Ideology and Macroeconomics, by Arnold Kling: Scott Sumner writes,
I am amazed by how many proponents of fiscal policy don’t understand that
it’s symmetrical. Fiscal policy doesn’t mean more government; it means more
government during recessions and less government during booms, with no
overall change in the average level of government. Anyone who doesn’t even
get to that level of understanding, who doesn’t think in terms of policy
regimes, is simply not part of the serious conversation.
I agree with the first two sentences, but not with the last.
Yes, in theory, there should be economists who, as they argued for more
stimulus in 2009, should at the same time have been arguing for entitlement
reform or other reductions in future spending. Other things equal, the bigger
debt that we have accumulated over the past five years would make a
non-ideological macroeconomist want to propose tighter fiscal policy somewhere
down the road.
But “nonideological” and macroeconomics are nearly oxymorons. ...
(from 2005, before the recession had even started):
... To use fiscal policy to stabilize the economy however, you have to spend
more or tax less in the bad times (increase the deficit) and then do the hard
thing which is to raise taxes or cut spending in the good times (decrease the
deficit). To keep the budget in balance the good has to be matched
somewhere by the bad. If you cut taxes for this disaster, or this
recession, or this war, and don’t raise them later, what do you do next time?
Cut again? Okay, what about the time after that? It won’t work
forever. The priming of the economy during the bad times must be matched
by a slowdown during the good. Borrow when income is low, pay it back when
income is high.
Furthermore, in stabilization policy, it’s also not possible in the long-run
to use both government spending and taxation at opposite points in the business
cycle. That is, suppose you cut taxes during the bad times, then cut
spending during the good times to pay it back. That will work for a
recession or two, a hurricane or two, but it won’t work forever because
eventually there will be nothing left to cut out of government. The
opposite will not work forever either. If you increase spending during the
bad times then increase taxes during the good, the size of government will grow
indefinitely over the long-run. In more graphic form:
G↑ (rec) → T↑ (boom) → G↑ (rec)→ T↑ (boom) → G↑ (rec)
→ T↑ (boom) → bloated government
T↓ (rec) → G↓ (boom) → T↓ (rec)→ G↓ (boom) → T↓ (rec) →
G↓ (boom) → no government
These two policies, or some combination of them (increase G and cut T in
recessions, do the opposite in booms) are sustainable:
G↑ (rec) → G↓ (boom) → G↑ (rec) → G↓ (boom) → G↑ (rec)
→ G↓ (boom) → sustainable size of government
T↓ (rec) → T↑ (boom) → T↓ (rec) → T↑ (boom) → T↓ (rec)
→ T↑ (boom) → sustainable size of government
The Democrats are accused of adopting the first strategy and bloating the
government. The Republicans claim to adopt the second strategy to shrink
government, but they’ve bloated government themselves (take the second line and
change it to T↓ (rec) → G↑ (boom) → etc., a clearly unsustainable path).
Neither party seems willing or able to use either the third and/or the fourth
lines as a means of stabilizing the economy. We are seeing that now, and
maybe even less stable budgetary variations. The WSJ and other
members of the GOP seems to advocate T↓ (rec)→ T↓ (boom) → etc. which, without
cuts in G, cause deficits rise no matter how much they claim otherwise.
There are, of course, lots and lots of variations on these basic chains of
events, e.g. to adjust the size of government the first or second strategies can
be adopted temporarily, and you hope lawmakers would put all their cards on the
table as they do so whichever direction government size is to be adjusted.
But fiscal policy that is sustainable in the long-run, through recession after
recession, natural disaster after natural disaster, war after war, has to adopt
some combination of the third and fourth lines. ...
(from 2008, a bit afer the recession started):
Short-run stabilization policy for the economy during a downturn involves
either cutting taxes to stimulate consumption and investment (and sometimes
net exports), or increasing government spending. Which of these is used and
the specific policy adopted has important implications for the effectiveness
of policy, but no matter how it is done it will raise the deficit, and the
increase in the deficit is often used to oppose the policy.
Theoretically, however, there is no reason at all why short-run
stabilization policy ought to impact the long-run budget picture. Ideally,
the deficits that accumulate during bad times are paid for by raising taxes
or cutting spending during the good times so that there is no net change in
the budget in the long-run.
Historically, we have been pretty good at spending money in bad times, but
not so good at paying for the spending when times are better. But if we are
serious about stabilization, that's what we need to do. When output is below
the long-run sustainable rate we increase economic activity by deficit
spending, and when output exceeds the long-run sustainable rate, we decrease
activity by running a surplus. Doing this fills the troughs with the shaved
peaks from the booms and keeps the economy closer to the long-run trend
I've been wondering if the current crisis will change our attitude about
paying for stabilization policy, i.e. if it will make us more willing to
raise taxes and cut spending when times are good. One of the problems with
the last two boom-bust cycles was unchecked exuberance. Any calls to raise
taxes or interest rates were met with howls about how it would cut off the
boom, and who would want to do that? But tempering the boom might have
helped to reduce the size of the meltdown we are experiencing now and left
us much better off.
When the next boom develops, will we be more willing to raise taxes, cut
spending, and tighten Fed policy? Will we remember what happened when the
previous two booms ended and be more willing to step in and slow down the
booming economy, will we be less susceptible to the argument that doing so
will eliminate creative and productive innovation (as opposed to
misdirecting resources during the mania phase)? This doesn't mean creating a
recession or slamming on the brakes so hard we hit our heads, it doesn't
mean ending innovative activity, it simply means what it says, bringing the
growth rate down to its sustainable rate, and attenuating the exuberance
that leads to housing and dot.com bubbles. Will we be more willing to take
the necessary steps the next time the economy begins to boom?
I doubt it.
And the problem is that if we aren't willing to pay our bills during the
good times, then it will be much harder to spend the money we need to spend
when times are bad -- our hands will be tied when it comes to stabilization
I could go on, but I'll just simply note that Krugman has been arguing (more than once) that
there is little evidence that expansionary fiscal policy in recessions is
Oh, and since we are talking about unwillingness to reverse policy for
ideological reasons, are conservatives arguing that the tax cuts they call for
in recessions ought to be reversed when the economy improves? Why aren't those
who are so worried about reversing policy in good times only talking about the
spending side of the equation? Could it be -- gasp -- that their ideology, there
belief that government is too big, is the reason?
Posted by Mark Thoma on Sunday, October 20, 2013 at 08:57 AM in Economics, Fiscal Policy, Politics |
Posted by Mark Thoma on Sunday, October 20, 2013 at 12:03 AM in Economics, Links |
Comments on this post from Dan Little?:
Polarization: Suppose a country had come to the brink of financial
catastrophe because the two parties in its legislature were unable to find
compromises in the public interest. Suppose further that the discourse in that
country had evolved towards a highly toxic and hateful stream of anathemas by
one party against the other. And suppose that one party projects an
unprecedented amount of vitriol and hatred towards the leader of the other
party, the president of the country. How would we describe this state of
affairs? And what hypotheses might we consider to explain how this state of
affairs came to be?
First, description. This seems like a society on the brink of political
breakdown. It is riven by hard hatreds, with almost no strands of civility and
shared values to hold it together. One side portrays the other in extreme terms,
with few voices that insist on the basic decency of the other party. (There is
one maverick voice, perhaps, who breaks ranks with the extremists of his party,
and who expresses a decent respect for his political foes. He is accused of
being too soft -- perhaps a secret ally of the opposition.)
Here is how the point is put in a recent piece in the Washington Post:
Today there is a New Confederacy, an insurgent political force that has
captured the Republican Party and is taking up where the Old Confederacy
left off in its efforts to bring down the federal government. (link)
Consider this map of the distribution and density of slaveholding in the
South that Abraham Lincoln found very useful in the run-up to the Civil War;
Compare this to a map created by Richard Florida in the Atlantic
There is a pretty strong alignment between the two maps.
So where does the extremism come from? There is a fairly direct hypothesis that
comes to mind: racism and racial resentment. We are facing a real inversion of
the white-black power relation that this country has so often embraced. Perhaps
this is just very hard for the president's opponents to accept. Perhaps it
creates a curdling sense of resentment that is difficult to handle. This is
certainly the impression created by the recent incident involving the waving of
a confederate flag in front of the White House, an act not so different from a
cross-burning in front of the home of a black family. And in fact, there is a
pretty striking correlation between the heart of this anti-government activism
and the distribution of slaveholding in the United States before the Civil War
that is revealed in the two maps above.
Another possibility is that it's really and truly about ideology. The right
really hates the president because they think he advocates an extreme left set
of policies. The problem with this idea is that the President is in fact quite
moderate and centrist. The health care reforms he spearheaded were themselves
advocated by conservative think tanks only a few years earlier; the President's
agenda has not given much attention to poverty; and the President has avoided
serious efforts at redistribution through more progressive taxation. So in fact
the President represents the center, not the left, on most economic policies.
So where do these trends seem to be taking us? I used the word "polarization" to
describe the situation, but perhaps that is not quite accurate. The percentage
of the electorate represented by the extremist faction is small -- nothing like
a plurality, let alone majority, of the population. So the extremism in our
politics is being driven by a fairly small segment of our society. Because of
the extreme degree of gerrymandering that exists in many Congressional
districts, though, these legislators are secure in their home districts. So we
can't have a lot of hope in the idea that their own electorates will turn them
Maybe this society will cycle back to a more moderate set of voices and values.
Maybe the public will express its displeasure with the extremist voices, and
like good political entrepreneurs they will adapt. Maybe. But we don't seem to
see the signs of thaw yet.
Posted by Mark Thoma on Saturday, October 19, 2013 at 10:47 AM in Economics, Politics |
Here's the conclusion from a
Vox EU piece by Òscar Jordà, Moritz Schularick,
The long-run historical record underscores the central role played by
private-sector borrowing behavior for the buildup of financial instability.
- The idea that financial
crises typically have their roots in fiscal problems is not supported by
- We find evidence,
however, that high levels of public debt can matter for the path of the
recovery, confirming the results of Reinhart et al. (2012).
However, this effect is
related to recoveries from financial crises rather than typical recessions.
- While high levels of
public debt make little difference in normal times, entering a financial
crisis recession with an elevated level of public debt exacerbates the
effects of private-sector deleveraging, and typically leads to a prolonged
period of sub-par economic performance.
Put differently, the
long-run data suggest that without enough fiscal space, a country’s capacity to
perform macroeconomic stabilisation and resume growth may be impaired.
Posted by Mark Thoma on Saturday, October 19, 2013 at 10:47 AM in Economics, Financial System |
On the road and out and about today, so -- for now -- just a quick one from Paul Krugman
responding to Antonio Fatas (some of Krugman's supporting evidence has been
Do Currency Regimes Matter?:
Antonio Fatas, citing new work by
Andy Rose (pdf),
suggests that currency regimes don’t really matter — in particular that
membership in the euro has not really been a special problem for peripheral
Challenging preconceptions is always good, and this is a serious debate. I
am still, however, very much on the other side. I’d argue two points.
First, nominal wage stickiness — the key argument for the virtues of
floating exchange rates — is an
overwhelmingly demonstrated fact. Rose doesn’t offer reasons why this
doesn’t matter; he just offers a reduced-form relationship between currency
regimes and economic performance, and fails to find a significant effect. Is
this because there really is no effect, or because his tests lack power?
Second, there is the very striking empirical observation that debt levels
matter much less for countries with their own currency than for those
without. ... Indeed: debt only seems to matter for euro nations.
So I don’t buy the notion that the currency regime is irrelevant. But
clearly the Rose results need to be taken seriously, and we have to figure
out why he finds what he does.
Posted by Mark Thoma on Saturday, October 19, 2013 at 09:54 AM in Economics, International Finance |
Posted by Mark Thoma on Saturday, October 19, 2013 at 12:33 AM in Economics, Links |
"The limitation of our paper is that we haven't shown that our circuit has
relevance to the stock market":
Market bubbles may be predictable, controllable, EurekAlert: It's an
idea financial regulators have dreamed of. Experiments on a simple model of
chaos have found that it may be possible not only to predict an extreme
event, like a stock market collapse, but to intervene and prevent it from
In a paper appearing October 21 in the journal Physical Review Letters,
an international team of chaos researchers say that these extreme events,
which they call "dragon kings," are less random than had been thought and
that, in a simple experiment at least, they can be anticipated and
"These dragon kings are predictable, if we knew what to measure," said
co-author Dan Gauthier, the Robert C. Richardson professor of physics at
The latest finding is an outgrowth of experimental work Gauthier has been
doing since the 1990s with simple electrical circuits he calls "chaos
During a long run of the experiment, the data reveal that the chaotic
behavior visits "hot spots" in which an extreme event, "a bubble," might
occur. This is an event in which the circuits suddenly and temporarily loose
synch. Sometimes the size of the event is small, like a small change in a
financial market, and other times it is gigantic, like a market crash. And
the size of most of these disturbances follows a power law distribution, in
which one variable changes as a power of the other. The most extreme events,
the "dragon kings," are responsible for significant deviations from the
curve of the power law.
Extreme events that may be governed by these laws would include sudden
population crashes in species or freak waves in the ocean, Gauthier said.
Other examples might be epileptic storms of activity in the brain and
rolling power outages caused by an initial small disturbance, like a
squirrel shorting out one substation on a large grid. Other examples could
be found in the occurrence of incipient failure of materials and of
engineering structures, in the synchronized behavior of kidney and heart
cells in the body, in meteorological front dynamics and in climate change,
among many others.
In a series of experiments performed with the coupled chaos circuits by
Gauthier's colleague and former post-doctoral research associate, Hugo
Cavalcante, who is now at the Federal University of Paraiba in Brazil, it
was found that the introduction of a tiny amount of current injected into
one of the circuits at just the right time prevented a predicted dragon king
from happening. "Maybe tiny nudges can make a big difference," Gauthier
"The limitation of our paper is that we haven't shown that our circuit has
relevance to the stock market," which has many more variables, Gauthier
said. "We aren't yet sure where to look, but for this one simple system, we
figured out how to find it."
Gauthier said the five-page
paper faced a difficult gauntlet of reviewers before being accepted in
Posted by Mark Thoma on Friday, October 18, 2013 at 10:02 AM in Economics, Financial System |
One Million Page Views and Round Number Bias: Earlier this week, this
Conversable Economist blog reached 1,000,000 pageviews. ... Of course, being
me, I can 't commemorate a landmark without worrying about it. Is focusing
on 1,000,000 pageviews just another example of round-number bias? Are
pageviews a classic example of looking at what is easily measureable, when
what matters is not as easily measurable?
Round number bias is the human tendency to pay special attention to numbers
that are "round" in some way. For example, in the June 2013 issue of the
Journal of Economic Psychology (vol. 36, pp. 96-102) ,Michael Lynn, Sean
Masaki Flynn, and Chelsea Helion ask "Do consumers prefer round prices?
Evidence from pay-what-you-want decisions and self-pumped gasoline
purchases." They find, for example, that at a gas station where you pump
your own, 56% of sales ended in .00, and an additional 7% ended in
.01--which probably means that the person tried to stop at .00 and missed.
They also find evidence of round-number bias in patterns of restaurant
tipping and other contexts.
Another set of examples of round number bias come from Devin Pope and Uri
Simonsohn in a 2011 paper that appeared in Psychological Science (22:
1, pp. 71-79): "Round Numbers as Goals: Evidence from Baseball, SAT Takers,
and the Lab." They find, for example, that if you look at the batting
averages of baseball players five days before the end of the season, you
will see that the distribution over .298, .299, .300, and .301 is
essentially even--as one would expect it to be by chance. However, at the
end of the season, the share of players who hit .300 or .301 was more than
double the proportion who hit .299 or .298. What happens in those last five
days? They argue that batters already hitting .300 or .301 are more likely
to get a day off, or to be pinch-hit for, rather than risk dropping below
the round number. Conversely, those just below .300 may get some extra
at-bats, or be matched against a pitcher where they are more likely to have
success. Pope and Simonsohn also find that those who take the SAT test and
end up with a score just below a round number--like 990 or 1090 on what used
to be a 1600-point scale--are much more likely to retake the test than those
who score a round number or just above. They find no evidence that this
behavior makes any difference at all in actual college admissions.
Round number bias rears its head in finance, too. In a working paper called
"Round Numbers and Security Returns," Edward Johnson, Nicole Bastian
Johnson, and Devin Shanthikumar desribe their results this way: "We find,
for one-digit, two-digit and three-digit levels, that returns following
closing prices just above a round number benchmark are significantly higher
than returns following prices just below. For example, returns following
“9-ending” prices, which are just below round numbers, such as $25.49, are
significantly lower than returns following “1-ending” prices, such as
$25.51, which are just above. Our results hold when controlling for bid/ask
bounce, and are robust for a wide collection of subsamples based on year,
firm size, trading volume, exchange and institutional ownership. While the
magnitude of return difference varies depending on the type of round number
or the subsample, the magnitude generally amounts to between 5 and 20 basis
points per day (roughly 15% to 75% annualized)."
In "Rounding of Analyst Forecasts," in the July 2005 issue of Accounting
Review (80: 3, pp. 805-823), Don Herrmann and Wayne B. Thomas write: "We
find that analyst forecasts of earnings per share occur in nickel intervals
at a much greater frequency than do actual earnings per share. Analysts who
round their earnings per share forecasts to nickel intervals exhibit
characteristics of analysts that are less informed, exert less effort, and
have fewer resources. Rounded forecasts are less accurate and the negative
relation between rounding and forecast accuracy increases as the rounding
interval goes from nickel to dime, quarter, half-dollar, and dollar
In short, the research on round-number bias strongly suggests not getting
too excited about 1,000,000 in particular. There is very little reason to
write this blog post now, as opposed to several months in the past or in the
future. However, I hereby acknowledge my own personal round number bias and
succumb to it. ...
Posted by Mark Thoma on Friday, October 18, 2013 at 10:02 AM in Economics, Weblogs |
Republicans have made the economy worse:
The Damage Done, by Paul Krugman, Commentary, NY Times: The government
is reopening, and we didn’t default on our debt. Happy days are here again,
Well, no. ...Congress has only voted in a temporary fix, and we could find
ourselves going through it all over again in a few months. ...
Beyond that,... it’s important to recognize that the economic damage from
obstruction and extortion didn’t start when the G.O.P. shut down the
government..., it has been an ongoing process, dating back to the Republican
takeover of the House in 2010. ...
A useful starting point for assessing the damage done is a ...
report by ... Macroeconomic Advisers, which estimated that “crisis
driven” fiscal policy ... since 2010 ... has subtracted about 1 percent off
the U.S. growth rate for the past three years. This implies cumulative
economic losses ... of around $700 billion. The firm also estimated that
unemployment is 1.4 percentage points higher...
Yet ... the report doesn’t take into account ... other bad policies that are
a more or less direct result of the Republican takeover in 2010. Two big
bads stand out: letting payroll taxes rise, and sharply reducing aid to the
unemployed... Both actions have reduced the purchasing power of American
workers, weakening consumer demand and further reducing growth. ...
But why have Republican demands so consistently had a depressing effect on
Part of the answer is that the party remains determined to wage top-down
class warfare... Slashing benefits to the unemployed because you think they
have it too easy is cruel even in normal times, but it has the side effect
of destroying jobs when the economy is already depressed. Defending tax cuts
for the wealthy while happily scrapping tax cuts for ordinary workers means
redistributing money from people likely to spend it to people who are likely
to sit on it.
We should also acknowledge the power of bad ideas. Back in 2011,
triumphant Republicans eagerly adopted the concept ... of “expansionary
austerity” — ...that cutting spending would actually boost the economy by
increasing confidence. Experience since then has thoroughly refuted this
Are all the economy’s problems the G.O.P.’s fault? Of course not. .... But
most of the blame for the wrong turn we took on economic policy,
nonetheless, rests with the extremists and extortionists controlling the
Things could have been even worse. This week, we managed to avoid driving
off a cliff. But we’re still on the road to nowhere.
Posted by Mark Thoma on Friday, October 18, 2013 at 02:25 AM in Economics, Fiscal Policy, Politics |
Posted by Mark Thoma on Friday, October 18, 2013 at 12:03 AM in Economics, Links |
Teaching, then travel today, so just a few quick ones for now. Let's start
with Paul Krugman:
Drag: ... The now widely-cited
Macroeconomic Advisers report estimated the cost of crisis-driven fiscal
policy at 1 percentage point off the growth rate for three years, or roughly
3 percent now. More than half of this estimated cost comes from the “fiscal
drag” of falling discretionary spending, with the rest coming from a (shaky)
estimate of the impacts of fiscal uncertainty on borrowing costs.
I’ve been looking a bit harder at that report, and while I am in broad
agreement with its conclusion, I think it’s missing quite a lot. On balance,
I’d argue that the negative effect of the crazies has been even worse than
MA says. ...
OK, first thing: I’m not too happy with the report’s reliance on the Bloom
et al uncertainty index to measure costs. ... It’s really not something you
want to lean on, and if you take it out, MA’s estimates of the Republican
drag fall. But we shouldn’t stop there, because there are two important
aspects of the story that MA leaves out.
First, part of the fiscal cliff deal involved letting the Obama payroll tax
cut — a significant, useful form of economic stimulus — expire. (Republicans
only like tax cuts that go to people with high incomes.) This led to a
surprisingly large tax hike in 2013, focused on workers...
Second, GOP opposition to unemployment insurance has been the biggest factor
in a very rapid decline in unemployment benefits despite continuing weak job
markets... This hurts the unemployed a lot, but it also hurts the economy,
because the unemployed ... surely must have been forced into spending cuts
as benefits expired.
The combination of the payroll take hike and the benefit cuts amounts to
about $200 billion of fiscal contraction at an annual rate, or 1.25 percent
of GDP, probably with a significant multiplier effect. Add this to the
effects of sharp cuts in discretionary spending and the effects of economic
uncertainty, however measured, and I don’t think it’s unreasonable to
suggest that extortion tactics may have shaved as much as 4 percent off GDP
and added 2 points to the unemployment rate.
In other words, we’d be looking at a vastly healthier economy if it weren’t
for the GOP takeover of the House in 2010.
Posted by Mark Thoma on Thursday, October 17, 2013 at 10:52 AM in Economics, Fiscal Policy |
Simon Johnson is less than optimistic about the long run prospects for "the
current governmental arrangement known as the United States of America":
The Long March of the American Right, by Simon Johnson, Commentary, NY Times:
With a last-minute agreement on lifting the debt ceiling, the immediate
threat of legal and financial disaster from a default on United States
government obligations has been averted. But the last week has provided
additional insight into how and why the current governmental arrangement
known as the United States of America will end.
The mainstream narrative is that the problem is “dysfunctional government”
or “paralysis in Washington.” That’s true, up to a point, but the real
problem is the steady decline in legitimacy of the federal government – and
the way this is related to what has happened on the right of the political
In the 1940s, many people believed ... in the ability of the federal
government to both organize activities at home and to have a positive impact
around the world. This was, perhaps, the most lasting effect of the Great
Depression..., on the whole, government was perceived as stepping in to
This positive view of an expanded federal government never sat well with
people on the right, but the organized pushback was limited through the
1950s. It was only with the turmoil of the Vietnam War and other social
pressures in the 1960s that the conservatives got their chance – starting
with political direct mailing (American Target Advertising was founded in
1965), the rise of talk radio (particularly from the 1980s), and early
anti-tax campaigns (including Proposition 13, which cut property taxes
sharply in California in 1978). ...
The ... decline in legitimacy of the United States government is real and
lasting... Reinforcing and accelerating this trend is perhaps the greatest
damage caused by the financial crisis of 2007-8...
Sooner or later, the American public may elect a group of politicians
determined to end the belief that the federal government can be trusted.
Their initial steps in that direction will strengthen their showing in
opinion polls – and they will be encouraged to go further. At that time, the
United States will default on its debts and the world’s financial and fiscal
systems will be plunged into chaos.
Posted by Mark Thoma on Thursday, October 17, 2013 at 10:51 AM in Economics, Politics |
Chris Blattman (the original is much longer):
Is aid a roadblock to development? Some thoughts on Angus Deaton’s new book,
by Chris Blattman: I was talking with a prominent development economist... He expressed surprise that Angus Deaton’s
new book on development wasn’t getting more attention. Deaton is one of
the three or four intellectual giants of the field...
You have to be careful what you wish for. The NY Times
wrote a positive but skeptical review this weekend, and my Twitter feed
has been full since then with some support but a great deal more skepticism
for the book. ...
The bulk of Deaton’s book is an overview of half of humanity’s climb from
abject poverty to health and wealth. ... It
is a marvelous overview for the newcomer and the oldcomer. Where he’s enflamed passions, though, is his last chapter: “How to help
those left behind”. It’s a tirade against aid, especially naive aid. Overall
one message comes through: Aid is a roadblock to development.
I’m half with Deaton and half not. ... Aid isn’t a uniform mass. Deaton knows this, and my guess is he’s talking
about a particular kind of aid. I don’t think he means emergency relief for
disaster and conflicts. I don’t think he means the money behind peacekeeping
forces and post-war assistance. He might exclude child sponsorship. I’m
guessing he’s not talking about money spent on vaccine research in the
West. He might even exclude support for elections and party-building and
I think Deaton has his sights aimed at dollars sent by the West to local
governments to supposedly reduce poverty, improve health, and ignite growth.
This is a lot (if not the bulk) of money sent to poor countries, and so it’s
a fair target.
This makes it easier to see what he means by aid not working. It probably
hasn’t produced growth... And it might not be what’s responsible for falling poverty
levels. Frankly we don’t know, but I think we can say that if aid did ignite
this growth, it certainly has been coy about it.
But I wouldn’t diminish these other kinds of aid. ... Without a doubt, big chunks of the aid machine are broken. I’d prefer to fix
them and not throw them away. In large part, this is what Deaton recommends.
He also reminds us there are things that are harder to do than give money,
like opening our borders, that could help more.
The polemic will sell more books and get people talking about the world’s
problems. That’s exactly what polemic is supposed to do. But I would
recommend paying the most attention to the concrete suggestions and
solutions in the book. I think the promoters and detractors are all closer
to sharing the same opinions than we think. ...
Posted by Mark Thoma on Thursday, October 17, 2013 at 10:50 AM in Development, Economics |
Posted by Mark Thoma on Thursday, October 17, 2013 at 12:03 AM in Economics, Links |
A colleague says "I found this to be very interesting. Maybe your
readers would be interested?" (To some extent, this is the point I was trying to get at in the post below this one):
Enemies vs. Adversaries, by Michael Ignatieff, NY Times: For democracies
to work, politicians need to respect the difference between an enemy and an
An adversary is someone you want to defeat. An enemy is someone you have to
destroy. With adversaries, compromise is honorable: Today’s adversary could
be tomorrow’s ally. With enemies, on the other hand, compromise is
Between adversaries, trust is possible. They will beat you if they can, but
they will accept the verdict of a fair fight. This, and a willingness to
play by the rules, is what good-faith democracy demands.
Between enemies, trust is impossible. They do not play by the rules (or if
they do, only as a means to an end) and if they win, they will try to
rewrite the rules, so that they can never be beaten again.
Adversaries can easily turn into enemies. If majority parties never let
minority parties come away with half a loaf, the losers are bound to
conclude they can only win through the utter destruction of the majority.
Once adversaries think of democracy as a zero-sum game, the next step is to
conceive of politics as war: no quarter given, no prisoners taken, no mercy
More civility and gentility — being nicer — will not cure this. What needs
to change are the institutions themselves, and they will only change when
the political class in Washington realizes that, just as in American
football, there are some hits that are killing the game.
Saving the game means changing the rules. ...
What’s indefensible is a political class that believes nothing better is
possible — a class that benefits from enmity without realizing that the
damage from it is corrosive, and possibly irreversible.
Posted by Mark Thoma on Wednesday, October 16, 2013 at 02:08 PM in Economics, Politics |
I am probably one of the few liberals who don’t think the Tea Party caucus
is engaged in irresponsible hostage-taking. Sure, I disagree with their
policy objectives, and they are risking economic catastrophe by trying to
force the government into default. But they are also fighting for a
principle, misguided as it may be: Obamacare is evil, and should be stopped.
The debt ceiling is an absurdity that should not exist. But since it does
exist, it is leverage that conservatives can use to try to achieve their
policy goals. The problem is that the debt ceiling exists; given its
existence, you can’t blame people for using it for their ends. It’s like the
filibuster: you can say that the 60-vote requirement is bad, but you can’t
blame people for taking advantage of it. As Norman Ornstein said..., “If you
hold one-half of one-third of the reins of power in Washington, and are
willing to use and maintain that kind of discipline even if you will bring
the entire temple down around your head, there is a pretty good chance that
you are going to get your way.”
I don't think that the fact that something is permissible under existing
rules necessarily makes it OK. Unlike the public, legislators have the power to change laws/rules that allow behavior that shouldn't be permitted, that's their job, and I don't think threatening the economy with severe harm to get your way ought to be allowed. They aren't operating in a world where the rules are determined exogenously, so they can't just say the rules are the rules and we are simply operating within them -- the rules can (and should) be changed.
Posted by Mark Thoma on Wednesday, October 16, 2013 at 10:15 AM in Economics, Politics |
John Williams, President of the SF Fed, gives forward guidance on forward
Forward policy guidance at the Federal Reserve, by John C. Williams,
President, FRBSF, Vox EU: In response to the financial crisis, the
Federal Open Market Committee (FOMC) lowered the target federal funds rate
to essentially zero in December 2008, where it has remained. The economy,
however, was still reeling, and it wasn’t possible to create additional
monetary stimulus by cutting the federal funds rate further—owing to the
inability of nominal interest rates to fall much below that point.
The FOMC therefore turned to “unconventional” monetary policies, including
forward policy guidance. Through the use of forward guidance, the FOMC
influences business and investor views about where monetary policy in
general, and the federal funds rate in particular, is likely headed. This
affects longer-term interest rates, as investors adjust their views on
future short-term rates. In particular, we have used the Fed’s
communications tools—policy statements, FOMC participants’ forecasts, press
conferences, and speeches—to convey our expectation that short-term interest
rates will remain low for some time.
The FOMC experimented with forward guidance in the past—in 2003 and 2004—and
made a renewed effort in December 2008, when the FOMC stated that it
expected to keep the funds rate low “for some time.” Although this
qualitative forward guidance succeeded in influencing the public’s
expectations of future policy, nonetheless, public expectations often
remained much tighter than the FOMC’s own views. In fact, from 2009 to
mid-2011, expectations from financial markets consistently showed the
federal funds rate lifting off from zero within just a few quarters. This
view persisted despite the efforts of many FOMC members to communicate the
need for a sustained period of highly accommodative monetary policy,
necessitated by the severity of the downturn and the slow recovery.
To push back against these excessively tight policy expectations, the FOMC
shifted its forward guidance to make it more explicit. This occurred in the
summer of 2011, offering a real-world example of the influence more
assertive guidance can wield. At the time, many private-sector economists
still believed that the federal funds rate would be raised within the year.
By amending the language in its August statement—specifically, by writing
that economic conditions were “likely to warrant exceptionally low levels
for the federal funds rate at least through mid-2013”—the Fed was able to
communicate its expectation that liftoff from zero would take at least two
years. The communication allowed us to bring public expectations into closer
alignment with Fed thinking. As a result, longer-term interest rates fell by
10 to 20 basis points—a significant drop.
In December of 2012, we introduced a new form of forward guidance. Instead
of speaking in terms of dates on the calendar, we began to tie the path of
monetary policy to economic variables such as the unemployment rate.
Specifically, the statement read that the FOMC “currently anticipates that
this exceptionally low range for the federal funds rate will be appropriate
at least as long as the unemployment rate remains above 6½ percent.” This
shift was undertaken with the intent of helping the public better understand
the Fed’s decision-making process in response to changes in economic
conditions. The caveat being, of course, that the public should not infer
that reaching the quoted unemployment level would spark an immediate policy
change; hence the wording, “at least as long as.” That is, this 6½ percent
threshold is not an automatic trigger; it is merely a line of demarcation,
after which we will reassess the most fitting course for the federal funds
rate. For example, my own current projection—even though I expect the
unemployment rate to fall below 6½ percent in early 2015—is that it won’t be
appropriate to raise the funds rate until well after that point is reached,
likely sometime in the second half of 2015.
This leads me to another form of forward guidance, the FOMC participants’
projections for coming years. Four times a year, FOMC participants submit
their views on the appropriate future path of the federal funds rate, along
with associated projections for economic growth, unemployment, and
inflation. These projections are published on the Federal Reserve Board’s
web site. At our most recent meeting in September, a substantial majority of
FOMC participants—14 of 17—expected that the first funds rate hike would
take place in 2015 or later. After the initial hike, most predicted future
rate increases would occur only gradually, with the median projection that
the funds rate would rise to just 2 percent by the end of 2016.
Again, these projections improve public understanding of Fed thinking. In
addition to helping people better predict how the Fed reacts to changes in
economic conditions, establishing this range of projections reinforces that
the future path of policy is determined not by a preset course, but by how
economic events unfold. This helps reduce the uncertainty and confusion
we’ve historically seen as a result of public misperceptions of Federal
Reserve monetary policy.
While forward guidance brings with it a number of benefits, it is also
necessary to acknowledge both its limitations and some potential drawbacks.
First, efficacy depends on credibility. In severe downturns, the likes of
which we have recently experienced, appropriate forward guidance can stretch
years into the future. Public credulity may be tested by statements relating
to events so far off, particularly when policy makers may be different than
the ones making assertions today. Second, clearly communicating monetary
policy and the associated data dependence is difficult to do well.
Asset-price fluctuations over the past several months, sparked by Fed
communications, demonstrate how hard it is to effectively convey FOMC policy
plans in an evolving economic environment. Just as good communication can
reduce confusion and enhance the effectiveness of monetary policy, poor
communication can do the opposite. Third, there is a danger of creating an
over-reliance on Fed communication. While we want to convey our expectations
and intentions, we want to avoid the public substituting independent thought
with an attempt to read the Fed tealeaves.
Those issues notwithstanding, I expect that forward guidance will continue
to play a central role in Federal Reserve policy in coming years. While the
U.S. economy has been improving over the past four years, the unemployment
rate stands at 7.3 percent, still substantially above its natural rate,
which I estimate to be about 5½ percent. Additionally, inflation has been
running persistently well below the Fed’s preferred goal of 2 percent. Under
these circumstances, monetary policy is appropriately very accommodative and
will continue to be for quite some time. Of course, as the economy continues
to strengthen, the unemployment rate drops, and inflation gets closer to our
ideal level, the stance of monetary policy will need to be normalized.
Once that occurs, I see a continued role for some aspects of forward
guidance. The introduction of FOMC policy projections reflects a shift
toward greater transparency about the future of the federal funds rate.
Coupled with the new emphasis on providing an economic basis for forward
guidance, this should result in greater public understanding of Federal
Reserve policy and the reasons driving policy decisions. This, in turn,
should reduce households’ and businesses’ uncertainty and help them make
better borrowing and investment decisions, ultimately making monetary policy
Author's note: The views presented in this article are the author’s
alone, and do not necessarily reflect those of other members of the Federal
Rudebusch, G D and J C Williams (2008), “Revealing the Secrets of the
Temple: The Value of Publishing Central Bank Interest Rate Projections”, in
J Y Campbell (ed), Asset Prices and Monetary Policy, Chicago: University of
Chicago Press, pp. 247–284.
Williams, J C (2013), “Will
Unconventional Policy Be the New Normal?” FRBSF Economic Letter 2013-29,
Posted by Mark Thoma on Wednesday, October 16, 2013 at 09:43 AM in Economics, Monetary Policy |
Posted by Mark Thoma on Wednesday, October 16, 2013 at 12:03 AM in Economics, Links |
Policy Uncertainty, October 14: Policy uncertainty, as measured by the
Baker, Bloom and Davis index, is skyrocketing.
Figure 1: Baker, Bloom and Davis Policy Uncertainty Index (blue),
31 day centered moving average (orange), and observation for 10/14 (red square).
Source: Baker, Bloom,
and Davis, accessed 10/14/2013.
If one thought that policy uncertainty was slowing the economy, would this
be any way of conducting policy?
Posted by Mark Thoma on Tuesday, October 15, 2013 at 09:56 AM in Economics |
Just a quick note on the efficient markets hypothesis, rationality, and all
that. I view these as important contributions not because they are accurate
descriptions of the world (though they may come close in some cases), but rather
because they give us an important benchmark to measure departures from an ideal
world. It's somewhat like studying the effects of gravity in an idealized system
with no wind, etc. -- in a vacuum -- as a first step. If people say, yes, but
it's always windy here, then we can account for those effects (though if we are
dropping 100 pound weighs from 10 feet accounting for wind may not matter much,
but if we are dropping something light from a much higher distance then we would
need to incorporate these forces). Same for the efficient markets hypothesis and
rationality. If people say, if effect, but it's always windy here -- those
models miss important behavioral effects, e.g., -- then the models need to be
amended appropriately (though, like dropping heavy weights short distances in
the wind, some markets may act close enough to idealized conditions to allow
these models to be used). We have not done enough to amend models to account for
departures from the ideal, but that doesn't mean the ideal models aren't useful
Anyway, just a quick thought...
Posted by Mark Thoma on Tuesday, October 15, 2013 at 09:32 AM in Economics, Methodology |
Tax: Macroeconomic Advisers has a
new report out about the effects of bad fiscal policy since 2010 — that
is, since the GOP takeover of the House. ... They say that combined effects
of uncertainty in the bond market and cuts in discretionary spending have
subtracted 1% from GDP growth. That’s not 1% off GDP — it’s the annualized
rate of growth, so that we’re talking about almost 3% of GDP at this point;
cumulatively, the losses come to around $700 billion of wasted economic
potential. This is in the same ballpark as my own estimates.
And they also estimate that the current unemployment rate is 1.4 points
higher than it would have been without those policies (a number consistent
with almost 3% lower GDP); so, we’d have unemployment below 6% if not for
Great work all around, guys.
But the master's of the universe -- the wealthy supporters of the GOP and a
driving force behind the push for austerity -- are doing great. If they get lower taxes as a result of all this, that's allthat matter, right? Who cares about all the other people who are struggling as a result of cuts to social services, higher unemployment rates, and the like?
Posted by Mark Thoma on Tuesday, October 15, 2013 at 09:03 AM in Economics, Fiscal Policy, Politics, Social Insurance, Taxes |
Posted by Mark Thoma on Tuesday, October 15, 2013 at 12:03 AM in Economics, Links |
Dean Baker is not happy with how budget issues are being presented to the public:
Republicans are delusional about US spending and deficits: It is
understandable that the public is disgusted with Washington; they have every
right to be. At a time when the country continues to suffer from the worst
patch of unemployment since the Great Depression, the government is shut
down over concerns about the budget deficit.
There is no doubt that the Republicans deserve the blame for the shutdown
and the risk of debt default. They decided that it was worth shutting down
the government and risking default in order stop Obamacare. That is what
they said as loudly and as clearly...
Going to the wall for something that is incredibly important is a reasonable
tactic. However, the public apparently did not agree with the Republicans.
Polls show that they overwhelmingly oppose their tactic of shutting down the
government and risking default over Obamacare. As a result, the Republicans
are now claiming that the dispute is actually over spending.
Anywhere outside of Washington DC and totalitarian states, you don't get to
rewrite history. However, given the national media's concept of
impartiality, they now feel an obligation to accept that the Republicans'
claim that this is a dispute over spending levels.
But that is only the beginning of the reason that people should detest
budget reporters. The more important reason is that they have spread
incredible nonsense about the deficit and spending problems facing the
country, causing most of the public to be completely confused on these
Yes, the public has every right to be disgusted.
Posted by Mark Thoma on Monday, October 14, 2013 at 04:54 PM in Economics, Press |
On the run today, a few comments on the Nobel (I'll add more as I find them):
Posted by Mark Thoma on Monday, October 14, 2013 at 09:53 AM in Economics |
What's the biggest problem we face right now?:
The Dixiecrat Solution, by Paul Krugman, Commentary, NY Times: ...
Stocks surged last Friday in the belief that House Republicans were getting
ready to back down on their ransom demands over the government shutdown and
the debt ceiling. But what Republicans were actually offering, it seems, was
the “compromise” Paul Ryan ... laid out...: rolling back some of the
“sequester” budget cuts — which both parties dislike; cuts in
Medicare, but with no quid pro quo in the form of higher revenue; and only a
temporary fix on the debt ceiling, so that we would soon find ourselves in
crisis again. ... Yet even this ludicrously unbalanced offer was too much
for conservative activists, who lambasted Mr. Ryan for basically leaving
health reform intact. ...
Conservative activists are simply not willing to give up on the idea of
ruling through extortion, and the Obama administration has decided, wisely,
that it will not give in to extortion. So how does this end? How does
America become governable again?
One answer might be ... Dixiecrats in reverse.
Here’s the precedent: For a long time, starting as
early as 1938, Democrats generally controlled Congress on paper, but
actual control often rested with an alliance between Republicans and
conservative Southerners who were Democrats in name only. You may not like
what this alliance did... But at least America had a functioning
And right now we have all the necessary ingredients for a comparable
alliance, with roles reversed. Despite denials from Republican leaders,
everyone I talk to believes that it would be easy to pass both a continuing
resolution, reopening the government, and an increase in the debt ceiling,
averting default, if only such measures were brought to the House floor.
How? The answer is, they would get support from just about all Democrats
plus some Republicans, mainly relatively moderate non-Southerners. As I
said, Dixiecrats in reverse.
The problem is that John Boehner ... won’t allow such votes, because he’s
afraid of the backlash from his party’s radicals. Which points to a broader
conclusion: The biggest problem we ... face right now is not the extremism
of Republican radicals, which is a given, but the cowardice of Republican
non-extremists (it would be stretching to call them moderates).
The question for the next few days is whether plunging markets and urgent
appeals from big business will stiffen the non-extremists’ spines. For as
far as I can tell, the reverse-Dixiecrat solution is the only way out of
Posted by Mark Thoma on Monday, October 14, 2013 at 12:24 AM in Economics, Politics |
Posted by Mark Thoma on Monday, October 14, 2013 at 12:03 AM in Economics, Links |
Here's the latest from the "blame the other side for the crappy things we do
to people we don't care about" party. This is from Ezra Klein:
The GOP’s latest poison pill, Wonkblog: ...House Republicans are preparing a six-week debt-ceiling
extension that includes the Vitter amendment (see
here for more on that bit of health-care trolling), strengthened income
verification under Obamacare, and Rep. James Lankford's 'Government
Shutdown Prevention Act.' Lankford's bill is interesting. Here's
the description from his congressional office:
If Congress fails to approve a budget by the end of each fiscal year,
the Government Shutdown Prevention Act would ensure that all operations
remain running normally .. by automatically triggering a continuing
resolution (CR) or short-term, stop-gap spending device. ... After the
first 120 days, auto-CR funding would be reduced by one percentage point
and would continue to be reduced by that margin every 90 days.
By progressively decreasing the amounts provided under the automatic
continuing resolution, the bill provides continued incentives for
Congress and the President to reach agreement on regular appropriations
Catch the problem? The Lankford bill creates a world in which the failure to fund the
government leads to automatic, across-the-board spending cuts. That's not a
world in which there are "continued incentives for Congress and the
President to reach agreement on regular appropriations bills." It's a world
in which Republicans who want spending cuts have a continued incentive to
refuse to reach agreement on bills to fund the government.
If Lankford wanted to incentivize both sides to come to a deal he'd propose
a bill that paired automatic spending cuts with automatic tax increases. ...
It'll die a quick death in the Senate. ...
Posted by Mark Thoma on Sunday, October 13, 2013 at 07:11 PM in Economics, Politics |
David Warsh asks why there is no counterpart to Paul Krugman on the center
right, and suggests that Larry Summers should play that role for the WSJ (there
is quite a bit more in the original):
Wanted: A Straw to Stir the Drink, Economic Principals: “The straw that
stirs the drink” is an old newspaper colloquialism, derived from politics,
applied to very successful columnists. It means a commentator with a large
following, one whom even the opposition reads. ... The drink-stirrer for the
last ten years or so in the world of center-left economic policy has been
Paul Krugman... He seems to have learned every trick in the columnist’s
Why is there no Krugman on the center right?
That a receptive community exists is obvious. ... The Wall
Street Journal has ... a tent big enough to accommodate all those who
prefer ... an alternative to whatever the Democratic Party was offering...
[But...] Where Krugman writes two pieces a week (which he energetically supplements
with daily entries on his Times-sponsored blog), the WSJ’s only writer with
an economics background is former George Mason University graduate student
Stephen Moore. (In his twice-weekly “Business World” column, Holman Jenkins
Jr. dispenses shrewd microeconomic commentary.) Moore is not exactly deeply
grounded in the discipline. ...
So what would a center-right counterpart to Krugman look like?
Such a commentator would have to know something about monetary policy – have
a feeling for the possibilities for better banking regulation. He or she
would have to confront the
unpleasant news about income distribution emanating from the University
of California at Berkeley, in the work of Emmanuel Saez, and not simply
dismiss his epic collaboration with Thomas Piketty as
French economists… rock stars of the intellectual Left… special[izing] in
“earnings inequality” and “wealth concentration.” Such a person probably
would accept that the main features of the safety net, such as the Social
Security System, are here to stay, and recognize a government role in
formulating the market for health insurance. (Remember, it was GOP
presidential candidate Mitt Romney who introduced a version of Obamacare
when he was governor of Massachusetts.) A serious economics commentator for
the WSJ would take climate change seriously, too...
Come to think of it, a sensible full-time economics columnist who would
broaden the audience of the WSJ’s editorial page and give it a realistic
claim on the future might look a lot like Lawrence Summers. I know, he’s
thought to be something of a liberal. He unquestionably possesses a decent
heart. But that is part of the job description I have been writing. It is
his famously tough mind, so bothersome to progressives over the years, that
is his main attraction. He could cite his having worked in the Reagan
administration, for his mentor Martin Feldstein, as a credential! (So did
I know, too, that it’s the Financial Times that put him in the
column-writing business. But that audience is too thin, and the paper too
precarious a perch for Summers’s ambition... Summers is uniquely qualified
to play a part at the WSJ that for many years has gone uncast– the role of
loyal opposition. Murdoch and he should think about it. .
Posted by Mark Thoma on Sunday, October 13, 2013 at 02:53 PM in Economics |
Developing countries are unhappy with the IMF:
Impatience With I.M.F. Is Growing, by Reuters: Emerging market countries
complained on Saturday about the plodding progress in giving them more power
at the International Monetary Fund. The global lender, after its annual
meetings this past weekend, failed to meet a deadline originally
self-imposed for 2012 to make historic changes meant to give emerging
nations a greater say. ...
The delay on changes first agreed to in 2010 also pushes off even more
difficult decisions about how to reform the I.M.F., which is still dominated
by the nations that founded the organization after World War II.
The 2010 changes have been held up because the United States, the fund’s
biggest and most powerful member, has not ratified them and prospects for
action before the end of the year are slim due to gridlock in the U.S.
The next round of voting changes may involve even more give and take, as
I.M.F. member countries wrangle over the specifics of an elaborate formula
that determines the voting power of each country, how much it must
contribute to the Fund and what it can borrow. ...
The I.M.F. said it planned to finalize a formula by January... But ...
another deadline is likely to slip by. The revision of the formula is
intended to further reflect the rise of China, Brazil and other large
emerging market economies...
Joe Stiglitz in 2006:
... As the IMF has increasingly lectured others about the importance of
governance, problems in its own political legitimacy have increasingly
impaired its efficacy. Granting more voting powers to China and a few other
countries that are under represented is a step in the right direction. But
even the IMF recognizes that it is only the first step. Critics point out
that these changes are unlikely to have much effect on its decisions, and
they worry that having granted the most powerful of the underrepresented
more voting power, the drive for further reform will weaken.
That would be a shame. The U.S. still is the only country with veto power.
The choice of the heads of both the IMF and the World Bank make a mockery of
legitimate democratic governance. Neither asks who is most qualified,
regardless of race, color, nationality. The American president appoints the
head of the World Bank and Europe chooses the head of the IMF. The recent
selection of the head of the World Bank highlighted the problems.
The IMF’s new focus on global imbalances is also a step in the right
direction. ... The IMF should have long been focusing on such issues—its
real mandate—rather than on development and the transition from Communism to
the market economy, areas that are clearly not within its core competence,
and where its policies were often badly misguided. ...
Posted by Mark Thoma on Sunday, October 13, 2013 at 12:39 PM in Economics, International Finance |
Posted by Mark Thoma on Sunday, October 13, 2013 at 12:03 AM in Economics, Links |
Nominal wage rigidity in macro: an example of methodological failure:
This post develops a
point made by Bryan Caplan (HT MT). I have two stock complaints about
the dominance of the microfoundations approach in macro. Neither imply that
the microfoundations approach is ‘fundamentally flawed’ or should be
abandoned: I still learn useful things from building DSGE models. My first
complaint is that too many economists follow what I
call the microfoundations purist position: if it cannot be microfounded,
it should not be in your model. Perhaps a better way of
putting it is that they only model what they can microfound, not what
they see. This corresponds to a standard method of rejecting an innovative
macro paper: the innovation is ‘ad hoc’.
My second complaint is that the microfoundations used by macroeconomists is
so out of date. Behavioural economics just does not get a look in. A good
and very important example comes from the reluctance of firms to cut nominal
wages. There is overwhelming empirical evidence for this phenomenon (see for
Timothy Taylor) or the work of
Jennifer Smith at
Warwick). The behavioral reasons for this are explored in detail in this
book by Truman Bewley, which Bryan Caplan discusses
here. Both money illusion and the importance of workforce morale are now
well accepted ideas in behavioral economics.
Yet debates among macroeconomists about whether and why wages are sticky go
While we can debate why this is at the level of general methodology, the
importance of this particular example to current policy is huge. Many have
argued that the failure of inflation to fall further in the recession is
evidence that the output gap is not that large. As Paul Krugman in
particular has repeatedly suggested, the reluctance of workers or firms to
cut nominal wages may mean that inflation could be much more sticky at very
low levels, so the current behavior of inflation is not inconsistent with a
large output gap. ... Yet this is hardly a new discovery, so why is macro
rediscover these basic empirical truths? ...
He goes on to give an example of why this matters (failure to
incorporate downward nominal wage rigidity caused policymakers to underestimate
the size of the output gap by a large margin, and that led to a suboptimal
Time for me to catch a plane ...
Posted by Mark Thoma on Saturday, October 12, 2013 at 11:29 AM in Economics, Macroeconomics, Methodology |
Business and the GOP: Still no resolution on the debt ceiling, and I
think people are still too optimistic here. Republicans still aren’t willing
to walk away from this without some kind of trophy, so they can claim
victory; the whole point of Obama’s position is that you don’t get anything,
not even something trivial, as a reward for threatening disaster.
Meanwhile, Republicans are getting a lot of pressure from business, which
doesn’t like what’s happening. And some pundits are already speculating
about the possibility either of a split within the GOP or a kind of coup in
which the business-backed party elders take control back from the crazies.
So I’ve been thinking about this, and have managed to convince myself that
it’s wishful thinking.
Now, it’s true that Republicans are bad for business... Ever since
Republicans retook the House, federal spending adjusted for inflation and
population has been dropping fast...
This is exactly the wrong thing to be doing in a still-depressed economy
with interest rates at zero... But here’s the thing: while the modern GOP is
bad for business, it’s arguably good for wealthy business leaders. After
all, it keeps their taxes low, so that their take-home pay is probably
higher than it would be under better economic management. ...
In a way, this is an inversion of the usual argument made by defenders of
inequality. They’re always saying that workers should be happy to accept a
declining share of national income, because the incentives associated with
inequality make the economic pie bigger, and they end up better off in the
end. What’s really going on with plutocrats right now, however, is that
they’re basically willing to accept lousy economic policies from right-wing
politicians as long as they get a bigger share of the shrinking pie.
This may sound very cynical — but then, if you aren’t cynical at this point,
you aren’t paying attention. And I suspect that the GOP would have to get a
lot crazier before big business bails.
This also speaks to the well known agency issue between the "wealthy business leaders"
and the stockholders in the firms they are running.
Posted by Mark Thoma on Saturday, October 12, 2013 at 11:29 AM in Economics, Politics |
Barry Eichengreen on Japan:
Japan rising? Shinzo Abe’s Excellent Adventure, by Barry Eichengreen, The
Milken Institute Review: “I shot an arrow in the air, it fell to
earth, I knew not where.” — Henry Wadsworth Longfellow
Longfellow, the early-19th-century American poet, was obviously not
referring to the current Japanese prime minister, Shinzo Abe, but he could
have been. What Abe calls his “three-arrows” economic-regeneration plan is a
shot in the dark in a country generally not inclined to risk-taking. The
first arrow, aggressive monetary easing, is designed to slay the dragon of
deflation. The second, a one-time dose of fiscal stimulus, is intended to
jump- start economic growth after more than two decades of stagnation. The
third, a mix of structural reforms, is designed to boost productive
efficiency, attract investment and render faster growth sustainable.
It remains to be seen whether Abe’s arrows will follow the trajectory he
anticipates. On the first, the chattering classes seem evenly divided
between those who doubt the Bank of Japan will succeed in ending deflation
and those who fear that the inflation produced by monetary easing will
spiral out of control. On the second, some wonder whether fiscal stimulus
is, in fact, gilding the lily, warning that additional deficit spending by
an already heavily indebted Japanese government could provoke a crisis of
Views are less divided when it comes to the third arrow, comprehensive
structural reform. Here observers are all but unanimous in their approval –
but question whether the weapon will even get off the ground. ...[continue
Posted by Mark Thoma on Saturday, October 12, 2013 at 12:33 AM in Economics, Monetary Policy |
The ICT Revolution Isn’t Over: ...I thought I would make one casual
observation about technology. Here it is:... the relatively limited impact
so far of the much-heralded rise of ICT — information and communication
technologies. For a long time these technologies seemed to be doing nothing
for the economy; then, finally, they seemed to kick in circa 1995. But the
new era of productivity growth, as Bob says, wasn’t a match for the long
boom post World War II, and seemed to have petered out by the late 2000s.
What I’d note, however, is that there is almost surely a second wind coming.
The 1995-2007 productivity rise was basically a “wired” phenomenon, a lot of
it having to do with local area networks rather than the Internet. Wireless
data is a whole different thing, and it’s a surprisingly recent thing — the
iPhone was introduced in 2007, the iPad in 2010. And we know from repeated
experience that it takes quite a while for new technologies to show up in
economic growth, a point famously made by
David and confirmed by the 25-year lag between the introduction of the
microprocessor and the 90s productivity takeoff.
So there’s more coming. How big is another question.
Posted by Mark Thoma on Saturday, October 12, 2013 at 12:24 AM in Economics, Technology |
Posted by Mark Thoma on Saturday, October 12, 2013 at 12:03 AM in Economics, Links |
Analyzing Emergent Properties of Systems of Decentralized Exchange: Part
IIIA of My "The Economist as ?: The Public Square and Economists: Equitable
Growth Notes for October 11, 2013: So what do economists have to say
when they speak as public intellectuals in the public square? As I see it,
economists have five things to teach at the "micro" level--of how
individuals act, and of their well-being as they try to make their way in
the world. These are: the deep roots of markets in human psychology and
society, the extraordinary power of markets as decentralized mechanisms for
getting large groups of humans to work broadly together rather than at
cross-purposes, the ways in which markets can powerfully reinforce and
amplify the harm done by domination and oppression, the manifold other ways
in which the market can go wrong because it is somewhat paradoxically so
effective, and how the market needs the state to underpin and manage it on
the “micro” level.
These five are:
The Deep Roots of Markets...
The Extraordinary Power of Markets...
Market Systems Reinforce and Amplify the Harm of Domination...
Other Ways in Which the Market Can Go Wrong...
[There's a fairly long discussion of each point.]
Posted by Mark Thoma on Friday, October 11, 2013 at 08:23 AM in Economics |
Don't listen to the default deniers:
Dealing With Default, by Paul Krugman, Commentary, NY Times: So
Republicans may have decided to raise the debt ceiling without conditions
attached — the details still aren’t clear. Maybe that’s the end of that
particular extortion tactic, but maybe not, because, at best, we’re only
looking at a very short-term extension. The threat of hitting the ceiling
So what are the choices if we do hit the ceiling? ... What would a general
default look like? ...
First, the U.S. government would ... be ... failing to meet its legal
obligations to pay. You may say that things like Social Security checks
aren’t the same as interest due on bonds... But ... Social Security benefits
have the same inviolable legal status as payments to investors.
Second, prioritizing interest payments would reinforce the terrible
precedent we set after the 2008 crisis, when Wall Street was bailed out but
distressed workers and homeowners got little or nothing. We would, once
again, be signaling that the financial industry gets special treatment
because it can threaten to shut down the economy if it doesn’t.
Third, the spending cuts would create great hardship if they go on for any
length of time. Think Medicare recipients turned away from hospitals...
Finally, while prioritizing might avoid an immediate financial crisis, it
would still have devastating economic effects. We’d be looking at an
immediate spending cut
roughly comparable to the plunge in housing investment after the bubble
burst... That by itself would surely be enough to push us into recession.
And it wouldn’t end there. As the U.S. economy went into recession, tax
receipts would fall sharply, and the government, unable to borrow, would be
a second round of spending cuts, worsening the economic downturn,
reducing receipts even more, and so on. So ... we could ... be looking at a
slump worse than the Great Recession.
So are there
Many legal experts think there is another option: One way or another,
the president could simply choose to defy Congress and ignore the debt
Wouldn’t this be breaking the law? Maybe, maybe not — opinions differ. But
not making good on federal obligations is also breaking the law. And if
House Republicans are pushing the president into a situation where he must
break the law no matter what he does, why not choose the version that hurts
America least? ...
So what will happen if and when we hit the debt ceiling? Let’s hope we don’t
Posted by Mark Thoma on Friday, October 11, 2013 at 12:33 AM in Budget Deficit, Economics, Politics |
Posted by Mark Thoma on Friday, October 11, 2013 at 12:03 AM in Economics, Links |
I am here for the next two days:
38th Annual Federal Reserve Bank of St. Louis Fall
Thursday, October 10, 2013
8: 45 – 9:00 am Opening Remarks
James Bullard, President, Federal Reserve Bank of St. Louis
Session I - Financial Markets 1
9:00 – 10:15 am
"Trade Dynamics in the Market for Federal Funds"
Presenter: Ricardo Lagos, New York University
Coauthor: Gara Afonso, Federal Reserve Bank of New York
Discussant: Huberto Ennis, Federal Reserve Bank of Richmond
10:45 am – 12:00 pm
"Banks' Risk Exposures"
Presenter: Martin Schneider , Stanford University
Coauthors: Juliane Begenau, Stanford University and Monika Piazzesi,
Discussant: Hanno Lustig, University of California-Los Angeles
Session II: Monetary Policy and Macro Dynamics
1:00 – 2:15 pm
"Unemployment and Business Cycles"
Presenter: Martin S. Eichenbaum, Northwestern University
Coauthors: Lawrence J. Christiano, Northwestern University and Mathias
Trabandt, Board of Governors of the Federal Reserve System
Discussant: Jaroslav Borovicka, New York University
2:45 – 4:00 pm
"Conventional and Unconventional Monetary Policy in a Model with Endogenous
Presenter: Michael Woodford, Columbia University
Coauthors: Aloísio Araújo, Getulio Vargas Foundation and Susan
Schommer, Instituto Nacional de Matemática Pura e Aplicada
Discussant: Stephen Williamson, Washington University
4:00 – 5:15 pm
"Leverage Restrictions in a Business Cycle Model"
Presenter: Lawrence J. Christiano, Northwestern University
Coauthor: Daisuke Ikeda, Bank of Japan
Discussant: Benjamin Moll, Princeton UniversityFriday, October 11,
Friday, October 11, 2013
Session III: Financial Markets 2
9:00 – 10:15 am
"Measuring the Financial Soundness of U.S. Firms, 1926—2012"
Presenter: Andrew G. Atkeson, University of California-Los Angeles
Coauthor: Andrea L. Eisfeldt, University of California-Los Angeles and
Pierre-Olivier Weill, University of California-Los Angeles
Discussant: Gian Luca Clementi, New York University
10:45 am – 12:00 pm
"The I Theory of Money"
Presenter: Markus K. Brunnermeier, Princeton University
Coauthor: Yuliy Sannikov, Princeton University
Discussant: Ed Nosal, Federal Reserve Bank of Chicago
Session IV: Households Lifecycle Behavior
1:00 – 2:15 pm
"Is There 'Too Much' Inequality in Health Spending Across Income Groups?"
Presenter: Larry E. Jones, University of Minnesota
Coauthors: Laurence Ales, Carnegie Mellon University and Roozbeh
Hosseini , Arizona State University
Discussant: Selahattin İmrohoroğlu, University of Southern California
2:15 –3:30 pm
"Retirement, Home Production and Labor Supply Elasticities"
Presenter: Richard Rogerson, Princeton University
Coauthor: Johanna Wallenius, Stockholm School of Economics
Discussant: Nancy Stokey, University of Chicago
Posted by Mark Thoma on Thursday, October 10, 2013 at 05:04 AM in Academic Papers, Conferences, Economics |
The second of two from Tim Duy:
Kind of a Clown Show, by Tim Duy:
Matthew Klein rebuts
Ryan Avent (my sympathetic position
here), and makes some good points. That said, I still think the FOMC is
kind of a clown show right now. A significant problem is that they can't
communicate effectively, either internally or externally, that the Fed is
now operating under a triple mandate. They are struggling with the
resulting trade-offs and while the struggle is public, it is not explicit.
Klein does a much better job than the totality of the FOMC in bringing this
issue to light.
Klein summarizes his objection to Avent with:
After reading this narrative, the Economist’s Ryan Avent concluded that
the U.S. central bank is a “clown show.” While there are plenty of legitimate
criticisms one can make about Fed policymaking over the years,
Avent’s misses the mark. This sort of simplistic reasoning assumes
central bankers only need to manage a single trade-off between the rate
of consumer price inflation and the level of joblessness. The real
world, however, is far more complex.
Why is it more complex than the dual mandate?
While the precise meanings of “maximum employment” and “stable prices”
remain undefined, the biggest source of ambiguity is the time-frame.
Certain policies might temporarily suppress the unemployment rate but
end up sowing the seeds of trouble down the road.
For example, the Fed’s accommodative policies in the 2000s may have
mitigated the collapse in business investment after the end of the tech
bubble, but this brief reprieve came at the cost of soaring private
indebtedness and a financial sector that blew itself up.
What is the specific problem today?
Many Fed policymakers appreciate the complexity of these trade-offs and
are trying to grapple with them in the context of today’s environment.
High unemployment and sluggish increases in consumer prices would
suggest that the Fed should step on the gas. On the other hand,
risk-takers in the financial sector may end up overextending themselves
and sow the seeds of another crisis.
And there lies the communication problem. The Fed has largely communicated
its policy objective on the basis of two variables, inflation and
unemployment. The Evan's Rule, from the
last FOMC statement:
In particular, the Committee decided to keep the target range for the
federal funds rate at 0 to 1/4 percent and currently anticipates that
this exceptionally low range for the federal funds rate will be
appropriate at least as long as the unemployment rate remains above
6-1/2 percent, inflation between one and two years ahead is projected to
be no more than a half percentage point above the Committee's 2 percent
longer-run goal, and longer-term inflation expectations continue to be
And note that Yellen's much heralded optimal control strategy explicitly
reduces policy to a near-term inflation/unemployment trade-off:
"Financial stability" is not identified here. And it makes only a passing
appearance in the statement:
In determining how long to maintain a highly accommodative stance of
monetary policy, the Committee will also consider other information,
including additional measures of labor market conditions, indicators of
inflation pressures and inflation expectations, and readings on
But even that statement is followed up by a return to the dual mandate:
When the Committee decides to begin to remove policy accommodation, it
will take a balanced approach consistent with its longer-run goals of
maximum employment and inflation of 2 percent.
We do of course still have the "costs and benefits" clause of the asset
Asset purchases are not on a preset course, and the Committee's
decisions about their pace will remain contingent on the Committee's
economic outlook as well as its assessment of the likely efficacy and
costs of such purchases.
But even here we have precious few explanations of the costs and risks of
asset purchases and few on the FOMC willing to say asset purchases are
In short, the FOMC's public face is largely focused on the
unemployment/inflation trade off. But Klein's correct, something else is
brewing under the surface of policy. Take for example
today's comments by Vice Chair Janet Yellen. Most focused on:
The mandate of the Federal Reserve is to serve all the American people,
and too many Americans still can't find a job and worry how they will
pay their bills and provide for their families. The Federal Reserve can
help, if it does its job effectively. We can help ensure that everyone
has the opportunity to work hard and build a better life.
But read the next two lines:
We can ensure that inflation remains in check and doesn't undermine the
benefits of a growing economy. We can and must safeguard the financial
Triple mandate - maximum sustainable employment, price stability, and
Perhaps if monetary policy could focus solely on the first two, while
macroprudential policy takes on the last, then the triple mandate would not
pose a major challenge. But, alas, as Klein notes, this is not the case.
Federal Reserve Governor Jeremy Stein explicitly
identified the issue in February:
Nevertheless, as we move forward, I believe it will be important to keep
an open mind and avoid adhering to the decoupling philosophy too
rigidly. In spite of the caveats I just described, I can imagine
situations where it might make sense to enlist monetary policy tools in
the pursuit of financial stability.
Consider the tradeoffs now in play. More so than in the past, the Fed is
aware that by promoting maximum employment and price stability, they may be
promoting financial instability. So they may need to take action in the
near term to promote financial stability at the expense of the first two
objectives. Indeed, this is exactly what happened this year with regards to
the tapering talk. Consider Stein's
Having said all of this, I believe we are currently in a pretty good
place with respect to the pricing of interest rate risk. The movement in
Treasury rates that we have seen since early May has led to somewhat
tighter financial conditions in certain sectors--most notably the
mortgage market--but has also brought term premiums closer into line
with historical norms, and thereby has arguably reduced the risk of a
more damaging upward spike at some future date. On net, I believe the
adjustment has been a healthy one.
The tighter financial conditions may have slowed progress on the
employment/price stability mandates, but improved the financial stability
outlook. One instrument, three objectives. Won't be able to make everyone
happy all of the time.
The introduction of a third mandate into the policymaking process, however,
has not been communicated very well. As a consequence, in my opinion,
market participants cannot determine the bar to tapering. And, arguably, it
leaves an unaccounted variable floating around in Yellen's optimal control
strategy that could influence the path of interest rates. And if low
inflation environments breed financial instability, will the Fed sacrifice
the inflation target or the employment mandate? There are lots
and lots of questions here. Klein is right - it isn't easy.
That said, we should not have to pull this debate out of odd speeches here
and there. Leaving this on the back of Stein's infrequent speeches is not
enough. It seems clear that financial stability objectives are now part of
the Fed's reaction function. Policymakers need to bring this issue to the
forefront, the sooner the better.
Bottom Line: Monetary policymakers are viewing financial stability as an
important element of sustaining maximum employment and stable prices over
the course of a business cycle. The challenge is that this involves a new
trade-off in the monetary policy process that they are struggling to
understand. Unfortunately, the public debate they are carrying on is
somewhat clownish in that it is sending conflicting signals about the path
of monetary policy. This is really not surprising. What exactly is the
Fed's reaction function if we throw financial stability into the mix? They
don't know any better than we do. I don't even think monetary policymakers
even share a common framework when it comes to incorporating financial
stability into the reaction function. This, I think, is an opportunity for
a strong leader to chart a course for the Fed that while encouraging
internal discussion works to keep a consistent external message. I am
hoping Yellen will serve that role.
Posted by Mark Thoma on Thursday, October 10, 2013 at 12:33 AM in Economics, Fed Watch, Monetary Policy |
The first of two from Tim Duy:
FOMC Minutes Overtaken by Events, by Tim Duy: Out of the contentious meeting
evident in the
most recent FOMC minutes comes a narrative of the tapering debate, a debate
that, for the moment, the hawks lost. The opportunity to take even a baby step
to ending asset purchases slipped away. Because after the September meeting,
the door closed on tapering for at least three more months, and probably longer.
Back in February Governor Jeremy Stein presented
an important speech on the interplay between monetary policy and financial
The third factor that can lead to overheating is a change in the economic
environment that alters the risk-taking incentives of agents making credit
decisions. For example, a prolonged period of low interest rates, of the
sort we are experiencing today, can create incentives for agents to take on
greater duration or credit risks, or to employ additional financial
leverage, in an effort to "reach for yield."
While Stein emphasizes separating monetary policy tools from financial
stability tools, he concludes:
Nevertheless, as we move forward, I believe it will be important to keep
an open mind and avoid adhering to the decoupling philosophy too rigidly. In
spite of the caveats I just described, I can imagine situations where it
might make sense to enlist monetary policy tools in the pursuit of financial
stability. Let me offer three observations in support of this perspective.
One such reason:
Third, in response to concerns about numbers of instruments, we have seen
in recent years that the monetary policy toolkit consists of more than just
a single instrument. We can do more than adjust the federal funds rate. By
changing the composition of our asset holdings, as in our recently completed
maturity extension program (MEP), we can influence not just the expected
path of short rates, but also term premiums and the shape of the yield
curve. Once we move away from the zero lower bound, this second instrument
might continue to be helpful, not simply in providing accommodation, but
also as a complement to other efforts on the financial stability front.
Asset purchases are both a financial stability tool and a monetary policy
tool. You can quickly see how policy would evolve with this view of asset
purchases. If QE is creating financial stability issues, then policymakers
would need to exit from QE while finding another tool to hold net accommodation
constant. Thus is born an emphasis on forward guidance regarding the path of
the Federal Funds rate as a replacement for asset purchases. A change in the
policy mix, not the level of accommodation.
Hawkish Federal Reserve regional presidents must have been ecstatic at the
potential for this policy shift among the governors. There has also been a
group opposed to QE, particularly the open-ended version. Names such as Fisher,
Plosser, Lacker and George come to mind. But a critical center of the FOMC, the
governors, have tended to favor the program. But with that changing, an
opportunity to end QE suddenly came into view.
Indeed, as we now know from
Jon Hilsenrath's work, the anti-QE crowd was not limited to Stein, but also
included Governors Powell and Duke. And I am guessing Federal Reserve Chair Ben
Bernanke did not try to stop the anti-QE train. Did Vice Chair Yellen?
Unknown. But by April momentum toward QE was growing enough that San Francisco
Federal Reserve President John Williams predicted that tapering could begin as
early as June of this year. I said
at the time:
Based on William's current forecast, he expects the Fed will begin
tapering off asset purchases this summer, perhaps the June FOMC meeting. He
is apparently more optimistic than me, as this puts him at least three
months ahead of my expectations - I had not anticipated slowing the pace of
purchases until late in the year.
By June, the anti-QE momentum had gained further, with the end result that
Bernanke turned decidedly hawkish at the post-FOMC press conference, laying out
the path to ending asset purchases and even throwing down a 7% unemployment
trigger. I have to imagine he wishes he hadn't given a firm number as that part
of the Fed's forecast was too pessimistic.
Although Fed speakers tries to hold back expectations on Fed tapering and
emphasize the data dependent program, expectations for tapering continued to
build. The problem was that while the data was lackluster, it was hard to say
that is was not "broadly consistent" with the Fed's forecast. Moreover, few
policymakers were willing to step in front of the tapering train, with the
Minneapolis Federal Reserve President Narayana Kocherlakota. The lack of
obvious doves was noted by Reuters journalist
Pedro DaCosta in the wake of Jackson Hole.
Indeed, if New York Federal Reserve President William Dudley had made this speech prior
to the September meeting, the tapering expectations train would have ground to a
halt. Why didn't he or others? Possibly because they did not know what
resistance they would face from anti-QE governors at the meeting. The governors
talk infrequently. Could any regional president really know how thought was
evolving inside the Board? Best to be quiet than be wrong. But market
participants mistook quiet for acquiescence.
Policy hawks likely saw everything moving in their direction at the September
FOMC meeting began. To be sure, the data was marginal. But the markets were
fully expecting a small taper! The FOMC was getting a free pass for a small
taper. They could match the taper with a dovish statement, and market
participants would eat it up with a smile. The timing would never be better.
But the dove didn't roll over:
In general, those who preferred to maintain for now the pace of purchases
viewed incoming data as having been on the disappointing side and, despite
clear improvements in labor market conditions since the purchase program's
inception in September 2012, were not yet adequately confident of continued
progress. Many of these participants had revised down their forecasts for
economic activity or pointed to near-term risks and uncertainties.
The fight must have been, as far as recent FOMC meetings are concerned,
bordering on epic. Hawks responded forcefully:
The participants who spoke in favor of moderating the pace of securities
purchases at this meeting also cited the incoming data, but viewed those
data as broadly consistent with the Committee's outlook for the labor market
at the time of the June FOMC meeting when the contingent expectation that
the pace of asset purchases would be reduced later in the year was first
presented to the public. Moreover, they highlighted what they saw as
meaningful cumulative progress in labor market conditions since the purchase
program began. Those participants generally were satisfied that investors
had come to understand the data-dependent nature of the Committee's thinking
about asset purchases, and, because they judged that the conditions laid out
in June had been met, they believed that the credibility of the Committee
would best be served by announcing a downward adjustment in asset purchases
at this meeting. With the markets apparently viewing a cut in purchases as
the most likely outcome, it was noted that the postponement of such an
announcement to later in the year or beyond could have significant
implications for the effectiveness of Committee communications. In
particular, concerns were expressed that a delay could potentially undermine
the credibility or predictability of monetary policy by, for example,
increasing uncertainty about the Committee's reaction function and about its
commitment to the forward guidance for the federal funds rate, with the
result of an increase in volatility in financial markets. Moreover,
maintaining the pace of purchases could be perceived as a sign that the FOMC
had turned more pessimistic about the economic outlook.
And, probably most frightening to hawks, they saw that the door was about to
close on tapering in the near term:
Finally, it was noted that if the Committee did not pare back its
purchases in these circumstances, it might be difficult to explain a cut in
coming months, absent clearly stronger data on the economy and a swift
resolution of federal fiscal uncertainties.
It's not just difficult to explain a cut in the coming months. It just isn't
going to happen. Stronger data? We no longer have any of the most important
data. Swift resolution of fiscal uncertainties? That battle is even bloodier
than that within the Fed. Moreover, the impending leadership change also argues
for delaying tapering until 2014. Unless the economy lurches upward, what
exactly is the reason to pull the trigger on tapering before the March FOMC
meeting, after which future Chair Janet Yellen will lead a press conference?
Bottom Line: Any hawkish overtones in the FOMC minutes have been overtaken
by events. The opportunity for even a small taper slipped through the hawks'
talons. They should not be so unnerved. They pulled off a piece of flesh as
they flew past their prey, triggering a substantial monetary tightening as the
term premium jumped in response the tapering talk. Still doves are again
ascendant for the moment. Not only does the budget/debt showdown put any
tapering on indefinite hold, once again the Fed may be called upon to boost the
pace of asset purchases should financial markets crack. And hawks are correct -
the bottom range of "broadly consistent" is no longer good enough to justify
tapering. Clearly stronger data is needed. And that data is literally almost
nowhere to be found.
Posted by Mark Thoma on Thursday, October 10, 2013 at 12:24 AM in Economics, Fed Watch, Monetary Policy |
I'm not much of a haiku kind of guy, but I suppose that shouldn't stand in the way. I received the following from Stephen T. Ziliak, Professor of Economics at Roosevelt University and pioneer of "haiku economics":
Moral sentiment –
Not even Hayek would want
a shuttered White House
Affordable care -
A man in the house dining
on my last food stamp
October sunset –
The debt ceiling turns Boehner
red-orange and pink
Red October sun -
The debt ceiling is burning
Boehner a real tan
When I was in school
quantitative easing was
“O Captain! My Captain!
The ship’s weather’d every rack” –
at the Goodwill store
Posted by Mark Thoma on Thursday, October 10, 2013 at 12:15 AM
Posted by Mark Thoma on Thursday, October 10, 2013 at 12:03 AM in Economics, Links |
A quick one on a moderately long travel day:
Higher Education and the Opportunity Gap, by Isabel V. Sawhill, Brookings:
America faces an opportunity gap. Those born in the bottom ranks have
difficulty moving up. Although the United States has long thought of itself
as a meritocracy, a place where anyone who gets an education and works hard
can make it, the facts tell a somewhat different story. Children born into
the top fifth of the income distribution have about twice as much of a
chance of becoming middle class or better in their adult years as those born
into the bottom fifth (Isaacs, Sawhill, & Haskins, 2008). One way that
lower-income children can beat the odds is by getting a college degree.
Those who complete four-year degrees have a much better chance of becoming
middle class than those who don’t — although still not as good of a chance
as their more affluent peers. But the even bigger problem is that few
actually manage to get the degree. Moreover, the link between parental
income and college-going has increased in recent decades (Bailey & Dynarski,
2011). In short, higher education is not the kind of mobility-enhancing
vehicle that it could be. ...
Posted by Mark Thoma on Wednesday, October 9, 2013 at 10:42 AM in Economics, Income Distribution, Universities |
When firms are allowed to choose who audits them, it causes "skewed auditing incentives":
An experiment puts auditing under scrutiny, by Peter Dizikes, MIT News:
The structure of the auditing business appears problematic: Typically, major
companies pay auditors to examine their books under the so-called
“third-party” audit system. But when an auditing firm’s revenues come
directly from its clients, the auditors have an incentive not to deliver bad
news to them.
So: Does this arrangement affect the actual performance of auditors?
In an eye-opening experiment involving roughly 500 industrial plants in the
state of Gujarat, in western India, changing the auditing system has indeed
produced dramatically different outcomes — reducing pollution, and more
generally calling into question the whole practice of letting firms pay the
auditors who scrutinize them.
“There is a fundamental conflict of interest in the way auditing markets are
set up around the world,” says MIT economist Michael Greenstone, one of the
co-authors of the study, whose findings are published today in the
Quarterly Journal of Economics. “We suggested some reforms to remove the
conflict of interest, officials in Gujarat implemented them, and it produced
The two-year experiment was conducted by MIT and Harvard University
researchers along with the Gujarat Pollution Control Board (GPCB). It found
that randomly assigning auditors to plants, paying auditors from central
funds, double-checking their work, and rewarding the auditors for accuracy
had large effects. Among other things, the project revealed that 59 percent
of the plants were actually violating India’s laws on particulate emissions,
but only 7 percent of the plants were cited for this offense when standard
audits were used.
Across all types of pollutants, 29 percent of audits, using the standard
practice, wrongly reported that emissions were below legal levels.
The study also produced real-world effects: The state used the information
to enforce its pollution laws, and within six months, air and water
pollution from the plants receiving the new form of audit were significantly
lower than at plants assessed using the traditional method.
The co-authors of the paper are Greenstone, the 3M Professor of
Environmental Economics at MIT; Esther Duflo, the Abdul Latif Jameel
Professor of Poverty Alleviation and Development Economics at MIT; Rohini
Pande, a professor of public policy at the Harvard Kennedy School; and
Nicholas Ryan PhD ’12, now a visiting postdoc at Harvard.
The power of random assignment
The experiment involved 473 industrial plants in two parts of Gujarat, which
has a large manufacturing industry. Since 1996 the GPCB has used the
third-party audit system, in which auditors check air and water pollution
levels three times annually, then submit a yearly report to the GPCB.
To conduct the study, 233 of the plants tried a new arrangement: Instead of
auditors being hired by the companies running the power plants, the GPCB
randomly assigned them to plants in this group. The auditors were paid fixed
fees from a pool of money; 20 percent of their audits were randomly chosen
for re-examination. Finally, the auditors received incentive payments for
In comparing the 233 plants using the new method with the 240 using the
standard practice, the researchers uncovered that almost 75 percent of
traditional audits reported particulate-matter emissions just below the
legal limit; using the randomized method, only 19 percent of plants fell in
that narrow band.
All told, across several different air- and water-pollution measures,
inaccurate reports of plants complying with the law dropped by about 80
percent when the randomized method was employed.
The researchers emphasize that the experiment enabled the real-world
follow-up to occur.
“The ultimate hope with the experiment was definitely to see pollution at
the firm level drop,” Duflo says. The state’s enforcement was effective, as
Pande explains, partly because “it becomes cheaper for some of the more
egregious pollution violators to reduce pollution levels than to attempt to
persuade auditors to falsify reports.”
According to Ryan, the Gujarat case also dispels myths about the difficulty
of enforcing laws, since the experiment “shows the government has
credibility and will.”
But how general is the finding?
In the paper, the authors broaden their critique of the audit system,
referring to standard corporate financial reports and the global debt-rating
system as other areas where auditors have skewed auditing incentives. Still,
it is an open question how broadly the current study’s findings can be
“It would be a mistake to assume that quarterly financial reports for public
companies in the U.S. are exactly the same as pollution reports in Gujarat,
India,” Greenstone acknowledges. “But one thing I do know is that these
markets were all set up with an obvious fundamental flaw — they all have the
feature that the auditors are paid by the firms who have a stake in the
outcome of the audit.” ...
Greenstone also says he hopes the current finding will spur related
experiments, and gain notice among regulators and policymakers.
“No one has really had the political will to do something about this,”
Greenstone says. “Now we have some evidence.” ...
Posted by Mark Thoma on Wednesday, October 9, 2013 at 08:01 AM
Why a war on poor people?, Understanding Society: American conservatives for
the past several decades have shown a remarkable hostility to poor people in our
country. The recent effort to slash the SNAP food stamp program in the House (link);
the astounding refusal of 26 Republican governors to expand Medicaid coverage in
their states -- depriving millions of poor people from access to Medicaid health
and the general legislative indifference to a rising poverty rate in the United
States -- all this suggests something beyond ideology or neglect.
The indifference to low-income and uninsured people in their states of
conservative governors and legislators in Texas, Florida, and other states is
almost incomprehensible. Here is a piece in Bustle that reviews some of
the facts about expanding Medicaid coverage:
In total, 26 states have rejected the expansion, including the state of
Mississippi, which has the highest rate of uninsured poor people in the
country. Sixty-eight percent of uninsured single mothers live in the states
that rejected the expansion, as do 60 percent of the nation’s uninsured
working poor. (link)
These attitudes and legislative efforts didn't begin yesterday. They extend
back at least to the Reagan administration in the early 1980s. Here is Lou
Cannon describing the Reagan years and the Reagan administration's attitude
Despite the sea of happy children’s faces that graced the “feel-good”
commercials, poverty exploded in the inner cities of America during the
Reagan years, claiming children as its principal victims. The reason for
this suffering was that programs targeted to low-income families, such as
AFDC, were cut back far more than programs such as Social Security. As a
result of cuts in such targeted programs-including school lunches and
subsidized housing-federal benefit programs for households with incomes of
less than $10,000 a year declined nearly 8% during the Reagan first term
while federal aid for households with more than $40,000 income was almost
unchanged. Source: The Role of a Lifetime, by Lou Cannon, p. 516-17, Jul
Most shameful, many would feel, is the attempt to reduce food assistance in a
time of rising poverty and deprivation. It's hard to see how a government or
party could justify taking food assistance away from hungry adults and children,
especially in a time of rising poverty. And yet this is precisely the effort we
have witnessed in the past several months in revisions to the farm bill in the
House of Representatives. In a recent post Dave Johnson debunks the myths and
falsehoods underlying conservative attacks on the food stamp program in the
House revision of the farm bill (link).
This tenor of our politics indicates an overt hostility and animus towards
poor people. How is it possible to explain this part of contemporary politics on
the right? What can account for this persistent and unblinking hostility towards
One piece of the puzzle seems to come down to ideology and a passionate and
unquestioning faith in "the market". If you are poor in a market system, this
ideology implies you've done something wrong; you aren't productive; you don't
deserve a better quality of life. You are probably a drug addict, a welfare
queen, a slacker. (Remember "slackers" from the 2012 Presidential campaign?)
Another element here seems to have something to do with social distance.
Segments of society with whom one has not contact may be easier to treat
impersonally and cruelly. How many conservative legislators or governors have
actually spent time with poor people, with the working poor, and with poor
children? But without exposure to one's fellow citizens in many different life
circumstances, it is hard to acquire the inner qualities of compassion and
caring that make one sensitive to the facts about poverty.
A crucial thread here seems to be a familiar American narrative around race.
The language of welfare reform, abuse of food stamps, and the inner city is
interwoven with racial assumptions and stereotypes. Joan Walsh's recent column
in Salon (link)
does a good job of connecting the dots between conservative rhetoric in the past
thirty years and racism. She quotes a particularly prophetic passage from Lee
Atwater in 1982 that basically lays out the transition from overtly racist
language to coded language couched in terms of "big government".
Finally, it seems unavoidable that some of this hostility derives from a
fairly straightforward conflict of group interests. In order to create programs
and economic opportunities that would significantly reduce poverty, it takes
government spending -- on income and food support, on education, on housing
allowances, and on public amenities for low-income people. Government spending
requires taxation; and taxation reduces the income and wealth of households at
the top of the ladder. So there is a fairly obvious connection between an
anti-poverty legislative agenda and the material interests of the privileged in
These are a few hypotheses about where the animus to the poor comes from. But
there is an equally important puzzle about the political passivity of the poor.
It is puzzling to consider why the millions of people who are the subject of
this hostility do not create a potent electoral block that can force significant
changes on our political discourse. Why are poor people in Texas, Florida, and
other non-adopting states not voicing their opposition to the governors and
legislators who are sacrificing their health to a political ideology in the
current struggles over Medicaid expansion?
Two factors seem to be relevant in explaining the political powerlessness of
the poor. One is the gerrymandering that has reached an exact science in many
state legislatures in recent years, with unassailable majorities for the
incumbent party. This means that poor people have little chance of defeating
conservative candidates in congressional elections. And second are the resurgent
efforts that the Supreme Court enabled last summer to create ever-more onerous
voting requirements, once again giving every appearance of serving the purpose
of limiting voter participation by poor and minority groups. So conservative
incumbents feel largely immune from the political interests that they dis-serve.
This topic hasn't gotten the attention it deserves in studies of American
politics. One exception is the work of Frances Fox Piven and Richard Cloward.
People's Movements: Why They Succeed, How They Failthey offer
a powerful interpretation of the challenge of bringing poverty into politics.
Most poor people are "working poor" and are not homeless. But there are hundreds
of thousands of homeless people in the United States, and their living
conditions are horrible. Here is a powerful and humanizing album that captures
some of the situation of homeless people in America. Give
US Your Poor is worth listening to. Here is the title clip of the album:
Posted by Mark Thoma on Wednesday, October 9, 2013 at 12:24 AM in Economics, Links |
Posted by Mark Thoma on Wednesday, October 9, 2013 at 12:03 AM in Economics, Links |
Inexcusable Republican Tactics Endanger the Economy
A better title might have been "Makers, Takers, and the Real Immoral
Behavior," or perhaps "Why are Republicans Putting Working Class Households at
Posted by Mark Thoma on Tuesday, October 8, 2013 at 10:28 AM in Economics, Fiscal Times, Politics |
Credibility on the Line, by Tim Duy: I was pleased to see this morning that
at least one other person was as appalled as me by the
Jon Hilsenrath WSJ story this morning. Below I will cover some of the same
Ryan Avent, but the story deserves to be told more the once. Simply put,
the Hilsenrath piece reveals that monetary policy and communication are in
complete disarray and speaks poorly to the ability of the Federal Reserve to
smoothly exit this period of extraordinary accommodation.
I have long suspected the Federal Reserve was increasingly biased against QE,
suggesting the bar to tapering was much lower than would have been implied by
the data flow. This is particularly the case with inflation, which has remained
well below the Fed's official target. Moreover, the talk of tapering seemed
ill-timed given the calendar. It was basically impossible to believe that the
Fed could even begin to have sufficient evidence about the impact of fiscal
tightening to justify tapering within the Fed's framework of "stronger and
sustainable" before the final quarter of this year. The data flow simply didn't
Now we know, however, that a cadre of governors was pushing for the end of QE
due to financial market concerns. From Hilsenrath:
Privately, Mr. Stein and two other governors, Jerome Powell and Elizabeth
Duke , were a driving force behind efforts to limit the program's
growth, according to people involved in the deliberations. All three
supported Mr. Bernanke's efforts to charge up a weak economy but were uneasy
about the program's potential side effects and the growing size of the Fed's
Mr. Stein, a Harvard finance professor, focused on the risk that the Fed
might stoke a new credit bubble. Mr. Powell, a former Wall Street executive,
talked at meetings about developing a "stopping rule" for the program to
ensure the Fed's portfolio of securities didn't get too big. Ms. Duke, a
former banker, was likewise wary of making an unlimited commitment.
So policy was in fact separated from the data flow. Or was it? Arguably,
the Fed could be invoking the "costs and benefits" clause of the statement. But
they never fully communicated that position. Why not? Perhaps they couldn't
admit that the Federal Reserve had reached its policy limits. Or, as is more
likely, the group formulating policy is not the same as the group communicating
Twelve outspoken regional bank presidents often disagree publicly on Fed
policy. Those based in Dallas, Philadelphia, Kansas City and Richmond have
openly opposed the bond-buying program.
Six Washington-based Fed governors, in contrast, rarely speak out
publicly against the chairman or dissent at meetings. Mr. Bernanke has
regular contact with the these governors, who work down the hall from him.
They have voted unanimously to continue the bond-buying program since it
started a year ago.
The regional bank presidents are apparently clueless about the evolution of
policy between meetings. They are simply not directly involved in the
day-to-day evolution of policy. Worse yet, those that are involved choose to
remain silent. They do not provide the regular speeches that would serve as a
baseline for either market participants or regional bank presidents. Federal
Reserve Chairman Ben Bernanke does not want to serve in this role (revealed
preference), and Vice Chair Janet Yellen has gone to ground in the nomination
The latter opens up other can of worms. Where does Yellen stand on QE and
tapering nowadays? Everyone assumes that she is anti-tapering at the moment,
but we don't know her bar for tapering. And, as Avent points out, notice that
two of these anti-QE governors were Obama appointees. Are more such nominees on
the way? Is Yellen secretly such a nominee?
Also, this episode makes clear that the Fed cannot credibly commit to the
irresponsible behavior necessary to summon what Brad DeLong calls the "inflation
expectations imp." Back to Hilsenrath:
By April more officials, including the governors, were getting worried
about terms like "QE-ternity" and "QE-infinity" floating around financial
markets, which suggested some investors thought the program was boundless,
according to people familiar with Fed discussions. The Fed officials thought
the job market had made enough progress to warrant discussing an exit.
If you want to change expectations, you had to convince participants that
policy was in fact boundless, that you were prepared to do whatever it takes. The
talk of "QE-infinity" was a feature, not a bug of the policy. That's what
was holding down the term premium and keeping a lid on interest rates. The
instant everyone realized the Federal Reserve was clearly not committed to
irresponsible policy, the term premium jumped up, creating a tightening of
monetary conditions just as the economy was entering another budget battle.
If he Federal Reserve was genuinely committed to implementing the dual
mandate in the context of the actual and forecast data, this should never have
happened given the calendar. But it did. Why? Because apparently the Federal
Reserve is moving to a triple mandate: Maximum employment, price stability, and
financial stability. They just failed to communicate that last part.
Whether you agree with QE or not, several points seem evident at this point:
- Obama is stacking the Federal Reserve Board with anti-QE candidates.
- The anti-QE contingent has been heavily influenced by the asset bubbles
of recent years and is concerned about the financial stability implications
of monetary policy. The dual mandate is becoming a triple mandate.
- Communication is likely to remain confusing because the regional bank
presidents are largely ignorant of what is happening on Constitution Ave.
except in the immediate aftermath of an FOMC meeting.
- Points one to three above imply that the Federal Reserve cannot credibly
commit to an irresponsible policy path such that inflation expectations even
nudge higher. Notice that the Fed's own forecasts still have inflation
reaching target from below, not above. They don't even believe they can
push inflation higher. Why should you?
- The Fed desperately needs to rethink its communications strategy. They
need some central view to anchor expectations. Arguably, this is the job
for that guy with the beard. He just doesn't want to do it.
- If monetary policy is moving to a triple mandate, and consequently the
Federal Reserve has reached the limits of what it is willing to do to
support the economy, the emphasis needs to shift to fiscal stimulus in the
near term. To the extent that in the long-run there remain concerns about
the cost of social security and, more importantly, health care, such
concerns would be much easier to address in the context of an economy
operating at full employment.
- If fiscal policy is all we have left to push the economy back to full
employment, we are in deep, deep trouble, because nothing but fiscal
consolidation is coming out of this Congress or Administration.
Bottom Line: Federal Reserve communications are in disarray in the midst of
a lack of internal consensus about either the costs and benefits of QE or the
parameters for ending QE. This does not bode well for an institution that
increasingly relies on forward guidance to implement policy.
Posted by Mark Thoma on Tuesday, October 8, 2013 at 10:26 AM in Economics, Fed Watch, Monetary Policy |
America’s children are the silent victims of the Great Recession: The
Great Recession has disrupted the lives of families and their children in an
It has changed everyday life in some ways that can be measured by money, but
in others that cannot, and at the extreme it has even led to a six-fold
increase in the risk children will be physically abused.
Lost jobs, falling incomes, and foreclosures will likely compromise the
capacity of children to become all that they can be, with the effects of the
recession echoing not just across years, but also across generations.
Recessions do not normally figure into the way economists think about the
factors determining the adult prospects of children. Unemployment spells are
usually short, temporary events. In gauging the capacities of families to
invest in and promote the capabilities of their children, it is important to
look past the changes in incomes that result, and focus on the long-term,
more permanent, resources available to parents. ...[more]...
Posted by Mark Thoma on Tuesday, October 8, 2013 at 10:08 AM in Economics |