This might interest some of you:
The lifecycle of scholarly articles across fields of economic research, by Sebastian Galiani, Ramiro Gálvez, Maria Victoria Anauati, Vox EU: Citation counts stand as the de facto methodology for measuring the influence of scholarly articles in today’s economics profession. Nevertheless, a great deal of criticism has been made of the practice of naively using citation analysis to compare the impact of scholarly articles without taking into account other factors which may affect citation patterns (see Bornmann and Daniel 2008).
One recurrent criticism focuses on ‘field-dependent factors’... In a recent paper (Anauati et al. 2015), we analyze if the ‘field-dependent factors’ critique is also valid for fields of research inside economics. Our approach began by assigning into one of four fields of economic research (applied, applied theory, econometric methods and theory) every paper published in the top five economics journals – The American Economic Review, Econometrica, the Journal of Political Economy, The Quarterly Journal of Economics, and The Review of Economic Studies.
The sample consisted of 9,672 articles published in the top five journals between 1970 and 2000. It did not include notes, comments, announcements or American Economic Review Papers and Proceedings issues. ...
What did they find?:
Conclusions Even though citation counts are an extremely valuable tool for measuring the importance of academic articles, the patterns observed for the lifecycles of papers across fields of economic research support the ‘field-dependent factors’ inside this discipline. Evidence seems to provide a basis for a caveat regarding the use of citation counts as a ‘one-size-fits-all’ yardstick to measure research outcomes in economics across fields of research, as the incentives generated by their use can be detrimental for fields of research which effectively generate valuable (but perhaps more specialized) knowledge, not only in economics but in other disciplines as well.
According to our findings, pure theoretical economic research is the clear loser in terms of citation counts. Therefore, if specialized journals' impact factors are calculated solely on the basis of citations during the first years after an article’s publication, then theoretical research will clearly not be attractive to departments, universities or journals that are trying to improve their rankings or to researchers who use their citation records when applying for better university positions or for grants. The opposite is true for applied papers and applied theory papers – these fields of research are the outright winners when citation counts are used as a measurement of articles' importance, and their citation patterns over time are highly attractive for all concerned. Econometric method papers are a special case; their citation patterns vary a great deal across different levels of success.
Posted by Mark Thoma on Monday, September 21, 2015 at 12:51 AM in Academic Papers, Economics |
Posted by Mark Thoma on Monday, September 21, 2015 at 12:06 AM in Economics, Links |
William D. Nordhaus reviews Pope Francis’s encyclical on the environment and capitalism (Laudato Si’: On Care for Our Common Home, an encyclical letter by Pope Francis, Vatican Press, 184 pp., available at w2.vatican.va):
The Pope & the Market, NYRB: Pope Francis’s encyclical on the environment and capitalism, Laudato Si’, is an eloquent description of the natural world and its relationship to human societies.1 ... Most commentaries have focused on the pope’s endorsement of climate science, but my focus here is primarily on the social sciences, particularly economics.
My major point is that the encyclical overlooks the central part that markets, particularly market-based environmental policies such as carbon pricing, must play if countries are to make substantial progress in slowing global warming. ...
Unfortunately, Laudato Si’ does not recognize the fact that environmental problems are caused by market distortions rather than by markets per se. This is seen in the condemnation of “carbon credits”... Many commentators have interpreted this passage as a condemnation of cap-and-trade... Whatever the specific target, this part of the encyclical is clearly a critique of market-based environmental approaches. ...
Cap-and-trade has in fact been successfully used, for example to phase out lead from gasoline, to limit sulfur dioxide emissions in the United States by more than half, and to limit carbon dioxide emissions both in the European Union and more recently in major Chinese municipalities. The alternative to cap-and-trade is carbon taxation, which raises carbon prices by taxing carbon emissions. Such a tax is simpler and avoids any of the potential corruption, market volatility, and distributional issues that might arise with cap-and-trade systems.
Given the successes of cap-and-trade and other market mechanisms to improve the environment, it is unfortunate that they are the target of Pope Francis’s criticism. ... He does indeed acknowledge the soundness of the science and the reality of global warming. It is unfortunate that he does not endorse a market-based solution, particularly carbon pricing, as the only practical policy tool we have to bend down the dangerous curves of climate change and the damages they cause.
[I left out quite a bit. All of his points, and much more, are fully explained in the review.]
Posted by Mark Thoma on Sunday, September 20, 2015 at 09:18 AM in Economics, Environment |
Posted by Mark Thoma on Sunday, September 20, 2015 at 12:06 AM in Economics, Links |
SF Fed President John Williams on China:
China, Rates, and the Outlook: May the (Economic) Force Be with You: ...China has garnered almost as much editorial ink in the past month as U.S. presidential candidates—which may or may not be a complimentary comparison. I don’t want to sound pejorative by calling some of the commentary “hand-wringing”—though to be fair, some of it has been downright apocalyptic—but I don’t see the situation as dire. I’ve said publicly over the past few months that after going to China, and after talking to academics and officials there, I came away a lot less concerned than when I arrived. And I have to say that recent events have not changed my thinking to any serious extent.
This is where I’ll reuse one of the more helpful quotes for forecasting: “It’s difficult to make predictions, especially about the future.” With the dangers of prognostication acknowledged, I’ll tread into that territory anyway.
The China story is remarkable, and its growth over the past 30 years has been unprecedented.5 But now China’s at something of a crossroads, facing tradeoffs in their goals, dealing with a new normal for growth expectations, and pivoting to a new source of economic momentum.
It’s important to see the situation not through the filters of our own paradigms, but from the perspective of China’s unique position. China is not the U.S. Or the U.K. Or Japan. Its goals, structure, government, and place on its growth trajectory are very different, and looking to impose foreign expectations on China’s markets or actions can lead one astray.
Growth versus reform
In a nutshell, China is facing a tradeoff between its short-term growth goals and its longer-term reform agenda.
China’s government has made it abundantly clear that it is willing to intervene when necessary, ensuring that growth stays on its target path, even if that means extending the timeline on reform. That willingness to do “whatever it takes” to keep growth on target is what made me less worried about a hard landing for China.
Of course, that very disposition for intervention is the source of much hue and cry on this side of the globe. China has made important incremental steps on the road to liberalization, and from the perspective of a fully open, free-market, Western-oriented paradigm or advocacy, the recent stock market interventions seem anathema to that goal. But that’s a view through a narrow lens that may obscure the bigger picture.
For all its moves towards liberalization, China’s markets are not the same as ours. Yes, they have a reform agenda, but it’s a mistake to think that in the foreseeable future China will have fully open capital and financial markets in the way that we in the U.S. and other countries think about them. They are relaxing their grip on the exchange rate—allowing the renminbi to respond to economic news, letting its value be more market-determined—and as a policy approach, this is a positive; it’s something we as economists wanted to see happen. But it’s very clear that China is not going to let its exchange rate float completely freely. They’ll continue to have buffers to ensure that, should some dramatic event unfold, they can step in again and stop that interfering with their other goals. To some extent, we can see these moves as something akin to beta-testing liberalization. It is happening, which is a remarkable shift. But completely free, open markets are not in the cards, and the government has made clear that those are not their intention.
This, incidentally, is why talk about the renminbi replacing the dollar as an international reserve currency is unrealistic. The role of a reserve currency is to be a harbor during a storm; it’s where people flock when the unexpected happens. As we saw in the financial crisis, as we’ve seen in other crises, the market’s instinct is, when in doubt, go to the dollar. As long as China has controls in place to mediate the free flow of money, the dollar will be the refuge, not the renminbi.
In the context of China’s dual—oftentimes conflicting—goals, the recent stock market intervention by the government should be seen as what I believe it was: A move to keep growth on pace. It’s a pattern we’ve seen before. When the Chinese authorities see growth struggling, or other economic warning lights, they take steps, including reversing or postponing reforms, to keep growth at pace. Fiscal and economic policymakers can pull a number of levers and the Chinese government has proved again and again its willingness to do just that.
China’s growth rate
In balancing these objectives, the Chinese government has realistically moderated its expectations for growth. For decades we all marveled at China’s double-digit growth, and there was, perhaps, some expectation that it would persist in perpetuity. But growth like that is unsustainable. If you look at the progression of Japan, for instance, from the 1960s to the 1980s, or South Korea from the 1980s to the 2000s, you see the pattern China will likely follow.6 At low income levels, growth can be rapid, because low domestic wages make exports very competitive and there is so much untapped potential in moving workers to more productive pursuits.
But as income or GDP per capita rise, these advantages begin to ebb, and growth naturally slows. The pattern is clear, with a rapid decline in the growth rate and eventual leveling out as domestic income and wages rise. This is the natural progression of economies moving into maturity. The further they have to go, the faster they can grow; but once they’ve come to a place like Japan or Korea—that is, around 80 or 90 percent of U.S. per capita GDP—their growth expectations will be lower because they’re closer to the finish line. China obviously isn’t close yet, but it’s a good indicator of how much further it can go. What China’s accomplished has been amazing—but we also called Japan a growth miracle and Korea’s success was remarkable as well. There were challenges along the way for both countries, but ultimately, what slowed growth was entering the middle-income bracket and the inevitability of slower growth for wealthier countries.
The officials and economists I spoke to in China know that not only are the days of 10 percent growth behind them, but that it will move below the current 7 percent target. Seven will likely become 6, which will become 5, and so on as their economy moves into a middle-income economy and progresses to a high-income one.
Shift in focus
Of course, China faces challenges in continuing that advance. One is a refocus of its economic engine. Given the global environment, how do they successfully pivot their economy to more domestic consumption, moving the emphasis more toward services and away from manufacturing? That’s clearly a challenge, but also a central objective of the government.
For people who have concerns about China, one of the red flags they point to is that industrial production has slowed a lot, more so than the economy overall. I fall on the side of commentators who’ve pointed out that this isn’t surprising.7 China’s been talking for years about switching from industry to services. They’re moving from making steel and concrete to making consumer goods. One of the interesting things I heard this summer was the plan to build more tourism in China for China. That’s something that’s virtually nonexistent at the moment. They don’t have the abundance of recreational resources we do; in California alone, you can go skiing or surfing, to wine country or Disneyland. As high- or low-brow as you want it, we as Americans have become incredibly used to spending our leisure dollars domestically. That’s something China’s looking to do for itself.
When you look at where China’s priorities lie—in switching to services, in expanding tourism—it makes absolute sense that industrial production is slowing.
Liberalization and the impact of risks from abroad
I’ve mentioned that China is seen by some as a risk; but conversely, what effect does U.S. policy have on them? Right now, China is more susceptible to the shifts in U.S. monetary policy. But as they liberalize their exchange rate, it will automatically adjust to changes in situations around the world. This is a huge advantage and an automatic stabilizer. When China pegs to the dollar, they’re too linked to U.S. policy, so that when the U.S. tightens or loosens, they effectively follow suit. By allowing market-based influence, China will have a buffer when the U.S. economy is moving in a different direction than theirs. And that’s going to make it easier in the end for China to manage its economy.
An outside observer might ask why they haven’t done this already. I think that China was wary that unpegging would’ve interrupted the double-digit growth. When a country’s exchange rate and capital flows suddenly start shifting around dramatically, it can interfere with the ability to deliver on growth targets. As China’s growth targets have come down, and as they begin to shift away from an export-reliant economy, instead fueling itself via domestic consumption, they can start allowing their exchange rate to move—though again, it won’t be the free floating exchange rate that we have.
This is all just one economist’s take. ...
Posted by Mark Thoma on Saturday, September 19, 2015 at 10:57 AM in China, Economics, Monetary Policy |
Is the Fed Pulling or Pushing?: ... Is the Fed in fact "holding down" interest rates? Is there some sort of natural market equilibrium that features higher rates now, but the Fed is pushing down rates? That's the conventional view...
Well, let's think about that. If a central bank were holding down rates, what would it do? Answer, it would lend a lot of money at low rates. Money would be flowing out the discount window (that's where the Fed lends to banks), to banks, and through banks to the rest of the economy, flooding the place with low-rate loans. The interest rate the Fed pays on reserves and banks pay to borrow from the Fed would be low compared to market rates; credit and term spreads would be large, as the Fed would be trying to drag down those market rates.
That is, of course, the exact opposite of what's happening now. Banks are lending the Fed about $3 trillion worth of reserves, reserves the banks could go out and lend elsewhere if the market were producing great opportunities. Spreads of other rates over the rates banks lend to or borrow from the Fed are very low, not very high. Deposits are flooding in to banks, not loans out of banks.
If you just look out the window, our economy looks a lot more like one in which the Fed is keeping rates high, by sucking deposits out of the economy and paying banks more than they can get elsewhere; not pushing rates down, by lending a lot to banks at rates lower than they can get elsewhere.
Posted by Mark Thoma on Saturday, September 19, 2015 at 10:25 AM in Economics, Monetary Policy |
Some preliminary results from a working paper by Alisdair Mckay and Ricardo Reis:
Optimal Automatic Stabilizers, by Alisdair McKay and Ricardo Reis: 1 Introduction How generous should the unemployment insurance system be? How progressive should the tax system be? These questions have been studied extensively and there are well-known trade-offs between social insurance and incentives. Typically these issues are explored in the context of a stationary economy. These policies, however, also serve as automatic stabilizers that alter the dynamics of the business cycle. The purpose of this paper is to ask how and when aggregate stabilization objectives call for, say, more generous unemployment benefits or a more progressive tax system than would be desirable in a stationary economy. ...
We consider two classic automatic stabilizers: unemployment benefits and progressive taxation. Both of these policies have roles in redistributing income and in providing social insurance. Redistribution affects aggregate demand in our model because households differ in their marginal propensities to consume. Social insurance affects aggregate demand through precautionary savings decisions because markets are incomplete. In addition to unemployment insurance and progressive taxation, we also consider a fiscal rule that makes government spending respond automatically to the state of the economy.
Our focus is on the manner in which the optimal fiscal structure of the economy is altered by aggregate stabilization concerns. Increasing the scope of the automatic stabilizers can lead to welfare gains if they raise equilibrium output when it would otherwise be inefficiently low and vice versa. Therefore, it is not stabilization per se that is the objective but rather eliminating inefficient fluctuations. An important aspect of the model specification is therefore the extent of inefficient business cycle fluctuations. Our model generates inefficient fluctuations because prices are sticky and monetary policy cannot fully eliminate the distortions. We show that in a reasonable calibration, more generous unemployment benefits and more progressive taxation are helpful in reducing these inefficiencies. Simply put, if unemployment is high when there is a negative output gap, a larger unemployment benefit will stimulate aggregate demand when it is inefficiently low thereby raising welfare. Similarly, if idiosyncratic risk is high when there is a negative output gap,1 providing social insurance through more progressive taxation will also increase welfare....
Posted by Mark Thoma on Saturday, September 19, 2015 at 12:23 AM in Academic Papers, Economics, Fiscal Policy, Social Insurance |
Posted by Mark Thoma on Saturday, September 19, 2015 at 12:06 AM in Economics, Links |
More on income stagnation and inequality:
The typical male U.S. worker earned less in 2014 than in 1973: The median male worker who was employed year-round and full time earned less in 2014 than a similarly situated worker earned four decades ago. And those are the ones who had jobs. ...
What about women? Well, they haven’t closed the pay gap with men, but the inflation-adjusted earnings of the median female worker increased more than 30% between 1973 and 2014... But back to men. Why are wages for the typical male worker stagnating? ... I contacted Larry Katz, the Harvard University labor economist. He identified three factors to explain the stagnation of men’s wages:
1. Although this is not the major factor, workers have been getting more of their compensation in benefits as opposed to the cash wages that the Census tallies. ...
2. Labor’s share of national income has been declining since 2000 and capital’s share has been rising. Labor’s compensation (wages and benefits) has not been keeping pace with productivity growth. ...EPI’s Josh Bivens and Larry Mishel argue, “ This decoupling coincided with the passage of many policies that explicitly aimed to erode the bargaining power of low- and moderate-wage workers in the labor market.”
3. The “most important factor,” Mr. Katz says, is the rise in wage inequality, the gap between the earnings of the best-paid workers and the ones at the middle and the bottom that has been widening steadily since about 1980. Economists differ over how much of this is the result of globalization, technological change, changing social mores, and government policies, but there is no longer much dispute about the fact that inequality is increasing.
... It’s not hard to understand why so many voters ... are drawn to candidates who acknowledge this reality, lambast incumbents for not doing more to address it, and style themselves as outsiders with fresh approaches to one of the nation’s most alarming economic problems.
To me, it's interesting how much the explanation for inequality has shifted away from the "skill-biased technical change" and technological based arguments and towards "changing social mores, and government policies." Even so, I think these types of arguments -- those that explain the decline in bargaining power in wage negotiations -- have more explanatory power than many people acknowledge. But even if we acknowledge that we aren't sure about the degree to which inequality can be explained by market-based versus institutional structure arguments, what seems clear to me is that the market won't solve this problem by itself. There do not appear to be forces within capitalism that necessarily push us toward an equal distribution of income. Thus, there is no assurance that heeding calls for government to get out of the way would help to reduce inequality, and it could make it worse. To me, policies that increase the ability of workers to bargain for a fair share of what they produce holds the most promise for solving the inequality problem (in a way that avoids direct redistribution). How to actually accomplish this is a difficult problem, unions have less power in a world where the threat of moving production to another country is very real (or a region within the US where the laws are more favorable), but at the very least we ought to ensure that new legislation does not make the highly unequal wage bargaining problem any worse (see Scott Walker).
Posted by Mark Thoma on Friday, September 18, 2015 at 12:32 PM in Economics, Income Distribution |
Trade within versus between nations: ...economics does not offer unconditional policy prescriptions. Every graduate student learns that depending on the background specifications, any policy x can be good or bad. A minimum wage can lower or raise employment (depending on whether employers have monopsony power); a natural resource discovery can raise or lower growth (depending on the likelihood of the Dutch disease); fiscal consolidation can expand or contract output (depending on the respective strengths of expectational versus Keynesian effects). And yes, the dictum that free trade benefits a nation depends on a long list of qualifying conditions.
So the proper response to the question “is free trade good?” is, as always, “it depends.” When an economist says “I support free trade” s/he must mean that s/he judges the circumstances under which free trade would not be desirable to be very rare or unlikely to obtain in the context at hand.
Many of the conditions under which free trade between nations is guaranteed to be desirable are unlikely to hold in practice. Market imperfections, returns to scale, macro imbalances, absence of first-best policy instruments are ubiquitous in the real world, particularly in the developing world on which I spend most of my time. This does not guarantee that import restrictions will be necessarily desirable. There are many ways in which governments can screw up, even when they mean well. But it does mean that a knee-jerk free trader response is faith-based rather than science-based. ...
[He goes on to answer a question about differential support for trade within nations versus trade between nations.]
Posted by Mark Thoma on Friday, September 18, 2015 at 10:50 AM in Economics, International Trade, Market Failure |
I often forget to post the link to my MoneyWatch pieces:
Republicans and Climate Change: What should we do about climate change? When Jake Tapper asked that question at the Republican debate Wednesday night, the candidates were united in their view that the economic costs of fighting climate change are much larger than the potential benefits.
Florida Senator Marco Rubio, for example, said "Every proposal they (Democrats) put forward will make it harder to do business in America. Harder to create jobs in America." New Jersey Governor Chris Christie had similar sentiments. "We shouldn't be destroying our economy in order to chase some wild left-wing idea that somehow us by ourselves is going to fix the climate," he said. And Wisconsin Governor Scott Walker responded with: "We're going to put people -- manufacturing jobs -- this administration is going to put them at risk."
The skepticism among those on the political right about the benefits of addressing climate change could be at least partly based on the apparent pause in global warming from 1998-2013. But according to work from a group of researchers at Stanford University, that "hiatus" is a statistical artifact. The climb in temperatures hasn't paused at all.
Given that, and the voluminous scientific evidence indicating that global warming is a substantial threat, it's important to understand the extent to which climate change will affect the economy. Will the loss to GDP be large (so that the benefits of abatement are also large)? Will the impacts be equally distributed across geographic regions? Is it possible that some regions will actually benefit from global warming? ...
Posted by Mark Thoma on Friday, September 18, 2015 at 10:01 AM in Economics, Environment, MoneyWatch |
The Republican debate was "scary":
Fantasies and Fictions at G.O.P. Debate, by Paul Krugman, Commentary, Ny Times: I’ve been going over what was said at Wednesday’s Republican debate, and I’m terrified. You should be, too. After all, given the vagaries of elections, there’s a pretty good chance that one of these people will end up in the White House.
Why is that scary? ...G.O.P. candidates are calling for policies that would be deeply destructive at home, abroad, or both. ...
Let’s start at the shallow end, with the fantasy economics of the establishment candidates.
You’re probably tired of hearing this, but modern G.O.P. economic discourse is completely dominated by an economic doctrine — the sovereign importance of low taxes on the rich — that has failed completely and utterly in practice over the past generation. ... Yet the hold of this failed dogma on Republican politics is stronger than ever...
If the discussion of economics was alarming, the discussion of foreign policy was practically demented. Almost all the candidates seem to believe that American military strength can shock-and-awe other countries into doing what we want without any need for negotiations, and that we shouldn’t even talk with foreign leaders we don’t like. ...
The real revelation on Wednesday, however, was the ... candidates ... making outright false assertions, and probably doing so knowingly, which turns those false assertions into what are technically known as “lies.”
For example, Chris Christie asserted, as he did in the first G.O.P. debate, that he was named U.S. attorney the day before 9/11. It’s still not true ...
Mr. Christie’s mendacity pales, however, in comparison to that of Carly Fiorina, who was widely hailed as the “winner” of the debate.
Some of Mrs. Fiorina’s fibs involved repeating thoroughly debunked claims about her business record. ... But the truly awesome moment came when she asserted that the videos being used to attack Planned Parenthood show “a fully formed fetus on the table, its heart beating, its legs kicking while someone says we have to keep it alive to harvest its brain.” No, they don’t. ...
I began writing for The Times during the 2000 election campaign, and what I remember above all from that campaign is the way the conventions of “evenhanded” reporting allowed then-candidate George W. Bush to make clearly false assertions — about his tax cuts, about Social Security — without paying any price. ...
Now we have presidential candidates who make Mr. Bush look like Abe Lincoln. But who will tell the people?
Posted by Mark Thoma on Friday, September 18, 2015 at 01:08 AM in Economics, Politics |
Posted by Mark Thoma on Friday, September 18, 2015 at 12:06 AM in Economics, Links |
Tim Duy called it. No rate hike (and only one dissent, lacker). Here's the statement:
Press Release, Release Date: September 17, 2015: Information received since the Federal Open Market Committee met in July suggests that economic activity is expanding at a moderate pace. Household spending and business fixed investment have been increasing moderately, and the housing sector has improved further; however, net exports have been soft. The labor market continued to improve, with solid job gains and declining unemployment. On balance, labor market indicators show that underutilization of labor resources has diminished since early this year. Inflation has continued to run below the Committee's longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation moved lower; survey-based measures of longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term. Nonetheless, the Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring developments abroad. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams. Voting against the action was Jeffrey M. Lacker, who preferred to raise the target range for the federal funds rate by 25 basis points at this meeting.
Posted by Mark Thoma on Thursday, September 17, 2015 at 11:05 AM in Economics, Monetary Policy |
On raising the retirement age for Social Security (and other social insurance programs):
New report examines implications of growing gap in life span by income for entitlement programs, National Academy of Sciences, EurekAlert!: As the gap in life expectancy between the highest and lowest earners in the U.S. has widened over time, high earners have disproportionately received larger lifetime benefits from government programs such as Social Security and Medicare, says a new congressionally mandated report from the National Academies of Sciences, Engineering, and Medicine. The report looked at life expectancy patterns among a group of Americans born in 1930 and compared those with projections for a group born in 1960.
"Life expectancy has risen significantly in the U.S. over the past century, and it has long been the case that people who are better-educated and earn higher incomes live longer, on average, than those with less education and lower incomes," said Peter Orszag, co-chair of the committee that carried out the study and wrote the report, and vice chairman of Citigroup in New York City. "What has changed is that the life expectancy gap across different income groups has become so much bigger."
Men born in 1930 in the highest of five earnings levels who survived to age 50 could expect to live to be about 82 years old, on average, while men born in 1960 in the same earnings bracket are projected to live an average of 89 years - a substantial gain. In contrast, life expectancy for men with the lowest earnings was found to decline slightly, from 77 years old on average for men born in 1930 to 76 years old on average for men born in 1960. The projections for women show a similar pattern, in that life expectancy gains have been larger for higher earners than lower earners. ...
"The increasing gap in longevity by socio-economic status is important in itself, but it also means that high earners will increasingly collect some government benefits over more years than will lower earners," said committee co-chair Ronald Lee, professor of demography and economics at the University of California, Berkeley. "Policymakers considering changes to put entitlement programs on firmer financial footing should take into account how such policy changes interact with these differential trends in life expectancy." ...
[They go on to evaluate various changes in eligibility for Social Security and Medicare, and how the changes would impact low and high income households. For example, "Increasing the earliest eligibility age for Social Security from 62 to 64 would not generate significant savings for the Social Security system and would slightly widen the gap in benefits received between high earners and low earners."]
Posted by Mark Thoma on Thursday, September 17, 2015 at 10:57 AM in Economics, Social Insurance, Social Security |
This is via Tim Taylor (who posted it as part of a longer discussion on new poverty statistics):
...here's a short essay from Charles Dickens. It was published in a magazine called All the Year Round that Dickens edited during the 1860s. This particular essay, "Temperate Temperance," appeared in the issue of March 18, 1863. The articles in the magazine did not name its authors , but a group of Australian researchers attributed it to Dickens by using "computational stylistics"--which is basically using a computer analysis of the style of the writing and comparing it to manuscripts whose authorship is known to determine the author. ... And here's the full 1863 essay.
WE want to know, and we always have wanted to know, why the English workman is to be patronised? Why are his dwelling-place, his house-keeping arrangements, the organisation of his cellar, and his larder — nay, the occupation of his leisure hours even — why are all these things regarded as the business of everybody except himself? Why is his beer to be a question agitating the minds of society, more than our sherry? Why is his visit to the gallery of the theatre, a more suspicious proceeding than our visit to the stalls? Why is his perusal of his penny newspaper so aggravating to the philanthropical world, that it longs to snatch it out of his hand and substitute a number of the Band of Hope Review?
It is not the endeavour really and honestly to improve the condition of the lower classes which we would discourage, but the way in which that endeavour is made. Heaven knows, the working classes, and especially the lowest working classes, want a helping hand sorely enough. No one who is at all familiar with a poor neighbourhood can doubt that. But you must help them judiciously. You must look at things with their eyes, a little; you must not always expect them to see with your eyes. The weak point in almost every attempt which has been made to deal with the lower classes is invariably the same — too much is expected of them. You ask them to do, simply the most difficult thing in the world — you ask them to change their habits. Your standard is too high. The transition from the Whitechapel cellar to the comfortable rooms in the model-house, is too violent; the habits which the cellar involved would have to be abandoned; a great effort would have to be made; and to abandon habits and make great efforts is hard work even for clever, good, and educated people.
The position of the lowest poor in London and elsewhere, is so terrible, they are so unmanageable, so deprived of energy through vice and low living and bad lodging, and so little ready to second any efforts that are made for their benefit, that those who have dealings with them are continually tempted to abandon their philanthropic endeavours as desperate, and to turn their attention towards another class: those, namely, who are one degree higher in the social scale, and one degree less hopeless.
It is proposed just now, as everybody knows, to establish, in different poor neighbourhoods, certain great dining-halls and kitchens for the use of poor people, on the plan of those establishments which have been highly successful in Glasgow and Manchester. The plan is a good one, and we wish it every success — on certain conditions. The poor man who attends one of these eating-houses must be treated as the rich man is treated who goes to a tavern. The thing must not be made a favour of. The custom of the diner-out is to be solicited as a thing on which the prosperity of the establishment depends. The officials, cooks, and all persons who are paid to be the servants of the man who dines, are to behave respectfully to him, as hired servants should; he is not to be patronised, or ordered about, or read to, or made speeches at, or in any respect used less respectfully than he would be in a beef and pudding shop, or other house of entertainment. Above all, he is to be jolly, he is to enjoy himself, he is to have his beer to drink; while, if he show any sign of being drunk or disorderly, he is to be turned out, just as I should be ejected from a club, or turned out of the Wellington or the Albion Tavern this very day, if I got drunk there.
There must be none of that Sunday-school mawkishness, which too much pervades our dealings with the lower classes; and we must get it into our heads — which seems harder to do than many people would imagine — that the working man is neither a felon, nor necessarily a drunkard, nor a very little child. Our wholesome plan is to get him to co-operate with us. Encourage him to take an interest in the success of the undertaking, and, above all things, be very sure that it pays, and pays well, so that the scheme is worth going into without any philanthropic flourishes at all. He is already flourished to death, and he hates to be flourished to, or flourished about.
There is a tendency in the officials who are engaged in institutions organised for the benefit of the poor, to fall into one of two errors; to be rough and brutal, which is the Poor-law Board style; or cheerfully condescending, which is the Charitable Committee style. Both these tones are offensive to the poor, and well they may be. The proper tone is that of the tradesman at whose shop the workman deals, who is glad to serve him, and who makes a profit out of his custom. Who has not been outraged by observing that cheerfully patronising mode of dealing with poor people which is in vogue at our soup-kitchens and other depôts of alms? There is a particular manner of looking at the soup through a gold double eye-glass, or of tasting it, and saying, " Monstrous good — monstrous good indeed; why, I should like to dine off it myself!" which is more than flesh and blood can bear.
We must get rid of all idea of enforcing what is miscalled temperance — which is in itself anything but a temperate idea. A man must be allowed to have his beer with his dinner, though he must not be allowed to make a beast of himself. Some account was given not long since, in these pages, of a certain soldiers' institute at Chatham; it was then urged that by all means the soldiers ought to be supplied with beer on the premises, in order that the institution might compete on fair terms with the public-house. It was decided, however, by those in authority, or by some of them, that this beer was not to be. The consequence is, as was predicted, that the undertaking, which had every other element of success, is very far from being in a flourishing condition. And similarly, this excellent idea of dining-rooms for the working classes will also be in danger of failing, if that important ingredient in a poor man's dinner — a mug of beer — is not to be a part of it.
The cause of temperance is not promoted by any intemperate measures. It is intemperate conduct to assert that fermented liquors ought not to be drunk at all, because, when taken in excess, they do harm. Wine, and beer, and spirits, have their place in the world. We should try to convince the working man that he is acting foolishly if he give more importance to drink than it ought to have. But we have no right to inveigh against drink, though we have a distinct right to inveigh against drunkenness. There is no intrinsic harm in beer; far from it; and so, by raving against it, we take up a line of argument from which we may be beaten quite easily by any person who has the simplest power of reasoning. The real temperance cause is injured by intemperate advocacy; and an
argument which we cannot honestly sustain is injurious to the cause it is enlisted to support. Suppose you forbid the introduction of beer into one of these institutions, and you are asked your reason for doing so, what is your answer? That you are afraid of drunkenness. There is some danger in the introduction of gas into a building. You don't exclude it; but you place it under certain restrictions, and use certain precautions to prevent explosions. Why don't you do so with beer?
He (Tim Taylor) adds:
For those with a taste for this subject, last year when the Census Bureau released its poverty line statistics I discussed a passage from George Orwell's 1937 book, The Road to Wigan Pier, which details the lives of the poor and working poor in northern industrial areas of Britain like Lancashire and Yorkshire during the Depression. Orwell is writing from a leftist and socialist perspective, with deep sympathy for the poor. But Orwell is also painfully honest: for example, he laments that the poor make such rotten choices about food--but then he also points out how unsatisfactory it feels to patronizingly tell those with low incomes how to spend what little they have. Indeed, as I pointed out last year, there's some evidence in the behavioral economics literature that poverty can encourage some of the behaviors, like a short-run mentality, which can then tend to perpetuate poverty.
Posted by Mark Thoma on Thursday, September 17, 2015 at 10:07 AM
About that supposed pause in global warming:
Global warming 'hiatus' never happened, Stanford scientists say: An apparent lull in the recent rate of global warming that has been widely accepted as fact is actually an artifact arising from faulty statistical methods, Stanford scientists say. ...The finding calls into question the idea that global warming "stalled" or "paused" during the period between 1998 and 2013. ...
Using a novel statistical framework that was developed specifically for studying geophysical processes such as global temperature fluctuations, Rajaratnam and his team of Stanford collaborators have shown that the hiatus never happened.
"Our results clearly show that, in terms of the statistics of the long-term global temperature data, there never was a hiatus, a pause or a slowdown in global warming," said Noah Diffenbaugh, a climate scientist in the School of Earth, Energy & Environmental Sciences, and a co-author of the study.
Faulty ocean buoys
The Stanford group's findings are the latest in a growing series of papers to cast doubt on the existence of a hiatus. ...
The Stanford scientists say their findings should go a long way toward restoring confidence in the basic science and climate computer models that form the foundation for climate change predictions.
"Global warming is like other noisy systems that fluctuate wildly but still follow a trend," Diffenbaugh said. "Think of the U.S. stock market: There have been bull markets and bear markets, but overall it has grown a lot over the past century. What is clear from analyzing the long-term data in a rigorous statistical framework is that, even though climate varies from year-to-year and decade-to-decade, global temperature has increased in the long term, and the recent period does not stand out as being abnormal."
[I omitted the detailed discussion of the research.]
Posted by Mark Thoma on Thursday, September 17, 2015 at 09:49 AM in Economics, Environment |
Final Thoughts On September, by Tim Duy: Everyone's bets are placed for the outcome of tomorrow's FOMC statement and subsequent press conference. Final thoughts heading into the meeting:
I expect the Fed will pass on raising rates this meeting. This is a highly contentious issue, and reasonable arguments can be made for either case. Economists appear to be roughly split, while financial market participants taking the under with a roughly 25% probability of a rate hike. Whatever the outcome, roughly half of the economists on Wall Street will be wrong. Good thing, as misery loves company.
I believe FOMC participants will arrive at a consensus for the timing and direction of policy for subsequent meetings. The FOMC has had something of a luxury in that economic conditions have not forced them to choose a defined policy path. I believe they no longer have that luxury. They will need to commit policy to one side of the mandate or the other. At this meeting they will decide if their Phillips curve view of the world in concert with their estimate of the natural rate of unemployment dominates the fact that inflation continues to drift away from their target.
I expect the Fed will ultimately pledge allegiance to the Phillips curve. I think they believe that stable inflation is incompatible with sub-5% unemployment if short term interest rates remain at zero. Hence, they will signal that the first rate hike is imminent.
Fed Chair Janet Yellen has the opportunity to prove her mettle. Assuming that I am correct that the Fed needs to forge a consensus, Yellen will be the guiding influence on that consensus. The best outcome for her is a consensus with no dissenting votes. That said, it may be that only an immediate rate hike would be acceptable to Richmond Federal Reserve President Jeffrey Lacker.
I expect Yellen will make a strong attempt to open the door for October. The Fed has established expectations that, outside of obvious exigent circumstances, they can only make major decisions when there is a scheduled press conference. Yellen will push back hard. Indeed, I think there is a possibility that this becomes the "rate hike" press conference in spirit, with the actual hike in October. Something to think about.
The Fed will try to take the sting out of any hawkish signals with a dovish message. I expect the terminal rate forecasts in the dot plot to drift lower. In addition, I expect Yellen will emphasize that low inflation provides room for a slow and halting pace of rate increases. (My expectation, however, is that assuming the first hike goes smoothly, subsequent hikes will come at regular intervals.) Finally, the estimate of the natural rate of unemployment may drift down further.
If I am wrong...two potential alternatives. First is that everything above remains the same, but they pull the trigger today. They tend not to surprise, but maybe this time is different. Maybe they don't need to built a consensus, although I think that unlikely. Second is that Yellen pushes the FOMC into a dramatically more dovish direction that re-emphasizes the issue of underemployment and shifts expectations to 2016. I don't think that is likely as I think she is fairly entrenched in the 5% NAIRU camp, but we will see tomorrow.
Enjoy the day's excitement!
Posted by Mark Thoma on Thursday, September 17, 2015 at 12:15 AM in Economics, Fed Watch, Monetary Policy |
Posted by Mark Thoma on Thursday, September 17, 2015 at 12:06 AM in Economics, Links |
James Kwak (Dean Baker makes the same point):
Bernie Sanders Wants to Spend $18 Trillion: So What?: The front page of yesterday’s Wall Street Journal featured an article claiming that Bernie Sanders wants to increase federal government spending by $18 trillion over the next ten years—an increase of about one-third over that time period. This was apparently supposed to raise some kind of alarm—what kind of maniac is this?—and I’m sure both Republicans and Hillary Clinton are happy the Journal is doing their work for them.
The problem is that a spending figure, even one as big as $18 trillion, is meaningless on its own.
Most of that money—$15 trillion—is the expansion of Medicare to cover all Americans. Yes, that’s a lot of money. But we are already spending a ton of money on health care—with embarrassingly poor results. In 2013,... Americans ... paid ... $1.4 trillion... Project that out for ten years, add health care inflation, and you’re talking about a lot more than $15 trillion.
At the end of the day, what matters isn’t the amount of money that the federal government spends for health care. What matters is the amount of money that the American people spend for health care. The government is just a device that we use to provide certain services that are better handled collectively than individually. If the government can provide equivalent service at lower prices, then the gross dollar amount involved doesn’t matter. ...
Now the big issue, I admit, is whether the government can provide equivalent service at lower prices. For the vast majority of consumer goods and services, it can’t. ... But real economists have known for more than half a century that health care doesn’t behave like ordinary consumer goods. ...
If you don’t want to read economics papers, the best evidence that health care is different comes from comparing the United States to other rich countries, which all have something closer to a single payer model for health insurance. As is well known, we spend a lot more money and have comparable or worse aggregate health outcomes. There is a huge ongoing adebate about why this is, which I’m not going to try to settle here.
The main point, however, is that if you want to argue against the Bernie Sanders health care plan, you have to make the case that Medicare for all will actually produce worse outcomes or higher costs than our current system. The fact that it costs a lot of money is beside the point.
Posted by Mark Thoma on Wednesday, September 16, 2015 at 10:40 AM in Economics, Health Care, Market Failure, Politics |
Posted by Mark Thoma on Wednesday, September 16, 2015 at 10:17 AM in Economics, Income Distribution |
The Gloomy European Economist, Francesco Sarsceno, says before complaining about US policy, take a look at Europe:
Lessons from Lehman: Jared Bernstein has a very interesting piece on the lessons we
(did not) learn from the great crisis. He basically makes two points:
First, the attitude towards lenders, while somewhat schizophrenic (Bear Sterns, up; Lehman, down. Why? We still don’t know), was forgiving to say the least. in his words, ” Borrowers get austerity, joblessness, and poverty. Lenders get bailouts when credit is scarce and bribes not to lend when it’s too plentiful”. He then argues that both letting lenders fail and bailing them out has large costs, that should be avoided ex ante through better regulation (and we are not there, yet).
Bernstein is perfectly right, but he neglects mentioning a third option, that was advocated at the time, for example by Joe Stiglitz: temporary bank nationalization. ... Temporary nationalization ... would have avoided the “Heads I win Tail you lose” feature of financial sector bailouts.
The second point Bernstein makes is that regardless of the strategy chosen to save the financial sector, fiscal policy should have been much more aggressive in fighting the downturn. ...
Well, he says it all. What drives me nuts, is that the he complains about the US, THE US, where the Fed showed incredible activism, where the Obama administration voted and implemented a huge stimulus package (the American Recovery and Reinvestment Act) just weeks after been sworn in office, while it took us 7 years, to decide to adopt a cumbersome investment plan that will make little or no difference.
Without even mentioning the fact that the whole Greek crisis, since 2010, has been managed with an eye to (mostly German and French) lenders’ needs, rather than to the well-being of European (and in particular Greek) taxpayers.
I really would like to know what would Bernstein say, were he to comment the EMU lessons from the crisis…
Posted by Mark Thoma on Wednesday, September 16, 2015 at 10:04 AM in Economics, Financial System |
Posted by Mark Thoma on Wednesday, September 16, 2015 at 12:06 AM in Economics, Links |
This was in links a day or two ago, but it's worth highlighting:
Collecting Taxes Is Government Work, Editorial, NY Times: Buried in the Senate-passed version of the big highway bill is a provision that would require the Treasury secretary to use private debt collectors to collect unpaid back taxes.
The provision, added to the bill by Republican leaders, is ostensibly intended to help pay for highways. But it’s a bad idea that should be kept out of the House version of the bill and out of any final compromise version.
Private tax collection was tried in the 1990s and in the 2000s. Both times it lost money. It increases the cost of handling complaints and appeals at the Internal Revenue Service, and it is far less efficient than simply increasing the collection budget of the I.R.S.
Worse, it fosters taxpayer abuse. The debts involved are ones that the I.R.S. has not been able to collect, in part because the taxpayers are too hard-pressed to pay up. A private company is probably not going to have better luck unless it uses abusive tactics.
And yet, private tax collection is an idea that keeps resurfacing. Why? One reason is that it would be a cash cow for the four companies likely to win tax-collection contracts...
Senator Chuck Schumer, Democrat of New York, has argued in the past that using federal money to pay private companies for tax collection would create jobs at those companies. But it would be better to increase the I.R.S. budget to create middle-class public-sector jobs in professional tax collection than to throw money at low-paying private-sector contractors who cannot do the job as well. ...
I've posted this before (in 2006) (I left out his two other examples of the Bush administration trying to take us "back to the 16th century"):
Back to a bad old future:
Tax Farmers, Mercenaries and Viceroys, by Paul Krugman, A Monarchy Commentary, NY Times: Yesterday The New York Times reported that the Internal Revenue Service would outsource collection of unpaid back taxes to private debt collectors, who would receive a share of the proceeds.
It’s an awful idea. Privatizing tax collection will cost far more than hiring additional I.R.S. agents, raise less revenue and pose obvious risks of abuse. But what’s really amazing is the extent to which this plan is a retreat from modern principles of government. I used to say that conservatives want to take us back to the 1920’s, but the Bush administration seemingly wants to go back to the 16th century....
In the bad old days, ...[t]here was no bureaucracy to collect taxes, so the king subcontracted the job to private “tax farmers,” who often engaged in extortion. There was no regular army, so the king hired mercenaries, who tended to wander off and pillage the nearest village. There was no regular system of administration, so the king assigned the task to favored courtiers, who tended to be corrupt, incompetent or both.
Modern governments solved these problems by creating a professional revenue department to collect taxes, a professional officer corps to enforce military discipline, and a professional civil service. But President Bush apparently doesn’t like these innovations, preferring to govern as if he were King Louis XII.
So the tax farmers are coming back...
Tax farmers, mercenaries and viceroys: why does the Bush administration want to run a modern superpower as if it were a 16th-century monarchy? Maybe people who’ve spent their political careers denouncing government as the root of all evil can’t grasp the idea of governing well. Or maybe it’s cynical politics: privatization provides both an opportunity to evade accountability and a vast source of patronage.
But the price is enormous. This administration has thrown away centuries of lessons about how to make government work. No wonder it has failed at everything except fearmongering.
Posted by Mark Thoma on Tuesday, September 15, 2015 at 02:36 PM in Economics, Politics, Taxes |
Via Austin Frakt at The Incidental Economist (I shortened the summaries):
Market Power: Recent NBER publications by Laurence Baker, M. Kate Bundorf, and Daniel Kessler:
1) “The Effect of Hospital/Physician Integration on Hospital Choice“:
We find that a hospital’s ownership of an admitting physician dramatically increases the probability that the physician’s patients will choose the owning hospital. We also find that ownership of an admitting physician has large effects on how the hospital’s cost and quality affect patients’ hospital choice. Patients whose admitting physician is not owned by a hospital are more likely to choose facilities that are low cost and high quality. ... We conclude that hospital/physician integration affects patients’ hospital choices in a way that is inconsistent with their best interests.
2) “Does Health Plan Generosity Enhance Hospital Market Power?” :
To what extent does the generosity of health insurance coverage facilitate the exercise of market power by producers of health services? […]
We find a statistically significant and economically important effect of plan generosity on hospital prices in uncompetitive markets. ...
Posted by Mark Thoma on Tuesday, September 15, 2015 at 11:11 AM in Academic Papers, Economics, Health Care |
Keynesianism Explained: Attacks on Keynesians in general, and on me in particular, rely heavily on an army of straw men — on knocking down claims about what people like me have predicted or asserted that have nothing to do with what we’ve actually said. But maybe we (or at least I) have been remiss, failing to offer a simple explanation of what it’s all about. I don’t mean the models; I mean the policy implications.
So here’s an attempt at a quick summary, followed by a sampling of typical bogus claims.
I would summarize the Keynesian view in terms of four points:
1. Economies sometimes produce much less than they could, and employ many fewer workers than they should, because there just isn’t enough spending. Such episodes can happen for a variety of reasons; the question is how to respond.
2. There are normally forces that tend to push the economy back toward full employment. But they work slowly; a hands-off policy toward depressed economies means accepting a long, unnecessary period of pain.
3. It is often possible to drastically shorten this period of pain and greatly reduce the human and financial losses by “printing money”, using the central bank’s power of currency creation to push interest rates down.
4. Sometimes, however, monetary policy loses its effectiveness, especially when rates are close to zero. In that case temporary deficit spending can provide a useful boost. And conversely, fiscal austerity in a depressed economy imposes large economic losses.
Is this a complicated, convoluted doctrine? ...
But strange things happen in the minds of critics. Again and again we see the following bogus claims about what Keynesians believe:
B1: Any economic recovery, no matter how slow and how delayed, proves Keynesian economics wrong. See  above for why that’s illiterate.
B2: Keynesians believe that printing money solves all problems. See : printing money can solve one specific problem, an economy operating far below capacity. Nobody said that it can conjure up higher productivity, or cure the common cold.
B3: Keynesians always favor deficit spending, under all conditions. See : The case for fiscal stimulus is quite restrictive, requiring both a depressed economy and severe limits to monetary policy. That just happens to be the world we’ve been living in lately.
I have no illusions that saying this obvious stuff will stop the usual suspects from engaging in the usual bogosity. But maybe this will help others respond when they do.
I would add:
5. Keynesian are not opposed to supply-side, growth enhancing policy. They types of taxes that are imposed matters, entrepreneurial activity should be encouraged, and so on. But these arguments should not be used as cover for redistribution of income to the wealthy through tax cuts and other means, or as a means of arguing for cuts to important social service programs. Not should they be used only to support tax cuts. Infrastructure spending is important for growth, an educated, healthy workforce is more productive, etc., etc. Economic growth is about much more than tax cuts for wealthy political donors.
On the other side, I would have added a point to B3:
B3a: Keynesians do not favor large government. They believe that deficits should be used to stimulate the economy in severe recessions (when monetary policy alone is not enough), but they also believe that the deficits should be paid for during good times (shave the peaks to fill the troughs and stabilize the path of GDP and employment). We haven't been very good at the pay for it during good times part, but Democrats can hardly be blamed for that (see tax cuts for the wealthy for openers).
Anything else, e.g. perhaps something like "Keynesians do not believe that helping people in need undermines their desire to work"?
Posted by Mark Thoma on Tuesday, September 15, 2015 at 10:51 AM in Economics, Macroeconomics, Politics |
Tim Duy at Bloomberg:
Why the Fed Is Likely to Stand Pat This Week: What a week it might have been?
Speeches and interviews have made it fairly clear that Federal Reserve officials were building a case to begin normalizing interest rate policy as soon as this month, but they are increasingly wary that a misstep could derail the economy at a time when they perceive a lack of tools to address renewed weakness.
From the policy discussion of the June Federal Open Market Committee meeting:
Another concern related to the risk of premature policy tightening was the limited ability of monetary policy to offset downside shocks to inflation and economic activity when the federal funds rate was near its effective lower bound.
This concern will weigh heavily on the policy discussion as the Fed begins what promises to be a tumultuous two-day meeting this week. While the central bank was likely prepared to raise interest rates this month at the conclusion of the last FOMC meeting, deteriorating global economic conditions and market volatility will likely derail those plans.
Nor is the inflation picture particularly supportive at this juncture. ...[continue]...
Posted by Mark Thoma on Tuesday, September 15, 2015 at 09:57 AM in Economics, Fed Watch, Monetary Policy |
Posted by Mark Thoma on Tuesday, September 15, 2015 at 12:06 AM in Economics, Links |
Thoughts on Dynamic Scoring: Last Thursday two of the smartest participants at last Friday's Brookings Panel on Economic Activity conference--Martin Feldstein and Glenn Hubbard--claimed marvelous things from the enactment of JEB!'s proposed tax cuts and his regulatory reform program.
They claimed it would boost economic growth over the next ten years by 0.5%/year (for the tax cuts) plus an additional 0.3%/year (for the regulatory reforms).
That would ... mean that over the next ten years faster growth would produce an average of $210 billion a year of additional revenue to offset more than half of the $340 billion a year "static" revenue lost from the tax cuts... And that would mean that in the tenth year--fiscal 2027--the $400 billion "static" cost of the tax cuts in that year would be outweighed by a $420 billion faster-growth revenue gain.
The problem is that if I were doing the numbers I would reverse the sign.
- I would say that, on net, deregulatory programs have been very costly to the U.S. economy in unpredictable ways--witness the subprime boom and the financial crisis.
- I would say that the incentive effects would tend to push up growth by only 0.1%/year, and that would be more than offset by a drag on the economy that would vary depending on how the tax cuts were financed.
- If they were financed by issuing debt, I would ballpark the drag at -0.2%/year.
- If they were financed by cutting public investment, I would ballpark the drag at -0.4%/year.
- If they were financed by cutting government programs, there might be a small boost to growth--0.1%/year--but any societal welfare benefit-cost calculation would conclude that the growth gain was not worth the cost.
And there is substantial evidence that I am right:
- You cannot find a boost to potential output growth flowing from either the Reagan or the Bush tax cuts.
- You cannot find a drag on growth from the Obama tax increases.
- You can find an effect of the Clinton tax increases--but it is that, thereafter, growth was faster, because the reduction in the deficit powered an investment-led recovery.
Over the past thirty years, the agencies that do the government's accounting have tried to reduce their vulnerability to the imposition of a rosy scenario by their political masters by claiming as a matter of principle that they do not calculate positive growth impacts of policies. This is clearly the wrong thing to do--policies do affect growth rates. But is overestimating growth effects in a way that pleases one's political masters a less-wrong thing? ...
The problem is that when I look at the example of "dynamic scoring" that was on the table at Brookings today--the 0.8%/year growth boost that I really think should be a -0.1%/year growth drag...
Yet the near-consensus of the meeting was that dynamic scoring--done properly--was a thing that estimating agencies like JCT and CBO (and Treasury OTA) should do.
If there were to be a day less favorable to such a consensus conclusion, I do not know what that day would have looked like...
Posted by Mark Thoma on Monday, September 14, 2015 at 10:44 AM in Economics, Politics, Taxes |
Not sure what to say about this:
You're not irrational, you're just quantum probabilistic, EurekAlert!: The next time someone accuses you of making an irrational decision, just explain that you're obeying the laws of quantum physics. ...
According to Zheng Joyce Wang and others who try to model our decision-making processes mathematically, the equations and axioms that most closely match human behavior may be ones that are rooted in quantum physics.
"We have accumulated so many paradoxical findings in the field of cognition, and especially in decision-making," said Wang, who is an associate professor of communication and director of the Communication and Psychophysiology Lab at The Ohio State University.
"Whenever something comes up that isn't consistent with classical theories, we often label it as 'irrational.' But from the perspective of quantum cognition, some findings aren't irrational anymore. They're consistent with quantum theory--and with how people really behave."
In two new review papers in academic journals, Wang and her colleagues spell out their new theoretical approach to psychology. One paper appears in Current Directions in Psychological Science, and the other in Trends in Cognitive Sciences.
Their work suggests that thinking in a quantum-like way--essentially not following a conventional approach based on classical probability theory--enables humans to make important decisions in the face of uncertainty, and lets us confront complex questions despite our limited mental resources.
When researchers try to study human behavior using only classical mathematical models of rationality, some aspects of human behavior do not compute. From the classical point of view, those behaviors seem irrational, Wang explained.
For instance, scientists have long known that the order in which questions are asked on a survey can change how people respond--an effect previously thought to be due to vaguely labeled effects, such as "carry-over effects" and "anchoring and adjustment," or noise in the data. Survey organizations normally change the order of questions between respondents, hoping to cancel out this effect. But in the Proceedings of the National Academy of Sciences last year, Wang and collaborators demonstrated that the effect can be precisely predicted and explained by a quantum-like aspect of people's behavior. ...
With the quantum approach, Wang and her colleagues argued, many different and complex aspects of behavior can be explained with the same limited set of axioms. The same quantum model that explains how question order changes people's survey answers also explains violations of rationality in the prisoner's dilemma paradigm, an effect in which people cooperate even when it's in their best interest not to do so.
"The prisoner's dilemma and question order are two completely different effects in classical psychology, but they both can be explained by the same quantum model," Wang said. "The same quantum model has been used to explain many other seemingly unrelated, puzzling findings in psychology. That's elegant."
Posted by Mark Thoma on Monday, September 14, 2015 at 10:05 AM in Economics |
"Mr. Corbyn’s triumph isn’t that surprising":
Labour’s Dead Center, by Paul Krugman, Commentary, NY Times: Jeremy Corbyn, a long-time leftist dissident, has won a stunning victory in the contest for leadership of Britain’s Labour Party. Political pundits say that this means doom for Labour’s electoral prospects; they could be right, although I’m not the only person wondering why commentators who completely failed to predict the Corbyn phenomenon have so much confidence in their analyses...
But I won’t ... get into that game. What I want to do instead is talk about one crucial piece of background to the Corbyn surge — the implosion of Labour’s moderates. On economic policy, in particular, the striking thing ... was that every candidate other than Mr. Corbyn essentially supported the Conservative government’s austerity policies.
Worse, they all implicitly accepted the bogus justification for those policies, in effect pleading guilty to policy crimes that Labour did not ... commit. If you want a U.S. analogy, it’s as if all the leading candidates for the Democratic nomination in 2004 had gone around declaring, “We were weak on national security, and 9/11 was our fault.” Would we have been surprised if Democratic primary voters had turned to a candidate who rejected that canard, whatever other views he or she held?
In the British case, the false accusations against Labour involve ... claims that the Labour governments that ruled Britain from 1997 to 2010 spent far beyond their means, creating a ... debt crisis that..., in turn, supposedly left no alternative to severe cuts in spending, especially spending that helps the poor.
These claims have ... echoed by almost all British news media ... as facts. It has been an amazing thing to watch —... every piece of this conventional narrative is ... nonsense. ... And all of Mr. Corbyn’s rivals for Labour leadership bought fully into that conventional nonsense, in effect accepting the Conservative case that their party did a terrible job of managing the economy, which simply isn’t true. So as I said, Mr. Corbyn’s triumph isn’t that surprising given the determination of moderate Labour politicians to accept false claims about past malfeasance.
This still leaves the question of why Labour’s moderates have been so hapless.... Labour’s political establishment seems to lack all conviction, for reasons I don’t fully understand. And this means that the Corbyn upset isn’t about a sudden left turn on the part of Labour supporters. It’s mainly about the strange, sad moral and intellectual collapse of Labour moderates.
Posted by Mark Thoma on Monday, September 14, 2015 at 01:08 AM in Economics, Media, Politics |
Posted by Mark Thoma on Monday, September 14, 2015 at 12:06 AM in Economics, Links |
Botox for Development: In a talk at the World Bank that I gave last week, I repeated a riff that I’ve used before. Suppose your internist told you:
The x-ray shows a mass that is probably cancer, but we don’t have any good randomized clinical trials showing that your surgeon’s recommendation, operating to remove it, actually causes the remission that tends to follow. However, we do have an extremely clever clinical trial showing conclusively that Botox will make you look younger. So my recommendation is that you wait for some better studies before doing anything about the tumor but that I give you some Botox injections.”
If it were me, I’d get a new internist.
To be sure, researchers would always prefer data from randomized treatments... Unfortunately, randomization is not free. It is available at low or moderate cost for some treatments and at a prohibitively high cost for other potentially important treatments. ...
I work on high expected-return policies that can be implemented, with no concern about whether I will be able to publish the results from this work in the standard economics journals....
I have the good fortune of knowing that I can be a successful academic even if the journals will not publish results from the work I do. I realize that many other economists do not have this freedom. I understand that they have to respond to the incentives they face, and that the publication process biases their work in the direction of policies that are more like Botox than surgery.
But we can all work to change the existing equilibrium. It is good that economists pay careful attention to identification and causality. This inclination will be even more important as new sources of “big” non-experimental data become available. But it is not the only good thing we can do. We have to weigh the tradeoffs we face between getting precise answers about such policies as setting up women’s self-help groups (the example that Lant Pritchett uses as his illustration of what I am calling Botox for economic development) versus such other policies as facilitating urbanization or migration that offer returns that are uncertain but have an expected value that is larger by many orders of magnitude.
If economists can’t understand the tradeoff between risk and expected return, who can?
Posted by Mark Thoma on Sunday, September 13, 2015 at 11:35 AM in Development, Economics, Methodology |
The pickings are a bit scant so far today. You'd think it was the weekend or something. Here's something from Erik Brynjolfsson & Andrew McAfee:
The jobs that AI can't replace,BBC News: Current advances in robots and other digital technologies are stirring up anxiety among workers and in the media. There is a great deal of fear, for example, that robots will not only destroy existing jobs, but also be better at most or all of the tasks required in the future.
Our research at the Massachusetts Institute of Technology (MIT) has shown that that's at best a half-truth. While it is true that robots are getting very good at a whole bunch of jobs and tasks, there are still many categories in which humans perform better. ...
Posted by Mark Thoma on Sunday, September 13, 2015 at 11:01 AM in Economics, Productivity, Technology, Unemployment |
Posted by Mark Thoma on Sunday, September 13, 2015 at 12:06 AM in Economics, Links |
Posted by Mark Thoma on Saturday, September 12, 2015 at 04:25 PM in Econometrics, Video |
Back to the Future: While I’m wide open to evidence that I’m wrong, I’ve been skeptical of the claim that the robots are coming for our jobs. To be technical, the economics question is this: is the pace at which labor-saving technology is entering the workforce accelerating? ...
There are various pieces of evidence suggesting that the answer is “no.” Most importantly, if the rate at which machines are replacing workers is increasing, then productivity growth—output/hours worked—should also be increasing. But it has been slowing.
One reason for slower productivity growth is diminished investment in capital goods—like machines—a trend that also doesn’t square with the acceleration hypothesis. ...
So, what we have is largely anecdote and our own observation..., but ... when it comes to observations, humans are good at seeing first derivatives (rates of change) and less good at seeing second derivatives (changes in rates of change). We see that iPads and self-scanners are replacing waitpersons and cashiers but it’s hard for us to tell whether “labor-saving technology” ...is coming more quickly than it has in the past.
Of course, this time might really be different (some smart people say it is).
Or, as this article ... reminded me (h/t: KN), this time might not be very different at all. It’s about a new quinoa restaurant in San Francisco, called Eatsa, where you order and get your food without ever interacting with a person. ...
Now, where have I seen that before? Fifty years ago (!), I used to love to go to Manhattan automats, where ... a few coins would get you a sandwich, a veggie (not quinoa!), a slice of delicious pie, and so on. For the record, productivity growth was faster and unemployment was lower back then (though at 10, I don’t recall knowing these facts at the time).
All’s I’m saying is that tech change is always with us, and it’s really hard to tell by observation whether the pace with which it’s replacing workers is accelerating. And there are so many more moving parts to this. I’d bet a big difference between the economies in these two pictures is where the machines were manufactured. In other words, technology doesn’t historically kill labor demand. But it does move it around to different industries, occupations, and today, countries.
So before we conclude we’re all robot fodder, let’s see it in the productivity and investment data. ...
Posted by Mark Thoma on Saturday, September 12, 2015 at 11:19 AM in Economics, Productivity, Technology, Unemployment |
Posted by Mark Thoma on Saturday, September 12, 2015 at 12:06 AM in Economics, Links |
Ending deflation is easy. But convincing people to support the policy that is needed is almost impossible:
Japan’s Economy, Crippled by Caution, by Paul Krugman, Commentary, NY Times: Visitors to Japan are often surprised by how prosperous it seems. It doesn’t look like a deeply depressed economy. And that’s because it isn’t. ...
Yet Japan is still caught in an economic trap. Persistent deflation... So Japan needs to make a decisive break with its deflationary past. You might think ... ending deflation is easy. Can’t you just print money? But ... central banks like the Federal Reserve or the Bank of Japan ... generally use it to buy government debt. In normal times ... sellers of that government debt don’t want to sit on idle cash, so they lend it out, stimulating spending... And as the economy heats up, wages and prices should eventually start to rise, solving the problem of deflation.
These days, however, interest rates are very low in most major economies, reflecting the weakness of investment demand. What this means is that there’s no real penalty for sitting on cash, and that’s what people and institutions do. ...
How, then, can policy fight deflation?
Well, the answer currently being tried in much of the world is so-called quantitative easing. ... But is this sufficient? Doubtful. ...
What’s remarkable about this record of dubious achievement is that there actually is a surefire way to fight deflation: When you print money, don’t use it to buy assets; use it to buy stuff. That is, run budget deficits paid for with the printing press. ...
But nobody is doing the obvious thing. Instead, all around the advanced world governments are engaged in fiscal austerity, dragging their economies down...
Why? Part of the answer is that demands for austerity serve a political agenda, with panic over the alleged risks of deficits providing an excuse for cuts in social spending. But the biggest reason it’s so hard to fight deflation, I contend, is the curse of conventionality.
After all, printing money to pay for stuff sounds irresponsible, because in normal times it is. And no matter how many times some of us try to explain that these are not normal times, that in a depressed, deflationary economy conventional fiscal prudence is dangerous folly, very few policy makers are willing to stick their necks out and break with convention.
The result is that seven years after the financial crisis, policy is still crippled by caution. Respectability is killing the world economy.
Posted by Mark Thoma on Friday, September 11, 2015 at 08:24 AM in Economics, Inflation |
This is the conclusion to "The intellectual history of the minimum wage and overtime," by Oya Aktas:
...The intellectual history of maximum hours and minimum wages is a story of debates over which groups should be protected from exploitation and what form this protection should take. Concerns over women’s health, ambivalence toward African American rights, and advocating for unorganized workers dominated the debate at different points. As social views changed, so did economic policies. Today, women account for two-thirds of minimum wage earners and people of color account for two-fifths. Studying the history of the minimum wage should compel policymakers to question how social priorities influence different groups, who is considered worthy of protection, and to what extent their welfare is considered. By implementing effective maximum hour and minimum wage regulations, policymakers can protect vulnerable workers’ standard of living to encourage productivity, push companies to increase their efficiency, and consequently cultivate long-term equitable growth.
Posted by Mark Thoma on Friday, September 11, 2015 at 12:33 AM in Economics |
John Haltiwanger, Henry Hyatt, and Erika McEntarfer:
...young firms usually start small, and some of those small, young firms turn out to be highly productive and grow rapidly and poach workers away from other firms. It turns out that small, mature firms (those aged ten years or more) lose workers, on net, through poaching while young firms gain workers, on net, from poaching. Additionally, there is an important segment of large firms that offer low wages (e.g. in the retail trade sector). Those large, low-wage firms tend to hire non-employed workers, and this hiring shuts down during recessions. Moreover, workers at large, low-wage firms are often poached away by other firms. Understanding the factors that drive a wedge in the relationship between firm size, firm productivity and firm wages should be an active area for future research. Our findings suggest researchers should be cautious about using firm size as a proxy for productivity and wages in studying the dynamics of the economy.
Posted by Mark Thoma on Friday, September 11, 2015 at 12:24 AM in Economics, Unemployment |
More on the Fed. How much faith should we have in the Fed's forecasts of inflation? This is from Cecchetti & Schoenholtz:
The FOMC is coming: Having dropped to 5.1%, the unemployment rate has reached the longer-run employment goal of the Federal Reserve’s Open Market Committee (FOMC). So, starting to raise interest rates would seem to be in the cards. And, many observers expect policymakers to act soon, possibly very soon.
The key sticking point, and it is a big one, is that inflation – as measured by the personal consumption expenditure price index (PCE) favored by the FOMC – has been consistently below their stated 2% medium-term objective since early 2012.
Tightening monetary policy for the first time since 2006 requires confidence that inflation will in fact head back up... And, as it turns out, precise forecasts of inflation are hard to come by. ...
First, what’s been happening to inflation? ... It has been over three years since inflation hit 2%, while the core measures recently have remained stubbornly around 1½%. And this has occurred amid remarkably low inflation across most of the world and deflation risks in several advanced economies. ...
The question facing the FOMC is how secure are they that inflation will rise back to 2% in the fairly near future? ...
Skipping the details:
Our bottom line is that the models we have simply aren’t very good at forecasting inflation – at least not to the precision we would need to distinguish a change of trend inflation of one-half of one percentage point over the next two years. And, what was challenging a decade ago has gotten more difficult since then. (For a very careful and technical analysis, see here.)
But, central bankers need inflation forecasts to do their job. And for want of better models, they will use the ones that they have. They just need to be humble about the models’ reliability. ...
FOMC members presumably expect that a continued tightening of labor markets eventually will start to exert inflationary pressure. So far, however, there is little indication of a pickup in the trends of wage or price inflation. Maybe this is a temporary consequence of the fall in energy prices, the appreciation of the dollar, and the slowdown in China. Or, maybe it is something else. We surely don’t know, and we assume they don’t either. This kind of uncertainty probably ... favors inertia. ...
Posted by Mark Thoma on Friday, September 11, 2015 at 12:15 AM
Posted by Mark Thoma on Friday, September 11, 2015 at 12:06 AM in Economics, Links |
This is probably not the path to reduced inequality:
Growing economic segregation among school districts and schools: ... Rising income inequality means those at the top have a growing resource advantage. Some high-income families use these resources to pay for housing in particular neighborhoods, resulting in increasing segregation by income between neighborhoods over the past four decades. Residential segregation creates inequalities between neighborhoods, and neighborhood contexts are critical for children’s development. Children who grow up in disadvantaged neighborhoods have worse educational and occupational outcomes later in life. ...
In a recent study, Sean F. Reardon, Christopher Jencks, and I documented trends in economic segregation between schools and school districts. ... We found that segregation by family income between school districts within metropolitan areas rose from 1970 to 2010. Looking only at families with children enrolled in public school from 1990 to 2010, segregation by family income between school districts rose by nearly 20 percent. ...
Segregation of upper-middle-class and affluent families from all others increased the most. In 2010, families with incomes in the top 10 percent of the national income distribution lived in the most homogenous districts, with other affluent families like them. In contrast, we found that poor families have become slightly more integrated by income between school districts. However, given that high-income families have distanced themselves from others, poor families are likely integrating with working-poor or lower-middle-class families rather than the affluent.
We then examined segregation between schools within school districts. Available data limit our investigation to measuring segregation between students that qualify for free lunch and those that do not. We found that segregation based on free lunch eligibility between schools within districts was 10 percent higher in 2010 than 1991. Focusing only on the 100 largest districts in the U.S., segregation by free lunch status between schools increased by 30 percent. Therefore, students increasingly attend school with students whose family incomes are similar to their own. ....
Our findings have serious implications for future inequality. ...
Posted by Mark Thoma on Thursday, September 10, 2015 at 09:34 AM in Economics, Income Distribution |
Jeb’s tax plan makes George W. Bush’s policies look good: ... There is no doubt that Bush’s tax plan would blow a massive hole in the budget deficit. His own economic advisers estimate that it would raise the budget deficit by $3.4 trillion over 10 years. Even if their dubious estimate of higher growth is achieved, massive spending cuts will be needed just to keep the deficit from rising above current projections.
In this respect, Bush’s tax plan is much more similar to his brother’s than to Reagan’s tax reform. According to the Congressional Budget Office, George W. Bush’s tax cuts added $3 trillion to the national debt and did nothing to raise growth or forestall the massive recession that began in 2007. That recession was still ongoing when Barack Obama took office, yet Jeb spends much space in his proposal criticizing him for not immediately reversing all the negative budgetary effects of his brother’s policies, which added a total of $12 trillion to the national debt, according to CBO.
It appears that Bush has relied upon advice from economists who have been wrong about just about everything to do with taxes for the last 20 or more years. One, Stephen Moore, who founded the Club for Growth and now works for the ultra-right-wing Heritage Foundation, published a book in 2004, “Bullish on Bush,” that made the same extravagant promises for George W. Bush’s tax cuts that Jeb Bush now claims for his.
The reality is that the U.S. economy did very, very poorly under George W. Bush – even before the recession began in December 2007. At the very minimum, there is zero evidence that his tax cuts did anything whatsoever to raise growth or lower unemployment. ..
We had a real world test of Jeb Bush’s tax plan from 2001 to 2008 – and it failed miserably. The people advising him have an unblemished record of being wrong... The only effect of this discredited ideology has been to make the rich richer while doing nothing for the average American. ...
Jared Bernstein talked yesterday about a few bones the Bush tax plans throws in the direction of the less fortunate (i.e. people not among the wealthy constituents the Bush plan mainly serves). But with such massive cuts in revenues, Bush as president (imaging what is hopefully impossible), and a Republican congress (not impossible), program cuts would almost surely follow leaving the less fortunate, on net, far worse off.
Posted by Mark Thoma on Thursday, September 10, 2015 at 09:11 AM in Economics, Politics, Taxes |
Posted by Mark Thoma on Thursday, September 10, 2015 at 12:06 AM in Economics, Links |
Jared Bernstein on the Bush tax plan:
Jeb Bush’s new tax plan: A revenue-eating wolf in sheep’s clothing: It seems like just yesterday we were pointing out that a) the arithmetic in Republican presidential candidates’ tax plans didn’t add up, and b) they were highly regressive.
Well, crank up the old calculator, because Jeb Bush’s new tax plan appears to have both of those problems, big time. ... I can confidently assert that the plan loses piles of revenue. Perhaps that’s the point, but if so, it’s a serious problem for our fiscal accounts, our economy, and the ability of our government to do what we need it to do. ...[some details of the plan] ...
These are just absolutely huge, regressive changes, far bigger than his bro’s, and really–what did we get for all of W’s supply-side cuts? Growth, jobs, and productivity had little to show for them, while after-tax inequality significantly worsened.
There are a few pieces I’ll note below that claw back some lost revenue, but this is really aggressive tax cutting. ... But didn’t I say something about sheep’s clothing?
There are a few ideas in the plan that tilt in different directions from the usual supply-side formula. To its credit, the Bush team expands the Earned Income Tax Credit for childless workers... They also expand the standard deduction, thereby significantly reducing the number of households with federal tax liability..., this pits Bush against the Romney “makers/takers” crowd...
[More details, both positive and negative] ... OK, that’s enough of the weeds. And I give the Bush team credit for presenting a fairly detailed plan at this early stage of the race. Also..., we’ll have to wait for a score by someone not associated with the campaign (rev up the hamster wheels, TPC!) to see the real extent of the revenue and distributional damage. But I’d be amazed—and I promise ... I will admit my mistake on these pages ... if I’m wrong—if this plan doesn’t blow a huge hole in the budget and make the federal tax code less progressive.
And those are two things we really, really don’t need right now.
Posted by Mark Thoma on Wednesday, September 9, 2015 at 12:31 PM in Budget Deficit, Economics, Politics, Taxes |
I tried to argue against the points Richard Fisher is making in my column yesterday.
First, he tells us to ignore the headline inflation rate since it is subject to lots of short-run variation from factors such as food and commodity prices, and instead focus on the Dallas Fed's trimmed mean measure. Here it is:
|12-month PCE inflation
|PCE excluding food & energy
|Trimmed Mean PCE
See the problem? The Fed's target rte of inflation is 2.0 percent, but trimmed mean inflation, which is intended to isolate long-run inflation trends and ignore short-run variation, is holding steady at 1.6 percent.
Actually, Fisher is a bit loose with the numbers. He says:
conventional core PCE inflation has averaged 1.65 per cent, nearly 30 basis points below headline inflation’s 1.94 per cent average.
But, his preferred measure of inflation, the trimmed mean, shows inflation:
coming in at 1.83 per cent over the past decade, 10 basis points below the headline rate.
But for policy, who cares about 10 years ago? Recently, as shown above, the measure has been close to 1.6 percent, and that's a big miss on the downward side. He does acknowledge this, but still acts as though it is only a near miss:
the Dallas Fed trimmed mean rate has been running steadily at 1.6 per cent over the past year, lower than policymakers are shooting for, but less discouraging than the most watched measures suggest.
Yes, 1.6 versus 1.2 percent for July (see above) is a bit better, but let's not pretend it's close to target. Maybe it is "less discouraging," but it is still discouraging.
In any case, if you are a hawk and want rates up, what do you argue at this point? First, that labor markets are tightening (he ignores the secular stagnation point others use to argue labor markets are tighter than they seem), and inflation is just around the corner (as it always is if you are Richard Fisher, go back and look at what he has been saying throughout the crisis -- inflation has always been just ahead):
History tells us that wage growth initially picks up slowly when unemployment starts to fall but, as it approaches more fulsome levels, wage rises accelerate.
That is the territory we are approaching now. Unemployment has reached 5.1 per cent sooner than the Fed’s rate setters expected. Wage-inflation pressures are not yet nettlesome but they have been rising, smack dab in line with past experience.
But as I explained in my column, recent research says much of that history can be ignored since the relationship between wage inflation and price inflation has changed considerably over the years (pass-through has diminished quite a bit since 1980, i.e. wage increases no longer translate into price increases as they once did, for example in the 1970s Fisher remembers so well). And as the WSJ recently explained, where is the wage inflation the hawks are so worried about?:
U.S. employers aren’t yet being squeezed by workers demanding higher wages. The employment-cost index, a broad gauge of wage and benefit expenditures, rose a seasonally adjusted 0.6% in the fourth quarter last year, the Labor Department said Friday. That’s down from 0.7% in the two earlier quarters and jibes with other data showing only limited wage pressure across the U.S.
But inflation is coming. It's always coming, right?
Okay, price inflation is below target, wage inflation is really hard to find, and there are many reasons to suspect that labor markets are not as robust as the unemployment rate suggests (not to mention uncertainties in the world economy). But if you are a hawk, you don't give up merely because the data is stacked against you. Instead, you fall back on the "long lags" argument:
Monetary policy ... operates with a lag. If the Fed waits for full employment and then has to throttle back sharply, there will be a nasty shock. The upcoming Fed meetings present a timely opportunity to start slowing down the engines
The question I raised yesterday is whether, with advances in digital technology, we should expect these lags to be as long as they were in the past, e.g. in the 1970s. It seems to me that they have likely shortened, perhaps quite a bit, and that gives the Fed more room for patience than it had in the past. Couldn't it at least wait for clear signs of a problem before acting?
Finally, why the huge fear over a little bit of inflation rather than huge fear over higher than necessary unemployment? Why not reserve the same level of fear for those who struggle with unemployment and all the troubles that come with it? Which is the greater problem to avoid? If we make a mistake, should it be to allow a bit of inflation, which the Fed can quickly reverse, or allow a higher level of unemployment, a problem that is much more costly and much harder to deal with? Why does inflation get so much more attention from some people? Why the hurry to raise rates?
Posted by Mark Thoma on Wednesday, September 9, 2015 at 10:19 AM in Economics, Inflation, Monetary Policy |
Dean Bakers says we shouldn't get overly excited about today's seemingly positive data on job openings and turnover:
Hold the Celebration on Job Openings: The Labor Department released new data this morning on job openings and turnover. The release showed a big jump in openings in July compared with June or July of 2014. In the past this has been taken as evidence of the economy's strength and also as an indication that employers are having problems get workers with the needed skills.
One problem with this story is that many of the openings are showing up in retail trade and restaurants, which are not areas where we ordinarily think the skill requirements are very high (which does not mean that the work is not difficult). The chart below shows most of the sectors responsible for the jump in openings. The biggest rise is professional and business services, which includes many highly skilled occupations, but also includes temp help and custodians. The point here is that it is not clear what is going on in these markets based on the rise in openings. If employers were really having trouble getting the workers they need then they should be offering higher pay. Thus far, they are not.
Posted by Mark Thoma on Wednesday, September 9, 2015 at 08:33 AM in Economics, Unemployment |
This research is examines how state-level income inequality impacts political polarization within state legislatures. It's from one of our graduate students, John Voorheis (who will be on the job market at the AEA meetings this year), along with Nolan McCarty at Princeton and Boris Shor at Georgetown (who have very good state level legislator ideology data).
They have some preliminary results, which were presented this at last weekend's APSA meetings (there is a preliminary working paper on SSRN). Here's a thumbnail sketch of the results:
- They use a simulated instrument for state level inequality to address potential endogeneity between state politics and state income distributions. That allows them to estimate the causal effect of inequality on polarization (a first for this literature).
- They find robust evidence that increases in state inequality cause increased political polarization (i.e. the ideological distance between Democratic and Republican parties).
- Inequality affects the mean position of both Democratic and Republican parties, but the effect is larger and more precisely estimated for Democrats.
- Income Inequality also causes a rightward shift in the average ideology of state legislatures.
- They conclude that inequality's effect on polarization primarily occurs through moving the moderate wing of the Democratic party to the left; this occurs through replacing moderate Democrats with Republicans, which results in a more liberal Democratic party but a more conservative legislature overall.
John's work was supported by a young scholar grant from the Washington Center for Equitable Growth.
Posted by Mark Thoma on Wednesday, September 9, 2015 at 12:24 AM in Economics, Income Distribution, Politics |