- Jobs Threatened by Machines Concern Gains Respect - NYTimes
- Debt is not nearly as bad as everyone says it is -Washington Post
- German macroeconomics: The long shadow of Walter Eucken - VoxEU
- The elusive employment effect of the minimum wage - Equitable Growth
- What Jeb Hensarling Gets Wrong About Capital Requirements - Rortybomb
- China’s May Reserves - Brad Setser
- Money and Debt - Simon Wren-Lewis
- Inequality and Monetary Policy - IGM Forum
- Artificial intelligence and employment - VoxEU
- Rents Might Be Higher in the US than in Europe - ProMarket
- China Should Rebalance by Following the Fed - Econbrowser
- Immigration economics: A review - Equitable Growth
- The Law of Reflux vs Helicopter Money - Nick Rowe
- The Rise Of Negative Interest Assets - EconoSpeak
- When Finance Becomes Self-Referential - Tim Taylor
- Synchronisation in business cycles - VoxEU
Wednesday, June 08, 2016
Tuesday, June 07, 2016
Justin Fox (also in today's links):
This Job Market Slump Started a While Ago: The sharp May hiring slowdown revealed in Friday's employment report took a lot of people -- including me -- by surprise. It shouldn't have. Things have actually been on the downswing for the U.S. labor market for months, according to the Federal Reserve's Labor Market Conditions Index.
The LMCI is a new measure cooked up by Federal Reserve Board economists in 2014 that consolidates 19 different labor market indicators to reflect changes in the job market. ... As you can see from the chart, the index has now declined for five straight months -- its worst performance since the recession. The index does get revised a lot. ...
Though the signals coming from the U.S. labor market have been mostly negative for several months now, according to the LMCI, they'll have to get much worse before it indicates that the economy is falling into a recession. Still, this is clearly more than just one off month.
From Microeconomic Insights:
The dynamics of labor market adjustment to trade liberalization, by Rafael Dix-Carneiro: International trade theory has typically ignored the costs of adjusting to a change in trade policy, focusing instead on static models and long-run conclusions. However, adjustment costs are central to much of the controversy over trade liberalization. This work measures the importance of the dynamics of adjustment in shaping the distributional consequences of trade policy, and characterizes the time it takes for the economy to complete the transition to the new long-run equilibrium. When these adjustment costs are taken into account, the benefits of trade liberalization can be substantially smaller. ...
From the CBPP:
Commentary: Under Current Poverty Programs, It Pays to Work, Despite House Republicans’ Contentions, by June 6, 2016 by Isaac Shapiro: In the overwhelming majority of cases, adults in poverty are significantly better off if they take a job, work more hours, or receive a wage hike, we found in our recent comprehensive analysis of the data and research related to work and the safety net. Further, various changes in the safety net over the past two decades (including health reform, or the Affordable Care Act) have substantially increased incentives to work for people in poverty.
Nevertheless, leading up to the release of their forthcoming plan to address poverty, House Republicans continue to claim that the low-income assistance system strongly discourages work. They have said that people receiving assistance from these programs often receive more, or nearly as much, from not working — and receiving government aid — than from working. Or they’ve argued that low-paid workers have little incentive to work more hours or seek higher wages because losses in government aid will cancel out the earnings gains. They may repeat such claims in the coming days. But our research has found that these assertions don’t withstand scrutiny. ...
Policymakers should not ignore those circumstances in which marginal tax rates can be quite high. But it’s important they also recognize that such circumstances are concentrated among a small fraction of families with earnings just above the poverty line that receive benefits from a number of programs that phase down simultaneously — and, just as importantly, that reducing such marginal rates involves very difficult tradeoffs.
There are really only two options to lowering marginal tax rates. One is to phase out benefits more slowly as earnings rise; this reduces marginal tax rates for those currently in the phase-out range. But it also extends benefits farther up the income scale and increases costs considerably, a tradeoff that many policymakers may not want to make. The second option is to shrink (or even eliminate) benefits for people in poverty so they have less of a benefit to phase out and thus lose less as benefits are phased down. This reduces marginal tax rates, but it pushes poor families into — or deeper into — poverty and increases hardship, and thus may cause significant harm to children in these families. In effect, the second option would “help” the poor by making them worse off. ...
The solution that some who use marginal-tax-rate arguments to attack safety net programs have advanced in the past — block grants with extensive state flexibility — does nothing to resolve these inevitable tradeoffs. Block grants would merely pass the buck in making these tradeoffs from federal to state decision-makers.
This paper by Gauti Eggertsston, Neil Mehrotra, Sanjay Singh, and Larry Summers was released yesterday as an NBER Working paper. The paper looks at secular stagnation in open economy and examines how it is transmitted across countries (in an OLG framework with many countries and imperfect capital integration). One interesting implication is that if the Fed pursues an interest rate hike, and the rest of the world does not follow, we should expect strong capital flows into the US thus possibly generating a mismatch between desired savings and investment. This, in turn, leads to a drop in the US natural rate of interest forcing the Fed to cut rates again to avoid a recession:
A Contagious Malady? Open Economy Dimensions of Secular Stagnation, by Gauti B. Eggertsson, Neil R. Mehrotra, Sanjay R. Singh, Lawrence H. Summers, NBER Working Paper No. 22299: Conditions of secular stagnation - low interest rates, below target inflation, and sluggish output growth - characterize much of the global economy. We consider an overlapping generations, open economy model of secular stagnation, and examine the effect of capital flows on the transmission of stagnation. In a world with a low natural rate of interest, greater capital integration transmits recessions across countries as opposed to lower interest rates. In a global secular stagnation, expansionary fiscal policy carries positive spillovers implying gains from coordination, and fiscal policy is self-financing. Expansionary monetary policy, by contrast, is beggar-thy-neighbor with output gains in one country coming at the expense of the other. Similarly, we find that competitiveness policies including structural labor market reforms or neomercantilist trade policies are also beggar-thy-neighbor in a global secular stagnation.
A related variation that strips down the argument in the paper (which uses and elaborate DSGE model) into a simple textbook IS-MP framework is in this year's AER Papers and Proceedings volume. The results are much the same. See here. The more elaborate model should give people comfort in knowing that the key insights hold once you put add all the bells and whistles of a modern DSGE (or perhaps it's the other way around).
- Agriculture the Worst Mistake in the History of the Human Race? - Brad DeLong
- Republicans to Unveil Plan to Revamp Dodd-Frank - NYTimes
- Why Trump, the ‘King of Debt,’ Hates Dodd-Frank - Alan Blinder
- Are Supply Shocks Contractionary at the ZLB? - NBER
- This Job Market Slump Started a While Ago - Justin Fox
- Evolution Not Revolution: Rethinking Policy at the IMF - IMF
- Current Conditions and the Outlook for the U.S. Economy - Janet Yellen
- The U.S. is causing a major controversy in the WTO - Washington Post
- The Macro Impact of Unemployment Benefits - FRB Minneapolis
- Can wage subsidies boost employment? - All About Finance
- Why Helicopter Money is a “Free Lunch” - EconoMonitor
- The Overselling of Financial Transaction Taxes - Kenneth Rogoff
- As Common as Ditchwater - EconoSpeak
- Update on Remittances - Tim Taylor
- Fixed Effects Without Panel Data - No Hesitations
- It Pays to Work, Despite House Republicans’ Contentions - CBPP
- Credit ratings and conflicts of interest - Cecchetti & Schoenholtz
Monday, June 06, 2016
Employment Report, Yellen, and More, by Tim Duy: Lot's of Fed news over the past few days that add up to a simple takeaway: June is off the table (again), the stars have to align just right for a July rate hike (not likely), and September is coming into focus as the next possible rate hike opportunity. September, however, assumes that the employment report is more of an outlier than part of a trend. that's what the Fed will be taking out of the data in the coming months.
Nonfarm payrolls grew by a disappointing 38K in May, low even after accounting for the Verizon strike. Downward revisions struck previous months, leaving behind a marked deceleration in job growth:
Slowest three-month average since 2011. Perversely, the unemployment rate dropped to 4.7 percent, breaking a long period of stagnate readings. The decline, however, was driven by an exit from the labor force - not exactly the improvement we were hoping for. Measures if underemployment continue to track generally sideways at elevated levels:
By these metrics, progress toward full employment has slowly noticeably. Wage growth, however, is showing signs of improvement, and should get a boost next month from base year effects:
How should we interpret the mess that is the May employment report? One take is to treat it as an anomaly, simply a bad draw. Federal Reserve Chair Janet Yellen leaned in this direction in today's speech. After characterizing the economy as near full employment, she added:
So the overall labor market situation has been quite positive. In that context, this past Friday's labor market report was disappointing...Although this recent labor market report was, on balance, concerning, let me emphasize that one should never attach too much significance to any single monthly report. Other timely indicators from the labor market have been more positive. For example, the number of people filing new claims for unemployment insurance--which can be a good early indicator of changes in labor market conditions--remains quite low, and the public's perceptions of the health of the labor market, as reported in various consumer surveys, remain positive...
Still, the data disappointed sufficiently to push her to the sidelines:
That said, the monthly labor market report is an important economic indicator, and so we will need to watch labor market developments carefully.
Later she adds:
Over the past few months, financial conditions have recovered significantly and many of the risks from abroad have diminished, although some risks remain. In addition, consumer spending appears to have rebounded, providing some reassurance that overall growth has indeed picked up as expected. Unfortunately, as I noted earlier, new questions about the economic outlook have been raised by the recent labor market data. Is the markedly reduced pace of hiring in April and May a harbinger of a persistent slowdown in the broader economy? Or will monthly payroll gains move up toward the solid pace they maintained earlier this year and in 2015? Does the latest reading on the unemployment rate indicate that we are essentially back to full employment, or does relatively subdued wage growth signal that more slack remains? My colleagues and I will be wrestling with these and other related questions going forward.
Will Yellen be able to answer these questions with enough confidence to hike in July? Doubtful, in my opinion. A strong report for May would have been sufficient to put them on track for a July hike. But now a July hike requires a sharp rebound in June payroll growth plus substantial upward revisions to the May numbers (in addition to the rest of the data falling into place). That is not likely, and may account for Yellen dropping the "coming months" language when referring to the expected policy path. June or July looked like reasonable possibilities last week, but not so much now.
A second interpretation, however, is more ominous. In this interpretation, the employment data is finally catching up with the slower pace of GDP growth:
The acceleration that began in 2013 looks to have played itself out by the middle of last year. Job growth remained strong, however, pushing productivity growth into negative territory. This, as David Rosenberg explains at Business Insider, was not sustainable. Something had to give, and the labor market finally gave. Similarly, wage growth is a lagging indicator - if the labor market is faltering, the current pace of gains will not be sustainable.
Similarly, note that the ISM services data looks to be catching up to this story as well:
In addition, temporary employment payrolls is flashing a yellow light:
If this is the story, the the Fed will move to the sidelines for an extended period of time, pushing out any hope of a rate hike until December. That assumes the Fed does not make a policy error by rushing to raise rates in these circumstances.
In other news, Federal Reserve Governor Daniel Tarullo, who rarely speaks publicly on monetary policy, defined the current dynamic within the FOMC as those looking to hike versus those looking not to hike. Via MarketWatch:
In an interview with Bloomberg TV, Tarullo said he is in the camp of Fed officials that backs further, gradual, rate hikes but said he is more cautious about a move than some others in that camp.One group favoring gradual rate hikes wants to hike “unless there is a reason not to” in order to avoid problems with inflation later on, he said.The other camp, where he sits, wants “an affirmative reason to move” and asks “why do we need” an interest rate hike. Tarullo said.“The second approach I’ve been a little bit more inclined towards is to say ‘gee, you know, it is not clear what full employment is, we’re in a global environment that is not inflationary, we can perhaps get some more employment and some higher wages which will be particularly useful to those more on the margins of the labor force,’” Tarullo said.
Positioning himself ahead of the FOMC meeting as opposing a rate hike. And this was before the employment report.
Federal Reserve Governor Lael Brainard also put down her marker ahead of the meeting:
Prudent risk-management would suggest the risks from waiting until the totality of the data provides greater confidence in a rebound in domestic activity, and there is greater certainty regarding the "Brexit" vote, seem lower than the risks associated with moving ahead of these developments. This is especially true since the feedback loop through exchange rate and financial market channels appears to be elevated. In light of this amplified feedback loop, when conditions are appropriate for a policy move, it will be important that it be understood that any subsequent moves would be conditioned on further evidence confirming continued progress toward our objectives and not as inevitable steps on a preset course.
I think these are both key influencers within the FOMC; Brainard's resistance to rate hikes in particular is something that hawks would need to overcome to get their way. I don't think that will be easy.
Chicago Federal Reserve President Charles Evans called for an Evans Rule 2.0:
The question is whether such upside risks would increase substantially under a policy of holding the funds rate at its current level until core inflation returned to 2 percent. I just don’t see it. Given the shallow path of market policy expectations today, there is a good argument that inflationary risks would not become serious even under this alternative policy threshold. And when inflation rises above 2 percent, as it inevitably will at some point, the FOMC knows how to respond and will do so to provide the necessary, more restrictive financial conditions to keep inflation near our price stability objective.
So one can bet he would oppose a rate hike in June. Or July. And even St. Louis Federal Reserve President James Bullard has lost his appetite for a near-term rate hike. Via the Wall Street Journal:
Federal Reserve Bank of St. Louis President James Bullard said in an interview Monday that he is leaning against supporting a rate rise at the central bank’s coming meeting.If the Fed is going to raise its short-term interest-rate target, “I’d rather move on the back of good news about the economy,” Mr. Bullard told The Wall Street Journal. And since the Fed will be meeting following the release of the underwhelming May jobs data, it is a “fair assessment” the argument for raising rates is now considerably weaker than it had been
Meanwhile, Atlanta Federal Reserve President Dennis Lockhart worked to keep July in play:
“I don’t personally see a lot of cost to being patient to the July meeting at least,” Lockhart said Monday in a Bloomberg Television interview with Michael McKee in New York. “I think we can be watchful and see how things develop over the next few weeks.”
There will be resistance to letting the markets price out July. That will play into the FOMC's crafting of their statement next week as well as Yellen's press conference.
Bottom Line: The May employment report killed the chances of a rate hike in June. And it was weak enough that July no longer looks likely as well. I had thought that, assuming a solid May number they would set the stage for a July hike. That seems unlikely now; they will probably need two months of good numbers to overcome the May hit. The data might bounce in the direction of July, to be sure. Hence Fed officials won't want to take July off the table just yet, so expect, in particular, the more hawkish elements of the FOMC to keep up the tough talk.
Nicole Dussault, Maxim Pinkovskiy, and Basit Zafar at the NY Fed's Liberty Street Economics blog:
Is Health Insurance Good for Your Financial Health?: What is the purpose of health care? What is the purpose of health insurance? When people fall ill, they seek health care in order to get better. But insurance has a slightly different function: Its main role is not to protect our health per se, but to protect our finances. For most people, lifetime health expenditures are quite low. However, some people have enormous health costs owing to major illnesses or health conditions. And this is where health insurance comes in—its goal (like that of any other form of insurance) is to protect these individuals against large, and sometimes ruinous, health expenditures. Has the recent health reform served this purpose?
Protection against financial hardship was one of the drivers behind passage of the 2010 Patient Protection and Affordable Care Act, commonly known as the Affordable Care Act (ACA). ...
In this blog post, we discuss the results of a research project that examines the effect of the Affordable Care Act’s Medicaid expansion on personal financial indicators. We find suggestive evidence that after the implementation of the ACA in the first quarter of 2014, counties with a high uninsurance burden pre-reform in states that subsequently expanded Medicaid had a decrease in average debt sent to collections agencies compared with such counties in states that did not expand Medicaid.
Our findings are consistent with prior research that has provided evidence that health insurance is good for individual finances...
While the full effects of the Affordable Care Act on financial health are yet to be seen, and while the effects of the ACA—positive or negative—are not restricted to financial health, we offer suggestive early evidence that the Medicaid expansion is fulfilling the goal of health insurance: providing “peace of mind” by protecting against financial hardship. ...
The Semi-Surprising Weakness of U.S. Imports: I suspect the big jobs report meant that last Friday’s trade release got a bit less attention than normal.
The dollar’s strength continues to have the expected impact on real exports, more or less. Excluding petrol, real goods exports are down 2.5 percent in the first four months of the year (relative to the same period in 2016). ... This is pretty common when the real dollar is strong. .... The real dollar ... is about between 10 and 15 percent points higher than it was in early 2014.
I am surprised though at how flat imports continue to be. Real goods imports are about half a point lower in the first four months of 2016 than in the first four months of 2015... Real goods imports haven’t really changed at all for say the last 15 or so months. ...
While real GDP growth hasn’t been spectacular, demand has continued to grow. .... Positive demand growth usually means positive import growth, which mechanically subtracts from overall growth. ... Most careful analysis also has shown there is some impact of the dollar on imports, even if the impact on exports is greater.
So I at least find the weakness in goods imports a bit puzzling weakness. It isn’t explained by falling oil imports either...
And, as a result of more or less flat imports, net exports haven’t subtracted significantly from U.S. growth over the last four quarters — which also runs against my priors.
Put a bit differently, it wouldn’t surprise me if net exports emerge as a stronger headwind over the next couple of quarters. All it would take is for imports to start to respond a bit more normally to U.S. demand growth.
If the economy goes into recession, Republicans will stand in the way of the needed response from monetary and fiscal policy:
A Pause That Distresses, by Paul Krugman, NY Times: Friday’s employment report was a major disappointment: only 38,000 jobs added, a big step down from the more than 200,000 a month average since January 2013. Special factors, notably the Verizon strike, explain part of the bad news, and in any case job growth is a noisy series... Still, all the evidence points to slowing growth. It’s not a recession, at least not yet, but it is definitely a pause in the economy’s progress. ...
So what is causing the economy to slow? My guess is that the biggest factor is the recent sharp rise in the dollar, which has made U.S. goods less competitive on world markets. The dollar’s rise, in turn, largely reflected misguided talk by the Federal Reserve about the need to raise interest rates. ...
Whatever the cause of a downturn, the economy can recover quickly if policy makers can and do take useful action. ...
But that won’t — in fact, can’t — happen this time. Short-term interest rates, which the Fed more or less controls, are still very low... We now know that it’s possible for rates to go slightly below zero, but there still isn’t much room for a rate cut.
That said, there are other policies that could easily reverse an economic downturn. ... For the simplest, most effective answer to a downturn would be fiscal stimulus...
But unless the coming election delivers Democratic control of the House, which is unlikely, Republicans would almost surely block anything along those lines. Partly, this would reflect ideology... It would also reflect an unwillingness to do anything that might help a Democrat in the White House. ...
If not fiscal stimulus, then what? For much of the past six years the Fed, unable to cut interest rates further, has tried to boost the economy through large-scale purchases of things like long-term government debt and mortgage-backed securities. But it’s unclear how much difference that made — and meanwhile, this policy faced constant attacks and vilification from the right, with claims that it was debasing the dollar and/or illegitimately bailing out a fiscally irresponsible president. We can guess that the Fed will be very reluctant to resume the program...
So the evidence of a U.S. slowdown should worry you. I don’t see anything like the 2008 crisis on the horizon (he says with fingers crossed behind his back), but even a smaller negative shock could turn into very bad news, given our political gridlock.
- The clash between inalienability and unfettered property rights - John Quiggin
- Why the Economic Payoff From Technology Is So Elusive - NYTimes
- Global activity steady, but the US slows again - Gavyn Davies
- Mutual knowledge and Trump’s new clothes - Leisure of the Theory Class
- IS-LM, Teaching Intermediate Macro, and my despair - Nick Rowe
- The Existential Crisis that is Stalking Economic Principals - Economic Principals
- Avoiding political discourse - mainly macro
Sunday, June 05, 2016
... What I find surprising is that US and global markets and financial policymakers seem much less sensitive to “Trump risk” than they are to “Brexit risk”. Options markets suggest only modestly elevated volatility in the period leading up to the presidential election. ...
Yet, as great as the risks of Brexit are to the British economy, I believe the risks to the US and global economies of Mr Trump’s election as president are far greater. If he is elected, I would expect a protracted recession to begin within 18 months. The damage would be felt far beyond the United States. ...
More econometrics: Special Session: Model Selection and Inference (Technical)
- Peer-reviewed output of North American economics PhDs - VoxEU
- Intergenerational Mobility, Guilds and Income in the Very LR - ProMarket
- Earnings inequality at the top has slowed progress in pay equity - Miles Corak
- Long-lasting effects of a socialist education - VoxEU
- Today’s trade policy and trade research - VoxEU
- The politicisation of truth - mainly macro
- How China Fell Off the Miracle Path - The New York Times
- What Does China's Demographic "Problem" Mean? - Dean Baker
Saturday, June 04, 2016
- The Economic Outlook and Implications for Monetary Policy - Lael Brainard
- The Rich Are Different, and It Matters - Narayana Kocherlakota
- A Boy’s Life: The Fictional Truth of Donald Trump - The Fiscal Times
- Applying Behavioral Economics to Canadian public policy - Miles Corak
- The origins of the Great Divergence - globalinequality
- It's the Unemployment Rate Stupid - Roger Farmer
- Pushing on a String - Gloomy European Economist
- More Time to Unwind, Unless You’re a Woman - Tyler Cowen
- The Collective Action Problem of Resistance to Antibiotics - Tim Taylor
- Is there a Canadian economics, or just economics by Canadians? - Miles Corak
- How to relax and start loving the robots - INET
- Populists and Productivity - Nouriel Roubini
- The Media and Brexit redux - mainly macro
- Cyclicality in banks’ risk appetite - Bank Underground
- The transatlantic economy: Convergence or divergence? - VoxEU
- Corporate resilience to banking crises - VoxEU
Friday, June 03, 2016
A Disappointing Employment Report: The headline jobs number was very disappointing, and there were downward revisions to job growth for prior months. The key negatives were few jobs added (only 38 thousand, although the Verizon strike cut the job growth by about 37 thousand), a decline in the participation rate, and a sharp increase in the number of people working part time for economic reasons. A few positives include wage growth, a lower unemployment rate (however, for the wrong reason - a lower participation rate), and fewer long term unemployed. ...
There are still signs of slack (as example, part time workers for economic reasons increase sharply, and elevated U-6), but there also signs the labor market is tightening (decline in long term unemployed, slight pickup in wages). Overall this was a disappointing report.
The way to bet is that two-thirds of the surprising component of this month's employment report will be reversed over the next quarter or so.
Nevertheless: does anybody want to say that the Federal Reserve's increase in interest rates last December and its subsequent champing-at-the-bit chatter about raising interest rates was prudent in retrospect? Anyone? Anyone? Bueller?
And does anybody want to say--given that the downside risks we are now seeing were in the fan of possibilities as of last December, and given that the Federal Reserve could have quickly reacted to neutralize any inflationary pressures generated by the upside possibilities in the fan last December--that the Federal Reserve's increase in interest rates last December and its subsequent champing-at-the-bit chatter about raising interest rates was sensible as any form of an optimal-control exercise?
And we haven't even gotten to the impact of the withdrawal of risk-bearing capacity from the rest of the world that happens in a Federal Reserve tightening cycle...
Job Growth Plunges in May, Although the Unemployment Rate Fall to 4.7 Percent: The Labor Department reported that the economy created just 38,000 new jobs in May, the weakest job growth since September of 2010, when it lost 52,000 jobs. In addition, the jobs numbers for the prior two months were revised down by 59,000, bringing the average for the last three months to just 116,000.
The household survey showed a drop of 0.3 percentage points in the unemployment rate, but this is not especially good news. The decline was almost entirely due to people leaving the labor force. The employment to population ratio [EPOP] was unchanged at 59.7 percent, 0.2 pp below the peak for the recovery.
The drop in EPOPs is especially disturbing since it is among prime age workers and it is for both women and men. ... While many analysts have tried to explain this drop as a supply side story, it seems implausible... The only plausible explanation is that the demand for labor has weakened sharply. ...
Other data in the household survey was mixed. The number of people involuntarily working part-time jumped by 468,000 (7.8 percent). However the duration measures of unemployment all fell in May. The percentage of the unemployment due to voluntary quits was little changed. The number of people who chose to work part-time continued its upward path, growing by 110,000. It is now 640,000 above its year ago level.
There was little positive news in the establishment survey. ...
There is little change in the wage growth picture, with wages up by 2.5 percent over the last year, although the annualized rate comparing the most recent three months with the prior three months is somewhat better at 2.9 percent. It is important to remember that wages have been rising faster than total compensation, as employers have been reducing the generosity of their health care benefits.
Adding to the picture of weakness in this report, the one-month employment diffusion index, which shows the percentage of industries adding jobs, was just 51.3 in May, the lowest reading since February of 2010. The 3-month and 6-month indexes, which reflect employer hiring intentions, were similarly weak. The index of aggregate hours rose just 0.1 percent in May, the same as the prior two months and is actually below its January level. It would be difficult for the Fed to look at these data and say that the economy should be growing more slowly.
Donald Trump is "mind-bogglingly petty":
The Id That Ate the Planet, by Paul Krugman, NY Times: ...Donald Trump’s personality endangers the whole planet. ...
The outlook for climate change if current policies continue has never looked worse, but the prospects for turning away from the path of destruction have never looked better. Everything depends on who ends up sitting in the White House for the next few years. ...
But what happens if the next president is a man who doesn’t believe in climate science, or indeed in inconvenient facts of any kind?
Republican hostility to climate science and climate action is usually attributed to ideology and the power of special interests, and both of these surely play important roles. ... Meanwhile, buying politicians is a pretty good business investment for fossil-fuel magnates like the Koch brothers.
But I’ve always had the sense that there was a third factor, which is basically psychological. There are some men — it’s almost always men — who become enraged at any suggestion that they must give up something they want for the common good..., for example, prominent conservatives suggesting violence against government officials because they don’t like the performance of phosphate-free detergent. But polluter’s rage isn’t about rational thought.
Which brings us to the presumptive Republican presidential nominee ...
No doubt Donald Trump hates environmental protection in part for the usual reasons. But there’s an extra layer of venom to his pro-pollution stances that is both personal and mind-bogglingly petty.
For example, he has repeatedly denounced restrictions intended to protect the ozone layer — one of the great success stories of global environmental policy — because, he claims, they’re the reason his hair spray doesn’t work as well as it used to. I am not making this up.
He’s also a bitter foe of wind power..., his real motivation seems to be ire over unsuccessful attempts to block an offshore wind farm near one of his British golf courses.
And if evidence gets in the way of his self-centeredness, never mind. Recently he assured audiences that there isn’t a drought in California, that officials have just refused to turn on the water.
I know how ridiculous it sounds. Can the planet really be in danger because a rich guy worries about his hairdo? But Republicans are rallying around this guy just as if he were a normal candidate. And if Democrats don’t rally the same way, he just might make it to the White House.
- Japan’s Consumption Tax Hike Was a Demand Disaster - Brad Setser
- I think the very sharp Olivier Blanchard has got it wrong - Brad DeLong
- Using the residual on the right-hand side is not "explaining" - Brad DeLong
- The asymmetry of inflation or ECB Communication? - Antonio Fatas
- John Whitehead: The Conservative Bias in Economics? - Brad DeLong
- Evidence of hidden protectionism in the US in the Great Recession - VoxEU
- We're Still Not Sure What Causes Big Recessions - Noah Smith
- A Big Merger May Flatten America’s Beer Market - The New York Times
- The Fed takes a look beyond US data - FT.com
- Moving On Up - macroblog
Thursday, June 02, 2016
I am going to have to redo the videos and other materials for my online macroeconomics course that uses this text:
How to Teach Intermediate Macroeconomics after the Crisis?, by Olivier Blanchard: Having just concluded a seven-year run as chief economist of the International Monetary Fund, and having to rewrite the seventh edition of my undergraduate macroeconomics book (link is external) , I had to confront the issue: How should we teach macroeconomics to undergraduates after the crisis? Here are some of my conclusions (I shall focus here on the short and medium runs; it will take another blog to discuss how we should teach growth theory).
The Investment-Saving (IS) Relation The IS relation remains the key to understanding short-run movements in output. In the short run, the demand for goods determines the level of output. A desire by people to save more leads to a decrease in demand and, in turn, a decrease in output. Except in exceptional circumstances, the same is true of fiscal consolidation.
I was struck by how many times during the crisis I had to explain the “paradox of saving” and fight the Hoover-German line, “Reduce your budget deficit, keep your house in order, and don’t worry, the economy will be in good shape.” Anybody who argues along these lines must explain how it is consistent with the IS relation.
The demand for goods, in turn, depends on the rate at which people and firms can borrow (not the policy rate set by the central bank, more on this below) and on expectations of the future. John Maynard Keynes rightly insisted on the role of animal spirits. Uncertainty, pessimism, justified or not, decrease demand and can be largely self-fulfilling. Worries about future prospects feed back to decisions today. Such worries are probably the source of our slow recovery. (link is external)
The Liquidity Preference/Money Supply (LM) Relation The LM relation, in its traditional formulation, is the relic of a time when central banks focused on the money supply rather than the interest rate. ... The reality is now different. Central banks think of the policy rate as their main instrument and adjust the money supply to achieve it. Thus, the LM equation must be replaced, quite simply, by the choice of the policy rate by the central bank, subject to the zero lower bound. ... This change had already taken place in the new Keynesian models; it should make its way into undergraduate texts.
Integrating the Financial System into Macro Models If anything, the crisis has shown the importance of the financial system for macroeconomics. Traditionally, the financial system was given short shrift in undergraduate macro texts. The same interest rate appeared in the IS and LM equations; in other words, people and firms were assumed to borrow at the policy rate set by the central bank. We have learned, dearly, that this is not the case and that things go very wrong.
The teaching solution, in my view, is to introduce two interest rates, the policy rate set by the central bank in the LM equation and the rate at which people and firms can borrow, which enters the IS equation, and then to discuss how the financial system determines the spread between the two. I see this as the required extension of the traditional IS-LM model. A simple model of banks showing the role of capital, on the one hand, and the role of liquidity, on the other, can do the trick. Many of the issues that dominated the crisis, from losses and low capital to liquidity runs can be discussed and integrated into the IS-LM model. With this extension, one can show both the effects of shocks on the financial system and the way in which the financial system modifies the effects of other shocks on the economy.
(Getting Rid of) Aggregate Demand–Aggregate Supply Turning to the supply side, the contraption known as the aggregate demand–aggregate supply model should be eliminated. It is clunky and, for good reasons, undergraduates find it difficult to understand. Its main point is to show how output naturally returns to potential with no change in policy, through a mechanism that appears marginally relevant in practice..
These difficulties are avoided if one simply uses a Phillips Curve (PC) relation to characterize the supply side. ...
Again, this way of discussing the supply side is already standard in more advanced presentations and the new Keynesian model (although the Calvo specification used in that model, as elegant as it is, is arbitrarily constraining and does not do justice to the facts). It is time to integrate it into the undergraduate model.
The IS-LM-Phillips Curve Model Put together, these modified IS, LM, and PC relations can do a good job of explaining recent and current events. For example, financial dislocations lead to a large spread between the borrowing and policy rates. The zero lower bound (or as we have learned, the slightly negative lower bound) prevents the central bank from decreasing the policy rate by enough to maintain demand. Output falls. Inflation decreases, potentially to the point where it turns into deflation, increasing real interest rates, and making it even harder to return to potential output.
One can go much further. ...
Macroeconomics is a tremendously exciting subject. Most of what we taught before the crisis remains highly relevant. But it needs some dusting and updating. My hope is that a model along the lines above can contribute to it.
President Obama leans into Social Security expansion: “It’s time we finally made Social Security more generous and increased its benefits so today’s retirees and future generations get the dignified retirement that they have earned.”
Guess who said that? Bernie Sanders? Hillary Clinton? The Donald? Sen. Warren? Dean Baker? Me? None of the above.
Those words were spoken by President Obama on Wednesday in his economics speech in Elkhart, Ind. ...
But wouldn’t it be fiscally reckless to expand benefits, say, for low-income retirees? Well, first, you heard the president suggest a “payfor,” by increasing taxes on those at the top of the scale. In fact..., there’s now a smaller share of covered earnings below the tax max: about 81 percent now vs. 90 percent a few decades ago. So there’s a real margin for new revenue to support the program.
Second, if you consider the three-legged retirement security stool — savings, pensions and Social Security — for many less well-off aging people, the latter is in the best financial shape of all..., contrary to critics’ false claims, it ain’t exactly going broke.
That said, the big point here is that we should get the venerable program on a more solid fiscal trajectory, one that doesn’t just close the long-term funding gap but considers an expansion of the type the president suggested. ...
It’s great to hear the president defending this essential, efficient, progressive program. ...
Full session: Plenary Session: Minimum Wages Presented by: Alan. B. Krueger
(Lecture starts at 6:35)
1 Richard Blundell, University College London and Institute of Fiscal Studies
2 Arindrajit Dube, University of Massachusetts Amherst
Rethinking Macro Policy: Progress or Confusion?: On April 15 and 16, 2015, the IMF hosted the third conference on “Rethinking Macroeconomic Policy.” I had initially chosen as the title and subtitle “Rethinking Macroeconomic Policy III. Down in the Trenches.” I thought of the first conference in 2011 as having identified the main failings of previous policies, the second conference in 2013 as having identified general directions, and this conference as a progress report. My subtitle was rejected by one of the co-organizers, Larry Summers. He argued that I was far too optimistic, that we were nowhere close to knowing where were going. Arguing with Larry is tough, so I chose an agnostic title and shifted to “Rethinking Macro Policy III: Progress or Confusion?” Where do I think we are today? I think both Larry and I are right. I do not say this for diplomatic reasons. We are indeed proceeding in the trenches. But where the trenches will eventually lead remains unclear. This is the theme I shall develop in these concluding remarks, focusing on macroprudential tools, monetary policy, and fiscal policy. ...
Brad DeLong responds: On this one--views of fiscal policy--put me down not for progress but for "confusion for $2000", Alex, for on this one I think the very sharp Olivier Blanchard has got it wrong. ...
- If wages and incomes are rising, why are people so angry? - Washington Post
- The Conservative Bias in Economics? - Environmental Economics
- The Value of the Humanities - The Baseline Scenario
- Use estate taxes to fund inheritance for all - David Johnson
- Revisiting the Case for International Policy Coordination - Liberty Street
- Using Inventories to Help Explain Post-1984 Business Cycles - FRB Richmond
- Lobbyists and Regulators Were Socially and Culturally the Same - ProMarket
- Can social science yield objective knowledge? - Noahpinion
- Putting the Wage Growth Tracker to Work - macroblog
- The centre-left's failure - Stumbling and Mumbling
- The Economies of Africa: Will Bust Follow Boom? - Tim Taylor
- OECD Blasts Governments for Slipping Into ‘Low-Growth Trap’ - Bloomberg
- Greece under Troika rule - mainly macro
Wednesday, June 01, 2016
Waiting For The Employment Report, by Tim Duy: Last week Federal Reserve Chair Janet Yellen gave the green light for a rate hike this summer. Via the Wall Street Journal:
“It’s appropriate…for the Fed to gradually and cautiously increase our overnight interest rate over time, and probably in the coming months such a move would be appropriate,” she said during a panel discussion at the Radcliffe Institute for Advanced Study at Harvard University.
This follows on the back numerous Fed speakers, as well as the minutes of the last meeting, that helped place June into play. Of course, Yellen's "coming months" could easily be beyond June, and I suspect that her concern about underemployment and low wage growth will induce her to proceed cautiously and take a pass on June. That said, the meeting is clearly in play and the bar for the next rate hike appears relatively low.
The personal income and spending report bolstered the hawkish position that first quarter economic jitters were much ado about nothing. Real spending jumped 0.6 percent on the back of a lower savings rate, helping to put a floor under the year-over-year numbers:
The consumer stubbornly refuses to believe that a recession is underway.
Inflation firmed somewhat for the month:
Two of the last three monthly readings on the core were just above 2 percent annualized, something that will also give confidence to Fed hawks that their inflation forecast will play out (they will assume headline will head in that direction). Compared to a year ago, however, core inflation continues to languish below target.
The ISM report came in somewhat better than expected considering weak regional surveys. Most of the action was in suppliers delivers (slower), customers' inventories (flat), and prices (higher). New orders held up well; employment still a touch below 50:
On net, neither a great relief nor a disaster. But then it is probably too early to expect the healing touch of a weaker dollar and stronger oil to be evident in the manufacturing data.
In addition, construction spending was down (see Calculated Risk), which, in addition to the ISM report brought the Atlanta Fed estimate of Q2 GDP growth down to a still respectable 2.5 percent from 2.8 percent. If the Fed could be confident in the number, they would have a strong incentive to hike. But I suspect they will wanted an even clearer picture that won't be available until the July meeting at the earliest.
The Beige Book was fairly uneventful on most accounts. Growth was still just "modest" but with an optimistic outlook:
Information received from the 12 Federal Reserve Districts mostly described modest economic growth since the last Beige Book report. Economic activity in April through mid-May increased at a moderate pace in the San Francisco District, while modest growth was reported by Philadelphia, Cleveland, Atlanta, Chicago, St. Louis, and Minneapolis. Chicago noted that the pace of growth slowed, as did Kansas City. Dallas reported that economic activity grew marginally, while New York characterized activity as generally flat since the last report. Several Districts noted that contacts had generally optimistic outlooks, with firms expecting growth either to continue at its current pace or to increase.
There was some anecdotal evidence that hawks will use to justify a rate hike:
Employment grew modestly since the last report, but tight labor markets were widely noted; wages grew modestly, and price pressure grew slightly in most Districts.
In my opinion, modest wage growth and slight price pressures do not sound particularly worrisome.Auto sales ran at estimated 17.4 million annual rate in May. Bloomberg suggested that the numbers might scare the Fed straight:
U.S. auto sales were softer than predicted in May, a bellwether month that may help Federal Reserve decision makers determine whether the economy can handle an interest-rate hike this summer.
My guess is that the Fed already knows that auto sales are leveling out and are not likely to be a significant source of growth going forward. In other words, I have to imagine it is already in the forecast.
Another Bloomberg story to keep an eye on:Softening apartment rents in New York and San Francisco have forced landlord Equity Residential to lower its revenue forecast for the second time this year, as newly signed leases aren’t meeting the company’s expectations.Equity Residential said it expects revenue growth from properties open at least a year to be no higher than 4.5 percent this year, according to a statement Wednesday. The reduction follows one made in April, when the Chicago-based real estate investment trust set the upper limit at 5 percent, down from a previous estimate of 5.25 percent.
Two thoughts. First is that maybe multifamily construction has finally caught up with demand, thus rent growth will slow and so will its impact on inflation. Second thought is that if demand for apartments is tapering off, then it may be that millennials are growing out of apartments and into single family housing. This handoff is thus likely to continue:
Look for softer underwriting conditions and marketing campaigns to help encourage this shift.
The Verizon strike likely negatively impacted the headline nonfarm payrolls numbers in the May employment report, so adjust your expectations accordingly. I would pay special attention to the unemployment rate and metrics of underemployment; the Fed would be more inclined to hike rates if progress on these from resumed.
Bottom Line: Nothing here suggests to me that the Fed will soon reject their expectation of a rate hike in the "coming months."
There Goes the Fed's Credibility, by Narayana Kocherlakota: Back in January 2012, the Federal Reserve promised to keep its preferred measure of inflation close to 2 percent over the longer run. More than three years later, that promise remains unfulfilled, casting doubt on the central bank's willingness to deliver.
The latest reading for the measure, known as the price index for personal consumption expenditures, showed annual inflation running at only 1.1 percent in April. Excluding volatile food and energy prices, the inflation rate was 1.6 percent. ...
Some would say that central banks are out of ammunition... Actually, though, the Fed has been deliberately tightening monetary policy over the past three years. ...
To understand the Fed's motivations, consider this: Would it have started pulling back on stimulus in May 2013 if its short-term interest-rate target had been at 5 percent instead of near zero, and if it hadn’t been holding trillions of dollars in bonds? I strongly suspect that the Fed would instead have added stimulus by lowering interest rates. If so, then the Fed's current course is driven not by state of the economy, but by a desire to get interest rates and its balance sheet back to what is considered "normal." ...
I have something at MoneyWatch:
Tax hikes on the wealthy: Good or bad for growth?: Conservatives have argued for decades that tax cuts are the key to economic prosperity. And the tax plan presumptive GOP nominee Donald Trump is pushing would cut taxes for the top 0.1 percent of earners by an average of approximately $1.3 million per year, embracing that conservative point of view.
On the other hand, Democrats such as front-runner Hillary Clinton take another approach. Clinton says she'll reform the U.S. tax code so that the wealthiest pay their fair share. The response from Republicans has been predictable: They argue that such a tax plan will lower growth and harm the economy.
Do the conservative arguments against tax increases have any merit? Or are they, as Democrats claim, a way to serve an ideological goal of smaller government and reward wealthy Republican donors? Let's take a closer look. ...
- How informative is the Yield Curve? - Antonio Fatas
- Uncertainty at the Fed - J. Bradford DeLong
- Bad Narratives - Paul Krugman
- What Drove China’s Large Reserve Sales? - Brad Setser
- A universal basic income could absolutely solve poverty - Vox
- With a basic income, the numbers just do not add up - FT.com
- Why a Universal Basic Income Will Not Solve Poverty - NY Times
- The Trade Slowdown, China, and the Rest of the World - Econbrowser
- Profound Changes in Economics Make Left vs. Right Debates Irrelevant - INET
- The Case for Stimulus, in Three Charts - Narayana Kocherlakota
- Financing Health and Education for All - Jeffrey D. Sachs
- Donald the Destroyer - Simon Johnson
- Modernity and Capitalism - EconoSpeak
- Rational consumers - Stumbling and Mumbling
- Why the political centre needs to be radical - mainly macro
- Adult Coloring Books: Innovation lies outside economics - Digitopoly
- There's Little Positive About Negative Rates - Noah Smith
- Family networks and distributive politics - VoxEU
- Insurance and systemic risk: No easy conclusions - VoxEU
Tuesday, May 31, 2016
I have a new column:
Yes, Nick Kristof, There Is a Conservative Bias in Economics: Nicholas Kristof recent reignited the debate over liberal bias in academia with his claim that “universities risk becoming liberal echo chambers and hostile environments for conservatives.” He does single out my profession, economics, as being better than most social science departments in representing conservative viewpoints:
“Economists remain influential. I wonder if that isn’t partly because there is a critical mass of Republican economists who battle the Democratic economists and thus tether the discipline to the American mainstream.”
But the extent to which conservative ideology is represented within the profession is much larger than a simple tally of the number of conservatives versus liberals indicates. ...
It was too long, so I cut this part:
In my 30 years of participating in the hiring of new faculty, I can’t recall a single time when the politics of the candidate came up in the discussion, or when there was resistance to the type of question the candidate’s research was addressing. The research may have been viewed as uninteresting, flawed, or otherwise unlikely to make a splash in the best journals, but all that mattered was the quality of the research and the likelihood it would help our department to get better. If an applicant is likely to publish important papers in the top journal in the field, they will be offered job. I don’t even know the politics of many of my colleagues, it’s just not something that comes up in the day-to-day work on research. And it wouldn’t be simple to characterize their views in any case as I suspect some would be liberal on social issues, but conservative with respect to economic policy.
Heather Boushey "talks with economist Claudia Goldin about the gender wage gap and some of its implications
A Grand Gender Convergence: Its Last Chapter“—and I love the title of that—you argue that the gender wage gap cannot be explained by differences in productivity between men and women. Instead, when we look at occupations, we see that there is a price paid for flexibility in the workplace. ... Can you tell me a little bit more about this result?
Claudia Goldin: So the key finding is that there is a gender wage gap. But the question is why? We know from lots of people’s work that we used to be able to squeeze a lot of the gap away due to differences in education—differences in your college major, whether you went to college or not, whether you have a Ph.D., an M.D., whatever. We were also able to squeeze a lot away on the basis of whether you had continuous work experience or not.
Today, we are not able to squeeze much away. In fact, women on average have more education than men. The quantities [of women with college degrees] are higher, and even the qualities [of degrees] aren’t that much different anymore. And the extent of past labor force participation is pretty high. Lifecycle labor force participation for women is very, very high. So we can’t squeeze that much away anymore.
What’s also really striking is that, given lots of factors such as an individual’s education level, many occupations have very large gender gaps and some occupations have very small gender gaps. Looking at occupations at the higher part of the income spectrum, which is also the higher part of the education spectrum — so occupations where about 50 or 60 percent of all college graduates are—we see that the biggest gaps are in occupations in the corporate and finance field, in law, and in health occupations that have high amounts of self-employment. And the smallest gaps are found in occupations in technology, in science, and in lots of the health occupations where there is a very low level of self-employment.
That’s sort of a striking finding.
Then when we dig deeper and look at particular occupations—in law, for example, and in the corporate and finance field—we see a couple of things. We see that differences in hours have very high penalties even on a per hour basis. Differences in short amounts of time off have very high penalties, unlike in other fields. And many of the differences occur at the event of or just after the event of first birth. So there is something that looks like women disproportionately, relative to men, are doing something different after they have kids.
When we look at men and women in the finance and corporate fields who haven’t taken any time off and among the women who don’t have kids, we find that the differences are really tiny. So those are the differences that are coming about, not surprisingly, from the fact that women are valuing predictability, and flexibility, and many other aspects of the job that many men are not valuing.
So, looking at data for the United States, we find that this change from being an employee, a worker, and a professional, to being an employee, a worker, a professional, and a parent has a disproportionate impact on women.
Now one might say, isn’t that because the United States has really lousy coverage in terms of parental leave policy, and in terms of subsidized daycare? Well, there are two very interesting papers, one for Sweden and one for Denmark. Both countries have policies that are just about the best in the world...
And women are moving into occupations that have more flexibility, but they are working fewer hours and getting less per hour. And the same sorts of things are going on even in countries that have incredibly good parental leave policies, subsidized daycare, schools that appear to us to be better, and what we think of as social norms that are better. ...
- Why No Byzantine Road to Modernity? - Brad DeLong
- Quantitative Easing and Financial Stability (NBER) - Michael Woodford
- The latest battleground in Trump’s war on data - Washington Post
- Allocation of Scarce Elevators - Tim Taylor
- On unproductive labor - Branko Milanovic
- Overdosing on Heterodoxy Can Kill You - Ricardo Hausmann
- Spillovers, spillbacks and policy coordination - Cecchetti & Schoenholtz
- Bourdieu on post-modern biography - Understanding Society
- The incredible miracle in poor country development - Noahpinion
- Bo Rothstein, Part II: On Strong Markets and Quality Government - ProMarket
Monday, May 30, 2016
The current state of the race:
Feel the Math, by Paul Krugman, NY Times: ...So far, election commentary has been even worse than I imagined it would be..., bang-your-head-on-the-desk awful... I know this isn’t scientific, but based on conversations I’ve had recently, many people ... have been given a fundamentally wrong impression of the current state of play..., people aren’t being properly informed about the basic arithmetic of the situation.
Now, I’m not a political scientist or polling expert... But I am fairly numerate, and I assiduously follow real experts... And they’ve taught me some basic rules that I keep seeing violated.
First, at a certain point you have to stop reporting about the race for a party’s nomination as if it’s mainly about narrative and “momentum.” ... Eventually ... it all becomes a simple, concrete matter of delegate counts.
That’s why Hillary Clinton will be the Democratic nominee; she locked it up over a month ago with her big Mid-Atlantic wins...
And no, saying that the race is effectively over isn’t somehow aiding a nefarious plot to shut it down by prematurely declaring victory. ... You may think those people chose the wrong candidate, but choose her they did.
Second, polls can be really helpful at assessing the state of a race, but only if you fight the temptation to cherry-pick... What the polling experts keep telling us to do is rely on averages of polls rather than highlighting any one poll in particular. ...
Which brings us to the general election. Here’s what you should know, but may not be hearing clearly in the political reporting: Mrs. Clinton is clearly ahead, both in general election polls and in Electoral College projections based on state polls. ... So unless Bernie Sanders refuses to concede and insinuates that the nomination was somehow stolen by the candidate who won more votes, Mrs. Clinton is a clear favorite to win the White House.
Now, obviously things can and will change over the course of the general election campaign. Every one of the presidential elections I’ve covered at The Times felt at some point like a nail-biter. But the current state of the race should not be a source of dispute or confusion. Barring the equivalent of a meteor strike, Hillary Clinton will be the Democratic nominee; despite the reluctance of Sanders supporters to concede that reality, she’s currently ahead of Donald Trump. That’s what the math says, and anyone who says it doesn’t is misleading you.
- Trends in oil supply and demand - Econbrowser
- The mystery of weak US productivity - FT.com
- The late Victorian ‘workshop of the world’ - VoxEU
- Trump and loss aversion - James Surowiecki
- The Hail Mary gamble of voting for Trump - Washington Post
- Some questions concerning equity-financed banking - MacroMania
- The motivations behind effort: Evidence and expert forecasts - VoxEU
- Pragmatic Engagement, Anyone? - Economic Principals
Sunday, May 29, 2016
Bill McBride at Calculated Risk:
The War on Data, Calculated Risk: People have different priorities and different values. But we share the same data. Over the last few days, we've heard a presidential contender make comments completing ignoring the data. This should concern everyone - ignoring data leads to irresponsible comments and poor policy decisions.
First, I live in California, and I was shocked to hear Donald Trump say there is no drought in the state. That is the opposite of what the data says! Here is an excerpt from Daniel Swain at the California Weather Blog (written 10 days ago discussing the data):While the reservoirs in California’s wetter, more northern reaches have reached (or are nearing) capacity after a slightly wetter-than-average winter in that part of the state, multi-year water deficits remain enormous. The 2015-2016 winter did bring some drought relief to California, but nearly all long-term drought indicators continue to suggest that California remains in a significant drought. ...
... Mr. Trump's comments were incorrect and irresponsible.
Second, Mr. Trump was also quoted as saying that anyone who believes the unemployment rate is 5% is a "dummy".Trump says he thinks the US unemployment rate is close to 20 percent and not the 5 percent reported by the Labor Department.
Anyone who believes the 5 percent is a “dummy,” he said.
I don't believe the headline U-3 unemployment rate tells the entire story, and that is why I also track U-6 (a measure of underemployment) and other measures. But U-3 is measured in a transparent way - and remains a key measure of unemployment - and is measured consistently.
When we use U-6 (includes "unemployed, plus all marginally attached workers plus total employed part time for economic reasons") we need to compare to previous readings of U-6, not previous readings of U-3. Currently U-6 is at 9.7%. U-6 bottomed in 2006 at 7.9% and in 2000 at 6.8%. So U-6 is still elevated and there is still slack in the labor market.
Also, some people think the participation rate will increase significantly as the labor market improves. I've written about the participation rate extensively... There is no huge hidden pool of workers that will suddenly show up in the labor force. Looking at the data, Mr. Trump's suggestion that unemployment is closer to 20% than 5% is absurd.
I guess Trump thinks I'm a "dummy"! I think he is reckless and irresponsible.
- Populist Backlash and Political Economy - Brad DeLong
- Neoliberalism, Mirowski and me - mainly macro
- Forecasting From an Error Correction Model - Dave Giles
- A Worrisome Pileup of $100 Million Homes - Robert Frank
- New Test Finds No Impact of QE on Long-Term Rates - John Taylor
- The trade-off between efficiency and equity - VoxEU
- Do Courts Have a Pro-Business Bias? - ProMarket
- Labour's economic answers - Stumbling and Mumbling
- The Skyline from My Corner of the Blogosphere - Miles Kimball
Saturday, May 28, 2016
On the road headed to my dad's 80th birthday party, so just a quick one for now. This is from VoxEU:
How bank networks amplify financial crises: Evidence from the Great Depression, by Kris James Mitchener and Gary Richardson: How financial networks propagate shocks and magnify recessions is of interest to both scholars and policymakers. The financial crisis of 2007-8 convinced many observers that financial networks were fragile, and while reforms are underway, much remains to be learned about how and why connections between financial firms matter for the macroeconomy. Indeed, the complexity and sheer number of linkages has made it particularly challenging to formulate empirical estimates of their role in amplifying downturns.
Economic theory suggests many channels through which networks may transmit shocks (Allen and Gale 2000, Cabellero and Simesek 2013) and empirical research has provided some evidence of contagious failures flowing through interbank markets, particularly for the recent financial crisis in the US and Europe (Puhr et al. 2012, Fricke and Lux 2012). History should have a lot to say about the role of networks in contributing to the severity of financial crises, but it is a surprisingly lightly studied aspect of earlier periods of financial turmoil – even for well-researched episodes such as the Great Depression. This lacuna exists despite the fact that financial networks of the past may be simpler in structure, thus making it somewhat easier to identify empirically how aggregate variables, such as lending, were affected when linkages were disrupted.
In a recent paper, we document how the interbank network transmitted liquidity shocks through the US banking system and how the transmission of these shocks amplified the contraction in real economic activity during the Great Depression (Mitchener and Richardson 2016). The paper contributes to the growing literature on financial networks and the real economy, illuminating both a mechanism for transmission (interbank deposits) as well as a source of amplification (balance-sheet effects). It also introduces an additional channel through which banking distress deepened the Great Depression and complements existing research on how bank distress during the Great Depression influenced the real economy.
We describe how a pyramid-like structure of interbank deposits developed in the 19th century, how the founding of the Fed altered the holdings of these deposits, and how this structure then influenced real economic activity during periods of severe distress, such as banking panics (Mitchener and Richardson 2016). The interbank network that existed on the eve of the Great Depression linked large money centre banks in New York and Chicago to tens of thousands of smaller rural banks throughout the US. The money centre banks served as correspondents holding deposits from institutions in the countryside. Interbank balances exposed correspondent banks to shocks afflicting banks in the hinterland. Interbank deposits were a liquid source of funds that could be deployed to meet sudden demands by depositors to convert claims to cash, and the removal of these deposits from correspondent banks peaked during periods that contemporary commentators described as – and that our detailed statistical analysis of bank suspensions confirms were – banking panics. Although the pyramided system of interbank deposits could handle idiosyncratic bank runs, when runs clustered in time and space (i.e. when panics occurred) the system became overwhelmed in the sense that banks higher up the pyramid were forced to adjust to these changes in liabilities by changing their assets (i.e. lending). ...
Ironically, the Federal Reserve System had been created with the purpose of preventing crises such as those that had regularly plagued the banking system in the 19th century. We help to explain why the Fed failed to fulfill this basic responsibility. ...
- Mortality for middle-aged white men going down, not up - Washington Post
- Waiting in Line for the Illusion of Security - The New York Times
- Those Long TSA Lines: Take This Bag and Check It! - Dean Baker
- How PreCheck Made Airport Security Lines Longer - Justin Fox
- US Corporate Stock: The Transition in Who Owns It - Tim Taylor
- Markets as selection devices - Stumbling and Mumbling
- The China Syndrome - Roger Farmer
- Bonus culture - mainly macro
Friday, May 27, 2016
At Microeconomic Insights:
Impoverished children with access to food stamps become healthier and wealthier adults: Adults who participated in the Food Stamp Program, renamed the Supplemental Nutrition Assistance Program (SNAP) in 2008, as children are healthier and better off financially than poverty-stricken families who did not have access to the program, according to findings in joint work with Douglas Almond and Diane Schanzenbach (this paper and a companion paper Almond, et al. 2011). Children with access were more likely as adults to graduate from high school, earn more, and rely less on government welfare programs as adults than impoverished children who did not have access to SNAP. Women, in particular, are substantially more likely to self-report they are in good health and are more economically self-sufficient in adulthood. We find no additional long-term health impacts for children from more exposure to the program during middle childhood, but individuals with access to food stamps before age 5 had measurably better health outcomes in adulthood with significant impacts for those in early childhood. ...
In terms of policy, it’s important to recognize that the benefits of SNAP not only include improved food security in the short-run, but the program also helps prevent negative, long-term, and lasting effects of deprivation during childhood, such as less education and earnings as adults, along with health problems like obesity, heart disease, or diabetes.
Because these individuals are healthier and more financially sound, the benefits also pay out to taxpayers. Healthier Americans leads to less cost when it comes to future health care for the average taxpayer. Additionally, by increasing self-sufficiency, SNAP today can reduce the future costs of safety net programs and also increase tax revenues in the long run.
Our findings suggest that the SNAP benefits that go to children are better thought of as an investment rather than as charity.
Trump's towering ignorance about how to run the U.S. economy:
Trump’s Delusions of Competence, by Paul Krugman, NY Times: In general, you shouldn’t pay much attention to polls at this point, especially with Republicans unifying around Donald Trump while Bernie Sanders hasn’t conceded the inevitable. Still, I was struck by several recent polls showing Mr. Trump favored over Hillary Clinton on the question of who can best manage the economy.
This is pretty remarkable given the incoherence and wild irresponsibility of Mr. Trump’s policy pronouncements. Granted, most voters probably don’t know anything about that, in part thanks to substance-free news coverage. ...
One of the many peculiar things about his run for the White House is that it rests heavily on his claims of being a masterful businessman, yet it’s far from clear how good he really is at the “art of the deal.” ...
But leave questions about whether Mr. Trump is the business genius he claims to be on one side. Does business success carry with it the knowledge and instincts needed to make good economic policy? No, it doesn’t..., it’s often startlingly bad, for two reasons. One is that wealthy, powerful people sometimes don’t know what they don’t know — and who’s going to tell them? The other is that a country is nothing like a corporation, and running a national economy is nothing like running a business.
Here’s a specific, and relevant, example of the difference. Last fall, the now-presumed Republican nominee declared: “Our wages are too high. We have to compete with other countries.” ...
The truth is that wage cuts are the last thing America needs right now: We sell most of what we produce to ourselves, and wage cuts would hurt domestic sales by reducing purchasing power and increasing the burden of private-sector debt. Lower wages probably wouldn’t even help the fraction of the U.S. economy that competes internationally, since they would normally lead to a stronger dollar, negating any competitive advantage.
The point, however, is that these feedback effects from wage cuts aren’t the sort of things even very smart business leaders need to take into account to run their companies. Businesses sell stuff to other people; they don’t need to worry about the effect of their cost-cutting measures on demand for their products. Managing national economic policy, on the other hand, is all about the feedback. ...
The truth is that the idea that Donald Trump, of all people, knows how to run the U.S. economy is ludicrous. But will voters ever recognize that truth?
- Lobbyists Are Behind the Rise in Corporate Profits - HBR
- Rebel with a Cause - Dani Rodrik Profile- IMF
- A lesson on infrastructure from the Anderson Bridge fiasco - Larry Summers
- Social-democratic vs market-friendly progressivism - Lane Kenworthy
- Economic reflections on the Fall of Constantinople - globalinequality
- The Atlanta Fed Wage Tracker: What’s it saying re the Fed? - Jared Bernstein
- Finding Better Ideas to Rebuild America - Noah Smith
- Emerging technologies, education, and the income gap - Equitable Growth
- What Does Changing Sectoral Composition Mean for Workers? - FRB Chicago
- Innovation and restrictions on insider trading - VoxEU
- Lessons for the Euro from Early American History - Tim Taylor
- OECD Compendium of Productivity Indicators 2016 - OECD Insights
- When economic incentives crowd in social preferences - VoxEU
- There’s no substitute for a substitute - interfluidity
- 101ism, overtime pay edition - Noahpinion
Thursday, May 26, 2016
For the near term, my baseline expectation is that our economy will continue on its path of growth at around 2 percent. To confirm that expectation, it will be important to see a significant strengthening in growth in the second quarter after the apparent softness of the past two quarters. To support this growth narrative, I also expect the ongoing healing process in labor markets to continue, with strong job growth, further reductions in headline unemployment and other measures of slack, and increases in wage inflation. As the economy tightens, I expect that inflation will continue to move over time to the Committee's 2 percent objective.If incoming data continue to support those expectations, I would see it as appropriate to continue to gradually raise the federal funds rate. Depending on the incoming data and the evolving risks, another rate increase may be appropriate fairly soon.
Will these conditions be met for Powell by the time of the next FOMC meeting in June? On one hand, the Atlanta Fed tracking estimate for Q2 is up solidly:
That said, the tracking estimate is famously volatile and could easily collapse after the June meeting. So while a hopeful sign, I would not take it for granted yet that Q2 GDP will come in at a 3 percent pace. And given that Powell views this rebound as an "important" signal, I suspect he will want to be more certain of the Q2 results than allowable by the data available on June 14-15.
Note also he is expecting "further reductions in headline unemployment and other measures of slack" to justify a rate hike. This echoes my recent theme that stagnating progress toward full employment should be something that stays the Fed's hand for the moment. Powell also identifies evolving risks as an important factor in the timing of the next rate hike. As I said earlier this week, I think FOMC members need to shift to a balanced risk assessment prior to hiking. They were closer in April than March on that point, but I still think will fall short in June. Or at best are balanced in June and thus can justify setting the stage for a July hike. Either way, Powell made clear that if the data holds, he would support a rate hike in the near-term.
Powell tempers the rate hike message with a reminder that the path forward is likely to be very, very slow:
Several factors suggest that the pace of rate increases should be gradual, including the asymmetry of risks at the zero lower bound, downside risks from weak global demand and geopolitical events, a lower long-run neutral federal funds rate, and the apparently elevated sensitivity of financial conditions to monetary policy. Uncertainty about the location of supply-side constraints provides another reason for gradualism.
Earlier in the speech Powell, while commenting on slow productivity growth, said:
Lower potential growth would likely translate into lower estimates of the level of interest rates necessary to sustain stable prices and full employment. Estimates of the long-run "neutral" federal funds rate have declined about 100 basis points since the end of the crisis. The real yield on the 10-year Treasury is currently close to zero, compared with around 2 percent in the mid-2000s. Some of the decline in longer-term rates is explained by lower estimates of potential growth, and some by other factors such as very low term premiums.
I suspect that ongoing low productivity growth will lead to further reductions in the Fed's estimates of the longer run federal funds rate. I further suspect that this, combined with Powell's other concerns that limit the pace of rate hikes, means the likely medium-term path forward will be more shallow than the Fed anticipates. In other words, given current conditions, the Fed is still likely to move to the markets over the medium-term even if markets have moved somewhat toward the Fed in the near-term.
Housing data came in strong this week, including a jump in home home sales:
The shift from multifamily to single family looks well underway. While I wouldn't exactly expect sales to climb back up to 1.4 million units, there is clearly room for more upside here given a long period of under-building and high demand for housing. The latter was confirmed by the strong numbers in existing home sales. See Calculated Risk for more.
Initial unemployment claims was once again your weekly reminder that if you are looking for recession, you need to look somewhere else:
But the durable goods data was mixed, with an OK-ish headline but a weak core:
This weakness is consistent with soft regional ISM survey data that foreshadow a soft national ISM manufacturing number for May (to be released next week). Manufacturing data is likely to remain weak until the impacts of lower oil prices and a stronger dollar (both reversing this year) work their way through the sector, hopefully (keep your fingers crossed) by later this year.
While I do not believe current manufacturing numbers are indicative of a US recession, I would not be eager to hike rates into manufacturing weakness either. Moreover, if I were concerned about low productivity, like Powell and other FOMC participants, I would not be eager to hike into the low business investment numbers suggested by the core durable goods figures. Tend to think that this argues against June.
Bottom Line: Fed officials believe the data is lining up for a rate hike in the near future. Ultimately, I think they pass on June. Strategically, July offers a lot to like. They can wait for a more clear view of the 2nd quarter. They can use the June meeting and press conference to set the stage for July. They can broker a compromise between hawks and doves. The former should be happy because a strong signal in June is effectively a rate hike, the latter because it becomes an easily reversed rate hike (by skipping July if necessary) and they can bolster their case for gradualism. And a July hike will end the belief that the Fed can only hike on meetings with press conferences. My personal preference is to delay until September, but I don't run the show. All of the above assumes, of course, that data and financial conditions hold.
From the Brookings Institution:
On negative effects of vouchers, by Mark Dynarski: Executive summary Recent research on statewide voucher programs in Louisiana and Indiana has found that public school students that received vouchers to attend private schools subsequently scored lower on reading and math tests compared to similar students that remained in public schools. The magnitudes of the negative impacts were large. These studies used rigorous research designs that allow for strong causal conclusions. And they showed that the results were not explained by the particular tests that were used or the possibility that students receiving vouchers transferred out of above-average public schools.
Another explanation is that our historical understanding of the superior performance of private schools is no longer accurate. Since the nineties, public schools have been under heavy pressure to improve test scores. Private schools were exempt from these accountability requirements. A recent study showed that public schools closed the score gap with private schools. That study did not look specifically at Louisiana and Indiana, but trends in scores on the National Assessment of Educational Progress for public school students in those states are similar to national trends.
In education as in medicine, ‘first, do no harm’ is a powerful guiding principle. A case to use taxpayer funds to send children of low-income parents to private schools is based on an expectation that the outcome will be positive. These recent findings point in the other direction. More needs to be known about long-term outcomes from these recently implemented voucher programs to make the case that they are a good investment of public funds. As well, we need to know if private schools would up their game in a scenario in which their performance with voucher students is reported publicly and subject to both regulatory and market accountability. ...
From the American Sociological Association
Study dispels myth about millionaire migration in the US., EurekAlert: The view that the rich are highly mobile has gained much political traction in recent years and has become a central argument in debates about whether there should be "millionaire taxes" on top-income earners. But a new study dispels the common myth about the propensity of millionaires in the United States to move from high to low tax states.
"The most striking finding in our study is how little elites seem willing to move to exploit tax advantages across state lines," said Cristobal Young, an assistant professor of sociology at Stanford University and the lead author of the study. ...
In any given year, Young and his fellow researchers found that roughly 500,000 individuals file tax returns reporting incomes of $1 million or more (constant 2005 dollars). From this population, only about 12,000 millionaires change their state each year. The annual millionaire migration rate is 2.4 percent, which is lower than the migration rate of the general population (2.9 percent). The highest rates of migration are seen among low-income tax filers: migration is 4.5 percent among people who earn around $10,000 a year. ...
The study finds that family responsibilities are a key factor that limit migration among top-income earners. "Very affluent people are much more likely to be married and to have school-age children, which makes moving more difficult," Young said. ...
While millionaire migration is extremely limited, there is a grain of truth in the worries about millionaire tax flight, the study finds. "When millionaires do migrate, they are more likely to move to a state with a lower tax rate, and that state is almost always Florida," Young said. ...
"My guess is that if Florida established a 'millionaire tax,' elites would still find Florida appealing because of its climate and geography -- and patterns of elite migration wouldn't really change," Young said. ...
The study also looked at the millionaire population along the borders between states with different tax rates. "In these narrow geographic regions, you would expect millionaires to cluster on the low tax side of the border, but we see very weak evidence of this," Young said.
As for policy implications, Young said "millionaire taxes" result in minimal tax flight among millionaires and help states raise revenue to improve education, infrastructure, and public services, while reducing inequality.
"Our research indicates that 'millionaire taxes' raise a lot of revenue and have very little downside," Young said.
- Talking Global Inequality - Paul Krugman
- Why the global trade slowdown may matter - VoxEU
- How much we work: The past, the present, and the future - VoxEU
- Dan Drezner Asked Three Questions - Brad Setser
- Behavioral Economics Then and Now - Carola Binder
- Household debt and house prices - mainly macro
- Transfer Pricing Abuse - EconoSpeak
- Monetary policy and fiscal stability - Donald Kohn
- Helicopter Money is small beer, and normal - Nick Rowe
- The Fed's Amazing Self-Fulfilling Forecast - Narayana Kocherlakota
- The Macro Effects of the Recent Swing in Financial Conditions - Liberty Street
- The impact of negative rates on derivatives activity - Bank Underground
Wednesday, May 25, 2016
Should The Fed Tolerate 5% Unemployment?. by Tim Duy: In recent posts I highlighted the stagnant unemployment rate. I believe the Fed is on thin ice by raising rates when unemployment is moving sideways, especially when there exists evidence of substantial underemployment (see also this FEDS note). But there is also evidence of growing wage pressures, in particular the Atlanta Fed wage measure:
Would wage growth continue to accelerate if unemployment persisted at current levels? If so, would this mean the Fed had reached a tolerable equilibrium? My answers are "possibly" to the former question, and "probably not" to the latter.
Another way to consider the data is via a wage Phillips curve:
I suspect the black dots around 4 percent unemployment are effectively incompatible with a 2 percent inflation target given current productivity growth. The economy is currently operating at the light blue dot. My expectation is that when when conditions are sufficiently tight to raise wage growth to the 4 percent range, they will also be sufficiently tight to raise inflation to the Fed's target. It is possible that this occurs near 5 percent unemployment - essentially a vertical move from the current position.
But while this might be possible (wage growth might just stall out at current levels of unemployment), I hesitate to say that it was optimal. Points up and to the left - lower unemployment but the same wage growth are likely consistent with the Fed's inflation target and thus obviously preferable as they entail higher levels of employment.
Getting to such points, however, includes a higher possibility of overshooting the inflation target (although I would suggest that the magnitude of the overshooting would be no more excessive than the magnitude of undershooting the Fed is currently willing to tolerate). So, and this is reiterating a point from yesterday, I would say that if the Fed slows activity now, they risk settling the economy into a suboptimal outcome with lower employment and, maybe, lower inflation than their mandate. This would seem to be the policy approach of a central bank hell-bent on approaching the inflation target from below. By avoiding further rate hikes until it is clear that activity is in fact sufficient to induce further declines in the unemployment rate, the Fed will maximize its odds of meeting its mandates, but at the cost of some risk of overshooting its inflation target.
It seems to me then that a central bank with a symmetric inflation target would choose to refrain from further rate hikes when progress toward full employment had clearly decelerated:
(or even stalled):
and inflation remains below target:
We will soon see if the Fed agrees.
In case you missed this in yesterday's links (the full interview is much longer):
Interview with Matthew Gentzkow, by Douglas Clement. Editor, The Region: Before Matthew Gentzkow entered the field, the economics of media was largely uncharted territory. Today, media economics is flourishing thanks largely to him and his co-authors—particularly Jesse Shapiro... But Gentzkow’s expertise is not confined to media; he’s also a pioneer in methodology, empirical procedure and economic theory with landmark research on communication, social influence and marketing.
With unique insights, innovative technique, methodological rigor and massive databases he often creates for an express purpose, Gentzkow has answered questions about television, newspapers, product branding, competition, persuasion and politics that many scholars had asked but no one had answered convincingly.
Due to this work, we now know that newspaper media slant is driven mostly by the preferences of readers, not newspaper owners. And by examining browser data, he discovered that people don’t largely live in internet “echo chambers”—that is, they don’t exclusively visit sites that align with their political bent. Product brand preferences, he found, are established early in life and endure long after exposure to essentially identical, less expensive alternatives. These and dozens of other economic mysteries have yielded to his curiosity, insight and skill.
Gentzkow received the John Bates Clark Medal in 2014...
... Newspapers and politics Region: You’ve done a great deal of research on newspapers and particularly their relationship to politics. There certainly isn’t time to get to it all. But in a key, early paper with Shapiro, you build a model in which media bias emerges because firms slant their coverage toward their audience to build a reputation for quality. I’m curious to know how that holds up empirically
I’d also like to ask about your findings on the role of newspaper owners in driving media slant, and what that implies for competition policy for media.
Gentzkow: ...One of the things we found in looking at newspapers is that their political slant or political content seems to be driven very strongly by demand from their readers, the fact that people in conservative places want to hear conservative stuff and the converse for liberals. And that slant is basically uncorrelated with anything about their owners, the ownership of the paper.
So if you look at two newspapers that are owned by the same company, or the same individual, they are no more similar to each other than two unconnected newspapers in those same places. For instance, the New York Times Company at one time owned a bunch of newspapers all over the country. Those newspapers did not all look like the New York Times; they looked like other newspapers in the places where they were located.
That speaks directly to regulation because much of the way we regulate media is by regulating media ownership. The premise of a lot of that regulation has explicitly been that having diverse viewpoints, diverse ideas and independent reporting is important for democracy. And that in order to guarantee, we need to have diverse ownership because owners are going to put their own imprint on the content of their media.
Region: The concern that if Rupert Murdoch, for instance, or William Hearst in an earlier era, controls newspapers, radio, et cetera, he’ll use that platform to push his political agenda.
Gentzkow: Right, if Murdoch takes over everything, we’re not going to like it because everything will look like Fox News.
Our research results push back on that and say that, at least in this particular context, ownership is not really the key driver of slant and, in fact, a lot of the driver is actually coming from consumer demand. Not only does that say that you might not need to be as worried about ownership, but it also says that the welfare implications of this are a little more complicated because now consumers are getting what they want.
We might think from a political, democratic point of view that it would be better if the public got different, more diverse information. But there’s going to be a welfare trade-off because we would be giving them content they would prefer less. If we want to give people diverse content that we think is good for democracy, then we have to get them to actually read, watch or consume it. And, you know, giving a bunch of people in conservative places some liberal newspaper—well, our results would suggest they’re not going to read it. So, that seems to have important implications for policy.
But it comes with a really important caveat. The finding that ownership doesn’t matter in terms of a newspaper’s political slant is not a universal result. It doesn’t apply everywhere. It’s a statement about newspaper markets in the United States—a highly commercialized, relatively competitive setting, and a place where the political returns to manipulating the average content of a newspaper might not be all that big.
It could be entirely consistent with those results that in other countries, in other contexts, it may well differ. Does Silvio Berlusconi influence the media in Italy? A lot of evidence suggests yes. Does control by the government of Russia affect the content of the media in Russia? Or even if we were to look at national cable outlets in the U.S., would we be confident that ownership doesn’t matter? I think that’s a pretty big leap; you need to be careful.
My own view would be that, probably more than is often assumed, the fact that Fox News has conservative content in the U.S. is related more to the fact that that’s a very profitable business strategy than to any personal political agenda of Rupert Murdoch. But our results don’t settle that question, and it’s an important question.
People in different places and different backgrounds can have such persistently different beliefs about even factual issues, beliefs that never seem to converge. How do people end up with such different beliefs? Why don’t they converge? The sharp empirical test that’s going to pin [this] down—that, I think, we’re still looking for.
Region: And your earlier paper with Shapiro in which you developed a model about newspapers and political slant: Could you tell us a bit about it and how it fares empirically?
Gentzkow: The theory paper that Jesse and I wrote makes the point that, first of all, there’s a mechanism by which even rational consumers, even consumers who really care about getting the truth, are nevertheless going to demand news in a way that matches what we see empirically. That is, they’re going to demand news that matches their own ideology.
Why is that true? Well, suppose you live in a world where you don’t know ahead of time which sources have accurate information and can be trusted, and which don’t have accurate information and can’t be trusted. In that world, a correct, rational, Bayesian inference is that if you say a bunch of stuff that I think a priori is incredibly unlikely to be true, I’m going to trust you less. And if you say stuff that sounds to me like it’s probably right, that is consistent with my prior beliefs about what’s most likely to be true, I’ll trust you more.
It’s obvious in the extremes. If we go into a supermarket and see a tabloid newspaper reporting that Elvis Presley was spotted in New York or that aliens came down from outer space, and you have a strong prior belief that that’s not true, then even if we’ve never seen that newspaper before, we’ll infer that it’s probably not a very accurate newspaper. It’s a totally reasonable judgment that nobody would take issue with.
That same kind of judgment leads to things such as, if I’m somebody who believes very strongly that global warming is a hoax or that the evidence for it is weak, and a lot of people I’ve talked to believe that global warming has been exaggerated, then if I see news outlets that are arguing otherwise, I’m going to trust them less. And if I see news outlets that are skeptical about global warming, I’m going to trust them more.
You can see that playing out on lots and lots of political issues. So, on net, if I’m conservative, I will sincerely believe that Fox News is a more trustworthy source of information. I’m not simply watching Fox News because, “Well, I know that it’s distorted, but it makes me feel better.” That is, I’m not watching it because it confirms my biases and makes me feel good by telling me that I’m right even though I sort of know that it’s less accurate. Rather, I’m watching it because I genuinely think it’s the most accurate source of information there is.
So, that’s what’s true in the world of that model but, as you asked, does that match the facts? Has that been confirmed? I think it resonates very strongly with my casual, anecdotal impression of how people feel about the media choices they make, and it resonates with a lot of survey evidence.
Surveys show that people who, for instance, happen to be liberal and are also consistent readers of the New York Times (including many of our friends in academia) sincerely believe that the New York Times is a trustworthy and accurate newspaper. True, it happens to agree with their political point of view, but if you ask them to bet on a factual question, they would put money on the New York Times being accurate. And surveys also show that people who are conservatives believe exactly the same thing about Fox News.
But that’s all anecdotal, survey-type evidence. We haven’t figured out a way to confirm it empirically, so it remains kind of an open question. We need sharper empirical tests that separate how much of the demand for like-minded information comes from this kind of mechanism versus a variety of other psychological mechanisms that we know are operating.
For example, there’s good evidence that we remember things better when they’re consistent with our prior point of view. There is also a sense of enjoyment at hearing confirmatory information. It’s really fun if you’re a conservative, for instance, to listen to Rush Limbaugh, and it’s really fun if you’re a liberal to listen to Jon Stewart or the “Daily Show”—people making fun of the people you disagree with is really enjoyable. So, there’s definitely that element; the pleasure of hearing somebody reinforce your beliefs is a very real thing.
That tendency of people to seek out like-minded information is so pervasive. You see it in absolutely every context that anyone has ever looked at; you see it for well-educated people and those who are far less-educated. You see it when the stakes are low as well as when they’re high. You see it everywhere and all the time. And some big component of that fact that it’s so robust and pervasive is related to this underlying fact that it’s also rationally what you would do if you were genuinely trying to figure out what is true.
There’s a broader question that is part of what first got me interested in all of this, which is, how is it that people in different places and different backgrounds can have such persistently different beliefs about even factual issues, beliefs that never seem to converge.
We’ve talked about liberals and conservatives in the U.S., but there are also huge differences across countries. Jesse and I looked at some Gallup data where following 9/11, 75 percent of people across nine Islamic countries believed that the World Trade Center was not destroyed by an airplane—that was hijacked by Arab terrorists. They had a variety of other explanations: The CIA did it, Mossad did it or something else. In stark contrast, basically 100 percent of people in the U.S would agree that 9/11 was a terrorist attack.
How do people end up with such different beliefs? Why don’t they converge? Is it all because people are deceiving themselves, or they’re biased, or they want to be told that they’re right? Maybe that’s part of it, but at the root of it, I think, is that figuring out who you can trust is a really, really hard thing. We all start out surrounded by information coming from all these different sources—from our friends, our parents, different media outlets, from the government. We need some point of reference to judge who we’re going to listen to.
So it seems obvious—if you’re sitting in America—that, “Well, of course, the World Trade Center was destroyed by terrorists. Every single news organization that we’ve ever seen agrees with that; every single expert we’ve ever heard from agrees with that.”
But if you’re sitting in Pakistan, it’s not crazy to say, “Well, those are all Western news organizations, they share the same bias, they’re part of the same conspiracy, they’re controlled by the same people. Telling me that a hundred of them say this or that isn’t so different from telling me that one of them says it. And I’ve heard from a bunch of other people and seen some videos on YouTube. There’s actually a lot of evidence on the other side, and so I’m going to make a different judgment.”
So that core question of trust has seemed to me for a long time to be really important, but the sharp empirical test that’s going to pin down how much is due to a particular thing— that, I think, we’re still looking for. ...
- What you need to know about the next recession - Larry Summers
- Urban Living Becomes a Luxury Good - Justin Fox
- The OCR leak: some disclosures - croaking cassandra
- China Is Pivoting Away From Imports... - Brad Setser
- Here is how populism can be defeated - Martin Wolf
- Donald Trump’s Real Estate Math Tricks - David Cay Johnston
- Hints of Increased Hardship in America’s Oil-Producing Counties - Liberty Street
- Ending an Unhealthy Obsession With the Fed - Narayana Kocherlakota
- How John Graunt invented economics - EconoSpeak
- Is the Eurozone dying? - mainly macro
- Target coal or carbon? - MIT News
Tuesday, May 24, 2016
Prospect theory & populism: Does prospect theory help explain support for Brexit in the UK and for Donald Trump in the US?
The bit of the theory I have in mind is the prediction that people are risk-seeking when they are losing, because they gamble to get even. This explains several phenomena: ...why (pdf) stock-pickers hold onto losing shares; why losing sports teams abandon their tactics in favour of risky all-out attack and “Hail Mary” passes; and why we sometimes get rogue traders – men who try to recoup losses by making riskier trades and so lose even more.
The same thing might explain support for Brexit and Trump. It’s generally agreed that both causes draw support from workers and the unemployed who feel that they’ve lost out under the existing order. ...
Of course, voting for Brexit, Trump or other populists is risky. But prospect theory tells us that those who feel they’ve lost might want to take risks. This might be because they feel they’ve nothing to lose: the threat of higher unemployment isn’t so scary if you’re already unemployed or if you think there’s a high chance of losing your job anyway. And/or it might be because they think that change carries upside risk.
This mechanism is amplified by another – distrust. The elite’s warnings that Brexit and Trump are risky are true. But many poorer workers and unemployed don’t trust elites...
Curious, by Tim Duy: I find the Fed's current obsession with raising interest rates curious to say the least. The basic argument for rate hikes is that the economy, and in particular the labor market, sustained its momentum in the last two quarters better than market participants believe. Given that the economy is near or beyond full employment, the lack of excess slack will soon manifest itself in the form of inflationary pressures. Hence, to remain ahead of the inflation curve and maximize the chance that rate hikes will be gradual, they need to soon raise rates.
For instance, St. Louis Federal Reserve President today, from his press release:
“By nearly any metric, U.S. labor markets are at or beyond full employment,” Bullard said. For example, he noted that job openings per available worker are at a cyclical low, unemployment insurance claims relative to the size of the labor force are at a multi-decade low, and nonfarm payroll employment growth has been above longer-run trends. In addition, the level of a labor market conditions index created by staff at the Board of Governors continues to be well above average.
In a recent speech, Boston Federal Reserve President Eric Rosengren argued that employment was close to entering the danger zone:
However, the unemployment rate is now at 5 percent – relatively close to my estimate of full employment, 4.7 percent – and net payroll employment growth is averaging over 200,000 jobs per month over the past quarter. My concern is that given these conditions, an interest rate path at the pace embedded in the futures markets could risk an unemployment rate that falls well below the natural rate of unemployment. We are currently at an unemployment rate where such a large, rapid decline in unemployment could be risky, as an overheating economy would eventually produce inflation rising above our 2 percent goal, eventually necessitating a rapid removal of monetary policy accommodation. I would prefer that the Federal Reserve not risk making the mistake of significantly overshooting the full employment level, resulting in the need to rapidly raise interest rates – with potentially disruptive effects and an increased risk of a recession.
Both these claims appear to me to be hasty. I think this narrative rang true through last summer. But, by my read of the data, since then progress toward full employment has stalled. For instance:
Part-time employment and long-term unemployment look to be moving sideways since the middle of last year, while progress in the U6 unemployment rate has decelerated markedly. And these shifts in momentum are occurring while at levels above those prior to the recession. Moreover, U3 unemployment is now moving sideways at a level above the Fed's estimate of full employment:
I understand that this flattening is attributable to rising labor force participation. That fact, however, should not induce the Fed to tighten. Quite the opposite in fact, as it suggests that available slack is deeper than imagined and hence requires an even longer period of low rates.
To me then, it appears that by raising rates now the Fed is risking falling short on its employment mandate at a time when the price mandate is also challenged. And falling short on the employment mandate now suggests an economy with sufficient slack to prevent reaching that price mandate. And that is without considering neither the balance of risks to the outlook nor the possibility that escaping the zero bound requires approaching the inflation target from above rather than below. Consequently, it seems that the case for a rate hike in June should be quite weak.
I would think that Federal Reserve Chair Janet Yellen should also find it quite weak. But the minutes of the April FOMC meeting and recent Fedspeak indicate that a large number of monetary policymakers find the case for a rate hike quite compelling. Given her past concerns regarding underemployment, I would have expected Yellen to lean stronger in the opposite direction. But I don't know that she is in fact leaning against the logic driving a rate hike. I am hoping we learn as much via her upcoming speaking engagements.
But, Yellen aside, what is driving so many FOMC participants to the rate hike camp? I think they are driven in part by two ideas that I believe to be erroneous. First, they believe that tapering and ending QE was not tightening, and hence essentially they have removed no accommodation. I think tapering was tightening as it reduced expectations about the ultimate size of the Fed's balance sheet and signaled a tighter future path of monetary policy. One place to see the tighter stance of policy is the Wu-Xia shadow rate:
Second, the Fed may be too enamored with the end game, the idea of normalization itself, as reflected in the dot-plot. They have already decided that the equilibrium fed funds rate is north of 3 percent, and hence assume that the current rate is highly accommodative. They thus see a large distance that needs to be covered, and feel an urge to start sooner than later.
Bottom Line: I don't find it surprising that some Fed policymakers are eager to hike rates. I am surprised that such sentiments are widespread throughout FOMC participants. It does not seem consistent with my understanding of the Fed's reaction function. They seem to be dismissing the recent lack of progress in reducing underemployment. This I think also might help explain the previously wide distance between financial market participants and the policymakers. And that might perhaps be why financial market participants largely ignored the warnings that rate hikes were likely until the release of the April minutes.
- Bad arguments against Marxism - Chris Dillow
- Interview with Matthew Gentzkow - FRB Minneapolis
- The Truth About the Sanders Movement - Paul Krugman
- Can Two Wrongs Make a Right? (Forecasting) - macroblog
- Who Bears the Cost of Recessions? - NBER
- The price of regret - MIT News
- The FRBNY DSGE Model Forecast—May 2016 - Liberty Street Economics
- Theory vs. Evidence: Unemployment Insurance edition - Noahpinion
- Three conceptions of biography - Understanding Society
- Are Rising Stock Prices Related to Income Inequality? - St. Louis Fed
- The Case for More Public Investment in Germany is Strong - Brad Setser
- The even cloudier future of peer-to-peer lending - Cecchetti & Schoenholtz
- Testing for Cointegration Using the Johansen Procedure - Stochastic Trend
- Paul Krugman and the Bubbles - Dean Baker
- Lepore’s missing cites - Digitopoly
- Telemedicine - Tim Taylor
Monday, May 23, 2016
Social Credit and "Neutral" Monetary Policies: A Rant on "Helicopter Money" and "Monetary Neutrality"
Social Credit and "Neutral" Monetary Policies: A Rant on "Helicopter Money" and "Monetary Neutrality": Badly-intentioned or incompetent policymakers can mess up any system of macroeconomic regulation. And we now have two centuries of history of demand-driven business cycles in industrial and post-industrial economies to teach us that there is no perfect, automatic self-regulating way to organize the economy at the macroeconomic level.
Over and over again, the grifters, charlatans, and cranks ask: "Why doesn't the central bank simply adopt the rule of setting a "neutral" monetary policy? In fact, why not replace the central bank completely with an automatic system that would do the job?"
Over the decades many have promised easy definitions of "neutrality", along with rules-of-thumb for maintaining it. All had their day:
- advocates of the gold standard,
- believers in a stable monetary base,
- devotees of a constant growth rate for the (narrowly defined) supply of money;
- believers in a constant growth rate for broad money and credit aggregates;
- various "Taylor rules".
And the answer, of course, is that by now centuries of painful experience have taught central bankers one thing: All advocates, wittingly or unwittingly, were simply selling snake oil. All such "automatic" rules and systems have been tried and found wanting.
It is a fact that all such rule-based central bank policies and all such so-called automatic systems have fallen down on the job. They have failed to properly manage "the" interest rate to set aggregate demand equal to potential output and balance the supply of whatever at that moment counts as "money", in whatever the operative sense of "money" is at that moment, to the demand for it.
Nudging interest rates to the level at which investment equals savings at full employment is what a properly "neutral" monetary policy really is.
Things are complicated, most importantly, by the fact that the business-cycle patterns of one generation are never likely to apply to the next. Consider: At any moment in the past century, the macroeconomic rules-of-thumb and models of economies' business-cycle behavior that had dominated forty, thirty, even twenty years before--the ones taught then to undergraduates, assumed as the background for op-eds, and including in the talking points of politicians whose aides wanted them to sound intelligent in answer to the first question and fuzz the answer to the follow-up before ducking away. We can now see that, for fifteen years now, central banks have been well behind the curve in their failure to recognize that the business-cycle pattern of the first post-World War II generations has definitely come to an end. The models and approaches developed to understand the small size of the post-WWII generation’s cycle and its bias toward moderate inflation are wrong today--and are worse than useless because they propagate error.
And this should not come as a surprise. ...