Not much to say about this, policy is unchanged, and not as much guidance on what to expect going forward as some expected (i.e., to get people ready for a rate increase in September):
Press Release, Release Date: July 29, 2015: Information received since the Federal Open Market Committee met in June indicates that economic activity has been expanding moderately in recent months. Growth in household spending has been moderate and the housing sector has shown additional improvement; however, business fixed investment and net exports stayed soft. The labor market continued to improve, with solid job gains and declining unemployment. On balance, a range of labor market indicators suggests that underutilization of labor resources has diminished since early this year. Inflation continued to run below the Committee's longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of earlier declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Jeffrey M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams.
Posted by Mark Thoma on Wednesday, July 29, 2015 at 11:14 AM in Economics, Monetary Policy |
More from Paul Romer on "mathiness" -- this time the use of math in finance to obfuscate communication with regulators:
Using Math to Obfuscate — Observations from Finance: The usual narrative suggests that the new mathematical tools of modern finance were like the wings that Daedalus gave Icarus. The people who put these tools to work soared too high and crashed.
In two posts, here and here, Tim Johnson notes that two government investigations (one in the UK, the other in the US) tell a different tale. People in finance used math to hide what they were doing.
One of the premises I used to take for granted was that an argument presented using math would be more precise than the corresponding argument presented using words. Under this model, words from natural language are more flexible than math. They let us refer to concepts we do not yet fully understand. They are like rough prototypes. Then as our understanding grows, we use math to give words more precise definitions and meanings. ...
I assumed that because I was trying to use math to reason more precisely and to communicate more clearly, everyone would use it the same way. I knew that math, like words, could be used to confuse a reader, but I assumed that all of us who used math operated in a reputational equilibrium where obfuscating would be costly. I expected that in this equilibrium, we would see only the use of math to clarify and lend precision.
Unfortunately, I was wrong even about the equilibrium in the academic world, where mathiness is in fact used to obfuscate. In the world of for-profit finance, the return to obfuscation in communication with regulators is much higher, so there is every reason to expect that mathiness would be used liberally, particularly in mandated disclosures. ...
We should expect that there will be mistakes in math, just as there are mistakes in computer code. We should also expect some inaccuracies in the verbal claims about what the math says. A small number of errors of either type should not be a cause for alarm, particularly if the math is presented transparently so that readers can check the math itself and check whether it aligns with the words. In contrast, either opaque math or ambiguous verbal statements about the math should be grounds for suspicion. ...
Mathiness–exposition characterized by a systematic divergence between what the words say and what the math implies–should be rejected outright.
Posted by Mark Thoma on Wednesday, July 29, 2015 at 10:52 AM in Economics, Financial System, Methodology |
From Ross Levine, Chen Lin, and Wensi Xie at Vox EU:
Spare tire? Stock markets, banking crises, and economic recoveries: Do stock markets act as a ‘spare tire’ during banking crises, providing an alternative corporate financing channel and mitigating the economic severity of crises when the banking system goes flat?
In 1999, Alan Greenspan, then Chairman of the Federal Reserve System, argued that stock markets could mitigate the negative effects of banking crises, including more fragile businesses and greater unemployment. Using the analogy of a spare tire, he conjectured that banking crises in Japan and East Asia would have been less severe if those countries had built the necessary legal infrastructure so that their stock markets could have provided financing to corporations when their banking systems could not. If firms can substitute equity issuances for bank loans during banking crises, then banking crises will have less harmful effects on the public.
But researchers have not evaluated the spare tire view. Although official entities and others discuss the spare tire argument (e.g. US Financial Crisis Inquiry Commission 2011, Wessel 2009), we are unaware of systematic assessments of the testable implications emerging from Greenspan’s view of how financial markets can ease the effects of systemic banking failures.
In a recent paper, we provide the first assessment of the spare tire view... The findings are consistent with the three predictions of the spare tire view. ... The estimated economic effects are large...
Posted by Mark Thoma on Wednesday, July 29, 2015 at 10:52 AM in Economics, Financial System |
Paul Krugman wonders if he has been advocating for the right type of policies:
Second-best Macroeconomics: The ... economic problems facing both the United States and Europe have been quite straightforward and comprehensible. ... So no worries: just hit the big macroeconomic That Was Easy button, and soon the troubles will be over.
Except that all the natural answers to our problems have been ruled out politically. Austerians not only block the use of fiscal policy, they drive it in the wrong direction; a rise in the inflation target is impossible given both central-banker prejudices and the power of the goldbug right. Exchange rate adjustment is blocked by the disappearance of European national currencies, plus extreme fear over technical difficulties in reintroducing them.
As a result, we’re stuck with highly problematic second-best policies like quantitative easing and internal devaluation. ... In case you don’t know, “second best” ... comes from a classic 1956 paper by Lipsey and Lancaster, which showed that policies which might seem to distort markets may nonetheless help the economy if markets are already distorted by other factors. ...
The problems with second best as a policy rationale are familiar. For one thing, it’s always better to address existing distortions directly, if you can — second best policies generally have undesirable side effects... There’s also a political economy concern,... in a complicated world you can come up with a second best rationale for practically anything. ...
But here we are, with anything resembling first-best macroeconomic policy ruled out by political prejudice, and the distortions we’re trying to correct are huge — one global depression can ruin your whole day. So we have quantitative easing, which is of uncertain effectiveness, probably distorts financial markets at least a bit, and gets trashed all the time by people stressing its real or presumed faults; someone like me is then put in the position of having to defend a policy I would never have chosen if there seemed to be a viable alternative. ...
Which makes me ask myself the question: Do people like me spend too much time being limited by what is presumed to be politically practical? Should we devote more time to trying to widen the range of options, to pointing out that we really would be much better off if we threw off the fetters of conventional deficit fears, the 2 percent inflation target, and the extremely ill-advised euro project?
Posted by Mark Thoma on Wednesday, July 29, 2015 at 12:24 AM in Economics, Policy, Politics |
Posted by Mark Thoma on Wednesday, July 29, 2015 at 12:06 AM in Economics, Links |
The Politics of Economics and ‘Very Serious People’: The latest debate in the economics blogosphere is about the true meaning of the term “Very Serious People,” a term of derision initially used to describe some supporters of the Iraq war. It was later broadened to describe people who advocate for the tough position on any issue – budget cuts and entitlement reform to ease debt worries, increases in interest rates to prevent inflation, and so on – despite evidence contrary to their policy proposals.
Very Serious People often embrace unpopular policies; they adopt the tough and serious route they believe is needed to ensure the US remains on solid footing, and they ridicule the opposition as softies unwilling to accept that there is no easy way to overcome our economic problems. Gain requires pain, but we should note that the tough policies Very Serious People embrace usually impose the pain on other people -- often the poor and disadvantaged. When they are asked to step up and pay more taxes to reduce the deficit, for example, their tune generally changes.
Henry Farrell, an Associate Professor of Political Science at George Washington University says, “Being a Very Serious Person is about occupying a structural position that tends to reinforce, rather than counter, one’s innate biases and prejudices.” I’m not sure that fully captures the desire to appear tough and disciplined, to be seen as the one willing to say what needs to be done no matter how hard it is, but it did lead me to think about the degree to which I, and other economists, are influenced by our political leanings. To what extent do our politics determine our economics? ...
Posted by Mark Thoma on Tuesday, July 28, 2015 at 09:15 AM in Economics, Politics |
Simon Wren-Lewis on whether "central bankers need to keep quiet about policy matters that are not within their remit":
Should central bankers stick to talking about monetary policy?: Few disagree that the recent remarks on corporate governance and investment made by Andy Haldane (Chief Economist at the Bank of England) are interesting, and that if they start a debate on short-termism that would be a good thing. As Will Hutton notes, Hillary Clinton has been saying similar things in the US. The problem Tony Yates has (and which Duncan Weldon, the interviewer, alluded to in his follow-up question) is that this is not obviously part of the monetary policy remit.
Haldane gave an answer to that, which Tony correctly points out is somewhat strained. ...
I have in the past said very similar things to Tony...
However I am beginning to have second thoughts about my own and Tony’s views on this. First, it all seems a bit British in tone. Tony worked at the Bank, and I have been involved with both the Bank and Treasury on and off, so we are both steeped in a British culture of secrecy. I do not think either of us are suggesting that senior Bank officials should never give advice to politicians, so what are the virtues of keeping this private? In trying to analyse how policy was made in 2010, it is useful to have a pretty good idea of what advice the Bank’s governor gave politicians because of what he said in public, rather than having to guess. ...
It is often said that central bankers need to keep quiet about policy matters that are not within their remit as part of an implicit quid pro quo with politicians, so that politicians will refrain from making public their views about monetary policy. Putting aside the fact that the ECB never got this memo, I wonder whether this is just a fiction so that politicians can inhibit central bankers from saying things politicians might find awkward (like fiscal austerity is making our life difficult). In a country like the UK with a well established independent central bank, it is not that clear what the central bank is getting out of this quid pro quo. And if it stops someone with the wide ranging vision of Haldane from raising issues just because they could be deemed political, you have to wonder whether this mutual public inhibition serves the social good.
The danger is that the Fed will become politicized as a result of taking sides on hotly debated political/policy questions. This is from a post in February of 2007:
...Should the Federal Reserve Chair talk only about matters directly related to monetary policy, or is it okay to discuss broader issues such as inequality, minimum wages, and Social Security without making the direct connection to monetary policy evident?...:
Willem Buiter: Martin's Column "Why America will need some elements of a welfare state", refers extensively to a recent speech by Ben Bernanke...
I believe it is a serious mistake for central bankers to express public views on politically contentious issues outside their mandates. The mistake is no less serious for being made so commonly by central bankers all over the world.
Central bank Governors have a lengthy and unfortunate track record of holding forth in public on matters that are outside the domains of their mandate (in the case of the Fed, monetary policy and financial stability)... With the exception of the Governors of the Bank of England and the Reserve Bank of New Zealand, every Governor on the block appears to want to share his or her views on necessary or desirable fiscal, structural and social reforms. Examples are social security reform and the minimum wage, subjects on which Alan Greenspan liked to pontificate when he was Chairman of the Board of Governors of the Federal Reserve System. Jean-Claude Trichet cannot open his mouth without some exhortation for fiscal restraint or structural reform rolling out. In the case of Chairman Bernanke's speech, equality of opportunity, income distribution, teenage pregnancy and welfare dependency are clearly not part of the (admittedly broad) three-headed mandate of the Fed: maximum employment, stable prices and moderate long-term interest rates. ...
When the Head of a central bank becomes a participant, often a partisan participant, in public policy debates on matters beyond the central bank's mandate..., the institution of the central bank itself is politicised and put at risk of becoming a partisan-political football. This puts at risk the central bank's operational independence in the management of monetary policy and in securing financial stability.
Central bankers, Mr. Bernanke included, should 'stick to their knitting' (if I may borrow Alan Blinder's phrase). Being the head of an institution with the national and global visibility of the Fed or the ECB gives one an unparalleled platform for addressing whatever one considers the great issues of the time. The temptation to climb that unique pulpit must be near-irresistible. Nevertheless, unless the text for the sermon concerns monetary policy or financial stability, that temptation is to be resisted in the interest of the institutional integrity and independence of the central bank.
As I've said before, I agree.
Fiscal policy has a clear connection to monetary policy through the government budget constraint, and there are also times -- e.g. recently -- when monetary policy needs the help of fiscal policy (if the Fed is forced to shoulder the entire burden, it can bring other risks). So I have no problem with the Fed chair raising fiscal policy issues (as Bernanke did, though not forcefully enough perhaps). I have a bit more trouble when the topic is inequality (e.g. Yellen's big speech on this -- and the subsequent reaction from the right). It's harder to see how that is connected to the Fed's policy mandate, and with Republicans already out to take away as much of the Fed's powers as they can, it was a bad time to tick them off.
Maybe this is too cautious. Perhaps Federal Reserve officials should feel free to address whatever topic they'd like. But the Fed's independence was instrumental during the Great Recession -- without it, monetary policy would have been as terrible as fiscal policy and things would have been much worse -- and I'd rather not take any risks.
Posted by Mark Thoma on Tuesday, July 28, 2015 at 12:42 AM in Economics, Monetary Policy, Politics |
This is from the NBER (Project Syndicate, are you listening?):
Content Aggregation by Platforms: The Case of the News Media, by Lesley Chiou and Catherine Tucker, NBER Working Paper No. 21404, July 2015: ... In recent years, the digitization of content has led to the prominence of platforms as aggregators of content in many economically important industries, including media and Internet-based industries (Evans and Schmalensee, 2012).
These new platforms consolidate content from multiple sources into one place, thereby lowering the transactions costs of obtaining content and introducing new information to consumers. ... For these reasons, platforms have attracted considerable legal and policy attention. ...
Our results indicate that ... the traffic effect is large, as aggregators may guide users to new content. We do not find evidence of a scanning effect...
Our empirical distinction between a scanning effect where the aggregator substitutes for original content and a traffic effect where the aggregator is complementary, is useful for analyzing the potential policy implications of such business models. The fact we find evidence of a "traffic effect" even with a relatively large amount of content on an aggregator, is perhaps evidence that the "fair use" exemptions often relied on by such sites are less potentially damaging to the original copyright holder than often thought.
On the comment that the benefits outweigh the harm "even with a relatively large amount of content on an aggregator," when I post an entire article, as I did yesterday with this Vox EU piece, a surprisingly high percentage of you still click through to the original.
With video, at least in most cases, there is code available to put the video on your site. You play it and it has ads, branding, etc. I've always thought (or maybe hoped) content providers should do the same thing. Provide an embed button that allows me to duplicate an article -- it would come with ads, links to other content on their site, etc. -- on my site. Reads of the article would go way up (not from just my site, I mean if they allowed everyone to do this), and it would increase the number of people who see ads associated with their content (so they could charge more).
Posted by Mark Thoma on Tuesday, July 28, 2015 at 12:33 AM in Academic Papers, Economics, Links, Weblogs |
Cecchetti & Schoenholtz:
Are we overestimating inflation (again?): Twenty years ago, a group of experts – the “Boskin Commission” – concluded that the U.S. consumer price index (CPI) systematically overstated inflation by 0.8 to 1.6 percentage points each year. Taking these findings to heart, the Bureau of Labor Statistics (BLS) got to work reducing this bias, so that by the mid-2000s, experts felt it had fallen by as much as half a percentage point.
We bring this up because there is a concern that as a consequence of the way in which we measure information technology (IT), health care, digital content and the like, the degree to which conventional indices overestimate inflation may have risen. ...
When indices like the consumer price index (CPI) or the personal consumption expenditure price index (PCE) persistently overstate inflation, there are important consequences. So long as the upward bias is constant, central bankers can (and do) modify their inflation targets. Yet, these price indexes also are used to adjust entitlement benefits without correcting for any persistent bias. And, they can have an important impact on public discourse. In particular, upward bias means that the median real wage may have risen substantially over past decades, in contrast to reported stagnation.
If the overstatement of inflation has increased during the past decade, this also has profound consequences. For one thing, the reported slowdown in annual productivity growth – from something like 2½% in the decade prior to the crisis to about 1% today – could be more apparent than real. For another, true inflation may be even further below the Federal Reserve’s long-run objective of 2% on the PCE than current readings imply.
There is good reason to think that the price mismeasurement problem has gotten worse, but quantifying that deterioration is another thing. The impact on inflation may turn out to be small – perhaps an extra ¼% annually – leaving it well within the range of uncertainty that the Boskin Commission highlighted 20 years ago. ...
After presenting their analysis, they end with:
So, what’s the bottom line? We have little doubt that inflation has been overstated for decades. That means that the rise of U.S. real output, real income, productivity, and living standards has been understated materially over the long run. In recent years, IT price mismeasurement probably has worsened this growth and productivity bias significantly. But the potential impact of IT mismeasurement on measures of consumer price inflation – which has been the source of much discussion – is small compared to what a worsening bias in health care prices would imply.
[There is a large controversy surrounding the Boskin report that I am ignoring.]
Posted by Mark Thoma on Tuesday, July 28, 2015 at 12:24 AM in Economics, Inflation |
Posted by Mark Thoma on Tuesday, July 28, 2015 at 12:06 AM in Economics, Links |
Despite what you might hear from conservatives, Medicare is "eminently sustainable":
Zombies Against Medicare, by Paul Krugman, Commentary, NY Times: Medicare turns 50 this week, and it has been a very good half-century. Before the program went into effect, Ronald Reagan warned that it would destroy American freedom; it didn’t, as far as anyone can tell. What it did do was provide a huge improvement in financial security for seniors and their families, and in many cases it has literally been a lifesaver as well.
But the right has never abandoned its dream of killing the program. So it’s really no surprise that Jeb Bush recently declared that while he wants to let those already on Medicare keep their benefits, “We need to figure out a way to phase out this program for others.” ...
The ... reason conservatives want to do away with Medicare has always been political: It’s the very idea of the government providing a universal safety net that they hate, and they hate it even more when such programs are successful. But ... they usually shy away from making their real case...
What Medicare’s would-be killers usually argue, instead, is that the program as we know it is unaffordable — that we must destroy the system in order to save it... And the new system they usually advocate is ... vouchers that can be applied to the purchase of private insurance.
The underlying premise here is that Medicare as we know it is incapable of controlling costs, that only the only way to keep health care affordable going forward is to rely on the magic of privatization.
Now, this was always a dubious claim. .... In fact, Medicare costs per beneficiary have consistently grown more slowly than private insurance premiums... Indeed, Medicare spending keeps coming in ever further below expectations...
Right now is, in other words, a very odd time to be going on about the impossibility of preserving Medicare, a program whose finances will be strained by an aging population but no longer look disastrous. One can only guess that Mr. Bush is unaware of all this, that he’s living inside the conservative information bubble, whose impervious shield blocks all positive news about health reform.
Meanwhile, what the rest of us need to know is that Medicare at 50 still looks very good. It needs to keep working on costs, it will need some additional resources, but it looks eminently sustainable. The only real threat it faces is that of attack by right-wing zombies.
Posted by Mark Thoma on Monday, July 27, 2015 at 12:42 AM in Budget Deficit, Economics, Health Care, Politics, Social Insurance |
Genes are not as important as people think:
Poor Little Rich Kids? The Determinants of the Intergenerational Transmission of Wealth, by Sandra E. Black, Paul J. Devereux, Petter Lundborg, and Kaveh Majlesi, NBER Working Paper No. 21409 Issued in July 2015: Wealth is highly correlated between parents and their children; however, little is known about the extent to which these relationships are genetic or determined by environmental factors. We use administrative data on the net wealth of a large sample of Swedish adoptees merged with similar information for their biological and adoptive parents. Comparing the relationship between the wealth of adopted and biological parents and that of the adopted child, we find that, even prior to any inheritance, there is a substantial role for environment and a much smaller role for genetics. We also examine the role played by bequests and find that, when they are taken into account, the role of adoptive parental wealth becomes much stronger. Our findings suggest that wealth transmission is not primarily because children from wealthier families are inherently more talented or more able but that, even in relatively egalitarian Sweden, wealth begets wealth.
Posted by Mark Thoma on Monday, July 27, 2015 at 12:33 AM in Academic Papers, Economics, Income Distribution |
"When we consider the dangers of debt in today’s world, we should keep an eye on its potential benefits as well.":
Debt miracle: Why the country that borrowed the most industrialized first, by Jaume Ventura and Hans-Joachim Voth, Vox EU: Towering debts, rapidly rising taxes, constant and expensive wars, a debt burden surpassing 200% of GDP. What are the chances that a country with such characteristics would grow rapidly? Almost anyone would probably say ‘none’.
And yet, these are exactly the conditions under which the Industrial Revolution took place in Britain. Britain’s government debt went from 5% of GDP in 1700 to over 200% in 1820, it fought a war in one year out of three (most of them for little or no economic gain), and taxes increased rapidly but not enough to keep pace with the rise in spending.
Figure 1 shows how war drove up spending and led to massive debt accumulation – the shaded grey areas indicate wars, and they are responsible for almost all of the rise in debt. Over the same period, Britain moved a large part of its population out of agriculture and into industry and services – out of the countryside and into cities. Population grew rapidly, and industrial output surged (Crafts 1985). As a result, Britain became the first country to break free from the shackles of the Malthusian regime.
Figure 1. Debt accumulation and government expenditure in the UK, 1690-1860
Until now, scholars mostly thought of the effect of government borrowing on growth as either neutral or negative. One prominent view held that investment in private industry would have been higher had Britain fought and borrowed less (Williamson 1984). Another argument is that private savings decisions undid the potentially negative effects of massive borrowing – because debt eventually has to be repaid, private agents anticipated rising taxes in the future and neutralized the effects of debt accumulation (Barro 1990).
The revolution that wasn’t
In a recent paper, we argue that Britain’s borrowing binge was actually good for growth (Ventura and Voth 2015). To understand why massive debt accumulation may have accelerated the Industrial Revolution, we first consider what should have happened in an economy where entrepreneurs suddenly start to exploit a new technology with high returns. Typically, we would expect capital to chase these investment opportunities – anyone with money should have tried to put their savings into new cotton factories, iron foundries and ceramics manufacturers. Where they didn’t have the expertise to invest directly, banks and stock companies should have recycled funds to direct savings to where returns where highest.
This is not what happened. Financial intermediation was woefully inadequate – it failed to send the money where it should have gone. As one prominent historian of the British Industrial Revolution argued:
“the reservoirs of savings were full enough, but conduits to connect them with the wheels of industry were few and meagre … surprisingly little of [Britain’s] wealth found its way into the new industrial enterprises ….” (Postan 1935).
There were many reasons for this, but deliberate financial repression by the government was one of them. Usury limits, the Bubble Act, the Six Partner Rule that limited the size of banks – all of them were designed to stifle private intermediation, in part so as to facilitate access to funds for the government (Temin and Voth 2013).
Without effective intermediation, new sectors had to self-finance – rates of return stayed high because so little fresh capital entered to chase the sky-high returns. Allen calculated that the profit rate for capital rose from 10% in the 1770s to over 20% by the 1830s – capital’s share of national income more than doubled (Allen 2009).
Why debt helped
The inefficiency of private intermediation is crucial for debt to play a beneficial role. By issuing bonds on a massive scale, the government effectively pioneered a way – unintentionally – to put money in the pockets of entrepreneurs in the new sectors.
How did it do that? Before the availability of government debt, Britain’s rich and mighty – the nobility – overwhelmingly invested in land and land improvements. Status was closely tied to land, but improving it was not a profitable enterprise. Many forms of investment yielded a return of 2% of less. No wonder that noblemen were disenchanted with landed investment: By the 1750s, the first nobles were switching massively out of land and into government debt. The Prime Minister Sir Robert Peel advised: “every landowner ought to have as much property (as his estate) in consols or other securities…” (Habbakuk 1994). Many nobles obliged, shifting into an asset with a superior risk-return profile. As Lord Monson put it: “What an infernal bore is landed property. No certain income can be reckoned upon. I hope your future wife will have consols. . . ” (Thompson 1963).
The shift from investing in liming, marling, draining, and enclosure into government debt liberated resources – labor that could no longer be profitably employed in the countryside had to look for employment elsewhere. Because so much of English agricultural labor was provided by wage laborers, the switch to government debt pushed workers off the land. Unsurprisingly, wages failed to keep pace with output; real wages, adjusted for urban disamenities, probably fell over the period 1750-1830. What made life miserable for the workers, as eloquently described by Engels amongst others, was a boon to the capitalists. Their profit rates continued to rise as capital received an ever-larger share of the pie – while the share of national income going to labor and land contracted. Higher profits spelled more investment in new industries, and Britain’s industrial growth accelerated.
By putting debt at the center of our interpretation of the Industrial Revolution, we can provide a unified explanation for a number of features that have so far seemed puzzling. Growth was relatively slow, especially in the beginning (Crafts 1985) – but technological change was probably quite rapid (Temin 1997). Government borrowing slowed capital formation on impact – but structural change was rapid over the period as a whole. Rates of return were high in industry, but little capital chased these returns. Wages failed to keep up with productivity despite the rapid move out of the countryside and into the cities. By emphasizing how government debt issuance ‘healed’ the negative consequences of financial frictions, we can jointly explain rapid structural change and slow growth; rapid technological change and poor wage growth; massive government borrowing and the first take-off into sustained growth.
Good-bye to Downton
The issuance of government debt also accelerated social change – the rise of the capitalists and the decline of nobility. Without it, rates of profit in industry would have been less, and the decline and fall of the nobility as a dominant economic force would have taken much longer.
The solution that would have ensured the fastest growth – a much better financial system – would have preserved England’s social hierarchy entirely. Financial investment from the nobility would have flowed into new sectors via banks and the stock market, allowing the top 1% to earn high returns. The rise of the capitalists would have been long-delayed or been avoided altogether.
The bigger picture
How much of the situation in industrializing England has any relevance for the world as it is now? Is this a tale from a distant island and period of which we know little – to paraphrase Chamberlain – or does it hold lessons for the present? Financial frictions are still very prominent even in the most developed countries today; changing the profitability of revolutionary sectors should have first-order effects on the long-run rate of growth. The issuance of government debt may still crowd out investment that is, overall, inefficient.
These efficiency-enhancing effects of government debt may be all the more important in developing countries. There, the added benefits of debt that we did not discuss – such as providing a safe store of value, and a certain source of liquidity (Holmstrom and Tirole 1998) – may tilt the overall scoresheet even more in favor of government borrowing. None of this is to say that debts may not become excessive (Reinhart and Rogoff 2009) – but when we consider the dangers of debt, we should keep an eye on its potential benefits as well.
Allen, R (2009), “Engel’s pause: A pessimist’s guide to the British Industrial Revolution”, Explorations in Economic History 46 (2): 418–35.
Barro, R J (1987), “Government spending, interest rates, prices, and budget deficits in the United Kingdom, 1701–1918”, Journal of Monetary Economics 20 (2): 221–47.
Crafts, N F R (1985), British Economic Growth during the Industrial Revolution, Oxford: Oxford University Press.
Habakkuk, H J (1994), Marriage, Debt, and the Estates System: English Landownership, 1650-1950, Clarendon Press.
Holmstrom, B R, and J Tirole (1998), “Private and Public Supply of Liquidity”, Journal of Political Economy 106(1): 1-40.
Postan, M M (1935), “Recent trends in the accumulation of capital”, The Economic History Review 6 (1): 1–12.
Temin, P (1997), "Two views of the British industrial revolution", The Journal of Economic History 57(1): 63-82.
Temin, P and H-J Voth (2013), Prometheus Shackled: Goldsmith Banks and England’s Financial Revolution After 1700, Oxford University Press.
Thompson, F M L (1963), “English landed society in the nineteenth century”, English Landed Society in the Nineteenth Century.
Reinhart, C M, and K Rogoff (2009), This Time is Different, Princeton University Press.
Williamson, J G (1984), "Why was British growth so slow during the industrial revolution?" The Journal of Economic History 44(3): 687-712.
Ventura, J and H-J Voth (2015), “Debt into growth: How government borrowing accelerated the Industrial Revolution”, CEPR DP No. 10652.
Posted by Mark Thoma on Monday, July 27, 2015 at 12:24 AM in Budget Deficit, Economics |
Posted by Mark Thoma on Monday, July 27, 2015 at 12:06 AM in Economics, Links |
The F story about the Great Inflation: Here F could stand for folk. The story that is often told by economists to their students goes as follows. After Phillips discovered his curve, which relates inflation to unemployment, Samuelson and Solow in 1960 suggested this implied a trade-off that policymakers could use. They could permanently have a bit less unemployment at the cost of a bit more inflation. Policymakers took up that option, but then could not understand why inflation didn’t just go up a bit, but kept on going up and up. Along came Milton Friedman to the rescue, who in a 1968 presidential address argued that inflation also depended on inflation expectations, which meant the long run Phillips curve was vertical and there was no permanent inflation unemployment trade-off. Policymakers then saw the light, and the steady rise in inflation seen in the 1960s and 1970s came to an end.
This is a neat little story, particularly if you like the idea that all great macroeconomic disasters stem from errors in mainstream macroeconomics. However even a half awake student should spot one small difficulty with this tale. Why did it take over 10 years for Friedman’s wisdom to be adopted by policymakers, while Samuelson and Solow’s alleged mistake seems to have been adopted quickly? Even if you think that the inflation problem only really started in the 1970s that imparts a 10 year lag into the knowledge transmission mechanism, which is a little strange.
However none of that matters, because this folk story is simply untrue. There has been some discussion of this in blogs (by Robert Waldmann in particular - see Mark Thoma here), and the best source on this is another F: James Forder. There are papers (e.g. here), but the most comprehensive source is now his book, which presents an exhaustive study of this folk story. It is, he argues, untrue in every respect. Not only did Samuelson and Solow not argue that there was a permanent inflation unemployment trade-off that policymakers could exploit, policymakers never believed there was such a trade-off. So how did this folk story arise? Quite simply from another F: Friedman himself, in his Nobel Prize lecture in 1977.
Forder discusses much else in his book, including the extent to which Friedman’s 1968 emphasis on the importance of expectations was particularly original (it wasn’t). He also describes how and why he thinks Friedman’s story became so embedded that it became folklore....
Posted by Mark Thoma on Sunday, July 26, 2015 at 09:48 AM in Economics, History of Thought, Macroeconomics |
Posted by Mark Thoma on Sunday, July 26, 2015 at 12:06 AM in Economics, Links |
From Vox EU (and in today's links), can economic factors explain the rise in obesity?:
Changing economic factors and the rise in obesity: The dramatic increase in obesity has raised the question of whether economic incentives can explain this trend. ...
Of the 27 economic factors, two stand out as having the largest effects. First is the increase in restaurants per capita, which explains 12%, 14%, and 23% of the increases in BMI, obesity, and severe obesity, respectively. Increased availability of restaurant food would likely encourage substitution away from home-cooked meals to relatively unhealthy restaurant meals. Furthermore, fast food is not the lone culprit. When we split the restaurant variable into fast-food and full-service restaurants, we find similar effects for each type.
The second major contributor is the increase in superstores and warehouse clubs per capita, which accounts for 17%, 16%, and 24% of the growth in body mass index, obesity, and severe obesity. The superstore variable combines Walmart Supercenters with the warehouse club chains Costco, Sam’s Club, and BJ’s Wholesale Club. A possible explanation for the impact of these stores on obesity is that they sell food at discounts of around 20% relative to traditional grocers. Alternatively, buying food in bulk at warehouse clubs could contribute to overeating. However, when decomposing the superstore variable, Walmart Supercenters are found to have roughly the same effect as warehouse clubs. Since Walmart Supercenters sell food in traditional package sizes, this reduces the likelihood that bulk buying is a primary explanation.
This analysis suggests that variables related to the costs of eating – particularly Supercenter/warehouse club expansion and increasing numbers of restaurants – are leading drivers of the rise in obesity occurring since the early 1980s. However, the source of these effects remains somewhat uncertain. One possibility, previously discussed, is that they lower food prices, particularly for energy-dense food products and restaurant meals, so that the utility-maximising level of weight has increased. An alternative is that the expansion of Supercenters/warehouse clubs and restaurants has reduced time costs because of the greater availability of such foods. When combined with time-inconsistent preferences (i.e. the inability to follow through on previously made plans) this could lead to weight gains beyond utility-maximising levels. Consistent with this, we find that Supercenter/warehouse club densities are correlated with increases in weight loss attempts, which may reflect eating mistakes.
While restaurants, Supercenters, and warehouse clubs appear to have contributed substantially to the rise in obesity, this does not necessarily mean that they are bad for society. The increased availability and affordability of food brought about by these businesses undoubtedly have substantial benefits for consumers. However, such progress comes at a cost. Future research should investigate the reasons why restaurants and superstores contribute to obesity with the aim of helping policymakers develop appropriately targeted solutions.
Posted by Mark Thoma on Saturday, July 25, 2015 at 10:59 AM in Economics |
The Old Man and the CPI: I don’t watch financial news, but CNBC was on in the gym, so I was treated to a long ad from Ron Paul, who wants you to buy his video explaining the coming crisis brought on by loose money. And I found myself thinking about the remarkable fact that there really are people who will buy that video.
After all, Ron Paul has been making the same prediction year after year — in fact, he’s been making this prediction at least since 1981! — and has been wrong year after year. It’s hard to think of a doctrine that has been as thoroughly refuted by events as goldbug economics. ...
The basic mindset of the kind of people who pay Ron Paul for his economic advice is pretty clear: they’ve made some money over the course of their lives, they believe that all of it reflects their own virtue, and they think they know from that experience what it takes to create wealth. They hear that the Fed is printing money, and it sounds to them like a violation of both the laws of economics and morality — and they surely think of it as a plot to take away their completely earned gains and give them to Those People (hence the whiteness issue).
You can try as hard as you like to tell such people that monetary policy is mainly a technical problem, that the Fed isn’t giving money away, and that predictions of runaway inflation have been utterly wrong; it will make no difference. You can point out that they would have done a much better job of investing if they had listened to the MIT gang; sorry, we’re just not their kind of people.
I’d say it’s sad, but I find it hard to feel much sympathy for the marks of this particular scam. Then again, that’s probably why they will never, ever listen to what I have to say.
There are also silverbugs:
LBJ signed the 1965 act,... the president noted, “our coinage of dimes, and quarters, and half dollars, and dollars have contained 90% silver.” Not any more: The new dimes and quarters would “contain no silver.” Instead they would be “composites, with faces of the same alloy used in our 5-cent piece that is bonded to a core of pure copper.” The new half dollar would have 80% silver on the outside and 19% silver inside.
... The value of the dollar started sinking after the 1965 coinage act, and by 1980 the dollar—so long valued at 0.77 ounces of silver—plunged to 0.02 ounces of silver. Today it is valued at 0.06 ounces of silver.
The pre-1965 silver coins have mostly disappeared from circulation. Misers who try to spend silver or gold coins they have hoarded are subject to a capital-gains tax. Monetary purists, incidentally, prefer to speak of “spending” gold and silver, rather than “selling” it, because gold and silver are the true constitutional money.
The U.S. Constitution prohibits states from coining money themselves or making anything but gold or silver coins legal tender. ...
A ... radical approach would be the Free Competition in Currency Act, originally the brainchild of Ron Paul, the former Texas congressman, and offered again in the last Congress by Rep. Paul Broun (R., Ga.). It adopts the idea of the late Nobel laureate Friedrich Hayek. This measure would end the legal tender laws, halt capital-gains taxation on gold and silver, and permit private coinage.
One important characteristic of a medium of exchange is that its supply can be controlled in way that allows shocks to the supply and demand for the medium of exchange to be offset. Otherwise, the value will potentially vary quite a bit over time. (E.g. the price of silver went from around $10 near the end of 1972 to over $100 at the beginning of 1980, followed by a large fall back to around $10 at the beginning of 1990. In 2001 it fell to around $6, then spiked to around $50 by 2011, then fell again to around $15 today, and all indications are that it will fall further.) Such large variations in purchasing power of the medium of exchange are highly undesirable -- this is what the gold and silver bugs object to, periods of rapid inflation and deflation (in addition to the variation in purchasing power, it creates considerably uncertainty about the future -- what will be the value of the medium of exchange when loans are repaid? -- and harms future investment).
One way to control the supply is to have it be essentially fixed, as with bitcoin, but that is not sufficient. As we've seen with bitcoin, variations in demand can have a huge impact on value. Similarly for precious metals. Supply can change with mining, etc., but it changes slowly, and variations in demand can lead to wildly fluctuating values. The solution is to have some central authority -- let's call if "the Fed" -- with the ability to alter the supply of the commodity quickly so as to keep the price stable.
So the choice is to have a medium of exchange whose value can vary significantly, suddenly and unexpectedly, or have a central authority intervene to stabilize the price (by stockpiling or selling the medium of exchange to offset shocks to the supply and demand for the commodity). The point is that if changes in the value of a medium of exchange is the concern, as it appears to be, then switching to a commodity money does not solve the problem of needing a central authority to keep the value stable.
Posted by Mark Thoma on Saturday, July 25, 2015 at 10:58 AM in Economics |
The conclusion of a long White House report on long-term interest rates:
V. Conclusion Many factors play roles in the determination of long - term interest rates, including the rate of productivity growth, beliefs about future risks, consumer preferences , demographic shifts , and the stance s of monetary and fiscal policy. As markets have become globally integrated, conditions in foreign markets are increasingly important for U . S . long - term interest rates. Over the past two decades, long - term interest rates have been falling worldwide. An explanation for why they are so low — and whether those low levels will persist — i s one of the most difficult questions facing macroeconomists today.
Interest rates are jointly determined by the supply of saving and the demand for investment. While it is difficult to make strong predictions, this report argues that there are a number of reasons to think that the global saving supply curve has shifted outward , a development that would help to keep equilibrium interest rates low . As with any price in the economy, a low price is beneficial to some and has negative ramifications for others. Low long - term interest rates make it cheaper for governments to finance their debt burdens. By reducing the cost of borrowing, lower long - term interest rates create more fiscal sp ace for government programs, including infrastructure investment, reducing the cost of expansionary fiscal policy. Lower long - term interest rates should also reduce the cost of borrowing by the private sector, encouraging investments that can enhance growth in the future. However, if rates are low because of subdued expectations about future growth, investment is unlikely to be robust .
For savers, lower equilibrium long - term interest rates would affect the return to savings, the cost of borrowing for homeownership, and lifecycle decisions about when to retire and the time pattern of consumption.
Finally, lower long - term interest rates could have important implications for monetary policy, particularly regarding the zero lower bound for short - term interest rates and specific policy tools. Market participants , in turn, may take these factors into effect when making economic forecasts or planning consumption and investment.
Ultimately, interest rates reflect fundamental macroeconomic conditions and there is no “optimal” rate of interest. The goal of policy should not be to target a particular rate, but to support long - run growth, maintain price stability, and strengthen the resilience of financial markets .
Posted by Mark Thoma on Saturday, July 25, 2015 at 10:58 AM in Economics |
Posted by Mark Thoma on Saturday, July 25, 2015 at 12:06 AM in Economics, Links |
Raise the Gas Tax Already: Senate Majority Leader Mitch McConnell is a conservative Republican. Senator Barbara Boxer is a liberal Democrat. So the fact that they’ve worked together to come up with a plan to fund highway spending for the next three years might seem like a good thing, a rare moment of bipartisanship in a Congress riven by ideological hostility. And, in fact, you could see the thousand-page bill they’ve produced as, in the words of the Times, “real progress,” except for one thing: their complicated, jury-rigged plan is only necessary because of the continued refusal by Congress to embrace the obvious, economically sensible solution to highway funding, namely raising the gas tax. ...
The fundamental problem, of course, is that raising taxes, no matter how economically sensible those taxes might be, is anathema to a huge swath of the Republican Party. ... Opposition to higher income taxes has some theoretical justification: higher marginal rates discourage people from working more and investing. ... But no such argument exists against the gas tax: all it does, in essence, is ask drivers to pay for the roads they use. It’s not even fair to say that keeping this tax at its current level is a check on big government, since most federal highway spending now goes toward rebuilding and repairing roads—maintenance that even conservatives recognize we must do.
Highway revenue has to be raised somehow. Congress should show some political spine, discard the Rube Goldberg funding schemes, and stop treating all taxes as bad ones.
As noted in the article, there are also, of course, environmental benefits from an increase in gas taxes.
Posted by Mark Thoma on Friday, July 24, 2015 at 10:38 AM in Economics, Environment, Politics, Taxes |
This is from Edmund Phelps. It was kind of hard to highlight the main points in brief extracts, so you may want to take a look at the full article:
What Is Wrong with the West’s Economies?: What is wrong with the economies of the West—and with economics? ...
Many of us in Western Europe and America feel that our economies are far from just...
With little or no effective policy initiative giving a lift to the less advantaged, the jarring market forces of the past four decades—mainly the slowdowns in productivity that have spread over the West and, of course, globalization, which has moved much low-wage manufacturing to Asia—have proceeded, unopposed, to drag down both employment and wage rates at the low end. The setback has cost the less advantaged not only a loss of income but also a loss of what economists call inclusion—access to jobs offering work and pay that provide self-respect. And inclusion was already lacking to begin with. ...
How might Western nations gain—or regain—widespread prospering and flourishing? Taking concrete actions will not help much without fresh thinking: people must first grasp that standard economics is not a guide to flourishing—it is a tool only for efficiency. Widespread flourishing in a nation requires an economy energized by its own homegrown innovation from the grassroots on up. For such innovation a nation must possess the dynamism to imagine and create the new—economic freedoms are not sufficient. And dynamism needs to be nourished with strong human values.
Of the concrete steps that would help to widen flourishing, a reform of education stands out. The problem here is not a perceived mismatch between skills taught and skills in demand. ... The problem is that young people are not taught to see the economy as a place where participants may imagine new things, where entrepreneurs may want to build them and investors may venture to back some of them. It is essential to educate young people to this image of the economy.
It will also be essential that high schools and colleges expose students to the human values expressed in the masterpieces of Western literature, so that young people will want to seek economies offering imaginative and creative careers. Education systems must put students in touch with the humanities in order to fuel the human desire to conceive the new and perchance to achieve innovations. This reorientation of general education will have to be supported by a similar reorientation of economic education.
We will all have to turn from the classical fixation on wealth accumulation and efficiency to a modern economics that places imagination and creativity at the center of economic life.
I'm skeptical that this is the answer to our inequality/job satisfaction problems.
Posted by Mark Thoma on Friday, July 24, 2015 at 10:38 AM in Economics, Income Distribution, Productivity |
For the fans of Robert Shiller:
The Housing Market Still Isn’t Rational: Home prices have been climbing. They have risen 27 percent nationally since 2012, even more in places like San Francisco. But why worry? If you accept the efficient markets theory — and believe that real estate is an efficient market — then these prices are based on “new information,” even if you don’t know what that information is.
The problem with this kind of thinking is that the efficient markets theory is at best a half-truth, as a voluminous literature on market anomalies shows. What’s more, even that half-truth is grounded mainly in the stock market, which attracts professional investors who sometimes do make the market behave efficiently.
The housing market is another matter. It is far less rational than even the often irrational stock market...[explains why]...
The bottom line is that there is no reason to assume that the real estate market is even close to efficient. You may want to buy a house if you love it and can afford it. But remember that you cannot safely rely on “comparable sales” to judge that the price is fair. The market isn’t efficient enough for that.
Posted by Mark Thoma on Friday, July 24, 2015 at 10:03 AM in Economics, Housing, Market Failure |
The MIT school of economics:
The M.I.T. Gang, by Paul Krugman, Commentary, NY Times: Goodbye, Chicago boys. Hello, M.I.T. gang.
If you don’t know what I’m talking about, the term “Chicago boys” was originally used to refer to Latin American economists, trained at the University of Chicago, who took radical free-market ideology back to their home countries. The influence of these economists was part of a broader phenomenon: The 1970s and 1980s were an era of ascendancy for laissez-faire economic ideas and the Chicago school...
But that was a long time ago. Now a different school is in the ascendant, and deservedly so.
It’s actually surprising how little media attention has been given to the dominance of M.I.T.-trained economists in policy positions and policy discourse. But it’s quite remarkable. Ben Bernanke has an M.I.T. Ph.D.; so do Mario Draghi, the president of the European Central Bank, and Olivier Blanchard, the enormously influential chief economist of the International Monetary Fund. Mr. Blanchard is retiring, but his replacement, Maurice Obstfeld, is another M.I.T. guy — and another student of Stanley Fischer, who taught at M.I.T. for many years and is now the Fed’s vice chairman. ...
M.I.T.-trained economists, especially Ph.D.s from the 1970s, play an outsized role ... in policy discussion across the Western world. And yes, I’m part of the same gang.
So what distinguishes M.I.T. economics, and why does it matter? ...
At M.I.T..., Keynes never went away. To be sure, stagflation showed that there were limits to what policy can do. But students continued to learn about the imperfections of markets and the role that monetary and fiscal policy can play in boosting a depressed economy. ...
This open-minded, pragmatic approach was overwhelmingly vindicated after crisis struck in 2008. Chicago-school types warned incessantly that responding to the crisis by printing money and running deficits would lead to 70s-type stagflation, with soaring inflation and interest rates. But M.I.T. types predicted, correctly, that inflation and interest rates would stay low in a depressed economy, and that attempts to slash deficits too soon would deepen the slump. ...
Meanwhile, in the United States, Republicans have responded to the utter failure of free-market orthodoxy and the remarkably successful predictions of much-hated Keynesians by digging in even deeper, determined to learn nothing from experience.
In other words, being right isn’t necessarily enough to change the world. But it’s still better to be right than to be wrong, and M.I.T.-style economics, with its pragmatic openness to evidence, has been very right indeed.
Posted by Mark Thoma on Friday, July 24, 2015 at 09:09 AM in Economics, Macroeconomics |
Posted by Mark Thoma on Friday, July 24, 2015 at 12:06 AM in Economics, Links |
Conservative states like socialism?:
Socialism, American-Style, by Gar Alperovitz and Thomas M. Hanna, Commentary, NY Times: The great 20th-century conservative economist Joseph Schumpeter thought the left had overlooked a major selling point in pressing the case for public — i.e., government — control over productive capital. “One of the most significant titles to superiority,” he suggested, was that public ownership produced profits, which means not having to depend on taxes to raise money.
The bulk of the left never took up Schumpeter’s argument. But in an oddly fitting twist, these days the mantra of public control in exchange for lower taxes has been embraced by a surprising quarter of the American political leadership: conservatives.
The most well-known case is Alaska. The Alaska Permanent Fund ... combines not one, but two socialist principles: public ownership and the provision of a basic income for all residents. The fund collects and invests proceeds from the extraction of oil and minerals in the state. Dividends are paid out annually to all state residents. ...
The authors go on to cite many more examples, e.g. the Texas Permanent School Fund and the Texas Permanent University Fund, The Permanent Wyoming Mineral Trust Fund, which "is almost a direct expression of Schumpeter’s doctrine: Socialized ownership has helped to eliminate income taxes in the state," the Tennessee Valley Authority, electricity generation in Nebraska, where "Partly as a result, Nebraskans pay one of the lowest rates for electricity in the nation." They conclude with:
The list goes on. More than 450 communities have also built partial or full public Internet systems, some after significant political battles. Roughly one-fifth of all hospitals are also currently publicly owned. Many cities own hotels, including Dallas...
Moreover, contrary to conventional opinion, studies of the comparative efficiency of modern public enterprise show rough equivalency to private firms in many cases. ...
With skepticism about capitalism growing among minorities and young voters, will we see more such endeavors in the future? Pendulums have a way of swinging, sometimes very sharply, when big economic tsunamis hit. It is possible that in the next big crisis, both sides might see the wisdom and practical benefits of public ownership, and embrace Joseph Schumpeter’s point even more boldly than they do today.
I think this would benefit from separating natural monopolies -- where it is not surprising in the least that costs/prices are lower with public ownership (or strict regulation of prices if privately owned) -- from the other examples. When *significant* market failures justify it, I fully support public ownership. But in most cases I'd prefer private sector ownership with regulatory oversight.
Posted by Mark Thoma on Thursday, July 23, 2015 at 10:58 AM in Economics, Market Failure |
...The Bible of academic research on how colleges affect students is a book titled, plainly enough, “How College Affects Students.” It’s an 848-page synthesis of many thousands of independent research studies over the decades. ...
The sections devoted to how colleges differ from one another are notable for how little they find. As Mr. Pascarella and Mr. Terenzini carefully document, studies have found that some colleges are indeed better than others in certain ways. Students tend to learn more in colleges where they have closer relationships with faculty and peers, for example, and earn a little more after graduating from more selective institutions.
But these findings are overwhelmed in both size and degree by the many instances in which researchers trying to detect differences between colleges found nothing.
“The great majority of postsecondary institutions appear to have surprisingly similar net impacts on student growth,” the authors write. “...in the most internally valid studies, even the statistically significant effects tend to be quite small and often trivial in magnitude.” ...
People can learn a lot in college, and many do. But which college matters much less than everyone assumes. As Mr. Pascarella and Mr. Terenzini explain, the real differences exist at the departmental level, or within the classrooms of individual professors, who teach with a great deal of autonomy under the principles of academic freedom. ... The problem for students is that it is all but impossible to know ahead of time which part of the disunified university is which. ...
The whole apparatus of selective college admissions is designed to deliberately confuse things that exist with things that don’t. Many of the most prestigious colleges are an order of magnitude wealthier and more selective than the typical university. These are the primary factors driving their annual rankings at or near the top of the U.S. News list of “best” colleges. The implication is that the differences in the quality of education they provide are of a similar size. There is no evidence to suggest that this is remotely true. ...
Not sure this captures all the benefits of going to, say, Harvard in terms of social connections that can be valuable later on.
Posted by Mark Thoma on Thursday, July 23, 2015 at 10:30 AM in Economics |
Does rising wealth buy greater happiness?: How much does an increase in wealth increase happiness? If you win the lottery, receive a large unexpected inheritance or some other good fortune comes your way, will it permanently make you happier? ...
Posted by Mark Thoma on Thursday, July 23, 2015 at 09:12 AM in Economics |
Posted by Mark Thoma on Thursday, July 23, 2015 at 12:06 AM in Economics, Links |
New research on living standards during the Industrial Revolution is described at Vox EU:
Biased samples yield biased results: What historical heights can teach us about past living standards, by Howard Bodenhorn, Timothy W. Guinnane, and Thomas Mroz: Were living standards during early industrialization as terrible as we imagine? Robert Fogel, the Nobel prize-winning economic historian, taught us a great deal about studying long-term living standards through looking into people’s height. This column argues that one of Fogel’s early claims turns out to have, at best, a weak foundation. ...
And the conclusion:
So what do we know about living standards during early industrialization? ... The measured decline of mean height during industrialization reflects in large part the nature of the data sources, not necessarily changes in the heights of the underlying populations.
As economies grew, tight labor markets discouraged military enlistments by the most productive workers, with those enlisting (and being measured) increasingly over-representing the less advantaged members of society. The Industrial Revolution posed challenges for those facing the transformations it wrought, but it did not make people shorter.
Posted by Mark Thoma on Wednesday, July 22, 2015 at 12:16 PM in Economics |
You Can’t Reform Your Way to Rapid Growth: ...in response to the small back-and-forth that Noah Smith (also here) and John Cochrane had regarding Jeb! Bush’s suggestion/idea/hope to push the growth of GDP up to 4% per year. Cochrane asked “why not?”, and offered several proposals for structural reforms (e.g. reforming occupational licensing) that could contribute to growth. Smith was skeptical...
Oddly enough, the discussion of Jeb!’s 4% target is also a good entry point to talking about Greece, and the possibility that the various structural reforms insisted on by the Germans will manage to materially change their situation. But we’ll get to that.
First, what are the possibilities of generating 4% GDP growth in the U.S.? I’m presuming that we’re talking about whether we can boost per capita growth up to 4% per year for some relatively short time frame, because history suggests that sustained 4% growth in GDP is incredibly unlikely. From Jeb!’s perspective, I’m guessing either 4 or 8 years is the right window to look at, but let’s say we’re trying to achieve this for just 5 years. ...[discusses and illustrates the conclusions of a standard growth model]...
You can just scrape 4% growth if you continue to assume that structural reforms to the U.S. economy can add $3 trillion to potential GDP and that the convergence parameter is ... more than twice as big as any reliable empirical estimate. Or you could ... assume that structural reforms were capable of pushing potential GDP to $26 trillion, a 53% increase over potential GDP today. Both are huge stretches, and almost certainly wrong.
It is this same logic that is at play in Greece, by the way. ...
Massive structural reforms are not capable of generating immediate short-run jumps in growth rates in the U.S., Greece, or any other relatively developed economy. They play out over long periods of time, and the empirics we have suggest that by long periods we mean decades and decades of slightly above average growth. ...
Structural reforms don’t generate massive short-term changes in growth rates because they are fiddling with marginal decisions, making people marginally more likely to invest, or change jobs, or get an education, or start a company. By permanently changing those marginal decisions, structural reforms act like glaciers, slowly carving the economy into a new shape over long periods of time. ...
If you want to radically boost GDP growth now, then someone has to spend money now. Take infrastructure spending..., the beauty of infrastructure spending is that is doesn’t just push us closer to potential, it almost certainly raises potential GDP as well, and keeps the growth rate above average for longer. ...
The difference with infrastructure spending is that it does not nibble around the edges or play with marginal decisions. It dumps a bunch of new spending into the economy. And that is the only way to juice the growth rate appreciably in the short run. Structural reforms will raise GDP, and in the long run may raise GDP by far more than immediate infrastructure spending. But that increase in GDP will take decades, and the change in growth will be barely noticeable. You want demonstrably faster growth right now? Then be prepared to spend lots of money right now.
In the Greek situation, the implication is that without some kind of boost to spending now, they are unlikely to ever grow fast enough to ever get out of this hole they are in. ...
Posted by Mark Thoma on Wednesday, July 22, 2015 at 09:39 AM in Economics, Fiscal Policy, Productivity |
My response to this argument that economists don't get the politics of the euro was simply "I think we get the underlying political motivations. But whether the euro was politically motivated for the most part, or not, economics matters for the sustainability of a political union." Paul Krugman has more to say:
Annoying Euro Apologetics, by Paul Krugman: Are there good arguments against the proposition that the creation of the euro was an epic mistake? Maybe. But the arguments I’ve been hearing lately are really bad. And they’re also deeply annoying.
One argument I keep seeing is that economist critics like myself don’t understand that the euro was a political and strategic project, not merely a matter of economic costs and benefits. Yes, I’m a dumb uncouth economist, completely unaware of the role of politics and international strategy in policy decisions, who never heard of the European project and its origins in the effort to put Europe’s legacy of war behind it, not to mention strengthen democracy in the Cold War.
Well, actually I do know all about that. The point, however, is that while the European project has at every stage combined economic objectives with broader political goals – it’s about peace and democracy through integration and prosperity – the project can’t be expected to work unless the economic measures are a good idea in and of themselves, or at least a non-catastrophic idea. What happened in the march to the euro was that European elites, in love with the symbolism of a single currency, closed their minds to warnings that currency union – unlike the removal of trade barriers – was at best ambiguous in its economic logic, and arguably, even ex ante, a very bad idea indeed.
An alternative argument, which we’re hearing from depressed European economies like Finland, is that the short-term costs of inflexibility are outweighed by the supposedly huge gains from greater integration. But where’s the evidence for these huge gains? ...
As I said, maybe there are good arguments against the proposition that the euro was a mistake. But pointing out that politics matters, and economies grow, doesn’t cut it; these aren’t the factoids you’re looking for.
Posted by Mark Thoma on Wednesday, July 22, 2015 at 09:14 AM in Economics, International Finance, Politics |
Posted by Mark Thoma on Wednesday, July 22, 2015 at 12:06 AM in Economics, Links |
Today is the 5th anniversary of the Dodd-Frank financial reform bill. When the bill was being debated, I was torn on which strategy is best, to strike while the iron is hot -- to implement financial reform legislation as soon as possible -- or to take a patient approach that allows careful consideration and study of proposed regulatory changes:
Kashyap and Mishkin ... may be right that now is not the time to change regulations because it could create additional destabilizing uncertainty in financial markets, and that waiting will give us time to see how the crisis plays out and to consider the regulatory moves carefully. But as we wait, passions will fade, defenses will mount, the media will respond to the those opposed to regulation by making it a he said, she said issue that fogs things up and confuses the public as well as politicians. By the time it is all over there's every chance that legislation will pass that is nothing but a facade with no real teeth that can change the behaviors that go us into this mess.
More and more, I think doing what you can while passions are inflamed, and then defending the legislation as much as possible when the inevitable attack from the industry comes is the best strategy. For example, in the WSJ two days ago, there was an opinion piece with the title "After Five Years, Dodd-Frank Is a Failure," and the sub-header "The law has crushed small banks, restricted access to credit, and planted the seeds of financial instability."
There is a problem with small banks. Here's an email I received earlier this year (last March, in response to an article of mine at CBS MoneyWatch on the decline in the number of small banks and how that could harm smaller buinesses):
I am a regular reader of your columns, and lean more to the left than virtually any banker I know, but I have to tell you that you are on to something with the decline in the number of small banks, and regulations. As the Chairman of a small bank in [state omitted], the shear amount of regulations that have come out since the banking crisis started are incredible. I know of banks in the area which have simply had to hire a full time staff person to help with compliance. Our bank has had to hire the CPA firm [omitted] to have them come in once a quarter to help us keep up with the compliance. Obviously, this crimps our profits, as does the ZLB which we have had to deal with for six years now, through no fault, at all, of our own.
Don't get me wrong, I understand why all these regulations have been put in place, but unfortunately for us, most of these have little to do with our small bank. They seem to be designed to keep the behemoths out of trouble, and we got dragged along. There needs to be a different set of rules for banks under a certain size. Banks like ours, who keep all our loans in house, and aren't a threat to the economy as a whole, have never been ones to "screw" our customers, or write "bogus" loans, and sell them. Our loan losses since 2008 have been minimal to say the least, because we try very hard to make loans that are going to be repaid. Our total losses over the last six or seven years are not any worse than, and probably, better than they were before the banking crisis arrived.
We, as a board of the bank, have talked on numerous occasions in the last few years on what to do about this problem, and have brought it up with the federal regulators at our last two exams, but have really gotten no where as far as coming up with any ideas on what to do to try and alleviate these burdens on small banks. Any suggestions, or publicity regarding the issue, would be greatly appreciated.
The point I'm trying to make is this. There are two choices when trying to fix a financial system after a crisis. The first is to move fast while the politics are supportive, and put as many of the needed rules and regulations in place as possible. Then, over time, *carefully* adjust the rules to overcome unforeseen problems (while resisting attempts to rollback needed legislation, a delicate balance). The second is to proceed slowly and deliberately and "consider the regulatory moves carefully" before implementing legislation. But by the time this deliberate procedure has been completed, it may very well be that the politics have changed and nothing will be done at all. So I'd rather move fast, if imperfectly, and then fix problems later instead of waiting in an attempt to put near perfect legislation in place and risk doing very little, or nothing at all.
Posted by Mark Thoma on Tuesday, July 21, 2015 at 10:50 AM in Economics, Financial System, Regulation |
One of those "economists don't understand" thingies:
This is what economists don’t understand about the euro crisis – or the U.S. dollar, by Kathleen McNamara, Monkey Cage: Prominent American economists are weighing in on the Greek debt crisis, with more than a hint of schadenfreude. The title of a New York Times op-ed by Gregory Mankiw says it all in one smarmy sentence. “They told you so: Economists were Right To Doubt the Euro.” Economists are condescendingly scolding the Europeans for venturing into a single currency without the proper underlying economic conditions. Paul Krugman has relentlessly excoriated the leaders of Europe for being what he calls “self-indulgent politicians” who have “spent a quarter-century trying to run Europe on the basis of fantasy economics.” The conventional wisdom seems to be that the problems of the euro zone are, as economist Martin Feldstein once put it, “the inevitable consequence of imposing a single currency on a very heterogeneous group of countries.”
What this commentary gets wrong, however, is that single currencies are never the product of debates about optimal economic solutions. Instead, currencies like the U.S. dollar itself are the result of political battles, where motivated actors try to centralize power. This has most often occurred “through iron and blood,” as Otto van Bismarck, the unifier of Germany put it, as a result of catastrophic wars. Smaller geographic units were brought together to build the modern nation state, with a unified fiscal system, a common national language that was often imposed by force, a unified legal system, and, a single currency. Put differently (with apologies to sociologist Charles Tilly), war makes the state, and the state makes the currency. ...
European leaders weren’t stupid or self indulgent when they decided to move ahead with the euro, without fiscal union or strong Europe-level democracy. They just cared more about politics and international security than economics. They wanted to build a Europe that had transcended the divisions of the Cold War, and bind together Germany, which was reunited and much more powerful, with the rest of Europe. When they did think about economics, they hoped that a strong euro, anchored in an independent European Central Bank located in Frankfurt and built on a commitment to protecting the stability of the currency, would help resolve the problems of currency depreciation, spiraling inflation and economic instability that came with the weak currencies of the “Club Med” countries to the south of Europe.
European leaders, the IMF and the European Commission have done a terrible job at handling the Greek debt crisis. However, criticizing the euro because it doesn’t meet the ideal economic conditions for a single currency is missing the point. ...
I think we get the underlying political motivations. But whether the euro was politically motivated for the most part, or not, economics matters for the sustainability of a political union.
Posted by Mark Thoma on Tuesday, July 21, 2015 at 09:58 AM in Economics, International Finance, Politics |
Farmers Markets and Food-Borne Illness: ... After working on it for almost two years, I am happy to finally be able to circulate my new paper titled “Farmers Markets and Food-Borne Illness,” coauthored with my colleague Rob King and my student Jenny Nguyen, in which we ask whether farmers markets are associated with food-borne illness in a systematic way. ...
In sum, what we find is:
- A positive relationship between the number of farmers markets and the number of reported outbreaks of food-borne illness in the average state-year./li>
- A positive relationship between the number of farmers markets and the number of reported cases of food-borne illness in the average state-year.
- A positive relationship between the number of farmers markets and the number of reported outbreaks of Campylobacter jejuni in the average state-year.
- A positive relationship between the number of farmers markets and the number of reported cases of Campylobacter jejuni in the average state-year.
- Six dogs that didn’t bark, i.e., no systematic relationship between the number of farmers markets and the number of outbreaks or cases of norovirus, Salmonella enterica, Clostridium perfringens, E. coli, Staphylococcus (i.e., staph), or scombroid food poisoning.
- When controlling for the number of farmers markets, there is a negative relationship between the number of farmers markets that accept SNAP and food-borne illness in the average state-year.
- AA doubling of the number of farmers markets in the average state-year would be associated with a relatively modest economic cost of about $900,000 in terms of additional cases of food-borne illness.
Of course, correlation is not causation, which is why we spend a great deal of time in the paper discussing the potential threats to causal identification in this context, investigating them, and trying to triangulate our findings with a number of different specifications and estimators. At the end of the day, we are pretty confident in the robustness of our core finding, viz. that there is a positive association between the number of farmers markets and the number of reported outbreaks and cases of food-borne illness. ...
Posted by Mark Thoma on Tuesday, July 21, 2015 at 09:46 AM in Academic Papers, Economics |
Posted by Mark Thoma on Tuesday, July 21, 2015 at 12:06 AM in Economics, Links |
Cecchetti & Schoenholtz:
AIIB: The first international financial institution of the 21st century: ...What happens when official international financial institutions (IFIs) fail to respond to a changing environment? The same thing that happens to firms that stop innovating. New, more competitive institutions (firms) arise that compel them to change or – like dinosaurs – become extinct.
We may be witnessing this process of creative destruction right now. Last month, a group of 57 founding nations led by China signed the articles of agreement to establish the Asian Infrastructure Investment Bank (AIIB) with an initial subscribed capital of $100 billion. While most of the G20 nations, including the big European states, Australia, and South Korea, are among the founding members, the United States, Japan, and Canada are noticeably not.
No one disputes the need for more official infrastructure funding... What we find the most interesting is that the AIIB founders didn’t ask member countries to approve an expansion of either the World Bank or the ADB. Instead, they opted for a new organization altogether.
Why? The problem is institutional legitimacy arising from issues of power and governance. ...
The most glaring problem with the 20th century IFI’s – the BIS, IMF, World Bank and the regional development banks – is representation. ... Perhaps most important are the veto rights. ...
Is the AIIB likely to do better? There are reasons to be hopeful. ...
Of course, the proof will be in the pudding. When the AIIB begins operations, observers will be watching closely whether these ideals are realized. ...
As economists, we like competition. If the AIIB meets the high standards its leaders espouse, it will heighten the pressure on the existing IFIs’ political masters to change with the times. In addition, in light of numerous potential areas of conflict between China and the United States (think cyberspace and the South China Sea for starters), wouldn’t we all benefit from having these two leading economies and governments instead focus their competitive energies on improving global infrastructure finance?
From this perspective, we see a powerful argument for the United States to do two things. First, the U.S. Congress should belatedly approve the IMF’s 2010 Quota and Governance Reforms to signal its support for continued global economic and financial cooperation in coming decades. And second, after failing to stop the AIIB, and refusing to participate as a founding member, the United States should join the institution as soon as it can, participating actively in holding it to the highest 21st century standards.
Posted by Mark Thoma on Monday, July 20, 2015 at 10:39 AM in Economics, International Finance, Politics |
Why did Europe ignore the "euroskeptics"?:
Europe’s Impossible Dream, by Paul Krugman, Commentary, NY Times: ... To someone who didn’t know much economics, or chose to ignore awkward questions, establishing a unified European currency sounded like a great idea. It would make doing business across national borders easier, while serving as a powerful symbol of unity. Who could have foreseen the huge problems the euro would eventually cause?
Actually, lots of people. ... The only big mistake of the euroskeptics was underestimating just how much damage the single currency would do.
The point is that it wasn’t at all hard to see, right from the beginning, that currency union without political union was a very dubious project. So why did Europe go ahead with it?
Mainly, I’d say, because the idea of the euro sounded ... forward-looking, European-minded, exactly the kind of thing that appeals to the kind of people who give speeches at Davos. Such people didn’t want nerdy economists telling them that their glamorous vision was a bad idea...
And the euro came. For a decade after its introduction a huge financial bubble masked its underlying problems. But now ... all of the skeptics’ fears have been vindicated.
Furthermore, the story doesn’t end there. When the predicted and predictable strains on the euro began, Europe’s policy response was to impose draconian austerity on debtor nations — and to deny the simple logic and historical evidence indicating that such policies would inflict terrible economic damage while failing to achieve the promised debt reduction.
It’s astonishing even now how blithely top European officials dismissed warnings that slashing government spending and raising taxes would cause deep recessions...
What should Europe do now? There are no good answers — but the reason there are no good answers is because the euro has turned into a Roach Motel, a trap that’s hard to escape. If Greece still had its own currency, the case for devaluing that currency, improving Greek competitiveness and ending deflation, would be overwhelming.
The fact that Greece no longer has a currency, that it would have to create one from scratch, vastly raises the stakes. My guess is that euro exit will still prove necessary. And in any case it will be essential to write down much of Greece’s debt.
But we’re not having a clear discussion of these options, because European discourse is still dominated by ideas the continent’s elite would like to be true, but aren’t. And Europe is paying a terrible price for this monstrous self-indulgence.
Posted by Mark Thoma on Monday, July 20, 2015 at 09:44 AM in Economics, International Finance, Politics |
Posted by Mark Thoma on Monday, July 20, 2015 at 12:06 AM in Economics, Links |
This is by David Warsh:
The Rivals, Economic Principals: When Keynes died, in April 1946, The Times of London gave him the best farewell since Nelson after Trafalgar: “To find an economist of comparable influence one would have to go back to Adam Smith.” A few years later, Alvin Hansen, of Harvard University, Keynes’ leading disciple in the United States, wrote , “It may be a little too early to claim that, along with Darwin’s Origin of Species and Marx’s Capital, The General Theory is one of the most significant book which have appeared in the last hundred years. … But… it continues to gain in importance.”
In fact, the influence of Keynes’ book, as opposed to the vision of “macroeconomics” at the heart of it, and the penumbra of fame surrounding it, already had begun its downward arc. Civilians continued to read the book, more for its often sparkling prose than for the clarity of its argument. Among economists, intermediaries and translators had emerged in various communities to explain the insights the great man had sought to convey. Speaking of the group in Cambridge, Massachusetts, Robert Solow put it this way, many years later: “We learned not as much from it – it was…almost unreadable – as from a number of explanatory articles that appeared on all our graduate school reading lists.”
Instead it was another book that ushered in an era of economics very different from the age before. Foundations of Economic Analysis, by Paul A. Samuelson, important parts of it written as much as ten years before, appeared in 1947. “Mathematics is a Language,” proclaimed its frontispiece; equations dominated nearly every page. “It might be still too early to tell how the discoveries of the 1930s would pan out,” Samuelson wrote delicately in the introduction, but their value could be ascertained only by expressing them in mathematical models whose properties could be thoroughly explored and tested. “The laborious literary working-over of essentially simple mathematical concepts such as is characteristic of much of modern economic theory is not only unrewarding from the standpoint of advancing the science, but involves as well mental gymnastics of a particularly depraved type.”
Foundations had won a prize as a dissertation, so Harvard University was required to publish it as a book. In Samuelson’s telling, the department chairman had to be forced to agree to printing a thousand copies, dragged his feet, and then permitted its laboriously hand-set plates to be melted down for other uses after 887 copies were run off. Thus Foundations couldn’t be revised in subsequent printings, until a humbled Harvard University Press republished an “enlarged edition” with a new introduction and a mathematical appendix in 1983. When Samuelson biographer Roger Backhouse went through the various archival records, he concluded that the delay could be explained by production difficulties and recycling of the lead type by postwar exigencies at Press.
It didn’t matter. With the profession, Samuelson soon would win the day.
The “new” economics that he represented – the earliest developments had commenced in the years after World War I – conquered the profession, high and low. The next year Samuelson published an introductory textbook, Economics, to inculcate the young. Macroeconomic theory was to be put to work to damp the business cycle and, especially, avoid the tragedy of another Great Depression. The new approach swiftly attracted a community away from alternative modes of inquiry, in the expectation that it would yield new solutions to the pressing problem of depression-prevention. Alfred Marshall’s Principles of Economics eventually would be swept completely off the table. Foundations was a paradigm in the Kuhnian sense.
At the very zenith of Samuelson’s success, another sort of book appeared, in 1962, A Monetary History of the United States, 1869-1960, by Milton Friedman and Anna Schwartz, published by the National Bureau of Economic Research. At first glance, the two books had nothing to do with one another. A Monetary History harkened back to approaches that had been displaced by Samuelsonian methods – “hypotheses” instead of theorems; charts instead of models, narrative, not econometric analytics. The volume did little to change the language that Samuelson had established. Indeed, economists at the University of Chicago, Friedman’s stronghold, were on the verge of adapting a new, still- higher mathematical style to the general equilibrium approach that Samuelson had pioneered.
Yet one interpretation of the relationship between the price system and the Daedalean wings that A Monetary History contained was sufficiently striking as to reopen a question thought to have been settled. A chapter of their book, “The Great Contraction,” contained an interpretation of the origins of the Great Depression that gradually came to overshadow the rest. As J. Daniel Hammond has written,
The “Great Contraction” marked a watershed in thinking about the greatest economic calamity in modern times. Until Friedman and Schwartz provoked the interest of economists by rehabilitating monetary history and theory, neither economic theorists nor economic historians devoted as much attention to the Depression as historians.
So you could say that some part of the basic agenda of the next fifty years was ordained by the rivalry that began in the hour that Samuelson and Friedman became aware of each other, perhaps in the autumn of 1932, when both turned up the recently-completed Social Science Research Building of the University of Chicago, at the bottom of the Great Depression. Excellent historians, with access to extensive archives, have been working on both men’s lives and work: Hammond, of Wake Forest University, has largely completed his project on Friedman; Backhouse, of the University of Birmingham, is finishing a volume on Samuelson’s early years. Neither author has yet come across a frank recollection by either man of those first few meetings. Let’s hope one or more second-hand accounts turn up in the papers of the many men and women who knew them then. When I asked Friedman about their relationship in 2005, he deferred to his wife, who, somewhat uncomfortably, mentioned a differential in privilege. I lacked the temerity to ask Samuelson directly the last couple of times we talked; he clearly didn’t enjoy discussing it.
Biography is no substitute for history, much less for theory and history of thought, and journalism is, at best, only a provisional substitute for biography. But one way of understanding what happened in economics in the twentieth century is to view it as an argument between Samuelson and Friedman that lasted nearly eighty years, until one aspect of it, at least, was resolved by the financial crisis of 2008. The departments of economics they founded in Cambridge and Chicago, headquarters in the long wars between the Keynesians and the monetarists, came to be the Athens and Sparta of their day. ...[continue reading]...
[There is much, much more in the full post.]
Posted by Mark Thoma on Sunday, July 19, 2015 at 10:49 AM in Economics, Macroeconomics, Methodology |
Posted by Mark Thoma on Sunday, July 19, 2015 at 12:06 AM in Economics, Links |
... In an earlier era, Greece could have devalued the drachma, making its exports more competitive on world markets. Easy monetary policy would have offset some of the pain from tight fiscal policy. Mr. Friedman and Mr. Feldstein were right: The euro has turned into an economic liability that has exacerbated political tensions. For this, the European elites who pushed for the currency union bear some responsibility.
As creditor nations and international institutions sort through the wreckage, it is worth bearing in mind the lessons from Mr. Keynes. A nation can only withstand so much economic pain before the political fallout becomes ugly. And that fallout can extend beyond the border of the problem nation.
Yes, the Greeks have every reason to be contrite. But it might also be wise for the rest of the world to show some mercy.
Posted by Mark Thoma on Saturday, July 18, 2015 at 09:58 AM in Economics, International Finance, Politics |
Apes respond to framing:
...The susceptibility to positive framing is what scientists call an irrational bias, and it is very powerful. To better understand why our psyche responds so deeply, Christopher Krupenye, a Duke University graduate student in evolutionary anthropology, and his colleagues Alexandra Rosati of Yale University and Brian Hare of Duke gathered 40 of our closest living relatives—23 chimpanzees and 17 bonobos—and offered them options for choosing food: either one or two fruits versus a constant number of peanuts. Sometimes the apes were shown one piece of fruit each time they made the selection, but half the time they were given two: positive framing. In other trials, the apes were initially presented two pieces of fruit, but half the time they got only one: negative framing. Regardless of the framing, the apes ended up with an identical quantity of fruit. Yet they were more likely to choose fruit when they were offered the single fruit with its frequent “bonus” than the double fruit with its frequent “loss.”
Because these framing effects are shared with our nonhuman relatives, Krupenye says, the results suggest that these biases are hardwired into our biology and may have conferred some evolutionary benefit as apes foraged for food. Yet a hardwired tendency does not have to be a sentence. Although susceptibility to framing is in our blood, being aware of the bias can help us avoid making poor decisions. ... Chances are, you can use your brain to outwit your biology.
The sexes are not equally swayed by spin..., in the Duke study ... male apes were more affected than females by how their choices were framed. ...
Posted by Mark Thoma on Saturday, July 18, 2015 at 09:53 AM in Economics |
Fabio Ghironi in Vox EU:
Variable geometry bites back: Schäuble’s motives, by Fabio Ghironi: Success of the German-inspired solution for the latest Greek crisis is far from assured. If it fails, the Eurozone may be changed forever. This column argues that the failure would lead to an outcome that has been favoured for decades by Germany’s Finance Minister, Wolfgang Schäuble. Perhaps the package the Eurozone agreed is just a backdoor way of getting to the ‘variable geometry’ and monetary unification for the core that the Maastricht criteria had failed to achieve.
The Greek crisis risks shattering the Eurozone as we know it. Germany’s Finance Minister Wolfgang Schäuble has been leading a coalition of hawks who appear determined to make Grexit an unavoidable outcome. If not immediately then at least once it becomes clear (or clearer) that it is impossible for Greece to satisfy the conditions it is being asked to meet.
As one ponders Mr. Schäuble’s possible motives for insisting on such demanding (many would say infeasible) targets, it is instructive to recall his political and intellectual history in the run-up to the euro.
How Schäuble viewed the Eurozone
Mr. Schäuble was Minister of the Interior of the Federal Republic of Germany between 1989 and 1991. In this capacity, he played a central role in the negotiations that led to German reunification. The same period saw the negotiations leading up to the Maastricht Treaty, which established the foundation for the Eurozone.
A widely held view at the time was that Germany agreeing to give up the deutschmark and to participate in a European monetary union was the quid pro quo for British and French acquiescence to German reunification – an event of monumental implications, given Europe’s history.
Germans were understandably reluctant to give up a very successful currency for the uncertainty of monetary union with less rigorous partners. Thus, at their insistence, the Maastricht Treaty included convergence criteria that would have to be fulfilled for euro membership. In effect, those conditions were intended to keep unreliable Southern European countries out of the monetary union.
In those years, Mr. Schäuble – heir apparent to Chancellor Helmut Kohl at the time – championed a ‘variable geometry’ approach to the Eurozone. A key implication of this ‘variable geometry’ was that that monetary unification should be restricted to a set of ‘core’ countries that shared Germany’s preference for austerity.
Mr. Schäuble originally made his argument explicit in a blueprint for the Eurozone co-authored with Karl Lamers and released by Germany’s Christian Democratic Union in the late summer of 1994 (Lamers and Schäuble 2014). Responding to critics less than two weeks later, Mr. Schäuble stated that “We cannot set the pace of European integration according to the slowest ship in the convoy.” Speed was clearly defined relative to the German benchmark, as enshrined in the Maastricht convergence criteria. Chancellor Kohl described the Schäuble-Lamers document as a ‘discussion paper,’ but he did not explicitly distance himself from it, and he defended the plan of a ‘core’ Europe.
Schäuble after German and France flouted the Maastricht criteria
In August of 2014, Mr. Schäuble and Mr. Lamers reiterated their plea for ‘variable geometry’ in a Financial Times article 20 years after their original paper (Lamers and Schäuble 2014). They conclude: “In order to make progress […], we should keep using the approach that proved its mettle back in 1994: to establish cores of co-operation within the EU that enable smaller, willing groups of member states to forge ahead.” Importantly, the article acknowledges the crucial role of Germany (and France) in scuttling the credibility of the Stability Pact’s fiscal policy rules in 2003.
Mr. Schäuble’s commitment to European integration is unquestioned, and no better description can be found than the remarks by IMF Managing Director Christine Lagarde when Mr. Schäuble was awarded the Charlemagne Prize in 2012 (Lagarde 2012). But Mr Schäuble’s history shows that his commitment to ‘variable geometry’ is just as strong -- to the point that his most recent statements on support for Grexit within the German government are creating a rift with Chancellor Angela Merkel.
As it turned out, the Maastricht criteria that were meant to implement Mr Schäuble’s vision failed to keep Southern European countries out of the euro, and through steps that we all became more or less familiar with, we have gotten to the start of the crisis in 2010, and the current situation.
The cost of Schäuble’s strategy
If Greece exits the euro it will become evident to everyone that irreversibility of euro membership is an illusion as long as the countries involved retain their essential sovereignty.
- Markets will likely test the resolve of countries’ governments to stay in the euro, and costly trade-offs will provide additional fuel for populism and nationalism.
While government commitment and ECB firepower may prevent a domino effect, the balance of market and political forces may well result in other Mediterranean countries leaving the euro.
At that point, Germany would be left in a Eurozone that would consist of Mr Schäuble’s early 1990s ‘core,’ plus partners to the East and Baltic countries who have been renewing their historical economic ties with Germany since joining the EU.
All this raises the following question: Is Mr Schäuble’s position simply intended to find a backdoor way to return to the ‘variable geometry’ and monetary unification for the ‘core’ that the Maastricht criteria had failed to achieve?
History will be the judge, but if this was the way to revive ‘variable geometry,’ it was better to leave it resting. ...
Posted by Mark Thoma on Saturday, July 18, 2015 at 09:47 AM in Economics, Politics |
Posted by Mark Thoma on Saturday, July 18, 2015 at 12:06 AM in Economics, Links |
Mary Amiti and Tyler Bodine-Smith in the NY Fed's Liberty Street Economics blog:
The Effect of the Strong Dollar on U.S. Growth: The recent strengthening of the U.S. dollar has raised concerns about its impact on U.S. GDP growth. The U.S. dollar has appreciated around 12 percent since mid-2014, rising against almost all of our trading partners, with the largest gains against Japan, Mexico, Canada, and the euro area. There was far less movement against newly industrial Asian economies and hardly any change against China. In this blog, we ask how the strength of the dollar affects U.S. GDP growth. Although the dollar can impact the U.S. growth through a number of different channels, we focus on the direct impact through the U.S. trade balance. Our analysis shows that a 10 percent appreciation in one quarter shaves 0.5 percentage point off GDP growth over one year and an additional 0.2 percentage point in the following year if the strength of the dollar persists. ...
Posted by Mark Thoma on Friday, July 17, 2015 at 01:41 PM in Economics, International Finance |
We can do more to encourage firms to raise wages:
Liberals and Wages, by Paul Krugman, Commentary, NY Times: Hillary Clinton gave her first big economic speech on Monday, and progressives were by and large gratified. For Mrs. Clinton’s core message was that the federal government can and should use its influence to push for higher wages. ...
Mrs. Clinton’s speech reflected major changes, deeply grounded in evidence, in our understanding of what determines wages. And a key implication of that new understanding is that public policy can do a lot to help workers without bringing down the wrath of the invisible hand.
Many economists used to think of the labor market as being pretty much like the market for anything else, with the prices of different kinds of labor — that is, wage rates — fully determined by supply and demand. So if wages for many workers have stagnated or declined, it must be because demand for their services is falling.
In particular, the conventional wisdom attributed rising inequality to technological change, which was raising the demand for highly educated workers while devaluing blue-collar work. And there was nothing much policy could do to change the trend... But the case for “skill-biased technological change” as the main driver of wage stagnation has largely fallen apart. ...
Meanwhile, our understanding of wage determination has been transformed by an intellectual revolution...
The ... market for labor isn’t like the market for, say, wheat, because workers are people. And because they’re people, there are important benefits, even to the employer, from paying them more: better morale, lower turnover, increased productivity. These benefits largely offset the direct effect of higher labor costs, so that raising the minimum wage needn’t cost jobs after all.
The direct takeaway from this intellectual revolution is, of course, that we should raise minimum wages. But there are broader implications, too: Once you take what we’ve learned from minimum-wage studies seriously, you realize that they’re not relevant just to the lowest-paid workers.
For employers always face a trade-off between low-wage and higher-wage strategies — between, say, the traditional Walmart model of paying as little as possible and accepting high turnover and low morale, and the Costco model of higher pay and benefits leading to a more stable work force. And there’s every reason to believe that public policy can, in a variety of ways — including making it easier for workers to organize — encourage more firms to choose the good-wage strategy.
So there was a lot more behind Hillary’s speech than I suspect most commentators realized. ...
Posted by Mark Thoma on Friday, July 17, 2015 at 01:08 AM in Economics, Income Distribution, Technology, Unemployment |
The Case For September, by Tim Duy: The Wall Street Journal reports that most economists still expect the Fed to raise rates in September:
Financial market participants tend to be less confident, with odds of a September hike running around 35%. Still, the consideration of any rate hike may seem odd given the lackluster nature of the US economy. Notably, inflation wallows below trend and anemic wage growth suggests significant remaining labor market slack. The Fed, however, looks at the progress towards its goals, which on the unemployment side has been substantial, as well as the perceived need to act ahead of actual inflation.
In short, the Fed believes the risks to the economy are shifting toward overheating, even if the economy is not yet overheating. And, as Greg Ip at the Wall Street Journal identifies, this has important consequences for monetary policy:
Risk management suggests they ought to start in September, because then they retain the option of tightening once or twice before the end of the year. But if they wait until December, they forgo that option. (This assumes they do not move at their meeting in October, which is not followed by a press conference.)
This is probably the best argument for a September rate hike. Federal Reserve Chair Janet Yellen made it fairly clear in her Congressional appearances this week that she would prefer to move earlier but more gradually than later and more rapidly. And even if you think she only anticipates a single rate hike this year, that outcome is not precluded by a hike in September. Yellen has also said we should not expect a clearly identified path similar to the last tightening cycle. They can hike in September and pass on December.
Paul Krugman thinks the Fed's logic is completely backwards. From his Bloomberg interview this week:
If the Fed waits too long to raise rates, then we get a little bit of inflation. If the Fed raises rates too soon, we risk getting caught in another lost decade. So the risks are hugely asymmetric. I really find it quite mysterious that the Fed is eager to raise rates given that, they're going to be wrong one way or the other, we just don't know which way. But the costs of being wrong in one direction are so much higher than the costs of being the other.
The Fed, I think, believes the risks are asymmetric in the other direction - that inflation expectations are very fragile to the upside, and hence waiting too long risks a costly rise in actual inflation.
If I had to bet who would be proven right, I would put my money with Krugman. Inflation and inflation expectations have proven substantially less fragile in the past twenty years than the Fed likes to admit. Consider first that inflation has tended to hover mostly below two percent since 1995:
Core inflation averaged 1.70% since 1995, headline inflation 1.86%, both comfortably below target. Note the particular rarity of periods where core inflation rises more than 25bp above target. What used to be one of the Fed's favorite indicators, the 5-year, 5-year forward breakeven rate, isn't pointing toward high inflation in the medium term:
Although the Fed frets about unemployment, even at low levels of unemployment, inflation is more often than not below target:
And neither faster wage growth nor low unemployment triggers higher inflation expectations. Inflation expectations are remarkably stable, with relatively few deviations from 3% which tend to be traced back to gasoline prices:
The Fed would argue that their credibility explains stable inflation expectations. By acting ahead of inflation, the Fed ensures there is no above-target inflation, and that connection between policy and outcomes gives rise to that credibility. I would argue that two decades of generally below target inflation suggests an overly excessive pursuit of credibility at the cost of economic underperformance. We don't reach the target inflation consistently, but we do get recessions and slow job market recoveries.
Also, it seems that Yellen abandoned her enchantment with optimal control models. A recent version from the IMF indicates it would be still preferable to delay rate hikes in favor of a more aggressive normalization path later:
Under the optimal control approach, the Fed would accept the cost of temporarily higher inflation (still within a 25b range of target) in return for a faster return to potential output. Yellen now appears will to tolerate a return to the inflation target from below, rather than above, in order to avoid the possibility of a sharper rise in rates later.
Why the change of heart? Why the gradualist approach? It is reasonable to believe its about financial market instability. Back to Greg Ip:
... the effects of six years of zero rates on leverage and risk-taking are increasingly evident. As Ms. Yellen’s Monetary Policy Report noted, “Credit markets have been reflecting some signs of reach-for-yield behavior, as issuance of speculative grade bonds continues to be strong, yields are low, and credit spreads are somewhat narrow by historical standards.”
Fair enough, maybe it isn't about inflation, but financial markets. But that is kind of disconcerting as well - the gradualist approach didn't work so well last time around. Seems like if you were really worried about financial markets, you would want to follow the optimal control approach and move quickly when inflation warranted a policy shift. The error of the last cycle may not have been in waiting too long to hike, but hiking too slowly when the time came.
Bottom Line: Ultimately, as the crisis fades further into the rearview mirror, the Fed see the policy risks shifting. Many, including Yellen, will shift back toward the central banker's natural inclination to fight inflation, despite the lack of inflation for the past two decades. And that natural inclination keeps the September option alive. Given the Fed's penchant for tight policy on average, the risk is that while they don't trip the economy into recession in the near term, they instead lock the economy into a sub-par equilibrium.
Posted by Mark Thoma on Friday, July 17, 2015 at 12:15 AM in Economics, Fed Watch, Monetary Policy |
Posted by Mark Thoma on Friday, July 17, 2015 at 12:06 AM in Economics, Links |