Paying taxes is rarely pleasant, but as April 15 approaches it’s worth remembering that our tax system is a progressive one and serves a little-noticed but crucial purpose: It mitigates some of the worst consequences of income inequality. ...
                              But it’s also clear that ... what we have isn’t nearly enough. It’s time — past time, actually — to tweak the system so that it can respond effectively if income inequality becomes more extreme. ...
                              In testimony before the Senate Finance Committee last month, [Leonard] Burman proposed a version of inequality indexing that might be politically acceptable... His idea was to integrate inequality indexing with inflation indexing: Instead of just linking tax brackets to inflation..., he proposed that ... if inequality worsened, higher tax brackets would bear a bit more of the burden, and people at the bottom would bear less.
                              A relatively minor change like this should be politically acceptable. It is a reframing of inflation indexing, which is already a sacrosanct principle, and would be revenue-neutral. ... Such a plan would be a nice first step toward making our tax system manage the risk of future increases in inequality.

                              I'm a bit more doubtful than he is about the political acceptability of this proposal so long as the GOP is in a position to block any movement in this direction.

                                Posted by on Saturday, April 12, 2014 at 10:56 AM in Economics, Income Distribution, Politics, Taxes | Permalink  Comments (82)


                                'What Money Can't Buy'

                                I liked this session:

                                "In recent decades, market values have crowded out non- market norms in almost every aspect of life—medicine, education, government, law, art, sports, even family life and personal relations. Without quite realizing it, we have drifted from having a market economy to being a market society. Is this where we want to be? Should we pay children to read books or to get good grades? Should we allow corporations to pay for the right to pollute the atmosphere? Is it ethical to pay people to test risky new drugs or to donate their organs? What about hiring mercenaries to fight our wars? Auctioning admission to elite universities? Selling citizenship to immi- grants willing to pay? This discussion takes on one of the biggest ethical questions of our time: Is there something wrong with a world in which everything is for sale? And if so, how can we prevent market values from reaching into spheres of life where they don't belong? What are the moral limits of markets?"

                                • Introduction: Robert Johnson President, Institute of New Economic Thinking
                                • Presenter: Michael Sandel Professor of Government, Harvard University
                                • Discussant: Chrystia Freeland Member of the Parliament of Canada, Toronto Centre

                                  Posted by on Saturday, April 12, 2014 at 10:08 AM Permalink  Comments (16)


                                  Have We Repaired Financial Regulations Since Lehman?

                                  "The 2008 financial crisis led to the worst recession in the developed world since the Great Depression. Governments had to respond decisively on a large scale to contain the destructive impact of massive debt deflation. Still, several large financial institutions and thousands of small-to-medium-sized institutions collapsed or had to be rescued, numerous non-financial businesses closed, and millions of households lost their savings, jobs, and homes. Five years later, we are still feeling these effects. Will the financial reforms introduced since the onset of the crisis prevent another catastrophe? This keynote panel titled 'Have We Repaired Financial Regulation Since Lehman' at the Institute for New Economic Thinking's "Human After All" conference in Toronto."

                                  Featured speakers: Anat Admati, Richard Bookstaber, Andy Haldane, and Edward Kane, moderated by Martin Wolf.

                                    Posted by on Saturday, April 12, 2014 at 05:03 AM in Economics, Financial System, Regulation | Permalink  Comments (4)


                                    Links for 4-12-14

                                      Posted by on Saturday, April 12, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (94)


                                      Friday, April 11, 2014

                                      'What Do Average Americans Think About Inequality?'

                                      Sociologist Claude Fischer:

                                      What do average Americans think about inequality?: ... In her 2013 book, The Undeserving Rich: American Beliefs about Inequality, Opportunity, and Redistribution, sociologist Leslie McCall methodically tries to figure out Americans’ thinking about inequality. ... Here is what McCall found (updated a bit with new surveys):
                                      • First, surveys show that Americans are aware that inequality has grown...
                                      • Second, Americans do not like high income inequality. ...
                                      • Third, most Americans find widening inequality objectionable because it seems to undercut opportunities for economic advancement. ...
                                      • Fourth, a growing percentage of Americans want something done about inequality. ...
                                      • Fifth, what Americans have not increasingly endorsed is having the government redistribute income. ...
                                      • Sixth, what Americans do want the government to do – and there is increasing support for this – is to increase opportunity, notably by funding more education. ...
                                      ...I am struck that, in her data and analysis, Americans generally do not object to economic inequality on grounds that perhaps other westerners might: not that it is morally, religiously offensive – Pope Francis speaks of “moral destitution”; nor on the grounds that everyone has a human right to a decent standard of living;  nor because inequality might have damaging psychological consequences or social consequences; nor even because inequality slows economic growth. Generally, Americans object to inequality, it seems, because they think that it undermines the chances that  individual ambition and hard work will succeed.

                                        Posted by on Friday, April 11, 2014 at 01:04 PM in Economics, Equity, Income Distribution | Permalink  Comments (46)


                                        'The Great Moderation Is Back'

                                        Is the Great Moderation "still in progress"? Jason Furman says it is:

                                        The Great Moderation Is Back, by Binyamin Appelbaum, NY Times: Perhaps you remember the Great Moderation, the comforting term economists pinned on the period of relatively steady growth that began in the early 1980s.
                                        Perhaps you’ve even looked back and laughed at the very idea.
                                        Jason Furman has a more complicated view. The head of the president’s Council of Economic Advisers argued in an interesting speech on Thursday that the Great Moderation is still in progress. The growth of jobs and economic activity over the last five years has snapped back into the same kind of steady pattern that prevailed before the recession...

                                          Posted by on Friday, April 11, 2014 at 12:33 PM in Economics | Permalink  Comments (32)


                                          Paul Krugman: Health Care Nightmares

                                          Dreaming of politicians on the right who actually care about the unemployed, the uninsured, and the unfortunate. But it's just a dream:

                                          Health Care Nightmares, by Paul Krugman, Commentary, NY Times: When it comes to health reform, Republicans suffer from delusions of disaster. They know, just know, that the Affordable Care Act is doomed to utter failure, so failure is what they see, never mind the facts on the ground.
                                          Thus, on Tuesday, Mitch McConnell, the Senate minority leader, dismissed the push for pay equity as an attempt to “change the subject from the nightmare of Obamacare”; on the same day, the nonpartisan RAND Corporation released a study estimating “a net gain of 9.3 million in the number of American adults with health insurance coverage...” Some nightmare. And the overall gain ... must be considerably larger.
                                          But ... Obamacare is looking like anything but a nightmare... It will be months before we have a full picture, but it’s clear that the number of uninsured Americans has already dropped significantly...
                                          Republicans clearly have no idea how to respond... At the state level, however, Republican governors and legislators are still in a position to block the act’s expansion of Medicaid, denying health care to millions of vulnerable Americans. And they have seized that opportunity with gusto: Most Republican-controlled states, totaling half the nation, have rejected Medicaid expansion. ...
                                          What’s amazing about this wave of rejection is that it appears to be motivated by pure spite. The federal government is prepared to pay for Medicaid expansion, so it would cost the states nothing, and would, in fact, provide an inflow of dollars. ...Jonathan Gruber ... recently summed it up: The Medicaid-rejection states “are willing to sacrifice billions of dollars of injections into their economy in order to punish poor people. It really is just almost awesome in its evilness.” Indeed.
                                          And while supposed Obamacare horror stories keep on turning out to be false, it’s already quite easy to find examples of people who died because their states refused to expand Medicaid. According to one recent study, the death toll from Medicaid rejection is likely to run between 7,000 and 17,000 Americans each year.
                                          But nobody expects to see a lot of prominent Republicans declaring that rejecting Medicaid expansion is wrong, that caring for Americans in need is more important than scoring political points against the Obama administration. As I said, there’s an extraordinary ugliness of spirit abroad in today’s America, which health reform has brought out into the open.
                                          And that revelation, not reform itself — which is going pretty well — is the real Obamacare nightmare.

                                            Posted by on Friday, April 11, 2014 at 07:06 AM in Economics, Health Care, Politics | Permalink  Comments (84)


                                            Links for 4-11-14

                                              Posted by on Friday, April 11, 2014 at 06:05 AM in Economics, Links | Permalink  Comments (39)


                                              Thursday, April 10, 2014

                                              'Pseudo-Mathematics and Financial Charlatanism'

                                              "Past performance is not an indicator of future results":

                                              Pseudo-mathematics and financial charlatanism, EurekAlert: Your financial advisor calls you up to suggest a new investment scheme. Drawing on 20 years of data, he has set his computer to work on this question: If you had invested according to this scheme in the past, which portfolio would have been the best? His computer assembled thousands of such simulated portfolios and calculated for each one an industry-standard measure of return on risk. Out of this gargantuan calculation, your advisor has chosen the optimal portfolio. After briefly reminding you of the oft-repeated slogan that "past performance is not an indicator of future results", the advisor enthusiastically recommends the portfolio, noting that it is based on sound mathematical methods. Should you invest?
                                              The somewhat surprising answer is, probably not. Examining a huge number of sample past portfolios---known as "backtesting"---might seem like a good way to zero in on the best future portfolio. But if the number of portfolios in the backtest is so large as to be out of balance with the number of years of data in the backtest, the portfolios that look best are actually just those that target extremes in the dataset. When an investment strategy "overfits" a backtest in this way, the strategy is not capitalizing on any general financial structure but is simply highlighting vagaries in the data. ...
                                              Unfortunately, the overfitting of backtests is commonplace not only in the offerings of financial advisors but also in research papers in mathematical finance. One way to lessen the problems of backtest overfitting is to test how well the investment strategy performs on data outside of the original dataset on which the strategy is based; this is called "out-of-sample" testing. However, few investment companies and researchers do out-of-sample testing. ...

                                                Posted by on Thursday, April 10, 2014 at 01:56 PM in Econometrics, Economics, Financial System | Permalink  Comments (19)


                                                Fed Watch: When Will The Fed Change Its Reaction Function?

                                                Tim Duy:

                                                When Will The Fed Change Its Reaction Function?, by Tim Duy: The March FOMC minutes were generally interpretted as having a dovish tenor, contrasting with the generally hawkish reception for the statement and ensuing press conference. Overall, the Fed appears committed to a long period of low interest rates and I continue to think this should be the baseline view. But actually policy seems to remain hawkish relative to the Fed's rhetoric. By its own admission, the Fed is missing badly on both its mandates. Why then the push to reduce accommodation by ending asset purchases and laying the groundwork for the first rate hike? This leaves me wary the Fed could turn dramatically more hawkish with little provocation from the data. At the same time, one can imagine the Fed realizes that the current reaction function remains inconsistent its desired goals, and policy consequently shifts in a dovish direction.

                                                Consider the Fed's take on labor markets:

                                                In their discussion of labor market developments, participants noted further improvement, on balance, in labor market conditions.

                                                Fair enough. But where is the majority of policymakers on the issue of slack?

                                                While there was general agreement that slack remains in the labor market, participants expressed a range of views regarding the amount of slack and how well the unemployment rate performs as a summary indicator of labor market conditions. Several participants pointed to a number of factors--including the low labor force participation rate and the still-high rates of longer-duration unemployment and of workers employed part time for economic reasons--as suggesting that there might be considerably more labor market slack than indicated by the unemployment rate alone.

                                                The opposing view was held by just a "couple" of participants. The "high slack" contingent holds of the upper hand, in my view, given the limited wage pressure to date:

                                                Several participants cited low nominal wage growth as pointing to the existence of continued labor market slack. Participants also noted the debate in the research literature and elsewhere concerning whether long-term unemployment differs materially from short-term unemployment in its implications for wage and price pressures.

                                                It seems fairly clear that the dominant view on the Fed is that labor markets contain more than sufficient slack to contain wage and inflation pressures. And inflation pressures are, by their own admission, nonexistent. But this concern is not as widespread:

                                                Inflation continued to run below the Committee's 2 percent longer-run objective over the intermeeting period. A couple of participants expressed concern that inflation might not return to 2 percent in the next few years and suggested that a protracted period of inflation below 2 percent raised questions about whether the Committee was providing an appropriate degree of monetary accommodation.

                                                Why is the majority not concerned? Because even as they use low wages to justify claims of sufficient slack in the labor market, they use a forecast of higher wages to dismiss the inflation numbers:

                                                A number of participants noted that a pickup in nominal wage growth would be consistent with labor market conditions moving closer to normal and would support the return of consumer price inflation to the Committee's 2 percent longer-run goal.

                                                But how long will the process take? A long time:

                                                Most participants expected inflation to return to 2 percent over the next few years, supported by stable inflation expectations and the continued gradual recovery in economic activity.

                                                The Federal Reserve is clearing communicating the willingness to endure a sustained period of suboptimal outcomes on both the employment and price stability metrics. This suggest that actual policy - entirely directed at reducing accommodation - is considerably more hawkish than dictated by data. It sounds like policy fatigue. The Fed wants out of asset purchases and zero rates and are willing to dismiss the dual mandate to move in this direction. No wonder then that Chicago Federal Reserve President Charles Evans is worried that policymakers will push too hard to normalize rates too early. Via the Wall Street Journal:

                                                “One of the big risks is that we withdraw our accommodative policies prematurely,” Mr. Evans said during a panel discussion at the International Monetary Fund’s spring meetings. “I think it’s just human nature to start thinking we’ve been doing this for a long time.”

                                                The Fed’s benchmark short-term interest rate has been pinned near zero since late 2008, which could prompt some policy-makers to think “that must have been long enough. Maybe it’s time to start the process of renormalizing,” Mr. Evans said. Most Fed officials indicated last month they expect to start raising rates next year.

                                                Consider also the Fed's willingness to continue the taper despite persistent low inflation in the context of this from Federal Reserve Governor Daniel Tarullo:

                                                Last week Chair Yellen explained why substantial slack very likely remains. I would add to her explanation only the observation that, in the face of some uncertainty as to how best to measure slack, we are well advised to proceed pragmatically. We should remain attentive to evidence that labor markets have actually tightened to the point that there is demonstrable inflationary pressure that would place at risk maintenance of the FOMC's stated inflation target (which, of course, we are currently not meeting on the downside). But we should not rush to act preemptively in anticipation of such pressures based on arguments about the potential increase in structural unemployment in recent years.

                                                Arguably, tapering implies that are already acting prematurely. Combine with this commentary by David Zeros via Business Insider:

                                                "As the market prices in higher short-term yields and lower long-term yields, it is really making a bet that the Fed, by tapering our punchbowl drip, is increasing the risk of deflation," says Zervos.

                                                "And at this stage of the game, with inflation BELOW target and plenty of slack in labor markets, that could very well be a mistake. The most important point here is to recognize that low long-term yields are not a sign of a healthy economy."

                                                Indeed, it is reasonable to believe the Fed will make a mistake in the hawkish direction (or already has) given that policy already seems inconsistent with the dual mandate. In other words, the Fed has a hawkish reaction function.

                                                Regarding that reaction function, the now infamous dots were also a topic of discussion. Policymakers knew exactly the implications of the dots:

                                                A number of participants noted the overall upward shift since December in participants' projections of the federal funds rate included in the March SEP, with some expressing concern that this component of the SEP could be misconstrued as indicating a move by the Committee to a less accommodative reaction function.

                                                The next line, however, is not particularly helpful:

                                                However, several participants noted that the increase in the median projection overstated the shift in the projections.

                                                This begs the question of "why?" Some dots moved forward. Why does that overstate the shift? That said, some participants noted that the shift should not be cause to worry:

                                                In addition, a number of participants observed that an upward shift was arguably warranted by the improvement in participants' outlooks for the labor market since December and therefore need not be viewed as signifying a less accommodative reaction function.

                                                This was my interpretation - the upward shift of the dots were consistent with a change in the unemployment projections given the Fed's reaction function. But that doesn't quite explain why the reaction function is so tight to begin with. This is I think the best explanation:

                                                In their discussion of recent financial developments, participants saw financial conditions as generally consistent with the Committee's policy intentions. However, several participants mentioned trends that, if continued, could become a concern from the perspective of financial stability. A couple of participants pointed to the decline in credit spreads to relatively low levels by historical standards; one of these participants noted the risk of either a sharp rise in spreads, which could have negative repercussions for aggregate demand, or a continuation of the decline in spreads, which could undermine financial stability over time. One participant voiced concern about high levels of margin debt and of equity market valuations as well as a notable shift into commodity investments. Another participant stressed the growth in consumer credit to less creditworthy households.

                                                I think the Fed's reaction function now includes some financial stability variable, but the Fed is loath to discuss that variable and the related parameters impacting policy. That said, we are fairly confident that the push to end asset purchases and plan the exit from zero rates were a response to bubbling financial stability concerns at the Fed. They simply hid that behind the "progress toward goals" language.

                                                More surprisingly is that not only did they begin the exit from extraordinary stimulus in the face of clearly suboptimal labor outcomes, they did so in the face of clearly suboptimal inflation outcomes. Now, though, they may be realizing the error of their ways. Via Jon Hilsenrath at the Wall Street Journal:

                                                Federal Reserve officials are growing concerned the U.S. inflation rate won't budge from low levels, the latest sign of angst among central bankers about weakness in the global economy.

                                                So what comes next? To answer that, we again need to divide policy into movements along the reaction function and shifts of the reaction function. We should recognize that the SEP dots will shift in response to the data. If data comes in stronger than anticipated, then the dots will move forward. If weaker, then backward.

                                                A more hawkish reaction function - the dots moving up and forward independent of the forecast - would most likely occur due to heightened financial stability concerns. A less likely cause is that inflation expectations suddenly jump.

                                                What about a more dovish reaction function? I think it was expected that new Federal Reserve Chair Janet Yellen would have already pushed forward a more dovish reaction function given her expressed concerned for the unemployed. So far, she has disappointed such expectations. Factors that could still trigger a downward shift include 1.) a desire to accelerate the pace of improvement in labor markets, 2.) a lessening of financial stability concerns, 3.) a heightened concern about the negative impacts of persistently low inflation.

                                                The inflation concern is my leading candidate at the moment. Still, I would not want to overestimate the chance of such a shift. It is easy to see that ongoing improvements in labor markets could be sufficient to contain inflation concerns to low rumblings.

                                                Bottom Line: Fed policy - dovish those it seems - is maddenly disconnected from their actual forecasts. What does that mean for future policy? Given the relatively dovish forecast, I am concerned that the balance of risk lies on the upside, which implies tighter policy along the existing reaction function. But at the same time I remain open to the possibility that even if the economy evolves as expected, the Fed could extend the low interest rate horizon via shifting the reaction function down. That said, I suspect there is a fairly high bar to such a shift. As unemployment drops further, they will become increasingly concerned about being caught behind the curve given the level of financial accommodation already in place.

                                                  Posted by on Thursday, April 10, 2014 at 09:32 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (30)


                                                  Have Blog, Will Travel

                                                  I am here today:

                                                  INET: Human After All - April 10-12: The Institute for New Economic Thinking is hosting its fifth annual conference with its partner the Centre for International Governance Innovation (CIGI) at the Fairmont Royal York Hotel in Toronto. The conference topic is the economics of innovation and the impact of innovation on society. Speakers will include a roster of newsmakers, including former U.S. Treasury Secretary Larry Summers, Nobel laureates Joseph Stiglitz and James Heckman, former co-CEO of Research In Motion Jim Balsillie, Bank of England Chief Economist Andy Haldane, former head of the U.K. Financial Services Authority Adair Lord Turner, Harvard University professor and best-selling author Michael Sandel, and author, essayist and President of PEN International, John Ralston Saul. Watch Live beginning at noon EST.

                                                   I will post the conference schedule as soon as I can -- for some reason it's not yet available

                                                  Update: Today's schedule (I'll post Friday and Saturday later):

                                                  CANADIAN ROOM 1:00–2:45 PM LUNCH KEYNOTE ( OPENING ) Is Innovation Always A Good Thing? Technology and innovation create “disruption.” That basically means creating new markets or value networks, which eventually disrupts earlier technologies. New products, new inventions, new sources of demand are all possible. Yet, the very innovation that creates these opportunities also can create job losses as well as having significant distributional consequences for society as a whole.

                                                  The panel seeks to explore this duality.

                                                  • James Balsillie Chair, Centre for International Governance Innovation
                                                  • Lisa Cook Professor, Department of Economics, Michigan State University
                                                  • Robert Johnson President, Institute for New Economic Thinking
                                                  • Richard Nelson Professor of Economics, Columbia University
                                                  • Moderator Richard Waters Financial Times


                                                  CANADIAN ROOM 3:00–4:30 PM PLENARY PANEL
                                                  Innovation: Do Private Returns Produce the Social Returns We Need? The machines of the frst age replaced and multiplied the physical labor of humans and animals. The machines of the second age will replace and multiply our intelligence. The driving force behind this revolution will, argue the “techno-positivists,” exponentially increase the power (or exponentially reduce the cost) of computing. The celebrated example is Moore’s Law, named after Gordon Moore, a founder of Intel. For half a century, the number of transistors on a semiconductor chip has doubled at least every two years. But the information age has coincided with—and must, to some extent, have caused—adverse economic trends: stagnation of median real incomes; rising inequality of labor income and of the distribution of income between labor and capital; and growing long- term unemployment. Are the great gains in wealth and material prosperity created by our entrepreneurs in and of themselves sufficient to produce desired social returns demanded in today’s world?

                                                  • Simon Head Fellow, Institute for Public Knowledge, New York University, and Director of Programs, The New York Review of Books Foundation
                                                  • Mariana Mazzucato R.M. Phillips Professor in the Economics of Innovation, SPRU, University of Sussex
                                                  • Stian Westlake Executive Director, National Endowment for Science Technology and the Arts
                                                  • Dr. Joon Yun Partner and President, Palo Alto, LLC Moderator Quentin Hardy Deputy Tech Editor, The New York Times
                                                  • Moderator Quentin Hardy Deputy Tech Editor, The New York Time


                                                  CANADIAN ROOM 4:45–6:15 PM PLENARY PANEL
                                                  Have we Repaired Financial Regulations since Lehman? The 2008 global financial crisis led to the worst recession in the developed world since the Great Depression. Governments had to respond decisively on a large scale to contain the destructive impact of massive debt deflation, (although there is some question as to the degree to which this represented support for the financial ser - vices industry vs the needs of the real economy). Still, large financial institutions such as American International Group, Bear Stearns, Lehman Brothers, Countrywide Financial, Washington Mutual, Wachovia, Northern Rock, and Landsbanki collapsed; thousands of small-to-medium- sized financial institutions failed or needed to be rescued; millions of households lost their retirement savings, jobs, homes, and communities; and numerous non- financial businesses closed. Five years later, we are still experiencing the effects of the crisis. Are the financial reforms and regulations introduced since the onset of the crisis likely to be effective in preventing another catastrophe?

                                                  • Anat Admati Professor, Stanford Graduate School of Business
                                                  • Richard Bookstaber U.S. Treasury with the Office of Financial Research and FSOC
                                                  • Andrew Haldane Executive Director of Financial Stability, Bank of England
                                                  • Edward Kane Professor of Finance, Boston College
                                                  • Moderator Martin Wolf Financial Times


                                                  CANADIAN ROOM FOYER 6:15–7:15 PM Cocktail Reception


                                                  CANADIAN ROOM 7:15–9:00 PM KEYNOTE DINNER
                                                  Innovation: To What Purpose? Innovation is said to be essential for survival in most industries. Yet, innovation can be very risky—some inno - vations can even destroy value. How can managers and entrepreneurs know what to do, and how should this trade-o ff between innovation and risk be treated? What are the broader social goals that ought to be achieved via innovation?

                                                  • Presenter John Ralston Saul Novelist, Essayist and President, PEN International
                                                  • Moderator Rohinton Medhora President, Centre for International Governance Innovation

                                                    Posted by on Thursday, April 10, 2014 at 08:53 AM in Conferences, Economics, Travel | Permalink  Comments (3)


                                                    Links for 4-10-14

                                                      Posted by on Thursday, April 10, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (71)


                                                      Wednesday, April 09, 2014

                                                      Note

                                                      Traveling today. I'll post as (and if) I can, but probably no more blogging until tonight.

                                                        Posted by on Wednesday, April 9, 2014 at 12:22 PM in Economics, Travel | Permalink  Comments (2)


                                                        Romer: The Aftermath of Financial Crises Doesn't Have To Be That Bad

                                                          Posted by on Wednesday, April 9, 2014 at 11:13 AM in Economics, Video | Permalink  Comments (10)


                                                          'Rich people rule!'

                                                          In case you missed this in today's links, Larry Bartels:

                                                          Rich people rule!, by Larry Bartels, Commentary, Washington Post: Everyone thinks they know that money is important in American politics. But how important? .. For decades, most political scientists have sidestepped that question... But now, political scientists are belatedly turning more systematic attention to the political impact of wealth, and their findings should reshape how we think about American democracy.
                                                          forthcoming article ... by ... Martin Gilens and ... Benjamin Page marks a notable step in that process. ... They conclude that “economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while mass-based interest groups and average citizens have little or no independent influence.”
                                                          Average citizens have “little or no independent influence” on the policy-making process? This must be an overstatement of Gilens’s and Page’s findings, no?
                                                          Alas, no. In their primary statistical analysis, the collective preferences of ordinary citizens had only a negligible estimated effect on policy outcomes, while the collective preferences of “economic elites” ... were 15 times as important. ...

                                                            Posted by on Wednesday, April 9, 2014 at 10:58 AM in Economics, Income Distribution, Politics | Permalink  Comments (24)


                                                            'Long-Term Unemployment Is Elevated Across All Education, Age, Occupation, Industry, Gender, And Racial And Ethnic Groups'

                                                            Who are the long-term unemployed? From Heidi Shierholz at the EPI:

                                                            Long-Term Unemployment Is Elevated Across All Education, Age, Occupation, Industry, Gender, And Racial And Ethnic Groups, by Heidi Shierholz: Today’s Economic Snapshot shows that long-term unemployment is elevated for workers at every education level. ... The long-term unemployment rate is between 2.9 and 4.3 times as high now as it was six years ago for all age, education, occupation, industry, gender, and racial and ethnic groups. Today’s long-term unemployment crisis is not at all confined to unlucky or inflexible workers who happen to be looking for work in specific occupations or industries where jobs aren’t available. Long-term unemployment is elevated in every group, in every occupation, in every industry, at all levels of education.
                                                            Elevated long-term unemployment for all groups, like we see today, means that today’s long-term unemployment crisis is not due to something wrong with these workers, it is due to the fact that businesses across the board simply haven’t needed to significantly increase hiring because they haven’t seen demand for their goods and services pick up enough to warrant it.
                                                            Nevertheless, Congress allowed federal unemployment insurance to expire at the end of 2013, and over two million workers have lost their unemployment benefits since then. In the first sign of progress in months, yesterday the Senate reinstated a temporary five-month extension of federal unemployment insurance. It will, however, face an uphill battle in the House. In considering this measure, the House should not ignore the fact that our long-term unemployment crisis is not the fault of individual unemployed workers failing to exert enough effort or flexibility in their job search. It is instead due to more than six years of weak hiring on the part of businesses, who simply don’t need more workers because they don’t have enough demand for their products.

                                                              Posted by on Wednesday, April 9, 2014 at 10:16 AM in Economics, Politics, Social Insurance, Unemployment | Permalink  Comments (8)


                                                              Links for 4-09-14

                                                                Posted by on Wednesday, April 9, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (77)


                                                                Tuesday, April 08, 2014

                                                                A Model of Secular Stagnation

                                                                Gauti Eggertson and Neil Mehotra have an interesting new paper:

                                                                A Model of Secular Stagnation, by Gauti Eggertsson and Neil Mehrotra: 1 Introduction During the closing phase of the Great Depression in 1938, the President of the American Economic Association, Alvin Hansen, delivered a disturbing message in his Presidential Address to the Association (see Hansen ( 1939 )). He suggested that the Great Depression might just be the start of a new era of ongoing unemployment and economic stagnation without any natural force towards full employment. This idea was termed the ”secular stagnation” hypothesis. One of the main driving forces of secular stagnation, according to Hansen, was a decline in the population birth rate and an oversupply of savings that was suppressing aggregate demand. Soon after Hansen’s address, the Second World War led to a massive increase in government spending effectively end- ing any concern of insufficient demand. Moreover, the baby boom following WWII drastically changed the population dynamics in the US, thus effectively erasing the problem of excess sav- ings of an aging population that was of principal importance in his secular stagnation hypothesis.
                                                                Recently Hansen’s secular stagnation hypothesis has gained increased attention. One obvious motivation is the Japanese malaise that has by now lasted two decades and has many of the same symptoms as the U.S. Great Depression - namely dwindling population growth, a nominal interest rate at zero, and subpar GDP growth. Another reason for renewed interest is that even if the financial panic of 2008 was contained, growth remains weak in the United States and unemployment high. Most prominently, Lawrence Summers raised the prospect that the crisis of 2008 may have ushered in the beginning of secular stagnation in the United States in much the same way as suggested by Alvin Hansen in 1938. Summers suggests that this episode of low demand may even have started well before 2008 but was masked by the housing bubble before the onset of the crisis of 2008. In Summers’ words, we may have found ourselves in a situation in which the natural rate of interest - the short-term real interest rate consistent with full employment - is permanently negative (see Summers ( 2013 )). And this, according to Summers, has profound implications for the conduct of monetary, fiscal and financial stability policy today.
                                                                Despite the prominence of Summers’ discussion of the secular stagnation hypothesis and a flurry of commentary that followed it (see e.g. Krugman ( 2013 ), Taylor ( 2014 ), Delong ( 2014 ) for a few examples), there has not, to the best of our knowledge, been any attempt to formally model this idea, i.e., to write down an explicit model in which unemployment is high for an indefinite amount of time due to a permanent drop in the natural rate of interest. The goal of this paper is to fill this gap. ...[read more]...

                                                                In the abstract, they note the policy prescriptions for secular stagnation:

                                                                In contrast to earlier work on deleveraging, our model does not feature a strong self-correcting force back to full employment in the long-run, absent policy actions. Successful policy actions include, among others, a permanent increase in inflation and a permanent increase in government spending. We also establish conditions under which an income redistribution can increase demand. Policies such as committing to keep nominal interest rates low or temporary government spending, however, are less powerful than in models with temporary slumps. Our model sheds light on the long persistence of the Japanese crisis, the Great Depression, and the slow recovery out of the Great Recession.

                                                                  Posted by on Tuesday, April 8, 2014 at 10:08 AM in Academic Papers, Economics, Macroeconomics | Permalink  Comments (30)


                                                                  Why is Deflation so Harmful?

                                                                  I have a new "explainer" -- their term -- at Moneywatch:

                                                                  Explainer: Why is deflation so harmful?, by Mark Thoma, CBS News: John Makin, writing for conservative-leaning think tank the American Enterprise Institute, warned on Monday that "Now is the time to preempt deflation." Conservatives are usually inflation hawks. So, why are some of them calling for "aggressive monetization" to avoid the deflation threat in the U.S. and Europe?
                                                                  Deflation is an actual fall in prices, rather than just the inflation rate getting lower, which is call disinflation. Recall that the fear of deflation was the main reason the Federal Reserve instituted the first round of quantitative easing. What was the Fed so afraid of?
                                                                  There are three main reasons to fear deflation. ...

                                                                    Posted by on Tuesday, April 8, 2014 at 09:18 AM in Economics, Inflation, MoneyWatch | Permalink  Comments (29)


                                                                    Who’s to Blame for the Power Shift at the Fed?

                                                                    New column:

                                                                    Who’s to Blame for the Power Shift at the Fed?, by Mark Thoma, The Fiscal Times: Federal Reserve Board governor Jeremy Stein announced that he is stepping down at the end of May. That could leave the Board of Governors severely short-handed. Presently, three of the seven positions on the Board are open. There are nominations for two of the open positions, and the nominees, Stanley Fischer and Lael Brainard, await Senate confirmation. However, President Obama has not yet nominated anyone to fill the third open seat, and if Senate confirmation for Fischer and Brainard does not occur before June, then only three of the seven Board positions will be filled. 
                                                                    That will alter the balance of power on the committee responsible for setting monetary policy, the all-important Federal Open Market Committee. ...
                                                                    One problem in filling the open positions on the Federal Reserve Board is that nominations have been blocked in the Senate, and Republicans have been particularly obstructionist. What is the reason for this?
                                                                    In addition to the desire to block whatever this president tries to do as a way of obtaining political advantage, there are two factors that have helped to motivate the obstructionist tendencies. ...

                                                                      Posted by on Tuesday, April 8, 2014 at 08:46 AM in Economics, Fiscal Times, Monetary Policy, Politics | Permalink  Comments (10)


                                                                      Links for 4-08-14

                                                                        Posted by on Tuesday, April 8, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (91)


                                                                        Monday, April 07, 2014

                                                                        'Summers: Lack of Demand Creates Lack of Supply'

                                                                        For those of you who just can't get enough of Larry Summers (his talk starts at the 9:00 mark):

                                                                          Posted by on Monday, April 7, 2014 at 09:22 AM in Economics, Video | Permalink  Comments (66)


                                                                          Paul Krugman: Oligarchs and Money

                                                                          Class interests stand in the way of raising the inflation target:

                                                                          Oligarchs and Money, by Paul Krugman, Commentary, NY Times: Econonerds eagerly await each new edition of the International Monetary Fund’s World Economic Outlook. ... This latest report ... in effect makes a compelling case for raising inflation targets above 2 percent, the current norm in advanced countries. ...
                                                                          First, let’s talk about the case for higher inflation. ... It’s good for debtors — and therefore good for the economy as a whole when an overhang of debt is holding back growth and job creation. It encourages people to spend rather than sit on cash — again, a good thing in a depressed economy. And it can serve as a kind of economic lubricant, making it easier to adjust wages and prices...
                                                                          But ... would it be enough to get back to 2 percent, the official inflation target...? Almost certainly not.
                                                                          You see, monetary experts ... thought that 2 percent was high enough to ... make liquidity traps ... very rare. But America has now been in a liquidity trap for more than five years. Clearly, the experts were wrong.
                                                                          Furthermore,... there’s strong evidence that changes in the global economy are increasing the tendency of investors to hoard cash..., thereby increasing the risk of liquidity traps unless the inflation target is raised. But the report never dares to say this outright.
                                                                          So why is the obvious unsayable? One answer is that serious people like to prove their seriousness by calling for tough choices and sacrifice (by other people, of course). They hate being told about answers that don’t involve more suffering.
                                                                          And behind this attitude, one suspects, lies class bias. Doing what America did after World War II — using low interest rates and inflation to erode the debt burden — is often referred to as “financial repression,” which sounds bad. But who wouldn’t prefer modest inflation and a bit of asset erosion to mass unemployment? Well, you know who: the 0.1 percent... Modestly higher inflation, say 4 percent, would be good for the vast majority of people, but it would be bad for the superelite. And guess who gets to define conventional wisdom.
                                                                          Now, I don’t think that class interest is all-powerful. Good arguments and good policies sometimes prevail even if they hurt the 0.1 percent — otherwise we would never have gotten health reform. But we do need to make clear what’s going on, and realize that in monetary policy as in so much else, what’s good for oligarchs isn’t good for America.

                                                                            Posted by on Monday, April 7, 2014 at 12:24 AM in Economics, Income Distribution, Inflation, Monetary Policy, Policy, Unemployment | Permalink  Comments (147)


                                                                            Links for 4-07-14

                                                                              Posted by on Monday, April 7, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (50)


                                                                              Sunday, April 06, 2014

                                                                              'Superfluous Financial Intermediation'

                                                                              Rajiv Sethi:

                                                                              Superfluous Financial Intermediation: I'm only about halfway through Flash Boys but have already come across a couple of striking examples of what might charitably be called superfluous financial intermediation. This is the practice of inserting oneself between a buyer and a seller of an asset, when both parties have already communicated to the market a willingness to trade at a mutually acceptable price. If the intermediary were simply absent from the marketplace, a trade would occur between the parties virtually instantaneously at a single price that is acceptable to both. Instead, both parties trade against the intermediary, at different prices. The intermediary captures the spread at the expense of the parties who wish to transact, adds nothing to liquidity in the market for the asset, and doubles the notional volume of trade. ... [gives two examples] ....

                                                                              Michael Lewis has focused on practices such as these because their social wastefulness and fundamental unfairness is so transparent. But it's important to recognize that most of the strategies implemented by high frequency trading firms may not be quite so easy to classify or condemn. For instance, how is one to evaluate trading based on short term price forecasts based on genuinely public information? I have tried to argue in earlier posts that the proliferation of such information extracting strategies can give rise to greater price volatility. Furthermore, an arms race among intermediaries willing to sink significant resources into securing the slightest of speed advantages must ultimately be paid for by investors. ...

                                                                              I hope that the minor factual errors in Flash Boys won't detract from the book's main message, or derail the important and overdue debate that it has predictably stirred. By focusing on the most egregious practices Lewis has already picked the low-hanging fruit. What remains to be figured out is how typical such practices really are. Taking full account of the range of strategies used by high frequency traders, to what extent are our asset markets characterized by superfluous financial intermediation?

                                                                                Posted by on Sunday, April 6, 2014 at 04:24 PM in Economics, Financial System | Permalink  Comments (6)


                                                                                Links for 4-06-14

                                                                                  Posted by on Sunday, April 6, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (48)


                                                                                  Saturday, April 05, 2014

                                                                                  'Automation Alone Isn’t Killing Jobs'

                                                                                  Tyler Cowen:

                                                                                  Automation Alone Isn’t Killing Jobs, by Tyler Cowen, Commentary, NY Times: Although the labor market report on Friday showed modest job growth, employment opportunities remain stubbornly low in the United States, giving new prominence to the old notion that automation throws people out of work.
                                                                                  Back in the 19th century, steam power and machinery took away many traditional jobs, though they also created new ones. This time around, computers, smart software and robots are seen as the culprits. They seem to be replacing many of the remaining manufacturing jobs and encroaching on service-sector jobs, too.
                                                                                  Driverless vehicles and drone aircraft are no longer science fiction, and over time, they may eliminate millions of transportation jobs. Many other examples of automatable jobs are discussed in “The Second Machine Age,” a book by Erik Brynjolfsson and Andrew McAfee, and in my own book, “Average Is Over.” The upshot is that machines are often filling in for our smarts, not just for our brawn — and this trend is likely to grow.
                                                                                  How afraid should workers be of these new technologies? There is reason to be skeptical of the assumption that machines will leave humanity without jobs. ...

                                                                                  See also, Dean Baker "If Technology Has Increased Unemployment Among the Less Educated, Someone Forgot to Tell the Data."

                                                                                    Posted by on Saturday, April 5, 2014 at 08:28 PM in Economics, Productivity, Technology, Unemployment | Permalink  Comments (61)


                                                                                    Links for 4-05-14

                                                                                      Posted by on Saturday, April 5, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (133)


                                                                                      Friday, April 04, 2014

                                                                                      Fed Watch: One For the Doves

                                                                                      Tim Duy:

                                                                                      One For the Doves, by Tim Duy: The March employment report came in pretty much in line with expectations. Nonfarm payrolls gained by 192k, and January and February were both revised higher. If you can discern any meaningful change in the underlying pace of economic activity from the nonfarm payrolls numbers, you have sharper eyes than me:

                                                                                      NFPa040413

                                                                                      You could almost draw that twelve month trend with a ruler. The unemployment rate moved sideways:

                                                                                      UNEMP040413

                                                                                      In the past, sharp declines in the unemployment rate have been followed by periods of relative stability. I suspect we are currently in one such period.
                                                                                      The internals of the household report were generally positive. The labor force rose by 503k, pushing the participation rate up by 0.2 percentage points. And the labor market appeared to absorb those new participants nicely, with employment rise by 476k while the ranks of unemployed grew by just 27k. Measures of underemployment remain consistent with recent trends:

                                                                                      NFPb040413

                                                                                      As might be expected if there remains plenty of slack in labor markets, wage growth remained largely unchanged:

                                                                                      WAGES040414

                                                                                      I would say that on average, this report fits nicely with the view outlined by Federal Reserve Chair Janet Yellen earlier this week. The labor market continues to improve at a moderate pace, a pace that remains insufficient to rapidly alleviate the issues of underemployment and low wage growth. Indeed, combined with the readings on inflation:

                                                                                      PCE033114

                                                                                      PCEa033114

                                                                                      I think the real policy question should be why is the Fed engaged in reducing policy accommodation in the first place? If Yellen is as concerned about the plight of labor as she purports to be, and if she and her colleagues are as committed to the 2% inflation target as they purport to be, then it seems like there is a strong argument for slowing the pace of the taper and using a rules based approach to taket the risk of earlier-than-anticipated rate hikes off the table. In short, there seems to be a disconnect between the Fed's rhetoric and the general policy direction. They seem to have lost interest in speeding the pace of the recovery.

                                                                                      Persistently low inflation, however, may push them into action. St. Louis Federal Reserve President James Bullard opened up the door to slowing the taper if inflation does not prove to be bottoming. Via Bloomberg:

                                                                                      “I still think it is important to defend the inflation target from the low side,” Bullard, who doesn’t vote on policy this year, said today in a Bloomberg Radio interview with Kathleen Hays and Vonnie Quinn in St. Louis. “If inflation takes another step down, that will put heavy pressure” on policy makers “to take further action.”

                                                                                      That said, take this in context of a Fed that fundamentally wants out of the asset purchase business. Moreover, this is not Bullard's baseline forecast. Via Reuters:

                                                                                      "Mine is in the first quarter of 2015, as far as liftoff for the funds rate," St. Louis Federal Reserve Bank President James Bullard told Reuters Insider television, when asked for his view on when the U.S. central bank should make its first rate hike since 2006.

                                                                                      "You have to keep in mind I tend to be a more optimistic member of the committee," he said. "I have a probably, a somewhat stronger forecast and a view about policy that suggests that maybe we should get up a bit faster than what some of the other members have."

                                                                                      This labor report, however, is not exactly consistent with such a view, but that is also still a year away. In contrast San Franscisco President John Williams reiterated his view, which is much more consistent with the general consensus. Via Reuters:

                                                                                      "Given the economic outlook, and given also my view that we need accommodative policy relative to historical norms, we need to have relatively low levels of interest rates for quite some time," San Francisco Federal Reserve Bank President John Williams told Reuters. "My own view is it makes sense to start raising rates in the second half of 2015."

                                                                                      But the pace of rate increases, in Williams' view, should be extremely slow, with rates ending 2016 well below the historical norm of 4 percent, "with the first digit being a '2,'" he said.

                                                                                      Of course, the second half of 2015 is a fairly big window, and I suspect that any conditions that draw the first rate hike to the front end of that forecast, and certainly to Bullard's forecast, will be followed by a more rapid pace of tightening than currently anticipated. But that again is a matter for the data to decide. That and financial stability concerns; such concerns seem to be having a bigger impact on policy than officials like to admit.

                                                                                      Bottom Line: The doves win this round. One wonders, however, why, if they hold such a strong hand, they have been unable or unwilling to stop the systematic reduction in accommodation that began with the tapering talk of last year?

                                                                                        Posted by on Friday, April 4, 2014 at 11:01 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (26)


                                                                                        'The Legitimacy of High Frequency Trading'

                                                                                        Tim Johnson on high frequency trading:

                                                                                        The Legitimacy of High Frequency Trading: Mark Thoma brought my attention to a post by Dean Baker, High Speed Trading and Slow-Witted Economic Policy. High Frequency Trading, or more generically Computer Based Trading, is proving problematic because it is a general term involving a variety of different techniques, some of which appear uncontroversial, others appear very dubious.

                                                                                        For example, a technique I would consider legitimate derives from Robert Almgren and Neil Chriss' work on optimal order execution: how do you structure a large trade such that it has minimal negative price impact and low transaction costs. There are firms that now specialise in performing these trades on behalf of institutions and I don't think there is an issue with how they innovate in order to generate profits.

                                                                                        The technique that is most widely regarded as illegitimate is order, or quote, stuffing. The technique involves placing orders and within a tenth of a second or less, cancelling them if they are not executed. I suspect this is the process that Baker refers to that enables HFTs to 'front run' the market. Baker regards the process as illegitimate...

                                                                                        The problem I have with Baker's argument is that I do not think it is robust. ... [explains why] ...

                                                                                        The substantive question is whether I can come up with a more robust argument than Baker's, and I offer an argument at the bottom of this piece. ...

                                                                                          Posted by on Friday, April 4, 2014 at 08:34 AM in Economics, Financial System | Permalink  Comments (23)


                                                                                          'Economy Adds 192,000 Jobs in March, Unemployment Rate Unchanged'

                                                                                          Dean Baker (see also "Comments on Employment Report" by Calculated Risk):

                                                                                          Economy Adds 192,000 Jobs in March, Unemployment Rate Unchanged: The ACA appears to be allowing workers to opt for part-time jobs and older workers to retire early.
                                                                                          The economy added 192,000 jobs in March, bringing the average over the last three months to 178,000. The unemployment rate was unchanged at 6.7 percent. The employment-to-population ratio (EPOP) edged up to 58.9 percent. This is the highest of the recovery, but still four full percentage points below its pre-recession level.
                                                                                          This report answered several questions that had come up based on the prior two reports. First, it appears the weakness in prior months was in fact largely the result of the weather. The three month average of 178,000 is probably close to the economy's underlying trend at this point. It was also encouraging to see a jump of 0.2 hours in the length of the average workweek to 34.5 hours. This completely wipes out the decline in average hours worked that many were attributing to the Affordable Care Act (ACA) and other measures.
                                                                                          The average hourly wage for production workers also fell slightly last month. While this is not good news, it does show that the concerns raised by many about a tight labor market leading to excessive wage growth, and that this would trigger inflation, were completely unfounded. Over the last year, wages for production and non-supervisory workers have risen by 2.2 percent. That’s up slightly from 1.9 percent over the prior twelve months, but still below the 2.3 percent rate of increase in the 12 months from March of 2009 to 2010. Basically, wage growth in this series has hovered near 2.0 percent for the last five years.
                                                                                          There is some evidence in this report that the ACA is having its predicted impact on the labor market. The number of employed people over age 55 fell by 133,000 in March. Since August, employment among people in this age group has risen by just 125,000. It had risen by an average of 1,150,000 annually over the prior four years, accounting for almost all of employment growth over this period. It is possible that the ACA is allowing many of these workers to retire early now that they can get health care insurance outside of employment. Workers in the 25-34 age group seem to be filling the gap, with an increase in employment of over 680,000 (2.2 percent) over the last seven months. However these numbers are erratic, so it is too early to make too much of this pattern.
                                                                                          The other area where we may be seeing the effect of the ACA is the rising number of people opting for part-time employment. The number of people who are voluntarily working part-time is up 415,000 (2.2 percent) from its year-ago level and is at its highest point since Lehman. (Involuntary part-time also rose, but is still below last fall’s levels.) At this point there is little evidence of more people opting for self-employment, as the number fell slightly in March, although it is still 262,000 (3.1 percent) above the year-ago level.

                                                                                          Unincorporated Self-employed Workers as Percent of Employed, 2007 - 2014

                                                                                          The job growth in March was heavily concentrated in employment services (42,000), restaurants (30,400), retail (21,300), and health care (19,400). The growth in retail is somewhat of a bounce-back after two months of declining employment. Manufacturing employment edged down by 1,000, its first drop since July. The decline was due to a drop in non-durable employment as the durable sector added 8,000 jobs. With overtime hours for production workers in the durable goods sector at their highest level since November of 2005, there may be more rapid hiring in the months ahead. Employment in the government sector was unchanged as a loss of 9,000 federal jobs and 2,000 state government jobs was offset by an increase in employment of 11,000 at the local level. Construction added 19,000 jobs, raising employment in the sector to 48,000 above the year-ago level.
                                                                                          With population growth implying labor force growth in the neighborhood of 90,000, the economy is cutting into the backlog of unemployed workers at the rate of 90,000 a month. With the economy still down close to 7 million jobs from trend levels, this would imply that we would reach full employment some time in 2020.

                                                                                            Posted by on Friday, April 4, 2014 at 07:51 AM in Economics, Unemployment | Permalink  Comments (30)


                                                                                            Paul Krugman: Rube Goldberg Survives

                                                                                            Supporters of health reform should "go ahead and celebrate":

                                                                                            Rube Goldberg Survives, by Paul Krugman, Commentary, NY Times: Holy seven million, Batman! ...Obamacare has made a stunning comeback from its shambolic start..., the original target of seven million signups, widely dismissed as unattainable, has been surpassed.
                                                                                            But what does it mean? That depends on whether you ask the law’s opponents or its supporters. You see, the opponents think that it means a lot, while the law’s supporters are being very cautious. And, in this one case, the enemies of health reform are right. This is a very big deal indeed.
                                                                                            Of course, you don’t find many Obamacare opponents admitting outright that 7.1 million and counting signups is a huge victory... But their reaction to the results — It’s a fraud! They’re cooking the books! — tells the tale. ...
                                                                                            So why are many reform supporters ... telling us not to read too much into the figures? ... I’d argue that they’re missing the forest for the trees.
                                                                                            The crucial thing to understand about the Affordable Care Act is that it’s a Rube Goldberg device, a complicated way to do something inherently simple. ... Remember, giving everyone health insurance doesn’t have to be hard; you can just do it with a government-run program..., extending Medicare to everyone would have been technically easy.
                                                                                            But it wasn’t politically possible,... health reform had to be run largely through private insurers, and be an add-on to the existing system... And, as a result, it had to be somewhat complex. ... It’s a system in which many things can go wrong; the nightmare scenario has always been that conservatives would seize on technical problems to discredit health reform... And last fall that nightmare seemed to be coming true.
                                                                                            But the nightmare is over. ... Now we know that the technical details can be managed... This thing is going to work.
                                                                                            And, yes, it’s also a big political victory for Democrats. They can point to a system that is already providing vital aid to millions of Americans, and Republicans — who were planning to run against a debacle — have nothing to offer in response. And I mean nothing. ...

                                                                                            So my advice to reform supporters is, go ahead and celebrate. Oh, and feel free to ridicule right-wingers who confidently predicted doom.

                                                                                            Clearly, there’s a lot of work ahead, and we can count on the news media to play up every hitch and glitch as if it were an existential disaster. But Rube Goldberg has survived; health reform has won.

                                                                                              Posted by on Friday, April 4, 2014 at 12:24 AM in Economics, Health Care, Politics | Permalink  Comments (26)


                                                                                              Links for 4-04-14

                                                                                                Posted by on Friday, April 4, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (53)


                                                                                                Thursday, April 03, 2014

                                                                                                Fed Watch: Employment Report Ahead

                                                                                                Tim Duy:

                                                                                                Employment Report Ahead, by Tim Duy: Sorry for the light blogging this week - just getting back into the swings of things during the first week of spring term. But nothing like an employment report to pull me out of hibernation.
                                                                                                It is no secret that the employment report has a significant impact on monetary policy. And we need to make increasingly deeper dives at the data to discern the implications for policy. Federal Reserve Chair Janet Yellen made that clear in her speech this week when she outlined a number of indicators - part-time but want full-time, wages,long-term unemployment, and labor force participation - as evidence of slack in the labor market. Such slack is sufficient, in her view, to justify maintaining accommodative policy for a considerable period (although note that accommodative does not mean zero rates).
                                                                                                Yellen, I think, outlined the most dovish case possible given the current information set. This suggests to me that the risk lies in the hawkish direction. Moreover, I think that Yellen and the remaining doves are losing the internal policy battle, leaving policy with a generally overall hawkish tone. Gone is the Evans rule and explicit allowance for above target inflation, gone, it seems, is a low bar for slowing the taper, gone is quantitative guidance in favor of qualitative guidance, gone is rules-based policy in favor of ad-hockery. And now departing Governor Jeremy Stein leaves behind an intellectual legacy that raises the importance of financial stability concerns when setting policy. Altogether, the stage is set for the Fed to move in a sharply more hawkish direction with just a little push from the data.
                                                                                                That said, that little push from the data is important. While I believe that the Fed has a hawkish bias, that bias will not be realized in the absence of data that is reasonably stronger than the Fed's forecasts. Which brings us to the next employment report. In general, the consensus view that the labor market shook off the winter doldrums with a 206k gain in nonfarm payrolls and 6.6% unemployment rate is probably pretty close to the Fed's expectations. The forecast range for payrolls, however, is skewed to the upside, with a range from 175k to 275k. The possibility of upside surprise follows from an expectation of a sharper bounce from earlier weather-related softness. This was evident in the employment component of the ISM Services report:

                                                                                                ISM0400314

                                                                                                In addition, weekly initial claims have improved in recent weeks, lending additional credence to expectations for a better-than-expected report:

                                                                                                INITCLAIMS0400314

                                                                                                Finally, the ADP number for private employment growth came in at a solid 191k for the month (noting of course, the less than perfect signal ADP provides). My quick and dirty approach - which admittedly was not particularly effective in recent months - points at a nfp gain of 199k in March, in line with consensus expectations:

                                                                                                NFPFOR0400314

                                                                                                As always, usual caveats apply. Guessing the preliminary numbers of a heavily revised data series is by itself something of a questionable game, a game we all play nonetheless.
                                                                                                As I noted earlier, however, headline numbers won't tell the whole story. The Fed will be looking deeper into the numbers for evidence of greater slack than indicated by the unemployment rate. My opinion is that if the slack is diminishing faster than the Fed doves expect, it is most likely we will see wage growth accelerate. If wage growth remains low, then the Fed will be confident that there is little incipient inflation pressure to justify a more aggressive reduction of policy accommodation.
                                                                                                Bottom Line: The baseline case remains zero rates until the middle to end of 2015, followed by a gentle pace of rate hikes. That said, it is all data dependent, and the baseline case appears to be contingent on a particularly dovish forecast. It seems to me that the risk thus lies in a less than dovish reality. SIgns that wages are increasing more rapidly would suggest just that. Still stagnant wage growth, however, gives the Fed more room to stick with the current policy path.

                                                                                                  Posted by on Thursday, April 3, 2014 at 05:23 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (4)


                                                                                                  'Jeremy Stein to Resign From Fed Board'

                                                                                                  When the Federal reserve Board is fully staffed, the Board members outnumber the regional bank presidents 7-5 on the FOMC (the committee that sets monetary policy). Presently, however, the power balance has shifted and it may shift even more:

                                                                                                  Jeremy Stein to Resign From Fed Board, by Binyamin Appelbaum, NY Times: Jeremy Stein, a member of the Federal Reserve’s board..., will resign at the end of May and return to his previous role at Harvard. Mr. Stein, who joined the Fed in 2012, needed to return within two years to preserve his tenured professorship. ...
                                                                                                  Mr. Stein, an economist and noted academic, has helped to provide an intellectual rationale for the cautious evolution of the Fed’s stimulus campaign, which has not succeeded in returning either unemployment or inflation to normal levels.
                                                                                                  He has argued that the Fed should temper its efforts to minimize unemployment because those policies encourage financial risk-taking, which can undermine long-term growth by destabilizing markets and causing new crises. ...
                                                                                                  His views remain controversial. ... Mr. Stein’s tenure will be among the shortest in recent Fed history...
                                                                                                  His departure could create a fourth vacancy on the seven-member board. Two nominees, Stanley Fischer and Lael Brainard, are awaiting Senate confirmation. Mr. Obama has not announced a nominee for a third vacancy, created last month when Sarah Bloom Raskin became deputy Treasury secretary.

                                                                                                  I think the Fed should have been more aggressive, especially early on, but it was probably good to have someone asking questions about QE and risk-taking.

                                                                                                    Posted by on Thursday, April 3, 2014 at 01:07 PM in Economics, Monetary Policy | Permalink  Comments (4)


                                                                                                    The Downward Drift in Real Interest Rates

                                                                                                    David Wessel reports on the IMF's World Economic Outlook:

                                                                                                    The Downward Drift in Inflation-Adjusted Interest Rates: Why? And So What?, by David Wessel, WSJ:

                                                                                                    Real-rates

                                                                                                    ...Two economists writing in the International Monetary Fund’s new World Economic Outlook note that inflation-adjusted interest rates have been coming down for more than three decades and suggests they may remain lower than normal for a very long time. ... But the important point is the trend towards lower interest rates began long before the Great Recession and advent of the Fed’s quantitative easing...
                                                                                                    Why does this matter? ... It also would pose a big challenge for the Fed. For one thing, it boosts the risk that investors will do foolish things to get a little extra yield and provoke the much-dreaded “financial instability.”
                                                                                                    It also increases the likelihood the economy will spend a whole lot more time with nominal rates ... uncomfortably close to zero, where it’s much harder for a central bank to use interest rates to steer the economy out of recessions.  ...
                                                                                                    If so, that argues ... for worrying a lot less about government budget deficits and a lot more about using government spending to give the economy a lift that monetary policy cannot provide. ...

                                                                                                    And at the same time, "Governments Scale Back Spending on School Construction, Public Safety."

                                                                                                      Posted by on Thursday, April 3, 2014 at 09:53 AM in Economics, Fiscal Policy, Monetary Policy | Permalink  Comments (27)