Monday, September 08, 2014

Fed Watch: Forward Guidance Heading for a Change

Tim Duy:

Forward Guidance Heading for a Change, by Tim Duy: The lackluster August employment report clearly defied expectations (including my own) for a strong number to round out the generally positive pattern of recent data. That said, one number does not make a trend, and the monthly change in nonfarm payrolls is notoriously volatile. The underlying pattern of improvement remains in tact, and thus the employment report did not alleviate the need to adjust the Fed's forward guidance, allow there is a less pressing need to do so at the next meeting. In any event, the days of the "considerable time" language are numbered.
Nonfarm payrolls gained just 142k in August while the unemployment rate ticked back down to 6.1%. In general, the employment report is consistent with steady progress in the context of data that Fed Chair Janet Yellen has identified in the past:

NFPa090814

NFPb090814

Arguably the only trend that is markedly different is the more rapid decline in long-term unemployment, a positive cyclical indicator. Labor force participation remains subdued, although the Fed increasing views that as a structural issue. Average wage growth remained flat while wages for production workers accelerated slightly to 2.53% over the past year. A postive development to be sure, but too early to declare a sustained trend.
The notable absence of any bad news in the labor report leaves the door open to changing the forward guidance at the next FOMC meeting. As Robin Harding at the Financial Times notes, many Fed officials, including both doves and hawks, have taken issue with the current language, particularly the seemingly calendar dependent "considerable time" phrase. Officials would like to move toward guidance that is more clearly data dependent.
Is a shift in the language likely at the next meeting? Harding is mixed:
Their remarks could mean a move at the September FOMC meeting in 10 days, although there is little consensus yet on new wording, so a shift might have to wait until next month.
The trick is to change the language without suggesting the timing of the first rate hike is necessarily moving forward. The benefit of the next meeting is that it includes updated projections and a press conference. Stable policy expectations in those projections would create a nice opportunity to change the language. Moreover, Yellen would be able to to further explain any changes at that time. This also helps set the stage for the end of asset purchases in October. A shift in the guidance next week has a lot to offer.
A change in the language would also throw some additional light on Yellen's comments at Jackson Hole. Her typically unabashed defense of labor market slack was missing from her speech, replaced by a much more even-handed evaluation of the data. Was she simply setting the stage for an academic conference, or was she signalling a shift in her convictions? A change in the language at the next meeting would suggest the latter.
Bottom Line: The US economy is moving to a point in the cycle in which monetary policymakers have less certainty about the path of rates. Perhaps they need to be pulled forward, perhaps pushed back. Policymakers will need to be increasingly pragmatic, to use Yellen's term, when assessing the data. The "considerable time" language is inconsistent with such a pragmatic approach. It is hard to see that such language survives more than another FOMC statement. Seems to be data and policy objections are not the impediments preventing a change in the guidance, but instead the roadblock is the ability to reach agreement on new language in the next ten days.

    Posted by on Monday, September 8, 2014 at 09:25 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (10)


    What were they thinking? The Federal Reserve in the Run-Up to the 2008 Financial Crisis

    At Vox EU:

    What were they thinking? The Federal Reserve in the run-up to the 2008 financial crisis, by Stephen Golub, Ayse Kaya, Michael Reay: Since the Global Crisis, critics have questioned why regulatory agencies failed to prevent it. This column argues that the US Federal Reserve was aware of potential problems brewing in the financial system, but was largely unconcerned by them. Both Greenspan and Bernanke subscribed to the view that identifying bubbles is very difficult, pre-emptive bursting may be harmful, and that central banks could limit the damage ex post. The scripted nature of FOMC meetings, the focus on the Greenbook, and a ‘silo’ mentality reduced the impact of dissenting views.

      Posted by on Monday, September 8, 2014 at 09:15 AM in Economics, Financial System, Monetary Policy, Regulation | Permalink  Comments (34)


      Have Economists Been Captured by Business Interests?

      Justin Fox:

      Have Economists Been Captured by Business Interests?: To be an economist, you kind of have to believe that people respond to economic incentives. But when anyone suggests that an economist’s views might be shaped by the economic incentives he or she faces,... it’s actually pretty common to hear economists saying things like — this is from the usually no-nonsense John Cochrane of the University of Chicago — “the idea that any of us do what we do because we’re paid off by fancy Wall Street salaries or cushy sabbaticals at Hoover is just ridiculous.” ...
      Happily, Luigi Zingales, a colleague of Cochrane’s at Chicago’s Booth School of Business, is trying to correct his discipline’s blind spot by examining the economics of economists’ opinions. ...
      Zingales ... subjects his notions to an empirical test: Are there discernible patterns in what kinds of economists think corporate executives are overpaid and what kinds think they’re paid fairly? ... The answer turns out to be yes. ...
      What Zingales doesn’t call for is any kind of blanket retreat by economists from consulting and expert witnessing and board memberships. Which is a good thing, I think. One of the reasons why economics rocketed past the other social sciences in influence and prestige over the past 75 years was because so many economists involved themselves in the worlds they studied. That has surely led to some amount of capture by outside interests, but it also seems to have counteracted the natural academic tendency toward insularity and obscurity. Lots of economists study things of direct relevance to business leaders and government policy-makers. We wouldn’t really want to take away their incentive to do that, would we?

        Posted by on Monday, September 8, 2014 at 09:14 AM in Economics, Regulation | Permalink  Comments (52)


        'Bold Reform is the Only Answer to Secular Stagnation'

        Larry Summers:

        Bold reform is the only answer to secular stagnation, by Lawrence H. Summers: The economy continues to operate way below any estimate of its potential made before the onset of financial crisis in 2007, with a shortfall of gross domestic product relative to previous trend in excess of $1.5tn, or $20,000 per family of four. As disturbing, the average growth rate of the economy of less than 2 per cent since that time has caused output to fall ... further below previous estimates of its potential.
        Almost a year ago I invoked the concept of secular stagnation... Secular stagnation in my version ... has emphasised the difficulty of maintaining sufficient demand to permit normal levels of output. ...
        To achieve growth of even 2 per cent over the next decade, active support for demand will be necessary but not sufficient. Structural reform is essential to increase the productivity of both workers and capital, and to increase growth in the number of people able and willing to work productively. Infrastructure investment, immigration reform, policies to promote family-friendly work, support for exploitation of energy resources, and business tax reform become ever more important policy imperatives.

          Posted by on Monday, September 8, 2014 at 09:14 AM in Economics | Permalink  Comments (17)


          Econometrics Mini-Course (NBER): Theory and Application of Network Models

          Summer Institute 2014 Theory and Application of Network Models, July 22, 2014 Daron Acemoglu and Matthew O. Jackson, Organizers:

          Matthew O. Jackson, Stanford University Social and Economic Networks: Backgound

          Daron Acemoglu, MIT Networks: Games over Networks and Peer Effects

          Matthew O. Jackson, Stanford University Diffusion, Identification, Network Formation

          Daron Acemoglu, MIT Networks: Propagation of Shocks over Economic Networks

            Posted by on Monday, September 8, 2014 at 08:46 AM in Econometrics, Economics, Video | Permalink  Comments (1)


            Paul Krugman: Scots, What the Heck?

            Spain provides a "cautionary tale" for the Scots:

            Scots, What the Heck?, by Paul Krugman, Commentary, NY Times: Next week Scotland will hold a referendum on whether to leave the United Kingdom. And polling suggests that support for independence has surged..., largely because pro-independence campaigners have managed to reduce the “fear factor” — that is, concern about the economic risks of going it alone. At this point the outcome looks like a tossup.
            Well, I have a message for the Scots: Be afraid, be very afraid. The risks of going it alone are huge. You may think that Scotland can become another Canada, but it’s all too likely that it would end up becoming Spain without the sunshine.
            Comparing Scotland with Canada seems, at first, pretty reasonable. After all, Canada, like Scotland, is a relatively small economy that does most of its trade with a much larger neighbor. ... And what the Canadian example shows is that this can work. ...
            But Canada has its own currency... An independent Scotland wouldn’t. ..: The Scottish independence movement has been very clear that it intends to keep the pound as the national currency. And the combination of political independence with a shared currency is a recipe for disaster. Which is where the cautionary tale of Spain comes in.
            If Spain and the other countries that gave up their own currencies to adopt the euro were part of a true federal system..., the recent economic history of Spain would have looked a lot like that of Florida. Both economies experienced a huge housing boom between 2000 and 2007. Both saw that boom turn into a spectacular bust. Both suffered a sharp downturn...
            Then, however, the paths diverged. In Florida’s case, most of the fiscal burden of the slump fell not on the local government but on Washington... In effect, Florida received large-scale aid in its time of distress.
            Spain, by contrast, bore all the costs of the housing bust on its own. The result ... was a horrific depression... And it wasn’t just Spain, it was all of southern Europe and more. ...
            In short, everything that has happened in Europe since 2009 or so has demonstrated that sharing a currency without sharing a government is very dangerous...
            I find it mind-boggling that Scotland would consider going down this path after all that has happened in the last few years. If Scottish voters really believe that it’s safe to become a country without a currency, they have been badly misled.

              Posted by on Monday, September 8, 2014 at 12:24 AM in Economics, International Finance | Permalink  Comments (157)


              Links for 9-08-14

                Posted by on Monday, September 8, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (61)


                Sunday, September 07, 2014

                'Few US 'Reshorings' Go Ahead'

                What they say is not necessarily the same as what they do:

                Few US ‘reshorings’ go ahead, study finds, by Robert Wrigh, FT: “Relatively few” of companies’ announced “reshorings” of manufacturing to the US have actually gone ahead and the trend’s effect on employment has been a “drop in the bucket,” research by a Massachusetts Institute of Technology academic suggests.
                The work, by Jim Rice, deputy director of MIT’s Center for Transportation and Logistics, throws into doubt expectations that the US economy might enjoy significant growth in manufacturing employment through job repatriation. ...

                  Posted by on Sunday, September 7, 2014 at 12:03 PM in Economics, Unemployment | Permalink  Comments (28)


                  Links for 9-07-14

                    Posted by on Sunday, September 7, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (80)


                    Saturday, September 06, 2014

                    Peter Diamond: The Beveridge Curve

                    Peter Diamond on his new research on the Beveridge curve ("casts doubt on everything I've written on the Beveridge curve," "shifts in the Beveridge curve are not very informative"):

                    Abstract: Debates about higher structural unemployment occur when unemployment has stayed high. With monthly publication of the US Beveridge curve (the relationship between the unemployment and vacancy rates), the recent debate has focused on the shift in the Beveridge curve and whether the shift will be lasting long enough to move the full-employment point. The curve appears stable through the NBER identified business cycle through in June 2009 or possibly the month of the maximal unemployment rate in October 2009. This shift in the Beveridge curve, with the economy experiencing a higher level of unemployment than before for the same level of the vacancy rate, suggests a deterioration in the matching/hiring process in the economy. It is tempting to interpret this decline as a structural change in the way that the labor market works and thus assume that it is orthogonal to changes in aggregate demand. Indeed, an assumption that a shift in the curve is structural has been a staple of the academic literature since at least 1958. This interpretation has an obvious policy implication: however useful aggregate stabilization policies while unemployment is very high, they are likely to fail in lowering the unemployment rate all the way to the levels that prevailed before the recession, since the labor market is structurally less efficient than before in creating successful matches. This lecture reviews the theory underlying the Beveridge curve and US evidence on the ability to draw an inference of structural change from its shift or a shift in the hiring (matching) function.

                    His lecture (video) is here. (The discussion of how to interpret shifts in the Beveridge curve starts at around the 12:30 mark. Switching to low quality helps the video to stream better. His view is that there is still substantial slack in the labor market.) My interview with him, which spends quite a bit of time on the Beveridge curve, is here.

                      Posted by on Saturday, September 6, 2014 at 10:48 AM in Economics, Unemployment | Permalink  Comments (20)


                      'The Wall Street Journal Parade of Climate Lies'

                      Jeff Sachs is unhappy with the editorial page of the WSJ:

                      The Wall Street Journal Parade of Climate Lies: That Rupert Murdoch governs over a criminal media empire has been made clear enough in the UK courts in recent years. That the Wall Street Journal op-ed pages, the latest victim of Murdoch's lawless greed, are little more than naked propaganda is perhaps less appreciated. The Journal runs one absurd op-ed after another purporting to unmask climate change science, but only succeeds in unmasking the crudeness and ignorance of Murdoch's henchmen. Yesterday's (September 5) op-ed by Matt Ridley is a case in point.
                      Ridley's "smoking gun" is a paper last week in Science Magazine by two scientists Xianyao Chen and Ka-Kit Tung, which Ridley somehow believes refutes all previous climate science. Ridley quotes a sentence fragment from the press release suggesting that roughly half of the global warming in the last three decades of the past century (1970-2000) was due to global warming and half to a natural Atlantic Ocean cycle. He then states that "the man-made warming of the past 20 years has been so feeble that a shifting current in one ocean was enough to wipe it out altogether," and "That to put the icing on the case of good news, Xianyao Chen and Ka-Kit Tung think the Atlantic Ocean may continue to prevent any warming for the next two decades."
                      The Wall Street Journal editors don't give a hoot about the nonsense they publish if it serves their cause of fighting measures to limit human-induced climate change. If they had simply gone online to read the actual paper, they would have found that the paper's conclusions are the very opposite of Ridley's. ...

                        Posted by on Saturday, September 6, 2014 at 09:27 AM in Economics, Environment, Press | Permalink  Comments (28)


                        Links for 9-06-14

                          Posted by on Saturday, September 6, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (166)


                          Friday, September 05, 2014

                          'The British Export Bubble of 1810 and Pegged versus Floating Exchange Rates'

                          James Narron, David Skeie, and Don Morgan in the NY Fed's Liberty Street Economics blog:

                          Crisis Chronicles: The British Export Bubble of 1810 and Pegged versus Floating Exchange Rates: In the early 1800s, Napoleon’s plan to defeat Britain was to destroy its ability to trade. The plan, however, was initially foiled. After Britain helped the Portuguese government flee Napoleon in 1807, the Portuguese returned the favor by opening Brazil to British exports—a move that caused trade to boom. In addition, Britain was able to circumvent Napoleon’s continental blockade by means of a North Sea route through the Baltics, which provided continental Europe with a conduit for commodities from the Americas. But when Britain’s trade via the North Sea was interrupted in 1810, the boom ended in crisis. In this edition of Crisis Chronicles, we explore the British Export Bubble of 1810 and ask whether pegged or floating exchange rates are better for an economy. ...

                            Posted by on Friday, September 5, 2014 at 01:36 PM in Economics, International Finance | Permalink  Comments (1)


                            'Pace of Job Growth Slows Further in August'

                            The Employment Report for August was released this morning. From the BLS:

                            Total nonfarm payroll employment increased by 142,000 in August, and the unemployment rate was little changed at 6.1 percent...
                            The change in total nonfarm payroll employment for June was revised from +298,000 to +267,000, and the change for July was revised from +209,000 to +212,000. With these revisions, employment gains in June and July combined were 28,000 less than previously reported.

                            Dean Baker:

                            Pace of Job Growth Slows Further in August: The pace of growth slowed sharply to 142,000 in August. Coupled with downward revisions to June's data, this brings the average rate of job growth over the last three months to 207,000. The economy had been adding jobs added jobs at a 267,000 monthly rate between March and June.
                            The falloff was widespread across industries. Manufacturing employment was flat after adding an average of 21,000 jobs a month in the prior three months. Retail employment fell by 8,400 in August after adding an average of 22,700 jobs in the prior three months. Transportation added just 1,200 jobs, down from an average 16,400 in the prior three months. Job growth in professional and technical services (16,800) and restaurants (21,100) was also somewhat weaker than its recent pace.
                            In percentage terms motion pictures continues to be a big job loser, shedding 6,000 jobs in August, 2.0 percent of total employment. Jobs in the sector have fallen by 18.6 percent over the last two years. On the opposite side, health care added 34,000 jobs, the third biggest rise in the last five years. This is likely an anomaly that will be offset by weaker growth in the months ahead.
                            There is little evidence that the strengthening labor market is leading to wage pressures. Over the last three months, the average hourly wage has risen at a 2.3 percent annual rate, virtually identical to the 2.1 percent rate over the last year. In fact, almost no sectors show evidence of substantial wage growth. Only three sectors, mining, information, and leisure and hospitality have seen hourly wage growth in excess of 2.5 percent over the last year. A 3.5 percent rate of wage growth is consistent with the Fed’s 2.0 percent inflation target (assuming 1.5 percent productivity growth), only mining at 4.1 percent and information at 3.8 percent cross this threshold. 
                            On the household side there was little new in the August data. The unemployment rate edged down slightly to 6.1 percent, but the employment to population ratio remained stable at 59.0 percent.
                            By education level, college grads don't seem to be faring well at this point in the recovery. Their unemployment edged up to 3.2 percent, while their EPOP fell 0.2 pp to 72.2 percent. Over the last year their unemployment rate has fallen by just 0.3 pp, while the EPOP of college grads is actually down by 0.6 pp. By comparison, those with some college have seen a drop of 0.7 pp in their unemployment rate and a rise of 0.4 pp in their EPOP.
                            The unemployment duration measures all declined in August, with the share of long-term unemployed falling to 31.2 percent, the lowest level since June of 2009. By comparison, long-term unemployment accounted for more than 22 percent of unemployment from June 2003 to June 2004. The number of people involuntarily working part-time fell by 197,000 and now stands 562,000 below its year ago level.  Voluntary part-time employment is up 271,000 from its year ago level, although down 152,000 from July.
                            Employment growth continues to be less skewed toward older workers. Workers over age 55 accounted for 108.2 percent of total employment growth in the first four years of the recovery. By contrast they accounted for just 29.4 percent of employment growth over the last year. This is consistent with a scenario in which many older but pre-Medicare age workers no longer feel as much need to work now that they can get health care insurance through the exchanges. Workers in the 25-34 age group appear to be the gainers, accounting for 37.1 percent of employment growth over the last year.
                            While the slower pace of job growth in this report is a surprise to many analysts, the stronger rate in the first half of this year really was not consistent with the rate of GDP growth that we have been seeing or is generally forecast for the near future. If the economy is growing in a 2.5 percent range then we should expect to see job growth of around 1.0 percent or 1.4 million a year. Unless the economy grows far more rapidly than is general expected, we should expect to see job growth well under 200,000 a month.

                              Posted by on Friday, September 5, 2014 at 09:26 AM in Economics, Unemployment | Permalink  Comments (49)


                              Paul Krugman: The Deflation Caucus

                              Why is there so much fear of inflation, particularly on the political right?:

                              The Deflation Caucus, by Paul Krugman, Commentary, NY Times: On Thursday, the European Central Bank announced a series of new steps it was taking in an effort to boost Europe’s economy. ... But its epiphany may have come too late. It’s far from clear that the measures now on the table will be strong enough to reverse the downward spiral.
                              And there but for the grace of Bernanke go we. Things ... are far from O.K., but we seem ... to have steered clear of the kind of trap facing Europe. Why? One answer is that the Federal Reserve started doing the right thing years ago, buying trillions of dollars’ worth of bonds in order to avoid the situation its European counterpart now faces.
                              You can argue ... the Fed should have done even more. But Fed officials have faced fierce attacks... Pundits, politicians and plutocrats have accused them, over and over again, of “debasing” the dollar, and warned that soaring inflation is just around the corner..., but despite being wrong year after year, hardly any of the critics have admitted being wrong, or even changed their tune. And the question I’ve been trying to answer is why. What ... makes a powerful faction in our body politic — ...the deflation caucus — demand tight money even in a depressed, low-inflation economy? ...
                              One answer is ... truthiness — Stephen Colbert’s justly famed term for things that aren’t true, but feel true to some people. “The Fed is printing money, printing money leads to inflation, and inflation is always a bad thing” is a triply untrue statement, but it feels true to a lot of people. ...
                              Another answer is class interest. Inflation helps debtors and hurts creditors, deflation does the reverse. And the wealthy are much more likely than workers and the poor to be creditors... So perceived class interest is probably also a key motivation for the deflation caucus. ...
                              And the important thing to understand is that the dominance of creditor interests on both sides of the Atlantic, supported by false but viscerally appealing economic doctrines, has had tragic consequences. Our economies have been dragged down by the woes of debtors, who have been forced to slash spending. To avoid a deep, prolonged slump, we needed policies to offset this drag. What we got instead was an obsession with the evils of budget deficits and paranoia over inflation — and a slump that has gone on and on.

                                Posted by on Friday, September 5, 2014 at 12:15 AM in Economics, Inflation, Politics | Permalink  Comments (73)


                                Links for 9-05-14

                                  Posted by on Friday, September 5, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (51)


                                  Thursday, September 04, 2014

                                  Fed Watch: August Employment Report Tomorrow

                                  Tim Duy:

                                  August Employment Report Tomorrow, by Tim Duy: Tomorrow morning we will be obsessing over the details of the August employment report with an eye toward the implications for monetary policy. Time for a quick review of some key indicators. First, initial unemployment claims continue to track at pre-recession levels:

                                  CLAIMS083114

                                  The employment components of both ISM reports where solid:

                                  EMPb090414

                                  The ADP report, however, was arguably lackluster with a gain of just 204k private sector jobs:

                                  EMPa090414

                                  The consensus forecast is for nonfarm payroll growth of 230k with a range of 195k to 279k. I am in general agreement with that forecast:

                                  EMPc090414

                                  I am somewhat concerned that I should be downgrading the importance of the ADP number and upgrading the strong claims and ISM data, leading me to conclude that the balance of risks lies to the upside of this forecast.
                                  Of course, the headline nonfarm payrolls report is not necessarily the most important. Per usual, we will be scouring the data for indications that underemployment is lessening and slack being driven out of the labor market. And although Fed Chair Yellen has diverted our attention to those numbers, we should also keep a close eye on the unemployment rate, still the best single indicator of the state of the labor market. Consensus is a slight drop in the rate to 6.1%. I would hazard that a sub-6% rate is not out of the question as we have seen our share of 0.3 percentage point declines or greater in recent years.
                                  A 5 handle on the unemployment rate would increase tensions in the FOMC between those who believe we are straying dangerously far from traditional indicators of appropriate monetary policy:

                                  EMPd090414

                                  and those who are willing to risk falling behind the curve by waiting until at least sustained target inflation is reached:

                                  EMPe090414

                                  Either way, I suspect any meaningful decline in unemployment will add fire to the communications debate at the Federal Reserve. Newly minted Cleveland Federal Reserve President Loretta Mester said today:
                                  In addition to taking another step to taper asset purchases, in July, the FOMC maintained its forward guidance on interest rates. This guidance indicated that given our assessment of realized and expected progress toward our dual-mandate objectives, it will likely be appropriate to maintain the current 0-to-¼ percentage point range for the federal funds rate for a considerable period after the asset purchase program ends. With the end of the program nearing, I believe it is again time for the Committee to reformulate its forward guidance.
                                  Bottom Line: Any further good news in labor markets will make it increasingly difficult for the Fed to maintain its "considerable period" guidance.

                                    Posted by on Thursday, September 4, 2014 at 12:28 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (6)


                                    FRB Explanatory Video: Changes in Family Finances

                                      Posted by on Thursday, September 4, 2014 at 11:23 AM in Economics, Income Distribution, Video | Permalink  Comments (0)


                                      'The US Economy Performs Better Under Democratic Presidents. Why?'

                                      In case you missed this research from Blinder and Watson:

                                      The US economy performs better under Democratic presidents. Why?, by Alan S. Blinder, Mark Watson: Economists and political scientists – not to mention the political commentariat – have devoted a huge amount of attention to the well-established fact that faster economic growth helps re-elect the incumbent party (see, for example, Fair 2011 for the US). But what about causation in the opposite direction – from election outcomes to economic performance? It turns out that the US economy grows faster – indeed, performs better by almost every metric – when a Democratic president occupies the White House.
                                      This partisan gap has barely been noticed by researchers, but it is wide.1 Since the end of World War II, there have been 16 complete four-year presidential terms - seven Democratic and nine Republican. Growth of real GDP averaged 4.35% per annum under the Democratic presidents but only 2.54% under the Republicans. That partisan growth gap of 1.8 percentage points is large by any standard - it implies that real GDP grew by 18.6% during a typical Democratic four-year term, but only by 10.6% during a typical Republican term - and it is statistically significant despite the relative paucity of data.2 In fact, as Figure 1 shows, growth has always slowed down when a Republican president replaced a Democrat and always sped up when a Democrat replaced a Republican. There are no exceptions.3
                                      Similar partisan gaps favouring Democrats – some larger, some smaller, and not always significant – appear in almost any macroeconomic indicator you can think of: the incidence of NBER recessions, employment growth, business investment growth, stock market returns, the profit share of GDP, and so on.

                                      Figure 1. Average annualised GDP growth, by presidential term

                                      The data hold more surprises. Here are a few:

                                      1. Even though the US Constitution assigns power over the budget (and most other economic powers) to Congress, not to the president, there is no difference in growth rates depending on which party controls Congress. It’s the presidency that matters.
                                      2. The Democratic growth advantage is concentrated in the first two years of a presidency, especially the first, even though Republicans bequeath much slower-growing economies to Democrats and US GDP growth is positively serially correlated (ρ ≈ 0.40 in quarterly data).
                                      3. As indicated both by time series models and by genuine ex ante forecasts, Democrats do not inherit economies that are poised for more rapid growth. Granger-causality runs from party-to-growth not from growth-to-party.

                                      Trying to explain the partisan growth gap

                                      Confronted with such stark partisan differences, a macroeconomist naturally wonders whether the explanation could be that fiscal policy was, on average, more expansionary under Democrats. We assess this possibility in a variety of ways and come up with the same answer: no. What about monetary policy, despite the Federal Reserve’s vaunted independence from politics? The answer here is that, if anything, monetary policy was more pro-growth under Republican presidents.4

                                      If the partisan gap cannot be explained by differential monetary and fiscal policy, what does explain it? And do these explanatory factors suggest it was good luck or good policy? We searched over a wide variety of factors, mostly entered in the form of econometric ‘shocks’, that is, as residuals from regressions that include the variable’s own lags and the current and lagged values of GDP growth. Four showed econometric promise:5

                                      1. Oil price shocks;
                                      2. Total factor productivity (TFP) shocks, adjusted to remove cyclical influences;
                                      3. Foreign (that is, European) growth shocks;
                                      4. Shocks to consumer expectations of future economic conditions.

                                      In addition, defence spending shocks mattered in samples that include the Korean War, but not much in samples that do not. Using all five of these variables enables us to explain about half of the partisan gap in GDP growth rates since 1947.

                                      As we peruse the list of explanatory variables, the first (oil shocks) looks to be mainly good luck, although US foreign policy (rather than economic policy) certainly played a role. (Think about George W Bush’s invasion of Iraq, for example.) The second variable (TFP) should in principle measure improvements in technology – and so be mostly driven by luck. But a wide variety of economic policies, ranging from R&D spending to regulation and much else, might influence TFP in multiple, subtle ways. And TFP shocks affect the economy with long lags, so that a portion of the TFP-induced strong growth for Democrats was inherited from previous administrations. The third (real growth in Europe) should not have much to do with US economic policies. And when you couple the fourth variable (consumer expectations) with the observed fact that spending on consumer durables grows much faster under Democrats, you get a tantalising suggestion of a self-fulfilling prophecy – consumers, expecting faster growth under Democratic presidents, buy more durable goods on that belief, which makes the economy grow faster. Did they know something economists didn’t?6

                                      These findings raise a host of questions. Among them:

                                      • Is the basic finding limited to post-World War II data?

                                      We think not. We found a similar (though smaller) partisan growth gap in US data going all the way back to 1875. But the 1875–1947 data are dominated by the administration of Franklin D Roosevelt, during which real GDP grew at a heady 7.4% annual rate.

                                      • Are there similar partisan gaps in other countries?

                                      We looked briefly at four other large democracies with stable two-party systems: Canada, the UK, France, and Germany. The Canadian data display a similar (though not quite as large) GDP growth gap in favour of Liberal over Conservative prime ministers. But that is not true in any of the three European countries.

                                      Our best econometric efforts explained little more than half of the Democratic growth gap - our ‘glass’ wound up literally half full and half empty. What factors explain the rest? Hopefully, further research will cast some light on that question.

                                      References

                                      Alberto Alesina and Jeffrey Sachs (1988), “Political Parties and the Business Cycle in the United States, 1948–1984”, Journal of Money, Credit, and Banking, 20(1): 63–82.

                                      Larry M Bartels (2008), Unequal Democracy: The Political Economy of the New Gilded Age, New York: Russell Sage Foundation, and Princeton, NJ: Princeton University Press.

                                      Alan S Blinder and Mark W Watson (2014), “Presidents and the U.S. Economy: An Econometric Exploration”, NBER Working Paper 20324, July. 

                                      Michael Comiskey and Lawrence C Marsh (2012), “Presidents, Parties, and the Business Cycle, 1949–2009”, Presidential Studies Quarterly, 42(1): 40–59.

                                      Ray C Fair (2011), Predicting Presidential Elections and Other Things, Second Edition, Stanford, CA: Stanford University Press.

                                      Endnotes

                                      1 Alesina and Sachs (1988), Bartels (2008, Chapter 2), and Comiskey and Marsh (2012) are a few exceptions. There are not many.

                                      2 In Blinder and Watson (2014), we compute standard errors in a variety of ways and find that the partisan gap is statistically significant at roughly a 1% significance level.

                                      3 But the Carter-to-Reagan transition exhibits only a small slowdown.

                                      4 This is true even though growth was decidedly faster under Fed chairmen who were first appointed by Democrats.

                                      5 We omit from this list factors that we found help explain why Republican presidents should have shown a growth advantage.

                                      6 The partisan growth gap does not rely on recent data. In fact, the estimate generally increases as we shorten the sample by eliminating more recent data.

                                        Posted by on Thursday, September 4, 2014 at 09:48 AM in Economics, Politics | Permalink  Comments (39)


                                        'Are the Job Prospects of Recent College Graduates Improving?'

                                        My students worry about this:

                                        Are the Job Prospects of Recent College Graduates Improving?, by Jaison R. Abel and Richard Deitz: This post is the fourth in a series of four Liberty Street Economics posts examining the value of a college degree. The promise of finding a good job upon graduation has always been an important consideration when weighing the value of a college degree. In our final post of this week’s blog series, we take a look at the job prospects of recent college graduates. While unemployment among recent graduates has continued to fall since 2011, underemployment has continued to climb—meaning that fewer graduates are finding jobs that make use of their degrees. Do these trends mean that there has been a decline in the demand for those with college degrees? Using data on online job postings, we show that after falling sharply during the Great Recession, the demand for college graduates rebounded during the early stages of the recovery, but has been flat for the past year and a half, suggesting that the demand for college graduates has leveled off. All in all, while finding a job has become easier for recent college graduates over the past few years, finding a good job has not, and doing so is likely to remain a challenge for some time to come. ...

                                          Posted by on Thursday, September 4, 2014 at 09:05 AM in Economics, Unemployment | Permalink  Comments (9)


                                          Links for 9-04-14

                                            Posted by on Thursday, September 4, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (99)


                                            Wednesday, September 03, 2014

                                            A Conversation with Lars Hansen

                                            See also conversations with Peter Diamond and Edmund Phelps.

                                              Posted by on Wednesday, September 3, 2014 at 09:00 AM in Econometrics, Economics, Video | Permalink  Comments (0)


                                              Minority Mortgage Market Experiences and the Financial Crisis

                                              Stephen Ross at Vox EU:

                                              Minority mortgage market experiences leading up to and during the Financial Crisis, by Stephen L. Ross, Vox EU: The subprime lending crisis in the US triggered a broad financial panic that lead to the global recession. Domestically, it meant bankruptcy and disaster for many households. This column analyses racial discrimination in subprime lending. Careful estimation of a detailed dataset reveals across-lender effects to have substantially disadvantaged black and Hispanic borrowers.

                                              The concluding paragraph:

                                              ... Minority homebuyers – especially blacks – tend to face a higher cost of mortgage credit and had substantially worse credit market outcomes during the recent downturn than white homebuyers with equivalent mortgage risk factors. In terms of the price of credit, a majority of the unexplained differences are associated with the lender from which the homebuyer obtained credit. These effects are felt most among minority borrowers with the lowest levels of education, and are likely due in part to the concentrated activity of subprime lenders in minority neighborhoods and a lack of knowledge of financial markets among minority borrowers with low levels of education. On the other hand, most of the racial differences in loan performance that are unexplained by traditional credit risk factors cannot be captured by controlling for the lender or other aspects of subprime lending. African-Americans and Hispanics appear to be more vulnerable to an economic downturn and to the associated risks of unemployment and housing price declines than observationally similar white homeowners. This higher vulnerability is most pronounced for borrowers who purchased their homes right before the onset of the financial crisis, even after controlling for the increased risk of negative equity associated with buying at the peak of the market. While the expansion of the subprime sector may have contributed to a higher cost of credit for black homebuyers, their concentration in high cost loans (and in the subprime market more generally) can explain only a small portion of the racial differences in foreclosure. Rather, a broad spectrum of black and Hispanic borrowers appear to be especially vulnerable to the economic downturn and associated shocks to their ability to meet their mortgage commitments.

                                                Posted by on Wednesday, September 3, 2014 at 08:00 AM in Economics, Financial System, Housing | Permalink  Comments (34)


                                                The Cause of Sagging Job Growth Since 2000

                                                I have another article at MoneyWatch:

                                                Sagging job growth: It's not a skills gap, by Mark Thoma: Many economists believe the rise in inequality can be explained by factors that have increasingly rewarded college-educated workers over those without a college degree. This "skills premium" has caused the middle class to shrink and polarized the labor market. The solution to these problems is the often-heard call for improved education and retraining programs that will give workers the skills they need to thrive in modern economies.
                                                Employment in manufacturing industries has been hit particularly hard over the last few decades, and economists have pointed to work by David Autor, an economics professor at MIT, and others suggesting that this has resulted more from technological change than from globalization and declining bargaining power of workers (e.g. due to the power of unions).
                                                According to this view, outsourcing is not the main problem. ... However, new work by Autor and several prominent co-authors calls this into question...

                                                  Posted by on Wednesday, September 3, 2014 at 07:46 AM in Economics, Unemployment | Permalink  Comments (24)


                                                  Links for 9-03-14

                                                    Posted by on Wednesday, September 3, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (79)


                                                    Tuesday, September 02, 2014

                                                    Fed Watch: Solid Start to September

                                                    Tim Duy:

                                                    Solid Start to September, by Tim Duy: The ISM manufacturing report came in ahead of expectations with the strongest number since 2011:

                                                    ISMa090114

                                                    Moreover, strength was evident throughout the internal components:

                                                    ISM090114

                                                    Note too that the report is consistent with other manufacturing numbers:

                                                    ISMb090114

                                                    If this is a taste of the data to expect this fall, it is tough to see how the Fed will be able to maintain their "considerable period" language much longer.

                                                      Posted by on Tuesday, September 2, 2014 at 11:49 AM in Economics, Fed Watch, Health Care, Monetary Policy | Permalink  Comments (6)


                                                      Objections to Fiscal Policy are Groundless—It Works

                                                      I have a new column:

                                                      Objections to Fiscal Policy are Groundless—It Works: One of the more controversial policies instituted in an attempt to stimulate the economy out of the Great Recession was the $816.3 billion fiscal stimulus package enacted just after Obama took office. ...

                                                      [The artwork is a bit mixed up, it has Keynes in a helicopter dropping money...]

                                                        Posted by on Tuesday, September 2, 2014 at 07:47 AM in Economics, Fiscal Policy | Permalink  Comments (19)


                                                        How to Shock the U.S. Economy Back to Life

                                                        At MoneyWatch:

                                                        How to shock the U.S. economy back to life, by Mark Thoma: During the Great Recession, U.S. gross domestic production -- the nation's total output of goods and services -- dropped below the trend rate of growth that prevailed before the collapse. More than five years into the recovery, the economy shows no signs of returning to that prior rate of growth.
                                                        Instead, as the following graph shows, although the economy is growing at roughly the same rate as before the crisis, the growth is from a much lower level of output:
                                                        Is this the "new normal" we hear so much about? Do Americans have no choice but to accept the lower level of output, and the lower level of employment and living standards that comes with it, or is there something we can do to push the economy back to the pre-Great Recession trend? ...[continue]...

                                                          Posted by on Tuesday, September 2, 2014 at 07:38 AM in Economics, Fiscal Policy | Permalink  Comments (19)


                                                          Fed Watch: Fed Positioning to Normalize Policy

                                                          Tim Duy:

                                                          Fed Positioning to Normalize Policy, by Tim Duy: With the leaves turning to gold signaling the end of summer, so too will the Fed be facing its own change of seasons as quantitative easing comes to an end. With asset purchases likely ending in October, time is growing short for the Fed to communicate a plan for the normalization of policy. To be sure, the outline of the plan is already in place, with interest on reserves playing a primary role backed by overnight repurchase operations. The timing of any action to raise rates, however, is likely to become a more contentious issue during the fall. Hawks will be pitted against doves as the former focus on improving labor markets while the latter point to underemployment and low inflation as reason for patience. The baseline scenario is that Fed Chair Janet Yellen guides the Fed to a delayed and gradual rate hike scenario. Given that this is just about the most dovish scenario imaginable at this juncture, the balance of risks is weighted toward a more aggressive approach to normalization.
                                                          The FOMC next meets Sept. 16 and 17. The almost certain outcome of that meeting will be another $10 billion cut from the Fed's asset purchase program. The subsequent press conference provides the opportunity to communicate more clearly the technical elements of the normalization process if the Fed feels sufficiently confident in the broad outlines of their plan. Less certain is a change in the forward guidance to reflect the the dissent of Philadelphia Federal Reserve Charles Plosser:
                                                          Voting against was Charles I. Plosser who objected to the guidance indicating that it likely will be appropriate to maintain the current target range for the federal funds rate for "a considerable time after the asset purchase program ends," because such language is time dependent and does not reflect the considerable economic progress that has been made toward the Committee's goals.
                                                          The ability to maintain the considerable period language will likely be dependent on the next employment report. The pattern of initial unemployment claims data points toward fairly strong momentum in labor markets:

                                                          CLAIMS083114

                                                          Further improvements in labor markets will be make it difficult to promise a "considerable" period of time before the FOMC decides conditions are ripe for the first rate hike. Moreover, I found Yellen's language regarding the summary of labor market conditions in her Jackson Hole speech to be intriguing:
                                                          One convenient way to summarize the information contained in a large number of indicators is through the use of so-called factor models. Following this methodology, Federal Reserve Board staff developed a labor market conditions index from 19 labor market indicators, including four I just discussed. This broadly based metric supports the conclusion that the labor market has improved significantly over the past year, but it also suggests that the decline in the unemployment rate over this period somewhat overstates the improvement in overall labor market conditions.
                                                          Notice that the unemployment rate only "somewhat" overstates improvement in labor market conditions. "Somewhat" is not a word that suggests much conviction. Quite the contrary. And Yellen would have good reason to have little conviction on this point. I would caution against reading too much of significance into the Fed's new labor market indicators. I think the insightful Carola Binder absolutely nailed this one:
                                                          The main reason I'm not too excited about the LMCI is that its correlation coefficient with the unemployment rate is -0.96. They are almost perfectly negatively correlated--and when you consider measurement error you can't even reject that they are perfectly negatively correlated-- so the LMCI doesn't tell you anything that the unemployment rate wouldn't already tell you. Given the choice, I'd rather just use the unemployment rate since it is simpler, intuitive, and already widely-used.
                                                          Yellen sent her staff to prove that the unemployment rate does not accurately represent labor market improvement, and they created a measure that is almost perfectly negatively correlated with unemployment. In effect, the staff proved what Yellen has said repeatedly. For example, back in April:
                                                          I will refer to the shortfall in employment relative to its mandate-consistent level as labor market slack, and there are a number of different indicators of this slack. Probably the best single indicator is the unemployment rate.
                                                          If the unemployment rate remains the single-best indicator, it is no wonder then that Yellen's Jackson Hole speech was pragmatic not dogmatic. And pragmatic relative to the current baseline suggests the risk is toward tighter than expected monetary policy.
                                                          All that said, the actual inflation data still argues for patience. The higher inflation we witnessed this spring proved to be temporary:

                                                          InfA083114

                                                          InfB083114

                                                          Moreover, the flattening yield curve is suggestive of global deflationary forces:

                                                          RateA083114

                                                          RateB083114

                                                          And financial markets are not sending a warning that inflation expectations are shifting upward:

                                                          RateC083114

                                                          How do I put this all together? I tend to think the risk is that the employment data pulls the timing of the first rate hike forward. I have been focused on mid-year with a preference for the second quarter over the third. That said, I find it difficult to entirely discount the March meeting, especially if we see a string of solid employment reports. The March meeting also has the benefit of having a press conference. The inflation data, however, still argue for a gradual pace of interest rate hikes, thus Yellen should be able to argue that as long as inflation remains contained, there is no need to normalize policy aggressively even if such a policy begins a little earlier.
                                                          Indeed, I think the hawks will argue that Yellen is most likely to be able to maintain a dovish trajectory if she pulls forward the timing of the first rate hike to reflect that the Fed is close to meeting its targets. This is also the easiest way to alleviate any tension in FOMC if incoming labor reports suggest to FOMC members that the zero interest rate stance is excessively accommodative. It would also be arguably a pragmatic approach to policy making as Yellen outlined at Jackson Hole:
                                                          My colleagues on the Federal Open Market Committee (FOMC) and I look to the presentations and discussions over the next two days for insights into possible changes that are affecting the labor market. I expect, however, that our understanding of labor market developments and their potential implications for inflation will remain far from perfect. As a consequence, monetary policy ultimately must be conducted in a pragmatic manner that relies not on any particular indicator or model, but instead reflects an ongoing assessment of a wide range of information in the context of our ever-evolving understanding of the economy.
                                                          Bottom Line: The baseline path for interest rates is a delayed and gradual rate hike scenario beginning mid-2015. It seems reasonable, however, to believe that the risk is that this baseline is too dovish given the general progress toward the Fed's goals, a point made repeatedly by Fed hawks. Internal dissension to the baseline would only intensify in the face of another six months of generally solid economic news, especially on the labor front. Yellen would not want to risk the recovery, however, on an overly aggressive approach, especially in the face of low inflation. Considering the path of the data relative to the various policy factions with the Fed, I believe the risk is that the Fed pulls forward the date of the first rate hike as early as March - still seven months away! - while maintaining expectations for a gradual subsequent rate path.

                                                            Posted by on Tuesday, September 2, 2014 at 12:24 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (3)


                                                            Links for 9-02-14

                                                              Posted by on Tuesday, September 2, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (124)


                                                              Monday, September 01, 2014

                                                              'What Unions No Longer Do'

                                                              Justin Fox:

                                                              What Unions No Longer Do, by Justin Fox: Forty years ago, about quarter of American workers belonged to unions, and those unions were a major economic and political force. Now union membership is down to 11.2% of the U.S. workforce, and it’s increasingly concentrated in the public sector — only 6.7% of private-sector workers were union members in 2013.
                                                              This isn’t exactly news... What doesn’t get talked about so much, though, are the consequences. Income inequality has, for example, become a hot topic. You might think that the dwindling away of an institution that devoted much of its energy to equalizing incomes would be a big part of that discussion. It hasn’t been.
                                                              Jake Rosenfeld, an associate professor of sociology at the University of Washington ... is out to change that. His book What Unions No Longer Do ... is an account of Rosenfeld’s attempt to empirically establish (mainly through a lot of regressions...) the consequences of Big Labor’s decline. ... [H]ere, for Labor Day, are the four big things that, according to Rosenfeld, unions in the U.S. no longer do:
                                                              Unions no longer equalize incomes. ...
                                                              Unions no longer counteract racial inequality. ...
                                                              Unions no longer play a big role in assimilating immigrants. ...
                                                              Unions no longer give lower-income Americans a political voice. ...
                                                              The decline of unions in the U.S. has often been painted as inevitable, or at least necessary for American businesses to remain internationally competitive. There are definitely industries where this account seems accurate. ... But ... even if the decline of unions was inevitable or desirable, that still leaves those tasks unions once accomplished — which on the whole seem like things that are good for society, and good for business — unattended to. Who’s going to do them now?

                                                              [See also, "The Origins of Labor Day" by Tim Taylor.]

                                                                Posted by on Monday, September 1, 2014 at 08:16 AM in Economics, Unions | Permalink  Comments (37)


                                                                Paul Krugman: The Medicare Miracle

                                                                Good news on health care costs:

                                                                The Medicare Miracle, By Paul Krugman, Commentary, NY Times: So, what do you think about those Medicare numbers? What, you haven’t heard about them? Well, they haven’t been front-page news. But something remarkable has been happening on the health-spending front, and it should (but probably won’t) transform a lot of our political debate.
                                                                The story so far: We’ve all seen projections of giant federal deficits... Policy wonks have long known ... that ... health care, rather than retirement, was driving those scary projections. Why? Because, historically, health spending has grown much faster than G.D.P., and it was assumed that this trend would continue.
                                                                But a funny thing has happened: Health spending has slowed sharply ... This is a really big deal...
                                                                But what accounts for this good news? ... Medicare is spending much less than expected, and those Obamacare cost-saving measures are at least part of the story. The conventional wisdom on what is and isn’t serious is completely wrong.
                                                                While we’re on the subject of health costs, there are two other stories you should know about.
                                                                One involves the supposed savings from running Medicare through for-profit insurance companies. That’s the way the drug benefit works, and conservatives love to point out that this benefit has ended up costing much less than projected, which they claim proves that privatization is the way to go. But the budget office has a new report on this issue, and it finds that privatization had nothing to do with it. Instead, Medicare Part D is costing less than expected partly because enrollment has been low and partly because an absence of new blockbuster drugs has led to an overall slowdown in pharmaceutical spending.
                                                                The other involves the “sticker shock” that opponents of health reform have been predicting for years. Bulletin: It’s still not happening. ...
                                                                What’s the moral here? For years, pundits and politicians have insisted that guaranteed health care is an impossible dream, even though every other advanced country has it. Covering the uninsured was supposed to be unaffordable; Medicare as we know it was supposed to be unsustainable. But it turns out that incremental steps to improve incentives and reduce costs can achieve a lot, and covering the uninsured isn’t hard at all.
                                                                When it comes to ensuring that Americans have access to health care, the message of the data is simple: Yes, we can.

                                                                  Posted by on Monday, September 1, 2014 at 12:24 AM in Economics, Health Care | Permalink  Comments (121)


                                                                  Links for 9-01-14

                                                                    Posted by on Monday, September 1, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (67)


                                                                    Sunday, August 31, 2014

                                                                    What Savings Glut?

                                                                    Joe Stiglitz in a review of Martin Wolf's new book "The Shifts and the Shocks":

                                                                    ... If I have a point of difference with Wolf’s analysis, it is that he ... is insufficiently critical of the “savings glut” hypothesis advanced by former Federal Reserve chairman Ben Bernanke, among others, which presents what used to be a virtue (savings) as a vice, shifting blame to China and (less vocally) to Germany. Yet the investment needs of today are staggering: for infrastructure in the developing world, let alone in the US; for retrofitting the global economy to cope with global warming; even for small and medium-sized enterprises starved of capital in much of the world. This should make it obvious that the problem is not an excess of savings but a financial system that is more fixated on speculation than on fulfilling its societal role of intermediation ... in which scarce savings are allocated to the investments of highest social returns.

                                                                    The problem goes beyond a "financial system that is more fixated on speculation":

                                                                    It is striking how much Wolf, like so many advocates of financial reform, focuses on protecting us against the banks: making sure that they don’t engage in excessive risk-taking... Wolf doesn’t dwell much on some of the more antisocial aspects evidenced in the aftermath of the crisis: the market manipulation (as in the Libor and forex scandals), the anti-competitive practices, the predatory and discriminatory lending, the lack of transparency, the fraudulent behavior. Presumably, this is because he believes, or hopes, that even too-big-to-fail and too-big-to-jail banks won’t be politically powerful enough to continue such behavior unimpaired. But he says too little about what might be done to make banks actually fulfill the societal role that they should be playing. ...

                                                                      Posted by on Sunday, August 31, 2014 at 08:52 AM in Economics, Financial System, Regulation | Permalink  Comments (29)


                                                                      'Where Danger Lurks'

                                                                      Olivier Blanchard (a much shortened version of his arguments, the entire piece is worth reading):

                                                                      Where Danger Lurks: Until the 2008 global financial crisis, mainstream U.S. macroeconomics had taken an increasingly benign view of economic fluctuations in output and employment. The crisis has made it clear that this view was wrong and that there is a need for a deep reassessment. ...
                                                                      That small shocks could sometimes have large effects and, as a result, that things could turn really bad, was not completely ignored by economists. But such an outcome was thought to be a thing of the past that would not happen again, or at least not in advanced economies thanks to their sound economic policies. ... We all knew that there were “dark corners”—situations in which the economy could badly malfunction. But we thought we were far away from those corners, and could for the most part ignore them. ...
                                                                      The main lesson of the crisis is that we were much closer to those dark corners than we thought—and the corners were even darker than we had thought too. ...
                                                                      How should we modify our benchmark models—the so-called dynamic stochastic general equilibrium (DSGE) models...? The easy and uncontroversial part of the answer is that the DSGE models should be expanded to better recognize the role of the financial system—and this is happening. But should these models be able to describe how the economy behaves in the dark corners?
                                                                      Let me offer a pragmatic answer. If macroeconomic policy and financial regulation are set in such a way as to maintain a healthy distance from dark corners, then our models that portray normal times may still be largely appropriate. Another class of economic models, aimed at measuring systemic risk, can be used to give warning signals that we are getting too close to dark corners, and that steps must be taken to reduce risk and increase distance. Trying to create a model that integrates normal times and systemic risks may be beyond the profession’s conceptual and technical reach at this stage.
                                                                      The crisis has been immensely painful. But one of its silver linings has been to jolt macroeconomics and macroeconomic policy. The main policy lesson is a simple one: Stay away from dark corners.

                                                                      That may be the best we can do for now (have separate models for normal times and "dark corners"), but an integrated model would be preferable. An integrated model would, for example, be better for conducting "policy and financial regulation ... to maintain a healthy distance from dark corners," and our aspirations ought to include models that can explain both normal and abnormal times. That may mean moving beyond the DSGE class of models, or perhaps the technical reach of DSGE models can be extended to incorporate the kinds of problems that can lead to Great Recessions, but we shouldn't be satisfied with models of normal times that cannot explain and anticipate major economic problems.

                                                                        Posted by on Sunday, August 31, 2014 at 08:24 AM in Economics, Macroeconomics, Methodology | Permalink  Comments (8)


                                                                        Links for 8-31-14

                                                                          Posted by on Sunday, August 31, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (74)


                                                                          Saturday, August 30, 2014

                                                                          'Incarceration Society'

                                                                          Dan Little:

                                                                          Incarceration society: It is becoming increasingly clear that the criminal justice system is an important component of the system of race in the United States today. Michelle Alexander's important book The New Jim Crow: Mass Incarceration in the Age of Colorblindness makes the case that the war on drugs and the war on crime have functioned disproportionately to incarcerate and control young black men in America's inner cities. ...

                                                                            Posted by on Saturday, August 30, 2014 at 09:40 AM in Economics | Permalink  Comments (73)


                                                                            Nobel Warnings

                                                                            I have interviews with Peter Diamond and Edmund Phelps available here and here, and an interview I did with Lars Hansen should be available later this week. All are from the Nobel Meetings in Economics at Lindau, Germany last week. But if you are itching for still more from the Nobel Laureates in economics (four of the five were not in Lindau), here is a set of interviews available at the IMF:

                                                                            • Global Warming by George A. Akerlof
                                                                            • Increasing Demand by Paul Krugman
                                                                            • Secular Stagnation by Robert Solow
                                                                            • Inclusiveness by Michael Spence
                                                                            • Inequality by Joseph Stiglitz

                                                                              Posted by on Saturday, August 30, 2014 at 08:47 AM in Economics | Permalink  Comments (4)


                                                                              Links for 8-30-14

                                                                                Posted by on Saturday, August 30, 2014 at 12:33 AM in Economics, Links | Permalink  Comments (65)


                                                                                Friday, August 29, 2014

                                                                                Paul Krugman: The Fall of France

                                                                                Why didn't François Hollande reverse austerity policies in France?:

                                                                                The Fall of France, by Paul Krugman, Commentary, NY Times: François Hollande, the president of France since 2012, coulda been a contender. He was elected on a promise to turn away from the austerity policies that killed Europe’s brief, inadequate economic recovery... But it was not to be. Once in office, Mr. Hollande promptly folded, giving in completely to demands for even more austerity.
                                                                                Let it not be said, however, that he is entirely spineless. Earlier this week, he took decisive action, but not, alas, on economic policy... Mr. Hollande ... was focused on purging members of his government daring to question his subservience to Berlin and Brussels.
                                                                                It’s a remarkable spectacle. To fully appreciate it, however, you need to understand two things. First, Europe, as a whole, is in deep trouble. Second,... France’s performance is much better than you would guess from news reports. France isn’t Greece; it isn’t even Italy. But it is letting itself be bullied as if it were a basket case. ...
                                                                                Why ... does France get such bad press? It’s hard to escape the suspicion that it’s political: France has a big government and a generous welfare state, which free-market ideology says should lead to economic disaster. So disaster is what gets reported, even if it’s not what the numbers say.
                                                                                And Mr. Hollande, even though he leads France’s Socialist Party, appears to believe this ideologically motivated bad-mouthing. Worse, he has fallen into a vicious circle in which austerity policies cause growth to stall, and this stalled growth is taken as evidence that France needs even more austerity.
                                                                                It’s a very sad story, and not just for France.
                                                                                Most immediately, Europe’s economy is in dire straits. ... Meanwhile, Germany is incorrigible. Its official response to the shake-up in France was a declaration that “there is no contradiction between consolidation and growth” — hey, never mind the experience of the past four years, we still believe that austerity is expansionary.
                                                                                So Europe desperately needs the leader of a major economy — one that is not in terrible shape — to stand up and say that austerity is killing the Continent’s economic prospects. Mr. Hollande could and should have been that leader, but he isn’t.
                                                                                And if the European economy continues to stagnate or worse, what will become of the European project — the long-term effort to secure peace and democracy through shared prosperity? In failing France, Mr. Hollande is also failing Europe as a whole — and nobody knows how bad it might get.

                                                                                  Posted by on Friday, August 29, 2014 at 04:26 AM in Economics, Fiscal Policy | Permalink  Comments (127)


                                                                                  Links for 8-29-14

                                                                                    Posted by on Friday, August 29, 2014 at 04:04 AM in Economics, Links | Permalink  Comments (59)


                                                                                    Thursday, August 28, 2014

                                                                                    Repugnant Markets and Prohibited Transactions

                                                                                    There seems to be a problem with embedding this video -- it's here:

                                                                                    Repugnant Markets and Prohibited Transactions

                                                                                      Posted by on Thursday, August 28, 2014 at 09:21 AM in Economics | Permalink  Comments (1)


                                                                                      When Do We Start Calling This 'The Greater Depression'?

                                                                                      Brad DeLong:

                                                                                      When Do We Start Calling This “The Greater Depression”?: We started by calling it the financial crisis of 2007. Then it became the financial crisis of 2008. Next it was the downturn of 2009-2009. By the middle of 2009 it was clearly the biggest thing since the 1930s, and acquired the name of “The Great Recession”. By the end of 2009 the business cycle trough had been passed, and people breathed a sigh of relief: “The Great Recession” would be its stable name–we would not have to change its name again, and move on to labels containing the D-word.
                                                                                      But we breathed our sigh of relief too soon..., the United States did not experience a rapid V-shaped recovery carrying it back to the previous growth trend of potential output. ...
                                                                                      Things have been even worse in Europe. The Eurozone experienced not recovery but renewed recession with a second-wave downturn starting in 2010...
                                                                                      Cumulative output losses relative to the 1995-2007 trends now stand at 78% of a year’s GDP for the United States, and at 60% of a year’s GDP for the Eurozone. These are extraordinary magnitudes of foregone prosperity...: nobody back in 2007 was forecasting ... the ... extraordinary decline in the rate of growth of potential output that statistical and policymaking agencies are now baking into their estimates. These magnitudes made me conclude at the start of 2011 that “The Great Recession” was no longer adequate: it was time to start calling this episode “The Lesser Depression”. ...

                                                                                        Posted by on Thursday, August 28, 2014 at 07:18 AM in Economics | Permalink  Comments (58)


                                                                                        Links for 8-28-14

                                                                                          Posted by on Thursday, August 28, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (98)


                                                                                          Wednesday, August 27, 2014

                                                                                          'On the Relationships between Wages, Prices, and Economic Activity'

                                                                                          This is from Edward S. Knotek II and Saeed Zaman of the Cleveland Fed:

                                                                                          On the Relationships between Wages, Prices, and Economic Activity: Labor costs and labor compensation have garnered considerable attention from economists in the wake of the financial crisis and recession. Across a range of measures, wage growth slowed sharply during the recession. Recently, wage growth has remained near historically low levels despite improvements in the labor market.
                                                                                          Subdued wage growth has been variously seen as both a cause and a consequence of the slow pace of economic growth and persistently low inflation rates. It also may have contributed to rising inequality. In some forecast narratives, a pickup in wage growth is viewed as a necessary condition for a stronger recovery and rising inflation. In others, it is a natural consequence of a tightening labor market.
                                                                                          This Commentary takes a closer look at the relationships between wages, prices, and economic activity. It finds that the connections among wages, prices, and economic activity are more akin to a tangled web than a straight line. In the United States, wages and prices have tended to move together, and causal relationships are difficult to identify. We do find that wages are sensitive to economic activity and the level of slack in the economy, but our forecasting results suggest that the ability of wages to help predict future inflation is limited. Thus, wages appear to be useful in assessing the current state of labor markets, but not necessarily sufficient for thinking about where the economy and inflation are going. ...

                                                                                          So even if wages do finally begin rising, policymakers shouldn't panic about inflation (wishful thinking).

                                                                                            Posted by on Wednesday, August 27, 2014 at 07:00 AM in Economics, Inflation, Monetary Policy, Unemployment | Permalink  Comments (35)


                                                                                            Filling the Gap: Monetary Policy or Tax Cuts or Government Spending?

                                                                                            Simon Wren-Lewis (a bit technical):

                                                                                            Filling the gap: monetary policy or tax cuts or government spending: Suppose there is a shortfall in aggregate demand associated with a rise in involuntary unemployment in a simple closed economy with no capital. Do we try and raise private consumption (C) or government consumption (G)? If the former, why do we prefer to use monetary policy rather than tax cuts? ...

                                                                                              Posted by on Wednesday, August 27, 2014 at 07:00 AM in Economics, Fiscal Policy, Monetary Policy | Permalink  Comments (18)


                                                                                              State Income Taxes Have Little Impact on Interstate Migration

                                                                                              From Michael Mazerov of the CBPP:

                                                                                              More Evidence That State Income Taxes Have Little Impact on Interstate Migration: The New York Times’ Upshot blog has published a fascinating set of graphs of Census Bureau data on interstate migration patterns since 1900, bolstering our argument that state income taxes don’t have a significant impact on people’s decisions about where to live.
                                                                                              We plotted the same Census data, which shows which states do the best job of retaining their native-born populations, on the chart below, also noting which states have (or don’t have) a state income tax.  Our chart shows that taxes have little to do with the extent to which native-born people leave their states of origin.
                                                                                              If Heritage Foundation economist Stephen Moore’s claim (which other tax-cut advocates often repeat) that “taxes are indisputably a major factor in determining where . . . families locate” were true, states without income taxes would see below-average shares of their native-born populations leaving at some point in their lifetime, while states with relatively high income taxes would see the opposite.  But the graph shows no such pattern...

                                                                                                Posted by on Wednesday, August 27, 2014 at 07:00 AM in Economics, Taxes | Permalink  Comments (33)


                                                                                                Links for 8-27-14

                                                                                                  Posted by on Wednesday, August 27, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (89)


                                                                                                  Tuesday, August 26, 2014

                                                                                                  A Reason to Question the Official Unemployment Rate

                                                                                                  [Still on the road ... three quick ones before another long day of driving.]

                                                                                                  David Leonhardt:

                                                                                                  A New Reason to Question the Official Unemployment Rate: ...A new academic paper suggests that the unemployment rate appears to have become less accurate over the last two decades, in part because of this rise in nonresponse. In particular, there seems to have been an increase in the number of people who once would have qualified as officially unemployed and today are considered out of the labor force, neither working nor looking for work.
                                                                                                  The trend obviously matters for its own sake: It suggests that the official unemployment rate – 6.2 percent in July – understates the extent of economic pain in the country today. ... The new paper is a reminder that the unemployment rate deserves less attention than it often receives.
                                                                                                  Yet the research also relates to a larger phenomenon. The declining response rate to surveys of almost all kinds is among the biggest problems in the social sciences. ...
                                                                                                  Why are people less willing to respond? The rise of caller ID and the decline of landlines play a role. But they’re not the only reasons. Americans’ trust in institutions – including government, the media, churches, banks, labor unions and schools – has fallen in recent decades. People seem more dubious of a survey’s purpose and more worried about intrusions into their privacy than in the past.
                                                                                                  “People are skeptical – Is this a real survey? What they are asking me?” Francis Horvath, of the Labor Department, says. ...

                                                                                                    Posted by on Tuesday, August 26, 2014 at 06:52 AM in Economics, Methodology, Unemployment | Permalink  Comments (55)


                                                                                                    'Who Pays Corporate Taxes?'

                                                                                                    Justin Fox

                                                                                                    Who Pays Corporate Taxes? Possibly You: Who pays corporate income taxes? Just one thing’s for sure: it’s not corporations. ...
                                                                                                    For a long time it was thought the owners paid the tax. That belief can be traced largely to a classic 1962 theoretical analysis by economist Arnold Harberger...
                                                                                                    Harberger saw this as a bad thing. By taking money away from capital owners, the corporate income tax was depressing investment and distorting the economy. But for those more concerned with the distributional effects of taxation, Harberger’s model at least showed the burden landing on people who were wealthier than average.
                                                                                                    His theoretical model, however, assumed a closed economy... As the world’s economies became more intertwined in recent decades, economists — Harberger among them — began constructing open-economy models that showed workers bearing a larger share of the burden. ...
                                                                                                    So in the past few years there’s been a determined attempt to answer the question empirically... Gravelle has a 2011 summary of this work, and her chief conclusions are that the results are all over the place and the most dramatic ones just aren’t credible. But most of these studies do show some significant chunk of the corporate tax burden landing on workers, which is perhaps not yet conclusive but is really interesting.
                                                                                                    Most public discussions of corporate taxes in the U.S., however, still ignore the possibility that workers might actually be the ones bearing the burden. ... Perhaps it’s ... just that, if corporations pay lower taxes, individuals have to pick up the slack. And even if you understand tax incidence perfectly well, a direct tax is still more noticeable than an indirect one.

                                                                                                      Posted by on Tuesday, August 26, 2014 at 06:51 AM in Economics, Taxes | Permalink  Comments (57)