Tim Taylor on why textbooks cost so much:
Thoughts on High-Priced Textbooks: High textbook prices are a pebble in the shoe of many college students. Sure, it's not the biggest financial issue they face, But it's a real and nagging annoyance that for hinders performance for many students. ...
David Kestenbaum and Jacob Goldstein at National Public Radio took up this question recently on one of their "Planet Money" podcasts. ... For economists, a highlight is that they converse with Greg Mankiw, author of what is currently the best-selling introductory economics textbook, which as they point out is selling for $286 on Amazon. Maybe this is a good place to point out that I am not a neutral observer in this argument: The third edition of my own Principles of Economics textbook is available through Textbook Media. The pricing varies from $25 for online access to the book, up through $60 for both a paper copy (soft-cover, black and white) and online access.
Several explanations for high textbook prices are on offer. The standard arguments are that textbook companies are marketing selling to professors, not to students, and professors are not necessarily very sensitive to textbook prices. (Indeed, one can argue that before the rapid rise in textbook prices in the last couple of decades, it made sense for professors not to focus too much on textbook prices.) Competition in the textbook market is limited, and the big publishers load up their books with features that might appeal to professors: multi-colored hardcover books, with DVDs and online access, together with test banks that allow professors to give quizzes and tests that can be machine-graded. At many colleges and universities, the intro econ class is taught in a large lecture format, which can include hundreds or even several thousand students, as well as a flock of teaching assistants, so some form of computerized grading and feedback is almost a necessity. Some of the marketing by textbook companies involves paying professors for reviewing chapters--of course in the hope that such reviewers will adopt the book.
The NPR show casts much of this dynamic as a "principal-agent problem," the name for a situation in which one person (the "principal") wants another person (the "agent") to act on their behalf, but lacks the ability to observe or evaluate the actions of the agent in a complete way. Principal-agent analysis is often used, for example, to think about the problem of a manager motivating employees. But it can also be used to consider the issue of students (the "principals") wanting the professor (the "agent") to choose the book that will best suit the needs of the students, with all factors of price and quality duly taken into account. The NPR reporters quote one expert saying that the profit margin for high school textbooks is 5-10%, because those books decisions are made by school districts and states that negotiate hard. However, profit margins on college textbooks--where the textbook choice is often made by a professor who may not even know the price that students will pay--are more like 20%.
The NPR report suggests this principal-agent framework to Greg Mankiw, author of the top-selling $286 economic textbook. Mankiw points out that principal-agent problems are in no way nefarious, but come up in many contexts. For example, when you get an operation, you rely on the doctor to make choices that involve costs; when you get your car fixed, you rely on a mechanic to make choices that involve costs; when you are having home repairs done, you rely on a repair person or a contractor to make choices that involve costs. Mankiw argues that professors, acting as the agents of students, have legitimate reason to be concerned about tradeoffs of time and money. As he notes, a high quality book is more important "than saving them a few dollars"--and he suggests that saving $30 isn't worth it for a low-quality book.
But of course, in the real world there are more choices than a high-quality $286 book and a low-quality $256 book. The PIRG student surveys suggest that up to two-thirds of students are avoiding buying textbooks at all, even though they fear it will hurt their grade, or are shifting to other classes with lower textbook costs. If a student is working 10 hours a week at a part-time job, making $8/hour after taxes, then the difference between $286 book and a $60 book is 28.25 hours--nearly three weeks of part-time work. I am unaware of any evidence in which students were randomly assigned different textbooks but otherwise taught and evaluated in the same way, and kept time diaries, which would show that higher-priced books save time or improve academic performance. It is by no means obvious that a lower-cost book (yes, like my own) works less well for students than a higher-cost book from a big publisher. Some would put that point more strongly.
A final dynamic that may be contributing to higher-prices textbooks is a sort of vicious circle related to the textbook resale market. The NPR report says that when selling a textbook over a three-year edition, a typical pattern was that sales fell by half after the first year and again by half after the second year, as students who had bought the first edition resold the book to later students. Of course, this dynamic also means that many students who bought the book new are not really paying full-price, but instead paying the original price minus the resale price. The argument is that as textbooks have increased in price, the resale market has become ever-more active, so that sales of a textbook in later years have dwindled much more quickly. Textbook companies react to this process by charging more for the new textbook, which of course only spurs more activity in the resale market.
A big question for the future of textbooks is how and in what ways they migrate to electronic forms. On one side, the hope is that electronic textbooks will offer expanded functionality, as well as being cheaper. But this future is not foreordained. At least at present, my sense is that the functionality of reading and taking notes in online textbooks hasn't yet caught up to the ease of reading on paper. Technology and better screens may well shift this balance over time. But even setting aside questions of reading for long periods of time on screen, or taking notes on screen, at present it remains harder to skip around in a computerized text between what you are currently reading and the earlier text that you need to be checking, as well as skipping to various graphs, tables, and definitions. To say it more simply, in a number of subjects it may still be harder to study an on-line text than to study a paper text.
Moreover, as textbook manufacturers shift to an on-line world, they will bring with them their full bag of tricks for getting paid. The Senack report notes:
Today’s marketplace offers more digital textbook options to the student consumer than ever. “Etextbooks” are digitized texts that students read on a laptop or tablet. Similar to PDF documents, e-textbooks enable students to annotate, highlight and search. The cost may be 40-50 percent of the print retail price, and access expires after 180 days. Publishers have introduced e-textbooks for nearly all their traditional textbook offerings. In addition, the emergence of the ereader like the Kindle and iPad, as well as the emergence of many e-textbook rental programs, all seemed to indicate that the e-textbook will alter the college textbook landscape for the better. However, despite this shift, users of e-textbooks are subject to expiration dates, on-line codes that only work once, page printing limits, and other tactics that only serve to restrict use and increase cost. Unfortunately for students, the publishing companies’ venture into e-textbooks is a continuation of the practices they use to monopolize the print market.
Posted by Mark Thoma on Thursday, October 16, 2014 at 11:29 AM in Economics, Universities |
Here are the conclusions to Regret and economic decision-making:
Conclusions We are clearly a long way from fully understanding how people behave in dynamic contexts. But our experimental data and that of earlier studies (Lohrenz 2007) suggest that regret is a part of the decision process and should not be overlooked. From a theoretical perspective, our work shows that regret aversion and counterfactual thinking make subtle predictions about behaviour in settings where past events serve as benchmarks. They are most vividly illustrated in the investment context.
Our theoretical findings show that if regret is anticipated, investors may keep their hands off risky investments, such as stocks, and not enter the market in the first place. Thus, anticipated regret aversion acts like a surrogate for higher risk aversion.
In contrast, once people have invested, they become very attached to their investment. Moreover, the better past performance was, the higher their commitment, because losses loom larger. This leads the investor to ‘gamble for resurrection’. In our experimental data, we very often observe exactly this pattern.
This dichotomy between ex ante and ex post risk appetites can be harmful for investors. It leads investors and businesses to escalate their commitment because of the sunk costs in their investments. For example, many investors missed out on the 2009 stock market rally while buckling down in the crash in 2007/2008, reluctant to sell early. Similarly, people who quit their jobs and invested their savings into their own business, often cannot with a cold, clear eye cut their losses and admit their business has failed.
Therefore, a better understanding of what motivates people to save and invest could enable us to help them avoid such mistakes, e.g. through educating people to set up clear budgets a priori or to impose a drop dead level for their losses. Such simple measures may help mitigate the effects of harmful emotional attachment and support individuals in making better decisions.
[This ("once people have invested, they become very attached to their investment" and cannot admit failure) includes investment in economic models and research (see previous post).]
Posted by Mark Thoma on Thursday, October 16, 2014 at 08:34 AM in Economics, Methodology |
Brad DeLong wonders why Cliff Asness in clinging to a theoretical model that has clearly been rejected by the data:
... What is not normal is to claim that your analysis back in 2010 that quantitative easing was generating major risks of inflation was dead-on.
What is not normal is to adopt the mental pose that your version of classical austerian economics cannot fail--that it can only be failed by an uncooperative and misbehaving world.
What is not normal is, after 4 1/2 years, in a week, a month, a six-month period in which market expectations of long-run future inflation continue on a downward trajectory, to refuse to mark your beliefs to market and demand that the market mark its beliefs to you. To still refuse to bring your mind into agreement with reality and demand that reality bring itself into agreement with your mind. To still refuse to say: "my intellectual adversaries back in 2010 had a definite point" and to say only: "IT'S NOT OVER YET!!!!"
There's a version of this in econometrics, i.e. you know the model is correct, you are just having trouble finding evidence for it. It goes as follows. You are testing a theory you came up with, but the data are uncooperative and say you are wrong. But instead of accepting that, you tell yourself "My theory is right, I just haven't found the right econometric specification yet. I need to add variables, remove variables, take a log, add an interaction, square a term, do a different correction for misspecification, try a different sample period, etc., etc., etc." Then, after finally digging out that one specification of the econometric model that confirms your hypothesis, you declare victory, write it up, and send it off (somehow never mentioning the intense specification mining that produced the result).
Too much econometric work proceeds along these lines. Not quite this blatantly, but that is, in effect, what happens in too many cases. I think it is often best to think of econometric results as the best case the researcher could make for a particular theory rather than a true test of the model.
Posted by Mark Thoma on Thursday, October 16, 2014 at 07:50 AM in Econometrics, Economics, Inflation |
Posted by Mark Thoma on Thursday, October 16, 2014 at 12:06 AM in Economics, Links |
A nice collection of essays on inequality and what can be done about it by Heather Boushey, Emmanuel Saez, Michael Ettlinger, and Fiona Chin:
Understanding economic inequality and growth at the top of the income ladder
For example, from Saez:
... Zucman and I show in our new working paper that the surge in wealth concentration and the erosion of middle class wealth can be explained by two factors. First, differences in the ability to save by the middle class and the wealthy means that more income inequality will translate into more inequality in savings. Upper earners will naturally save relatively more and accumulate more wealth as income inequality widens.
Second, the saving rate among the middle class has plummeted since the 1980s, in large part due to a surge in debt, in particular mortgage debt and student loans. With such low savings rates, middle class wealth formation is bound to stall. In contrast, the savings rate of the rich has remained substantial.
If such trends of growing income inequality and growing disparity in savings rates between the middle class and rich persist, then U.S. wealth inequality will continue to increase. The rich will be able to leave large estates to their heirs and the United States could find itself becoming a patrimonial society where inheritors dominate the top of the income and wealth distribution as famously pointed out by Piketty in his new book “Capital in the 21st Century.”
What should be done about the rise of income and wealth concentration in the United States? More progressive taxation would help on several fronts. Increasing the tax rate as incomes rise helps curb excessive and wasteful compensation of top income earners. Progressive taxation of capital income also reduces the rate of return on wealth, making it more difficult for large family fortunes to perpetuate themselves over generations. Progressive estate taxation is the most natural tool to prevent self-made wealth from becoming inherited wealth. At the same time, complementary policies are needed to encourage middle class wealth formation. Recent work in behavioral economics by Richard Thaler at the University of Chicago and Cass Sunstein at Harvard University shows that it is possible to encourage savings and wealth formation through well-designed programs that nudge people into savings.
Maybe if they had more income to save??? Another part of the essay gets at this (what I've called the mal-distribution of income, i.e. workers receiving less than the value of what they produce, and those at the top receiving more through rent-seeking and other means):
...while standard economic models assume that pay reflects productivity, there are strong reasons to be skeptical, especially at the top of the income ladder where the actual economic contribution of managers working in complex organizations is particularly difficult to measure. In this scenario, top earners might be able partly to set their own pay by bargaining harder or influencing executive compensation committees. Naturally, the incentives for such “rent-seeking” are much stronger when top tax rates are low.
In this scenario, cuts in top tax rates can still increase the share of total household income going to the top 1 percent at the expense of the remaining 99 percent. In other words, tax cuts for the wealthiest stimulate rent-seeking at the top but not overall economic growth—the key difference from the supply-side scenario that justified tax cuts for high income earners in the first place.
[I talked what I think should be done to curb rising inequality here and tried to make the point that one of the first things we can do is to claw back some of the income from high income earners and return it to those who actually deserve it. In the short-run, this can be done through progressive taxation and the redistribution of income to where it belongs, but in the longer run I'd like to see the distribution mechanism fixed, at least in part, through measures that increase the bargaining power of workers so that the playing filed is a bit more level. In addition, I'd also like to see measures/policies that will produce better jobs for working class households.]
Posted by Mark Thoma on Wednesday, October 15, 2014 at 10:38 AM in Economics, Income Distribution |
Josh Bivens has an adjective quibble:
Adjective Quibble: The Long-Term Unemployment Rate is NOT “Sticky” or “Stubborn”: A Wall Street Journal blog post this morning describes an Obama administration initiative to combat long-term unemployment. In the opening sentence, the author follows a too-common convention in describing the long-term unemployment rate as “sticky.” Sometimes the adjective is “stubborn.”
I know that this will sound like quibbling, but in this case adjectives really matter for understanding the problem. As a paper I co-wrote shows pretty clearly, the long-term unemployment rate (LTUR) has not been sticky or stubborn for years. In fact, the LTUR has fallen faster than one would expect given the overall pace of labor market improvement. It is true that the LTUR remains too high, but that is because it skyrocketed during the Great Recession and in the six months after its official end. But the LTUR has since then not become resistant to wider labor market improvement.
The concrete policy implication of recognizing this is that by far the most important thing that can be done to lower the still too-high LTUR is to maintain support for economic recovery more broadly. In today’s far too narrow macroeconomic policy debate, this simply means the Fed should not boost short-term interest rates until the labor market is much, much healthier (including a much lower LTUR). ...
And it's still far from too late for fiscal policy -- infrastructure spending for example -- to make a difference. But don't get your hopes up...
Posted by Mark Thoma on Wednesday, October 15, 2014 at 10:02 AM in Economics, Fiscal Policy, Monetary Policy, Unemployment |
Biagio Bossone and Richard Wood
To G-20 Leaders: Urgent Need to Boost Demand in the Eurozone: The economies in the Eurozone are continuing to slide into recession and depression. Senior officials of G-20 countries (including those in Australia, the host government) have not understood, or anticipated, that the Eurozone crisis is a major threat to global recovery. The officials have provided sub-standard advice to their leaders. The deepening crisis must be addressed. This article identifies a strong monetary/fiscal policy combination that could boost consumer and aggregate demand, and simultaneously address high public debt burdens and deflation.
1937: From the beginning, economists who had studied the Great Depression warned that policy makers needed, above all, to be careful not to pull another 1937 — a reference to the fateful year when FDR prematurely tried to balance the budget and the Fed prematurely tried to normalize monetary policy, aborting the recovery of the previous four years and sending the economy on another big downward slope.
Unfortunately, these warnings were ignored. ... And now things are sliding everywhere. Actually, Europe already had one 1937, with its slide into a double-dip recession; but now it’s very much looking like another. And the world economy as a whole is weakening fast. ...
I hope that the Fed will stop talking about exit strategies for a while. We are by no means out of the Lesser Depression.
Update: See also The Depressing Signals the Markets Are Sending About the Global Economy - NYTimes.com
Posted by Mark Thoma on Wednesday, October 15, 2014 at 10:01 AM in Economics, Fiscal Policy, Monetary Policy |
Public spending increased life expectancy in eastern Germany:
Three hours of life per euro, EurekAlert: Public spending appears to have contributed substantially to the fact that life expectancy in eastern Germany has not only increased, but is now almost equivalent to life expectancy in the west. While the possible connection of public spending and life expectancy has been a matter of debate, scientists at the Max Planck Institute for Demographic Research (MPIDR) have now for the first time quantified the effect. They found that for each additional euro the eastern Germans received in benefits from pensions and public health insurance after reunification, they gained on average three hours of life expectancy per person per year.
These are the conclusions of an analysis based on a newly developed set of age-specific data on public expenditures through the year 2000. MPIDR demographer Tobias Vogt published the results of the analysis recently in the scientific journal Journal of the Economics of Ageing. ...
"What has often been called an explosion in social spending in the wake of reunification has, however, led to a gratifying jump in life expectancy," says Tobias Vogt. ...
Additional expenditures by the health care system were found to have had a greater impact on life expectancy than higher pensions... However, Vogt observed, "without the pension payments of citizens in east and west converging to equivalent levels, the gap in life expectancy could not have been closed." This is because when there are no differences in the quality and level of medical care, the standard of living becomes the decisive factor in life expectancy. And the standard of living of older people is determined to a large extent by the size of their pensions. ...
Posted by Mark Thoma on Wednesday, October 15, 2014 at 10:00 AM in Economics, Fiscal Policy |
Jordan Weissmann asks Piketty about the IGM poll:
No, Mainstream Economists Did Not Just Reject Thomas Piketty’s Big Theory, by Jordan Weissmann: ...the University of Chicago’s Initiative on Global Markets ... asked economists whether they agreed or disagreed with the following statement: "The most powerful force pushing towards greater wealth inequality in the US since the 1970s is the gap between the after-tax return on capital and the economic growth rate.” ... Overwhelmingly, the panel’s answer was no, with only one out 36 panelists agreeing with the statement.
Afterwards, a number of journalists, economists, and other wags took to Twitter and blogs to talk about how Piketty had just gotten a black eye. ... Except ... Piketty ... never suggests r>g is the main reason behind the recent rise of inequality. Rather, [he] theorizes that, in the absence of government intervention, r>g ensures the future concentration of income and wealth. ... Ultimately,... IGM was asking economists to opine on an argument that nobody was making in the first place.
I found myself wondering: How would Piketty himself weigh in? “Well,” he told me in an email this morning, “I think the book makes pretty clear that the powerful force behind rising income and wealth inequality in the US since the 1970s is the rise of the inequality of labor earnings, itself due to a mixture of rising inequality in access to skills and higher education, and of exploding top managerial compensation (itself probably stimulated by large cuts in top tax rates), So this indeed has little to do with r>g.”
In short, you can add Piketty to the "Disagree" column, too.
The caption under the picture of Piketty in the article says it well:
He's probably thinking how it would be nice if people read his book before arguing with it.
See also Brad DeLong, Nick Bunker, and Matt O'Brien.
Posted by Mark Thoma on Wednesday, October 15, 2014 at 09:54 AM in Economics, Income Distribution |
Posted by Mark Thoma on Wednesday, October 15, 2014 at 12:06 AM in Economics, Links |
I have a new column:
What’s the Best Way to Overcome Rising Economic Inequality?: A debate over the use of progressive taxation and redistribution as a means of solving the problem of rising inequality erupted in the last week or so. The debate began with three publications, one from Edward Kleinbard, one from Nezih Guner, Martin Lopez-Daneri, and Gustavo Ventura, and one from Cathie Jo Martin and Alexander Hertel-Fernandez. They argue in turn that “progressive fiscal outcomes do not require particularly progressive tax systems,” “making taxes more progressive taxes won’t raise much revenue,” and “The way a tax system fights inequality isn't just redistribution. It's by generating enough revenue to fund programs and benefits that help middle class, working class, and poor people participate and succeed in the economy. While talk of taxing top earners may make for good political rhetoric on the left, relying on such taxes cannot pay the bills.” This brought responses from Jared Bernstein, Matt Bruenig, and Mike Konczal the three of whom, as Steve Waldman says in a nice summary of this debate, “offer responses that examine what ‘progressivity’ really means and offer support for taxing the rich more heavily than the poor.”
This debate brings up an important question: what is the best way to fight economic inequality? ...[continue]...
Posted by Mark Thoma on Tuesday, October 14, 2014 at 07:56 AM in Economics, Fiscal Times, Income Distribution |
Jean Tirole in the latest TSE Magazine:
Economics is a positive discipline as it aims to document and analyse individual and collective behaviours. It is also, and more importantly, a normative discipline as its main goal is to better the world through economic policies and recommendations.
Posted by Mark Thoma on Tuesday, October 14, 2014 at 07:55 AM in Economics, Methodology |
An entry in the ongoing debate over the Phillips curve:
The mythical Phillips curve?, by Simon Wren-Lewis, mainly macro: Suppose you had just an hour to teach the basics of macroeconomics, what relationship would you be sure to include? My answer would be the Phillips curve. With the Phillips curve you can go a long way to understanding what monetary policy is all about.
My faith in the Phillips curve comes from simple but highly plausible ideas. In a boom, demand is strong relative to the economy’s capacity to produce, so prices and wages tend to rise faster than in an economic downturn. However workers do not normally suffer from money illusion: in a boom they want higher real wages to go with increasing labour supply. Equally firms are interested in profit margins, so if costs rise, so will prices. As firms do not change prices every day, they will think about future as well as current costs. That means that inflation depends on expected inflation as well as some indicator of excess demand, like unemployment.
Microfoundations confirm this logic, but add a crucial point that is not immediately obvious. Inflation today will depend on expectations about inflation in the future, not expectations about current inflation. That is the major contribution of New Keynesian theory to macroeconomics. ...[turns to evidence]...
Is it this data which makes me believe in the Phillips curve? To be honest, no. Instead it is the basic theory that I discussed at the beginning of this post. It may also be because I’m old enough to remember the 1970s when there were still economists around who denied that lower unemployment would lead to higher inflation, or who thought that the influence of expectations on inflation was weak, or who thought any relationship could be negated by direct controls on wages and prices, with disastrous results. But given how ‘noisy’ macro data normally is, I find the data I have shown here pretty consistent with my beliefs.
Posted by Mark Thoma on Tuesday, October 14, 2014 at 07:54 AM in Economics, Inflation, Macroeconomics, Unemployment |
Posted by Mark Thoma on Tuesday, October 14, 2014 at 12:06 AM in Economics, Links |
This is not my area, so I'll turn the discussion over to others:
Research by Tirole, 61, now a professor of economics at the University of Toulouse in his native France, has highlighted the need for regulation to be tailored to individual industries, while creating a general framework for understanding the nuances of regulation across industries.
Tirole received his PhD in economics from MIT in 1981 under the supervision of Eric Maskin, a former MIT professor (now at Harvard University) who was himself a winner of the Nobel Prize in economic sciences in 2007.
Tirole remains an MIT faculty affiliate as the Annual Visiting Professor of Economics in MIT’s Department of Economics. He has co-authored papers with a number of members of the MIT economics faculty, including Olivier Blanchard, Jerry Hausman, Bengt Holmstrom, and Paul Joskow. Tirole and Holmstrom co-authored a 2011 book about liquidity in markets, “Inside and Outside Liquidity.”
Many of Tirole’s research advances have involved cases of oligopoly, where a few firms dominate a given industry, controlling the quantity and quality of goods being produced, as well as prices.
“From the mid-1980s and onwards, Jean Tirole has breathed new life into research on such market failures,” the Royal Swedish Academy of Science, which grants the Nobel awards, stated on Monday. “His analysis of firms with market power provides a unified theory with a strong bearing on central policy questions: how should the government deal with mergers or cartels, and how should it regulate monopolies?”
The academy emphasized that its award to Tirole also recognizes many of his findings on regulatory policy, some of which employ game theory and contract theory to describe the dynamics of regulating markets. For instance, regulators may know less than they wish about a firm’s costs and strategic options, so regulators can offer firms a series of options, in essence, regarding the regulatory contract the firm will enter into. It may also make sense, Tirole has concluded, for regulations to be drawn up in recognition of the fact that firms may hide information from regulators.
As the Nobel citation also noted, Tirole observed the potential for phenomena such as the “ratchet effect,” which relates to the timeframe of regulations: If a company does well in a short-term regulatory time frame, regulations may be ratcheted up, lowering the incentives for the firm to perform as well. Alternately, Tirole has suggested, regulators might impose lesser conditions and study their effects. ...
Posted by Mark Thoma on Monday, October 13, 2014 at 08:52 AM in Economics |
Why didn't homeowners, unlike banks, get the debt relief they needed?:
Revenge of the Unforgiven, by Paul Krugman, Commentary, NY Times: Stop me if you’ve heard this before: The world economy appears to be stumbling. For a while, things seemed to be looking up, and there was talk about green shoots of recovery. But now growth is stalling, and the specter of deflation looms.
If this story sounds familiar, it should; it has played out repeatedly since 2008. ... Why does this keep happening? ... The answer, I’d suggest, is an excess of virtue. Righteousness is killing the world economy.
What, after all, is our fundamental economic problem? ... In the years leading up to the Great Recession, we had an explosion of credit..., debt levels that would once have been considered deeply unsound became the norm.
Then the music stopped, the money stopped flowing, and everyone began trying to “deleverage,” to reduce the level of debt. For each individual, this was prudent. But ... when everyone tries to pay down debt at the same time, you get a depressed economy.
So what can be done? Historically, the solution to high levels of debt has often involved writing off and forgiving much of that debt. ...
What’s striking about the past few years, however, is how little debt relief has actually taken place. ...
Why are debtors receiving so little relief? As I said, it’s about righteousness — the sense that any kind of debt forgiveness would involve rewarding bad behavior. In America, the famous Rick Santelli rant that gave birth to the Tea Party wasn’t about taxes or spending — it was a furious denunciation of proposals to help troubled homeowners. In Europe, austerity policies have been driven less by economic analysis than by Germany’s moral indignation over the notion that irresponsible borrowers might not face the full consequences of their actions.
So the policy response to a crisis of excessive debt has, in effect, been a demand that debtors pay off their debts in full. What does history say about that strategy? That’s easy: It doesn’t work. ...
But it has been very hard to get either the policy elite or the public to understand that sometimes debt relief is in everyone’s interest. Instead, the response to poor economic performance has essentially been that the beatings will continue until morale improves.
Maybe, just maybe, bad news — say, a recession in Germany — will finally bring an end to this destructive reign of virtue. But don’t count on it.
Posted by Mark Thoma on Monday, October 13, 2014 at 12:24 AM in Economics, Policy |
The Methodical Fed, by Tim Duy: Just a few months ago the specter of inflation dominated Wall Street. Now the tables have turned and low inflation is again the worry du jour as a deflationary wave propagates from the rest of the world - think Europe, China, oil prices. How quickly sentiment changes.
And given how quickly sentiment changes, I am loath to make any predictions on the implications for Fed policy. The very earliest one could even imagine a possible rate hike would be March of next year, still five months away. But since that month is the preference of Fed hawks, better to think that the earliest is the June meeting, still eight months away.
Eight months is a long time. We could pass through two more of these sentiment cycles between now and then. Or maybe the story breaks decisively one direction or the other. Given the uncertainty of economy activity, it is clearly dangerous to become too wedded to a particular date for liftoff. At best we can describe probabilities.
But what I think is often missing is a recognition that through all of the ups and downs of last year, the Fed has sent a very consistent signal: The ongoing improvement in the US economy justifies the steady removal of monetary accommodation. To be sure, we can quibble over the timing of the first move, but consider the path since last May:
- In May of 2013, then-Federal Reserve Chair Ben Bernanke opens the door for tapering of asset purchases.
- The actual tapering begins in December of that year, two meetings later than expected. I think it is heroic to believe those 12 weeks were materially important. By that point, the underlying expectation was well established.
- Although they claimed that the pace of tapering was data dependent, they proceeded on a very methodical path of $10 billion cuts at each meeting. They proceeded on this path despite persistent below target inflation.
- They clearly established that this month's meeting is very, very likely to be the end of the asset purchase program. Again, they stated this expectation despite low inflation.
- Despite the current turmoil, I still expect the asset purchase program to end. I think hawks and doves alike want out of that program. They want to return to interest rate-based policy.
- Even as inflation bounces along below target, they formulated and announced the path of policy normalization. That normalization includes the expectation that the expansion of the balance sheet was temporary and thus will be reversed.
- Even as inflation has bounced along below trend, they have repeatedly warned via the Summary of Economic Projections that rate hikes are just around the corner, and that market participants should plan accordingly.
- And while New York Federal Reserve President William Dudley foreshadowed the minutes and a week of Fedspeak that was generally interpreted dovishly, the key takeaway was although the US economy was not expected to accelerate further, the current path was sufficient to believe in the "consensus view is that lift-off will take place around the middle of next year. That seems like a reasonable view to me" even "if it were to cause a bump or two in financial markets." Those remarks were seconded by San Francisco Federal Reserve President John Williams. So the moderates and hawks both continue to send signal rates hikes by the middle of next year, leaving the voices of doves Minneapolis Federal Reserve President Narayana Kocherlakota and Chicago Federal Reserve President Charles Evans sounding very lonely. Fed Chair Janet Yellen has been somewhat absent from the current debate, although we suppose she sympathizes more with the dovish position.
Given the consistent, methodological approach to policy normalization witnessed over the past year, is it wonder that inflation signals all look soft? For example:
Fed signaling resulted in consistent, downward pressure on inflation expectations. Hence what they view as a dovish policy stance, I view as a hawkish policy stance. And most remarkable to me is that they never realized what I always thought was obvious - that they were setting the stage for a return trip to the zero bound in the next recession. Matthew C Klein at the Financial Times points us to this from the Fed minutes:
For example, respondents to the recent Survey of Primary Dealers placed considerable odds on the federal funds rate returning to the zero lower bound during the two years following the initial increase in that rate. The probability that investors attach to such low interest rate scenarios could pull the expected path of the federal funds rate computed from market quotes below most Committee participants’ assessments of appropriate policy.
The most hawkish projection for the long-term Federal Funds rate is 4.25%. During the downside, cutting cycles are generally in excess of 500bp. The math here is not that complicated. I struggle to find the scenario by which policy does not revert to the zero lower bound. That would imply that the Fed allows conditions to evolve such that the appropriate Fed Funds rate is well in excess of 6%. But given the Fed thinks that the equilibrium real rate has fallen, this implies a willingness to support higher inflation expectations, which is something I just don't see at this point.
And I don't think it is just me. I don't think Wall Street sees the path out. Hence the high probability assigned to a return to the zero bound. Hence also the flattening of the yield curve since tapering began:
I think the Fed should very much change its messaging if policymakers want to lift us from the zero bound for more than a couple of years. I think they should drop the calendar-based guidance they are all now giving. I think they should drop the SEP dot plot, because that clearly sends a hawkish message. I think they should drop reference to the labor market outcomes in terms of quantities in favor of price signals (wages, a direction they seem to be moving). I think they should define their policy strategy to make clear they intend to lift the economy off the zero bound permanently, but that I believe requires them to abandon their 2% inflation fetish (and note that on this I believe their behavior is clearly more consistent with a 2% ceiling then a symmetrical target). They also need to adandon their claim that the balance sheet will be reversed. The size of the balance sheet should not be a policy objective, only the economic outcomes yielded by the size of the balance sheet.
That said, I am also beginning to expect that a return to the zero bound is almost guaranteed. I fear the time has passed for the appropriate mix of fiscal and monetary policy that leaps the economy to a higher equilibrium. But that is a topic for another post.
Bottom Line: Fed policy might sound dovish this week, but take note the the underlying tone has been methodically hawkish for a long, long time. And markets have responded accordingly, including anticipating a return to the zero bound when the next recession hits. Nor should this be unexpected. Monetary policymakers have yet to set clear objectives that includes a high probability that the zero bound is left behind for good.
Posted by Mark Thoma on Monday, October 13, 2014 at 12:15 AM in Economics, Fed Watch, Monetary Policy |
Posted by Mark Thoma on Monday, October 13, 2014 at 12:06 AM in Economics, Links |
In case you missed this from Paul Krugman:
In Defense of Obama, by Paul Krugman, Rolling Stone: When it comes to Barack Obama, I've always been out of sync. Back in 2008, when many liberals were wildly enthusiastic about his candidacy and his press was strongly favorable, I was skeptical. I worried that he was naive, that his talk about transcending the political divide was a dangerous illusion given the unyielding extremism of the modern American right. Furthermore, it seemed clear to me that, far from being the transformational figure his supporters imagined, he was rather conventional-minded: Even before taking office, he showed signs of paying far too much attention to what some of us would later take to calling Very Serious People, people who regarded cutting budget deficits and a willingness to slash Social Security as the very essence of political virtue.
And I wasn't wrong. Obama was indeed naive: He faced scorched-earth Republican opposition from Day One, and it took him years to start dealing with that opposition realistically. Furthermore, he came perilously close to doing terrible things to the U.S. safety net in pursuit of a budget Grand Bargain; we were saved from significant cuts to Social Security and a rise in the Medicare age only by Republican greed, the GOP's unwillingness to make even token concessions.
But now the shoe is on the other foot: Obama faces trash talk left, right and center – literally – and doesn't deserve it. Despite bitter opposition, despite having come close to self-inflicted disaster, Obama has emerged as one of the most consequential and, yes, successful presidents in American history. His health reform is imperfect but still a huge step forward – and it's working better than anyone expected. Financial reform fell far short of what should have happened, but it's much more effective than you'd think. Economic management has been half-crippled by Republican obstruction, but has nonetheless been much better than in other advanced countries. And environmental policy is starting to look like it could be a major legacy.
I'll go through those achievements shortly. First, however, let's take a moment to talk about the current wave of Obama-bashing. ...
Posted by Mark Thoma on Sunday, October 12, 2014 at 09:35 AM in Economics, Politics |
Lower oil prices: For the last 3 years, European Brent has mostly traded in a range of $100-$120 with West Texas intermediate selling at a $5 to $20 discount. But in September Brent started moving below $100 and now stands at $90 a barrel, and the spread over U.S. domestic crude has narrowed. Here I take a look at some of the factors behind these developments. ...
One factor has been weakness in Europe and Japan, which means lower demand for commodities as well as a strengthening dollar. ...
In terms of factors specific to the oil market, one important development has been the recovery of oil production from Libya. ...
But the biggest story is still the United States. Thanks to horizontal drilling to get oil out of tight underground formations... Just how low the price can go before some of the frackers start to drop out is subject to some debate. ...
Posted by Mark Thoma on Sunday, October 12, 2014 at 08:51 AM in Economics, Oil |
"This column turns to economic history to investigate whether the financial sector is too big":
The great mortgaging, by Òscar Jordà, Alan Taylor, Moritz Schularick, Vox EU: Understanding the causes and consequences of the rise of finance is a first order concern for macroeconomists and policymakers. The increasing size and leverage of the financial sector has been interpreted as an indicator of excessive risk taking1 and has been linked to the increase in income inequality in advanced economies,2 as well as to the growing political influence of the financial industry (Johnson and Kwak 2010). Yet surprisingly little is known about the driving forces behind these trends.
In our recent research we turn to economic history. We build on our earlier work that first demonstrated the dramatic growth of the balance sheets of financial intermediaries in the second half of the 20th century and how periods of rapid credit growth were often followed by systemic financial crises and severe recessions (Schularick and Taylor 2012, Jordà, Schularick, and Taylor 2013).
We unveil a new long-run dataset covering disaggregated bank credit for 17 advanced economies from 1870 to today (Jordà, Schularick, and Taylor 2014). The new data allow us to delve much deeper than has been previously possible into the forces driving the growth of finance. For the first time we can construct the share of mortgage loans in total bank lending for most countries back to the 19th century. In addition, we can calculate the share of bank credit to business and households for most countries for the decades after WW2, and back to the 19th century for a handful of countries. ...
In the second half of the 20th century, banks and households have been heavily leveraging up through mortgages. Mortgage credit on the balance sheets of banks has been the driving force behind the increasing financialisation of advanced economies. Our research shows that this great mortgaging has been a major influence on financial fragility in advanced economies, and has also increasingly left its mark on business cycle dynamics.
[There is quite a bit more discussion and evidence in the article.]
Posted by Mark Thoma on Sunday, October 12, 2014 at 08:34 AM
Posted by Mark Thoma on Sunday, October 12, 2014 at 12:06 AM in Economics, Links |
Barkley Rosser feels "sorry for Fred." Sort of:
Hiatt Hysterical Over Losing His Schtick: Poor Fred Hiatt. For years, this Editor of the Editorial page of the Washington Post has made his named appearances on the editorial page (he daily bloviates the main ed lead anonymously) only to call for cutting Social Security, and occasionally Medicare as well. This has been his schtick for many years. Now it is over, but he fails to recognize it. ...
So, I feel sorry for Fred. Beating up on seniors who have paid in their taxes for what they are getting has been the one an only topic that has inspired him to write columns under his own name for many years. The new projections of lower deficits, good news to most of us, simply do not register with him. Actually, they probably do. But Krugman is right. As much as anybody, he is the longstanding VSP in DC who has been whining for years about cutting Social Security and Medicare, whose excuse for this argument has simply disappeared, but he and his pals simply are not willing to face the new facts.
Posted by Mark Thoma on Saturday, October 11, 2014 at 09:08 AM in Budget Deficit, Economics, Politics, Social Insurance, Social Security |
Steve Waldman has a nice discussion of a recent debate:
Scale, progressivity, and socioeconomic cohesion, Interfluidity: Today seems to be the day to talk about whether those of us concerned with poverty and inequality should focus on progressive taxation. Edward D. Kleinbard in the New York Times and Cathie Jo Martin and Alexander Hertel-Fernandez at Vox argue that focusing on progressivity can be counterproductive. Jared Bernstein, Matt Bruenig, and Mike Konczal offer responses offer responses that examine what “progressivity” really means and offer support for taxing the rich more heavily than the poor. This is an intramural fight. All of these writers presume a shared goal of reducing inequality and increasing socioeconomic cohesion. Me too.
I don’t think we should be very categorical about the question of tax progressivity. We should recognize that, as a political matter, there may be tradeoffs between the scale of benefits and progressivity of the taxation that helps support them. We should be willing to trade some progressivity for a larger scale. Reducing inequality requires a large transfers footprint more than it requires steeply increasing tax rates. But, ceteris paribus, increasing tax rates do help. Also, high marginal tax rates may have indirect effects, especially on corporate behavior, that are socially valuable. We should be willing sometimes to trade tax progressivity for scale. But we should drive a hard bargain.
First, let’s define some terms...
Posted by Mark Thoma on Saturday, October 11, 2014 at 08:37 AM in Economics, Income Distribution, Taxes |
Paul Krugman is getting worried about Europe again:
Europanic 2.0: Anyone who works in international monetary economics is familiar with Dornbusch’s Law:
The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.
And so it is with the latest euro crisis. Not that long ago the austerians who had dictated macro policy in the euro area were strutting around, proclaiming victory on the basis of a modest uptick in growth. Then inflation plunged and the eurozone economy began to sputter — and perhaps more important, everyone looked at the fundamentals again and realized that the situation remains extremely dire.
Now, things looked very dire in the summer of 2012, too, and Mario Draghi pulled Europe back from the brink. And maybe, just maybe, he can do it again. But the task looks much harder. ...
Europe has surprised many people, myself included, with its resilience. And I do think the Draghi-era ECB has become a major source of strength. But I (and others I talk to) are having an ever harder time seeing how this ends — or rather, how it ends non-catastrophically. You may find a story in which Marine Le Pen takes France out of both the euro and the EU implausible; but what’s your scenario?
Posted by Mark Thoma on Saturday, October 11, 2014 at 08:19 AM in Economics |
Posted by Mark Thoma on Saturday, October 11, 2014 at 12:06 AM in Economics, Links |
Jared Bernstein wants to correct a potential "misimpression" of an op-ed by Ed Kleinbard (this was in today's links):
No, Ed Kleinbard Does Not Want a Less Progressive Tax System: I favorably reviewed Ed Kleinbard’s book here the other day so I’m obliged to step in a correct what looks to me like a misimpression growing out of an oped he has in today’s NYT.
Because the oped is entitled “Don’t Soak the Rich” and because Ed, IMHO, doesn’t articulate the nuances in his argument the way he needs to, the oped is being misrepresented as a call for a less progressive tax system (I also think Ed’s mistaken in his claim that the US tax system, all in, is the most progressive across advanced economies—in fact, it’s only mildly progressive…but more on that later).
For example, responding to the oped, Len Berman, a DC tax expert, tweeted “a progressive’s call for less progressive taxation.”
I can see where Len gets that from the piece, and obviously Ed will have to speak for himself, but Ed’s book clearly supports progressive taxation. He may not see the need to make the tax system more progressive, though his book calls for just that in ways I’ll note in a moment. But he certainly does not call for less progressivity. ...
Posted by Mark Thoma on Friday, October 10, 2014 at 11:19 AM in Economics, Taxes |
Why isn't America celebrating the large fall in the deficit?:
Secret Deficit Lovers, by Paul Krugman, Commentary, NY Times: What if they balanced the budget and nobody knew or cared?
O.K., the federal budget hasn’t actually been balanced. But the Congressional Budget Office has tallied up the totals for fiscal 2014..., and reports that the deficit plunge of the past several years continues. ...
So where are the ticker-tape parades? For that matter, where are the front-page news reports? After all, talk about the evils of deficits and the grave fiscal danger facing America dominated Washington for years. Shouldn’t we be making a big deal of the fact that the alleged crisis is over?
Well, we aren’t, and once you understand why, you also understand what fiscal hysteria was really about.
First, ordinary Americans aren’t celebrating the deficit’s decline because they don’t know about it. That’s not mere speculation...
Why doesn’t the public know better? Probably because of the way much of the news media report this and other issues, with bad news played up and good news downplayed if it’s reported at all.
This has been glaringly obvious in the case of health reform, where every problem ... has been the subject of headlines, while in right-wing media — and to some extent in mainstream news sources — favorable developments go unremarked. As a result, many people — even, in my experience, liberals — have the impression that the rollout of Obamacare has been a disaster, and have no idea that enrollment is above expectations, costs are lower than expected, and the number of Americans without insurance has dropped sharply. Surely something similar has happened on the budget deficit. ...
Deficit scolds actually love big budget deficits, and hate it when those deficits get smaller. Why? Because fears of a fiscal crisis — fears that they feed assiduously — are their best hope of getting what they really want: big cuts in social programs. ...
But isn’t the falling deficit just a short-term blip, with the long-run outlook as dire as ever? Actually, no..., there has ... been a dramatic slowdown in the growth of health spending — and if that continues, the long-run fiscal outlook is much better than anyone thought possible not long ago. ...
So let’s say goodbye to fiscal hysteria. I know that the deficit scolds are having a hard time letting go; they’re still trying to bring back the days when Bowles and Simpson bestrode the Beltway like colossi. But those days aren’t coming back, and we should be glad.
Posted by Mark Thoma on Friday, October 10, 2014 at 12:24 AM in Budget Deficit, Economics, Politics, Press |
Posted by Mark Thoma on Friday, October 10, 2014 at 12:06 AM in Economics, Links |
Busy day today -- a couple of quick ones for now. This is Tim Taylor:
The Light Bulb Cartel and Planned Obsolescence: The old 1951 movie "The Man in the White Suit," starring Alec Guinness, is both an entertaining adventure/comedy and a meditation on technology and planned obsolescence. The Alec Guinness character invents a wonderful new fabric that will never get dirty and never wear out. He sees a future where ordinary people will save money on clothes and cleaning expenses. People marvel at the invention at first, but soon everyone is against him: the textile and clothing companies fear his cloth will put them out of business, the workers in those companies fear losing their jobs, and those who do the washing fear losing work, too. Near the end of the movie, one character notes wryly that markets won't function if the products work too well. He says: “What do you think happened to all the other things? The razor blade that doesn’t get blunt? The car that runs on water with a pinch of something else?”
It's harder to come up with clear-cut real-world example of where companies sought to reduce the quality of a product in order to boost sales. After all, in real-world markets there should usually be a mixture of lower-quality, lower-price products and higher-quality, higher-price products, and what people want to buy will have a substantial effect on what gets produced. But in the October 2014 issue of IEEE Spectrum, Markus Krajewski tells the story of "The Great Lightbulb Conspiracy: The Phoebus cartel engineered a shorter-lived lightbulb and gave birth to planned obsolescence." ...
Posted by Mark Thoma on Thursday, October 9, 2014 at 07:25 AM in Economics |
Do we need a crisis to reduce the deficit?: The macroeconomic case for not cutting the deficit straight after a major recession is as watertight as these things get, at least outside of the Eurozone. (It is also true for the Eurozone, but just a bit more complicated, so its easier to just focus on the US and UK in this post.) If you want to bring the government deficit and debt down, you do so when interest rates are free to counter the impact on aggregate demand. As the problems of high government debt are long term there is no urgency for debt reduction, so the problem can wait. The costs of fiscal consolidation in a liquidity trap are large and immediate, as we have experienced to our cost.
Sometimes austerity proponents will admit this basic macroeconomic truth, but say that it ignores the politics. Politics means that it is very difficult for governments to reduce debt during booms, they say. Although it would be nice to wait for interest rates to rise before cutting the deficit, it will not happen if we do, so we have to cut now. Like all good myths, this is based on a half truth: in the 30 years before the recession, debt tended to rise as a share of GDP in most OECD countries. And it always sounds wise to say you cannot trust politicians.
However both the UK and US show that this is not some kind of iron law of politics. ...
Posted by Mark Thoma on Thursday, October 9, 2014 at 07:24 AM in Budget Deficit, Economics, Politics |
Posted by Mark Thoma on Thursday, October 9, 2014 at 12:06 AM in Economics, Links |
Carter Price and Heather Boushey:
How are economic inequality and growth connected?, by Carter C. Price and Heather Boushey: ... In the past several decades, economic inequality in the United States and other wealthy nations has risen sharply, spurring renewed interest in the question of whether and how changes in income distributions affect economic wellbeing. Over the same time period, economic inequality has persisted and even grown in many poorer economies.
These trends have sparked economists to conduct empirical studies, analyzing data across states and countries, to see if there is a direct relationship between economic inequality, and economic growth and stability. Early empirical work on this question generally found inequality is harmful for economic growth. Improved data and techniques added to this body of research, but the newer literature was generally inconclusive, with some finding a negative relationship between economic growth and inequality while others finding the opposite.
The latest research, however, provides nuance that can explain many of the conflicting trends within the earlier body of research. There is growing evidence that inequality is bad for growth in the long run. Specifically, a number of studies show that higher inequality is associated with slower income gains among those not at the top of the income and wealth spectrum. ...
In this paper, we review the recent empirical economic literature that specifically examines the effect inequality has on economic growth, wellbeing, or stability. This newly available research looks across developing and advanced countries and within the United States. Most research shows that, in the long term, inequality is negatively related to economic growth and that countries with less disparity and a larger middle class boast stronger and more stable growth. Some studies do suggest that in the short run, inequality may spur growth before hindering it over the longer term, but overall there is growing evidence that, in the long run, more equitable societies are associated with higher rates of growth. ...
Important as well for the purposes of this paper is this—the latest economic research we reviewed only examines the outcome of whether there are results for regressions that demonstrate positive or negative relationships between inequality and economic growth and stability. This means the paper cannot provide clear guidance for policymakers on exactly how to address inequality or mitigate its effects on growth. In other words, the research examined in this paper generally does not identify the channels or mechanisms by which inequality affects growth. ...
This paper does not contain policy advice. Instead, it contains analysis that largely demonstrates there are direct, and possibly causal, relationships between economic inequality and growth—places that begin with a lower level of inequality subsequently tend to grow faster and have longer periods of growth than those with a higher level of inequality. In future research, we will focus on the channels...
Posted by Mark Thoma on Wednesday, October 8, 2014 at 08:46 AM in Economics, Income Distribution |
I've noted this several times in the past, but it's worth pointing out again. The problems in the shadow banking sector are still present for the most part. From Tim Taylor:
Shadow Banking: U.S. Risks Persist: ...A "shadow bank" is any financial institution that gets funds from customers and then in some way lends the money to borrowers. However, a shadow bank doesn't have deposit insurance. And while the shadow bank often faces some regulation, it typically falls well short of the detailed level of risk regulation that real banks face. In this post in May, I tried to explain how shadow banking works in more detail. Many of the financial institutions at the heart of the financial crisis were "shadow banks." ...
Five years past the end of the Great Recession, how vulnerable is the U.S. and the world economy to instability from shadow banking? ... The IMF devotes a chapter in its October 2014 Global Financial Stability Report to "Shadow Banking Around the Globe: How Large, and How Risky?" ...
It is discomforting to me to read that for the U.S., shadow banking risks are "slightly below precrisis levels." In general, the policy approach here is clear enough. As the IMF notes: "Overall, the continued expansion of finance outside the regulatory perimeter calls for a more encompassing approach to regulation and supervision that combines a focus on both activities and entities and places greater emphasis on systemic risk and improved transparency."
Easy for them to say! But when you dig down into the specifics of the shadow banking sector, not so easy to do.
Posted by Mark Thoma on Wednesday, October 8, 2014 at 08:46 AM in Economics, Financial System, Regulation |
If the number of retweets of a link is any indication, there seems to be a lot of interest in this paper:
Busts hurt more than booms help: New lessons for growth policy from global wellbeing surveys, by Jan-Emmanuel De Neve and Michael I. Norton, Vox EU: Wellbeing measures allow us to distinguish higher incomes from higher happiness. This column looks at new welfare measures and macroeconomic fluctuations. It presents evidence that the life satisfaction of individuals is between two and eight times more sensitive to negative economic growth than it is to positive economic growth. Engineering economic ‘booms’ that risk even short ‘busts’ is unlikely to improve societal wellbeing in the long run.
To say it another way, "policymakers seeking to raise wellbeing should focus more on preventing busts than inculcating booms."
Posted by Mark Thoma on Wednesday, October 8, 2014 at 12:15 AM in Economics, Policy |
Posted by Mark Thoma on Wednesday, October 8, 2014 at 12:06 AM in Economics, Links |
It’s Not a Skills Gap That’s Holding Wages Down: It's the Weak Economy, Among Other Things: The inadequate quantity and quality of American jobs is one of the most fundamental economic challenges we face. It’s not the only challenge: Poverty, inequality, and stagnant mobility loom large, as well. But in a nation like ours, where wages and salaries are key to the living standards of working-age households, all these challenges flow from the labor market problem.
OK, but this is a supposed to be an article about technology. What’s the linkage between technology and this fundamental problem? As a D.C.-based economist who’s been working on the issue of jobs and earnings for almost 25 years, trust me when I tell you that most policy makers believe the following:
“Yes, there’s a problem of job quantity and quality, but it’s largely a skills problem. Because of recent technological advances, most notably computerization, an increasing share of the workforce lacks the skills to meet the demands of today’s workplaces.
What’s more, the pace at which technology is replacing the inadequately skilled is accelerating—think robotics and artificial intelligence. These dynamics explain growing wage stagnation, wage inequality, and the structural unemployment of those without college degrees.”
Problem is, most of that is wrong.
Technology and employers’ skill demands have played a critical role in our job market forever, but they turn out to be of limited use in explaining the depressed incomes of today, or of the past decade. ...
This is part of a post from three years ago when people were making similar arguments about the skills gap (another way of saying the problem is structural, not cyclical):
I wish I'd remembered point three when I wrote recently about the difficulty of separating cyclical and structural unemployment. I was saying, essentially, the same thing that Peter Diamnond says here (via):
...Third, I am skeptical of the value of attempting to separate cyclical from structural unemployment over a business cycle.... The tighter the labor market and the more valuable the filling of a vacancy, the more a firm is willing to hire a worker who is a less good match, who may need more training.... [A] worker who might be viewed as structurally unemployed, as facing serious mismatch in the current state of the economy, may be readily employable in a tight labor market. The common practice of thinking about the extent of unemployment as a sum of frictional, structural and cyclical parts misses the point.... [D]irect measures of frictional or structural unemployment... dependent on the tightness of the labor market... have limited relevance for the role of demand stimulation policies. The idea that the US economy is not adaptable and capable of dealing with the need for skills and jobs to adapt to each other is peculiar, given the long history of unemployment going up and down. When the labor market is tight and firms have trouble finding workers, they reach out to places they have not looked before and extend training in order to find workers who can fill their needs. ...
Here's (part of) the post of mine referred to above:
Cyclical and structural unemployment can be hard to tell apart. For example, suppose that a business owner would like to hire someone to operate a complicated piece of machinery, and needs someone with experience. The owner offers $10 per hour, but, unfortunately, no one applies. Interviewed by the local paper, the owner complains that qualified workers simply aren't available.
However, that is not true. There is an unemployed worker who has been running that kind of machine for 10 years. He's good at it, and only lost his job due to the fact that the place he had worked for the last 10 years shut its doors in the recession. At $15 per hour, or more, he would have taken the job. But $10 is just not enough to pay the bills and save the house, and he decides to hold out and hope that something better comes along.
So whose fault is it? Should be blame the worker for being unwilling to take a decent job due to the fact that it doesn't pay enough (perhaps unemployment compensation is helping the worker to wait for a job that will pay enough to support the household)? Should we blame the store owner for not paying enough to attract workers with families to support? Neither, the problem is lack of demand.
If times were better, i.e. demand were stronger, the business owner could afford to pay $15, and would -- problem solved. So, all that is needed is an increase in demand for the products the business sells (demand that would exist if the worker and others like him had jobs). But at current demand levels, which are depressed, it is not worth it to pay that much. The business owner would be losing money.
So is the problem cyclical or structural? It will look like structural unemployment in the data, the owner can't find anyone who is qualified who will take the job at the wage being offered, but the heart the problem is a lack in demand. ...
Or, as I've told the story at other times, there is a worker in another city who is unemployed, well--trained for this job, but the wage that is offered does not provide enough income to justify moving. At a higher wage, it might. Again, a problem that looks structural is actually due to lack of demand. With more demand, and the ability to pay a higher wage, the firm would find the skilled worker it seeks.
But I like the way Peter Diamond said it best.
Posted by Mark Thoma on Tuesday, October 7, 2014 at 09:45 AM in Economics, Unemployment |
Where have I seen this game played before? This is from Chris Dillow:
"The economy", by Chris Dillow: On the Today programme yesterday, Nick Clegg said (2'11 in)... Then on PM yesterday (about 17'402 in), Carolyn Quinn said...
In the context she's using the word, she clearly means not "fix the economy" but "fix the deficit".
Now, I had thought that Clegg had merely mis-spoke. But it's unlikely that two people would mis-speak in exactly the same way within hours of each other. I suspect something else is going on - the construction of a hyperreality.
They are trying to equate the deficit with the economy, to give the impression that good economic policy consists not in boosting real wages, cutting unemployment, or addressing the threat of secular stagnation but merely in "fixing the deficit." ...Clegg ... and Quinn ... are both in the same Bubble pushing the same quack mediamacro.
Worse still, by "fixing the deficit" they mean some type of austerity. But there's a big difference between the two. We could - perhaps - fix the deficit by state-contingent fiscal rules, or by adopting a higher inflation target (or NGDP target) and thus using monetary stimulus to inflate our way out of government debt. ...
Instead, the only economic policy permitted by the Bubble is the fake machismo of "tough choices." Not only are these tough only for other people - mostly the most vulnerable - but they don't even work in their own terms; one lesson we've learned since 2010 is that "tough decisions" to cut the deficit don't actually do so as much as their perpetrators hope. But then, in the Bubble's hyperreality, neither justice nor evidence count for anything.
It's sad that so many people think the way to fix the economy, or the deficit, is to help the people who don't need it rather than helping those who do. Austerity that hurts those in need trickles up -- austerity financed tax cuts help those at the top -- but very little trickles back down again. Tax cuts for the wealthy do little to help the economy, and tax cuts certainly don't help the deficit. The claim that they somehow pay for themselves and reduce the deficit has no foundation in actual evidence, it is also "quack mediamacro" designed to fool people into supporting policies that benefit a key GOP political contingency.
Posted by Mark Thoma on Tuesday, October 7, 2014 at 08:13 AM
The Labor Market Conditions Index: Use With Care, by Tim Duy: I was curious to see how the press would report on the Federal Reserve Board's new Labor Market Conditions Index. My prior was that the reporting should be confusing at best. My favorite so far is from Reuters, via the WSJ:
Fed Chairwoman Janet Yellen has cited the new index as a broader gauge of employment conditions than the unemployment rate, which has fallen faster than expected in recent months. The index’s slowdown over the summer could bolster the argument that the Fed should be patient in watching the economy improve before raising rates.
But its pickup last month could strengthen the case that the labor market is tightening fast and officials should consider raising rates sooner than widely expected. Many investors anticipate the Fed will make its first move in the middle of next year, a perception some top officials have encouraged.
Translation: We don't know what it means.
Now, this is not exactly the fault of the press. The Fed appears to want you to believe the LCMI is important, but they really don't give you reason to believe it should be important. They don't even release the LCMI - the charts on Business Week and US News and World Report are titled erroneously. The Fed releases the monthly change of the LCMI, as noted by Business Insider. But wait, no that's not right either. They actually release the six-month moving average of the LCMI, which means we really don't know the monthly change.1 What the Fed releases might actually be more impacted by what left the average six months ago than the reading from the most recent month. And you should recognize the danger of the six-month moving average - the longer the smoothing process, the more likely to miss turning points in the data. Unless of course the Fed released the raw data to follow as well. Which they don't.
The LCMI becomes even more confusing because it has been impressed upon the financial markets that it must have a dovish interpretation. From Business Insider:
The index was first "made famous" by Fed Chair Janet Yellen in her speech at Jackson Hole, when she said, "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."
Recall that at Jackson Hole, Yellen spoke about the labor market puzzle of a steadily declining unemployment rate and strong payroll gains against the backdrop of declining labor force participation and flat wages.
Consider this in light of this from the Fed:
The first part of the associated commentary:
Table 2 reports the cumulative and average monthly change in the LMCI during each of the NBER-defined contractions and expansions since 1980. Over that time period, the LMCI has fallen about an average of 20 points per month during a recession and risen about 4 points per month during an expansion. In terms of the average monthly changes, then, the labor market improvement seen in the current expansion has been roughly in line with its typical pace...
If you look closely, the average monthly change during this expansion is faster than every recovery since the 1980-81 expansion. How does this fit with the conventional wisdom that we are experiencing a slow labor market recovery? Indeed, look at the chart:
According to this measure, the pace of improvement in this recovery exceeds than much of the 1990's. Think about that.
Moreover, consider the next sentence of the commentary:
...That said, the cumulative increase in the index since July 2009 (290 index points) is still smaller in magnitude than the extraordinarily large decline during the Great Recession (over 350 points from January 2008 to June 2009).
OK - so the Fed thinks the cumulative change is important. They think it is relevant that the LCMI has not retraced all of its losses. Let's take this idea further. Rather than using the recession dating, consider the even larger move from peak to trough. Between May 2007 to June 2009, the cumulative decrease in the LCMI was 398.4. Since then, the cumulative increase is 300.7, so the LCMI has retraced 75% of its losses.
Now consider the unemployment rate. The unemployment rate increased 5.6 percentage points from a low of 4.4% to a high of 10%. SInce then it has retraced 4.1 percentage points of that gain to last month's 5.9% rate. 4.1 is 73% of 5.6. In other words, the unemployment rate has retraced 73% of it losses.
The LCMI has retraced 75% of its losses. The unemployment rate has retraced 73% of it losses. So the LCMI shows the exact same amount of improvement in labor market conditions peak to trough as implied by the retracement of the unemployment rate.
You see the problem. The LCMI (or the data made available to the public) suggests the same amount of improvement in labor market conditions as implied by the unemployment rate. The LCMI suggests a faster pace of improvement than that seen in the previous three recoveries. So how exactly does Yellen reach the conclusion that "the decline in the unemployment rate over this period somewhat overstates the improvement in overall labor market conditions"? I am not seeing it on the basis of the data provided. Indeed, where exactly is the research showing the LCMI has some policy relevance?
Then again, this could be exactly why Yellen uses the modifier "somewhat" in the above quote. Perhaps she has no conviction that the LCMI provides information not already in the unemployment rate. If that's the case, then expect the LCMI to die on the vine, eventually relegated to be computed by whoever still has the p-star model on their list of assignments.
Bottom Line: Use the Fed's new labor market index with caution. Extreme caution. They are not releasing the raw data. They don't appear to have research explaining its policy relevance. Yellen's halfhearted claim that it provides information above and beyond the unemployment rate is questionable with a simple look at the cumulative change of the index compared to that of unemployment. And her halfhearted claims are even more telling given that she was the impetus for the research. If it was policy relevant, you would think she would be a little more enthusiastic (think optimal control). Moreover, the faster pace of recovery of the index compared to previous recessions - as clearly indicated by the Fed - seems completely at odds with the story it is supposed to support. Simply put, the press and financial market participants should be pushing the Fed much harder to explain exactly why this measure is important.
1. The LCMI data provided by the Fed is described as the "average monthly change." I am not sure why they don't explicitly provide the span of the averaging, but the website describes it as "Chart 1 plots the average monthly change in the LMCI since 1977. Except for the final bar, which covers the first quarter of 2014, each of the bars represents the average over a six-month period."
Posted by Mark Thoma on Tuesday, October 7, 2014 at 12:15 AM in Economics, Fed Watch, Monetary Policy, Unemployment |
Posted by Mark Thoma on Tuesday, October 7, 2014 at 12:06 AM in Economics, Links |
A small part of a much longer argument/post by Simon Wren-Lewis:
More asymmetries: Is Keynesian economics left wing?: ...So why is there this desire to deny the importance of Keynesian theory coming from the political right? Perhaps it is precisely because monetary policy is necessary to ensure aggregate demand is neither excessive nor deficient. Monetary policy is state intervention: by setting a market price, an arm of the state ensures the macroeconomy works. When this particular procedure fails to work, in a liquidity trap for example, state intervention of another kind is required (fiscal policy). While these statements are self-evident to many mainstream economists, to someone of a neoliberal or ordoliberal persuasion they are discomforting. At the macroeconomic level, things only work well because of state intervention. This was so discomforting that New Classical economists attempted to create an alternative theory of business cycles where booms and recessions were nothing to be concerned about, but just the optimal response of agents to exogenous shocks.
So my argument is that Keynesian theory is not left wing, because it is not about market failure - it is just about how the macroeconomy works. On the other hand anti-Keynesian views are often politically motivated, because the pivotal role the state plays in managing the macroeconomy does not fit the ideology. ...
Posted by Mark Thoma on Monday, October 6, 2014 at 09:22 AM in Economics, Macroeconomics, Politics |
Will Republicans "destroy the credibility of a very important institution"?:
Voodoo Economics, the Next Generation, by Paul Krugman, Commentary, NY Times: Even if Republicans take the Senate this year, gaining control of both houses of Congress, they won’t gain much in conventional terms: They’re already able to block legislation, and they still won’t be able to pass anything over the president’s veto. One thing they will be able to do, however, is impose their will on the Congressional Budget Office, heretofore a nonpartisan referee on policy proposals.
As a result, we may soon find ourselves in deep voodoo.
During his failed bid for the 1980 Republican presidential nomination George H. W. Bush famously described Ronald Reagan’s “supply side” doctrine — the claim that cutting taxes on high incomes would lead to spectacular economic growth, so that tax cuts would pay for themselves — as “voodoo economic policy.” Bush was right. ...
But now it looks as if voodoo is making a comeback. At the state level, Republican governors — and Gov. Sam Brownback of Kansas, in particular — have been going all in on tax cuts despite troubled budgets, with confident assertions that growth will solve all problems. It’s not happening... But the true believers show no sign of wavering.
Meanwhile, in Congress Paul Ryan, the chairman of the House Budget Committee, is dropping broad hints that after the election he and his colleagues will do what the Bushies never did, try to push the budget office into adopting “dynamic scoring,” that is, assuming a big economic payoff from tax cuts.
So why is this happening now? It’s not because voodoo economics has become any more credible. ... In fact,... researchers at the International Monetary Fund, surveying cross-country evidence, have found that redistribution of income from the affluent to the poor, which conservatives insist kills growth, actually seems to boost economies.
But facts won’t stop the voodoo comeback,... for years they have relied on magic asterisks — claims that they will make up for lost revenue by closing loopholes and slashing spending, details to follow. But this dodge has been losing effectiveness as the years go by and the specifics keep not coming. Inevitably, then, they’re feeling the pull of that old black magic — and if they take the Senate, they’ll be able to infuse voodoo into supposedly neutral analysis.
Would they actually do it? It would destroy the credibility of a very important institution, one that has served the country well. But have you seen any evidence that the modern conservative movement cares about such things?
Posted by Mark Thoma on Monday, October 6, 2014 at 12:24 AM in Economics, Politics, Taxes |
Posted by Mark Thoma on Monday, October 6, 2014 at 12:06 AM in Economics, Links |
Is There a Wage Growth Puzzle?, by Tim Duy: Is there a wage growth puzzle? Justin Wolfers says there is, and uses this picture:
This puzzle isn’t entirely new, as the usual link between unemployment and the rate of wage growth has totally broken down over recent years.
The recent data have made a sharp departure from the usual textbook analysis in which a tighter labor market leads to faster wage growth, and subsequent cost pressures feed through to higher inflation.
But has the link between wage growth and unemployment "totally broken down"? Eyeball econometrics alone suggests reason to be cautious with this claim as the only deviation from the typical unemployment/wage growth relationship is the "swirlogram" of fairly high wage growth relative to unemployment through the end of 2011 or so. But is this a breakdown or a typical pattern of a fairly severe recession? While, it might seem unusual if you begin the sample at 1985 as Wolfers did, so let's see what the 1980-85 episode looks like:
Same swirlogram. Compare the two recessions:
Fairly similar patterns, although in the 80-85 episode there was more room to push down the inflation expectations component of wage growth. It would appear that in the face of severe contractions, wage adjustment is slow. Now consider the 1985-1990 period:
Notice that wage growth is stagnant until unemployment moves below 6% - past experience thus suggests that we should not expect significant wage growth until we move well below 6% (you could argue the response actually began at 6.5%). Thus, it is premature to believe that there has been a breakdown in this relationship. So far, the response of wages is exactly what you should have expected in light of the 1980's dynamics. Which leads to two points:
- I am no fan of Dallas Federal Reserve President Richard Fisher. That said, he did not pick 6.1% out of a hat when he said that was the point at which wage growth has tended to accelerate in the past. That number fell out of his staff's research for a reason and surprises me not one bit.
- There is a reason the Fed picked 6.5% unemployment for the Evan's rule. There was absolutely no chance that that would be a meaningful number as far as labor market healing is concerned.
Consider now the sample since 1990:
Note four points:
- Notice the minor "swirlogram" associated with the early-90's recession. Again, not a breakdown.
- After 1992, wage growth tends to move sideways until unemployment sinks below 6%.
- Since 2012, the relationship is as traditional theory would suggest, a point that is actually evident on Wolfer's chart as well. The R-squared on the regression line is 0.75. Although notice that again, as wage growth moves into that 2.5% range, it appears to once again move mostly sideways. No mystery - nothing we haven't seen before.
- Clearly, there is some noise in the relationship. You should be able to extract away from the noise and recognize that there is no sudden acceleration in wage growth.
Now let's take another step and consider the relationship between unemployment and real wages (note that the series ends in 2014:8 - we don't have the September PCE price data yet):
The period of the Great Disinflation was generally associated with negative real wage growth. The period of the mid-90s to the Great Recession was generally associated with positive real wage growth. The swirlogram of the Great Recession is again evident, but notice that as unemployment approached the bottom end of the black regression line (R-squared = 0.65), real wage growth actually accelerated before returning to trend. I now have additional sympathy for firms that have complained in the past two years that they could not push wage growth through to higher prices. It does appear that real wage growth was faster than might be expected given the pace of economic activity and, by extension, the level of unemployment.
Oh - and real wage growth has reverted to the pre-Great Recession trend - pretty much exactly where you would expect it to be given the level of unemployment. Honestly, this one surprised me.
Which suggests that labor market healing has progressed much further than many progressives would like to admit. Many conservatives as well.
Which also means a lot of people are not going to like this chart.
And before you complain that the all-employee average wage data holds some great secret that is not in the production and nonsupervisory wage series (I have trouble taking seriously any sweeping generalizations of the business cycle dynamics of a series we only have through one business cycle), here is that version:
Same swirlogram. Pretty much the same idea with wage growth heading right back to where you would expect prior to the great recession.
Bottom Line: Be cautious in assuming that this time is different. The unemployment and wage growth dynamics to date are actually very similar to what we have seen in the past. Low wage growth to date is not the "smoking gun" of proof of the importance of underemployment measures. There very well may have been much more labor market healing that many are willing to accept, even many FOMC members. The implications for monetary policy are straightforward - it suggests the risk leans toward tighter than anticipated policy.
Posted by Mark Thoma on Sunday, October 5, 2014 at 12:18 PM in Economics, Fed Watch, Monetary Policy |
Posted by Mark Thoma on Sunday, October 5, 2014 at 08:01 AM in Economics, Links |
Posted by Mark Thoma on Saturday, October 4, 2014 at 09:19 AM
Bill McBride on today's employment report:
Comments on Employment Report: Party Like it's 1999!: Earlier: September Employment Report: 248,000 Jobs, 5.9% Unemployment Rate
This was a solid report with 248,000 jobs added and combined upward revisions to July and August of 69,000. As always we shouldn't read too much into one month of data, but at the current pace (through September), the economy will add 2.72 million jobs this year (2.64 million private sector jobs). Right now 2014 is on pace to be the best year for both total and private sector job growth since 1999.
A few other positives: the unemployment rate declined to 5.9% (the lowest level since July 2008), U-6 (an alternative measure for labor underutilization) was at the lowest level since 2008, the number of part time workers for economic reasons declined slightly (lowest since October 2008), and the number of long term unemployed declined to the lowest level since January 2009.
Unfortunately wage growth is still subdued. From the BLS: "Average hourly earnings for all employees on private nonfarm payrolls, at $24.53, changed little in September (-1 cent). Over the year, average hourly earnings have risen by 2.0 percent. In September, average hourly earnings of private-sector production and nonsupervisory employees were unchanged at $20.67."
With the unemployment rate at 5.9%, there is still little upward pressure on wages. Wages should pick up as the unemployment rate falls over the next couple of years, but with the currently low inflation and little wage pressure, the Fed will likely remain patient.
A few more numbers...
[Dean Baker's comments are here.]
Posted by Mark Thoma on Friday, October 3, 2014 at 08:10 AM in Economics, Unemployment |
What is the price for getting it wrong?:
Depression Denial Syndrome, by Paul Krugman, Commentary, NY Times: Last week, Bill Gross, the so-called bond king, abruptly left Pimco, the investment firm he had managed for decades. People who follow the financial industry were shocked but not exactly surprised; tales of internal troubles at Pimco had been all over the papers. But why should you care?
The answer is that Mr. Gross’s fall is a symptom of a malady that continues to afflict major decision-makers, public and private. Call it depression denial syndrome: the refusal to acknowledge that the rules are different in a persistently depressed economy. ...
Now, we normally think of deficits as a bad thing — government borrowing competes with private borrowing, driving up interest rates, hurting investment... But, since 2008, we have ... been stuck in a liquidity trap... In this situation,... deficits needn’t cause interest rates to rise. ...
All this may sound strange and counterintuitive, but it’s what basic macroeconomic analysis tells you. ... But many, perhaps most, influential people in the alleged real world refused to believe...
Which brings me back to Mr. Gross.
For a time, Pimco — where Paul McCulley, a managing director at the time, was one of the leading voices explaining the logic of the liquidity trap — seemed admirably calm about deficits, and did very well as a result. ...
Then something changed. Mr. McCulley left Pimco at the end of 2010..., and Mr. Gross joined the deficit hysterics, declaring that low interest rates were “robbing” investors and selling off all his holdings of U.S. debt. In particular, he predicted a spike in interest rates when the Fed ended a program of debt purchases in June 2011. He was completely wrong, and neither he nor Pimco ever recovered.
So is this an edifying tale in which bad ideas were proved wrong by experience, people’s eyes were opened, and truth prevailed? Sorry, no. In fact, it’s very hard to find any examples of people who have changed their minds. People who were predicting soaring inflation and interest rates five years ago are still predicting soaring inflation and interest rates today, vigorously rejecting any suggestion that they should reconsider their views in light of experience.
And that’s what makes the Bill Gross story interesting. He’s pretty much the only major deficit hysteric to pay a price for getting it wrong (even though he remains, of course, immensely rich). Pimco has taken a hit, but everywhere else the reign of error continues undisturbed.
Posted by Mark Thoma on Friday, October 3, 2014 at 12:24 AM in Budget Deficit, Economics |
Thinking the Unthinkable: The Effects of a Money-Financed Fiscal Stimulus, by Jordi Galí, Vox EU: Many unconventional policies adopted by central banks in response to the Crisis failed to boost the economy. This column discusses the effects of a temporary money-financed fiscal stimulus. When a more realistic model is allowed, such a stimulus can have a strong effect on output and employment, and a mild effect on inflation.
He ends with:
The time may have come to leave old prejudices behind and come to terms with the urgent need to increase aggregate demand in a more foolproof way than tried up to now, especially in the Eurozone. The option of a money-financed fiscal stimulus should be considered seriously.
Posted by Mark Thoma on Friday, October 3, 2014 at 12:15 AM in Economics, Fiscal Policy |
Posted by Mark Thoma on Friday, October 3, 2014 at 12:06 AM in Economics, Links |