- Is The Economy Self-Correcting? (Wonkish) - Paul Krugman
- Are most academic papers really worthless? - LA Times
- Forecasting Unemployment during the Great Recession - Cleveland Fed
- "Silent Samuelson" Wants To Cut SS Benefits (Yet Again) - Barkley Rosser
- New Fed Rule Limits Emergency Lending Power - The New York Times
- Seattle. Chicago. Los Angeles. Min Wage Distortions Travel - Big Picture
- Changing labor laws may hurt public employees' clout - EurekAlert!
- Hyperglobalization and Global Inequality - Paul Krugman
- When Keynes Endorsed the Fisher Effect - Uneasy Money
- Age Discrimination May Hurt Women More - FiveThirtyEight
- Bank resilience: yet another missed opportunity - Cecchetti & Schoenholtz
- U.S. Banks’ Changing Footprint at Home and Abroad - Liberty Street
- Douglass North and Institutions - Tim Taylor
Tuesday, December 01, 2015
Monday, November 30, 2015
Colm McCarthy writing at The Irish Economy blog:
The Euro Debate and the Abuse of Language: Defenders of the Eurozone’s initial design, subsequent management and purported reform invariably refer to the system as a ‘monetary union’. So do academic commentators including the authors of the recent Vox piece on the origins of the crisis. Whether intended or unconscious, this is an abuse of language.
Monetary unions do not experience selective bank closures, the re-introduction of exchange controls or the numerous other manifestations of financial fragmentation that have occurred before and after the Eurozone ‘reforms’. Germany is a monetary union. In 1974 the Herstatt Bank collapsed in Cologne and several banks based in Dusseldorf went down in the recent crisis. Both cities are in Nordrhein Westfalen, but there was no closure of bank branches in the state nor were exchange controls introduced by the state authorities on either occasion. Interest rates in Nordrhein Westfalen did not detach from rates elsewhere in Germany nor did bank deposits flee the state.
When the Continental Illinois Bank went under in 1984, at the time the largest-ever US bank failure, the state of Illinois was not expected to handle the fall-out. ... The USA is also a monetary union and there is federal responsibility for bank supervision, bank resolution and the protection of bank creditors.
The Eurozone in contrast was established in 1999 as no more than a common currency area, with a ‘central bank’ responsible only for monetary policy in the aggregate, in pursuit of an inflation target. To describe it as a ‘monetary union’ is to deny that there is any distinction between a common currency area and a monetary union. If the Eurozone really was a monetary union in 2008 the history of the crisis would have been very different.
Language matters. ... The danger is that relentless description of the Eurozone as a monetary union deflects attention from the awkward truth that it is not, and from the political unwillingness to make it so.
Is balanced growth really the answer?: A recent must-read article by journalist Alec MacGillis documents a phenomenon that he suggests must “give Democrats the willies:” the increasing political opposition to safety net programs, even among those who’ve been helped by them. ...
MacGillis argues that this outcome is in part driven by resentments of those who believe they’ve pulled themselves up by their bootstraps (even if the government helped them pull) against those they view as milking public support without trying to improve their lot. Such sentiments are amped up by prominent conservatives like House Speaker Paul D. Ryan...
It’s an argument as old as poverty itself (see, e.g., English Poor Laws of 1601). I recall similar polemics during the welfare reform debate of the 1990s...
MacGillis believes that shared growth would go a long way toward altering these political dynamics in favor of a necessary role for policy in the list of areas just noted:
“The best way to reduce resentment … would be to bring about true economic growth in the areas where the use of government benefits is on the rise … if fewer people need the safety net to get by, the stigma will fade, and low-income citizens will be more likely to re-engage in their communities — not least by turning out to vote.”
By “true economic growth,” he means growth that reaches far beyond Wall Street, and even Main Street, to the hollows of Appalachia; growth that would fill the growing black hole in heart of coal country, where opportunity is fading and downward mobility is upon the land. ...
I'm not sure I agree. Growth of this type would be good, but is the problem production or distribution? If the problem is distribution, for example unequal bargaining power leading to low, stagnant wages that do not respond to increased productivity -- instead those gains flow upward -- then more growth will simply lead to even more inequality. So I don't think growth alone will necessarily be enough, we also need to change the institutions and economic incentives that determine how income is divided up within firms.
This is a way of avoiding calls for "redistribution," which implies taking something one person has earned and giving it to someone who has not. But as I've said many times, if the distribution of income is determined by something other than productivity, as it appears to be -- if income that was not earned through higher productivity flows to those at the top of firms due to unequal bargaining power or other forces -- then returning that income to those who did earn it is not taking something unjustly (taking the normative position that people should earn their contribution to national output), instead it is restoring justice. The trick is to get people to understand that.
Anyway, I think it's necessary to think about distribution, not just growth, if we want to solve the inequality problem.
There is this, I suppose:
...there’s some evidence that more growth reaching more people would lead to greater support for progressive policies. Political science provides cross-country evidence that voter turnout falls as inequality rises (though the correlation for the U.S. is weak) and today’s non-voters support notably more progressive agendas than voters. And it does seem that especially given the rising share of non-whites, unmarried women and millennials — the so-called Rising American Electorate — favorable outcomes for Democrats are increasingly dependent on robust turnout. ...
Which reinforces the need to think about changes beyond just growth (I'm sure Jared gets this, just want to reinforce the point).
"You don’t have to be a conservative to believe that we have too much regulation":
Inequality and the City, by Paul Krugman, Commentary, NY Times: New York, New York, a helluva town. The rents are up, but the crime rate is down. The food is better than ever, and the cultural scene is vibrant. Truly, it’s a golden age for the town I recently moved to — if you can afford the housing. But more and more people can’t.
And it’s not just New York. ... The story for many of our iconic cities is ... one of gentrification... Specifically, urban America reached an inflection point around 15 years ago: after decades of decline, central cities began getting richer, more educated, and, yes, whiter. Today our urban cores are providing ever more amenities, but largely to a very affluent minority. ...
We’re not just talking about the superrich here, or even the 1 percent. At a guess, we might be talking about the top 10 percent. And for these people, it’s a happy story. But what about all the people, surely a large majority, who are being priced out of America’s urban revival? Does it have to be that way?
The answer, surely, is no, at least not to the extent we’re seeing now. Rising demand for urban living by the elite could be met largely by increasing supply. There’s still room to build, even in New York, especially upward. Yet while there is something of a building boom in the city, it’s far smaller than the soaring prices warrant, mainly because land use restrictions are in the way.
And this is part of a broader national story. ... Yes, this is an issue on which you don’t have to be a conservative to believe that we have too much regulation.
The good news is that this is an issue over which local governments have a lot of influence. New York City can’t do much if anything about soaring inequality of incomes, but it could do a lot to increase the supply of housing, and thereby ensure that the inward migration of the elite doesn’t drive out everyone else. And its current mayor understands that.
But will that understanding lead to any action? That’s a subject I’ll have to return to another day. For now, let’s just say that in this age of gentrification, housing policy has become much more important than most people realize.
- America’s Incoherent Coal Policy - James Surowiecki
- Global growth bounces back a bit - Gavyn Davies
- It has finally happened - The Irish Economy
- German wage moderation and the EZ Crisis - Vox EU
- Innovation andglobal warming - Economic Principals
- How to do cephalapod philosophy - Understanding Society
- Secular stagnation and the financial sector - Crooked Timber
- Is Two the new Zero? Why Divine Coincidence failed - Nick Rowe
Sunday, November 29, 2015
Paul Krugman reviews Robert Reich's book Saving Capitalism: For the Many, Not the Few:
Challenging the Oligarchy: Back in 1991, in what now seems like a far more innocent time, Robert Reich published an influential book titled The Work of Nations, which among other things helped land him a cabinet post in the Clinton administration. It was a good book for its time—but time has moved on. And the gap between that relatively sunny take and Reich’s latest, Saving Capitalism, is itself an indicator of the unpleasant ways America has changed.
The Work of Nations was in some ways a groundbreaking work, because it focused squarely on the issue of rising inequality—an issue some economists, myself included, were already taking seriously, but that was not yet central to political discourse. Reich’s book saw inequality largely as a technical problem, with a technocratic, win-win solution. That was then. These days, Reich offers a much darker vision, and what is in effect a call for class war—or if you like, for an uprising of workers against the quiet class war that America’s oligarchy has been waging for decades. ...
Jim Hamilton's bottom line is worth noting:
Commodity prices and exchange rates: The dramatic decline in the prices of a number of commodities over the last 16 months must have a common factor. One variable that seems to be quite important is the exchange rate. ...
One would expect that when the dollar price of other countries’ currencies falls, so would the dollar price of internationally traded commodities. But it is a mistake to say that the exchange rate is the cause of the change in commodity prices. The reason is that exchange rates and commodity prices are jointly determined as the outcome of other forces. ...
For example,... the Great Recession in 2008-2009 ... meant falling demand for commodities. It was also associated with a flight to safety in capital markets, which showed up as a surge in the value of the dollar. It’s not the case that the strong dollar then was the cause of falling dollar prices of oil and copper. Instead, the Great Recession was itself the common cause behind movements in all three variables. ...
I had been giving a similar interpretation to the correlation since June 2014 ... – news about weakness in the world economy seemed to be a key reason for strength of the dollar..., and would also be a reason for declining commodity prices.
However, developments of the last three weeks call for a different explanation. The October 28 FOMC statement and subsequent statements by Fed officials have made clear that a hike in U.S. interest rates is coming December 16. An increase in U.S. interest rates relative to our trading partners is the primary reason that the dollar appreciated 4% (logarithmically) since October 16. Over that same period the dollar price of oil and copper each fell 16%. ...
I will offer the view, based on the market reaction so far, that if the Fed’s objective in raising rates is to lower U.S. inflation and GDP, it seems to have taken a significant step in that direction.
[There's quite a bit more analysis in the full post.]
- Demand, Supply, and Macroeconomic Models - Brad DeLong
- Financial frictions pushed against deflation - longandvariable
- Econ 101 and data (reply to David Henderson) - Noahpinion
- The Trouble With Interest Rates - J. Bradford DeLong
- Sovereign wealth funds in the new era of oil - Vox EU
- Demand, Supply, and what is new after 2008 - Angry Bear
- Worker Protection in the Gig Economy - Tyson andMendonca
- Founding the Fed - croaking cassandra
- TPP unveiled - Vox EU
Saturday, November 28, 2015
Paul Krugman on macroeconomic models:
Demand, Supply, and Macroeconomic Models: I’m supposed to do a presentation next week about “shifts in economic models,” which has me trying to systematize my thought about what the crisis and aftermath have and haven’t changed my understanding of macroeconomics. And it seems to me that there is an important theme here: it’s the supply side, stupid. ...
- Iceland, Ireland, and Devaluation Denial - Paul Krugman
- Measurement Errors and Monetary Policy - FRB Richmond
- Pro-poor bias of trade: New research on the expenditure channel - Vox EU
- Election-day vote buying: Evidence from monetary aggregates - Vox EU
- The Lesson Of Trump: Argue With Your Own Team - Adam Ozimek
- Accounting for differences in Europe’s post-Crisis growth - Vox EU
- Asset Concentrations and Community Bank Supervisors - FRS
- Five small thoughts on the Autumn Statement - mainly macro
- Revolutionary money - Enlightened Economist
Friday, November 27, 2015
On student loans:
Student Debt in America: Lend With a Smile, Collect With a Fist: ... Borrowing is risky, financial decisions are not always rational, and people often do a poor job of properly weighing the interests of their present and future selves.
The private enterprise system is built to limit overborrowing by sharing risk between lenders and borrowers. ... They charge more interest when they take on more risk. Because most loans can be discharged in bankruptcy, lenders share the cost of default. ...
But the federal student loan program doesn’t work that way. Those ads that run on bus stop signs and on late-night television — “No Cash? No Credit? No Problem!” — are essentially the Department of Education’s official policy on student loans.
On the front end, the department is the world’s nicest, most accommodating lender. Interest rates ... are lower than banks charge... Borrowing for college is essentially an entitlement...
When the loan bill finally comes due, the federal government transforms into a heartless loan collector. You don’t need burly men with brass knuckles to enforce debts when you have the Internal Revenue Service..., which can and will follow you as long as you live.
The government acts this way because the federal student loan program has been removed from the norms and values of prudent lending. Because the Department of Education doesn’t consider risk, it takes no responsibility. If life, luck and bad choices leave you ... in the hole, it’s all on you. ...
Most college students ... pay back their loans and enjoy the fruits of their degrees. But most pack-a-day smokers don’t die of lung cancer. And most people who bought cars with Takata airbags from 2002 to 2008 weren’t killed by shrapnel from explosions. Nevertheless, we still regard small risks of catastrophic outcomes as problems to be solved. ...
Just one quick comment. We need to solve the student loan problem for existing loans, but I wish talk about how to address this problem going forward was more about how to provide adequate funding for colleges so that large loans aren't needed in the first place rather than focusing on how to change the loan program itself.
The rise of the crazies is not unrelated:
What Is Holding Back the Economy?: ...for many if not most people, the standard of living that can be achieved by working has been permanently reduced — by long bouts of unemployment and underemployment, by unstable and insecure employment, by long-term stagnation of wages and, perhaps most significantly, by the failure of Congress to use fiscal policy, consistently and aggressively, to counteract the devastation of the recession and its corrosive effects on the economy.
For some people in some places, steady work is simply no longer a way of life, if it ever was. In several states where jobless rates have fallen to pre-recession levels, including Illinois and Ohio, the drop is due mainly to shrinking labor forces, not increases in hiring. When unemployment rates go down because people have despaired of ever finding a job, the economy is not really improving. Rather, it is downshifting to a less prosperous level.
There are two related ways to counter that downshift. One is to make productivity-enhancing investments that create jobs today and lay the foundation for future growth. Such investments would include bolstered spending for education, transportation, environmental protection, basic science and other fields that are the purview of government. The other is to enact policies to ensure that pay and profits from enhanced productivity are broadly shared, rather than concentrated at the top of the income-and-wealth ladder. Such policies would include strict anti-trust enforcement, steeply progressive taxes, a higher minimum wage and support for labor unions. ...
But for now, there is mostly talk..., and much of the talk, especially from Republicans, is about how government should not step up to the nation’s economic challenges. The economy has recovered from the worst and proven resilient, but it is being held back by what government at all levels has failed to do.
Not the first to say this, but the problem is that Republicans have misrepresented the causes of the distress so many households feel, in particular scapegoating those who have it even worse as somehow responsible for their problems (and the decline of America more generally). And then they sell the solutions as benefiting the middle class (trickle down anyone?) when they are really directed at reducing taxes for those at the top, and reducing the government services that people rely upon to survive in this economy to support the tax cuts.
But there is something else I'd like to note. The problem is blamed on government at all levels, and fiscal policy. We hear, when Republicans are named at all, that it is "especially" Republicans as though the balance only tilts in one direction. No, it's not especially Republicans, or even mostly Republicans that are standing in the way of doing more to help those who are struggling to make ends meet. It is Republicans. It's not congressional gridlock based upon reasonable differences over policy that cannot be resolved through compromise, it's an active attempt by one party to block anything the other party tries to do, even if it might help people economically. So long as the political benefits of this behavior -- benefits based upon selling snake oil for the most part -- exceed the economic costs of inaction, Republicans will stand in the way (all the while trying to convince those who are hurt the most by their actions that they will actually be helped). It's time to stop blaming "government" as though that is what is dysfunctional. The dysfunction, as evidenced by the slate of, and preferences over Republican presidential candidates, is in the Republican party. Their actions since the onset of the Great Recession have, in my view, hurt people who should have been helped, slowed the recovery, and diverted our attention from the true problems we face making it impossible to solve them (not that Republicans would have gone along with the solutions anyway). If this election tears Republicans apart and strips them of this ability to stand in the way of helping the working class, a dream I know, I will not be shedding tears. Quite the opposite.
A less than perfect union:
Europe the Unready, by Paul Krugman, Commentary, NY Times: Thanksgiving as we know it dates not to colonial days but to the middle of the Civil War, when Abraham Lincoln made it a federal holiday. It is, in other words, a celebration of national unity. And our national unity is indeed something to be thankful for.
To see why, consider the slow-motion disaster now overtaking the European project on multiple fronts..., in each case Europe’s ability to protect itself turns out to have been undermined by its imperfect union.
On the financial crisis: There’s widespread consensus among economists (though not, alas, among politicians) that Europe’s woes were mainly caused by mood swings among private investors, who recklessly poured money into southern Europe after the creation of the euro, then abruptly reversed course a decade later. Yet something similar happened in America, too, where money first poured into mortgage lending in the “sand states” — Florida, Arizona, Nevada, California — then took flight. In the U.S., however, the pain of that reversal was limited by federal institutions, ranging from Social Security to deposit insurance. In Europe, unfortunately, the cost of bank bailouts and much more fell on national governments, so that private-sector overreach soon spilled over into fiscal crisis.
On refugees: the politics of immigration in general, and refugees in particular, are nasty everywhere... But Europe is also trying to maintain open internal borders while leaving the management of external borders to national governments like that of impoverished, austerity-ravaged Greece. No wonder, then, that border controls are making a comeback.
And on terrorism: No free society can ever be perfectly secure from attack. But think about how much harder it gets when antiterrorism is pretty much left up to national governments, whose capacity for policing varies greatly. ...
Ideally, Europe would respond to these setbacks by strengthening its union, creating more of the institutions it needs to manage interdependence. But the political will for that kind of move forward seems lacking, even for the most obvious steps. ...
The alternative is to take a step back, which is already happening on border controls. European leaders are, rightly, concerned that each such move damages the whole European project. But what is the realistic alternative?
The truth is that I don’t know the answer. I’m just thankful that America has the kind of unity Europe can only dream of — at least for now. I guess we’ll see what’s left after President Trump gets done with it.
- The Import of Exports - Ricardo Hausmann
- A Very Trump Thanksgiving - Paul Krugman
- The ideas of Douglass North - Vox EU
- Douglass North, an economist’s historian - Vox EU
- Refugees, the US and the propagation of fear - FT.com
- The ZLB and threshold-based forward guidance - Bank Underground
- A Tax on Carbon Pollution Can Benefit Business - Scientific American
- Is this the right way to shrink the state (NHS edition)? - mainly macro
- Osborne's wage squeeze - Stumbling and Mumbling
Thursday, November 26, 2015
- It's A Conspiracy! - Paul Krugman
- Will Convergence Occur? - Tim Taylor
- Political economy assignments - mainly macro
- Lift off in a world of excess reserves - MacroMania
- Tayloring a criticism of Fed policy - longandvariable
- When is a Bailout not a Bailout - Robert Waldmann
- The Cost of Redistributing Wealth - Noah Smith
- Macro effects of capital inflows: Capital type matters - Vox EU
- Subway fires 80-hr-a-week worker after Oregonian story - OregonLive
- The value of average mortgage rate stats? - Bank Underground
- Iceland’s seven meagre years - Vox EU
- Gender and monetary policymaking - Vox EU
- Evidence that low real rates will persist - Vox EU
- The UK productivity puzzle: The Trojan horse - Vox EU
Wednesday, November 25, 2015
Early thanks giving to Jill Schlesinger:
Recognizing those who have improved our financial lives: ... I am often asked about which financial blogs that I use to augment the multitude of publications that I need to do my job. I am thankful for the terrific work of Bill McBride of the Calculated Risk blog. In addition to his wise insights about the housing market, Bill has a wonderful way of providing much need context to a world of economic numbers. I am also grateful for Barry Ritholtz' blog The Big Picture, with its great mix of information, humor and a healthy dose of skepticism. Although a bit wonkier, I always learn from economics professors James D. Hamilton and Menzie Chinn, who are the brains behind Econbrowser and Mark Thoma of Economistâs View. ...
Jonathan Rothwell at Brookings:
Drug offenders in American prisons: The critical distinction between stock and flow: There is now widespread, bipartisan agreement that mass incarceration is a huge problem in the United States. The rates and levels of imprisonment are destroying families and communities, and widening opportunity gaps—especially in terms of race.
But there is a growing dispute over how far imprisonment for drug offenses is to blame. Michelle Alexander, a legal scholar, published a powerful and influential critique ... in 2012, showing how the war on drugs has disproportionately and unfairly harmed African Americans.
Recent scholarship has challenged Alexander’s claim..., but the standard analysis—including Alexander’s critics—fails to distinguish between the stock and flow of drug crime-related incarceration. ...
The picture is clear: Drug crimes have been the predominant reason for new admissions into state and federal prisons in recent decades. ...
In other work, Pfaff provides grounds for believing that the aggressive behavior of local prosecutors in confronting all types of crime is an overlooked factor in the rise of mass incarceration.
More broadly, it is clear that the effect of the failed war on drugs has been devastating, especially for black Americans. As I’ve shown in a previous piece, blacks are 3 to 4 times more likely to be arrested for drug crimes, even though they are no more likely than whites to use or sell drugs. Worse still, blacks are roughly nine times more likely to be admitted into state prison for a drug offense....
A dangerous combination of approaches to policing, prosecution, sentencing, criminal justice, and incarceration is resulting in higher costs for taxpayers, less opportunity for affected individuals, and deep damage to hopes for racial equality.
John Cassidy (this was in today's links):
The Pfizer–Allergan Merger Is a Disgrace: In an announcement on Monday morning, Pfizer, the big drug company, whose headquarters are on East 42nd Street, in Manhattan, said that it is merging with one of its competitors, Allergan PLC. ...
It is widely acknowledged that the primary impetus for the deal is a financial one. In merging with Allergan, which is based in Dublin, Pfizer intends to move its corporate residency to Ireland, where the corporate tax rate is just 12.5 per cent, compared to thirty-five per cent for a company of its size in the United States. Over the next few years, the merger could save Pfizer billions of dollars in taxes and deprive the U.S. Treasury of the same amount.
Tax-driven deals of this nature are known as “inversions,” and they are becoming increasingly common. ... The Pfizer–Allergan deal will be the biggest inversion yet, and it is nothing short of a disgrace. ...
Read, in his statement explaining the proposal to merge with Allergen, said that it would help put Pfizer “on a more competitive footing within our industry.” This was a reference to the fact that other big pharma companies, such as AstraZeneca, GlaxoSmithKline, and Novartis, are headquartered in countries with lower corporate tax rates...
All things considered, it’s hard to avoid seeing the merger proposal as a cynical move designed to boost Pfizer’s stock price and generate a windfall for the company’s senior managers, who are compensated mainly in equity. ...
- Describing the Decline of Capital per Worker - Growth Economics
- Douglass North, An Economist’s Historian - A Fine Theorem
- The Pfizer–Allergan Merger Is a Disgrace - The New Yorker
- Most of What You Learned in Econ 101 Is Wrong - Noah Smith
- Openness and Inequality: Capital Account Liberalization - iMFdirect
- Lew Vows to Resist Attempts to Weaken Dodd-Frank - NYTimes
- Dilemma, Trilemmas and Difficult Choices - Capital Ebbs and Flows
- Tax Policy and the Magic Investment Channel - EconoSpeak
- The Economics of the Retail Sector - Tim Taylor
- Early Fisherism - John Cochrane
Tuesday, November 24, 2015
Economists and the Eurozone: wake up calls and political capture: ... It is natural at this point to talk about Germany, and the fact that as a result of low wage increases undercutting Eurozone neighbours before the recession, Germany is not suffering as much from this recession as other countries. But I have often tried to avoid stopping there, and instead to ask whether Germany's strange stance on these macro issues simply reflects this different conjunctural position. I think the answer is no.
I'm increasingly drawn to the view that Germany's stance reflects similar political economy pressures as you will find in other OECD economies: there is no German exceptionalism, but rather that the forces that everywhere are pushing austerity and tighter monetary policy happen for various reasons to be stronger in Germany. From this perspective, this post from Frances Coppola is particularly interesting. Perhaps the problem at the heart of the Eurozone is that economic policy advice in Germany has been effectively captured by employers' interests, and perhaps the interests of banks in particular.
Economic policy effectively captured by business and financial interests? That could never happen here...
Henry Aaron at Brookings:
Is the ACA in trouble?: United Health Care’s surprise announcement that it is considering whether to stop selling health insurance through the Affordable Care Act’s health exchanges in 2017 and is also pulling marketing and broker commissions in 2016 has health policy analysts scratching their heads. ...
Is United’s announcement seriously bad news for Obamacare, as many commentators have asserted? Is United seeking concessions in another area and using this announcement as a bargaining chip? Or, is something else going on? The answer, I believe, is that the announcement, while a bit of all of these things, is less significant than many suppose. ...
What seems to have happened—one can’t be sure...—is that the company, which mostly delayed its participation in the individual exchanges until 2015, incurred substantial start-up costs, enrolled few customers who turned out to be sicker than anticipated, and experienced more-than-anticipated attrition. Other insurers, including Blue-Cross/Blue-Shield plans nation-wide which hold a dominant position in individual markets in many states, did well... But minor players in the individual market, such as United, may have concluded that the costs of developing that market are too high for the expected pay-off. ...
What this means is that United’s announcement is regrettable news for those states from which they may decide to withdraw, as its departure would reduce competition. United might also use the threat of departure to negotiate favorable terms with states and the Administration. ... But it would be a mistake to treat United’s announcement, presumably made for good and sufficient business reasons, as a portentous omen of an ACA crisis.
- Shorts Subject - Paul Krugman
- Counting backwards to the next recession - Antonio Fatas
- Some very basic non-Walrasian economics - Nick Rowe
- What caused the Great Recession? - Robert Waldmann
- Economists Learn to Grapple with Big Data - FRB Richmond
- Can China shift from industry to services? - Ben Bernanke
- Global Fallout from China’s Industrial Slowdown - FRBSF
- Impact of Interest Rate Changes on the Auto Loans - Liberty Street
- Want Innovation? Try Raising Minimum Wages - Noah Smith
- The Size of Automatic Stabilizers in the US Budget - Tim Taylor
- Terror Politics: Bluster over Evidence - Paul Krugman
- Giving Billions to the Rich - The New York Times
- How not to talk about taxes - Brookings Institution
- Neo-Fisherian Ideas and Staggered Contracts - John Taylor
- Interview with John Taylor - Cecchetti & Schoenholtz
- Inflation Drumbeat - The Grumpy Economist
- Reply to John Cochrane - Noahpinion
Monday, November 23, 2015
James Poterba is interviewed by the Richmond Fed:
... EF: More recently, one of your areas of research has been retirement finance and the investment decisions of workers thinking about their retirement. In recent decades, we've seen a tremendous shift in the private sector from defined benefit retirement programs to defined contribution programs. Was this mainly a response by firms to the tightening of the regulatory environment for defined benefit plans, to changing demand from workers, or to something else?
Poterba: I think it's a bit of everything. A number of factors came together to create an environment in which firms were more comfortable offering defined contribution plans than defined benefit plans. One factor was that when firms began offering defined benefit plans, in World War II and the years following it, the U.S. economy and its population were growing rapidly. The size of the benefit recipient population from these plans relative to the workforce was small. It was also a time when life expectancy for people who were aged 65 was several years less than it is today. Over time, the financial executives at firms came to a greater recognition of the true cost of defined benefit plans.
I also think the fiduciary responsibilities and the financial burdens that were placed on firms under the Employee Retirement Income Security Act of 1974, or ERISA, have discouraged firms from continuing in the defined benefit sector. ERISA corrected a set of imbalances by requiring firms to take more responsibility for the retirement plans they were offering their workers and to fund those plans so that these were not empty promises. ERISA was enacted in the aftermath of some high-profile bankruptcies of major U.S. firms and the discovery that their defined benefit plans were not well-funded, leaving retirees with virtually no pension income.
But ERISA and the growing recognition of the costs of defined benefit plans are probably not the full story. The U.S. labor market has become more dynamic over time, or at least workers think it has, and that has led to fewer workers being well-suited to defined benefit plans. These plans worked very well for workers who had a long career at a single firm. Today, workers may overestimate the degree of dynamism in the labor market. But if they believe it is dynamic, they may place great value on a portable retirement structure that enables them to move from firm to firm and to take their retirement assets with them.
Most workers who are at large firms, firms that have 500 employees or more, have access to defined contribution plans. Unfortunately, we still don't have great coverage at smaller firms, below, say, 50 employees. For workers who will spend a long career at a small firm, the absence of these employer-based plans can make it harder to save for retirement. A key policy priority is pushing the coverage of defined contribution plans further down the firm size distribution. That's hard, because smaller firms are less likely to have the infrastructure in place in their HR departments or to have the spare resources to be able to learn how to establish a defined contribution plan and how to administer it. They are probably also more reluctant to take on the fiduciary burdens and responsibilities that come with offering these plans.
Another concern, within the defined contribution system, is the significant amount of leakage. Money that was originally contributed for retirement may be pulled out before the worker reaches retirement age.
EF: What is causing that? ...
Poterba: Say you've worked for 10 years at a firm that offers a 401(k) plan and you've been contributing all the way along. You decide to leave that firm. In some cases, the firm you are leaving may encourage you to take the money out of their retirement plan because they may not want to have you around as a legacy participant in their plan. ... Sometimes, the worker may choose to move the funds from the prior 401(k) plan to a retirement plan at their new employer, or to an IRA. Those moves keep the funds in the retirement system. But sometimes, the worker just spends the money. When an individual leaves a job, they may experience a spell of unemployment, or they may have health issues. There may be very good reasons for tapping into the 401(k) accumulation. Using the 401(k) system as a source of emergency cash, sort of as the ATM for these crises, diminishes what gets accumulated for retirement. ...
Inadequate social insurance for workers who lose their jobs leads to inadequate retirement savings. So while there may be a "very good reason" for this from an individual's perspective, from a larger social perspective this is a problem connected to our unwillingness to provide adequate social insurance for those who are the unlucky losers to the dynamism inherent in capitalism that propels us forward. Those who benefit so much from the dynamism could and should do more to help those who pay the costs.
The recent "bad, or at least not-great news about health reform" is won't derail Obamacare:
Health Reform Lives!, by Paul Krugman, Commentary, NY Times: To the right’s dismay, scare tactics — remember death panels? — and spurious legal challenges failed to protect the nation from the scourge of guaranteed health coverage. Still, Obamacare’s opponents insisted that it would implode in a “death spiral” of low enrollment and rising costs.
But the law’s first two years ... went remarkably well. The number of uninsured Americans dropped sharply,... while costs came in well below expectations. ...
I mention all of this to give you some perspective on recent developments that mark a break in the string of positive surprises. Yes, Obamacare has hit a few rough patches lately. But they’re much less significant than a lot of the reporting, let alone the right-wing reaction, would have you believe. Health reform is still a huge success story. ...
First, premiums are going up for next year, because insurers are finding that their risk pool is somewhat sicker and hence more expensive than they expected. There’s a lot of variation across states, but the average increase will be around 11 percent. That’s a slight disappointment, but it’s not shocking, given both the good news of the previous two years and the long-term tendency of insurance premiums to rise 5-10 percent a year.
Second, some Americans who bought low-cost insurance plans have been unpleasantly surprised by high deductibles. This is a real issue, but it shouldn’t be exaggerated. All allowed plans cover preventive services without a deductible, and many plans cover other health services as well. Furthermore, additional financial aid is available to lower-income families... Some people may not know about these mitigating factors ... but awareness should improve over time. ...
Oh, and official projections now say that fewer people will enroll in those exchanges than previously predicted. But the main reason is that surprisingly few employers are dropping coverage; overall projections for the number of uninsured Americans still look pretty good.
So where does that leave us? Without question, the run of unexpectedly good news for Obamacare has come to an end, as all such runs must. ... There were bound to be some bobbles along the way.
But are we looking at the beginnings of a death spiral? Some people are indeed saying that, but as far as I can tell, they’re all people who have been predicting disaster every step of the way...
The reality is that Obamacare is an imperfect system, but it’s workable — and it’s working.
"In the relatively near future probably some major central banks will begin gradually moving away from near-zero interest rates," Fed Vice Chairman Stanley Fischer told the San Francisco Fed's biannual Asia Economic Policy conference.
"While we at the Fed continue to scrutinize incoming data, and no final decisions have been made, we have done everything we can to avoid surprising the markets and governments when we move, to the extent that several emerging market (and other) central bankers have, for some time, been telling the Fed to 'just do it'."
New York Federal Reserve President William Dudley, via Reuters:
The Federal Reserve should "soon" be ready to raise interest rates as U.S. central bankers grow confident that low inflation will rebound and that employment remains stable, William Dudley, the influential head of the New York Fed, said on Friday.
"We hope that relatively soon we will become reasonably confident that inflation will return to our 2 percent objective," he said at Hofstra University. Dudley said it was "very logical" to expect that the Fed's inflation and employment conditions would be met "soon," allowing policymakers to "start thinking about raising the short-term interest rates."
Atlanta Federal Reserve President Dennis Lockhart, via CNBC:
A top Federal Reserve official said Thursday he is "comfortable" with raising the federal funds rate "soon," as concerns about low inflation and global risks are not persuasive enough to keep interest rates near zero.
"I'm comfortable with moving off zero soon," said Atlanta Fed President Dennis Lockhart in prepared remarks.
San Francisco Federal Reserve President John Williams, via Reuters:
"The data I think have been overall encouraging, especially on the labor market," San Francisco Fed President John Williams told reporters after a conference at University of California Berkeley's Clausen Center.
"Assuming that we continue to get good data on the economy, continue to get signs that we are moving closer to achieving our goals and gaining confidence getting back to 2-percent inflation... If that continues to happen there's a strong case to be made in December to raise rates."
Obviously serial dissenter Richmond Federal Reserve President Jeffrey Lacker is also looking for a rate hike. And so too is Cleveland Federal Reserve President Loretta Mester. To be sure, they all give a nod to “data dependence,” implying that a rate hike is not a sure thing. But, barring an outright collapse in financial markets, it is very difficult to see the data evolve between now and December 15-16 in such a way that the Fed suddenly has a change of heart. And note there is little reason for them to think at this point that growth has slowed well below trend. It is widely expected that Q3 GDP is this week revised up to 2.1% while current quarter GDP is tracking at 2.3%. While in 1990s terms these are not staggering numbers, in 2010 terms they exceed the Fed’s estimate of potential GDP growth. And with more and more Fed officials convinced the economy is operating near full employment, anything over 2% raises worries on Constitution Avenue that the economy might overheat.
Now, we still have one employment report ahead of us. Aside from the now-reversed equity declines in August, recall from the last minutes that uncertainty regarding the labor market helped stay the Fed’s hand:
In assessing whether economic conditions and the medium-term economic outlook warranted beginning the process of policy normalization at this meeting, members noted a variety of indicators, including some weaker-than-expected readings on measures of labor market conditions, and almost all members agreed it was appropriate to wait for additional information to clarify whether the recent deceleration in the pace of progress in the labor market was transitory or reflected more persistent factors that might jeopardize further progress.
It would seem that the October labor report put an end to those concerns. Consequently, the following comes into play:
Members emphasized that this change was intended to convey the sense that, while no decision had been made, it may well become appropriate to initiate the normalization process at the next meeting, provided that unanticipated shocks do not adversely affect the economic outlook and that incoming data support the expectation that labor market conditions will continue to improve and that inflation will return to the Committee's 2 percent objective over the medium term.
I suspect that only an outright disaster in the November labor report would prompt the Fed to take a pass at the December meeting. It is just simply the case that given their Phillips curve framework, they are running out of reasons not to raise rates. They would need enough weak data to fundamentally alter their outlook to the downside, and it is hard to see that happening in the short time remaining.
Consequently, it is hard to come to any other conclusion than that they are going to raise the target range on the federal funds rate in December. In Fedspeak, they might as well be screaming it into your ears.
While they may be taking the mystery out of the first rate hike, however, they are trying to put the mystery into subsequent rate hikes. Lockhart, via Reuters:
"The pace of increases may be somewhat slow and possibly more halting than historic episodes of rising rates," Lockhart said in a speech to the DeKalb Chamber of Commerce in Atlanta.
Williams, via Reuters:
"We definitely do not want to, either through our actions or our words, indicate a preference for a very mechanical path of interest rates, whether it’s every other meeting or however you think about it," Williams said. "Since economic data can surprise on the upside and the downside, maybe there will be opportunities to show we are data dependent."
And St. Louis Federal Reserve President James Bullard, via Bloomberg:
“When we had a normalization in 2004 to 2006 we moved at the same 25 basis points per meeting for 17 meetings in a row,” Bullard said. “I am virtually certain that was not optimal monetary policy. That was a very mechanical approach to increasing rates. This time I am hopeful we can be more flexible and reactive to data.”
How will they communicate uncertainty in the path of rate hikes? I wonder if they can simply retain this sentence in the next statement:
In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation.
It seems like this could be used to convey uncertainty in subsequent meetings, especially if they choose not to hike in January.
Bottom Line: The Fed is set to declare “Mission Accomplished” at the next FOMC meeting. Indeed, many policymakers have already said as much. Absent a very significant change in the outlook, failure to hike rates in December would renew the barrage of criticism regarding their communications strategy that prompted them to highlight the December meeting in their last statement. Once they have communicated their intentions for subsequent rate hikes, they will turn their attention to the issue of normalizing the balance sheet. Even though officials have not committed to a specific path, I am working with a baseline of 100bp of tightening between now and next December, or roughly 25bp every other meeting. I expect that by the second quarter of next year they will begin communicating the fate of the balance sheet. Whether they should hike or not remains a separate issue. Over the next twelve months we will learn the extent of which the Federal Reserve can resist the global downward pull of interest rates. Other central banks have been less-than-successful in their efforts to pull off of the zero bound – not exactly a hopeful precedent.
- Trends in oil production - Econbrowser
- Is this really social democracy versus socialism? - mainly macro
- VSPs and the Case of the Disappearing BPEA - Paul Krugman
- New historical database on economic freedom in the OECD - Vox EU
- UK bank regulators need incentives to do the right thing - Daniel Davies
- Thompson’s Reformulation of Macroeconomic Theory - Uneasy Money
- Are emergence and microfoundations contraries? - Understanding Society
- The anti-poor effects of large exchange rate devaluations - Vox EU
- Thinking About the Trumpthinkable - Paul Krugman
- Centripetal Forces - Economic Principals
Sunday, November 22, 2015
Harold Pollack (the beginning of the post talks about a recent column in the NY Times noting that "The people who most rely on the safety-net programs secured by Democrats are, by and large, not voting against their own interests by electing Republicans. Rather, they are not voting, period," and how that has turned blues states red):
What’s the matter with Kentucky?: ...Viewed from afar, one might think that categories such as “deserving poor” or “disabled” are reasonably clear-cut. Viewed up-close, things seem much more fuzzy. Many people who rely on public aid straddle the boundaries between deserving and undeserving, disabled and able-bodied. Many of us know people who receive various public benefits, and who might not need to rely on these programs if they made better choices, if they learned how to not talk back at work, if they had a better handle on various self-destructive behaviors, if they were more willing to take that crappy job and forego disability benefits, etc.
It’s easy, even viewing our own friends and relatives, to confuse cause and effect regarding more intimate barriers. A sad reality of psychiatric disorders is that the very symptoms which inflict mental pain on the sufferer can make themselves felt to others in ways that undermine empathy and personal relationships.
Across the Thanksgiving dinner table, you see these human frailties and failures more intensely and with greater granularity than the labor economist could possibly see running cold data at the Census Bureau. But operating at high altitude, the labor economist sees structural issues you can’t see from eye level.
There have always been vulnerable people, whose troubles arise from an impossible-to-untangle mixture of bad luck, destructive behaviors, and difficult personal circumstance. That economist can’t see why your imperfect cousin can’t seem to get it together to hold a basic job. She can see that your cousin is being squeezed out by an unforgiving musical-chairs economy. Every year, in the backwaters of America, that economy seems to put out fewer and fewer chairs.
- Are Banks Europe's Problem? - Paul Krugman
- The Free-Market Solution to a Liquidity Trap? Inflation! - Brad DeLong
- Practical lessons for measuring equal opportunities - Miles Corak
- The Changing Composition of Productivity Growth - Growth Economics
- What Has Not Been Said About The Late Herbert Scarf - EconoSpeak
- Thoughts on the Productivity Slowdown - Angry Bear
- Ruling From the Shadows - The New York Times
- A new economics - Stumbling and Mumbling
- The challenge of trade adjustment in Greece - Vox EU
Saturday, November 21, 2015
At Vox EU:
The political aftermath of financial crises: Going to extremes, by Manuel Funke, Moritz Schularick, and Christoph Trebesch: Summary Recent events in Europe provide ample evidence that the political aftershocks of financial crises can be severe. This column uses a new dataset that covers elections and crises in 20 advanced economies going back to 1870 to systematically study the political aftermath of financial crises. Far-right parties are the biggest beneficiaries of financial crises, while the fractionalization of parliaments complicates post-crisis governance. These effects are not observed following normal recessions or severe non-financial macroeconomic shocks.
- The Expansionary Austerity Zombie - Paul Krugman
- Welfare programs don't make people lazy - Vox
- Black Swans Is the Wrong Way to Think About It - Brad DeLong
- Aspen Summit on Inequality and Opportunity (video) - Equitable Growth
- How did the Bank’s forecasts perform? - Bank Underground
- Refugees, Displaced, Resettled: Some Global Snapshots - Tim Taylor
- The Cotton Famine of 1862-63 and theOne-Dollar Note - Liberty Street
- Not So Fast, 1 Percent Whippersnappers - The New York Times
- In defence of higher pensions - Stumbling and Mumbling
- President Obama on economic messaging - Jared Bernstein
- Desperately Seeking Consensus - Paul Krugman
- Unlearning economics - Noahpinion
- Grow your own way - EurekAlert!
Friday, November 20, 2015
Some Big Changes in Macroeconomic Thinking from Lawrence Summers: ...At a truly fascinating and intense conference on the global productivity slowdown we hosted earlier this week, Lawrence Summers put forward some newly and forcefully formulated challenges to the macroeconomic status quo in his keynote speech. [pdf] ...
The first point Summers raised ... pointed out that a major global trend over the last few decades has been the substantial disemployment—or withdrawal from the workforce—of relatively unskilled workers. ... In other words, it is a real puzzle to observe simultaneously multi-year trends of rising non-employment of low-skilled workers and declining measured productivity growth. ...
Another related major challenge to standard macroeconomics Summers put forward ... came in response to a question about whether he exaggerated the displacement of workers by technology. ... Summers bravely noted that if we suppose the “simple” non-economists who thought technology could destroy jobs without creating replacements in fact were right after all, then the world in some aspects would look a lot like it actually does today...
The third challenge ... Summers raised is perhaps the most profound... In a working paper the Institute just released, Olivier Blanchard, Eugenio Cerutti, and Summers examine essentially all of the recessions in the OECD economies since the 1960s, and find strong evidence that in most cases the level of GDP is lower five to ten years afterward than any prerecession forecast or trend would have predicted. In other words, to quote Summers’ speech..., “the classic model of cyclical fluctuations, that assume that they take place around the given trend is not the right model to begin the study of the business cycle. And [therefore]…the preoccupation of macroeconomics should be on lower frequency fluctuations that have consequences over long periods of time [that is, recessions and their aftermath].”
I have a lot of sympathy for this view. ... The very language we use to speak of business cycles, of trend growth rates, of recoveries of to those perhaps non-stationary trends, and so on—which reflects the underlying mental framework of most macroeconomists—would have to be rethought.
Productivity-based growth requires disruption in economic thinking just as it does in the real world.
The full text explains these points in more detail (I left out one point on the measurement of productivity).
Why do Republicans have so many panic attacks?:
The Farce Awakens, by Paul Krugman, Commentary, NY Times: Erick Erickson, the editor in chief of the website RedState.com, is a serious power in right-wing circles. ... So it’s worth paying attention to what Mr. Erickson says. And ... his response to the attack in Paris was a bit startling. The French themselves are making a point of staying calm, indeed of going out to cafes to show that they refuse to be intimidated. But Mr. Erickson declared on his website that he won’t be going to see the new “Star Wars” movie on opening day, because “there are no metal detectors at American theaters.”
It’s a bizarre reaction — but when you think about it, it’s part of a larger pattern. These days, panic attacks after something bad happens are the rule rather than the exception, at least on one side of the political divide. ...
But we shouldn’t really be surprised, because we’ve seen this movie before (unless we were too scared to go to the theater). Remember the great Ebola scare of 2014? The threat of a pandemic, like the threat of a terrorist attack, was real. But it was greatly exaggerated, thanks in large part to hype from the same people now hyping the terrorist danger.
What’s more, the supposed “solutions” were similar, too, in their combination of cruelty and stupidity. ...
What explains the modern right’s propensity for panic? Part of it, no doubt, is the familiar point that many bullies are also cowards. But I think it’s also linked to the apocalyptic mind-set that has developed among Republicans during the Obama years.
Think about it. From the day Mr. Obama took office, his political foes have warned about imminent catastrophe. Fiscal crisis! Hyperinflation! Economic collapse, brought on by the scourge of health insurance! And nobody on the right dares point out the failure of the promised disasters to materialize, or suggest a more nuanced approach.
Given this context, it’s only natural that the right would seize on a terrorist attack in France as proof that Mr. Obama has left America undefended and vulnerable. Ted Cruz ... goes so far as to declare that the president “does not wish to defend this country.” ...
The point is that at this point panic is what the right is all about, and the Republican nomination will go to whoever can most effectively channel that panic. Will the same hold true in the general election? Stay tuned.
Richard Baldwin at Vox EU:
Rebooting the Eurozone: Step 1 – Agreeing a Crisis narrative: The Eurozone needs fixing, but it is impossible to agree upon the steps to be taken without agreement on what went wrong. This column introduces a new CEPR Policy Insight that presents a consensus-narrative of the causes of the EZ Crisis. It was authored by a dozen leading economists from across the spectrum. The consensus narrative is supported by a long and growing list of economists.
The Eurozone Crisis broke out in May 2010; it is a long way from finished. Although some positive signs have emerged recently, EZ growth and unemployment are miserable and expected to remain miserable for years.
- A large slice of Europe’s youth have been or will be jobless during the critical, formative years of their working lives;
- The economic malaise is feeding extremist views and nationalistic tendencies just when Europe needs to pull together to deal with challenges ranging from the migration crush to possible new financial shocks.
Worse yet, many of the fragilities and imbalances that primed the monetary union for this crisis are still present.
- Many of Europe’s banks face problems of non-performing loans;
- Many are still heavily invested in their own nation’s public debt – a tie that means problems with banks threaten the solvency of the government and vice versa;
- Borrowers across the Continent are vulnerable to the inevitable normalisation of interest rates that have been near-zero for years.
As a first step to finding a broad consensus on what needs to be done to fix the Eurozone, we have written what we consider to be a consensus narrative of the Eurozone Crisis. It is published today as CEPR Policy Insight 85, which can be downloaded for free from:
Although the authors hark from diverse backgrounds, we found it surprisingly easy to agree upon a narrative and a list of the main causes of the EZ Crisis. We say “surprisingly” since EZ policymakers remain attached to very diverse narratives of the Eurozone crisis.
The need for a consensus narrative
Formulating a consensus on the causes of the EZ Crisis is essential. When terrible things happen, the natural tendency is to fix the immediate damage and take steps to avoid similar problems in the future. It is impossible to agree upon the steps to be taken without agreement on what went wrong. Absent such agreement, half-measures and messy compromises are the typical outcome. But this will not be good enough to put the EZ Crisis behind us and restore growth.
This is why formulating a consensus narrative of the EZ Crisis matters so much. Eurozone decision-makers will never agree upon the changes needed to prevent future crises unless they agree upon the basic facts that explain how the Crisis got so bad and lasted so long.
The following leading economists have agreed to support the consensus-narrative. If you are an economist and would like to support the consensus-narrative, please email email@example.com stating your support and attaching a CV showing you are an economist (business, media, academics, think tanks, etc.).
Supporters of the Consensus Narrative on the Eurozone Crisis (in order of replying)
Silvana Tenreyro, LSE, Sir Charles Bean, LSE (Ex-Deputy Governor Bank of England), Philippe Bacchetta, University of Lausanne, Jorge Braga de Macedo, Universidade Nova de Lisboa, Lars E O Svensson, Stockholm Univeristy (ex-Deputy Governor of Sveriges Riksbank), Andrew Rose, UC Berkeley, László Halpern, Hungarian Academy of Sciences, Refet S. Gürkaynak, Bilkent University, Giorgio E Primiceri, Northwestern University, Peter Bofinger, Universität Wurzburg, Jürgen von Hagen, Universität Bonn, Tryphon Kollintzas, Athens University of Economics and Business, Patrick Honohan, Trinity College Dublin (Ex-Governor of Central Bank of Ireland), Charles A Goodhart, LSE, David Vines, University of Oxford, Fabrizio Coricelli, University of Paris I, Stephanie Schmitt-Grohé, Columbia University, Pierre-Olivier Gourinchas, UC Berkeley, Evi Pappa, EUI, Cédric Tille, The Graduate Institute, Geneva (Member of the Swiss National Bank Council),
- Emerging Asia in Transition - Stanley Fischer
- More unpopular economic opinions - Fresh economic thinking
- Do we still need microfoundations? - Understanding Society
- Externalities and Public Goods: Theory OR Society? - INET
- IMF programmes: Greece vs Iceland - Vox EU
- A new historical database on world human development - Vox EU
- Distance to frontier, productivity and traveling waves - Vox EU
- Understanding FDI spillover mechanisms - Brookings Institution
- Industrial clusters: Who benefits? - Brookings Institution
- When central bankers should keep quiet - mainly macro
- Going All Natural at the Fed - David Beckworth
- Regulatory arbitrage in action - Bank Underground
Thursday, November 19, 2015
This is from the St. Louis Fed's On the Economy blog:
The Effects of Stimulus Spending on Surrounding Areas: Government spending on goods and services from the American Recovery and Reinvestment Act of 2009 (ARRA) reached around $350 billion.1 Some of this spending impacted not just the areas receiving the money, but surrounding areas as well, thanks to commuters. ...
Dupor and McCrory found substantial direct and spillover effects within regions interconnected by commuter flows. As noted in the article, stimulus spending in one county increased employment and wage payments in places two to three counties away, as long as the areas were sufficiently connected, as measured by commuting patterns. They found that:
- One dollar of ARRA spending in a subregion increased wage payments by $0.64 in that subregion.
- It increased wage payments in the neighboring subregion by $0.50.
In his article, Dupor wrote: “Thus, combining both the direct and spillover effects, there is a greater than one-for-one increase in the wage bill with respect to an increase in the stimulus spending.”
Dupor and McCrory also examined changes in the employment level to gauge economic activity. They found that, following the first two years after ARRA’s enactment, $1 million of stimulus in one part of a local labor market increased employment by 10.3 persons and increased employment in the rest of the local labor market by 8.5 persons.4
Dupor concluded in his article: “Besides providing evidence in favor of a government spending multiplier, our results should provide caution to other researchers, as well as to policymakers. Failing to take into account positive spillovers could lead policymakers to underestimate the total social benefit of government fiscal intervention.”
The main point of this research is how recessions impact labor market participation, but it also supports the claim in my most recent column that worker mobility (in terms of moving up the job ladder) has fallen due to "declining economic prospects":
How workers exit the labor market after local economic downturns: In light of the recent Great Recession, we continue to learn about how large economic downturns directly affect workers in a variety of ways. Here, we document that following an adverse demand shock, individuals exit local labor markets primarily through migration, although that has become less prominent in the Great Recession. Faced with declining economic prospects, workers are becoming more likely to stay put, without re-entering the labor market. While our research documents the increase in non-participation following adverse labor demand shocks, more needs to be done to understand what effect this phenomenon has on the broader economy. In particular, little research has been done on the effect of non-participation on wages and employment prospects for those seeking work, or on the long-term effects labor force exit has on a worker’s human capital.
- Interview of Esther Duflo - FT Alphaville
- Minutes of the FOMC, October 27-28 - FRB
- Crowdfunding or Crowdphishing? - Robert J. Shiller
- Remembering Herbert Scarf: 1930-2015 - Tim Taylor
- Inequality: a fact, interpretation, and policy recommendation - Miles Corak
- Models of the minimum wage (for what they’re worth) - Jared Bernstein
- Central banks and their interest rate plans - longandvariable
- First, second, and third order bias corrections - Andrew Gelman
- Commodity and Inflation - Liberty Street Economics
- Do lower taxes encourage investment? - OECD Insights
- Keynes' error - Stumbling and Mumbling
Wednesday, November 18, 2015
Haven't had a chance to read this carefully yet, but thought it might be of interest:
Boom and Bust, by Phillip Longman, Washington Monthly: Despite all the attention focused these days on the fortunes of the “1 percent,” our debates over inequality still tend to ignore one of its most politically destabilizing and economically destructive forms. This is the growing, and historically unprecedented, economic divide that has emerged in recent decades among the different regions of the United States.
Until the early 1980s, a long-running feature of American history was the gradual convergence of income across regions. The trend goes back to at least the 1840s, but grew particularly strong during the middle decades of the twentieth century. ...
Yet starting in the early 1980s, the long trend toward regional equality abruptly switched. ...
A major factor that has not received sufficient attention is the role of public policy [note: antitrust in particular]. Throughout most of the country’s history, American government at all levels has pursued policies designed to preserve local control of businesses and to check the tendency of a few dominant cities to monopolize power over the rest of the country. These efforts moved to the federal level beginning in the late nineteenth century and reached a climax of enforcement in the 1960s and ’70s. Yet starting shortly thereafter, each of these policy levers were flipped, one after the other, in the opposite direction, usually in the guise of “deregulation.” Understanding this history, largely forgotten in our own time, is essential to turning the problem of inequality around. ......Inequality, an issue politicians talked about hesitantly, if at all, a decade ago, is now a central focus of candidates in both parties. The terms of the debate, however, are about individuals and classes: the elite versus the middle, the 1 percent versus the 99 percent. That’s fair enough. But the language we currently use to describe inequality doesn’t capture the way it is manifest geographically. Growing inequality between and among regions and metro areas is obvious to all of us. But it is almost completely absent from the current political conversation. This absence would have been unfathomable to earlier generations of Americans; for most of this country’s history, equalizing opportunity among different parts of the country was at the center of politics. The resulting policies led to the greatest mass prosperity in human history. Yet somehow, about thirty years ago, we forgot our history.
A More Inflexible Fed Would Cause More Crises: Having saved the US economy from a second Great Depression, the Federal Reserve has become a political scapegoat in the Congress for its own failures to secure the recovery. Rather than improving our tax code, investing in our future, or simply passing a budget that is little more than avoiding default, the House is prioritizing so-called “reform” of the Fed. Just as throughout the global financial crisis and recovery, Congress is abdicating its economic responsibilities to the American people and attacking one of the few policy institutions that worked instead.
Both Republicans and Democrats have already curtailed the ability of the US central bank to respond proactively to any financial crisis... They have done this by restricting the Fed’s ability to lend to troubled institutions in a crisis—even though such lending is the very essence of why the central bank exists: ...
Now, there are new legislative efforts trying to force the Fed to follow strictly a narrow policy rule when setting monetary policy even in normal times—and report to Congress in a very literal-minded short-term way about any deviations from that rule. ...
More closely examined, any imposition of a simplistic rigid policy rule with mechanistic monitoring will only serve to politicize monetary policy to an unprecedented extent. And that, for good reason, is almost universally seen in the economics profession as something that would inevitably lead to ongoing higher inflation and bigger, more frequent boom-bust cycles. ...
Any effort to limit US monetary policy to an inflexible rule with politicized short-term oversight should be opposed..., doing so would bring severe harm to the workers, savers, and investors in the US economy.
- Terrorists and Aliens - Paul Krugman
- Electing to Ignore the Poorest of the Poor - NYTimes
- Migration as poverty reduction - Stumbling and Mumbling
- Nonbank Financial Intermediation - Daniel Tarullo
- Older Women and Long-Term Unemployment - On the Economy
- Corporate surpluses are contributing to the savings glut - Martin Wolf
- Austerity, the Treasury and Spending under Labour - mainly macro
- We’re Living Longer. That’s Great, Except for Social Security. - Josh Barro
- Why More Humanitarian Aid Should be Given in Cash - Tim Taylor
- Paris Can Be a Key Step on Environment - Robert Stavins
- The Farce Is Strong In This One - Paul Krugman
- How SME funding risk is allocated - Vox EU
- The Perils of Circus Politics - Robert Reich
- Is Uber disruptive? - Digitopoly
Tuesday, November 17, 2015
My latest column:
An Essential Part of Job Creation Policy is Missing: The presidential candidates from both parties have focused on the struggles of the working class, and rightly so. Inequality has been rising, jobs have been hard to find, and when jobs do appear they tend to pay low wages and offer few if any benefits. There is little security due to globalization and digital technology, and workers cannot count on adequate social insurance to insulate them from the high costs of unemployment.
Meanwhile, as wages for those who do have jobs stagnate, the costs of childcare, health care, housing, utilities, college, transportation, insurance, food, recreation (how many hours at the minimum wage are required to simply take a family of four to the movies?) and so on continue to rise making it harder and harder for families to make ends meet.
So the candidates have focused on how to create jobs that pay a decent wage. But there is an important facet of job creation that is being left out of these and other discussions...
Why have so many workers left the labor force?:
Where have all the workers gone?, by: Isabel V. Sawhill, Brookings: Employment rates among prime-age workers, especially men, have declined sharply over the last few decades. The Great Recession made matters worse. Recent declines in the unemployment rate have enticed some back into the active labor force but the long-term picture is still discouraging. When we compare the U.S. to other advanced countries, working-age adults are simply not working as much as adults in most European nations.
What's going on here? As my colleague Gary Burtless notes, three developments have probably played a role. First, real wages have fallen by 28 percent for high-school educated men since 1980, making work much less attractive, but also signaling that employers are looking for a higher level of skill. Second, the disability rolls have been growing (primarily because of musculoskeletal and mental health issues). Although getting onto disability is a long and involved process, the benefits compete favorably with what a low-skilled worker could earn and create a disincentive to re-enter the labor market. Third, now that women are almost half the labor force, the pressure for men to work has lessened.
In the shorter run, it's hard to tell how much of the recent sharp drop in employment is related to weak demand and how much to these longer-term factors. ....
David Leonhardt reviews ‘Chicagonomics’ and ‘Economics Rules’:
‘Chicagonomics’ and ‘Economics Rules’: He believed that government had a crucial role to play in a well-functioning economy. It should finance and run good schools, as well as build roads, bridges and parks, he argued. It should tax alcohol, sugar and tobacco, all of which impose costs on society. It should regulate businesses to protect workers. And it should tax the rich — who suffer from “indolence and vanity” — to help the poor.
Which leftist economist was this? None other than Adam Smith, the inventor of the “invisible hand” and the icon of laissez-faire economics today. Smith’s modern reputation is a caricature. ...
- Serious Delusions - Paul Krugman
- Mass layoffs and local labour market exit - Vox EU
- Japan's Endless Struggle to Spark Inflation - Noah Smith
- What’s Different about the Latest Housing Boom? - FRBSF
- Should Monetary Policy Respond to Financial Conditions? - Liberty Street
- A Primer on Central Bank Independence - Cecchetti & Schoenholtz
- Questions for Obama’s Nominee to lead the F.D.A. - NYTimes
- Innovation Central-Bank Style - Carolyn Wilkins
- The IMF’s analysis of the Irish bailout - Vox EU
- Local economy impact of fracking - Vox EU
- Arbitraging the 49th parallel - Moneyness
Monday, November 16, 2015
Olivier Blanchard, Eugenio Cerutti, and Lawrence Summers (the results are preliminary):
Inflation and Activity – Two Explorations and their Monetary Policy Implications Olivier Blanchard, Eugenio Cerutti, and Lawrence Summers NBER Working Paper No. 21726 November 2015: Introduction: We explore two empirical issues triggered by the Great Financial Crisis. First, in most advanced countries, output remains far below the pre-recession trend, leading researchers to revisit the issue of hysteresis... Second, while inflation has decreased, it has decreased less than was anticipated (an outcome referred to as the “missing disinflation’’), leading researchers to revisit the relation between inflation and activity.
Clearly, if confirmed, either the presence of hysteresis or the deterioration of the relation between inflation and activity would have major implications for monetary policy and for stabilization policy more generally. ...
First, we revisit the hysteresis hypothesis, defined as the hypothesis that recessions may have permanent effects on the level of output relative to trend. ... We find that a high proportion of recessions, about two-thirds, are followed by lower output relative to the pre-recession trend even after the economy has recovered. Perhaps more surprisingly, in about one-half of those cases, the recession is followed not just by lower output, but by lower output growth relative to the pre-recession output trend. That is, as time passes following recessions, the gap between output and projected output on the basis of the pre-recession trend increases. ...
Turning to the Phillips curve relation, we ... find clear evidence that the effect of the unemployment gap on inflation has substantially decreased since the 1970s. Most of the decrease, however, took place before the early 1990s. Since then, the coefficient appears to have been stable, and, in most cases, significant...
Finally, in the last section, we explore the implications of our findings for monetary policy. The findings of the second section have opposite implications for monetary policy... To the extent that recessions are due to the perception or anticipation of lower underlying growth, this implies that estimates of potential output, based on the assumption of an unchanged underlying trend, may be too optimistic, and lead to too strong a policy response to movements in output. However, to the extent that recessions have hysteresis or super-hysteresis effects, then the cost of allowing downward movements in output in response to shifts in demand increases implies that a stronger response to output gaps is desirable.
The findings of the third section yield less dramatic conclusions. To the extent that the coefficient on the unemployment gap, while small, remains significant, the implication is that, within an inflation targeting framework, the interest rate rule should put more weight on the output gap relative to inflation. ...
Uber Is Not the Future of Work: The rise of Uber has convinced many pundits, economists, and policymakers that freelancing via digital platforms is becoming increasingly important to Americans’ livelihood. It has also promoted the idea that new technology—particularly the explosion of platforms enabling the gig economy—will fundamentally alter the future of work.
While Uber and other new companies in the gig economy receive a lot of attention, a look at Uber’s own data about its drivers’ schedules and pay reveals them to be much less consequential than most people assume. In fact, dwelling on these companies too much distracts from the central features of work in America that should be prominent in the public discussion: a disappointingly low minimum wage, lax overtime rules, weak collective-bargaining rights, and excessive unemployment, to name a few. When it comes to the future of work, these are the aspects of the labor market that deserve the most attention. ...
Me, at MoneyWatch:
Clinton is Both Right and Wrong about Glass-Steagall: In the Democratic presidential debate, Hillary Clinton said she opposed the reimplementation of the Glass-Steagall act. The Act was repealed in 1999, and many people believe easing the restrictions the Act imposed on banks caused the financial crisis. As I will explain shortly, the evidence does not support this claim, but that doesn’t mean the repeal of Glass-Steagall was a good idea...
Don't give in to fear:
Fearing Fear Itself, by Paul Krugman, Commentary, NY Times: Like millions of people, I’ve been obsessively following the news from Paris, putting aside other things to focus on the horror. It’s the natural human reaction. But let’s be clear: it’s also the reaction the terrorists want. And that’s something not everyone seems to understand.
Take, for example, Jeb Bush’s declaration that “this is an organized attempt to destroy Western civilization.” No, it isn’t. It’s an organized attempt to sow panic, which isn’t at all the same thing. And remarks like that, which blur that distinction and make terrorists seem more powerful than they are, just help the jihadists’ cause. ...
So what was Friday’s attack about? Killing random people in restaurants and at concerts is a strategy that reflects its perpetrators’ fundamental weakness. It isn’t going to establish a caliphate in Paris. What it can do, however, is inspire fear — which is why we call it terrorism, and shouldn’t dignify it with the name of war.
The point is not to minimize the horror. It is, instead, to emphasize that the biggest danger terrorism poses ... comes not from the direct harm inflicted, but from the wrong-headed responses it can inspire. ...
It would certainly be a very bad thing if France or other democracies ... try to achieve perfect security by eliminating every conceivable threat — a response that inevitably makes things worse... 9/11 ... was a disastrous war that actually empowered terrorists, and set the stage for the rise of ISIS. ...
So what can we say about how to respond to terrorism? Before the atrocities in Paris, the West’s general response involved a mix of policing, precaution, and military action. All involved difficult tradeoffs: surveillance versus privacy, protection versus freedom of movement, denying terrorists safe havens versus the costs and dangers of waging war abroad. And it was always obvious that sometimes a terrorist attack would slip through.
Paris may have changed that calculus a bit, especially when it comes to Europe’s handling of refugees, an agonizing issue... And there will have to be a post-mortem on why such an elaborate plot wasn’t spotted. But do you remember all the pronouncements that 9/11 would change everything? Well, it didn’t — and neither will this atrocity.
Again, the goal of terrorists is to inspire terror, because that’s all they’re capable of. And the most important thing our societies can do in response is to refuse to give in to fear.
- Hysteresis and Monetary Policy - Twenty-Cent Paradigms
- Why Not Just Print More Money? - The New Yorker
- Asking the question is the most important step - Andrew Gelman
- Gelman vs. Case-Deaton: academics vs. blogs, again - Noahpinion
- “Shrinking bull’s-eye” algorithm speeds up complex modeling - MIT News
- Trading Places (at Minneapolis Fed) - Economic Principals
- What if Labour’s pessimists are right - mainly macro
- Is China the new Japan? - Gavyn Davies
- Fear and Friends - Paul Krugman