Bill McBride, aka Calculated Risk:
BLS: Jobs Openings increase sharply to 4.5 million in April: From the BLS: Job Openings and Labor Turnover Summary ...
Jobs openings increased in April to 4.455 million from 4.166 million in March.
The number of job openings ... are up 17% year-over-year compared to April 2013.
Quits are up 11% year-over-year. These are voluntary separations. ...
It is a good sign that job openings are over 4 million for the third consecutive month, and that quits are increasing.
But it's still too soon for policymakers to declare victory. Well, monetary policymakers anyway. Fiscal policymakers turned their backs on the unemployed long ago.
Posted by Mark Thoma on Tuesday, June 10, 2014 at 12:57 PM in Economics, Unemployment |
Larry Summers says:
The rich have advantages that money cannot buy, by Lawrence Summers: ... There is every reason to believe that taxes can be reformed to eliminate loopholes for the wealthy and become more progressive, while also promoting a more efficient allocation of investment. In areas ranging from local zoning laws to intellectual property protection, from financial regulation to energy subsidies, public policy now bestows great fortunes on those whose primary skill is working the political system rather than producing great products and services. There is a compelling case for policy measures to reduce profits from such rent-seeking activities as a number of economists, notably Dean Baker and the late Mancur Olson, have emphasised.
At the same time, unless one regards envy as a virtue, the primary reason for concern about inequality is that lower- and middle-income workers have too little – not that the rich have too much.
So in judging policies relating to inequality, the criterion should be what their impact will be on the middle class and the poor. ...
It is vital to remember, however, that important aspects of inequality are unlikely to be transformed just by limited income redistribution. Consider two fundamental components of life – health and the ability to provide opportunity for children.
He goes on to explain the vast difference between the rich and the poor in the areas of health and education, and I have no problem at all with his call to reduce inequality in these areas.
The question I have is whether we should not be worried "that the rich have too much." As he notes earlier, "public policy now bestows great fortunes on those whose primary skill is working the political system rather than producing great products and services." Those "great fortunes" give the ultra-wealthy the influence they need to capture the political system, and as the fortunes grow larger and larger it becomes harder and harder to change the system to eliminate this rent-seeking behavior (so I don't think "there is every reason to believe" that the system can be reformed). When this happens, when income flows to the top because they have captured the system -- income that could (and in my view should) be going elsewhere -- I think it's worth asking if they have "too much."
Posted by Mark Thoma on Tuesday, June 10, 2014 at 08:40 AM in Economics, Income Distribution, Market Failure, Politics |
The four lessons of happynomics, by Tim Harford: The discipline of happynomics (or to give it an academically respectable title, “the economics of subjective well-being”) is booming. Respected economists have joined the field, from Lord Layard in the UK to White House appointees such as Alan Krueger and Betsey Stevenson. Several have been charmed in by Daniel Kahneman, a widely admired psychologist with a Nobel Memorial Prize in economics.
Happiness is surely important, but the case for letting economists loose on the subject is less clear. So are happyconomists discovering things that will put a song in your heart and a smile on your face? Perhaps. After reading a stack of books about the economics of happiness, and seeking advice from some of the researchers involved, allow me to present four tips for happiness from the dismal science. ...
Posted by Mark Thoma on Tuesday, June 10, 2014 at 05:14 AM in Economics |
Posted by Mark Thoma on Tuesday, June 10, 2014 at 12:06 AM in Economics, Links |
When will we acknowledge what is happening, and do something about it?:
Shrinking Arctic Ice Prompts Drastic Change in National Geographic Atlas, by Christine Dell'Amore: The shrinking of the Arctic ice sheet in the upcoming 10th edition of the National Geographic Atlas of the World is one of the most striking changes in the publication's history, geographers say. ...
Ice loss is accelerated in the Arctic because of a phenomenon known as the feedback loop: Thin ice is less reflective than thick ice, allowing more sunlight to be absorbed by the ocean, which in turn weakens the ice and warms the ocean even more, NASA says.
Because thinner ice is flatter, it allows melt ponds to accumulate on the surface, reducing the reflectiveness of the ice and absorbing more heat....
"You hear reports all the time in the media about this," Valdés said. "Until you have a hard-copy map in your hand, the message doesn't really hit home." ...
Posted by Mark Thoma on Monday, June 9, 2014 at 11:51 AM in Economics, Environment |
How the VCR Wiped out Movies and Television: Perhaps you don't quite remember this event. But back in 1982, the videocassette recorder was just about about to wipe out the movie industry, and probably also the television industry. We know this is true because of the April 12, 1982, Congressional testimony from Jack Valenti, then the President of the Motion Picture Association of America, given in hearings before the House of Representatives, Committee on the Judiciary, Subcommittee on Courts, Civil Liberties, and the Administration of Justice.
Valenti was arguing in favor of a bill that would allow a charge to be imposed on all makers of VCRs and blank videotapes, most of which were at that time made by Japanese firms, with the proceeds to be distributed to the U.S. film and television industry. If you need a reminder to be skeptical when business leaders prophecy doom and gloom if their industry has to adapt to new technology, here's a sample of the rhetoric from Valenti. It's a minor classic in the genre of special interest pleading, in which an industry is about experience worse than a tidal wave, worse than an avalanche, but indeed a jungle, where it will hemorrhage and bleed and be strangled--but the industry's real concern, as we all know, is that it just wants to protect the old and the poor and the sick. ...
Posted by Mark Thoma on Monday, June 9, 2014 at 11:43 AM
Posted by Mark Thoma on Monday, June 9, 2014 at 12:03 AM in Economics, Links |
The "real obstacle" to action on climate change:
Interests, Ideology And Climate, by Paul Krugman, Commentary, NY Times: There are three things we know about man-made global warming. First, the consequences will be terrible if we don’t take quick action to limit carbon emissions. Second, in pure economic terms the required action shouldn’t be hard to take: emission controls, done right, would probably slow economic growth, but not by much. Third, the politics of action are nonetheless very difficult.
But why is it so hard to act? Is it the power of vested interests?
I’ve been looking into that issue and have come to the somewhat surprising conclusion that it’s not mainly about the vested interests. ... What makes rational action on climate so hard is something else — a toxic mix of ideology and anti-intellectualism.
Before I get to that, however, an aside on the economics.
I’ve noted in earlier columns that every even halfway serious study of the economic impact of carbon reductions ... finds at most modest costs. ...
But wouldn’t protecting the environment nonetheless impose costs on some sectors and regions? Yes, it would — but not as much as you think. ... So why is the opposition to climate policy so intense?
Well, think about global warming from the point of view of someone who grew up taking Ayn Rand seriously, believing that the untrammeled pursuit of self-interest is always good and that government is always the problem, never the solution. Along come some scientists declaring that unrestricted pursuit of self-interest will destroy the world, and that government intervention is the only answer..., this is a direct challenge to the libertarian worldview.
And the natural reaction is denial — angry denial. Read or watch any extended debate over climate policy and you’ll be struck by the venom, the sheer rage, of the denialists.
The fact that climate concerns rest on scientific consensus makes things even worse..., right-wingers never liked or trusted scientists in the first place.
So the real obstacle, as we try to confront global warming, is economic ideology reinforced by hostility to science. In some ways this makes the task easier: we do not, in fact, have to force people to accept large monetary losses. But we do have to overcome pride and willful ignorance, which is hard indeed.
Posted by Mark Thoma on Monday, June 9, 2014 at 12:01 AM in Economics, Environment |
Posted by Mark Thoma on Sunday, June 8, 2014 at 12:06 AM in Economics, Links |
What Does Piketty’s Capital Mean for Developing Countries?, by Gabriel Demombynes: The economics book that has launched a thousand blog posts, Thomas Piketty’s Capital in the Twenty-First Country, tells a grand story of inequality past and present. One would expect that a book on global inequality would have much to say about development. However, the book has limited relevance for the developing world, and the empirical data he marshals for developing countries is weak. ...[continue]...
Posted by Mark Thoma on Saturday, June 7, 2014 at 01:11 AM in Development, Economics, Income Distribution |
Posted by Mark Thoma on Saturday, June 7, 2014 at 12:06 AM in Economics, Links |
Josh Bivins at the WSJ:
... Much recent discussion about potential price inflation seems to take as a given that it would be sparked by a pickup of wage growth. But looking at data from the non-financial corporate sector–which accounts for well more than half of all private-sector economic activity and for which rich data are available–what’s really striking about price growth since the end of the Great Recession is how much of it has been driven by rising profits, not rising labor costs. In fact, labor costs have been essentially flat between the end of the Great Recession and the first quarter of 2014. Profits earned per unit sold, on the other hand, have been rising at an average annual growth rate of nearly 9% since the recovery’s beginning. To the degree that there is any inflationary pressure in the U.S. economy over that time, it is surely not coming from labor costs. ...
Posted by Mark Thoma on Friday, June 6, 2014 at 05:13 AM in Economics, Inflation |
Following up on the post below this one, this is Robert Stavins:
EPA’s Proposed Greenhouse Gas Regulation: Why are Conservatives Attacking its Market-Based Options?, by Robert Stavins: This week, the Obama Administration’s Environmental Protection Agency (EPA) released its long-awaited proposed regulation to reduce carbon dioxide (CO2) emissions from existing sources in the electricity-generating sector. The regulatory (rule) proposal calls for cutting CO2 emissions from the power sector by 30 percent below 2005 levels by 2030. ...
Much of the response this week has not been surprising..., but what should be surprising is the fact that conservative attacks on EPA’s proposed rule have focused, indeed fixated, on one of the options that is given to the states for implementation, namely the use of market-based instruments, that is, cap-and-trade systems. Given the demonization of cap-and-trade as “cap-and-tax” over the past few years by conservatives, why do I say that this fixation should be surprising?
The Irony of Conservatives Targeting Cap-and-Trade
Not so long ago, cap-and-trade mechanisms for environmental protection were popular in Congress. Now, such mechanisms are denigrated. What happened? Professor Richard Schmalensee (MIT) and I recently told the sordid tale of how conservatives in Congress who once supported cap and trade had come to lambast climate change legislation as “cap-and-tax.” Ironically, in doing this, conservatives have chosen to demonize their own market-based creation. ...
It may be that some conservatives in Congress opposed climate policies because of disagreement about the threat of climate change or the costs of the policies, but instead of debating those risks and costs, they chose to launch an ultimately successful campaign to demonize and thereby tarnish cap-and-trade as an instrument of public policy, rendering it “collateral damage” in the wider climate policy battle.
Today that “scorched-earth” approach may have come back to haunt conservatives. Have they now boxed themselves into a corner, unable to support the power of the marketplace to reduce their own states’ compliance costs under the new EPA CO2 regulation? I hope not, but only time will tell.
[The original post is much, much longer and detailed.]
Posted by Mark Thoma on Friday, June 6, 2014 at 01:08 AM in Economics, Environment |
On the administration's new climate rules:
The Climate Domino, by Paul Krugman, Commentary, NY Times: Maybe it’s me, but the predictable right-wing cries of outrage over the Environmental Protection Agency’s proposed rules on carbon seem oddly muted and unfocused. ... Where are the eye-catching fake horror stories?
For what it’s worth, however, the attacks on the new rules mainly involve the three C’s: conspiracy, cost and China. That is, right-wingers claim ... it’s all a hoax promulgated by thousands of scientists around the world; that taking action to limit greenhouse gas emissions would devastate the economy; and that, anyway, U.S. policy can’t accomplish anything because China will just go on spewing stuff into the atmosphere.
I don’t want to say much about the conspiracy theorizing, except to point out that any attempt to make sense of current American politics must take into account this particular indicator of the Republican Party’s descent into madness. There is, however, a lot to say about both the cost and China issues.
On cost: It’s reasonable to argue that new rules aimed at limiting emissions would have some negative effect on G.D.P.... Claims that the effects will be devastating are, however,... just wrong ... as I explained last week...
But what about the international aspect? At this point, the United States accounts for only 17 percent of the world’s carbon dioxide emissions, while China accounts for 27 percent — and China’s share is rising fast. So ... America, acting alone, can’t save the planet. We need international cooperation.
That, however, is precisely why we need the new policy. America can’t expect other countries to take strong action against emissions while refusing to do anything itself... And it’s fairly certain that action in the U.S. would lead to corresponding action in Europe and Japan.
That leaves China... China is enormously dependent on access to advanced-country markets ... and it knows that it would put this access at risk if it refused to play any role in protecting the planet.
More specifically, if and when wealthy countries take serious action to limit greenhouse gas emissions, they’re very likely to start imposing “carbon tariffs”... So China would find itself with strong incentives to start limiting emissions.
The new carbon policy, then, is supposed to be the beginning, not the end, a domino that, once pushed over, should start a chain reaction that leads, finally, to global steps to limit climate change. Do we know that it will work? Of course not. But it’s vital that we try.
Posted by Mark Thoma on Friday, June 6, 2014 at 12:24 AM in Economics, Environment |
Posted by Mark Thoma on Friday, June 6, 2014 at 12:06 AM in Economics, Links |
Energy Choices, by Paul Krugman: Nate Silver got a lot of grief when he chose Roger Pielke Jr., of all people, to write about environment for the new 538. Pielke is regarded among climate scientists as a concern troll – someone who pretends to be open-minded, but is actually committed to undermining the case for emissions limits any way he can. But is this fair?
Well, I’m happy to report that Pielke has a letter in today’s Financial Times about the economics of emissions caps – something I know a fair bit about – that abundantly confirms his bad reputation. Better still, the letter offers a teachable moment, a chance to explain why claims that we can’t limit emissions without destroying economic growth are nonsense. ...
Posted by Mark Thoma on Thursday, June 5, 2014 at 05:50 AM in Economics, Environment, Policy |
Posted by Mark Thoma on Thursday, June 5, 2014 at 02:46 AM in Economics, Video |
Neil Irwin on a new study from the EPI:
Growth Has Been Good for Decades. So Why Hasn’t Poverty Declined?: The surest way to fight poverty is to achieve stronger economic growth. That, anyway, is a view embedded in the thinking of a lot of politicians and economists. ...
But over the last generation in the United States, that simply hasn’t happened. Growth has been pretty good, up 147 percent per capita. But rather than decline further, the poverty rate has bounced around in the 12 to 15 percent range — higher than it was even in the early 1970s. The mystery of why — and how to change that — is one of the most fundamental challenges in the nation’s fight against poverty.
The disconnect between growth and poverty reduction is a key finding of a sweeping new study of wages from the Economic Policy Institute. ... From 1959 to 1973, a more robust United States economy and fewer people living below the poverty line went hand-in-hand. That relationship broke apart in the mid-1970s. If the old relationship between growth and poverty had held up, the E.P.I. researchers find, the poverty rate in the United States would have fallen to zero by 1986 and stayed there ever since. ...
...low-income workers are putting in more hours on the job than they did a generation ago — and the financial rewards for doing so just haven’t increased. ...[T]he facts ... cast doubt on the notion that growth alone will solve America’s poverty problem. ... That’s the real lesson of the data: If you want to address poverty in the United States, it’s not enough to say that you need to create better incentives for lower-income people to work. You also have to devise strategies that make the benefits of a stronger economy show up in the wages of the people on the edge of poverty, who need it most desperately.
I think it's also important to understand why the distribution of income changed in the 1970s. It's not enough to say that the rewards have flowed to those at the top because of their increased contribution to society, as productivity has risen since the 1970s workers have contributed more, but their compensation has not increased commensurately. My own belief is that changes in economic power and the political power that comes with it have distorted income flows and changed the rules of the game in a way that favors those at the top. Thus, it's not that those at the top deserve what they have received because of their contributions, though perhpas it's partly that, it's also due to a change in the way income is distributed arising from changes in economic/political power.
Posted by Mark Thoma on Thursday, June 5, 2014 at 01:40 AM in Economics, Income Distribution |
Sugar Mountain: ...Itamar Drechsler, Alexi Savov, and Philipp Schnabl's "Model of Monetary Policy and Risk Premia" ... addresses a very important issue. The policy and commentary community keeps saying that the Federal Reserve has a big effect on risk premiums by its control of short-term rates. Low interest rates are said to spark a "reach for yield," and encourage investors, and too big to fail banks especially, to take on unwise risks. This story has become a central argument for hawkishness at the moment. The causal channel is just stated as fact. But one should not accept an argument just because one likes the policy result.
Nice story. Except there is about zero economic logic to it. The level of nominal interest rates and the risk premium are two totally different phenomena. Borrowing at 5% and making a risky investment at 8%, or borrowing at 1% and making a risky investment at 4% is exactly the same risk-reward tradeoff. ...
OK, enter Drechsler, Savov, and Schnabl. They have a real, economic model of the phenomenon. That's great. We may disagree, but the only way to understand this issue is to write down a model, not to tell stories. ...
Read the paper for more. I have come to praise it not to criticize it. Real, solid, quantiative economic models are just what we need to have a serious discussion. This is a really important and unsolved question, which I will close by restating:
Does monetary policy, by controlling the level of short term rates, substantially affect risk premiums? If so, how?
Of course, maybe the answer is "it doesn't."
[See the original post for the technical arguments and "money illusion" intuition for the results in the paper. This has been a key argument behind the call to increase the Fed's target rate now rather than later, so it's an important issue.]
Posted by Mark Thoma on Thursday, June 5, 2014 at 12:33 AM in Economics, Monetary Policy |
Barry Eichengreen and Andrew Rose:
Capital controls in the 21st century, by Barry Eichengreen, Andrew K Rose, Vox EU: Summary Since the global financial crisis of 2008–2009, opposition to the use of capital controls has weakened, and some economists have advocated their use as a macroprudential policy instrument. This column shows that capital controls have rarely been used in this way in the past. Rather than moving with short-term macroeconomic variables, capital controls have tended to vary with financial, political, and institutional development. This may be because governments have other macroeconomic policy instruments at their disposal, or because suddenly imposing capital controls would send a bad signal.
Posted by Mark Thoma on Thursday, June 5, 2014 at 12:24 AM in Economics |
Posted by Mark Thoma on Thursday, June 5, 2014 at 12:06 AM in Economics, Links |
Basic social institutions and democratic equality, Understanding Society: We would like to think that it is possible for a society to embody basic institutions that work to preserve and enhance the wellbeing of all members of society in a fair way. We want social institutions to be beneficent (producing good outcomes for everyone), and we want them to be fair (treating all individuals and groups with equal consideration; creating comparable opportunities for everyone). There is a particularly fundamental component of liberal optimism that holds that the institutions of a market-based democracy accomplish both goals. Economic liberals maintain that the economic institutions of the market create efficient allocations of resources across activities, permitting the highest level of average wellbeing. Free public education permits all persons to develop their talents. And the political institutions of electoral democracy permit all groups to express and defend their interests in the arena of government and law.
But social critics cast doubt on all parts of this story, based on the role played by social inequalities within both sets of institutions. The market embodies and reproduces a set of economic inequalities that result in grave inequalities of wellbeing for different groups. Economic and social inequalities influence the quality of education available to young people. And electoral democracy permits the grossly disproportionate influence of wealth holders relative to other groups in society. So instead of reducing inequalities among citizens, these basic institutions seem to amplify them.
If we look at the fundamentals of social life in the United States we are forced to recognize a number of unpalatable realities: extensive and increasing inequalities of income, wealth, education, health, and quality of life; persistent racial inequalities; a growing indifference among the affluent and powerful to the poverty and deprivation of others; and a political system that is rapidly approaching the asymptote of oligarchy. It is difficult to be optimistic about our political future if we are particularly concerned about equality and opportunity for all; the politics of our time seem to be taking us further and further from these ideals.
So how should progressives think about a better future for our country and our world? What institutional arrangements might do a better job of ensuring greater economic justice and political legitimacy in the next fifty years in this country and other democracies of western Europe and North America?
Martin O’Neill and Thad Williamson’s recent collection, Property-Owning Democracy: Rawls and Beyond contains an excellent range of reflections on this set of problems, centered around the idea of a property-owning democracy that is articulated within John Rawls’s A Theory of Justice. A range of talented contributors provide essays on different aspects and implications of the theory of property-owning democracy. The contributions by O'Neill and Williamson are especially good, and the volume is a major contribution to political theory for the 21st century.
Here is one of Rawls's early statements of the idea of a property-owning democracy in A Theory of Justice:
In property-owning democracy, ... the aim is to realize in the basic institutions the idea of society as a fair system of cooperation between citizens regarded as free and equal. To do this, those institutions must, from the outset, put in the hands of citizens generally, and not only of a few, sufficient productive means for them to be fully cooperating members of society on a footing of equality. (140)
One thing that is striking about the discussions that recur throughout the essays in this volume is the important relationship they seem to have to Thomas Piketty’s arguments about rising inequalities in Capital in the Twenty-First Century. Piketty presents rising inequality as almost unavoidable; whereas the advocates for a property-owning democracy offer a vision of the future in which inequalities of assets are narrowed. The dissonance disappears, however, when we consider the possibility that the institutional arrangements of POD are in fact a powerful antidote to the economic imperatives identified by Piketty. And in fact the editors anticipate this possibility in their paraphrase of Rawls's reasons for preferring POD over welfare state capitalism:
Because capital is concentrated in private hands under welfare state capitalism, it will be difficult if not impossible to provide to call "the fair value of the political liberties"; that is to say, capitalist interests and the rich will have vastly more influence over the political process than other citizens, a condition which violates the requirement of equal political liberties. Second, Rawls suggests at points that welfare state capitalism produces a politics that tends to undermine the possibility of tax transfers sufficiently large to correct for the inequalities generated by market processes.(3)
These comments suggest that Rawls had an astute understanding of the ways that wealth and power and influence are connected; so he believed that a more equal prior distribution of assets is crucial for a just society.
The primary aim of this public activity is not to maximize economic growth (or to maximize utility) but rather to ensure that capital is widely distributed and that no group is allowed to dominate economic life; but Rawls also assumes that the economy needs to be successful in terms of conventional measures (i.e., by providing full employment, and lifting the living standards of the least well off over time). (4)
The editors make a point that is very incisive with respect to rising economic inequalities.
The concentration of capital and the emergence of finance as a driving sector of capitalism has generated not only instability and crisis; it also has led to extraordinary political power for private financial interests, with banking interest taking control in shaping not only policies immediately affecting that sector but economic (and thereby social) policy in general. (6)
In other words, attention to the idea of a property-owning democracy is in fact a very substantive rebuttal to the processes identified in Piketty's analysis of the tendencies of capital in the modern economy. As the editors put the point, the idea of a property-owning democracy provides a rich basis for the political programs of progressive movements in contemporary politics (5).
Two questions arise with respect to any political philosophy: is the end-state that it describes a genuinely desirable outcome; and is there a feasible path by which we can get from here to there? One might argue that POD is an appealing end-state; and yet it is an outcome that is virtually impossible to achieve within modern political and economic institutions. (Here is an earlier discussion of this idea; link.) These contributors give at least a moderate level of reason to believe that a progressive foundation for democratic action is available that may provide an effective counterweight to the conservative rhetoric that has dominated the scene for decades.
Posted by Mark Thoma on Wednesday, June 4, 2014 at 12:39 AM in Economics, Income Distribution, Politics |
How Discouraged Are the Marginally Attached?: Of the many statistical barometers of the U.S. economy that we monitor here at the Atlanta Fed, there are few that we await more eagerly than the monthly report on employment conditions. The May 2014 edition arrives this week and, like many others, we will be more interested in the underlying details than in the headline job growth or unemployment numbers.
One of those underlying details—the state of the pool of “discouraged” workers (or, maybe more precisely, potential workers)—garnered special attention lately in the wake of the relatively dramatic decline in the ranks of the official labor force, a decline depicted in the April employment survey from the U.S. Bureau of Labor Statistics. That attention included some notable commentary from Federal Reserve officials.
Federal Reserve Bank of New York President William Dudley, for example, recently suggested that a sizeable part of the decline in labor force participation since 2007 can be tied to discouraged workers exiting the workforce. This suggestion follows related comments from Federal Reserve Chair Janet Yellen in her press conference following the March meeting of the Federal Open Market Committee:
So I have talked in the past about indicators I like to watch or I think that are relevant in assessing the labor market. In addition to the standard unemployment rate, I certainly look at broader measures of unemployment… Of course, I watch discouraged and marginally attached workers… it may be that as the economy begins to strengthen, we could see labor force participation flatten out for a time as discouraged workers start moving back into the labor market. And so that's something I'm watching closely.
What may not be fully appreciated by those not steeped in the details of the employment statistics is that discouraged workers are actually a subset of “marginally attached” workers. Among the marginally attached—individuals who have actively sought employment within the most recent 12-month period but not during the most recent month—are indeed those who report that they are out of the labor force because they are discouraged. But the marginally attached also include those who have not recently sought work because of family responsibilities, school attendance, poor health, or other reasons.
In fact, most of the marginally attached are not classified (via self-reporting) as discouraged (see the chart):
At the St. Louis Fed, B. Ravikumar and Lin Shao recently published a report containing some detailed analysis of discouraged workers and their relationship to the labor force and the unemployment rate. As Ravikumar and Shao note,
Since discouraged workers are not actively searching for a job, they are considered nonparticipants in the labor market—that is, they are neither counted as unemployed nor included in the labor force.
More importantly, the authors point out that they tend to reenter the labor force at relatively high rates:
Since December 2007, on average, roughly 40 percent of discouraged workers reenter the labor force every month.
Therefore, it seems appropriate to count some fraction of the jobless population designated as discouraged (and out of the labor force) as among the officially unemployed.
We believe this logic should be extended to the entire group of marginally attached. As we've pointed out in the past, the marginally attached group as a whole also has a roughly 40 percent transition rate into the labor force. Even though more of the marginally attached are discouraged today than before the recession, the changing distribution has not affected the overall transition rate of the marginally attached into the labor force.
In fact, in terms of the propensity to flow into employment or officially measured unemployment, there is little to distinguish the discouraged from those who are marginally attached but who have other reasons for not recently seeking a job (see the chart):
What we take from these data is that, as a first pass, when we are talking about discouraged workers' attachment to the labor market, we are talking more generally about the marginally attached. And vice versa. Any differences in the demographic characteristics between discouraged and nondiscouraged marginally attached workers do not seem to materially affect their relative labor market attachment and ability to find work.
Sometimes labels matter. But in the case of discouraged marginally attached workers versus the nondiscouraged marginally attached workers—not so much.
Posted by Mark Thoma on Wednesday, June 4, 2014 at 12:33 AM in Economics, Unemployment |
Posted by Mark Thoma on Wednesday, June 4, 2014 at 12:06 AM
Why Economists Can’t Always Trust Data, by Mark Thoma, The Fiscal Times: To make progress in economics, it is essential that theoretical models be subjected to empirical tests that determine how well they can explain actual data. The tests that are used must be able to draw a sharp distinction between competing theoretical models, and one of the most important factors is the quality of the data used in the tests. Unfortunately, the quality of the data that economists employ is less than ideal, and this gets in the way of the ability of economists to improve the models they use. There are several reasons for the poor quality of economic data...
Posted by Mark Thoma on Tuesday, June 3, 2014 at 06:23 AM in Econometrics, Economics, Fiscal Times |
How is it exactly that cable companies in the US don’t compete?, by Joshua Gans: One of the arguments made in the proposed Comcast-Time Warner merger is that these two, very large cable companies do not actually compete. They are in different markets. This is something Tyler Cowen, for example, has pushed as a reason the merger should go ahead. ... But what should cause us to have pause was an issue raised in this excellent commentary on the state of the industry by John Oliver. ...
John Oliver asks: how is it that cable companies are not competing? After all, we can drum up a story of last mile bottlenecks and sunk investment and non-contestable markets. But the truth remains that somehow these two giants have managed to avoid competition in “the way a drug cartel divides up territories” (to quote Oliver).
I don’t have a definitive answer to this but we are all fans of situations where economic theory provides stories that are hard to plausibly deny. And just last week I released an NBER Working Paper co-authored with Martin Byford, that provides a theory as to why cable companies in the US don’t compete. ...
You don’t have to read the paper. You already know the argument: potential competitors stay out of each other’s turf and divide the market. The point of the paper is that this type of collusion is understudied in economics and, indeed, one of the implications is that it has consequences for mergers.
Why this is relevant is because, if this is the reason Comcast and Time Warner do not currently compete more extensively, then to allow them to merge precisely because they don’t compete seems to be rewarding and cementing that very behaviour. Thus, those who say Comcast and Time Warner should merge because they don’t compete should also explain precisely why they don’t now and ought not to compete in the future.
Posted by Mark Thoma on Tuesday, June 3, 2014 at 01:34 AM in Economics |
This is a nice summary of Joe Stiglitz lecture on his new book:
Learning and economic development, by Diane Coyle: Joseph Stiglitz gave today’s Jean-Jacques Laffont lecture at the Toulouse School of Economics’ Tiger forum, talking about his new book, Creating a Learning Society: A New Approach to Growth, Development and Social Progress. The two themes of the lecture were that sustained growth needs a ‘learning society’, and that markets alone can’t create this. ...
Also looking forward to this session. I believe it will be livecast at 1 pm (scroll down, 4 am PST, 7 am EST):
New Stances of Globalization:
Presented by : Diane Coyle,vice-chair, BBC Trust
- Hélène Rey (London Business School)
- Dani Rodrik (Institute for Advanced Study)
- Joseph Stiglitz (Colombia University)
Posted by Mark Thoma on Tuesday, June 3, 2014 at 01:01 AM in Economics |
Posted by Mark Thoma on Tuesday, June 3, 2014 at 12:06 AM in Economics, Links |
Department of “Huh?!”–I Don’t Understand More and More of Piketty’s Critics: Per Krusall and Tony Smith, by Brad DeLong: As time passes, it seems to me that a larger and larger fraction of Piketty’s critics are making arguments that really make no sense at all–that I really do not understand how people can believe them, or why anybody would think that anybody else would believe them. Today we have Per Krusall and Tony Smith assuming that the economy-wide capital depreciation rate δ is not 0.03 or 0.05 but 0.1–and it does make a huge difference…
Posted by Mark Thoma on Monday, June 2, 2014 at 05:59 AM in Economics |
I am here today:
Tiger Forum, Toulouse, France, June 2-6: Exclusive info: live streaming will be available for all policy events, including:
Joseph Stiglitz lecture: 16:30 to 17:30 Monday, June 2: "Creating a Learning Society: A New Approach to Growth, Development, and Social Progress
TIGER Insights: One-hour intensive sessions on specific themes, in a small format. Seats are limited to 50 to encourage debate and interactions, but the sessions can be followed online (live-streaming). Registration on-site from 9am on the morning of each session. ROARING Debates: Key policy-related debates in a round-table format aimed at a wide audience and open to all TIGER Forum participants. Held in the main lecture hall, registration online. ** Watch Live Streams Here ** [Note: we are 9 hours ahead of west coast time.]
Posted by Mark Thoma on Monday, June 2, 2014 at 12:33 AM in Conferences, Economics |
Inequality denial persists despite clear evidence to the contrary:
On Inequality Denial, by Paul Krugman, Commentary, NY Times: A while back I published an article titled “The Rich, the Right, and the Facts,” in which I described politically motivated efforts to deny the obvious — the sharp rise in U.S. inequality, especially at the very top of the income scale. ...
Nor will it surprise you to learn that nothing much has changed. ... What may surprise you is the year in which I published that article: 1992.
Which brings me to the latest intellectual scuffle, set off by an article by Chris Giles ... attacking the credibility of Thomas Piketty’s best-selling “Capital in the Twenty-First Century.” Mr. Giles claimed that Mr. Piketty’s work made “a series of errors that skew his findings,” and that there is in fact no clear evidence of rising concentration of wealth. And like just about everyone who has followed such controversies over the years, I thought, “Here we go again.”
Sure enough, the subsequent discussion has not gone well for Mr. Giles. ... In short, this latest attempt to debunk the notion that we’ve become a vastly more unequal society has itself been debunked. And you should have expected that. There are ... many independent indicators pointing to sharply rising inequality ...
Yet inequality denial persists, for pretty much the same reasons that climate change denial persists: there are powerful groups with a strong interest in rejecting the facts, or at least creating a fog of doubt. Indeed, you can be sure that the claim “The Piketty numbers are all wrong” will be endlessly repeated even though that claim quickly collapsed under scrutiny. ...
So here’s what you need to know: Yes, the concentration of both income and wealth ... has increased greatly over the past few decades. No, the people receiving that income and owning that wealth aren’t an ever-shifting group..., both rags to riches and riches to rags stories are rare... No, taxes and benefits don’t greatly change the picture — in fact, since the 1970s big tax cuts at the top have caused after-tax inequality to rise faster than inequality before taxes.
This picture makes some people uncomfortable, because it plays into populist demands for higher taxes on the rich. But good ideas don’t need to be sold on false pretenses. If the argument against populism rests on bogus claims about inequality, you should consider the possibility that the populists are right.
Posted by Mark Thoma on Monday, June 2, 2014 at 12:24 AM in Economics, Income Distribution |
Posted by Mark Thoma on Monday, June 2, 2014 at 12:06 AM in Economics, Links |
Where I disagree and agree with Debraj Ray’s critique of Piketty’s Capital in the 21s Century, by Branko Milanovic: Two people whose opinion I hold in very high esteem have told me, “Read Debraj Ray’s critique of Piketty; It is the best written yet.” I have read it before, but only in parts, and have focused on a few rather unimportant points in the first part of Debraj’s piece. So I decided now to read it carefully, and in full. It is a short piece, some 9 pages long. It is very well and clearly written. There are many things with which I agree. But there are also many with which I do not. Let me start, because it is more fun, with the latter. ...
Posted by Mark Thoma on Sunday, June 1, 2014 at 04:21 AM in Economics, Income Distribution |
Posted by Mark Thoma on Sunday, June 1, 2014 at 12:06 AM in Economics, Links |
At Vox EU:
Are banks too large?, by Lev Ratnovski, Luc Laeven, and Hui Tong: Summary: Large banks have grown and become more involved in market-based activities since the late 1990s. This column presents evidence that large banks receive too-big-to-fail subsidies and create systemic risk, whereas economies of scale in banking are modest. Hence, some large banks may be ‘too large’ from a social perspective. Since the optimal bank size is unknown, the best policies are capital surcharges and better bank resolution and governance.
Posted by Mark Thoma on Saturday, May 31, 2014 at 11:01 AM in Economics, Financial System |
Posted by Mark Thoma on Saturday, May 31, 2014 at 01:31 AM in Economics |
Piketty's full response from Vox EU (see also Paul Krugman: Thomas Doubting Refuted and Simon Wren-Lewis: What the Financial Times got (very) wrong):
Response to FT, by Thomas Piketty, Vox EU: This is a response to the criticisms - which I interpret as requests for additional information – that were published in the Financial Times on May 23 2014 (see FT article here).1 These criticisms only refer to the series reported in chapter 10 of my book Capital in the 21st century, and not to the other figures and tables presented in the other chapters, so in what follows I will only refer to these series.
This response should be read jointly with the technical appendix to my book, and particularly with the appendix to chapter 10 (available here). The page numbers given below refer to the HUP edition of my book that was published in March 2014.
Let me start by saying that the reason why I put all excel files on line, including all the detailed excel formulas about data constructions and adjustments, is precisely because I want to promote an open and transparent debate about these important and sensitive measurement issues.
Let me also say that I certainly agree that available data sources on wealth inequality are much less systematic than what we have for income inequality. In fact, one of the main reasons why I am in favor of wealth taxation, international cooperation and automatic exchange of bank information is that this would be a way to develop more financial transparency and more reliable sources of information on wealth dynamics (even if the tax was charged at very low rates, which everybody could agree with).
For the time being, we have to do with what we have, that is, a very diverse and heterogeneous set of data sources on wealth: historical inheritance declarations and estate tax statistics, scarce property and wealth tax data; household surveys with self-reported data on wealth (with typically a lot of under-reporting at the top); Forbes-type wealth rankings (which certainly give a more realistic picture of very top wealth groups than wealth surveys, but which also raise significant methodological problems, to say the least). As I make clear in the book, in the on-line appendix, and in the many technical papers on which this book relies, I have no doubt that my historical data series can be improved and will be improved in the future (this is why I put everything on line). In fact, the “World Top Incomes Database” (WTID) is set to become a “World Wealth and Income Database” in the coming years, and together with my colleagues we will put on-line updated estimates covering more countries. But I would be very surprised if any of the substantive conclusions about the long run evolution of wealth distributions was much affected by these improvements.
I welcome all criticisms and I am very happy that this book contributes to stimulate a global debate about these important issues. My problem with the FT criticisms is twofold. First, I did not find the FT criticism particularly constructive. The FT suggests that I made mistakes and errors in my computations, which is simply wrong, as I show below. The corrections proposed by the FT to my series (and with which I disagree) are for the most part relatively minor, and do not affect the long run evolutions and my overall analysis, contrarily to what the FT suggests. Next, the FT corrections that are somewhat more important are based upon methodological choices that are quite debatable (to say the least). In particular, the FT simply chooses to ignore the Saez-Zucman 2014 study, which indicates a higher rise in top wealth shares in the United States during recent decades than what I report in my book (if anything, my book underestimates the rise in wealth inequality). Regarding Britain, the FT seems to put a lot of trust in self-reported wealth survey data that notoriously underestimates wealth inequality.
I will start by giving an overview of the series on wealth inequality that I present in chapter 10 of my book. I will then respond to the specific points raised by the FT.
Overview of the series on wealth inequality reported in chapter 10
The long run series on wealth inequality provided in chapter 10 of my book deal with only four countries: France, Britain, Sweden, and the United States.
Figure 10.1. Wealth inequality in France, 1810-2010 (p.340)
Figure 10.2. Wealth inequality in versus France 1810-2010 (p.341)
Figure 10.3. Wealth inequality in Britain, 1810-2010 (p.344)
Figure 10.4. Wealth inequality in Sweden, 1810-2010 (p.345)
Figure 10.5. Wealth inequality in the United States, 1810-2010 (p.348)
Figure 10.6. Wealth inequality in Europe versus the US, 1810-2010 (p.349)
The series used to construct figures 10.1-10.6, replicated in the book on p.340-348 are available in table S10.1, as well as in the corresponding excel file.
These wealth inequality series deal with much fewer countries and are substantially more exploratory than the empirical material provided in other parts of the book: income and population growth in chapters 1-2; wealth-income ratios in chapters 3-6; income inequality series in chapters 7-9. This follows from the fact that available data sources on wealth inequality are much less systematic than data sources on growth, wealth-income ratios and income inequality. In particular, we do have yearly income declarations statistics for dozens of countries, but we do not have yearly wealth declarations statistics for most countries. So we have to do with the diverse set of sources that I described above.
I believe that the data we have on wealth inequality is sufficient to reach a number of conclusions. Namely, wealth inequality was extremely high and rising in European countries during the 19th century and up until World War 1 (with a top 10% wealth share around 90% of total wealth in 1910), then declined until the 1960s-1970s (down to about 50-60% for the top 10% wealth share); and finally increased moderately since the 1980s-1990s. In the United States, wealth inequality was less extreme than in Europe until World War 1, but it was less strongly affected by the 20th century shocks, and in recent decades it rose more strongly than in Europe. Both in Europe and in the United States, wealth inequality is less extreme than what it was in Europe on the eve on World War 1.
I believe that the data that we have is sufficient to reach these conclusions, but that it is insufficient to go much beyond that. In particular, our ability to measure the most recent trends in wealth inequality is limited, partly due to the huge rise in cross border financial assets and offshore wealth. According to Forbes-type wealth rankings, the very top of the world wealth distribution has been rising about three times faster than average wealth at the global level over the 1987-2013 period (see chapter 12 of my book, in particular Table 12.1. The growth rate of top global wealth, 1987-2013). This seems to be clear evidence than wealth inequality is rising, partly because the rate of return to very large portfolios is higher than the growth rate. This interpretation is consistent with what I find with the returns to large university endowments (see Table 12.2. The return on the capital endowments of US universities, 1980-2010). But we do not really know whether this holds only at the very very top or for bigger groups (say, above 10 millions $ and not only above 1 billion $). Let me make very clear that I do not believe that r>g is the only force that determines the dynamics of wealth inequality. There are many other important forces that could in principle drive wealth inequality in other directions. The main message coming from my book is not that there should always be a deterministic trend toward ever rising inequality (I do not believe in this); the main message is that we need more democratic transparency about wealth dynamics, so that we are able to adjust our institutions and policies to whatever we observe.
I now consider each of the four countries one by one and respond to the specific points raised by the FT. I start with Sweden (the first country for which the FT expresses concerns), and then move to France, the United States, and finally to Britain (arguably the country with the biggest data problems) and to the European average.
Sweden (see figure 10.4 here)
The FT does not point out any significant disagreement regarding Sweden. Their corrected figure looks virtually identical to mine (see their figure on Sweden here).
The FT argues however that my choice of years from raw data sources is not entirely clear. For instance, they point out that raw data for year "1908" for year "1910", year "1935" for year "1930", and so on. These issues are already explained in the book and in the technical appendix, but they probably need to be clarified. Generally speaking, when I present series on wealth-income ratios and wealth inequality (and also for some figures on income inequality), I usually choose to present decennial averages rather than yearly series. This is because wealth series often display a lot of short-run volatility (in particular due to sharp movements in asset prices). So in order to focus the attention on long-run evolutions, it is better to abstract from these short-run movements and show decennial averages. See for instance the wealth-income series presented in chapter 5: contrast figure 5.1 and figure 5.5. When full yearly series are available, the way decennial averages are computed in the book is the following: "1900" usually refers to the average "1900-1909", and so on. This is further explained in the technical paper "Capital is back..." (Piketty-Zucman QJE 2014) available here.
In the case of the wealth inequality series reported in chapter 10, the raw series are usually not available on annual basis, so I compute decennial averages on the basis of the closest years available. This is clearly explained in the chapter 10 excel file (see sheet "TS10.1"). For instance, "1870" is computed as the average for years "1873-1877", "1910" as the average "1907-1908", and so on. These choices can be discussed and improved, but they are reasonably transparent (they are explicitly mentioned in the excel table, which apparently the FT did not notice), and as one can check they have negligible impact on long run evolutions.
The FT also suggests that I made a transcription error by using the estimate for 1908 for the top 1% wealth share (namely, 53.8% of total wealth) for year 1920 (instead of the correct raw estimate for that year, namely 51.5% of total wealth). In fact, this adjustment was intended to correct for the fact that there is a break in a data sources in 1908: pre-1908 series use estate tax data, while post-1908 use wealth tax data, resulting into somewhat lower top wealth (as exemplified by year 1908, for which both data sources co-exist; see Waldenstrom 2009, Table 3.A1, p.120-121). This is standard practice, but I agree that this adjustment should have been made more explicit in the technical appendix and excel file.2 In any case, whatever adjustment one chooses to make to deal with this break in series is again going to have a negligible impact on long-run patterns.
France (see figure 10.1 and figure 10.2)
The FT does not point out any significant disagreement regarding France. Their corrected figure looks virtually identical to mine (see their figure on France here).
The FT argues however that no explanation is given for some of the data construction. Namely, the FT claims the following: “The original source reports data relative to the distribution of wealth among the dead. In order to obtain the distribution of wealth across the living, Prof Piketty augments the share of the top 10 per cent of the dead by 1 per cent and the wealth share of the top 1 per cent by 5 per cent. An adjustment of this sort is standard practice in this type of calculations to correct for the fact that those who die are not representative of the living population. Prof. Piketty does not explain why the adjustment is usually constant. But in one year, 1910, it is not constant and the adjustment scale rises to 2 per cent and 8 per cent respectively. There is no explanation.”
This is a surprising statement, because all necessary explanations are actually given in the technical research paper on which these series are based (see Piketty-Postel-Vinay-Rosenthal AER 2006) and in the chapter 10 excel file (see sheet "TS10.1DetailsFR"). Namely, the PPVR AER 2006 paper includes detailed, year-by-year estimates of how differential mortality affects wealth inequality among the living, and finds that the ratio between top wealth shares among the living and top wealth shares among decedents rises at the end of the 19th century and in the early 20th century. Intuitively, this is because differential mortality effects seem to become stronger around that time (namely, life expectancy rises quite fast among top wealth holders, but much less so for the rest of the population). One can see this explicitly in table A4 of the working paper version of the PPVR AER 2006 article; this is explicitly reproduced in chapter 10 excel file (see sheet "TS10.1DetailsFR", table A4 (2), ratios for top 1% shares). More recent research has also confirmed the changing pattern of differential mortality around that time. See in particular the appendix tables to Piketty-Postel-Vinay-Rosenthal EEH 2014. Differential mortality is a complex issue, and we do not have perfect answers; but we do our best to address this issue in the most transparent way. In particular, we put on line on this web site the large micro files that we have collected in French inheritance archives, so that everybody can reproduce our computations and use this data for their own research. We are currently collecting additional micro files in Parisian and provincial archives, and we will put new data files and updated estimates in the future.
What it find somewhat puzzling in this controversy is the following: (i) the FT journalists evidently did not read carefully the technical research papers and excel files that I have put on-line; (ii) whatever adjustment one makes to correct for differential mortality (and I certainly agree that there are uncertainties left regarding this complex and important issue), it should be clear to everyone that this really has a relatively small impact on the long-run trends in wealth inequality. This looks a little bit like criticism for the sake of criticism.
United States (see figure 10.5)
The FT does point out more substantial disagreements regarding the United States. Their corrected figure actually looks very close to mine regarding the long run evolution, but not for the recent decades, where the FT considers that I overestimate somewhat the rise in wealth inequality (see their figure on United States here). The FT also expresses concerns about some of the adjustments that are made for earlier periods, although they have little impact on the overall patterns.
As I explain in the book (chapter 10, p.347) and in the technical appendix to chapter 10 (available here), there are very large uncertainties regarding US historical sources on wealth inequality, and I certainly agree that the series that are provided in the book can be improved. I try to combine in the most consistent manner the information coming from estate tax statistics (which unfortunately only cover the top few percents of the distribution, and not the entire population like in France) and the information coming from household wealth surveys (fortunately the SCF is known to be of higher quality than most other wealth surveys). In particular, the estimate for year 1970 tries to combine the estimates available for top 10% and top 1% wealth shares for years 1960 and 1980 and the evolution of very top wealth shares between 1960, 1970 and 1980. This has little impact on the overall long-run pattern, but I agree that this is relatively uncertain, and that this could have been explained more clearly.
I should stress however that the more recent and more reliable estimates that were recently produced by Emmanuel Saez (Berkeley) and Gabriel Zucman (LSE) confirm the pattern that I find. See Saez-Zucman 2014. For the recent decades, they actually find a larger rise of top 10% wealth shares and especially top 1% and top 0.1% wealth shares than what I report in my book. So, if anything, my book tends to underestimate the recent rise in US wealth inequality (contrarily to what the FT suggests).
This important work was done after my book was written, so unfortunately I could not use it for my book. Saez and Zucman use much more systematic data than I used in my book, especially for the recent period. Also their series are constructed using a completely different data source and methodology (namely, the capitalization method using capital income flows and income statements by asset class). Now that this work is available, the Saez-Zucman series (which unfortunately the FT article seems to ignore) should be used as reference series for wealth inequality in the United States. In a recent survey chapter that will be published in the Handbook of Income Distribution (HID), we choose to use the Saez-Zucman series (rather than the series reported in my book) in order to describe the long-run evolution of US wealth inequality. See Piketty-Zucman 2014 (see in particular supplementary figure S3.5, p.91 for a comparison between the two series; as one can see, they look very similar).3
Britain (see figure 10.3)
The FT does point out substantial disagreements regarding the recent evolution in Britain. Their corrected figure actually looks very close to mine regarding the long run evolution, but not for the recent decades, where the FT considers that there was no rise at all in wealth inequality, and possibly a decline, whereas I report a rise (see their figure on Britain here). The biggest disagreement comes from the latest data point (c.2010): the FT considers that the right estimate for the top 10% wealth share is around 44% of total wealth (this comes from a recent household survey based upon self-reported data, namely the “wealth and assets survey”, which I believe underestimates top wealth groups significantly; see below); whereas I report an estimate with a top 10% wealth share around 71% (this comes from more reliable estate tax statistics). This is a very large difference indeed.
Let me make clear that although I think my estimate is more reliable and rests on better methodological choices, I also believe that this large gap reflects major uncertainties and limitations in our collective ability to measure recent evolution of wealth inequality in developed countries, particularly in Britain. As I explain above, I believe this is a major challenge for our statistical and democratic institutions.
The estimates that I report for wealth inequality in Britain rely primarily on the very careful estimates that were established by Atkinson-Harrison 1978 and Atkinson et al 1989 using estate tax statistics from the 1920s to the 1980s. I updated these series for the 1990-2010 period using official HMRC data that are also based upon estate tax records. I find a rising inequality trend, although a more modest one than for the United States. I think this is the most reasonable estimate one can obtain given available data, but this certainly should be improved in the future.
What is troubling about the FT methodological choices is that they use the estimates based upon estate tax statistics for the older decades (until the 1980s), and then they shift to the survey based estimates for the more recent period. This is problematic because we know that in every country wealth surveys tend to underestimate top wealth shares as compared to estimates based upon administrative fiscal data. Therefore such a methodological choice is bound to bias the results in the direction of declining inequality. For instance, as I note in the technical appendix to chapter 10 (available here), the recent wealth surveys undertaken by INSEE in 2004-2010 in France indicate a top decile share just above 50% of the total wealth, whereas fiscal data (inheritance and wealth tax) suggest a top decile share above 60% of the total wealth. The gap seems particularly large for the case of Britain, which could reflect the fact that the “wealth and assets survey” seems particularly bad at measuring the top part of the wealth distribution of the UK. Indeed, according to the latest report by the Office of national statistics (ONS), the response rate for this survey was only 64% in 2010-2012; this is an improvement as compared to the response rate of 55% that was observed during the 2006-2008 wave of the same survey (see ONS 2014, Table 7.1); but it is pretty clear that with such a low response rate, it is hard to claim that one can adequately measure wealth inequality, particularly at the top of the distribution. Also note that a 44% wealth share for the top 10% (and a 12.5% wealth share for the top 1%, according to the FT) would mean that Britain is currently one the most egalitarian countries in history in terms of wealth distribution; in particular this would mean that Britain is a lot more equal that Sweden, and in fact a lot more equal than what Sweden as ever been (including in the 1980s). This does not look particularly plausible.
Of course the estate records based estimates also raise significant methodological concerns, and I do not claim that the resulting estimates are perfectly reliable. In particular, they might also underestimate top wealth levels (because top wealth holders sometime escape the estate tax through sophisticated trust funds or offshore assets). But they definitely seem more plausible than the estimates based upon self-reported survey data.
Note also that in recent years more and more scholars and statisticians have started to recognize the limitations of household wealth surveys and to upgrade the top segments of survey based wealth distributions using other sources. For instance, a recent study undertaken at the research department of the ECB attempts to upgrade in a systematic manner the top tail of the wealth surveys undertaken in Eurozone countries by using the Pareto coefficients that one can estimate using Forbes rankings and other lists of very high wealth individuals in each country. The results indicate that this can lead to very large increases (more than 10 percentage points) in top wealth shares (see Vermeulen 2014). In the United States, although the SCF wealth survey is generally regarded as a very high quality wealth survey, there has been some important work trying to upgrade the top tail by using Forbes ranking and estate tax data (see Johnson-Shreiber 2006 and Raub-Johnson-Newcomb 2010). This is definitely something that should be done for the British “wealth and assets survey”.
Regarding the 19th century estimates, the FT expresses concerns with the way I compute the top wealth shares for Britain in 1810 and 1870. Namely, I borrow the top 1% wealth shares estimates from Lindert (54.9% and 61.1%, respectively), and I assume that the next 9% shares shifted from 28% to 26%. Lindert does report a lower estimate for the next 9% share (about 16%). However this would indicate a relatively unusual pattern of Pareto coefficients within the top 10% of the distribution (as compared both to the French 19th century inheritance data, which is a lot more comprehensive than the British probate data, and to the British estate tax statistics for 1911-1913). Given that the probate records used by Lindert seem to provide a better coverage of the top 1% than of the next 9%, I use Pareto interpolation techniques to estimate the next 9% share. This is an issue that should have been explained more clearly and that would definitely deserve further research. This has a limited impact for the long run patterns analyzed here (the pre-World War 1 rise in wealth inequality would be even larger without this adjustment).
European average (see figure 10.6)
Finally, the FT also expresses the following concern: the European average series, which I computed by making a simple arithmetic series between France, Britain and Sweden, should have been computed using population weighted averages. I do agree that population (or GDP) weighted averages are generally superior to simple arithmetic averages. However I should stress that it really does not make much of a difference here, because all three European countries that I use follow fairly similar long run patterns. Namely, all three countries display high and rising top wealth shares during the 19th century and up until World War 1 (with about 90% of total wealth for the top 10% around 1910); then a sharp decline until the 1960s-1970s (with top 10% wealth shares down to 50-60%); and finally a modest rise since the 1980s-1990s. So whether one weights the three countries with equal weights or according to population or GDP does not make a big difference. But in case Britain did follow a markedly different pattern than the other countries in recent decades (with a decline in wealth inequality rather than a rise), then putting more weight on Britain than on Sweden becomes a significant issue. So we are back to the previous question: what happened to wealth inequality in Britain in recent decades? The FT seems to believe it has become more equal; however the way they use self-reported wealth survey data is not convincing. This is nevertheless an interesting debate for the future, and we should all agree that we know too little about it.
1 See also the other two articles published by the FT on May 23 2014: here and there. See also my short reponse published here in the FT. Unfortunately I was given limited time to submit this response, so I could not address specific points; here is a longer response.
2 Also note that the raw series display a decline in top 1% wealth share between 1908 and 1920, but a sharp rise in the share of the next 9% (resulting into a significant increase in the top 10% share). This does not look entirely plausible and might also be due to a break in raw data sources (unless this is due to sharp short-run variations in the relative price of assets held by these different wealth groups).
3 Note that this HID chapter also includes novel series about the evolution of the share of inheritance in total wealth accumulation. These new series use a different methodology and complement those reported in chapter 11 of my book.
Posted by Mark Thoma on Friday, May 30, 2014 at 03:08 PM in Economics, Income Distribution, Press |
Steve Waldman at Interfluidity:
Welfare economics: an introduction (part 1 of a series): Commenters at interfluidity are usually much smarter than the author whose pieces they scribble beneath, and the previous post was no exception. But there were (I think) some pretty serious misconception in the comment thread, so I thought I’d give a bit of a primer on “welfare economics”, as I understand the subject. It looks like this will go long. I’ll turn it into a series. ...
Posted by Mark Thoma on Friday, May 30, 2014 at 11:02 AM in Economics, Equity |
Hours Worked, No Change; Output, Up 42%: Here's one snapshot of how the U.S. economy evolved in the last 15 years: an identical number of total hours worked in 1998 and 2013, even though the population rose by over 40 million people, but a 42% gain in output. Shawn Sprague explains in "What can labor productivity tell us about the U.S. economy?" published as the Beyond the Numbers newsletter from the U.S. Bureau of Labor Statistics for May 2014. ...
A lot can be said about this basic fact pattern. Of course, the comparison years are a bit unfair, because 1998 was near the top of the unsustainably rapid dot-com economic boom, with an unemployment rate around 4.5%, while 2013 is the sluggish aftermath of the Great Recession. The proportion of U.S. adults who either have jobs or are looking for jobs--the "labor force participation rate"--has been declining for a number of reasons: for example, the aging of the population so that more adults are entering retirement, a larger share of young adults pursuing additional education and not working while they do so, a rise in the share of workers receiving disability payments, and the dearth of decent-paying jobs for low-skilled labor. ...
The more immediate question is what to make of an economy that is growing in size, but not in hours worked, and that is self-evidently having a hard time generating jobs and bringing down the unemployment rates as quickly as desired. I'm still struggling with my own thoughts on this phenomenon. But I keep coming back to the tautology that there will be more good jobs when more potential employers see it as in their best economic interest to start firms, expand firms, and hire employees here in the United States.
Posted by Mark Thoma on Friday, May 30, 2014 at 08:28 AM in Economics, Productivity |
The cost of taking action to reduce the threat from global warming isn't as large as you might be led to believe:
Cutting Back on Carbon, by Paul Krugman, Commentary, NY Times: Next week the Environmental Protection Agency is expected to announce new rules designed to limit global warming. Although we don’t know the details yet, anti-environmental groups are already predicting vast costs and economic doom. Don’t believe them. Everything we know suggests that we can achieve large reductions in greenhouse gas emissions at little cost to the economy.
Just ask the United States Chamber of Commerce.
O.K., that’s not the message the Chamber of Commerce was trying to deliver in the report it put out Wednesday. It clearly meant to convey the impression that the E.P.A.’s new rules would wreak havoc. But if you focus on the report’s content rather than its rhetoric, you discover that ... the numbers are remarkably small.
Specifically, the report considers a carbon-reduction program that’s probably considerably more ambitious than we’re actually going to see, and it concludes that between now and 2030 the program would cost $50.2 billion in constant dollars per year. That’s supposed to sound like a big deal. ... These days, it’s just not a lot of money.
Remember, we have a $17 trillion economy..., and it’s going to grow over time. So what the Chamber of Commerce is actually saying is that we can take dramatic steps on climate ... while reducing our incomes by only one-fifth of 1 percent. That’s cheap! ...
And ... this is based on anti-environmentalists’ own numbers. The real costs would almost surely be smaller...
You might ask why the Chamber of Commerce is so fiercely opposed to action against global warming, if the cost of action is so small. The answer, of course, is that the chamber is serving special interests, notably the coal industry ... and also ... the ever more powerful anti-science sentiments of the Republican Party.
Finally, let me take on the anti-environmentalists’ last line of defense — the claim that whatever we do won’t matter, because other countries, China in particular, will just keep on burning ever more coal. This gets things exactly wrong. Yes, we need an international agreement... But U.S. unwillingness to act has been the biggest obstacle to such an agreement. ...
Now, we haven’t yet seen the details of the new climate action proposal... We can be reasonably sure, however, that the economic costs of the proposal will be small, because that’s what the research — even research paid for by anti-environmentalists... — tells us. Saving the planet would be remarkably cheap.
Posted by Mark Thoma on Friday, May 30, 2014 at 12:24 AM in Economics, Environment |
Posted by Mark Thoma on Friday, May 30, 2014 at 12:06 AM in Economics, Links |
Thomas Piketty's response to the FT:
Response to FT: ... I welcome all criticisms and I am very happy that this book contributes to stimulate a global debate about these important issues. My problem with the FT criticisms is twofold. First, I did not find the FT criticism particularly constructive. The FT suggests that I made mistakes and errors in my computations, which is simply wrong, as I show below. The corrections proposed by the FT to my series (and with which I disagree) are for the most part relatively minor, and do not affect the long run evolutions and my overall an alysis , contrarily to what the FT suggests . Next, the FT corrections that are somewhat more important are based upon methodological choices that are quite debatable (to say the least) . In particular, the FT simply chooses to ignore the Saez - Zucman 2014 study, which indicates a higher rise in top wealth shares in the United States during recent decades than what I report in my book (if anything, my book underestimates the rise in wealth inequality). Regarding Britain, the FT seems to put a lot of trust in self - reported wealth survey data that notoriously underestimates wealth inequality. ...
[This is just a snippet -- the full response is 10 pages long.]
Posted by Mark Thoma on Thursday, May 29, 2014 at 11:27 AM in Economics |
From Vox EU:
How highly educated immigrants raise native wages, by Giovanni Peri, Kevin Shih, and Chad Sparber, Vox EU: Immigration to the US has risen tremendously in recent decades. Though media attention and popular discourse often focus on illegal immigrants or the high foreign-born presence among less-educated workers, the data show that immigrants are drawn from both ends of the education spectrum. At the low end, immigrants grew from 5% of workers with a high school degree or less in 1970 to 20.8% in 2010. At the high end, the figure rose from 7.3% to 18.2% for those with graduate degrees over the same period.1
These trends suggest that it is important for economists and policymakers to understand the effects of highly educated immigrant flows. The canonical economic model, based on demand and supply, holds that, all else equal, an increase in labour supply should cause wages to fall. Thus, immigration should depress wages paid to natives. Evidence for such a downward effect in academic work is mixed. For example, Borjas (2003, 2013) find a negative impact of immigration on wages, while Card (2009) and Ottaviano and Peri (2012) do not. For the canonical model to fail and for immigrants to generate wage gains for natives, it must be the case that all else is not equal in the case of immigration. This is because the labour market is more complex than the market for typical goods. Adjustment mechanisms exist to allow natives and firms to respond to immigration without experiencing lower wages or fewer employment opportunities. Immigrants may also generate positive externalities that benefit native workers. This article provides a brief summary of the recent evidence for these phenomena in the context of the market for workers with a college degree.
Immigrants to the US specialise in STEM
The first step in understanding the peculiarities of the labour market is to recognise that native and foreign labour differ in their underlying characteristics. We do not think that the popular refrain claiming that “the US faces a skills shortage” is a useful way to approach this issue. Rather, we recognise the existence of important differences between natives and immigrants. Figure 1 provides a sense of this by describing the college majors of US bachelor’s degree recipients. Compared to natives, foreign-born workers are disproportionately likely to have obtained a bachelor’s degree in Science, Technology, Engineering, or Mathematics (STEM). 45.5% of college-educated immigrants in the labour force have a STEM degree, whereas only 28% of natives do. Conversely, natives are twice as likely as immigrants to have majored in education (12.2% versus 5.6%) or social sciences (9.5% versus 5%).
Figure 1. Primary degree share by nativity – workers with a bachelor’s degree or more education, 2009–2012
Source: American Community Survey.
These differences are crucial to understanding how natives might respond to college-educated immigrant flows. Figure 1 indicates that immigrants possess a comparative advantage and specialise in STEM. Thus, we might expect that natives respond to inflows of STEM-dominant immigrants by specialising in non-STEM work. Indeed, Peri and Sparber (2011) provide evidence of this phenomenon – inflows of highly educated immigrants cause natives switch to more communication-intensive occupations.
The contribution of STEM to overall productivity
This comparative advantage and specialisation story is not unique to the market for college-educated labour. Peri and Sparber (2009) document similar behaviour among workers with a high school degree or less education. However, the fact that foreign college-educated immigrants tend to specialise in STEM has an additional implication of paramount importance. Economists have long recognised the significance of innovation in generating economic growth, and the role of scientists and engineers in fostering such knowledge production. The process of innovation generates positive spillovers for the economy as a whole. Thus, by increasing the country’s stock of knowledge, foreign-born STEM workers can increase the overall productivity of the economy.
A rather simplistic estimate of the contribution of foreign-born STEM to productivity in the US can be calculated from just two pieces of information. First, Jones (2002) estimates that 50% of US total factor productivity (TFP) growth in recent decades is attributable to scientists and engineers. Second, college-educated STEM workers grew from 2.9% of total employment in 1990 to 3.7% of employment in 2010, and foreign-born workers were responsible for 80% of this growth. By combining immigrants’ contributions to STEM growth with STEM’s contribution to TFP growth, we can deduce that roughly 40% of aggregate productivity growth may be due to foreign-born college-educated STEM workers.
This is an enormous figure and it is based on data at a very high level of aggregation. In Peri, Shih, and Sparber (2014), we assess whether more thorough economic analysis delivers comparable results. Using cross-city panel regressions to estimate wage and employment responses to foreign STEM, we find a rise in foreign STEM by one percentage point of total employment increases real wages of college-educated natives by 7–8 percentage points and those of non-college-educated natives by 3-4 percentage points. We find no statistically significant effects on native employment growth.
Instrumenting for the growth of foreign STEM workers
Causal identification is driven by three regularities. First, the presence of foreign STEM workers varied substantially across US cities in 1980. Second, the H-1B visa program – which has been the method of entry for highly skilled immigrants in the US since its inception in 1990 – produced national level changes in the number of skilled immigrants in the country that can be seen as exogenous from a city-level perspective. Third, new immigrants are attracted to locations where previous immigrant communities have already been established. By interacting 1980 city-level settlements with subsequent national-level policy, we can predict the number of new foreign STEM workers in each city. This H-1B-driven imputation of future foreign STEM workers is a good predictor of the actual increase in both foreign STEM and overall STEM workers in a city over subsequent decades. However it is not correlated, by construction, with the economic conditions in the city during the subsequent decades. It therefore makes an excellent instrument for the actual growth of foreign STEM workers to obtain causal estimates of the impact of STEM growth on the wages and employment of college and non-college-educated native-born workers.2
From the perspective of the canonical supply and demand model, the positive relationship between foreign labour supply and native wages may appear peculiar, but it is reasonable in the context of STEM-driven economic and productivity growth. The analysis in Peri, Shih, and Sparber (2014) uses an aggregate production model at the city level, to derive the productivity effect implied by the estimated wage and employment effects. We find that foreign STEM workers can explain 30% to 60% of US TFP growth between 1990 and 2010 – in line with the simple calculation cited above.
Discussion of results and policy implications
The large and positive wage and productivity effects from foreign-born STEM labour raise two important issues. The first concerns how, in the presence of these gains, studies sometimes find detrimental effects. Borjas (2013), for example, argues that immigration from 1990–2010 may have reduced wages paid to workers with a bachelor’s degree by 3.2%, and for workers with a graduate degree by 4.1%. Similarly, Borjas and Doran (2012) find that the post-1992 inflow of Soviet mathematicians pushed American mathematicians to lower quality institutions and reduced their academic productivity. To understand the conflict between these results and our own, it is important to recognise that our gains arise due to complementarities and positive externalities from innovation. Analyses that ignore occupational adjustment, understate complementarities across skill groups, fail to account for externalities, or analyse markets in which positive spillovers are small, are more likely to miss the gains associated with immigration.
The second is whether foreign STEM workers are truly needed since the US could presumably enact policies to produce its own STEM talent. This is true, but three qualifications are necessary. First, our analysis, as well as that of Kerr and Lincoln (2010), argues that foreign H-1B workers increase innovation and the productivity of US STEM workers without crowding them out. Thus it may be possible to increase both foreign and domestic STEM supply. Second, Hunt and Gauthier-Loiselle (2010) argue that immigrants are more entrepreneurial and innovative than natives, and this may add a further productive complementarity for natives. Third, native STEM development might require extensive and expensive investment, whereas immigration policy could be a more cost-effective way of building the country’s STEM workforce.
The comprehensive immigration reform proposed in the US Senate Bill 744 that would increase the annual number of H-1B visas allotted by 50,000 per year. In the light of the results above, it should be obvious that the provision would produce long-run positive effects on US wages and innovation.
Borjas, G J (2003), “The labor demand curve is downward sloping: reexamining the impact of immigration on the labor market”, Quarterly Journal of Economics, 118(4): 1335–1374.
Borjas, G J (2013), “Immigration and the American Worker: A Review of the Academic Literature”, Center for Immigration Studies, April.
Borjas, G J and K B Doran (2012), “The Collapse of the Soviet Union and the Productivity of American Mathematicians”, Quarterly Journal of Economics, 127(3): 1143–1203.
Card, D (2009), “Immigration and Inequality”, The American Economic Review, 99(2): 1–21.
Hunt, J and M Gauthier-Loiselle (2010), “How Much Does Immigration Boost Innovation?”, American Economic Journal: Macroeconomics: 31–56.
Jones, C I (2002), “Sources of US Economic Growth in a World of Ideas”, The American Economic Review, 92(1): 220–239.
Kerr, W R and W F Lincoln (2010), “The supply side of innovation: H-1B visa reforms and US ethnic invention”, Journal of Labor Economics, 28: 473–508.
Ottaviano, G I P and G Peri (2012), “Rethinking the Effect of Immigration on Wages”, Journal of the European Economic Association, 10(1): 152–197.
Peri, G and C Sparber (2009), “Task Specialization, Immigration, and Wages”, American Economic Journal: Applied Economics, 1(3): 135–169.
Peri, G and C Sparber (2011), “Highly-Educated Immigrants and Native Occupational Choice”, Industrial Relations, 50(3).
Peri, Giovanni, Kevin Shih, and Chad Sparber (2014), “Foreign STEM Workers and Native Wages and Employment in U.S. Cities“, NBER Working Papers 20093.
1 Summary statistics are based on Census and American Community Survey (ACS) data.
2 This methodology is not immune to criticism. Persistent city-specific shocks affecting immigration, employment, and wage growth, for example, would challenge the validity of our instrumental variable strategy. However, we perform a series of robustness checks that all point to the same result – foreign-born STEM workers increase wages paid to native-born workers, with larger effects for those with a college degree.
Posted by Mark Thoma on Thursday, May 29, 2014 at 09:45 AM in Economics, Immigration |
The Great Recession's "biggest policy mistake", by Mark Thoma, CBS News: Two recent books, Timothy Geithner's "Stress Test: Reflections on Financial Crises" and "House of Debt" by Atif Mian and Amir Sufi, have reignited a discussion over the Obama administration's policies and attitude on mortgage debt relief.
In contrast with the former New York Fed president and later Treasury Secretary's account about the efforts to save the U.S. economy from the collapsing housing market, others say the administration -- more particularly the Geithner-led Treasury -- did not push aggressively for mortgage debt relief .
As a result, very little was done to help households struggling with mortgage debt. Indeed, Mian and Sufi argue that "The fact that Secretary Geithner and the Obama administration did not push for debt write-downs more aggressively remains the biggest policy mistake of the Great Recession."
Who is correct? ...[continue]...
Posted by Mark Thoma on Thursday, May 29, 2014 at 08:16 AM in Economics, Housing, Policy |
Posted by Mark Thoma on Thursday, May 29, 2014 at 12:06 AM in Economics, Links |
I can't watch this, so have no idea how foolish I look, or not, or what parts of the interview they chose to include:
Posted by Mark Thoma on Wednesday, May 28, 2014 at 03:17 PM in Economics, Video |
Glenn Rudebusch and John Williams:
A Wedge in the Dual Mandate: Monetary Policy and Long-Term Unemployment, by Glenn D. Rudebusch and John C. Williams, Federal Reserve Bank of San Francisco: Abstract In standard macroeconomic models, the two objectives in the Federal Reserve's dual mandate -- full employment and price stability -- are closely intertwined. We motivate and estimate an alternative model in which long-term unemployment varies endogenously over the business cycle but does not a ect price in ation. In this new model, an increase in long-term unemployment as a share of total unemployment creates short-term tradeoffs for optimal monetary policy and a wedge in the dual mandate. In particular, faced with high long-term unemployment following the Great Recession, optimal monetary policy would allow inflation to overshoot its target more than in standard models.
I'll believe the Fed will allow *intentional overshooting* of its inflation target when I see it.
Posted by Mark Thoma on Wednesday, May 28, 2014 at 01:15 PM in Economics, Inflation, Monetary Policy |
From the NBER Digest:
Unemployment Insurance and Disability Insurance in the Great Recession: At the end of 2012, 8.8 million American adults were receiving Social Security Disability Insurance (SSDI) benefits. The share of the American public receiving SSDI has more than doubled since 1990. This rapid growth has prompted concerns about SSDI's sustainability: recent projections suggest that the SSDI trust fund will be exhausted in 2016.
SSDI recipients tend to remain in the program, and out of the labor market, from the time they are approved for benefits until they reach retirement age. This means that if unemployed individuals turn to disability insurance as a source of benefits when they exhaust their unemployment insurance (UI), the long-term program costs can be substantial. Some have suggested that the savings from avoided SSDI cases could help to finance the cost of extending UI benefits, but little is known about the interaction between SSDI and UI.
In Unemployment Insurance and Disability Insurance in the Great Recession, (NBER Working Paper No. 19672), Andreas Mueller, Jesse Rothstein, and Till von Wachter use data from the last decade to investigate the relationship between UI exhaustion and SSDI applications. They take advantage of the variability of UI benefit durations during the recent economic downturn. The duration of these benefits was as long as 99 weeks in 2009, remained protracted for several years, then was shortened substantially in 2012. The authors focus on the uneven extension of UI benefits during and after the Great Recession to isolate variation in the duration of these benefits that is not confounded by variation in economic conditions more broadly.
The authors find very little interaction between UI benefit eligibility and SSDI applications, and conclude that SSDI applications do not appear to respond to UI exhaustion. While the authors cannot rule out small effects, they conclude that SSDI applications do not respond strongly enough to contribute meaningfully to a cost-benefit analysis of UI extensions or to account for the cyclical behavior of SSDI applications.
The authors suggest that the tendency for the number of SSDI applications to grow when the economy is weak may reflect variation in the potential reemployment wages of displaced workers, or changes in the employment opportunities of the marginally disabled that influence the evaluation of an SSDI applicant's employability. These channels are not linked to the generosity or duration of UI benefits, and they imply that more stringent functional capacity reviews of SSDI applicants may not reduce recession-induced SSDI claims if these claims reflect examiners' judgments that the applicants are truly not employable in the existing labor market.
Posted by Mark Thoma on Wednesday, May 28, 2014 at 11:24 AM in Academic Papers, Economics, Social Insurance |
Policy Induced Mediocrity?, by Tim Duy: Why did the Federal Reserve lean against their optimistic 2014 forecast? It seems that monetary policy over the past year can be summarized as a missed opportunity to supercharge the recovery, thereby locking the US economy into a suboptimal growth path.
Last week's speech by New York Federal Reserve President William Dudley noted the reasons monetary policymakers expected the economy to improve this year:
Since the downturn ended in mid-2009, real GDP growth has averaged only 2.2 percent per year despite a very accommodative monetary policy. This performance reflects three major factors—the significant headwinds resulting from the bursting of the housing bubble, the shift of fiscal policy from expansion toward restraint, especially in 2012 and 2013, and a series of shocks from abroad—most notably the European crisis.
The good news is that all three of these factors have abated. With respect to the headwinds resulting from the financial crisis, they are gradually becoming less severe. In particular, the sharp decline in household wealth due to the decline in housing prices and the weakness in equity prices has been largely reversed...On the fiscal side, the amount of restraint has diminished sharply. For 2014, the projected drag is about ½ percent of GDP, roughly half the level of 2013. Moreover, much of this restraint was frontloaded into the beginning of the year...In terms of the outlook abroad, the circumstances are more mixed.
The Federal Reserve could have chosen to lean into this generally upbeat forecast. Yet instead they chose to lean against it by turning to tapering and setting the stage for interest rate hikes. And the data so far suggests that once again the turn toward policy normalization was premature. The weak first quarter report is more suggestive of holding the recent pace of growth over the next year rather than an acceleration of activity. What is remarkable is that the Federal Reserve understood that their forecasts have tended toward optimism. Dudley again:
But, there remains considerable uncertainty about that forecast and, given the persistent over-optimism about the growth outlook by Federal Reserve officials and others in recent years, we shouldn’t count our chickens before they hatch.
Yet they choose to act prior to data confirmation. Why? I really don't quite know. Sure, we can tell a story about the declining unemployment rate and expected subsequent inflation pressures, but ultimately the turn toward less policy accommodation never made sense in the context of the Fed's own forecasts and questions about the degree of slack in the economy. It makes me wonder how seriously the Fed is truly interested in closing the output gap:
It seems reasonable to believe that if the economy regains potential output by the end of at best 2016, it will be attributable only to further downward revisions to potential output. And I even wonder whether the Fed would act to achieve their current growth forecasts or ultimately be content to continue along the current trend. The economy appears to be already molding itself around the lower output path. Despite the housing troubles and related weak rebound in construction, and the declines in government hiring, job growth is, on average, plugging along at a rate roughly consistent to that during the housing boom:
With that growth labor slack gradually steadily declines by any measure, the Fed appears reasonably comfortable with the resulting path. To be sure, arguably there still remains substantial slack. The failure of wage gains to accelerate is consistent with that story. But the Fed seems content to use that story only to justify its current policy path rather than justify an even easier policy to more quickly reduce slack.
Given the generally consistent overall reaction of the labor market to the current growth path, it is reasonable to believe that the faster pace of growth in the Fed's forecast would accelerate the pace of labor utilization and thus place upward pressure on inflation forecasts. In this case, we would expect the Fed to pull forward and steepen the pace of rate hikes to moderate the pace of activity. Thus, ultimately the Fed's commitment to regaining potential output could be even less than we have come to believe.
But even more telling would be the monetary policy reaction if growth continues along its current path. The weak first quarter results already place the forecast at risk, and the housing recovery is not progressing as smoothly as initially believed. Yet neither event prevented the Fed from continuing to cut asset purchases at the last FOMC meeting. Moreover, I still can't see any reason to expect the Fed will slow the tapering process unless the economy falls decisively off its current path. It could be that by the time they are sufficiently convinced growth will continue to fall short of forecast, asset purchases will be almost complete anyway. And I think the bar to restarting asset purchases would be very high. They want out of that business.
And if neither fiscal or monetary policy makers are interested in accelerating the pace of growth, should we really expect the pace of growth to accelerate? In other words, it appears to me that monetary policy largely amounts to setting expectations that reinforce the current growth path. Which was a recent topic of Bloomberg's Rich Miller who, reporting on the Fed's diminished expectations, quotes me:
By lowering its assessment of how fast the economy can expand and conducting policy accordingly, the Fed runs the risk of locking the U.S. into a slow-growth path, said Tim Duy, a former Treasury Department economist who is now a professor at the University of Oregon in Eugene...
...“They offset fiscal austerity on the downside but then arguably also offset the upside,” Duy said. “They seem to have lost interest in speeding the pace of the recovery.”
Bottom Line: The Federal Reserve has set reasonably clear expectations that rates will remain low for a long time. That path, however, seems to be a consequence of doing too little now to ensure a stronger recovery. In other words, the Fed seems to be taking a lower-rate future as a given rather than as a result of insufficient policy. Instead of acting to ensure a stronger forecast, they seem more interesting in acting to lock-in the lower path of activity. And that in turn will tend to lock in a low level of long-term rates. This, I think, is the best explanation for the inability of markets to sustain higher rates. It is simply reasonable to expect that the conditions which justify higher long rates will be met with tighter policy sufficient to contain growth to something closer to the current path of output than to current estimates of potential output.
Posted by Mark Thoma on Wednesday, May 28, 2014 at 12:15 AM in Economics, Fed Watch, Monetary Policy |
Posted by Mark Thoma on Wednesday, May 28, 2014 at 12:06 AM in Economics, Links |