Wednesday, August 31, 2016

Does Wall Street Do ''God’s Work''? Or Even Anything Useful?

Lynn Stout at ProMarket:

Does Wall Street Do “God’s Work”? Or Even Anything Useful?: In the wake of the 2008 crisis, Goldman Sachs CEO Lloyd Blankfein famously told a reporter that bankers are “doing God’s work.” This is, of course, an important part of the Wall Street mantra: it’s standard operating procedure for bank executives to frequently and loudly proclaim that Wall Street is vital to the nation’s economy and performs socially valuable services by raising capital, providing liquidity to investors, and ensuring that securities are priced accurately so that money flows to where it will be most productive. The mantra is essential, because it allows (non-psychopathic) bankers to look at themselves in the mirror each day, as well as helping them fend off serious attempts at government regulation. It also allows them to claim that they deserve to make outrageous amounts of money. According to the Statistical Abstract of the United States, in 2007 and 2008 employees in the finance industry earned a total of more than $500 billion annually—that’s a whopping half-trillion dollar payroll (Table 1168).
There’s just one problem: the Wall Street mantra isn’t true. ...

    Posted by on Wednesday, August 31, 2016 at 11:15 AM in Economics, Financial System | Permalink  Comments (66) 


    How Much Impact Can a President Have on the Economy?

    At MoneyWatch:

    How much impact can a president have on the economy?, by Mark Thoma: ... How much influence does the president actually have over the economy? 
    The stock answer is that presidents get too much credit when the economy does well and too much blame when it slumps. The boom-and-bust cycles that are inherent in capitalist economies depend on forces that are independent of any president’s actions. It’s mostly luck that determines how the economy is doing when it’s time to elect a president.
    However, it’s not right to conclude presidents don’t matter for the economy.  ...

      Posted by on Wednesday, August 31, 2016 at 11:01 AM in Economics, Politics | Permalink  Comments (28) 


      Links for 08-31-16

        Posted by on Wednesday, August 31, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (175) 


        Tuesday, August 30, 2016

        Rising Wage Inequality Continues

        Elise Gould at the EPI:

        Rising wage inequality continues to be a defining feature of the U.S. labor market: It’s well documented and widely understood that wage inequality has grown dramatically over the last four decades as productivity and compensation growth have become delinked. Despite an expanding and increasingly productive economy, wages have stagnated for the vast majority. Looking at the most recent data—through the first half of 2016—we see that wage inequality has continued to grow, with top earners faring far better than those in the middle or bottom of the wage scale. First, the data paints a striking picture of growing wage inequality since the last business cycle peak in 2007. Second, average wage growth overall is slow, and any significant real wage growth continues to be driven by low (and below target) inflation—not meaningful acceleration in nominal wage growth. Last, strong payroll employment growth the last couple of months suggests positive future trends for not only wage growth, but also declining unemployment and rising labor force participation. ...

          Posted by on Tuesday, August 30, 2016 at 01:09 PM in Economics, Income Distribution | Permalink  Comments (57) 


          Links for 08-30-16

            Posted by on Tuesday, August 30, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (153) 


            Monday, August 29, 2016

            Disappointed by What Came out of Jackson Hole

            Larry Summers:

            Disappointed by what came out of Jackson Hole: I had high hopes for the Federal Reserve’s annual Jackson Hole conference. The conference was billed as a forum that would look at new approaches to the conduct of monetary policy—something that I have been urging as necessary given secular stagnation risks and the sharp decline in the apparent neutral rate of interest. And Chair Yellen’s speech in a relatively academic setting provided an opportunity to signal that the Fed recognized that new realities required new approaches. ...
            On balance though, I am disappointed by what came out of Jackson Hole... First, the near term policy signals were on the tightening side which I think will end up hurting both the Fed’s credibility and the economy. Second, the longer term discussion revealed what I regard as dangerous complacency about the efficacy of the existing tool box. Third, there was failure to seriously consider major changes in the current monetary policy framework. ...
            The right signal to have sent in my view was very dovish. ...
            Even if the September employment report is strong, I do not see a case for a September rate increase. There is no imminent danger of repeating the 1970s experience where inflation expectations ratcheted up leading to stagflation. If a greater than 1/3 chance of a rate increase in September was not in markets, the cost of credit for small business would be lower and mortgage rates would decline. Employers would be more confident about hiring. And pressures would be removed from emerging markets. The world economy would be more robust.

              Posted by on Monday, August 29, 2016 at 07:32 AM in Economics, Monetary Policy | Permalink  Comments (55) 


              Complexity and Economic Policy

              Alan Kirman:

              Complexity and Economic Policy, OECD Insights: ...Economic theory has... developed increasingly sophisticated models to justify the contention that individuals left to their own devices will self organise into a socially desirable state.  However, in so doing, it has led us to a view of the economic system that is at odds with what has been happening in many other disciplines.
              Although in fields such as statistical physics, ecology and social psychology it is now widely accepted that systems of interacting individuals will not have the sort of behaviour that corresponds to that of one average or typical  particle or individual, this has not had much effect on economics. Whilst those disciplines moved on to study the emergence of non-linear dynamics as a result of the complex interaction between individuals, economists relentlessly insisted on basing their analysis on that of rational optimising individuals behaving as if they were acting in isolation. ...
              Yet this paradigm is neither validated by empirical evidence nor does it have sound theoretical foundations. It has become an assumption. ...
              As soon as one considers the economy as a complex adaptive system in which the aggregate behaviour emerges from the interaction between its components, no simple relation between the individual participant and the aggregate can be established. Because of all the interactions and the complicated feedbacks between the actions of the individuals and the behaviour of the system there will inevitably be “unforeseen consequences” of the actions taken by individuals, firms and governments. Not only the individuals themselves but the network that links them changes over time. The evolution of such systems is intrinsically difficult to predict, and for policymakers this means that assertions such as “this measure will cause that outcome” have to be replaced with “a number of outcomes are possible and our best estimates of the probabilities of those outcomes at the current point are…”. ...
              ...in trying to stabilise such systems it is an error to focus on one variable either to control the system or to inform us about its evolution. Single variables such as the interest rate do not permit sufficient flexibility for policy actions and single performance measures such as the unemployment rate or GDP convey too little information about the state of the economy.

                Posted by on Monday, August 29, 2016 at 07:32 AM in Economics, Methodology | Permalink  Comments (10) 


                Paul Krugman: States of Cruelty

                Why are some states unwilling to help the poor?:

                States of Cruelty, by Paul Krugman, NY Times: ...While many people are focused on national politics, with reason — one sociopath in the White House can ruin your whole day — many crucial decisions are taken at the state and local levels. If the people we elect to these offices are irresponsible, cruel, or both, they can do a lot of damage.
                This is especially true when it comes to health care. Even before the Affordable Care Act went into effect, there was wide variation in state policies, especially toward the poor and near-poor. Medicaid has always been a joint federal-state program... States with consistently conservative governments generally offered benefits to as few people as the law allowed, sometimes only to adults with children in truly dire poverty. States with more liberal governments extended benefits much more widely. These policy differences were one main reason for a huge divergence in the percentage of the population without insurance, with Texas consistently coming in first in that dismal ranking.
                And the gaps have only grown wider since Obamacare went into effect... This should be a no-brainer: If Washington is willing to provide health insurance to many of your state’s residents — and in so doing pump dollars into your state’s economy — why wouldn’t you say yes? But 19 states, Texas among them, are still refusing free money, denying health care to millions. ...
                But why are states like Texas so dead-set against helping the unfortunate, even if the feds are willing to pick up the tab? ...
                A large part of the answer, surely, is the usual one: It’s about race. Medicaid expansion disproportionately benefits nonwhite Americans; so does spending on public health more generally. And opposition to these programs is concentrated in states where voters in local elections don’t like the idea of helping neighbors who don’t look like them.
                In the specific case of Planned Parenthood, this usual answer is overlaid with other, equally nasty issues, including — or so I’d say — a substantial infusion of misogyny.
                But it doesn’t have to be this way. Most Americans are, I believe, far more generous than the politicians leading many of our states. The problem is that too many of us don’t vote in state and local elections, or realize how much cruelty is being carried out in our name. The point is that America would become a better place if more of us started paying attention to politics beyond the presidential race.

                  Posted by on Monday, August 29, 2016 at 06:35 AM in Economics, Health Care, Politics | Permalink  Comments (66) 


                  Links for 08-29-16

                    Posted by on Monday, August 29, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (117) 


                    Sunday, August 28, 2016

                    Brexit: This Backlash Has Been a Long Time Coming

                    Kevin O’Rourke at VoxEU:

                    Brexit: This backlash has been a long time coming: Editors' note: This column first appeared as a chapter in the VoxEU ebook, Brexit Beckons: Thinking ahead by leading economists, available to download free of charge here.

                    It has recently become commonplace to argue that globalisation can leave people behind, and that this can have severe political consequences. Since 23 June, this has even become conventional wisdom. While I welcome this belated acceptance of the blindingly obvious, I can't but help feeling a little frustrated, since this has been self-evident for many years now. What we are seeing, in part, is what happens to conventional wisdom when, all of a sudden, it finds that it can no longer dismiss as irrelevant something that had been staring it in the face for a long time.

                    The main point of my 1999 book with Jeff Williamson was that globalisation produces both winners and losers, and that this can lead to an anti-globalisation backlash (O'Rourke and Williamson 1999). We argued this based on late-19th century evidence. Then, the main losers from trade were European landowners, who found themselves competing with an elastic supply of cheap New World land. The result was that in Germany and France, Italy and Sweden, the move towards ever-freer trade that had been ongoing for several years was halted, and replaced by a shift towards protection that benefited not only agricultural interests, but industrial ones as well. Meanwhile, across the Atlantic, immigration restrictions were gradually tightened, as workers found themselves competing with European migrants coming from ever-poorer source countries. 

                    While Jeff and I were firmly focused on economic history, we were writing with half an eye on the ‘trade and wages’ debate that was raging during the 1990s. There was an obvious potential parallel between 19th-century European landowners, newly exposed to competition with elastic supplies of New World land, and late 20th-century OECD unskilled workers, newly exposed to competition with elastic supplies of Asian, and especially Chinese, labour. In our concluding chapter, we wrote that:

                    "A focus of this book has been the political implications of globalization, and the lessons are sobering. Politicians, journalists, and market analysts have a tendency to extrapolate the immediate past into the indefinite future, and such thinking suggests that the world is irreversibly headed toward ever greater levels of economic integration. The historical record suggests the contrary… unless politicians worry about who gains and who loses, they may be forced by the electorate to stop efforts to strengthen global economy links, and perhaps even to dismantle them…The globalization experience of the Atlantic economy prior to the Great War speaks directly and eloquently to globalization debates today. Economists who base their views of globalization, convergence, inequality, and policy solely on the years since 1970 are making a great mistake. We hope that this book will help them to avoid that mistake— or remedy it."

                    This time it is not different

                    You may argue that the economic history of a century ago is irrelevant – after all, this time is different. But ever since the beginning of the present century, at the very latest, it has been obvious that the politics of globalisation today bears a family resemblance to that of 100 years ago. 

                    • It was as long ago as 2001 that Kenneth Scheve and Matthew Slaughter published an article finding that Heckscher-Ohlin logic did a pretty good job of explaining American attitudes towards trade – lower-skilled workers were more protectionist (Scheve and Slaughter 2001: 267). 

                    Later work extended this finding to the rest of the world. 

                    • If the high skilled were more favourably inclined towards free trade in all countries, this would not be consistent with Heckscher-Ohlin theory, but that is not what the opinion survey evidence suggested – the Scheve-Slaughter finding held in rich countries, but not in poor ones (O'Rourke and Sinnott 2001: 157, Mayda and Rodrik 2005: 1393).

                    You may further argue that such political science evidence is irrelevant, or at least that conventional wisdom could be forgiven for ignoring it. But by the first decade of the 21st century, again at the very latest, it was clear that these forces could have tangible political effects. 

                    • In 2005, a French referendum rejected the so-called 'Constitutional Treaty' by a convincing margin. 

                    While the treaty itself was a technical document largely having to do with decision-making procedures inside the EU, the referendum campaign ended up becoming, to a very large extent, a debate about globalisation in its local, European manifestation. 

                    Opponents of the treaty pointed to the outsourcing of jobs to cheap labour competitors in Eastern Europe, and to the famous Polish plumber. Predictably enough, professionals voted overwhelmingly in favour of the treaty, while blue-collar workers, clerical workers and farmers rejected it. The net result was a clear rejection of the treaty.

                    Lessons not learned

                    Shamefully, the response was to repackage the treaty, give it a new name, and push it through regardless – a shabby manoeuver that has done much to fuel Euroscepticism in France. There was of course no referendum on the Lisbon Treaty in that country, but there was in Ireland in 2008. Once again, a clear class divide opened up, with rich areas overwhelmingly supporting Lisbon, and poor areas overwhelmingly rejecting it. Survey evidence commissioned afterwards by the Irish government suggested that what canvassers on the doorsteps had found was indeed the case – hostility towards immigration in the poorer parts of Dublin was an important factor explaining the "No" vote there (O'Rourke 2008, Sinnott et al. 2010).

                    For a long time, conventional wisdom ignored these rather large straws in the wind – after all, the Irish could always be asked to vote again, while the French could always be told that they couldn't vote again. And so the show could go on. But now Brexit is happening, and the obvious cannot be ignored any longer. 

                    Recent work suggests that exposure to Chinese import competition was a common factor in many British regions that voted to leave the EU (Colantone and Stanig 2016). If this finding survives the scholarly scrutiny that it deserves, it will hardly come as a surprise. But it is nevertheless crucial, since these are precisely the kinds of regions that are voting for the National Front in France. And unlike Britain, France is absolutely central to the European project.

                    What can be done? Great openness requires greater governments

                    This is where Dani Rodrik's finding that more open states had bigger governments in the late 20th century comes in (Rodrik 1998). Dani – who was long ago asking whether globalisation had gone too far (Rodrik 1997) – argues that markets expose workers to risk, and that government expenditure of various sorts can help protect them from those risks. 

                    In a series of articles (e.g. Huberman and Meissner 2009) and a book (Huberman 2012), Michael Huberman showed that this correlation between states and markets was present before 1914 as well. Countries with more liberal trade policies tended to have more advanced social protections of various sorts, and this helped maintain political support for openness.

                    Anti-immigration sentiment was clearly crucial in delivering an anti-EU vote in England. And if you talk to ordinary people, it seems clear that competition for scarce public housing and other public services was one important factor behind this. But if the problem was a lack of services per capita, then there were two possible solutions: 

                    • Reduce the number of 'capitas' by restricting immigration; or 
                    • Increase the supply of services. 

                    It is astonishing in retrospect how few people argued strongly for more services rather than fewer people.

                    Concluding remarks and possible solutions

                    If the Tories had really wanted to maintain support for the EU, investment in public services and public housing would have been the way to do it. If these had been elastically supplied, that would have muted the impression that there was a zero-sum competition between natives and immigrants. It wouldnít have satisfied the xenophobes, but not all anti-immigrant voters are xenophobes. But of course the Tories were never going to do that, at least not with George Osborne at the helm.

                    If the English want continued Single Market access, they will have to swallow continued labour mobility. There are complementary domestic policies that could help in making that politically feasible. We will have to wait and see what the English decide. But there are also lessons for the 27 remaining EU states (28 if, as I hope, Scotland remains a member). Too much market and too little state invites a backlash. Take the politics into account, and it becomes clear (as Dani Rodrik has often argued) that markets and states are complements, not substitutes.

                    References

                    Colantone, I. and P. Stanig (2016), "Brexit: Data Shows that Globalization Malaise, and not Immigration, Determined the Vote", Bocconi Knowledge, 12 July. 

                    Huberman, M. (2012), Odd Couple: International Trade and Labor Standards in History, New Haven, CT: Yale University Press.

                    Huberman, M. and C. M. Meissner (2009), "New evidence on the rise of trade and social protection", VoxEU.org, 23 October. 

                    Mayda, A. M. and D. Rodrik (2005), "Why are some people (and countries) more protectionist than others?", European Economic Review 49(6).

                    Rodrik, D. (1997), Has Globalization Gone Too Far?, Washington, DC: Peterson Institute for International Economics. 

                    Rodrik, D. (1998), "Why do More Open Economies Have Bigger Governments?" Journal of Political Economy 106(5): 997-1032

                    O'Rourke, K. (2008), "The Irish "no" and the rich-poor/urban-rural divide", VoxEU.org, 14 June. 

                    O'Rourke, K. and R. Sinnott (2001), "The Determinants of Individual Trade Policy Preferences: International Survey Evidence", Brookings Trade Forum. 

                    O'Rourke, K. and J. Williamson (1999), Globalization and History: The Evolution of a Nineteenth-Century Atlantic Economy, Cambridge, MA: MIT Press.

                    F. Scheve, K. F. and M. J. Slaughter (2001), "What determines individual trade-policy preferences?", Journal of International Economics 54(2).

                    Sinnott, R., J. A. Elkink, K. H. O'Rourke and J. McBride (2010), "Attitudes and Behaviour in the Referendum on the Treary of Lisbon", report prepared for the Department of Foreign Affairs.

                      Posted by on Sunday, August 28, 2016 at 07:49 AM in Economics, Immigration, International Trade, Politics, Social Insurance | Permalink  Comments (163) 


                      Saturday, August 27, 2016

                      Links for 08-27-16

                        Posted by on Saturday, August 27, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (264) 


                        Friday, August 26, 2016

                        Today’s Inequality Could Easily Become Tomorrow’s Catastrophe

                        Robert Shiller:

                        Today’s Inequality Could Easily Become Tomorrow’s Catastrophe: Economic inequality is already a concern, but it could become a nightmare in the decades ahead, and I fear that we are not well equipped to deal with it. ...
                        One way to judge the likely outcome is to look at what has happened in the past. ...Kenneth Scheve ... and David Stasavage ... looked at 20 countries over two centuries to see how societies have responded to the less fortunate. Their primary finding may seem disheartening: Taxes on the rich generally have not gone up when inequality and economic hardship has increased. ...
                        Professor Scheve and Professor Stasavage found that democratic countries have not consistently embraced more redistributive tax policies, and most people do not vote strictly in their narrow self-interest. ...
                        This is consistent with my own survey results, which focused on inheritance taxes. ... Taxing around a third of wealth, more or less, seemed fair to people. And perhaps it is reasonable, in the abstract, yet what will we do in the future if this degree of taxation won’t produce enough revenue to meaningfully help the very poor as well as the sagging middle class? ...
                        Angus Deaton..., commenting on what he called the “grotesque expansions in inequality of the past 30 years,” gave a pessimistic prediction: “Those who are doing well will organize to protect what they have, including in ways that benefit them at the expense of the majority. ” And Robert M. Solow ... said, “We are not good at large-scale redistribution of income.” ...
                        No one seems to have an effective plan to deal with the possibility of much more severe inequality, should it develop. ...
                        Despite past failures, we should not lose hope in our ability to improve the world. ...

                          Posted by on Friday, August 26, 2016 at 09:02 AM in Economics, Income Distribution | Permalink  Comments (67) 


                          Paul Krugman: No, Donald Trump, America Isn’t a Hellhole

                          What is Trump's pivot to crime all about?:

                          No, Donald Trump, America Isn’t a Hellhole, by Paul Krugman, NY Times: ...When the Trump campaign started, it was, at least nominally, about economics. Foreigners are stealing your jobs, the candidate declared, both through unfair trade and by coming here as immigrants. And he would make America great again with punitive tariffs and mass deportations.
                          But the story changed at the Republican convention. There was remarkably little economic discussion on display... Instead, the focus was all on law and order, on saving the nation from what the candidate described as a terrifying crime wave.
                          That theme has continued in recent weeks, with Mr. Trump’s “outreach” to minority voters. His notion of a pitch to these voters is to tell them how horrible their lives are, that they are facing “crime at levels that nobody has seen.” Even “war zones,” he says, are “safer than living in some of our inner cities.”
                          All of this is really strange — because nothing like this is actually happening. ...
                          Let’s talk specifically about violent crime. Consider, in particular, the murder rate... Homicides did shoot up between the early 1960s and the 1980s... Conservative writers assured us that soaring crime was the inevitable result of a collapse in traditional values...
                          But then a funny thing happened: The murder rate began falling, and falling, and falling. By 2014 it was ... back down to where it was half a century earlier. There was some rise in 2015, but so far ... it’s barely a blip in the long-run picture.
                          Basically, American cities are as safe as they’ve ever been...
                          So what is all of this about? The same thing everything in the Trump campaign is about: race.
                          I used scare quotes when talking about Mr. Trump’s racial “outreach” because it’s clear that the real purpose ... is to reassure squeamish whites that he isn’t as racist as he seems. But..: Even when he is trying to sound racially inclusive, his imagery is permeated by an “alt-right” sensibility that fundamentally sees nonwhites as subhuman. ... In the mental world he and those he listens to inhabit, blacks and other nonwhites are by definition shiftless burdens on society.
                          Which brings us back to the notion of America as a nightmarish dystopia. Taken literally, that’s nonsense. But today’s increasingly multiracial, multicultural society is a nightmare for people who want a white, Christian nation in which lesser breeds know their place. And those are the people Mr. Trump has brought out into the open.

                            Posted by on Friday, August 26, 2016 at 08:19 AM in Economics, Politics | Permalink  Comments (100) 


                            Links for 08-26-16

                              Posted by on Friday, August 26, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (174) 


                              Thursday, August 25, 2016

                              Why Do We Talk About ''Helicopter Money''?

                              Brad DeLong:

                              Why Do We Talk About “Helicopter Money”?: Why do we talk about “helicopter money”? We talk about helicopter money because we seek a tool for managing aggregate demand–for nudging the level of spending in an economy up to but not above the economy’s current sustainable productive potential–that is all of:

                              1. Effective and successful–even in the very low interest rate world we appear to be in.
                              2. Does not excite fears of an outsized central bank balance sheet–with its vague but truly-feared risks.
                              3. Does not excite fears of an outsized government interest-bearing debt–with its very real and costly amortization burdens should interest rates rise.
                              4. Keeps what ought to be a technocratic problem of public administration out of the mishegas that is modern partisan politics.

                              Right now the modal projection by participants in the Federal Reserve’s Open Market Committee meetings is that the U.S. Treasury Bill rate will top out at 3% this business cycle. It would be a brave meeting participant who would be confident that we would get there–if we would get there–with high probability before 2020. That does not provide enough room for the Federal Reserve to loosen policy by even the average amount of loosening seen in post-World War II recessions. Odds are standard open market operation-based interest rate tools will not be able to do the macroeconomic policy stabilization job when the next adverse shock hits the economy.

                              The last decade has taught us that quantitative easing on a scale large enough to rapidly return economies to full employment is one bridge if not more too far for central banks as they are currently constituted–if, that is, it is possible at all. The last decade has taught us that bond-funded expansionary fiscal policy on a scale large enough to rapidly return economies to full employment is at least several bridges too far for our political systems, at least as they are currently constituted.

                              If we do not now start planning for how to implement helicopter money when the next adverse shock comes, what will our plan be? As a candidate for a tool capable of doing all four of these things, helicopter money–giving the central bank the additional policy tool of printing up extra money and either mailing it out to households as checks or getting it into the hands of the public by buying extra useful stuff–is our last hope, and, if it is not our best hope, then I do not know what our best hope might be. ...

                              [The post also includes a list of links to other discussion of this topic.]

                                Posted by on Thursday, August 25, 2016 at 02:16 PM in Economics, Fiscal Policy, Monetary Policy, Politics | Permalink  Comments (69) 


                                Economists Who’ve Advised Presidents Are No Fans of Donald Trump

                                From Real Time Economics at the WSJ:

                                Economists Who’ve Advised Presidents Are No Fans of Donald Trump: Republican presidential nominee Donald Trump, who has broken with many of the GOP’s traditional positions on economic policy, garners no support from any of the White House economists who have advised U.S. presidents for the past half-century.
                                The Wall Street Journal this month reached out to all 45 surviving former members of the White House Council of Economic Advisers under the past eight presidents, going back to Richard Nixon, to get their views on this year’s presidential election.
                                Among 17 Republican appointees who responded to Journal inquiries, none said they supported Mr. Trump. ...

                                  Posted by on Thursday, August 25, 2016 at 08:44 AM in Economics, Politics | Permalink  Comments (37) 


                                  Links for 08-25-16

                                    Posted by on Thursday, August 25, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (143) 


                                    Wednesday, August 24, 2016

                                    Blog Note

                                    Travel day. Not sure when I can post.

                                      Posted by on Wednesday, August 24, 2016 at 03:54 AM in Economics, Travel, Weblogs | Permalink  Comments (5) 


                                      Links for 08-24-16

                                        Posted by on Wednesday, August 24, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (167) 


                                        Tuesday, August 23, 2016

                                        It’s Time to Bring More Realistic Models of Human Behavior into Economic Policy and Regulation

                                        David Halpern at Bank Underground:

                                        It’s time to bring more realistic models of human behaviour into economic policy and regulation: The Centre for Central Banking Studies recently hosted their annual Chief Economists Workshop, whose theme was “What can policymakers learn from other disciplines”.  In this guest post, one of the keynote speakers at the event, David Halpern, CEO of the Behavioural Insights Team, argues that insights from behavior science can improve the design and effectiveness of economic policy interventions.

                                        Behavior science has had major impacts on policy in recent years. Introducing a more realistic model of human behavior – to replace the ‘rational’ utility-maximizer – has enabled policymakers to boost savings; increase tax payments; encourage healthier choices; reduce energy consumption; boost educational attendance; reduce crime; and increase charitable giving. But there remain important areas where its potential has yet to be realized, including macroeconomic policy and large areas of regulatory practice. Businesses, consumers, and even regulators are subject to similar systematic biases to other humans. These include overconfidence; being overly influenced by what others are doing; and being influenced by irrelevant information. The good news is that behavioral science offers the prospect of helping regulators address some of their most pressing issues. This includes: anticipating and addressing ‘animal spirits’ that drive bubbles or sentiment-driven slowdowns; reducing corrupt market practices; and encouraging financial products that are comprehensible to humans. ...[continue]...

                                          Posted by on Tuesday, August 23, 2016 at 03:41 PM in Economics, Regulation | Permalink  Comments (17) 


                                          IMF Cannot Quit Fiscal Consolidation (in Asian Surplus Countries)

                                          Brad Setser:

                                          IMF Cannot Quit Fiscal Consolidation (in Asian Surplus Countries): In theory, the IMF now wants current account surplus countries to rely more heavily on fiscal stimulus and less on monetary stimulus.
                                          This shift makes sense in a world marked by low interest rates, the risk that surplus countries will export liquidity traps to deficit economies, and concerns about contagious secular stagnation. Fiscal expansion tends to lower the surplus of surplus countries and regions, while monetary expansion tends to increase surpluses.
                                          And large external surpluses should be a concern in a world where imbalances in goods trade are once again quite large—though the goods surpluses now being chalked up in many Asian countries are partially offset by hard-to-track deficits in “intangibles” (to use an old term), notably China’s ongoing deficit in investment income and its ever-rising and ever-harder-to-track deficit in tourism.
                                          In practice, though, the Fund seems to be having trouble actually advocating fiscal expansion in any major economy with a current account surplus.
                                          Best I can tell, the Fund is encouraging fiscal consolidation in China, Japan, and the eurozone. These economies have a combined GDP of close to $30 trillion. The Fund, by contrast, is, perhaps, willing to encourage a tiny bit of fiscal expansion in Sweden (though that isn’t obvious from the 2015 staff report) and in Korea—countries with a combined GDP of $2 trillion.*
                                          I previously have noted that the Fund is advocating a 2017 fiscal consolidation for the eurozone, as the consolidation the Fund advocates in France, Italy, and Spain would overwhelm the modest fiscal expansion the Fund proposed in the Netherlands (Germany would remain on the fiscal sidelines per the IMF’s recommendation).
                                          The same seems to be true in East Asia’s main surplus economies. ...
                                          Bottom line: if the Fund wants fiscal expansion in surplus countries to drive external rebalancing and reduce current account surpluses, it actually has to be willing to encourage major countries with large external surpluses to do fiscal expansion. Finding limited fiscal space in Sweden and perhaps Korea won’t do the trick. 20 or 30 basis points of fiscal expansion in small economies won’t move the global needle. Not if China, Japan, and the eurozone all lack fiscal space and all need to consolidate over time.

                                            Posted by on Tuesday, August 23, 2016 at 10:39 AM in Economics, International Finance | Permalink  Comments (23) 


                                            Why We Need a Fiscal Policy Commission

                                            I have a new column:

                                            Why We Need a Fiscal Policy Commission: During the Great Recession, monetary policymakers were aggressive and creative in their attempts to revive the economy. I wish they had been even more aggressive, and at times they were a bit slow to react due to excessive fear of inflation and the tendency to see recovery just around the corner, but their overall response to the crisis was commendable. Unfortunately, monetary policy alone was far from enough to give the economy the help it needed. Fiscal policy was needed too. 
                                            But fiscal policymakers let us down. ...

                                              Posted by on Tuesday, August 23, 2016 at 09:51 AM in Economics, Fiscal Policy, Fiscal Times, Politics | Permalink  Comments (93) 


                                              Links for 08-23-16

                                                Posted by on Tuesday, August 23, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (98) 


                                                Monday, August 22, 2016

                                                Paul Krugman: The Water Next Time

                                                "This election is likely to be decisive for the climate":

                                                The Water Next Time, by Paul Krugman, NY Times: ...The governor of flood-ravaged Louisiana asked President Obama to postpone a personal visit while relief efforts were still underway. ... He made the same request to Donald Trump, declaring, reasonably, that while aid would be welcome, a visit for the sake of a photo op would not.
                                                Sure enough, the G.O.P. candidate flew in, shook some hands, signed some autographs, and was filmed taking boxes of Play-Doh out of a truck. If he wrote a check, neither his campaign nor anyone else has mentioned it. Heckuva job, Donnie! ...
                                                Let’s back up for a minute and talk about the real meaning of the Louisiana floods. In case you haven’t been keeping track, lately we’ve been setting global temperature records every month. ...
                                                And one consequence of a warmer planet is more evaporation, more moisture in the air, and hence more disastrous floods. ... So a proliferation of disasters like the one in Louisiana is exactly what climate scientists have been warning us about.
                                                What can be done? The bad news is that drastic action to reduce emissions of greenhouse gases is long overdue. The good news is that the technological and economic basis for such action has never looked better. In particular, renewable energy — wind and solar — has become much cheaper in recent years, and progress in energy storage looks increasingly likely to resolve the problem of intermittency (The sun doesn’t always shine, the wind doesn’t always blow.) ...
                                                It probably won’t surprise you to hear that..., as with so many issues, Mr. Trump has gone deep down the rabbit hole, asserting not just that global warming is a hoax, but that it’s a hoax concocted by the Chinese to make America less competitive.
                                                The thing is, he’s not alone in going down that rabbit hole..., Mr. Trump is squarely in the Republican mainstream. ...
                                                In any case, this election is likely to be decisive for the climate, one way or another. President Obama has made some serious moves to address global warming, and there’s every reason to believe that Hillary Clinton would continue this push — using executive action if she faced a hostile Congress. Given the technological breakthroughs of the last few years, this push might just be enough to avert disaster. Donald Trump, on the other hand, would do everything in his power to trash the planet, with the enthusiastic support of his party. So which will it be? Stay tuned.

                                                  Posted by on Monday, August 22, 2016 at 07:18 AM in Economics, Environment, Politics | Permalink  Comments (103) 


                                                  Links for 08-22-16

                                                    Posted by on Monday, August 22, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (232) 


                                                    Saturday, August 20, 2016

                                                    Links for 08-20-16

                                                      Posted by on Saturday, August 20, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (239) 


                                                      Friday, August 19, 2016

                                                      Hard truths for the IMF

                                                      Simon Wren-Lewis:

                                                      Hard truths for the IMF: It is to the IMF’s credit that they have an Independent Evaluation Office, and their recent report on the Eurozone crisis is highly critical of the IMF’s actions. The IMF’s own staff told them in 2010 that Greek debt could well not be sustainable, but the IMF gave in to European pressure not to restructure Greek debt. Instead the Troika went down the disastrous route of excessive austerity, and the IMF underestimated (unwittingly or because they had to) the impact that austerity would have. In the last few years we keep hearing about an ultimatum the IMF has given European leaders to agree to restructure this debt, and on each occasion the IMF appears to fold under pressure.
                                                      These repeated errors suggest a structural problem. Back in 2015, Poul Thomsen, who runs the IMF’s European department, said “we need to ensure that we treat our member states equally, that we apply our rules uniformly.” But that is exactly what the IMF has failed to do with the Eurozone and Greece.
                                                      As Barry Eichengreen writes..., it is not as if the IMF have had problems demanding commitments from regional bodies such as African or Caribbean monetary unions and central banks in the past. The problem is much more straightforward. He notes that European governments are large shareholders in the Fund, and that “the IMF is a predominantly European institution, with a European managing director, a heavily European staff, and a European culture.”
                                                      In other words we have something akin to regulatory capture. The IMF’s job is to be an impartial arbitrator between creditor and debtor, ensuring that the creditor takes appropriate losses for imprudent lending but also that the debtor adjusts its policies so they become sustainable. In the case of the Eurozone it has in effect sided with the creditors, and ruinous austerity has been the result of that.

                                                        Posted by on Friday, August 19, 2016 at 11:03 AM in Economics, International Finance | Permalink  Comments (38) 


                                                        The Fed’s Effect on Black Americans

                                                        Narayana Kocherlakota:

                                                        The Fed’s Effect on Black Americans: The U.S. Federal Reserve appears to be paying more attention to how its policies affect black Americans. This is a wise move...
                                                        Imagine we’re in the midst of a severe recession. In deciding how aggressively to respond by lowering interest rates or buying assets, Fed officials must weigh the risk of unduly high inflation against the benefit of reducing unemployment. That benefit will be much greater for blacks..., any policy that reduces the overall unemployment rate by one percentage point ... reduces their unemployment rate by nearly two percentage points.
                                                        The differential impact also matters now, as the Fed contemplates removing stimulus. ...
                                                        The Fed rightly aims to pursue policies that are best for the economy as a whole. But I don’t believe that it will be seen as truly representative of all Americans unless it understands the differential impact of its policy choices on key demographic subgroups. It’s good to see from the minutes that the central bank is engaged in doing so.

                                                          Posted by on Friday, August 19, 2016 at 10:49 AM in Economics, Monetary Policy, Unemployment | Permalink  Comments (11) 


                                                          Paul Krugman: Obamacare Hits a Bump

                                                          The problems with Obamacare would be easy to fix, the real problem is Congress:

                                                          Obamacare Hits a Bump, by Paul Krugman, NY Times: More than two and half years have gone by since the Affordable Care Act, a.k.a. Obamacare, went fully into effect. Most of the news about health reform since then has been good, defying the dire predictions of right-wing doomsayers. But this week has brought some genuine bad news: The giant insurer Aetna announced that it would be pulling out of many of the “exchanges,” the special insurance markets the law established. ...
                                                          So what’s the problem?
                                                          Well, Obamacare is a system that relies on private insurance companies to provide much of its expanded coverage... And many of these private insurers are now finding themselves losing money, because previously uninsured Americans ... turn out to have been sicker and more in need of costly care than we realized. ...

                                                          The bad news mainly hits states that have small populations and/or have governments hostile to reform, where the exit of insurers may leave markets without adequate competition. That’s not the whole country, but it would be a significant setback.
                                                          But it would be quite easy to fix the system. It seems clear that subsidies for purchasing insurance, and in some cases for insurers themselves, should be somewhat bigger — an affordable proposition given that the program so far has come in under budget... There should also be a reinforced effort to ensure that healthy Americans buy insurance, as the law requires, rather than them waiting until they get sick. Such measures would go a long way toward getting things back on track.
                                                          Beyond all that, what about the public option?
                                                          The idea of allowing the government to offer a health plan directly to families was blocked in 2010 because private insurers didn’t want to face the competition. But if those insurers aren’t actually interested in providing insurance, why not let the government step in (as Hillary Clinton is in fact proposing)?
                                                          The trouble, of course, is Congress...
                                                          That said, there may still be room for action at the executive level. And I’m hearing suggestions that states may be able to offer their own public options; if these proved successful, they might gradually become the norm.
                                                          However this plays out, it’s important to realize that as far as anyone can tell, there’s nothing wrong with Obamacare that couldn’t be fairly easily fixed with a bit of bipartisan cooperation. The only thing that makes this hard is the blocking power of politicians who want reform to fail.

                                                            Posted by on Friday, August 19, 2016 at 10:21 AM in Economics, Health Care, Politics | Permalink  Comments (55) 


                                                            Links for 08-19-16

                                                              Posted by on Friday, August 19, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (211) 


                                                              Thursday, August 18, 2016

                                                              Note on Comments

                                                              There was a problem with comments -- they haven't been posting for a day or so.

                                                              Hopefully it has been resolved.

                                                              I will try to dig them out of the spam filter, but may not get to them all until much later today (will be traveling without internet access).

                                                                Posted by on Thursday, August 18, 2016 at 11:41 AM Permalink  Comments (4) 


                                                                Links for 08-18-16

                                                                  Posted by on Thursday, August 18, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (46) 


                                                                  Wednesday, August 17, 2016

                                                                  Liberalism and Hate-Based Extremism

                                                                  [I am traveling, so apologies for the lack of posts lately. Hopefully this will give you something to talk about.]

                                                                  Daniel Little:

                                                                  Liberalism and hate-based extremism, Understanding Society: How should a democratic society handle the increasingly virulent challenges presented by hate groups, anti-government extremists, and organizations that encourage violence and discrimination against others in society? Should extremist groups have unlimited rights to advocate for their ideologies of hatred and antagonism against other groups within a democracy?

                                                                  Erik Bleich has written extensively on the subject of racist speech and the law. Recent books include The Freedom to Be Racist?: How the United States and Europe Struggle to Preserve Freedom and Combat Racism and Race Politics in Britain and France: Ideas and Policymaking since the 1960s. Bleich correctly notes that these issues are broader than the freedom-of-speech framework in which they are often placed; so he examines law and policy in multiple countries on freedom of speech, freedom of association, and freedom of opinion-as-motive. In each of these areas he finds important differences across European countries and the United States with respect to legislation concerning racist expressions. In particular, liberal democracies like Great Britain, France, and Germany have created legislation to prohibit various kinds of hate-based speech and action. Here is his summary of the status of European legislation:

                                                                  European restrictions on racist expression have proceeded gradually but consistently since World War II. A few provisions were established in the immediate postwar era, but most countries’ key laws were enacted in the 1960s and 1970s. The statutes have been tinkered with, updated, and expanded in the ensuing decades to the point where virtually all European liberal democracies now have robust hate speech laws on their books. These laws are highly symbolic of a commitment to curb racism. But they are also more than just symbols. As measured by prosecutions and convictions, levels of enforcement vary significantly across Europe, but most countries have deployed their laws against a variety of racist speech and have recently enforced stiffer penalties for repeat offenders. (kl 960) 

                                                                  In the United States it is unconstitutional under the First Amendment of the Constitution to prohibit "hate speech" or to ban hate-based organizations. So racist and homophobic organizations are accorded all but unlimited rights of association and expression, no matter how odious and harmful the content and effects of their views. As Bleich points out, other liberal democracies have a very different legal framework for regulating hate-based extremism by individuals and organizations (France, Germany, Sweden, Canada).

                                                                  Here is the First Amendment of the US Constitution:

                                                                  Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.

                                                                  This is pure liberalism, according to which the state needs to remain entirely neutral about disagreements over values, and the only justification for legal prohibition of an activity is the harm the activity creates. There is a strong philosophical rationale for this position. John Stuart Mill maintains an ultra-strong and exceptionless view of freedom of expression in On Liberty.  He argues that all ideas have an equal right to free expression, and that this position is most advantageous to society as a whole. Vigorous debate leads to the best possible set of beliefs. Here are a few passages from On Liberty:

                                                                  The object of this Essay is to assert one very simple principle, as entitled to govern absolutely the dealings of society with the individual in the way of compulsion and control, whether the means used be physical force in the form of legal penalties, or the moral coercion of public opinion. That principle is, that the sole end for which mankind are warranted, individually or collectively, in interfering with the liberty of action of any of their number, is self-protection. (13)
                                                                  But the peculiar evil of silencing the expression of an opinion is, that it is robbing the human race; posterity as well as the existing generation; those who dissent from the opinion, still more than those who hold it. If the opinion is right, they are deprived of the opportunity of exchanging error for truth: if wrong, they lose, what is almost as great a benefit, the clearer perception and livelier impression of truth, produced by its collision with error. (19)

                                                                  This line of reasoning leads to legal toleration in the United States of groups like the White Citizens Councils, Neo-Nazi parties, and the Westboro Baptist Church to conduct their associations, propaganda, and demonstrations to further their hateful objectives. And they and their activists sometimes go further and commit actress of terrible violence (Timothy McVeigh, the murder of Matthew Shepherd in Wyoming, and the murders of civil rights workers in Mississippi).

                                                                  But as Mill acknowledges, a democratic society has a right and an obligation to protect its citizens from violence. This is the thrust of the "harm" principle in Mill's philosophy of political authority. Is right-wing extremism (RWE) really just another political platform, equally legitimate within the public sphere of debate in a democratic society? Or do these organizations represent a credible threat to personal safety and civil peace?

                                                                  Certainly most of the disagreements between liberals and conservatives fall in Millian category -- how much a society should spend on social welfare programs, what its immigration policies ought to be, the legal status of single-sex marriage. The disagreements among the parties are intense, but the debates and positions on both sides are legitimate. Mill is right about this range of policy disagreements. The political process and the sphere of public debate should resolve these disagreements.

                                                                  But RWE goes beyond this level of disagreement about policy and legislation. RWE represents a set of values and calls to action that are inconsistent with the fundamentals of a democratic society. And they are strongly and essentially related to violence. RWE activists call for violence against hated groups, they call for armed resistance to the state (e.g. the Bundy's), and they actively work to inculcate hatred against specific groups (Muslims, Jews, African Americans, gays and lesbians, ...). These groups are anti-constitutional and contemptuous of the common core of civility upon which a democratic society depends.

                                                                  There are two fundamental arguments against hate-based speech and associations that seem to justify exceptions to the general liberal principle of toleration of offensive speech. One is an argument linking hate to violence. There is ample historical evidence that hateful organizations do in fact stimulate violence by their followers (Birmingham bombing, lynchings and killings of civil rights workers, the assassination of Yitzak Rabin). So our collective interest in protecting all citizens against violence provides a moral basis for limiting incendiary hate speech and organization.

                                                                  The second kind of argument concerns hate itself, and the insidious effects that hateful ideologies have on individuals, groups, and the polity. EU reports make an effort to capture the essential nature and harms of hate (link). Hate incites mistrust, disrespect, discrimination, and violence against members of other groups. The social effects of hate are toxic and serious. Do these effects suffice to justify limiting hate speech?

                                                                  This is a difficult argument to make within the context of US jurisprudence. The realm of law involves coercion, and it is agreed that the threshold for interfering with liberty is a high one. It is also agreed that legal justifications and definitions need to be clear and specific. How do we define hate? Is it explained in terms of well-known existing hatreds -- racism, anti-semitism, islamophobia, homophobia, ...? Or should it be defined in terms of its effects -- inculcating disrespect and hostility towards members of another group? Can there be new hatreds in a society -- antagonisms against groups that were previously accepted without issue? Are there legitimate "hatreds" that do not lead to violence and exclusion? Or is there an inherent connection between hatred and overt antagonism? And what about expressions like those of Charlie Hebdo -- satire, humor, caricature? Is there a zone of artistic expression that should be exempt from anti-hate laws?

                                                                  Here is Bleich's considered view on the balance between liberty and racism. Like Mill, he focuses on the balance between the value of liberty and the harm created by racist speech and action.

                                                                  To telegraph the argument here, my perspective focuses on the level of harm inflicted on individuals, victim groups, and societies. For individuals and victim groups, the harm has to be measurable, specific, and intense. For societies, racism that fosters violence or that drives wedges between groups justifies limiting freedom of expression, association, and opinion-as-motive. (kl 247)

                                                                  Further:

                                                                  Racist expressions, associations, or actions that drive a wedge between segments of society or that provoke an extremely hostile response have little redeeming social value. Their harm to other core liberal democratic values such as social cohesion and public order simply outweighs any potential benefits to be gained by protecting them. At the same time, if the statements or organizations are designed to contribute to public debate about state policies, they have to be rigorously protected, even if they may have potentially damaging side effects. (kl 3403)

                                                                  And here are the closing words of advice offered in the book:

                                                                  How much freedom should we grant to racists? The ultimate answer is this: look at history, pay attention to context and effects, work out your principles, convince your friends, lobby your representatives, and walk away with a balance of values that you can live with. (kl 3551)

                                                                  The issue to this point has been whether the state can legitimately prohibit hate speech and organization. But other avenues for fighting hateful ideas fall within the realm of civil society itself. We can do exactly as Mill recommended: offer our own critiques and alternatives to hatred and racism, and strive to win the battle of public opinion. Empirically considered, this is not an entirely encouraging avenue, because a century of experience demonstrates that hate-based propaganda almost always finds a small but virulent audience. So it is not entirely clear that this remedy is sufficient to solve the problem.

                                                                  These are all difficult questions. But the rise and virulence of hate-based groups across the world makes it urgent for democracies to confront the problem in a just way, respecting equality and liberty of citizens while stamping out hate. And there are pressing practical questions we have to try to answer: do the non-coercive strategies available to the associations of civil society have the capacity to securely contain the harmful spread of hate-based organizations and ideologies? And, on the other hand, do the more restrictive legal codes against racism and hate-based organizations actually work in France or Germany? Or does the continuing advance of extremist groups there suggest that legal prohibition had little effect on RWE as a political movement? And if both questions turn out unfavorably, does liberalism face the possibility of defeat by the organizations of hatred and racism?

                                                                    Posted by on Wednesday, August 17, 2016 at 10:19 PM in Politics | Permalink  Comments (51) 


                                                                    Links for 08-17-16

                                                                      Posted by on Wednesday, August 17, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (119) 


                                                                      Tuesday, August 16, 2016

                                                                      General Equilibrium Theory: Sound and Fury, Signifying Nothing?

                                                                      A relatively long article by Raphaële Chappe at INET:

                                                                      General Equilibrium Theory: Sound and Fury, Signifying Nothing?: Does general equilibrium theory sufficiently enhance our understanding of the economic process to make the entire exercise worthwhile, if we consider that other forms of thinking may have been ‘crowded out’ as a result of its being the ‘dominant discourse’? What, in the end, have we really learned from it? ...

                                                                        Posted by on Tuesday, August 16, 2016 at 01:41 PM in Economics, Methodology | Permalink  Comments (38) 


                                                                        Obama Rescued the Economy. Could He Have Done More?

                                                                        Benjamin Friedman:

                                                                        Obama rescued the economy. Could he have done more?: ...Barack Obama took office Jan. 20, 2009, during the worst financial and economic crisis since World War II. By then, the Federal Reserve System had already acted to prevent the collapse of the banking system, and so the new president moved forward promptly to spur the depressed economy. The fiscal package he signed Feb. 17, 2009, allocated $787 billion — more than 5 percent of a year’s total U.S. income — ...aimed at stimulating economic activity. The money could have been better directed, so as to achieve greater impact, and in retrospect the amount was too small. But in the face of opposition from Republicans in Congress, Obama’s fiscal stimulus was about as much as any president could have done.
                                                                        After pushing through the stimulus, however, the Obama administration entered a period of quietude on the economic front. Despite large Democratic majorities in both houses of Congress, there was no other significant economic legislation during the new president’s first 100 days. Nor in the 100 days following that, nor in the 100 days after that. ...
                                                                        Instead, once the economic stimulus became law, the Obama domestic agenda shifted to health care. ... Raising the insured total to more than 90 percent of all Americans will likely stand as a historic achievement, but the cost was a diversion of the administration’s energy and attention from other economic problems badly in need of remedy.
                                                                        The most pressing among them was, and remains, financial reform. Rather than advance its own set of proposals ... when the Democrats held a filibuster-proof supermajority in the Senate ... the administration largely left the matter to Congress. ...
                                                                        Overall, if Dodd-Frank were merely one in a series of financial reform packages..., it would have been a laudable first step. But as the nation’s principal response to the worst financial crisis in two generations, it paled. Further, the specifics of many of the intended reforms were left to agency-level rulemaking exercises ... that, predictably, enabled industry lobbyists to blunt their force, if not thwart them altogether. ...

                                                                        There's quite a bit more in the article.

                                                                          Posted by on Tuesday, August 16, 2016 at 11:17 AM in Economics | Permalink  Comments (113) 


                                                                          Links for 08-16-16

                                                                            Posted by on Tuesday, August 16, 2016 at 12:06 AM Permalink  Comments (125) 


                                                                            Monday, August 15, 2016

                                                                            What's Useful about DSGE Models?

                                                                            George Evans responds to the recent discussion on the usefulness of DSGE models:

                                                                            Here is what I like and have found most useful about Dynamic Stochastic General Equilibrium (DSGE) models, also known as New Keynesian (NK), models. The original NK models were low dimensional – the simplest version reduces to a 3-equation model, while DSGE models are now typically much more elaborate. What I find attractive about these models can be stated in terms of the basic NK/DSGE model.
                                                                            First, because it is a carefully developed, micro- founded model incorporating price frictions, the NK model makes it possible to incorporate in a disciplined way the various additional sectors, distortions, adjustment costs, and parametric detail found in many NK/DSGE models. Theoretically this is much more attractive than starting with a reduced form IS-LM model and adding features in an ad hoc way. (At the same time I still find ad hoc models useful, especially for teaching and informal policy analysis, and the IS-LM model is part of the macroeconomics cannon).
                                                                            Second, and this is particularly important for my own research, the NK model makes explicit and gives a central role to expectations about future economic variables. The standard linearized three-equation NK model in output, inflation and interest rates has current output and inflation depending in a specified way on expected future output and inflation. The dependence of output on expected future output and future inflation comes through the household dynamic optimization condition, and the dependence of inflation on expected future inflation arises from the firm’s optimal pricing equation. The NK model thus places expectations of future economic variables front and center, and does so in a disciplined way.
                                                                            Third, while the NK model is typically solved under rational expectations (RE), it can also be viewed as providing the temporary equilibrium framework for studying the system under relaxations of the RE hypothesis. I particularly favor replacing RE with boundedly rational adaptive learning and decision-making (AL). Incorporating AL is especially fruitful in cases where there are multiple RE solutions, and AL brings out many Keynesian features of the NK model that extend IS-LM. In general I have found micro-founded macro models of all types to be ideal for incorporating bounded rationality, which is most naturally formulated at the agent level.
                                                                            Fourth, while the profession as a whole seemed to many of us slow to appreciate the implications of the NK model for policy during and following the financial crisis, this was not because the NK model was intrinsically defective (the neglect of financial frictions by most, though not all DSGE modelers, was also a deficiency in most textbook IS-LM models). This was really, I think, because many macro economists using NK models in 2007-8 did not fully appreciate the Keynesian mechanisms present in the model.
                                                                            However, many of us were alert to the NK model fiscal policy implications during the crisis. For example, in Evans, Guse and Honkapohja (“Liquidity traps, learning and stagnation,” 2008, European Economic Review), using an NK model with multiple RE solutions because of the liquidity trap, we showed, using the AL approach to expectations, that when there is a very large negative expectations shock, fiscal as well as monetary stimulus may be needed, and indeed a temporary fiscal stimulus that is large enough and early enough may be critical for avoiding a severe recession or depression. Of course such an argument could have been made using extensions of the ad hoc IS-LM model, but my point is that this policy implication was ready to be found in the NK model, and the key results center on the primacy of expectations.
                                                                            Finally, it should go without saying that NK/DSGE modeling should not be the one and only style. Most graduate-level core macro courses teach a wide range of macro models, and I see a diversity of innovations at the research frontier that will continue to keep macroeconomics vibrant and relevant.

                                                                              Posted by on Monday, August 15, 2016 at 02:04 PM in Economics, Macroeconomics, Methodology | Permalink  Comments (15) 


                                                                              Paul Krugman: Wisdom, Courage and the Economy

                                                                               "What do we actually know how to do when it comes to economic policy?":

                                                                              Wisdom, Courage and the Economy, by Paul Krugman, NY Times: It’s fantasy football time in political punditry, as commentators try to dismiss Hillary Clinton’s dominance in the polls — yes, Clinton Derangement Syndrome is alive and well — by insisting that she would be losing badly if only the G.O.P. had nominated someone else. We will, of course, never know. But one thing we do know is that none of Donald Trump’s actual rivals for the nomination bore any resemblance to their imaginary candidate, a sensible, moderate conservative with good ideas.
                                                                              Let’s not forget, for example, what Marco Rubio was doing in the memorized sentence he famously couldn’t stop repeating: namely, insinuating that President Obama is deliberately undermining America. It wasn’t all that different from Donald Trump’s claim that Mr. Obama founded ISIS. And let’s also not forget that Jeb Bush ... began his campaign with the ludicrous assertion that his policies would double the American economy’s growth rate.
                                                                              Which brings me to my main subject: Mrs. Clinton’s economic vision... It’s very much a center-left vision: incremental but fairly large increases in high-income tax rates, further tightening of financial regulation, further strengthening of the social safety net.
                                                                              It’s also a vision notable for its lack of outlandish assumptions. Unlike just about everyone on the Republican side, she isn’t justifying her proposals with claims that they would cause a radical quickening of the U.S. economy. ...
                                                                              So here’s my question: Is the modesty of the Clinton economic agenda too much of a good thing? Should accelerating U.S. economic growth be a bigger priority? ...
                                                                              After all, what do we actually know how to do when it comes to economic policy? ...
                                                                              According to the budget office, potential growth was pretty stable from 1970 to 2000, with nothing either Ronald Reagan or Bill Clinton did making much obvious difference. The subsequent slide began under George W. Bush and continued under Mr. Obama. This history suggests no easy way to change the trend. ...
                                                                              Now, I’m not saying that we shouldn’t try. ...
                                                                              But ... I don’t think enough people appreciate the courage involved in focusing on things we actually know how to do, as opposed to happy talk about wondrous growth. ...
                                                                              So it’s actually quite brave to say: “Here are the things I want to do, and here is how I’ll pay for them. Sorry, some of you will have to pay higher taxes.” Wouldn’t it be great if that kind of policy honesty became the norm?

                                                                                Posted by on Monday, August 15, 2016 at 01:38 AM Permalink  Comments (147) 


                                                                                Links for 08-15-16

                                                                                  Posted by on Monday, August 15, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (83) 


                                                                                  Saturday, August 13, 2016

                                                                                  Links for 08-13-16

                                                                                    Posted by on Saturday, August 13, 2016 at 10:23 AM in Economics, Links | Permalink  Comments (186) 


                                                                                    Friday, August 12, 2016

                                                                                    Paul Krugman: Pieces of Silver

                                                                                    How can Republicans support Trump?:

                                                                                    Pieces of Silver, by Paul Krugman, NY Times: By now, it’s obvious ... that Donald Trump is an ignorant, wildly dishonest, erratic, immature, bullying egomaniac. On the other hand, he’s a terrible person. But despite some high-profile defections, most senior figures in the Republican Party ... are still supporting him, threats of violence and all. Why?
                                                                                    One answer is that these were never men and women of principle. ...
                                                                                    Another answer is that ... the greatest risk facing many Republican politicians isn’t that of losing in the general election, it’s that of losing to an extremist primary challenger. This makes them afraid to cross Mr. Trump, whose ugliness channels the true feelings of the party’s base.
                                                                                    But there’s a third answer, which can be summarized in one number: 34..., the average federal tax rate for the top 1 percent in 2013.... And it’s up from just 28.2 in 2008, because President Obama allowed the high-end Bush tax cuts to expire and imposed new taxes to pay for a dramatic expansion of health coverage... Taxes on the really, really rich have gone up even more.
                                                                                    If Hillary Clinton wins, taxes on the elite will at minimum stay at this level, and may even go up significantly if Democrats do well enough ... to enable her to pass new legislation. ...
                                                                                    But if “populist” Donald Trump wins, taxes on the wealthy will go way down...
                                                                                    So if you’re wealthy, or you’re someone who has built a career by reliably serving the interests of the wealthy, the choice is clear — as long as you don’t care too much about stuff like shunning racism, preserving democracy and freedom of religion, or for that matter avoiding nuclear war, Mr. Trump is your guy..., it’s just an extension of the devil’s bargain the economic right has been making for decades, going all the way back to Nixon’s “Southern strategy.” ...
                                                                                    If this election goes the way it probably will, a few months from now those leading Republicans will be trying to pretend that they never really supported their party’s nominee, that in their hearts they always knew he was the wrong man.
                                                                                    But whatever doubts they may be feeling don’t excuse their actions, and in fact make them even less forgivable. For the fact is that right now, when it matters, they have decided that lower tax rates on the rich are sufficient payment for betraying American ideals and putting the republic as we know it in danger.

                                                                                      Posted by on Friday, August 12, 2016 at 10:09 AM in Economics, Politics | Permalink  Comments (100) 


                                                                                      Links for 08-12-16

                                                                                        Posted by on Friday, August 12, 2016 at 12:06 AM Permalink  Comments (268) 


                                                                                        Thursday, August 11, 2016

                                                                                        Links for 08-11-16

                                                                                          Posted by on Thursday, August 11, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (236) 


                                                                                          Wednesday, August 10, 2016

                                                                                          Do DSGE Models Have a Future?

                                                                                          Olivier Blanchard:

                                                                                          Do DSGE Models Have a Future?: DSGE models have come to play a dominant role in macroeconomic research. Some see them as the sign that macroeconomics has become a mature science, organized around a microfounded common core. Others see them as a dangerous dead end.
                                                                                           I believe the first claim is exaggerated and the second is wrong. I see the current DSGE models as seriously flawed, but they are eminently improvable and central to the future of macroeconomics. To improve, however, they have to become less insular, by drawing on a much broader body of economic research. They also have to become less imperialistic and accept to share the scene with other approaches to modelization.
                                                                                          For those who are not macroeconomists, or for those macroeconomists who lived on a desert island for the last 20 years, here is a brief refresher. DSGE stands for “dynamic stochastic general equilibrium.” The models are indeed dynamic, stochastic, and characterize the general equilibrium of the economy. They make three strategic modeling choices: First, the behavior of consumers, firms, and financial intermediaries, when present, is formally derived from microfoundations. Second, the underlying economic environment is that of a competitive economy, but with a number of essential distortions added, from nominal rigidities to monopoly power to information problems. Third, the model is estimated as a system, rather than equation by equation in the previous generations of macroeconomic models. The earliest DSGE model, representing an economy without distortions, was the Real Business Cycle model developed by Edward C. Prescott and focused on the effects of productivity shocks. In later incarnations, a wider set of distortions, and a wider set of shocks, has come to play a larger role, and current DSGE models are best seen as large- scale versions of the New Keynesian model, which empha- sizes nominal rigidities and a role for aggregate demand.[1]
                                                                                          There are many reasons to dislike current DSGE models. ...

                                                                                           

                                                                                            Posted by on Wednesday, August 10, 2016 at 03:07 PM Permalink  Comments (28) 


                                                                                            Links for 08-10-16

                                                                                              Posted by on Wednesday, August 10, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (192) 


                                                                                              Tuesday, August 09, 2016

                                                                                              Bosses Pay: The Right's Problem

                                                                                              Chris Dillow:

                                                                                              Bosses pay: the right's problem: The High Pay Centre said yesterday that FTSE 100 CEOs’ pay rose 10% last year to an average of almost £5.5m. It’s obvious that the left should find this a problem. I want to suggest that it should also be a problem for the right too, for four reasons.
                                                                                              First, high CEO pay is due in at least part to a market failure. ...
                                                                                              Secondly, rising CEO pay, especially when accompanied by a degradation of “middle-class” jobs means we’re shifting from a bourgeois society to a “winner-take-all” one. This has potentially nasty cultural effects. ...
                                                                                              Thirdly, it’s possible – I put it no stronger than that – that high CEO pay is bad for overall productivity. ...
                                                                                              Finally, there’s a danger that rising inequality will produce a nasty backlash. ... Political instability is no friend of business or free markets. ...
                                                                                              My point here is a simple one. There are good reasons why Theresa May has spoken of the “irrational, unhealthy and growing gap” between bosses’ and workers’ pay. It’s because such a gap threatens the values and interests of many conservatives.
                                                                                              Many Marxists are relaxed about this; it just confirms our view that capitalism is a device through which the rich exploit others. Should rightists really also be relaxed? I mean, they can’t all be just hypocritical shills of the rich, can they?

                                                                                              (There is an explanation of each point in the full post.)

                                                                                                Posted by on Tuesday, August 9, 2016 at 09:37 AM in Economics, Income Distribution | Permalink  Comments (35) 


                                                                                                Murky Macroeconomics

                                                                                                Paul Krugman:

                                                                                                Murky Macroeconomics: ...I realized something not too flattering about myself: I’m feeling nostalgic for 2011 or so.
                                                                                                Why? It was, of course, a terrible time for much of the world, and especially for anyone without a job. But for ... an economist ... it was a time of wonderful intellectual clarity. Liquidity-trap macroeconomics ... had become the story of the day. And the basic message of the models — that everything changes when you hit the zero lower bound — was being overwhelmingly confirmed by experience.
                                                                                                The thing is, it was all beautifully hard-edged: a crisp boundary at zero, a sharp change in the impact of monetary and fiscal policy when you hit that boundary. And the predictions we made came out consistently right.
                                                                                                But now things have gotten a bit, well, murky. The zero lower bound is not, it turns out, quite as hard a boundary as we thought. ...I’d be surprised if any central bank is willing to go much if at all below minus one percent — but it turns out to be a sort of a fuzzy no-man’s-land rather than a line that cannot be crossed.
                                                                                                More important, probably, is the fact that two of the major advanced economies — the US and, believe it or not, Japan — are arguably quite close to full employment. We don’t know how close... But you can no longer argue that supply limits are no longer relevant.
                                                                                                Correspondingly, you can also no longer argue with confidence that there can be no crowding out, because the Fed won’t raise rates. You can argue that it shouldn’t — and I would — but we are maybe, possibly, on our way out of the liquidity trap.
                                                                                                So we’re not in the simple, depressed-economy world of 2011 anymore. But here’s the thing: we’re not in what we used to call a normal macroeconomic situation either. Maybe we’re close to full employment, but maybe not, and that’s with near-zero interest rates; also, it’s all too easy to imagine adverse shocks in the near future, and not at all clear how the Fed could or would respond. We are, if you like, half-out of the liquidity trap, with one foot on dry land — but the other foot is still hanging over the edge, and it wouldn’t take much to topple us right back in.
                                                                                                What I would argue is that in this murky, fragile situation we should be conducting policy largely as if we were still in the trap — because we badly need to get both feet firmly on dry land with some distance between us and the quicksand. ... But it’s not the crystalline case we used to be able to make.
                                                                                                Still, we need to deal with this murky situation right, which means embracing the uncertainty as part of the argument. Make murkiness great again!

                                                                                                  Posted by on Tuesday, August 9, 2016 at 09:15 AM in Economics, Macroeconomics, Monetary Policy | Permalink  Comments (68) 


                                                                                                  The Failure of the Market for Presidential Candidates

                                                                                                  New column:

                                                                                                  The Failure of the Market for Presidential Candidates: Almost all economists believe in markets, and the tools economists use to analyze markets can be applied to a surprisingly large number of social interactions. Our attempts to use economics to examine questions that are traditionally the purview of sociology, psychology, and political science have not always been welcomed by those in other fields, and there’s no doubt that our methods are often applied naively without a full understanding of what researchers in other disciplines have learned. Nevertheless, I can’t help speculating on why the “market” for political candidates failed so spectacularly this year. ...

                                                                                                    Posted by on Tuesday, August 9, 2016 at 09:15 AM in Economics, Fiscal Times, Politics | Permalink  Comments (20) 


                                                                                                    Links for 08-09-16

                                                                                                      Posted by on Tuesday, August 9, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (124)