False Beliefs about Food Stamps: In this post on the University of Illinois Policy Matters blog, Craig Gundersen tries to lay to rest a few false beliefs (or misconceptions) that may people (and policy makers) have about the Supplemental Nutrition Assistance Program (SNAP, also known as "food stamps").
Does SNAP participation lead to obesity obesity? [no]...
Does SNAP participation cut down hunger? [yes] ...
Finally, Gundersen takes on the idea that various health restrictions on SNAP spending will have much impact. ...
To that I'll add that most SNAP participants can easily get around the restrictions on what they buy by rearranging what they buy with SNAP and what they buy with non-SNAP dollars (see my explanation of that phenomenon here). ...
Posted by Mark Thoma on Friday, February 19, 2016 at 09:15 AM in Economics, Social Insurance |
"Sorry, but there’s just no way to justify this stuff":
Varieties of Voodoo, by Paul Krugman, Commentary, NY Times: America’s two big political parties are very different from each other... Republicans routinely engage in deep voodoo, making outlandish claims about the positive effects of tax cuts for the rich. Democrats tend to be cautious and careful about promising too much...
But is all that about to change?
On Wednesday four former Democratic chairmen and chairwomen of the president’s Council of Economic Advisers ... released a stinging open letter to Bernie Sanders and Gerald Friedman, a University of Massachusetts professor... The economists called out the campaign for citing “extreme claims” by Mr. Friedman that “exceed even the most grandiose predictions by Republicans” and could “undermine the credibility of the progressive economic agenda.” ...
Sorry, but there’s just no way to justify this stuff. For wonks like me, it is, frankly, horrifying. ...
Mr. Sanders is calling for a large expansion of the U.S. social safety net... But ... such a move ... would probably create many losers as well as winners — a substantial number of Americans, mainly in the upper middle class, who would end up paying more in additional taxes than they would gain in enhanced benefits.
By endorsing outlandish economic claims, the Sanders campaign is basically signaling that it doesn’t believe its program can be sold on the merits, that it has to invoke a growth miracle to minimize the downsides of its vision. It is, in effect, confirming its critics’ worst suspicions.
What happens now? In the past, the Sanders campaign has responded to critiques by impugning the motives of the critics. But ... Alan Krueger is one of the founders of modern research on minimum wages, which shows that moderate increases in the minimum don’t cause major job loss. Christina Romer was a strong advocate for stimulus during her time in the White House, and a major figure in the pushback against austerity in the years that followed.
The point is that if you dismiss the likes of Mr. Krueger or Ms. Romer as Hillary shills or compromised members of the “establishment,” you’re excommunicating most of the policy experts who should be your allies.
So Mr. Sanders really needs to crack down on his campaign’s instinct to lash out. More than that, he needs to disassociate himself from voodoo of the left — not just because of the political risks, but because getting real is or ought to be a core progressive value.
Posted by Mark Thoma on Friday, February 19, 2016 at 01:49 AM in Economics, Politics |
Posted by Mark Thoma on Friday, February 19, 2016 at 12:06 AM in Economics, Links |
Wonkery Has A Well-Known Liberal Bias: ... So, about wonks and progressive values: the reason the joke about facts having a liberal bias rings so true is that this really has become a defining difference between the two sides of our political chasm. On the right, allegiance to voodoo has become obligatory — leading Republican economists fell right in line when Jeb! announced his 4-percent solution. On the left, real policy research and political positions have marched hand in hand. The push for higher minimum wages, to take a not at all arbitrary example, has been mightily helped by the research literature showing that higher minimums don’t cost jobs, a line of research pioneered by Alan Krueger, one of the signatories of that open letter.
And in general, progressivism in America has valued intellectual integrity and openness to evidence, while conservatism increasingly rejects all of that — which is why scientists overwhelmingly lean Democratic.
But what if the political left starts behaving like the political right, making support for implausible claims a litmus test of loyalty, declaring that anyone raising hard questions is ipso facto corrupt? That would become very uncomfortable, to say the least. ...
So I hope that the Sanders campaign doesn’t just brush off this criticism as the “establishment” doing its corrupt thing, and realizes that it really is in danger of losing not just an election but an important part of what it should be standing for.
Narayana Kocherlakota (note that this is about "above-normal growth"):
Faster Growth IS Possible - And It May Well Be Desirable: Professor Gerald Friedman has argued here that, by adopting Senator Bernie Sanders’ economic proposals, the US economy would grow in excess of 5% per year over the next decade. Previously, former Governor Jeb Bush put forward (different) proposals that he has argued would lead to 4% economic growth over an extended period. These kinds of growth outcomes are often dismissed as prima face unachievable given the historical behavior of the US economy. (That’s one way that some readers have interpreted this letter.)
In this post, I make three points related to this discussion:
- There is no technological reason why real gross domestic product (GDP) cannot grow at 4% or even over 5% per year over the coming decade.
- Given (1), the relevant issue is: are the benefits of achieving such a growth path higher than the costs of doing so? I suggest that there are good reasons to believe that the answer to this question is more likely to be positive than at any time since the end of World War II.
- If the answer to (2) is affirmative, the question becomes: what set of economic proposals will best allow the country to achieve those positive net benefits? I don’t attempt a detailed examination of the consequences of Senator Sanders’ proposals or those of Mr. Bush. I only make the broad point that, given current economic circumstances, demand-based stimulus is likely to be more effective than supply-based stimulus.
My first point is familiar to all economists. Technologically speaking, the US can grow much faster over the next ten years than is currently forecast if two changes take place. The first is that Americans allocate a much larger share of expenditures than is forecast to physical investment (like hospitals or housing) as opposed to current consumption. The second change is that Americans work a lot more hours in ten years' time than is forecast. (Of course, the super-normal growth will be followed by sub-normal growth unless these changes are sustained over time.) Neither change is in any way technologically impossible. The question is whether they are desirable or not.
With that in mind, my second point is about the benefits versus the costs of a higher growth path. Economists often attempt to answer this question by referring only to the historical time series behavior of quantities (like GDP or employment). But it’s a cost-benefit question - we surely have to use market prices. The behavior of the relevant prices is without precedent in the post-World War II period.
For example, the real interest rate is very low (and yet still seems to be too high to be consistent with full resource utilization). This price signal suggests that Americans are willing to give up a lot of current resources for the promise of certain future resources - that is, they seem unusually willing to forego consumption for growth. In terms of employment, wages remain unprecedentedly low relative to (average) worker productivity. This price signal suggests that there may be large net social benefits available associated with drawing many more Americans into the labor market.
My third point is about the right policy steps to take in order to achieve a higher growth path. Here, again, the macroeconomic circumstances matter. If the Fed and other central banks were well away from the zero lower bound, then I would be more favorably inclined to incentive-based supply-side interventions as the best way forward. But that’s not the situation. Around the world, aggregate demand remains low. In Larry Summers’ words, aggregate demand interventions like physical infrastructure investment may not be a free lunch - but it certainly seems like a cheap lunch.
To sum up: above-normal growth is always possible. The current data on market prices like interest rates and wages suggest that above-normal growth might well be desirable. The ongoing constraints on monetary policy suggest that we can best achieve that faster growth through demand-oriented policies.
Posted by Mark Thoma on Thursday, February 18, 2016 at 10:46 AM
FOMC Minutes and More, by Tim Duy: So much Fed, so little time. But the short story is this: The Fed is in risk management mode, which means they will leave rates on hold until they see clear evidence that markets are stabilizing, growth remains on track, and they are even leaning towards needing to see the white in the eyes of the inflation beast. This has the makings of a significant strategic shift. To date, the Fed has argued for early and modest action toward "normalizing" policy with the ultimately goal of staying ahead of the inflation curve. We are moving to a new strategy where Fed policy lags the cycle. The cost of a Fed pause now is the risk of more aggressive policy later.
The minutes of the January FOMC meeting revealed that policymakers struggled to reconcile market volatility with their economic outlook:
In discussing the appropriate path for the target range for the federal funds rate over the medium term, members agreed that it would be important to closely monitor global economic and financial developments and to continue to assess their implications for the labor market and inflation, and for the balance of risks to the outlook. Members expressed a range of views regarding the implications of recent economic and financial developments for the degree of uncertainty about the medium-term outlook, with many members judging that uncertainty had increased. Members generally agreed that the implications of the available information were not sufficiently clear to allow members to assess the balance of risks to the economic outlook in the Committee's postmeeting statement.
That said, they could agree on the following:
However, members observed that if the recent tightening of global financial conditions was sustained, it could be a factor amplifying downside risks.
And they had plenty of reasons to fear the downside risks:
Almost all participants cited a number of recent events as indicative of tighter financial conditions in the United States; these events included declines in equity prices, a widening in credit spreads, a further rise in the exchange value of the dollar, and an increase in financial market volatility. Some participants also pointed to significantly tighter financing conditions for speculative-grade firms and small businesses, and to reports of tighter standards at banks for C&I and CRE loans. The effects of these financial developments, if they were to persist, may be roughly equivalent to those from further firming in monetary policy.
It is very unlikely that these fears will be ameliorated by the March meeting, or even the April meeting, and Fed speakers are signaling as much. See, for example, remarks by Philadelphia Federal Reserve President Patrick Harker and Boston Federal Reserve President Eric Rosengren.
These concerns are growing:
Several participants noted that monetary policy was less well positioned to respond effectively to shocks that reduce inflation or real activity than to upside shocks, and that waiting for additional information regarding the underlying strength of economic activity and prospects for inflation before taking the next step to reduce policy accommodation would be prudent.
And echo a repeated warning from the Fed staff:
The staff viewed the uncertainty around its January projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. The risks to the forecast for real GDP were seen as tilted to the downside, reflecting the staff's assessment that neither monetary nor fiscal policy was well positioned to help the economy withstand substantial adverse shocks; the downside risks to the forecast of economic activity were seen as more pronounced than in December, mainly reflecting the greater uncertainty about global economic prospects and the financial market turbulence in the United States and abroad. Consistent with the downside risk to aggregate demand, the staff viewed the risks to its outlook for the unemployment rate as skewed to the upside. The risks to the projection for inflation were seen as weighted to the downside, reflecting the possibility that longer-term inflation expectations may have edged down and that the foreign exchange value of the dollar could rise substantially further, which would put downward pressure on inflation.
The recent unpleasantness in financial markets has likely prompted the FOMC to take the downside risks more seriously than they did in December. The fact of the matter is that they have very little left in their toolkit should the economy take a turn for the worse. Yes, they could turn toward more quantitative easing, but I think on average they are loathe to go down that route. And yes, they could consider negative interest rates, but that now looks a lot riskier than it did just a few weeks ago. Indeed, from the minutes:
The effects of a relatively flat yield curve and low interest rates in reducing banks' net interest margins were also noted.
A financial system based on banking starts to run into challenges when banks can't make a profit. Significantly negative rates likely require some substantial re-plumbing of the financial pipes to be effective.
The Fed may be turning toward my long-favored policy position - the best chance they have of lifting off from the zero bound is letting the economy run hot enough that inflation becomes a genuine concern. That means following the cycle, not trying to lead it. And I would argue that if the recession scare is just that, a scare, they are almost certainly going to fall behind the curve. The unemployment rate is below 5 percent and wage pressures are rising. The economy is already closing in on full-employment. If we don't have a recession, then how much further along will the economy be by the time the Fed deems they are sufficiently confident in the economy that they can resume raising rates? And note the importance of clearly progress on inflation:
Several participants reiterated the importance of monitoring inflation developments closely to confirm that inflation was evolving along the path anticipated by the Committee.
A couple of members emphasized that direct evidence that inflation was rising toward 2 percent would be an important element of their assessments of the appropriate timing of further policy firming.
By the time we actually see inflation we will be in my "scenario five":
Financial markets remain choppy in the first half of the year, pushing the Fed into “risk management” mode despite solid labor market activity. The Fed skips the March and April meetings. Officials’ delayed response calms markets and prevents a slowdown in activity, but they feel behind the curve and try to catch up with a steeper pace of hikes late in the year.
Separately, some members questioned the effectiveness of the Fed communication strategy:
A couple of participants questioned whether some financial market participants fully appreciated that monetary policy is data dependent, and a number of participants emphasized the importance of continuing to communicate this aspect of monetary policy.
St. Louis Federal Reserve President James Bullard was likely one such participant. From the press release of his speech tonight:
Bullard noted that the FOMC has repeatedly stated in official communication and public commentary that future monetary policy adjustments are data dependent. He then addressed the possibility that the financial markets may not believe this since the SEP may be unintentionally communicating a version of the 2004-2006 normalization cycle, which appeared to be mechanical.
“The policy rate component of the SEP was perhaps more useful when the policy rate was near zero, and the Committee wished to commit to the idea that the policy rate was likely to remain near zero for some period into the future,” Bullard explained. “But now, post liftoff, communicating a path for the policy rate via the median of the SEP could be viewed as an inadvertent calendar-based commitment to increase rates.”
You might forgive market participants for believing that the SEP infers some calendar-based guidance when Federal Reserve Vice Chair Stanley Fischer says things like:
Well, we watch what the market thinks, but we can't be led by what the market thinks. We've got to make our own analysis. We make our own analysis and our analysis says that the market is underestimating where we are going to be. You know, you can't rule out that there is some probability they are right because there's uncertainty. But we think that they are too low.
Saying the markets are wrong implies that the policy direction is fairly rigid. In any event, I am not confident there is yet much support for Bullard's position (you would think to switching to a press conference at every FOMC meeting would be easier, but he hasn't apparently made much progress there either). Instead, the Fed is debating enhancing the SEP with fan charts around the projections to illustrate the associated uncertainty. My preference is to reveal each participant's forecast and their associated dot, as well as the Greenbook forecast. This can be done anonymously. Then we could throw out the crazy forecasts and focus on the reaction functions of the remaining forecasts. I don't think, however, the Fed wants us identifying any forecasts as crazy because they would like us to believe all are equally valid. And they don't want to use the Greenbook forecast because that would imply a central FOMC forecast, which they maintain does not exist. So we are stuck with the dot plot for the foreseeable future.
Bullard has also gone full-dove. He remembered that he thought inflation expectations were supposed to be important, and the decline in 5-year, 5-year forward expectations has him spooked. And he thinks that the excess air has been released from financial markets, so his fears of asset bubbles has eased. Hence, the Fed can easily pause now. But note that Bullard is fickle - just one higher inflation number and he will quickly change his tune.
Bottom Line: The Fed is on hold, stuck in risk management mode until the skies clear. If you are in the "recession" camp, the path forward is obvious. The Fed cuts back to zero, drags its heals on more QE, and fumbles around as they try to figure out if negative rates are a good or bad thing. Not pretty. But if you are in the "no recession" camp, it's worth thinking about the implications of a Fed pause now on the pace of hikes later. Being on hold now raises the risk that by the time the Fed moves again, they will be behind the cycle.
Posted by Mark Thoma on Thursday, February 18, 2016 at 12:15 AM in Economics, Fed Watch, Monetary Policy |
Posted by Mark Thoma on Thursday, February 18, 2016 at 12:06 AM in Economics, Links |
In case you want to talk about this:
What Has the Wonks Worried, by Paul Krugman: The open letter to Sanders and Friedman by former CEA chairs didn’t get into specifics, and I’m already hearing from Bernie supporters accusing them of arrogance, or high-handedness, or something. But here’s what Friedman has said, in what the campaign’s policy director calls “outstanding work”:
– Real growth at 5.3 percent a year, versus a baseline of around 2 – Labor force participation rate back to 1999 level – 3.8 percent unemployment
OK, progressives have, rightly, mocked Jeb Bush for claiming that he could double growth to 4 percent. Now people close to Sanders say 5.3??? ...
Sanders needs to disassociate himself from this kind of fantasy economics right now. If his campaign responds instead by lashing out — well, a campaign that treats Alan Krueger, Christy Romer, and Laura Tyson as right-wing enemies is well on its way to making Donald Trump president.
Posted by Mark Thoma on Wednesday, February 17, 2016 at 10:02 AM
The "In Praise of Alexander Hamilton" Section from Our "Concrete Economics". In Fortune Online: ... Over at Fortune Online:
Stephen S. Cohen and J. Bradford DeLong: Why Hamilton—Not Jefferson—Is the Father of America's Economy: ... How we can better energize America’s economy, create more jobs, and provide more fulfilling lives for our citizens? Politics says that the answer is either ‘Left!’ or ‘Right!’ But neither of those is the solution. To find the answer, we need to look at our American past.
We Americans have been repeating the same political-economic arguments in different keys and with different harmonies—the arguments over the costs and benefits of freer trade, of government support for industry, over the righteousness of libertarian government, over activist New Dealism—for more than two centuries now. Yet today we have largely forgotten the earlier rounds of this debate: the ones that started with Thomas Jefferson and Alexander Hamilton. ...
Before Hamilton, it was the Jeffersonian economic mold, the mold that Britain had imposed through its mercantilist colonial policy, into which the American economy was being poured. Jefferson wanted to cut America loose politically from what he saw as the corruption of Imperial Britain. But he had no major quarrel with the un-industrialized agrarian economy that the British Empire was designing America to be.
Hamilton, a New Yorker, thought differently: that liberty could spring from the city as well as the countryside, and that prosperous market economies needed big pushes to get themselves going. And so Hamilton pushed the United States into a pro-industrialization, high-tariff, pro-finance, big-infrastructure political economy, and that push set in motion a self-sustaining process. ...
After Hamilton, the U.S. economy was different. It was a bet on manufacturing, technologies, infrastructure, commerce, corporations, finance, and government support of innovation. That turned out to be good for more than just farmers and the bosses and workers: it turned out to be good for the country as a whole. ...
The economy was to be reshaped to promote industry. And the principal instrument for this was a high tariff on manufactured imports from Britain...
It was also to be the major source of federal government revenues, and would thus support an extensive program of infrastructure development. This was vital for territorial expansion and economic development, and for adding the critical political support of the western farmers to the northern coastal commercial and labor interests.
But that was not all. The tariff was also the instrument that permitted the federal government to credibly assume states’ debts incurred to fund the Revolutionary War, thus strengthening the central government (central to Hamilton’s plans).
The creation of a federal government debt also constituted the basis of a new and vigorous financial market. No wonder then that in Hamilton’s strong and settled opinion: ‘a national debt, if it is not excessive, will be to us a national blessing.’
Finally there was Bank of the United States, which Hamilton designed to sit at the center of the financial system and tame the wildcat banks and their wildcat currencies. ...
So what is the lesson? ... The lesson is that ideologies—no matter what they are—are bad masters. Hamilton’s genius was in focusing on not what was decreed according to ideological first principles laid down by some academic scribbler, but rather focusing on what was in a pragmatic sense likely to generate prosperity at that moment in that situation. ...
It is only in the past generation that we have forgotten our pragmatic past and applied ideological litmus tests to what our public policies will be. And we have suffered for it.
Posted by Mark Thoma on Wednesday, February 17, 2016 at 09:46 AM in Economics |
Larry Summers is becoming more and more worried that secular stagnation is real:
Convinced of the Secular Stagnation Hypothesis: Foreign Affairs has just published my latest on the secular stagnation hypothesis. I am increasingly convinced that it captures what is going on in the industrialized world and that the risks of long term weakness on the current policy path are growing.
Unfortunately since I put forward the argument in late 2013, the data have been all too supportive. Despite monetary policy being much more expansionary than was expected and medium term interest rates falling rapidly, growth and inflation throughout the industrial world have been much lower than anticipated. This is exactly what one would expect if structural factors were increasing saving propensities relative to investment propensities. ...
If I am right in these judgments, monetary policy should now be focused on avoiding an economic slowdown and preparations should be starting with respect to the rapid application of fiscal policy. The focus of global coordination should shift from clichés about structural reform and budget consolidation to assuring an adequate level of global demand. And policymakers should be considering the radical steps that may be necessary if the US or global economy goes into recession.
Of course, real time economic theorizing is problematic and I cannot be certain that I am reading the current situation accurately. If the Fed succeeds in significantly raising rates over the next two years without a growth slowdown and if inflation accelerates to 2 percent, I will conclude that the secular stagnation hypothesis was overly alarmist in confusing cyclical elements with long term problems. If on the other hand, the economy turns down even at current interest rates, secular stagnation will have to be taken more seriously by policymakers than is currently the case.
Posted by Mark Thoma on Wednesday, February 17, 2016 at 08:08 AM in Economics |
Posted by Mark Thoma on Wednesday, February 17, 2016 at 12:06 AM in Economics, Links |
Ben Bernanke and Don Kohn:
The Fed’s interest payments to banks: At Janet Yellen’s recent hearing before the House Financial Services Committee, a few representatives expressed concern that the Federal Reserve is making interest payments to banks. Specifically, the Fed uses authority granted by Congress in 2008 to pay interest on the reserves that banks hold with it. Total payments to banks last year were about $7 billion. Why is the Fed paying such sums to banks? Are they “giveaways” to the financial sector, as some have implied? We’ll argue in this post that the interest payments the Fed is making are well-justified. In particular, they are essential to prudent monetary policy in current circumstances and do not unduly subsidize banks. ...
Posted by Mark Thoma on Tuesday, February 16, 2016 at 08:18 AM in Economics, Monetary Policy |
My Unicorn Problem: It has been an interesting few months on the progressive side of the political debate, and I mean that in the worst way. A significant number of progressives are very, very excited by the unexpected support for Bernie Sanders, and are shocked and horrified to find many — I think most — liberal policy wonks rather skeptical. For me this is somewhat familiar territory: I was skeptical about Barack Obama’s promises of transcendence back in 2008, too. And then as now a fair number of enthusiasts took no time at all to declare that I was a corrupt villain, a tool of the oligarchs, desperate for a job with Hillary etc.. OK, this too shall pass. But I thought it might be worth saying a bit more about where people like me find ourselves. ...
Posted by Mark Thoma on Tuesday, February 16, 2016 at 08:13 AM in Economics, Politics |
It’s Time To Go After Big Money: The Mossavar-Rahmani Center for Business and Government at Harvard that I am privileged to direct has just issued an important paper by Senior Fellow Peter Sands and a group of student collaborators. Sands’ paper makes a compelling case for stopping the issuance of high denomination notes like the 500 euro note and 100 dollar bill or even withdrawing them from circulation. ...
The fact that – as Sands points out — in certain circles the €500 is known as the “Bin Laden” confirms the arguments against it. Sands’ extensive analysis is totally convincing on the linkage between high denomination notes and crime. ...
Even better than unilateral measures in Europe would be a global agreement to stop issuing notes worth more than say $50 or $100. Such an agreement would be as significant as anything else the G7 or G20 has done in years. China, which is hosting the next G-20 in September, has made attacking corruption a central part of its economic and political strategy. More generally, at a time when such a demonstration is very much needed, a global agreement to stop issuing high denomination notes would also show that the global financial groupings can stand up against “big money” and for the interests of ordinary citizens.
Posted by Mark Thoma on Tuesday, February 16, 2016 at 08:10 AM in Economics |
Donald Trump and Other Republicans Are Unemployment “Truthers”, The Big Picture: Among Donald Trump’s stump sound bites is that the national unemployment rate is far, far higher than the official rate of 4.9 percent. He is not alone in making such claims. Both former Texas Governor Rick Perry, who dropped out of the presidential race last year, and retired surgeon Ben Carson have repeated this claim during this election cycle. Its origin dates back to the 2012 election when many Republicans believed that Barack Obama had ordered the Bureau of Labor Statistics to report a much lower unemployment rate in October, just before the election, than seemed plausible. It also feeds into a growing distrust for government statistical data that parallels a denial of scientific facts such as climate change.
The first to make an explicit conspiracy charge was former GE CEO Jack Welch...
The reason people like Trump can get away with making up numbers and making baseless charges is because many Americans are receptive to his message. An August 2014 survey found that on average people thought the unemployment rate was 32 percent rather than the official rate of 6 percent.
But even numbers people who should know better have made absurd claims about the unemployment rate and other government data. The CEO of Gallup, Jim Clifton, called the official rate “misleading” and implied that the White House has engaged in manipulation. Former Reagan Office of Management and Budget Director Dave Stockman, who now peddles conspiracy theories for almost everything, also claimed that the true unemployment rate was 43 percent in June 2015. Billionaire investor Paul Singer, a big Republican Party contributor, has said that virtually all government data, including the inflation rate, are faked and unreliable.
Why Republicans seem so willing to believe statistical nonsense as well as conspiracies about Obama’s birthplace and global warming is unclear. But there is no doubt that it is extensive and seemingly immune from refutation.
[There is quite a bit more in the original post.]
Posted by Mark Thoma on Tuesday, February 16, 2016 at 12:24 AM in Economics, Politics, Unemployment |
Posted by Mark Thoma on Tuesday, February 16, 2016 at 12:06 AM in Economics, Links |
What is wrong with our political system? Can it be fixed?:
How America Was Lost, by Paul Krugman, Commentary, NY Times: Once upon a time, the death of a Supreme Court justice wouldn’t have brought America to the edge of constitutional crisis. ...Republicans have more or less unanimously declared that President Obama has no right even to nominate a replacement for Mr. Scalia...
And there’s no telling how long that situation may last. ... How did we get into this mess?
At one level the answer is the ever-widening partisan divide. ... But simply pointing to rising partisanship..., while not exactly wrong, can be deeply misleading. First, decrying partisanship can make it seem as if we’re just talking about bad manners, when we’re really looking at huge differences on substance. Second, it’s really important not to engage in false symmetry: only one of our two major political parties has gone off the deep end.
On the substantive divide between the parties:... Even if you’re disappointed in what President Obama accomplished, he substantially raised taxes on the rich and dramatically expanded the social safety net; significantly tightened financial regulation; encouraged and oversaw a surge in renewable energy; moved forward on diplomacy with Iran.
Any Republican would undo all of that... When we talk about partisanship, then, we’re not talking about arbitrary teams, we’re talking about a deep divide on values and policy. ...
And it’s up to you to decide which version you prefer. So why do I say that only one party has gone off the deep end?
One answer is, compare last week’s Democratic debate with Saturday’s Republican debate. Need I say more?
Beyond that, there are huge differences in tactics and attitudes. Democrats never tried to extort concessions by threatening to cut off U.S. borrowing and create a financial crisis; Republicans did. Democrats don’t routinely deny the legitimacy of presidents from the other party; Republicans did it to both Bill Clinton and Mr. Obama. ...
So how does this get resolved? One answer could be a Republican sweep — although you have to ask, did the men on that stage Saturday convey the impression of a party that’s ready to govern? Or maybe you believe — based on no evidence I’m aware of — that a populist rising from the left is ready to happen any day now. But if divided government persists, it’s really hard to see how we avoid growing chaos.
Maybe we should all start wearing baseball caps that say, “Make America governable again.”
Posted by Mark Thoma on Monday, February 15, 2016 at 12:33 AM in Economics, Politics |
Posted by Mark Thoma on Monday, February 15, 2016 at 12:06 AM in Economics, Links |
In graduate school, we were required to take a history of economic thought course and there were two courses on US economic history (and we faced a core exam in the history of thought if we got less than a certain grade). Requirements like that have faded over time in most graduate schools, in part to make room for the expanded technical training needed to understand the modern literature. But there needs to be room for history too:
Economic history is dead; long live economic history?, The Economist: Two years ago, in a very interesting paper, Peter Temin bemoaned the decline of economic history as a research topic at universities. ...
But is economic history really dead? Last weekend, Britain's Economic History Society hosted its annual three-day conference in Telford, attempting to show the subject was still alive and kicking. The economic historians present at the gathering were bullish about the future. ... One reason for this may be that, as we pointed out in 2013, it is widely believed amongst scholars, policy makers and the public that a better understanding of economic history would have helped to avoid the worst of the recent crisis.
However, renewed vigor can be most clearly seen in the debates economists are now having with each other. ...
In order to investigate ... the historical claims of economists over issues as varied as the impact of high public debt and the causes of inequality, the contribution of historians—who have in fact mostly stayed away from these debates—is desperately needed. Economic history may well be dead as a subject studied in independent academic departments, as it was at universities in the 1970s. But as a subject that is needed as part of the study of economics and the making of public policy, economic history is—and should be—very much alive.
Posted by Mark Thoma on Sunday, February 14, 2016 at 11:31 AM in Economics, History of Thought |
How to fix Europe’s monetary union: Views of leading economists, Richard Baldwin and Francesco Giavazzi, VoxEU: Important progress has been made in repairing the design faults that the EZ Crisis revealed. This new VoxEU eBook argues that fixing the Eurozone is a job half done. The eBook, which presents 18 chapters by leading economists that hail from a broad range of nations and schools of thought, is surely the most comprehensive collection of solutions that has ever been assembled.
PDF Download: Download pdf
ePub Download: Purchase Kindle edition (Amazon US)
About the contributors
Richard Baldwin and Francesco Giavazzi
Part 1: Complete reform plans
Minimal conditions for the survival of the euro
Barry Eichengreen and Charles Wyplosz
Maastricht 2.0: Safeguarding the future of the Eurozone
Lars P. Feld, Christoph M. Schmidt, Isabel Schnabel and Volker Wieland
A sovereignless currency
The Eurozone’s Zeno paradox – and how to solve it
Part 2: Focusing on completing the Banking Union, and financial markets
Completing the Banking Union
Safeguarding the euro – balancing market discipline with certainty
The EZ Crisis: What went wrong with the European financial integration?
Part 3: Focusing on fiscal and monetary policy
Building common fiscal policy in the Eurozone
Rebooting Europe: Closer fiscal cooperation needed
How to reboot the Eurozone and ensure its long-term survival
Paul De Grauwe and Yuemei Ji
Policies and institutions for managing the aggregate macroeconomic stance of the Eurozone
Giancarlo Corsetti, Matthew Higgins and Paolo Pesenti
Asymmetries and Eurozone policymaking
ECB in Eurozone policymaking: Going forward
Refet S. Gürkaynak
Part 4: Focusing on structural and institutional reform
The Eurozone needs less heterogeneity
Balance-of-payments adjustment in the Eurozone
Needed: A European institutional union
Part 5: Dealing with legacy debt
The way forward: Coping with the insolvency risk of member states and giving teeth to the European Semester
Epilogue: Future history – how the crisis might have been handled
How the Euro Crisis was successfully resolved
Barry Eichengreen and Charles Wyplosz
Posted by Mark Thoma on Sunday, February 14, 2016 at 12:06 AM
Posted by Mark Thoma on Saturday, February 13, 2016 at 12:06 AM in Economics, Links |
Going "off the deep end on macroeconomic policy":
On Economic Stupidity, by Paul Krugman, Commentary, NY Times: ... If you’ve been following the financial news, you know that there’s a lot of market turmoil out there. It’s nothing like 2008, at least so far, but it’s worrisome. ... So how well do we think the various presidential wannabes would deal with those challenges?
Well, on the Republican side, the answer is basically, God help us. ... Leading the charge of the utterly crazy is ... Donald Trump, who ... asserted that Janet Yellen ... hadn’t raised rates “because Obama told her not to.” ... Yet ... Mr. Trump’s position isn’t that far from the Republican mainstream. After all, Paul Ryan ... not only berated Ben Bernanke ... for policies that allegedly risked inflation (which never materialized), but he also dabbled in conspiracy theorizing, accusing Mr. Bernanke of acting to “bail out fiscal policy.”
And even superficially sensible-sounding Republicans go off the deep end on macroeconomic policy. John Kasich’s signature initiative is a balanced-budget amendment that would cripple the economy in a recession, but he’s also a monetary hawk, arguing, bizarrely, that the Fed’s low-interest-rate policy is responsible for wage stagnation.
On the Democratic side, both contenders talk sensibly about macroeconomic policy... But Mr. Sanders has also attacked the Federal Reserve in a way Mrs. Clinton has not — and that difference illustrates in miniature both the reasons for his appeal and the reasons to be very worried about his approach.
You see, Mr. Sanders argues that the financial industry has too much influence on the Fed, which is surely true. But his solution is more congressional oversight — and he was one of the few non-Republican senators to vote for a bill, sponsored by Rand Paul, that called for “audits” of Fed monetary policy decisions. ...
Now, the idea of making the Fed accountable sounds good. But ... such a bill would essentially empower the cranks — the gold-standard-loving, hyperinflation-is-coming types who dominate the modern G.O.P., and have spent the past five or six years trying to bully monetary policy makers into ceasing and desisting from their efforts to prevent economic disaster. Given the economic risks we face, it’s a very good thing that Mr. Sanders’s support wasn’t enough to push the bill over the top.
But even without Mr. Paul’s bill, one shudders to think about how U.S. policy would respond to another downturn if any of the surviving Republican candidates make it to the Oval Office.
Posted by Mark Thoma on Friday, February 12, 2016 at 08:31 AM in Economics, Fiscal Policy, Monetary Policy, Politics |
Making Inferences about Tropics, Germs, and Crops: One of the long-running arguments in growth is "geography versus institutions". A lot of ink and a tiny amount of computing power was thrown at this question. The early stages of this involved a lot of cross-country regressions that attempted to figure out empirically whether measures of institutions or geography had explanatory power for GDP per capita. (By the way, I'm talking here just about the economic growth literature's take on this. The general question goes back centuries.)
A tweet by Garett Jones recently reminded me of one of the entries in this literature, Bill Easterly and Ross Levine's "Tropics, Germs, and Crops" paper. EL want to assess the role of geography in explaining cross-country incomes per capita. Their main questions are summed up nicely in the abstract.
Does economic development depend on geographic endowments like temperate instead of tropical location, the ecological conditions shaping diseases, or an environment good for grains or certain cash crops? Or do these endowments of tropics, germs, and crops affect economic development only through institutions or policies?
Their conclusion is that geography has no effect, other than through its relationship to institutions. This conclusion, though, doesn't follow from the empirical tests they run. Let's run through the empirics on these questions, and see how to answer them.
I'm going to do this with precisely the dataset that EL use. I don't recall when or where I picked up the data, but I believe it was from Easterly's old website, where he had a nice set of links to datasets. Regardless, it's the right dataset because I can perfectly replicate their results. ...
Posted by Mark Thoma on Friday, February 12, 2016 at 12:24 AM in Econometrics, Economics |
Posted by Mark Thoma on Friday, February 12, 2016 at 12:06 AM in Economics, Links |
Fed Watch: Fed Yet To Fully Embrace A New Policy Path, by Tim Duy: The Fed will take a pause on rate hikes. An indefinite pause. The sooner they admit this, the better off we will all be. Indeed, the sooner they admit this, the sooner financial markets will calm and the the sooner they would be able to resume hiking rates. Federal Reserve Chair Janet Yellen had two high profile opportunities this week to make such an admission. Yet she failed to do so. She gave some ground on March, to be sure. But overall, the Fed just isn’t ready to stop talking about rate hikes later this year.
The framework from which I consider the Fed’s current predicament begins with this chart:
Beginning in 2013 and extending through most of 2015, the domestic side of the US economy surged as consumer spending accelerated, investment stabilized, and government spending gained. The trade deficit acted as a pressure valve, widening to offshore some of the domestic demand. On net, economic activity was sufficient to collapse the output gap. By the end of 2015, the economy was near full-employment.
At full-employment, a combination of factors would work in tandem to slow activity to that of potential growth. I think of it as a new constellation of prices consistent with sustained full-employment. I can’t tell you exactly what the new constellation would look like other than the most likely combination: A mix of higher dollar, higher inflation, higher wages, and higher short term interest rates (tighter monetary policy).
How much monetary policy tightening is consistent with the new equilibrium depends on the evolution of the other prices. A reasonable baseline at the end of last year was that 100bp of tightening would be consistent with achieving full-employment. That was the Fed’s starting point as well.
The international interconnectivity of financial markets, however, dealt a blow to the expectation of even a gradual rate increase. The actual and expected policy divergence between the Federal Reserve and the rest of the world’s major central banks drove a rally in the dollar. That unexpected strength of that rally means that some other price has to move accordingly to sustain full employment. The most likely price is short-term interest rates. That’s the signal from the collapse in long rates. That signals the Fed will be lower for longer, reducing the magnitude of the policy divergence, and allowing the dollar to retreat.
Ironically, I suspect the Bank of Japan’s foray into negative interest rates sealed the fate of the divergence trade. First by pushing market participants into US Treasuries, signaling that the Fed would need to respond to the BOJ by reducing the expected short-term policy path. Second by killing bank stocks. Market participants in the US were already primed by Fed Vice Chair Stanley Fisher that negative rates could be a policy tool. And this point was seconded by Yellen this week.
But the collapse in banking stocks suggests strongly that negative interest rates are not compatible with our current economic institutions. The system relies on the banks, and the banks need to make money, and they struggle to do so in a negative rate environment. Should it be any surprise that the threat of global negative rates is slamming the financial sector?
If then zero (or something just below zero) is indeed a practical lower bound, and all major central banks are pulled in that direction, then the scope for policy divergence is limited. Again, this suggests the policy divergence trade – a one-way bet on the dollar – is nearing the end if not already there. It had to end sooner or later. A one-way bet would eventually cripple the US economy.
In sum, a key factor in keeping the US economy on the rails is acknowledging that tightening financial conditions via the dollar obviates the need to tightening conditions via monetary policy. This will also sustain the expansion and allow wage growth and inflation accelerate. The Fed can stand down, and let my scenario five evolve. All of this is well and good, but the Fed has yet to fully embrace this story. And that leaves them sounding relatively hawkish. Yellen’s testimony continues to emphasize that the Fed expects to keep raising rates. To be sure, she includes the data dependent caveat, and this:
Financial conditions in the United States have recently become less supportive of growth, with declines in broad measures of equity prices, higher borrowing rates for riskier borrowers, and a further appreciation of the dollar.
should be sufficient to take March off the table despite solid labor data. But the underlying message is that they expect higher rates. It is only the pace that changes, not the direction. There is just no reason to promise higher rates. All the Fed needs to say is:
“Monetary policy will be appropriate to achieve the Fed’s mandate.”
Yellen & Co. don’t need to emphasize the direction of rates. They just can’t stop themselves. Worse yet, they feel compelled to describe the level of future rates via the Summary of Economic Projections. A level entirely inconsistent with signals from bond markets, no less. They don't really know what the terminal fed funds rate will be, so why keep pretending they do? The “dot plot” does nothing more than project an overly-hawkish policy stance that leaves market participants persistently fearful a policy error is in the making. It is time to end the “dot plot.”
It might be helpful to add:
“We will not pursue negative interest rates if such a policy is incompatible with stability in financial sector.”
They should stop with the random and partially considered talk of negative interest rates. Instead, adopt a basic talking point indicating the idea has yet to be thoroughly vetted and as such any speculation on the topic is premature.
Bottom Line: The Fed has yet to fully embrace the change in financial conditionals and the implications for the path of policy. To be sure Yellen gave enough this week to take March off the table. That said, policymakers will hesitate to dramatically change their general policy outlook focused on higher rates. Consequently, I anticipate Fedspeak with seemingly unrealistic hawkish undertones. Essentially, they will leave the fear of policy error simmering on the back-burner.
Posted by Mark Thoma on Thursday, February 11, 2016 at 05:13 PM in Economics, Fed Watch, Monetary Policy |
This is from a Federal Reserve Bank of Philadelphia Working Paper:
Does inequality cause financial distress? Evidence from lottery winners and neighboring bankruptcies Sumit Agarwal, Vyacheslav Mikhed, and Barry Scholnick: Abstract We test the hypothesis that income inequality causes financial distress. To identify the effect of income inequality, we examine lottery prizes of random dollar magnitudes in the context of very small neighborhoods (13 households on average). We find that a C$1,000 increase in the lottery prize causes a 2.4% rise in subsequent bankruptcies among the winners’ close neighbors. We also provide evidence of conspicuous consumption as a mechanism for this causal relationship. The size of lottery prizes increases the value of visible assets (houses, cars, motorcycles), but not invisible assets (cash and pensions), appearing on the balance sheets of neighboring bankruptcy filers.
Download Full text.
Posted by Mark Thoma on Thursday, February 11, 2016 at 10:21 AM in Academic Papers, Economics, Income Distribution |
Part of an interview of Larry Summers at Equitable Growth:
... When I went to graduate school in the 1970s, the prevailing view among economists, captured by Art Okun’s book “Equality Versus Efficiency: The Big Tradeoff,” was that equality and efficiency were both desirable, but they were likely to trade off—that more progressive taxation would achieve more equality but would inevitably in some way distort economic choices and, so, reduce efficiency, for example.
I believe there are still many areas in which one does have to trade off equality versus efficiency. But I also believe there are many areas in which it’s possible to reform policy to promote both economic efficiency and equality. One such area is policy to mitigate secular stagnation by promoting demand at times when there is slack in the use of resources.
Recall that I defined secular stagnation as having at its essence an excess of savings over investment, desired saving over desired investment. There are many reasons for that. Some of them have to do, for example, with reduced investment demand because so much more capital can be purchased with fewer dollars. I think of the fact that my iPad has more computing power than a Cray supercomputer did when Bill Clinton came into office in 1993.
One aspect of that excess in saving over investments is that rising inequality has operated to reduce spending. We are fairly confident that what economists call the “marginal propensity to consume” of those with high incomes is less than the marginal propensity to consume of those with middle incomes.
And so the combination of rising inequality in the distribution of income across income levels and a shift in inequality toward the higher profit share slows economic growth. In normal times, such a change might be offset by easier monetary policy. But in the current environment, where interest rates are very close to the zero lower bound, the capacity for that kind of offset is greatly attenuated.
There’s another aspect of the connection between secular stagnation and inequality that bears emphasis. Experience suggests that in an economy where there are more workers seeking jobs than there are jobs seeking workers, the power is on the employer side, and workers do much less well. A tight economy, where employers are seeking workers, shifts the balance of power toward workers and leads to higher pay and better benefits. That, in turn, leads to more spending being injected into the economy, which supports further economic growth.
And so, as Keynes recognized when he wrote to FDR in the late 1930s urging the importance of wage increases, measures that strengthen workers’ capacity to earn income by increasing spending power can promote both equality and strengthen the economic performance of the country. ...
Posted by Mark Thoma on Thursday, February 11, 2016 at 08:34 AM in Economics |
This is from Congresswoman Gwen Moore's website:
The Use of Political Stunts to Attack Social Programs: Today, Budget Committee members Congresswoman Gwen Moore (WI-04) and Congresswoman Barbara Lee (CA-13) sent a letter to Chairman Tom Price expressing their collective concern regarding reports that House Republicans intend to use the budget reconciliation process to attack critical social safety net programs.
“Both Congresswoman Lee and I were once recipients of the very social services that are currently being targeted by our Republican colleagues,” said Congresswoman Moore. “Our distinct perspectives and firsthand experiences with these vital public assistance programs add unique and empathetic voices to a debate overpowered by crass sentiments and hostile attitudes. With 46.7 million Americans battling poverty, we should be able to engage in an open debate about these life-saving programs in the light of day, not behind closed doors or with the help of political stunts.”
“Today, more than 46 million Americans are living in poverty, including one in five American children. Republican proposals to use the budget process to make misguided and sweeping changes to our nation’s proven anti-poverty programs are destined to repeat the mistakes of the past while furthering eroding our social safety net. Their actions will result in more poverty, more hunger and less hope in America,” said Congresswoman Barbara Lee. “Attempts to use the budget process to push this extreme, Tea Party agenda is frankly disingenuous. Instead of working to demonize struggling families, we should be investing in programs that create more opportunity and build pathways into the middle class.”
The full text of letter can be found below...
Posted by Mark Thoma on Thursday, February 11, 2016 at 12:15 AM in Economics, Politics, Social Insurance |
Posted by Mark Thoma on Thursday, February 11, 2016 at 12:06 AM in Economics, Links |
Phil Angelides asks a "simple question":
Charge senior bank bosses, says former commissioner, by Ben McLannahan, FT: Phil Angelides uncovered evidence of widespread fraud and corruption in the US mortgage market as chairman of the commission which produced the government report on the global financial crisis. Five years on, he is asking the Department of Justice why it has yet to call any senior bank executives to account. ... In a letter to Loretta Lynch, US Attorney General, Mr Angelides has challenged the DoJ to take action before the ten-year statute of limitation expires.
“I ask a simple question: how could the banks have engaged in such massive misconduct and wrongdoing without a single individual being involved? In a sense, it’s the immaculate corruption,” he told the FT. “It defies common sense, and the people of America know this" ... "it breeds a great amount of cynicism and anger about the nature of our judicial system.”
Posted by Mark Thoma on Wednesday, February 10, 2016 at 07:15 PM in Economics, Financial System, Regulation |
From the NBER Digest:
The Cap-and-Trade Sulfur Dioxide Allowances Market Experiment: The Acid Rain Program led to higher levels of premature mortality than would have occurred under a hypothetical no-trade counterfactual with the same overall sulfur dioxide emissions.
Since the passage of the Clean Air Act of 1990, the federal government has pursued a variety of policies designed to reduce the level of sulfur dioxide emissions from coal-fired power plants and the associated acid rain. In The Market for Sulfur Dioxide Allowances: What Have We Learned from the Grand Policy Experiment? (NBER Working Paper No. 21383), H. Ron Chan, B. Andrew Chupp, B. Andrew Chupp, Maureen L. Cropper, and Nicholas Z. Muller evaluate the cost savings and the health consequences of relying on a cap-and-trade sulfur dioxide allowance market to implement emissions reductions.
The key argument advanced by proponents of cap-and-trade programs for pollution reduction is that they are less costly than regulatory programs that impose the same abatement requirements on all polluters. By allowing emission sources with high abatement costs to offset higher on-site emissions by purchasing additional reductions from other, lower-cost polluters, they assert trade in pollution allowances reduces the total cost of achieving a given reduction in aggregate emissions.
To study the cost savings associated with the Acid Rain Program, which allowed such trade, the authors model the cost of abatement for individual coal-fired power plants. They estimate how firms choose between the two leading technologies for sulfur dioxide abatement, burning low-sulfur coal and installing flue-gas desulfurization units. They use these estimates to compare abatement decisions corresponding to the Acid Rain Program and standards that achieve the same aggregate reduction in emissions by making uniform requirements on coal-fired plants, with no trading allowed. They find cost savings in 2002, with the Acid Rain Program in full swing, of approximately $250 million from trade in emission allowances. This is less than half of the previously estimated saving from tradable permits. The data suggest that many generating units were not complying with the Clean Air Act in the most economical manner.
One potential drawback of a cap-and-trade system is that in some areas the level of local pollutants — those which pose the greatest health threat near their place of emission — can be higher than under uniform emission standards. This could occur if, for example, utilities in the densely populated eastern United States, where emission reduction can be comparatively costly, pay utilities in less-populous western regions, where abatement is cheaper, to cut emissions there. The aggregate national reduction may still be achieved, but many more people in the densely populated east could be exposed to pollutants.
The researchers find a greater level of particulate air pollution and associated premature mortality under the Acid Rain Program than under a hypothetical no-trade scenario in which units emitted SO2 at a rate equal to 2002 allowance allocations plus observed drawdowns of their allowance banks. They estimate the cost of health damages associated with observed SO2 emissions in 2002 under the Acid Rain Program to be $2.4 billion higher than would have been the case under the no-trade scenario. They conclude that the health impact of a cap-and-trade program depends on how the program is structured and on the correlation between marginal abatement costs and marginal damages across pollution sources.
Posted by Mark Thoma on Wednesday, February 10, 2016 at 09:16 AM in Academic Papers, Economics, Environment, Regulation |
Eugene White at the Bank of England's Bank Underground:
Rescuing a SIFI, Halting a Panic: the Barings Crisis of 1890, Bank Underground: The collapse of Northern Rock in 2007 and Bear Sterns, Lehman Brothers, and AIG in 2008 renewed the debate over how a lender of last resort should respond to a troubled systemically important financial institution (SIFI). Based on research in the Bank of England Archive, this post re-examines a crisis in 1890 when the Bank, supported by central bank cooperation, rescued Baring Brothers & Co. and quashed a banking panic and a currency crisis, while mitigating moral hazard. This rescue is significant because it combined features similar to those mandated by recent U.K., U.S., and European reforms to ensure an orderly liquidation of SIFIs and increase the accountability of senior management (e.g. Title II of the Dodd-Frank Act (2010); the U.K. “Senior Managers Regime”).
Financial historians (Bordo (1990); Schwartz (1986); Bignon, Flandreau, & Ugolini, (2012)) have argued that, when faced with a crisis in the nineteenth century, the Bank of England simply followed Bagehot’s Rule to lend freely at a high rate to preserve market liquidity (Bagehot (1873)). This “historical fact” has lent support to policy recommendations to strictly follow Bagehot in a crisis. By downplaying the rescue and treating the 1890 crisis as minor (Turner (2014)), historians have overlooked its significance and that of its French precursor; thus they have missed important examples of successful pre-emptive intervention that limited damage to the economy and future risk-taking. ...
The rescue package provided to Barings was modelled on the 1889 rescue of the Comptoir d’Escompte. This commercial and investment bank had supported an effort to corner the copper market with loans and vast off-balance sheet guarantees of forward contracts. When copper prices fell, the Comptoir’s president committed suicide, prompting a run. The Banque de France provided loans of 140 million francs to meet withdrawals and, co-operating with the Minister of Finance, formed a bankers’ guarantee syndicate to absorb the first 40 million francs of losses. Contributions were assigned according to banks’ ability to pay and their role in the crisis, measured by how closely they were tied by interlocking directorships to the Comptoir. In addition, substantial fines and clawbacks were imposed on the directors and senior management. The run on the Comptoir abated and spread no further. A “good bank”, the Comptoir National d’Escompte, was recapitalized, while the Banque de France took over the liquidation of the toxic copper assets (Hautcoeur, Riva & White (2014)).
The British press had chronicled this Parisian rescue in detail; and London bankers were well-informed. But, given that policy was formulated quickly behind closed doors, histories have been silent on the importance of the French example. The key connection is found in Alphonse De Rothschild letter of November 14 (Figure 2), where he compared the two crises and declared: “La situation à l’égard de la Baring est exactement la même que celle dans laquelle se trouvait le Comptoir d’Escompte” – roughly translated, “The situation with regards to Barings is exactly the same as the one in which the Comptoir d’Escompte found itself” (Rothschild Archives, London). He then laid out the role that the House of Rothschild should play, pushing for the formation of a British guarantee syndicate, and specifying the Rothschild contribution. ...
The Barings rescue or “lifeboat” was announced on Saturday November 15, 1890. The Bank of England provided an advance of £7.5 million to Barings to discharge their liabilities. A four-year syndicate of banks would ratably share any loss from Barings’ liquidation. The guarantee fund of £17.1 million included all institutions, and some of the largest shares were assigned to banks whose inattentive lending had permitted Barings to swell its portfolio. The old firm was split into a recapitalized “good bank”, Baring Brothers & Co. Ltd., which took over the still profitable trade finance and a “bad bank” that retained its name and its toxic assets, managed by the Bank of England.
The Barings’ partners agreed to this arrangement, delivering powers-of-attorney over their property, avoiding the danger of a fire sale. But, as unlimited liability partners, they were still expected to cover any losses. The partners’ investments, country homes, town houses and their contents were to be sold with the proceeds moved to the asset side of the bad bank’s balance sheet (Figure 3). This assessment paralleled the liability imposed on the board of directors and senior management of the Comptoir. These payments covered most losses; and neither the French or British syndicates were called upon. Ultimately, the remains of the “bad” Barings bank was sold to a group of investors for £1.5 million, closing the liquidation. The heavy assessments on the Barings appear to have dampened risk-taking, as no other major bank failed before World War I and in general banks became more conservative (Baker & Collins (1990)). ...
This new research reveals that the two most important central banks of the late nineteenth century did not exclusively adhere to Bagehot’s rule. While the Bank of England and the Banque de France responded to panics by lending freely at high rates on good collateral, they also intervened to rescue deeply distressed SIFIs. Central bank cooperation to obtain liquidity and coordination with the Treasury were then critical to ensure that toxic assets were liquidated in an orderly fashion to minimize losses. Combined with penalties levied on the responsible principals, they were strikingly bold and successful rescues. While one may object that recent crises erupted because of system-wide incentives to take risk (Too Big To Fail, deposit insurance and flawed governance), these two episodes should be thought of as identifying appropriate policies to manage individual troubled SIFIs if the system-wide incentives can be brought under control.
Posted by Mark Thoma on Wednesday, February 10, 2016 at 08:45 AM in Economics, Financial System, Regulation |
Posted by Mark Thoma on Wednesday, February 10, 2016 at 12:06 AM in Economics, Links |
Why the Working Class Is Choosing Trump and Sanders, by Mark Thoma: Donald Trump recently defended Social Security, Medicare, and Medicaid:
“Every Republican wants to do a big number on Social Security, they want to do it on Medicare, they want to do it on Medicaid. And we can’t do that. And it’s not fair to the people that have been paying in for years and now all of the sudden they want to be cut.”
An opinion piece in the Wall Street Journal reflects the negative reaction to Trump’s remarks from many Republicans:
“Mr. Trump is a political harbinger here of a new strand of populist Republicanism, largely empowered by Obamacare, in which the ‘conservative’ position is to defend the existing entitlement programs from a perceived threat posed by a new-style Obama coalition of handout seekers that includes the chronically unemployed, students, immigrants, minorities and women … who typically vote Democrat.”
But is it true that our economic system redistributes substantial sums away from the middle class to “handout seekers”? ...
Posted by Mark Thoma on Tuesday, February 9, 2016 at 08:14 AM in Economics, Fiscal Times, Politics |
Negative Rates: A Gigantic Fiscal Policy Failure: Since October 2015, I’ve argued that the Federal Open Market Committee (FOMC) should reduce the target range for the fed funds rate below zero. Such a move would be appropriate for three reasons:
- It would facilitate a more rapid return of inflation to target.
- It would help reduce labor market slack more rapidly.
- It would slow and hopefully reverse the ongoing and dangerous slide in inflation expectations.
So, going negative is daring but appropriate monetary policy. But it is a sign of a terrible policy failure by fiscal policymakers.
The reason that the FOMC has to go negative is because the natural real rate of interest r* (defined to be the real interest rate consistent with the FOMC’s mandated inflation and employment goals) is so low. The low natural real interest rate is a signal that households and businesses around the world desperately want to buy and hold debt issued by the US government. (Yes, there is already a lot of that debt out there - but its high price is a clear signal that still more should be issued.) The US government should be issuing that debt that the public wants so desperately and using the proceeds to undertake investments of social value.
But maybe there are no such investments? That’s a tough argument to sustain... With a 30-year r* below 1%, our government can afford to make progress on a myriad of social problems. It is choosing not to.
If the government issued more debt and undertook these opportunities, it would push up r*. That would make life easier for monetary policymakers, because they could achieve their mandated objectives with higher nominal interest rates. But, more importantly, the change in fiscal policy would make life a lot better for all of us.
I don't think that Chair Yellen will say the above in her Humphrey-Hawkins testimony tomorrow - but I also think that it would be great if she did.
Posted by Mark Thoma on Tuesday, February 9, 2016 at 07:09 AM in Economics, Fiscal Policy, Monetary Policy |
Posted by Mark Thoma on Tuesday, February 9, 2016 at 12:06 AM in Economics, Links |
Will the Economic Recovery Die of Old Age?. SF Fed Economic Letter: Recent economic indicators show that U.S. economic growth has slowed considerably. After adjusting for inflation, aggregate output increased little during the final three months of 2015. Is this the start of a serious stumble by an aging economy with creaky knees? Are we due for a recession? Or is the slowdown just part of the normal ups and downs of a healthy, dynamic economy?
Recessions are notoriously difficult to forecast. However, much conventional wisdom views an aging expansion as increasingly fragile and more likely to end in recession. The associated predictions of recession—proclaiming that “it’s about time” for a downturn—have become more prominent lately because the current recovery, which started six and a half years ago, is relatively long already. ...
The notion that business expansions are more likely to end as they grow older was especially common before World War II. Gottfried Haberler’s (1937) classic synthesis of prewar business cycle theories devotes an entire section to the topic: “Why the Economic System Becomes Less and Less Capable of Withstanding Deflationary Shocks After an Expansion Has Progressed Beyond a Certain Point.” Nowadays, the underlying rationale for this view follows an analogy to human mortality: As the expansion ages, assorted imbalances and rigidities accumulate that hobble the economy and make it more fragile. Thus, the recovery could be jeopardized by ever smaller shocks, and it becomes more likely over time that the economy will fall into recession.
However, the historical record since World War II does not support the view that the probability of recession increases with the length of the recovery. The earliest statistical investigation of the issue by Diebold and Rudebusch (1990) found that postwar expansions were not more likely to end as they endured. This Economic Letter updates that analysis. The results concur with Yellen’s view that, all else equal, longer expansions are no more likely to end than shorter ones. ...
Posted by Mark Thoma on Monday, February 8, 2016 at 10:38 AM in Economics |
Cecchetti & Schoenholtz:
The Scandal is What's Legal: If you haven’t seen The Big Short, you should. The acting is superb and the story enlightening: a few brilliant outcasts each discover just how big the holes are that eventually bury the U.S. financial system in the crisis of 2007-2009. If you’re like most people we know, you’ll walk away delighted by the movie and disturbed by the reality it captures. ...
But we’re not film critics. The movie—along with some misleading criticism—prompts us to clarify what we view as the prime causes of the financal crisis. The financial corruption depicted in the movie is deeply troubling (we’ve written about fraud and conflicts of interest in finance here and here). But what made the U.S. financial system so fragile a decade ago, and what made the crisis so deep, were practices that were completely legal. The scandal is that we still haven’t addressed these properly.
We can’t “cover” the causes of the crisis in a blog post, but we can briefly explain our top three candidates: (1) insufficient capital and liquidity reflecting poor risk management and incentives; (2) the ability of complex, highly interconnected intermediaries to take on and conceal enormous amounts of risk; and (3) an absurdly byzantine regulatory structure that made it virtually impossible for anyone, however inclined, to understand (let alone manage) the system’s fragilities. ...[long explanationss of each]...
To say that this is a scandal that makes the system less safe is to dramatically understate the case.
Now, we could go on. There are plenty of other problems that policymakers have ignored and are allowing to fester (how about the government-sponsored enterprises?). But we focused on our top three: the need for financial intermediaries to have more capital and liquid assets; the need to improve the ability of both financial market participants and authorities to assess and control risk concentrations through a combination of central clearing and better information collection; and the need to simplify the structure and organization of the U.S. regulatory system itself.
Only if people learn how far the financial system remains from these ideals, only if they understand that the scandal is almost always what is legal, will there be much chance of making the next crisis less severe. ...
Posted by Mark Thoma on Monday, February 8, 2016 at 10:37 AM in Econometrics, Financial System, Regulation |
Greg Kaplan and Giovanni Violante at Microeconomic Insights:
Wealthy ‘hand-to-mouth’ households: key to understanding the impacts of fiscal stimulus: Many families in Europe and North America have substantial assets in the form of housing and retirement accounts but little in the way of liquid wealth or credit facilities to offset short-term income falls. This research shows that these wealthy ‘hand-to-mouth’ households respond strongly to receiving temporary government transfers such as tax rebates, boosting the economy through their increased consumption. ...
Our research also draws attention to the fact that the aggregate macroeconomic conditions surrounding policy interventions will affect the fraction of the transfer consumed by households in non-trivial ways.
In a mild recession, where earnings drops are small and short-lived, it is not worthwhile for the wealthy hand-to-mouth households to pay the transaction costs of accessing some of their illiquid assets (or to use expensive credit) to smooth their consumption. As a result, liquidity constraints get amplified and their consumption response to the receipt of a fiscal stimulus payment is strong.
Counter-intuitively, the same stimulus policy may have stronger effects in a mild downturn than in a severe recession
Conversely, at the outset of a severe recession that induces a large and long-lasting fall in income, many wealthy hand-to-mouth households will choose to borrow or tap into their illiquid account to create a buffer of liquid assets that can be used to counteract the income loss. Consequently, fewer households are hand-to-mouth when they receive a government windfall. Thus, somewhat counter-intuitively, the effect of the stimulus on consumption can be lower than when the same policy is implemented in a mild downturn.
Acknowledging the existence of wealthy hand-to-mouth households also has implications for economic policy beyond fiscal stimulus. In further work (Kaplan et al, 2015), we show the importance of these households for the efficacy of both conventional monetary policy (changes in nominal interest rates) and unconventional monetary policy (forward guidance about future changes in nominal interest rates).
Posted by Mark Thoma on Monday, February 8, 2016 at 10:11 AM in Economics, Fiscal Policy |
"It feels as if you’ve entered a different intellectual and moral universe":
The Time-Loop Part, by Paul Krugman, Commentary, NY Times: By now everyone who follows politics knows about Marco Rubio’s software-glitch performance in Saturday’s Republican debate. ... Mr. Rubio’s inability to do anything besides repeat canned talking points was startling. ... But really, isn’t everyone in his party doing pretty much the same thing, if not so conspicuously?
The truth is that the whole G.O.P. seems stuck in a time loop,... and ... shows no sign of learning anything from experience. ... Think about the doctrines every Republican politician now needs to endorse, on pain of excommunication.
First, there’s the ritual denunciation of Obamacare as a terrible, very bad, no good, job-killing law. ... Strange to say, this line hasn’t changed at all despite the fact that we’ve gained 5.7 million private-sector jobs since ... the Affordable Care Act went into full effect.
Then there’s the assertion that taxing the rich has terrible effects on economic growth, and conversely that tax cuts at the top can be counted on to produce an economic miracle. This doctrine was tested... But Republican faith in tax cuts as a universal economic elixir has, if anything, grown stronger...
Meanwhile, on foreign policy the required G.O.P. position has become one of utter confidence in the effectiveness of military force. How did that work in Iraq? ... And diplomacy, no matter how successful, is denounced as appeasement. ...
But don’t all politicians spout canned answers that bear little relationship to reality? No.
Like her or not, Hillary Clinton is a genuine policy wonk... Bernie Sanders is much more of a one-note candidate, but at least his signature issue — rising inequality and the effects of money on politics — reflects real concerns. When you revisit Democratic debates after what went down Saturday..., it feels as if you’ve entered a different intellectual and moral universe.
So how did this happen to the G.O.P.? In a direct sense, I suspect that it has a lot to do with Foxification, the way Republican primary voters live in a media bubble into which awkward facts can’t penetrate. But there must be deeper causes behind the creation of that bubble.
Whatever the ultimate reason, however, the point is that while Mr. Rubio did indeed make a fool of himself on Saturday, he wasn’t the only person on that stage spouting canned talking points that are divorced from reality. They all were, even if the other candidates managed to avoid repeating themselves word for word.
Posted by Mark Thoma on Monday, February 8, 2016 at 01:44 AM in Economics, Politics |
Posted by Mark Thoma on Monday, February 8, 2016 at 12:06 AM in Economics, Links |
Global growth now fraying at the edges: The growth rate in global activity remains broadly unchanged at around 2.8 per cent, little different from the rates recorded since mid 2015. However, there has been a further slowdown in economic activity in the advanced economies (AEs), which are growing at only 1.2 per cent, down from 1.6 percent late last year.
For the first time since 2012, the growth rate in the AEs is clearly below trend... Furthermore, the US nowcast is now at its lowest since the recovery began in 2009. ... Until now, however, this drag on global activity has been offset by fairly robust growth rates in the Eurozone. Worryingly, Eurozone growth has now sagged to about 1.3 percent. ...
This development reduces our confidence that the bout of American weakness in the industrial sector will be easily shrugged off by the global economy. Significant downgrades to consensus forecasts for US growth in 2016 now seem very likely. Although the risk of an outright recession still seems contained, the Fed must surely sit up and pay attention to this.
We judge that there has been little change in overall activity in the emerging markets this month. The China nowcast has moved down to the lower end of its recent range, but there are clear signs of stabilisation in Brazil – by far the weakest of the G20 economies last year – and an up-tick in growth in India. ...
Posted by Mark Thoma on Sunday, February 7, 2016 at 09:50 AM in Economics |
Posted by Mark Thoma on Sunday, February 7, 2016 at 12:06 AM in Economics, Links |
Posted by Mark Thoma on Saturday, February 6, 2016 at 12:06 AM in Economics, Links |
Solid Jobs Report Keeps Fed In Play, by Tim Duy: Just when you think it's safe to jump in the water, reality strikes. While I still think that the Fed passes in March, the solid jobs report is just what is takes to keep the Fed in the game. Back it up with another such report in March and a stronger inflation signal in one of the upcoming price reports and you set the stage for a divisive battle at the next FOMC meeting.
Nonfarm payrolls grew by 151k, below consensus but within a reasonable range of estimates. The twelve-month moving average reveals a very modest slowing of job growth over the year:
The jobs numbers in the context of data Federal Reserve Chair Janet Yellen pervasively identified as what to watch:
Notably, wage growth has accelerated over the past year, suggesting that the Fed's estimate of NAIRU is within range of reality:
Prior to the 2001 recession, wage growth typically accelerated at unemployment approached 6%. Now it looks like 5% is the magic number:
I suspect the the employment cost index will soon follow the wage numbers higher:
There are no signals of recession in this data. For those who will complain that it is lagging data, I suggest watching the temporary employment component:
Temporary hiring should flatten out as the cycle matures, and you can arguably see the beginning of that process. If you squint, that is. Even so, the process evolved over a two year period before the last recession struck. Even if the seeds of recession were sown this January, we wouldn't expect recession until 2017 at the earliest. Still not by base case; using history as a guide I have a recession penciled in for 2018. (Short story: economy is in later stages of a business cycle, Fed resumes tightening later this year and pushes it too far by middle of 2017. In a perfect world the Fed could moderate the pace of activity to hold unemployment near NAIRU for an extended period of time. That, however, has proven to be a challenge for the Fed in the past.)
Bottom Line: This jobs report complicates the Fed's decision making process. They are stuck with instability in the financial markets as the economy reaches full employment. They are concerned that in the absence of temporary factors, inflation will quickly jump higher if the economy continues on this trajectory. While they would like unemployment to settle somewhat below NAIRU to eliminate lingering underemployment, they don't want it to settle far below NAIRU. They don't believe they can easily tap the breaks to lift unemployment higher. Recession is almost guaranteed to follow. Hence they would like to be able to rates rates gradually to feel their way around the darkness in which the true value of NAIRU lies. They fear that if they delay additional tightening, they will pass the point of no return in which they are forced to abandon their doctrine of gradualism. The Fed's policy challenge just became a little bit harder today.
Posted by Mark Thoma on Friday, February 5, 2016 at 10:21 AM in Economics, Fed Watch, Monetary Policy, Unemployment |
The left's attack on Obamacare could be harmful:
Who Hates Obamacare?, by Paul Krugman, Commentary, NY Times: ...the Affordable Care Act is already doing enormous good. ... Why, then, do we hear not just conservatives but also many progressives trashing President Obama’s biggest policy achievement?
Part of the answer is that Bernie Sanders has chosen to make re-litigating reform, and trying for single-payer, a centerpiece of his presidential campaign. So some Sanders supporters have taken to attacking Obamacare as a failed system. ... And some of these critiques have merit. Others don’t.
Let’s start with the good critiques...
The number of uninsured Americans has dropped sharply... But millions are still uncovered, and in some cases high deductibles make coverage less useful than it should be.
This isn’t inherent in a non-single-payer system: Other countries with Obamacare-type systems, like the Netherlands and Switzerland, do have near-universal coverage even though they rely on private insurers. But Obamacare as currently constituted doesn’t seem likely to get there, perhaps because it’s somewhat underfunded.
Meanwhile, although cost control is looking better than even reform advocates expected, America’s health care remains much more expensive than anyone else’s.
So yes, there are real issues with Obamacare. The question is how to address those issues in a politically feasible way.
But a lot of what I hear from the left is not so much a complaint about how the reform falls short as outrage that private insurers get to play any role. The idea seems to be that any role for the profit motive taints the whole effort.
That is, however, a really bad critique..., the fact that some insurers are making money from reform (and their profits are not ... all that large) isn’t a reason to oppose that reform. The point is to help the uninsured, not to punish or demonize insurance companies.
And speaking of demonization: One unpleasant, ugly side of this debate has been the tendency of some Sanders supporters, and sometimes the campaign itself, to suggest that anyone raising questions about the senator’s proposals must be a corrupt tool of vested interests. ...
And let’s be clear: This kind of thing can do real harm. The truth is that whomever the Democrats nominate, the general election is mainly going to be a referendum on whether we preserve the real if incomplete progress we’ve made on health, financial reform and the environment. The last thing progressives should be doing is trash-talking that progress and impugning the motives of people who are fundamentally on their side.
Posted by Mark Thoma on Friday, February 5, 2016 at 07:56 AM in Economics, Health Care, Politics |
Job Growth Slows in January, Unemployment Falls to 4.9 Percent, by Dean Baker: The Labor Department reported the economy added 151,000 jobs in January, in line with some economists' expectations. There were largely offsetting revisions to the prior two months data leaving the average change over the last three months at 231,000. The household survey showed a jump in employment that both lowered the unemployment rate to 4.9 percent and also raised the employment-to-population ratio (EPOP) to 59.6 percent. This is the highest EPOP of the recovery, but it is still more than 3 percentage points below the pre-recession level. ...
There was a large 12 cent jump in the average hourly wage in January, but this followed a month in which there was no reported rise at all. Over the last three months the wage has risen at a 2.5 percent annual rate compared to the prior three months, the same as its pace over the last year. There is little basis for the belief that wage growth is accelerating. The Employment Cost Index for the fourth quarter showed no uptick at all in the pace of compensation growth, with wage growth in the private sector actually slowing slightly. ...
The overall picture in this report is mixed. The sharp slowing in job growth was to be expected, given the slow growth reported in the economy. The labor market is still not tight enough to produce healthy wage growth. With many downside risks to growth, 2016 may not be a good year for workers.
Posted by Mark Thoma on Friday, February 5, 2016 at 07:47 AM in Economics, Unemployment |
Posted by Mark Thoma on Friday, February 5, 2016 at 12:06 AM in Economics, Links |
Dovish Actions Require Dovish Talk (To Be Effective): The Federal Open Market Committee (FOMC) has bought a lot of assets and kept interest rates extraordinarily low for the past eight years. Yet, all of this stimulus has accomplished surprisingly little (for example, inflation and inflation expectations remain below target and are expected to do so for years to come). Does that experience mean that we should give up on monetary policy as a useful way to stimulate aggregate demand?
My answer is no. I argue that, over the past seven years, the FOMC's has consistently talked hawkish while acting dovish. This communications approach has weakened the effectiveness of policy choices, probably in a significant way. Future monetary policy stimulus can be considerably more effective if the FOMC is much more transparent about its willingness to support the economy - that is, about its true dovishness.
My starting point is that households and businesses don’t make their decisions about spending based on the current fed funds rate - which, is after all, a one-day interest rate. Rather, spending decisions are based on longer-term yields. Those longer-term yields depend on market participants’ beliefs about how monetary policy will evolve over the next few years. Those beliefs are a product of both FOMC actions and FOMC communications.
In December 2008, the FOMC lowered the fed funds rate target range to 0 to a quarter percent. It did not raise the target range until December 2015, when the unemployment rate had fallen back down to 5%. But - with the benefit of hindsight - a shocking amount of this eight years’ worth of unprecedented stimulus was wasted, because it was largely unanticipated by financial markets. (Full disclosure: I took part in FOMC meetings from November 2009 through October 2015, and it could certainly be argued that I was part of the problem that I describe until September 2012.)
I’ll illustrate my basic point in the most extreme way that I can. In November 2009, the Committee’s statement said that the fed funds rate might be raised after “an extended period” - a term that was generally interpreted to mean “about six months”. Accordingly, as footnote 25 of this speech notes, private forecasters in the Blue Chip survey projected that the unemployment rate would be near 10 percent at the time of the first interest rate increase.
Now, suppose that the FOMC had communicated its true reaction function in November 2009 (or even as late as December 2012): as long as inflation was anticipated to be below 2% over the medium-term, the Committee would not raise the fed funds rate until the unemployment rate had fallen to 5% or below. We can’t know the impact of such communication with certainty. But most macroeconomic models would predict that this kind of statement would have put significant upward pressure on employment and prices. In other words: the models predict that if the FOMC had been willing to communicate its true willingness to support the economy, the Committee would have been able to (safely) raise rates much sooner.
I want to be clear: my point in this post is not to express regrets or recrimination over past “mistakes”. (It would have been good in 2009 to know what we know now, but we didn’t.) And my point is not that monetary policy is some kind of panacea. In the presence of a lower bound on nominal interest rates, expansionist fiscal policy would have been helpful in the past (and could be now too).
My point is this: we shouldn’t make judgements about the efficacy of future monetary policy stimulus based on the experience from the past seven years. Unfortunately, much of the potential impact of that lengthy stimulus campaign was vitiated by the FOMC’s generally hawkish communications.
In my view, the FOMC can deliver useful impetus to aggregate demand with its remaining tools. But it needs to communicate ahead of time about its true willingness and ability to support the economy. Without that prior communication, later attempts at stimulus are likely to prove in vain - and the Fed’s credibility may suffer further damage.
Posted by Mark Thoma on Thursday, February 4, 2016 at 12:10 PM in Economics, Monetary Policy |
Robert Barro on China:
China’s growth prospects: ...it is not possible for the per capita growth rate to exceed 5% per year for very much longer.
China can be viewed as a convergence success story, in the sense that the strong economic growth over a sustained period led to a level of real per capita GDP that can be characterised as middle income. To put the Chinese accomplishment into international perspective, I calculated all the convergence success stories in the world based on reasonable criteria. Specifically, I looked first at countries that had at least doubled real per capita GDP since 1990. Within this group, I defined a middle-income success as having achieved a level of real per capita GDP in 2014 of at least $10,000. An upper-income success requires a level of at least $20,000 (the numbers are in 2011 US dollars and factor in international adjustments for changes in purchasing power).
With these criteria, the world’s middle-income convergence success stories comprise China, Costa Rica, Indonesia, Peru, Thailand, and Uruguay (Uruguay is a surprise, apparently boosted by dramatic migration of human capital out of Argentina.) The upper-income successes consist of Chile, Hong Kong, Ireland, Malaysia, Poland, Singapore, South Korea, and Taiwan.
A view that has gained recent popularity is the ‘middle-income trap’. According to this idea, the successful transition from low- to middle-income status is typically followed by barriers that impede a further transition to upper income. The data suggest that this trap is a myth. Moving from low- to middle-income status, as achieved recently by China, is difficult. Conditional on achieving middle-income status, the further transition to upper-income status is also difficult. However, there is no evidence that this second transition is harder than the first one.
As mentioned before, China’s growth rate of real per capita GDP has been remarkably high since around 1990, well above the rates predicted from international experience. Although I forecast that China’s per capita growth rate will decline soon from 7-8% per year to 3-4%, this lower growth rate is sufficient when sustained over two to three decades to transition from low- to middle-income status (which China has already accomplished) and then from middle- to high-income status (which China will probably achieve). Thus, although the likely future growth rates will be well below recent experience, they would actually be a great accomplishment.
Perhaps the biggest challenge is that the prospective per capita growth rates in China are well below the values of 5-6% per year implied by official forecasts. Thus, the future may bring political tensions in reconciling economic dreams with economic realities. Reducing the unrealistically optimistic growth expectations held inside and outside China’s government would reduce the risk of this tension and lower the temptation to achieve targets by manipulating the national-accounts data.
Posted by Mark Thoma on Thursday, February 4, 2016 at 08:08 AM in China, Economics |
Jobs Day, by Tim Duy: The jobs report for January is upon us. I would like to say this one will receive special attention but they all receive special attention. Consensus forecast is for nonfarm payrolls to gain 188k, with a range of 170k-215k, while unemployment holds constant at 5%. Calculated Risk looks at five indicators and concludes:
Unfortunately none of the indicators above is very good at predicting the initial BLS employment report. However, based on these indicators, it appears job gains will be below consensus.
One of the indicators CR considers in consumer sentiment, which as CR says is influenced by factors other than the labor market, so I will discount it in what follows. A regression of the monthly change in nonfarm payrolls on the remaining indicators - monthly change in ADP payrolls (ADP), the ISM employment index for manufacturing (NAPMEI), the ISM employment index for nonmanfucturing (NMFEI), and the monthly change in initial jobless claims (CLAIMS2) - yields:
This is a quick and dirty regression, to be sure, and I would caveat it by saying that it is more accurately described as a model of the revised nonfarm payrolls number than the initial release. Note also that the coefficient on the manufacturing employment index is not significant. As CR says:
Note: Recently the ADP has been a better predictor for BLS reported manufacturing employment than the ISM survey.
With these caveats in mind, the one-step ahead forecasts are:
The point forecast for January is 202.64k, a tad higher than consensus, but the 95% confidence interval is wide at (48k to 357k). Which is a reminder that trying to predict monthly payrolls is something of a fool's errand. I would not be surprised by any outcome within the 68% confidence interval, or 123k to 280k. A significant miss relative to consensus should not be a surprise. It would still be within the range of recent outcomes.
The Fed will be watching for signs that the economy has slowed precipitously since the final quarter of 2015. They will also be watching the unemployment rate and underemployment indicators to assess remaining slack in the economy. Further declines in the unemployment rate will make them increasingly uneasy with holding steady even as financial markets suggest they should. Watch wages for confirmation that slack has or has not diminished. And, finally, for those on recession watch, ignore the headlines whether they be weak or strong and look at temporary help payrolls and signs that long-term unemployment is back on the rise. Both tend to be leading indicators, especially the former.
In other news, New York Fed President William Dudley was reported to have cooled on rate hikes:
"One thing I think we can say with more confidence is that financial conditions are considerably tighter than they were at the time of the December meeting," said Dudley, a permanent voter on the Federal Open Market Committee, the Fed's monetary policy arm.
"So if those financial conditions were to remain in place by the time we get to the March meeting, we would have to take that into consideration in terms of that monetary policy decision," he said.
While the Wall Street Journal reports that Fed Governor Lael Brainard reiterated her warnings from last year:
Her concern is that stresses in emerging markets including China and slow growth in developed economies could spill over to the U.S. “This translates into weaker exports, business investment and manufacturing in the United States, slower progress on hitting the inflation target, and financial tightening through the exchange rate and rising risk spreads on financial assets,” Ms. Brainard said Monday in response to questions from The Wall Street Journal.
“Recent developments reinforce the case for watchful waiting,” she said.
Both are clearly more cautious than Kansas City Fed Esther George. And more influential as well. I enjoyed this:
“I don’t think it served Janet Yellen well,” former Dallas Fed President Richard Fisher said in an interview of Ms. Brainard’s critique. “It’s the only time I’ve known her when she didn’t appear to be a team player,” he said of Ms. Brainard, with whom he worked in the Clinton administration.
Seriously? Fisher has the gall to criticize Brainard as not a team player? Google "fisher dallas dissent" and see what you get. A sample:
Being a team player isn't always what the Fed needs. Fisher obviously thought so when he was on the FOMC. Yet he insists Brainard be the team player he wasn't. Sad.
Separately, Goldman Sachs has erased their expectations of a rate hike in March, but left three more penciled-in for the rest of the year. Clearly in the "no recession" camp. I think that March is unlikely, as is a chance to "catch-up" in April. But I can make a story on the back of calm in financial markets and two strong employment reports that March comes back on the table. Not my baseline though.
Bottom Line: Fed mostly coming around to delaying the next rate hike. Would need to see a lot of change over just a few weeks to get them back on their original track. More than seems likely. Rest of the year? If you are in the "no recession" camp like me, you anticipate the Fed will resume hiking later this year. If you are in the "recession" camp, it's all over.
Posted by Mark Thoma on Thursday, February 4, 2016 at 12:15 AM in Economics, Fed Watch, Monetary Policy |