Saturday, September 26, 2015

''A Few Less Obvious Answers'' on What is Wrong with Macroeconomics

From an interview with Olivier Blanchard:

...IMF Survey: In pushing the envelope, you also hosted three major Rethinking Macroeconomics conferences. What were the key insights and what are the key concerns on the macroeconomic front? 
Blanchard: Let me start with the obvious answer: That mainstream macroeconomics had taken the financial system for granted. The typical macro treatment of finance was a set of arbitrage equations, under the assumption that we did not need to look at who was doing what on Wall Street. That turned out to be badly wrong.
But let me give you a few less obvious answers:
The financial crisis raises a potentially existential crisis for macroeconomics. Practical macro is based on the assumption that there are fairly stable aggregate relations, so we do not need to keep track of each individual, firm, or financial institution—that we do not need to understand the details of the micro plumbing. We have learned that the plumbing, especially the financial plumbing, matters: the same aggregates can hide serious macro problems. How do we do macro then?
As a result of the crisis, a hundred intellectual flowers are blooming. Some are very old flowers: Hyman Minsky’s financial instability hypothesis. Kaldorian models of growth and inequality. Some propositions that would have been considered anathema in the past are being proposed by "serious" economists: For example, monetary financing of the fiscal deficit. Some fundamental assumptions are being challenged, for example the clean separation between cycles and trends: Hysteresis is making a comeback. Some of the econometric tools, based on a vision of the world as being stationary around a trend, are being challenged. This is all for the best.
Finally, there is a clear swing of the pendulum away from markets towards government intervention, be it macro prudential tools, capital controls, etc. Most macroeconomists are now solidly in a second best world. But this shift is happening with a twist—that is, with much skepticism about the efficiency of government intervention. ...

    Posted by on Saturday, September 26, 2015 at 01:12 PM in Economics, Financial System, Macroeconomics, Methodology | Permalink  Comments (21) 

    'Economics: What Went Right'

    Paul Krugman returns to a familiar theme:

    Economics: What Went Right: ...I’m at EconEd; here are my slides for later today. The theme of my talk is something I’ve emphasized a lot over the past few years: basic macroeconomics has actually worked remarkably well in the post-crisis world, with those of us who took our Hicks seriously calling the big stuff — the effects of monetary and fiscal policy — right, and those who went with their gut getting it all wrong. ...
    One thing I do try is to concede that one piece of the conventional story hasn’t worked that well, namely the Phillips curve, where the “clockwise spirals” of previous protracted large output gaps haven’t materialized. Maybe it’s about what happens at very low inflation rates.
    What’s notable about the Fed’s urge to raise rates, however, is that Fed officials, including Janet Yellen, are acting as if they have high confidence in their models of inflation dynamics –which is the one thing we really haven’t done well at recently. I really fear that we’re looking at incestuous amplification here.

    Agree about the uncertainty about inflation dynamics, but fear Fed officials will interpret it as risks on the upside that must be nullified through interest rate hikes. As for the Phillips curve, here's a graph from his talk:


    As Krugman says, "Maybe it’s about what happens at very low inflation rates." I would add that the combination of the zero bound, low inflation, and downward wage rigidity may be able to explain the change in the Phillips curve -- I'm not quite ready to give up yet.

    More generally, estimating inflation dynamics has been far from successful. For example, in many VAR models (a widely used empirical specification for establishing relationships among macroeconomic series), a shock to the federal funds rate often causes prices to go up (theory says they should go down). This can be overcome somewhat by including commodity prices in the model. The idea is that when the Fed expects inflation to go up it raises the federal funds rate, and since the policy does not complete eliminate the inflation, the data will show a positive correlation between the federal funds rate and inflation. Commodity prices are thought to embody and be sensitive to future expected inflation, so including this variable helps to solve the "price puzzle" as it is known. Even so, the results are highly sensitive to specification, and when you work with these models regularly you come away believing that the estimated price dynamics are not very good at all.

    But the Fed must forecast in order to do policy. There are lags (though I've argued they are likely shorter than common wisdom suggests), and the Fed must act before a clear picture emerges. The question is how the Fed should react to such uncertainty about its inflation forecasts, and to me -- given the corresponding uncertainties about the state of the labor market and the asymmetric nature of the costs of mistakes about inflation and unemployment (plus the distributional issues -- who gets hurt by each mistake?), it counsels patience rather than urgency on the inflation front.

      Posted by on Saturday, September 26, 2015 at 12:47 PM in Economics, Inflation, Macroeconomics, Unemployment | Permalink  Comments (8) 

      Jeb Bush's Claims and Reality

      Matthew Yglesias takes up a quote from Bush (I highlighted this yesterday):

      Jeb Bush can't explain the cost of his tax cuts correctly: ...Jeb Bush ... talking to CNBC's John Harwood about the impact of his plan on the deficit:
      Everybody freaks out about the deficit. And I worry about the structural deficit for sure. But if we grow our economy at a faster rate, the dynamic nature of tax policy will kick in. And so we'll be in the hole around $1.2 trillion over 10 years. And these are moderate growth effects. I'm not using the ones that I believe. I'm more optimistic.
      There's never been a time where there hasn't been a dynamic effect of taxation. That's not a risk at all. That's just a simple fact. Take the contrary argument here for a second: If tax policy doesn't matter, why don't we just tax everything?
      Bush is referring to an estimate prepared for media consumption by John Cogan, Martin Feldstein, Glenn Hubbard, and Kevin Warsh — four men who are smart economists in good standing but who are also very much partisan Republicans. The right way to think about an estimate they put together is that it represents the outer limit of what a person is willing to claim on behalf of the growth impacts of Bush's tax cut and feel like he can still look at his graduate students with a straight face.
      And guess what? The paper doesn't say what Bush says it says. ...
      Obviously even if Bush were able to get his basic facts right, the underlying claim about the growth-boosting impact of the tax cuts is disputable. Jeb's brother claimed that the growth-boosting power of his tax cuts would avoid increasing the deficit, and we got eight years of fairly dismal economic performance.

      The argument Republicans can make is that growth would have been even faster without the drag from Obama's policies.. But that's where comparisons to the past are useful. These comparisons establish a baseline on what we should expect. So let's take a look. This is from Calculated Risk. It shows private sector employment under recent past presidents:

      So Obama's job growth is all but tied with Reagan's, he beats both Bushes, G.W. by a considerable margin, but loses to Clinton and Carter. The most relevant comparison here is to G.W. Bush since Jeb promises to follow his policies for the most part, and by that comparison Obama wins soundly.

      What about public sector jobs? Government has expanded under Obama correct? So if you add private sector jobs to public sector jobs, or course Obama looks even better than for private sector jobs alone and wins handily -- it's the undue influence of government expansion that is driving the overall job numbers, not his economic policies.

      That story falls apart when the data are examined:

      Obama is the big "loser" here in terms of public sector job creation, a source of annoyance for me (that's not what you do in a recession, instead wait until the economy improves to make these kinds of cuts -- it's stimulative, it avoids sending people to unemployment and a dismal job market and compounding our problems, and it avoids the need to increase social services to help the unemployed during their struggle to find new employment). But to Republicans, Obama ought to be a hero.

      Okay, but surely Obamacare has been a job-killer, right? Republicans are noted for their forecasting ability, that runaway inflation we've had, the spike in interest rates, the stimulative effects of austerity (well, they are noted for how bad their forecasts have been), so surely they are right about this too. Obamacare has killed jobs and caused employers to shift people to part-time work, right?

      That story falls apart when the data are examined (this should be the first thing to think when Republicans start spouting claims about economics). This is from Jared Bernstein:

      Smell Something, Say Something: Obamacare, O’Reilly, and full-time jobs: ...I heard Fox’s Bill O’Reilly claim that the Affordable Care Act “has made it more difficult to create full-time jobs in America,” (around 2:30 in the video). The figure below, which indexes both full-time and part-time jobs to 100 in 2010, belies his claim. As ACA measures have been introduced, most notably the arrival of the subsidized exchanges and the Medicaid expansion in 2014, there’s been no noticeable change and certainly no Obamacare-induced shift to part-time work. Other data show that the number of involuntary part-time workers is down 18 percent—1.4 million fewer workers—since 2013.

      Source: BLS, my analysis

      No one’s claiming that the ACA is having miraculous effects on job growth, or even that it’s responsible for the full-time job growth you see above. ... My point is that while Obamacare is having its intended effect of making coverage more affordable and thereby lowering the uninsured rate, I’ve not seen any data that would lead an objective person to conclude it’s having a meaningful impact on the job market one way or the other.
      In other words, those who still want to repeal Obamacare need a new rationale besides “it’s not working” or “it’s a job killer.” It is working and it’s not killing jobs. Those who claim otherwise are, in fact, fact-killers. ...

      If you want slow growth, poor job creation, tax cuts for the wealthy, harder times for everyone else as social programs are cut on the false pretenses of ending dependency and building character (we know what the true goals are for most Republicans), if you want health care to be harder to get for those "others", environmental policies to be rolled back in the name of "business interests", if you want all of this and more -- we haven't even touched on issues like the supreme court, war, and Federal Reserve appointments -- Jeb is the man for you.

        Posted by on Saturday, September 26, 2015 at 12:05 PM in Economics, Politics | Permalink  Comments (50) 

        Links for 09-26-15

          Posted by on Saturday, September 26, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (164) 

          Friday, September 25, 2015

          The Path from Deficit Concern to Deficit Deceit'

          The politics in the UK is so much better than here. Politicians in the UK would never think of using smokescreens like concern over the deficit to conceal their true intentions:

          The path from deficit concern to deficit deceit, by Simon Wren-Lewis: ...A few days ago Lord Turnbull had the opportunity to question the Chancellor on his drive for further austerity. This is a part of what he said.

          “I think what you are doing actually, is, the real argument is you want a smaller state and there are good arguments for that and some people don’t agree but you don’t tell people you are doing that. What you tell people is this story about the impoverishment of debt which is a smokescreen. The urgency of reducing debt, the extent, I just can’t see the justification for it.”

          A former head of the civil service, who had initially supported Osborne on the deficit, was now accusing him of deliberate deceit. Big news you might have thought. And quite a turnaround in just 5 years.

          Yet it is not surprising. Osborne’s fiscal plans really have no basis in economics. That leaves two alternatives. Either Osborne is just stupid and cannot take advice, or he has other motives. George Osborne is clearly not stupid, which leaves only the second possibility. It is therefore entirely logical that Lord Turnbull should come to agree with what some of us were saying some time ago.

          What a strange world we are now in. The government goes for rapid deficit reduction as a smokescreen for reducing the size of the state. No less than a former cabinet secretary accuses the Chancellor of this deceit. Yet when a Labour leadership contender adopts an anti-austerity policy he is told it is extreme and committing electoral suicide. Is it any wonder that a quarter of a million Labour party members voted for change.

            Posted by on Friday, September 25, 2015 at 12:34 PM in Budget Deficit, Economics, Politics | Permalink  Comments (47) 


            This worked so well for Romney:

            Our message is one of hope and aspiration," he said at the East Cooper Republican Women’s Club annual Shrimp Dinner. "It isn't one of division and get in line and we'll take care of you with free stuff. Our message is one that is uplifting -- that says you can achieve earned success.

            Bush says this is how he will win back black voters, but I have a feeling his message of "hope and inspiration" and the reference to "free stuff" is for another group of voters.

            If the pope was a scientist, Bush would listen?:

            “I oppose the president’s policy as it relates to climate change because it will destroy the ability to re-industrialize the country, to allow for people to get higher wage jobs, for people to rise up,” Bush said, according to the Huffington Post.
            This is not the first time Bush has rejected the pope’s teachings on climate, but it may be the first time he has given the “not a scientist” reason.
            “He’s not a scientist, he’s a religious leader,” Bush says
            In fact, the pope studied chemistry and worked as a chemist. ...

            He couldn't possibly be using concern about people's ability to "rise up" as a cover for supporting business interests, could he?

            Tax cuts work, ignore the evidence:

            HARWOOD: Do you regard your brother's economic tenure—which pursued a broadly similar strategy to what you're proposing—as a proof point that this strategy works?

            BUSH: Well, look, he was impacted by some big secular events. The tech bubble, 9/11—those had huge impacts. There was growth. And there was some job growth.

            Wage growth has been flat for a long time in our country. We have this big challenge that we have to fix. And that's part of the mission I'm on—growth by itself isn't going to create higher wages. But higher growth will generate more wage growth than no growth. And if you do it in the right way, where you're putting money in people's pockets, you can create economic activity.

            The tax cuts will trickle down and let people "rise up" just like they did before. Oh wait. This is the "earned success" he talks so much about. It has nothing to do with supporting wealthy interests, it's all about economic growth and helping the disadvantaged. On the "earned success" point, it's hard not to recall Molly Ivins on George Bush:

            Jim Hightower's great line about [George] Bush, "Born on third and thinks he hit a triple," is still painfully true. Bush has simply never acknowledged that not only was he born with a silver spoon in his mouth -- he's been eating off it ever since..., he doesn't admit to himself or anyone else that he owes his entire life to being named George W. Bush. He didn't just get a head start by being his father's son -- it remained the single most salient fact about him for most of his life. He got into Andover as a legacy. He got into Yale as a legacy. He got into Harvard Business School as a courtesy (he was turned down by the University of Texas Law School). He got into the Texas Air National Guard -- and sat out Vietnam -- through Daddy's influence. (I would like to point out that that particular unit of FANGers, as regular Air Force referred to the "Fucking Air National Guard," included not only the sons of Governor John Connally and Senator Lloyd Bentsen, but some actual black members as well -- they just happened to play football for the Dallas Cowboys.) Bush was set up in the oil business by friends of his father. He went broke and was bailed out by friends of his father. He went broke again and was bailed out again by friends of his father; he went broke yet again and was bailed out by some fellow Yalies.
            That Bush's administration is salted with the sons of somebody-or-other should come as no surprise. I doubt it has ever even occurred to Bush that there is anything wrong with a class-driven good-ol'-boy system. ...

            But of course, nothing like that could possibly be true of self-made, I did it all by myself Jeb! Bush success (he "made it!" himself).

            Finally, surprise of surprises, when asked about the impact of his tax cut policies on the deficit, he gives the standard response, economic growth, like that his brother would have gotten if he wasn't so darn unlucky, will nullify much of the impact that tax cuts have on the deficit:

            Everybody freaks out about the deficit. And I worry about the structural deficit for sure. But if we grow our economy at a faster rate, the dynamic nature of tax policy will kick in. ... There's never been a time where there hasn't been a dynamic effect of taxation. That's not a risk at all. That's just a simple fact.

            It's also a "simple fact" (he hasn't moved on to "complicated facts" yet, apparently) that the Bush tax cuts did not trickle down, inequality was made worse by the Bush policies, and those in the lower parts of the income distribution had a harder time "rising up" because of these policies, and other policies that stripped away social support.

            Jeb's I will do what my brother did, except this time it will work for those who are not in the top of the income distribution, is not exactly inspiring. Unless, of course, you are used to eating with silver spoons.

              Posted by on Friday, September 25, 2015 at 12:06 PM in Economics, Politics | Permalink  Comments (9) 

              Paul Krugman: Dewey, Cheatem & Howe

              Republicans can't help but side with business, but there are very good reasons for the recent increase in regulatory oversight:

              Dewey, Cheatem & Howe, by Paul Krugman, Commentary, NY Times: Item: The C.E.O. of Volkswagen has resigned after revelations that his company committed fraud on an epic scale, installing software on its diesel cars that detected when their emissions were being tested, and produced deceptively low results.
              Item: The former president of a peanut company has been sentenced to 28 years in prison for knowingly shipping tainted products that later killed nine people and sickened 700.
              Item: Rights to a drug used to treat parasitic infections were acquired by Turing Pharmaceuticals, which specializes not in developing new drugs but in buying existing drugs and jacking up their prices. In this case, the price went from $13.50 a tablet to $750. ...
              There are, it turns out, people in the corporate world who will do whatever it takes, including fraud that kills people, in order to make a buck. And we need effective regulation to police that kind of bad behavior... But we knew that, right?
              Well, we used to know it... But ... an important part of America’s political class has declared war on even the most obviously necessary regulations. ...
              A case in point: This week Jeb Bush, who has an uncanny talent for bad timing, chose to publish an op-ed article in The Wall Street Journal denouncing the Obama administration for issuing “a flood of creativity-crushing and job-killing rules.” Never mind his misuse of cherry-picked statistics, or the fact that private-sector employment has grown much faster under President Obama’s “job killing” policies than it did under Mr. Bush’s brother’s administration. ...
              The thing is, Mr. Bush isn’t wrong to suggest that there has been a move back toward more regulation under Mr. Obama, a move that will probably continue if a Democrat wins next year. After all, Hillary Clinton released a plan to limit drug prices at the same time Mr. Bush was unleashing his anti-regulation diatribe.
              But the regulatory rebound is taking place for a reason. Maybe we had too much regulation in the 1970s, but we’ve now spent 35 years trusting business to do the right thing with minimal oversight — and it hasn’t worked.
              So what has been happening lately is an attempt to redress that imbalance, to replace knee-jerk opposition to regulation with the judicious use of regulation where there is good reason to believe that businesses might act in destructive ways. Will we see this effort continue? Next year’s election will tell.

                Posted by on Friday, September 25, 2015 at 12:33 AM in Economics, Politics, Regulation | Permalink  Comments (74) 

                ''Technological Progress Anxiety: Thinking About 'Peak Horse' and the Possibility of 'Peak Human'''

                Brad DeLong:

                Technological Progress Anxiety: Thinking About “Peak Horse” and the Possibility of “Peak Human”, by by Brad DeLong: Another well-written piece by an authorial team led by the very sharp Joel Mokyr–The History of Technological Anxiety and the Future of Economic Growth: Is This Time Different?–that in my mind fails to wrestle with the major question, and so leaves me unsatisfied.

                Hitherto,... every form of non-human power that substitutes and thus tends to reduce the value of human backs and thighs...–from the horse to the watermill to the steam engine to the diesel to the jet engine–and every single source of manipulation–from the potter’s wheel to the loom to the spinning jenny to the assembly line to the mechanized factory–has required a cybernetic control mechanism. Without such a mechanism, machines are useless. They cannot keep themselves on course and on track. ... And as cybernetic control mechanisms human brains had an overwhelming productivity edge.

                The fear is that this time things really are different. The fear is that, this time, technological anxiety is not misguided... For the first time, we find our machines substituting not for human backs, things, eyes, and hands, but for human brains. ... And this factor is offset only by the hope that our machines will reduce the market value of commodities faster than they reduce the value of the median worker’s labor...

                I must say that I really do wish that Mokyr et al. had included, in their paper, a discussion of “peak horse”.

                A standard economists’ argument goes roughly like this: Technology is introduced only when it is profitable, and lowers the costs of production. Thus the prices of the goods and services produced must go down, leaving consumers with more money to spend on other products, and this creates demand for any workers who are displaced. Thus there will always be new industries growing up to employ any workers displaced by technological change in existing industries.

                But that argument applies just as well to the oats, apples, and grooming needed for horses to subsist as for the wages of humans, no? One could ... just as easily have said, a century ago, that: “Fundamental economic principles will continue to operate. Scarcities will still be with us…. Most horses will still have useful tasks to perform, even in an economy where the capacities of power sources and automation have increased considerably…”

                Yet ... “Peak horse” in the U.S. came in the 1910s, I believe. After that there was no economic incentive to keep the horse population of America from declining sharply, as at the margin the horse was not worth its feed and care. And in a marginal-cost pricing world, in which humans are no longer the only plausible source of Turing-level cybernetic control mechanisms, what will happen to those who do not own property should the same come to be true, at the margin, of the human? What would “peak human” look like? Or–a related but somewhat different possibility–even “peak male”?

                  Posted by on Friday, September 25, 2015 at 12:24 AM in Economics, Productivity, Technology | Permalink  Comments (44) 

                  Links for 09-25-15

                    Posted by on Friday, September 25, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (147) 

                    Thursday, September 24, 2015

                    'Inflation Dynamics and Monetary Policy'

                    Federal Reserve Chair Janet L. Yellen:

                    Inflation Dynamics and Monetary Policy, by Chair Janet L. Yellen: ... In my remarks today, I will discuss inflation and its role in the Federal Reserve's conduct of monetary policy. I will begin by reviewing the history of inflation in the United States since the 1960s, highlighting two key points: that inflation is now much more stable than it used to be, and that it is currently running at a very low level. I will then consider the costs associated with inflation, and why these costs suggest that the Federal Reserve should try to keep inflation close to 2 percent. After briefly reviewing our policy actions since the financial crisis, I will discuss the dynamics of inflation and their implications for the outlook and monetary policy. ...

                    It's a relatively long speech. Skipping ahead:

                    Policy Implications
                    Assuming that my reading of the data is correct and long-run inflation expectations are in fact anchored near their pre-recession levels, what implications does the preceding description of inflation dynamics have for the inflation outlook and for monetary policy?
                    This framework suggests, first, that much of the recent shortfall of inflation from our 2 percent objective is attributable to special factors whose effects are likely to prove transitory. ...
                    To be reasonably confident that inflation will return to 2 percent over the next few years, we need, in turn, to be reasonably confident that we will see continued solid economic growth and further gains in resource utilization, with longer-term inflation expectations remaining near their pre-recession level. Fortunately, prospects for the U.S. economy generally appear solid. ... My colleagues and I, based on our most recent forecasts, anticipate that this pattern will continue and that labor market conditions will improve further as we head into 2016.
                    The labor market has achieved considerable progress over the past several years. Even so, further improvement in labor market conditions would be welcome because we are probably not yet all the way back to full employment ... which most FOMC participants now estimate is around 4.9 percent...  
                    Reducing slack ... may involve a temporary decline in the unemployment rate somewhat below the level that is estimated to be consistent, in the longer run, with inflation stabilizing at 2 percent. For example, attracting discouraged workers back into the labor force may require a period of especially plentiful employment opportunities and strong hiring. Similarly, firms may be unwilling to restructure their operations to use more full-time workers until they encounter greater difficulty filling part-time positions. Beyond these considerations, a modest decline in the unemployment rate below its long-run level for a time would, by increasing resource utilization, also have the benefit of speeding the return to 2 percent inflation. Finally, albeit more speculatively, such an environment might help reverse some of the significant supply-side damage that appears to have occurred in recent years, thereby improving Americans' standard of living.33
                    Consistent with the inflation framework I have outlined, the medians of the projections provided by FOMC participants at our recent meeting show inflation gradually moving back to 2 percent, accompanied by a temporary decline in unemployment slightly below the median estimate of the rate expected to prevail in the longer run. ... This expectation, coupled with inherent lags in the response of real activity and inflation to changes in monetary policy, are the key reasons that most of my colleagues and I anticipate that it will likely be appropriate to raise the target range for the federal funds rate sometime later this year and to continue boosting short-term rates at a gradual pace thereafter as the labor market improves further and inflation moves back to our 2 percent objective.
                    By itself, the precise timing of the first increase in our target for the federal funds rate should have only minor implications for financial conditions and the general economy. What matters for overall financial conditions is the entire trajectory of short-term interest rates that is anticipated by markets and the public. As I noted, most of my colleagues and I anticipate that economic conditions are likely to warrant raising short-term interest rates at a quite gradual pace over the next few years....
                    The economic outlook, of course, is highly uncertain... Given the highly uncertain nature of the outlook, one might ask: Why not hold off raising the federal funds rate until the economy has reached full employment and inflation is actually back at 2 percent? The difficulty with this strategy is that monetary policy affects real activity and inflation with a substantial lag. If the FOMC were to delay the start of the policy normalization process for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession. In addition, continuing to hold short-term interest rates near zero well after real activity has returned to normal and headwinds have faded could encourage excessive leverage and other forms of inappropriate risk-taking that might undermine financial stability. For these reasons, the more prudent strategy is to begin tightening in a timely fashion and at a gradual pace, adjusting policy as needed in light of incoming data.
                    To conclude, let me emphasize that, following the dual mandate established by the Congress, the Federal Reserve is committed to the achievement of maximum employment and price stability. To this end, we have maintained a highly accommodative monetary policy since the financial crisis; that policy has fostered a marked improvement in labor market conditions and helped check undesirable disinflationary pressures. However, we have not yet fully attained our objectives under the dual mandate: Some slack remains in labor markets, and the effects of this slack and the influence of lower energy prices and past dollar appreciation have been significant factors keeping inflation below our goal. But I expect that inflation will return to 2 percent over the next few years as the temporary factors that are currently weighing on inflation wane, provided that economic growth continues to be strong enough to complete the return to maximum employment and long-run inflation expectations remain well anchored. Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter. But if the economy surprises us, our judgments about appropriate monetary policy will change.

                      Posted by on Thursday, September 24, 2015 at 02:43 PM in Economics, Monetary Policy | Permalink  Comments (47) 

                      'Rational Drug Pricing'

                      Should we rationally expect rational drug pricing?:

                      Rational Drug Pricing, by Jeff Sachs: Drug pricing has taken center stage in U.S. politics, and it's high time that it should. ...
                      Drug pricing is not like the pricing of apples and oranges, clothing, or furniture that well and good should be left to the marketplace. There are two major reasons. First, the main cost of drug production is not the cost of manufacturing the tablet but the cost of producing the knowledge embedded in the tablet. Second, there is often a life-and-death stake in access to the drug, so society should take steps to ensure that the drug is affordable and accessible.
                      To ensure that financial resources flow to scientists to produce the knowledge embedded in the tablet, the government does two things. First, the government pays directly for a substantial part of the research and development (R&D). ... Second, the government grants patent rights for drug discovery. ...
                      It's a basic insight of economics that patent rights are a "second-best" solution to drug pricing, not an optimal solution. A patent creates an artificial monopoly to incentivize R&D. Yet it also reduces access to the product, perhaps with unacceptable and immoral life-and-death consequences. Rational drug pricing would get the best of the patent system but ensure that it is compatible with access to the life-saving drugs.
                      Unfortunately, the current rules of the game in the U.S. pharmaceutical sector do not compensate for the weaknesses of patents. They amplify them. ... What should be done? Here are three key principles.
                      First, private R&D should certainly be protected by patents but only enough to elicit the needed R&D, not to produce outlandish profits. ...
                      Second, when the U.S. government pays for much of the R&D, it should share in the property rights. This should be a no-brainer, but in fact the NIH simply gives away most or all the intellectual property that it has financed, so the taxpayer pays part of the R&D bills but the returns are fully captured by private companies.
                      Third, when companies ... make profits from their U.S.-based research and U.S.-based production and sales, they should certainly pay U.S. taxes on their profits. The fact that the IRS lets them hide their profits in overseas tax havens is scandalous and without any logical justification whatsoever.

                        Posted by on Thursday, September 24, 2015 at 10:42 AM in Economics, Health Care, Market Failure, Regulation | Permalink  Comments (42) 

                        'America’s Collapsing Trade Initiatives'

                        Robert Kuttner:

                        America’s Collapsing Trade Initiatives: ...Obama's trade policy is in tatters. The grand design, created by Obama's old friend and former Wall Street deal-maker, trade chief Mike Froman, comes in two parts: a grand bargain with Pacific nations aimed at building a U.S.-led trading bloc to contain the influence of China, and an Atlantic agreement to cement economic relations with the European Union.
                        Both are on the verge of collapse from their own contradictory goals and incoherent logic.
                        This past June, the president, using every ounce of his political capital, managed to get Congress to vote him negotiating authority (by the barest of margins) for these deals. Under the so-called fast-track procedure, there is a quick up-or-down vote on a trade agreement that can't be amended.
                        The assumption was that the administration could deliver a deal backed by major trading partners. But our partners are not playing. ...
                        The U.S. negotiators, increasingly, are prepared to give away the store, to get a deal. ...
                        It is a bit premature to write the obituaries for these deals. Never underestimate the power of corporate elites. But one has to ask, what was Obama thinking? The U.S. faces serious economic challenges from an economy that is still stagnant for regular people. And we face complex national security challenges from China. These trade deals address neither challenge, much less the even more daunting economic woes in Europe. ...

                        In general, I support lowering trade restrictions, but the details of trade agreements are important. Just because a deal is proposed does not necessarily mean it's a good one. I haven't kept up with the details of the current negotiations, but for the most part those that have appear less than impressed.

                          Posted by on Thursday, September 24, 2015 at 10:18 AM in Economics, International Trade, Politics | Permalink  Comments (38) 

                          Links for 09-24-15

                            Posted by on Thursday, September 24, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (74) 

                            Wednesday, September 23, 2015

                            'Jeb Bush Has No Clue About Business Regulation'

                            Kevin Drum is not impressed with Jeb Bush's plan for regulation, or his justification for it:

                            Jeb Bush Has No Clue About Business Regulation: Jeb Bush today in the Wall Street Journal:

                            To understand what is wrong with the regulatory culture of the U.S. under President Obama, consider this alarming statistic: Today, according to the World Bank—not exactly a right-wing think tank—the U.S. ranks 46th in the world in terms of ease of starting a business. That is unacceptable. Think what the U.S. could be and the prosperity we could have if we rolled back the overregulation that keeps us from ranking in the top 10.

                            My goodness. That does sound unacceptable. Still, it never hurts to check up on these presidential candidates... So let's click the link ... and see what it says: "The rankings of economies with populations over 100 million are based on data for 2 cities." Hmmm. It turns out the World Bank is ranking the US based on starting up a business in New York City. That seems to tip the scales a wee bit, no? ...

                            Now I get it. This isn't about getting a business up and running. It's solely about registering a new business. And it's got nothing to do with any of Obama's regulations. It's all about state and local stuff. ... I'm not sure what Jeb Bush thinks he's going to do to streamline this. Bottom line: this is completely meaningless. ...

                            But wait! There's more. The World Bank does have a broader "Ease of Doing Business" rank that takes into account the things you need to do to get up and running: construction permits, electricity, credit, paying taxes, enforcing contracts, etc. As it happens, the bulk of this stuff is still state and local, and has nothing to do with Obama or the federal government. Still, let's take a look since Jeb chose not to share it with us for some reason...

                            The World Bank has us in 7th place. We're already in the top ten that Jeb is aiming for. Mission accomplished! ...

                            As for the outrageous regulations he promises to repeal on Day One, this would mostly just benefit big campaign donors, not the yeoman entrepreneurs he claims to be sticking up for. No big surprise there, I suppose.

                              Posted by on Wednesday, September 23, 2015 at 12:11 PM in Economics, Politics, Regulation | Permalink  Comments (27) 

                              'Chinese Spillovers'

                              Paul Krugman:

                              Chinese Spillovers: China is clearly in economic trouble. But how worried should we be about spillovers from China’s woes to the rest of the world economy? I have in general been telling people “not very”, although it’s a bigger issue for Japan and Korea. But Citi’s Willem Buiter suggests that it could be a quite big deal, leading to a global recession. ... So could he be right?
                              Let me start with the case for not worrying too much, which comes down to the fact that China’s economy, while big, is still a small fraction of the global economy...
                              One possibility is ... that a Chinese slump could, via its impact on commodity prices, do a lot more harm to some other emerging markets than the above analysis suggests. I’m still working on this, although so far I don’t seem to be finding much there.
                              Another possibility is an international version of the financial accelerator. As Buiter points out, many emerging markets seem to be vulnerable thanks to private-sector foreign currency debt (which was so deadly in 1997-98). ...
                              Maybe, also, we could see some version of the financial contagion so obvious in the 1990s. Troubles in Brazil might make investors leery of other emerging markets, driving up interest spreads and forcing fiscal austerity that worsens the downturn. Or for matter, to the extent that the same hedge funds have been buying assets in a number of emerging nations, losses in one place could force them to liquidate assets elsewhere, causing a sort of global debt deflation. That was a popular story in the 1990s...
                              Overall, I’m not convinced of the Buiter thesis; China still seems to me not big enough to bring down the rest of the world. But I’m not rock-solid in that conviction, largely because we’ve seen so much contagion in the past. Stay tuned.

                                Posted by on Wednesday, September 23, 2015 at 09:57 AM in China, Economics, International Finance, International Trade | Permalink  Comments (50) 

                                Are We There Yet? A New Measure of Labor Market Performance

                                At Moneywatch, a discussion of the Atlanta Fed's new ZPOP measure of the labor market's performance:

                                How will the Fed know if we've hit "full employment"?: How close are we to full employment? That is a crucial question for the Federal reserve, and the answer plays a crucial role in the Federal Reserve’s decision about when to begin raising its target rate of interest.
                                According to the most recent data, the unemployment rate is 5.1 percent, a level that historically has been at or very near full employment. But there are well-known problems with the “headline” unemployment statistics such as the failure to account for discouraged workers, underutilized workers, and demographic effects. When these factors are accounted for, and when other statistics such as the prime-age employment to population ratio are examined, the labor market picture does not look as rosy. But there is still considerable uncertainty about the true state of the labor market, and researchers at the Atlanta Fed have developed an alternative to standard labor market measures that hopefully gives a clearer picture of where we stand. ...

                                [The editors always change the title/introduction, and there are usually other edits as well, but I never read the new versions to avoid becoming annoyed at the changes (I don't approve changes, they are simply made).]

                                  Posted by on Wednesday, September 23, 2015 at 09:54 AM in Economics, MoneyWatch, Unemployment | Permalink  Comments (28) 

                                  'Education Gap Between Rich and Poor Is Growing Wider'

                                  Eduardo Porter:

                                  Education Gap Between Rich and Poor Is Growing Wider, NY Times: the 1970s..., African-American children had nowhere near the same educational opportunities as whites. The civil rights movement, school desegregation and the War on Poverty helped bring a measure of equity to the playing field. Today,... racial disparities in education have narrowed significantly. ... But ...the achievement gaps between more affluent and less privileged children is wider than ever... Today the biggest threat to the American dream is class.
                                  Education is today more critical than ever. ... And yet American higher education is increasingly the preserve of the elite. ... The problem, of course, doesn’t start in college. ...
                                  “If we could equalize achievement from age zero to 14,” Professor [Jane] Waldfogel told me, “that would go a long way toward closing the college enrollment and completion gaps.”
                                  It can be done. Australia, Canada — even the historically class-ridden Britain — show much more equitable outcomes..., yet the strains from our world of increasing income inequality raise doubts about our ability to narrow the educational divide... The ... rich ... are spending hand over fist to ensure that their children end at the front of the rat race. Our public school system has proved no match to the forces reproducing inequality across the generations. ...
                                  Today, the proficiency gap between the poor and the rich is nearly twice as large as that between black and white children. In other words, even as one achievement gap narrowed, another opened wide. ...

                                    Posted by on Wednesday, September 23, 2015 at 12:24 AM in Economics, Income Distribution, Universities | Permalink  Comments (65) 

                                    'The Return of Policy Uncertainty'

                                    Menzie Chinn:

                                    The Return of Policy Uncertainty: From Hatzius et al., in Goldman Sachs Global Macro Research yesterday:

                                    A federal shutdown due to a funding lapse looks no less likely than it did two weeks ago, and we believe the probability is nearly 50%. The Senate is expected to begin voting later this week on a funding extension, but the House looks unlikely to act until shortly before the September 30 deadline.

                                    The impact on measured policy uncertainty is shown in Figure 1 below.


                                    Figure 1: Daily policy uncertainty index (blue), and 7 day trailing moving average (red). Source: Baker, Bloom and Davis, at, accessed 9/22/2015.


                                      Posted by on Wednesday, September 23, 2015 at 12:15 AM in Economics, Politics | Permalink  Comments (5) 

                                      Links for 09-23-15

                                        Posted by on Wednesday, September 23, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (109) 

                                        Tuesday, September 22, 2015

                                        'The Political Party of the President Matters for the Economy'

                                        I have a new column:

                                        The Political Party of the President Matters for the Economy: Since WWII, the economy does better when there is a Democrat in the White House. That conclusion holds for “almost every metric” of the economy’s performance according to research by Princeton economists Alan Blinder and Mark Watson. But is this due to policy differences between Democratic and Republican administrations? Or, with the limited number of observations since WWII, is this simply a statistical artifact, simply the luck of having Democrats in the office when good things happen?

                                        The dominant position among economists, one I’ll push back against, is that presidents have little ability to influence the economy. Steven Dubner, one of the authors of Freakonomics, gives the standard response:

                                        “…just once I'd love a presidential candidate to get up there on the stump and say: 'My fellow Americans, I can't control the U.S. economy. I've got a little bit of influence but mostly it does what it does. So if it gets worse on my watch, you shouldn't blame me -- and if it happens to get better, you probably shouldn't give me too much credit either.'”

                                        Austan Goolsbee, quoted in the same interview, echoes this:

                                        “I think the world vests too much power -- certainly in the president, probably in Washington in general -- for its influence on the economy, because most all of the economy has nothing to do with the government.”

                                        I disagree. Whether the president is a Republican or Democrat can make a critical difference for the economy. ...

                                          Posted by on Tuesday, September 22, 2015 at 08:28 AM in Economics, Politics | Permalink  Comments (73) 

                                          'Central Banks Have Made the Rich Richer'

                                          Paul Marshall, chairman of London-based hedge fund Marshall Wace, in the FT:

                                          Central banks have made the rich richer: Labour’s new shadow chancellor has got at least one thing right. ... Quantitative easing ... has bailed out bonus-happy banks and made the rich richer. ...
                                          It is no surprise that the left is angry about this, nor that they are looking for other versions of QE that do not so directly benefit bankers and the rich. Instead of increasing the money supply by buying sovereign bonds from banks, central banks could spread the love evenly by depositing extra money in every person’s bank account..., it might have been fairer.
                                          Mr McDonnell and Jeremy Corbyn, the new Labour leader, advocate a second approach: targeting QE at infrastructure projects. The central bank would buy bonds direct from the Treasury on the understanding that the funds would be used to improve housing and transport infrastructure. ...
                                          QE had clear wealth effects, which could have been offset by fiscal measures. All political parties should acknowledge this. So should those of us who want free markets to retain their legitimacy.

                                            Posted by on Tuesday, September 22, 2015 at 08:25 AM in Economics, Fiscal Policy, Monetary Policy | Permalink  Comments (49) 

                                            'Poor 'Poor People Don't Have Less Self-Control, Poverty Forces Them to Think Short-Term'

                                            How do you save for the future when your kids are barely getting enough to eat, let alone the other things they need?:

                                            Poor People Don't Have Less Self-Control. Poverty Forces Them to Think Short-Term, by  Elliot Berkman, New Republic: When considering poverty, our national conversation tends to overlook systemic causes. Instead, we often blame the poor for their poverty. Commentators echo the claim that people are poor because they have bad self-control and therefore make nearsighted choices. But psychology research says the opposite might be the case: poverty makes it hard for people to care about the future and forces them to live in the present.
                                            As a researcher who studies goals and motivation, I wanted to know how self-control works and if science can help us get better at it. Poverty seemed like a good place to start, because greater self-control could be especially helpful there. In fact, the federal Administration for Children and Families is adding character-skills training to its programs in efforts to improve self-control among children.
                                            But as I started this work I was surprised by all the reasons that it’s so hard for people in poverty to have good self-control. In fact, I started to question whether the usual definition of self-control–choosing long-term over short-term outcomes–even makes sense for people who are short on time, money, or both.
                                            The very definition of self-control is choosing behaviors that favor long-term outcomes over short-term rewards, but poverty can force people to live in a permanent now. Worrying about tomorrow can be a luxury if you don’t know how you’ll survive today.
                                            Research supports this idea by showing that poor people understandably have an increased focus on the present. People who are among the poorest one-fifth of Americans tend to spend their money on immediate needs such as food, utilities and housing, all of which have gotten more expensive. In this situation, the traditional definition of self-control doesn’t make a lot of sense. ...

                                            He concludes:

                                            This research makes me rethink both poverty and self-control. The science suggests that poverty has powerful harmful effects on people, and helps explain why it’s so hard to escape. Their choices are much more a product of their situation, rather than a lack of self-control.

                                            The way we scientists define self-control is part of the problem, too. We tend to think that focusing on long-term goals is always a good thing and satisfying short-term needs is always a bad thing; we say that “self-control failure” is equivalent to focusing on the near term. This definition works well for people who have the luxury of time and money to meet their basic needs and have resources left over to plan for the future. But self-control as currently defined might not even apply to people living in the permanent now.

                                              Posted by on Tuesday, September 22, 2015 at 08:19 AM in Economics | Permalink  Comments (12) 

                                              Links for 09-22-15

                                                Posted by on Tuesday, September 22, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (226) 

                                                Monday, September 21, 2015

                                                'Virtual Frenzies: Bitcoin and the Block Chain '

                                                For the bitcoin/blockchain enthusiasts, this is from Cecchetti & Schoenholtz:

                                                Virtual Frenzies: Bitcoin and the Block Chain: Bitcoin has prompted many people to expect a revolution in the means by which we make and settle everyday payments. Our view is that Bitcoin and other “virtual currency schemes” (VCS) lack critical features of money, so their use is likely to remain very limited.
                                                In contrast, the technology used to record Bitcoin ownership and transactions – the block chain – has potentially broad applications in supporting payments in any currency. The block chain can be thought of as an ever-growing public ledger of transactions that is encrypted and distributed over a network of computers. Even as the Bitcoin frenzy subsides, the block chain has attracted attention from bank and nonbank intermediaries looking for ways to economize on payments costs. Only extensive experimentation will determine whether there are large benefits.
                                                Again, however, we are somewhat skeptical. Today’s wholesale payments systems are so efficient that it is hard to see how or why one would make the costly and time-consuming effort to replace them. And the apparently high costs of retail transfers at least partly reflect factors that the block chain technology is unlikely to address. ...

                                                After much discussion of these and other points:

                                                So, what’s the bottom line? We share with Bitcoin advocates the desire to protect privacy (see, our post on paper money), but remain skeptical about the potential for any private currency – digital or otherwise – to do the job better than what we currently use. And the evidence so far is that government fiat monies – dollar, euro, yen, or whatever – are far more stable than Bitcoin. Not only that, but if there’s to be profit from issuing a currency, then we believe that it is the public that should benefit.
                                                As for the block chain, there’s plenty of room for experimentation – with the potentially greatest benefits coming where the current payments system is the least developed. But it remains to be seen whether the public ledger can compete against the big clearinghouses that dominate wholesale payments and settlement, and whether it can ensure payments providers have the ability to reliably filter out illegitimate transactions.
                                                Of course, even a big clearinghouse might find the block chain technology useful (see WSJ-gated story here). Wouldn’t it be ironic if it did so, but wished to keep the innovation private?

                                                  Posted by on Monday, September 21, 2015 at 10:30 AM in Economics, Financial System | Permalink  Comments (17) 

                                                  'Can We Rely on Market-Based Inflation Forecasts?'

                                                  Michael Bauer and Erin McCarthy of the SF Fed:

                                                  Can We Rely on Market-Based Inflation Forecasts?, Michael D. Bauer and Erin McCarthy, Economic Letter, FRBSF: The Federal Reserve’s dual mandate requires monetary policy to aim for both maximum employment and price stability. Although employment has recovered since the recession, inflation has consistently remained below the Fed’s 2% longer-run objective. Because expectations of future inflation play an important role in determining current inflation, decreases in measures of inflation expectations based on market prices have raised some concerns. For example, between June 2014 and January 2015, one-year inflation swap rates, which measure market-based expectations of inflation in the consumer price index (CPI) one year ahead, dropped over 2.5 percentage points. Large decreases were also observed in breakeven inflation rates, the difference between yields on nominal and inflation-indexed Treasury securities, known as TIPS.
                                                  Market-based measures of inflation expectations are calculated from the prices of financial securities. Their advantage is that they are readily available at high frequency and therefore are widely monitored. However, they reflect not only the public’s inflation expectations but also other idiosyncratic factors that affect market prices, which are difficult to quantify. For example, they include a risk premium to compensate investors for inflation uncertainty and are affected by changes in liquidity, unusual demand flows, and, more broadly, “animal spirits” that change prices but are unrelated to expectations (see Bauer and Rudebusch 2015). Hence it is unclear how much useful information they provide, and how much one should pay attention to these rates when forecasting inflation.
                                                  If market-based inflation expectations provided accurate inflation forecasts, then one surely would want to pay close attention to their evolution. In this Economic Letter, we evaluate their performance in comparison with a variety of alternative forecasts for CPI inflation. ...
                                                  Conclusions We find that market-based measures of inflation are poor predictors of future inflation. In particular, they perform much worse than forecasts constructed from survey expectations of future inflation, which incorporate all the information used by professional forecasters. Interestingly, a simple constant inflation rate corresponding to the Federal Reserve’s 2% inflation target consistently performs best. While our analysis is based on a short sample that displays a lot of volatility during the Great Recession, our results appear quite robust as they are consistent across two subsamples.
                                                  Our results add to the discussion about how much attention policymakers and professional forecasters should pay to market-based inflation forecasts. These measures mostly reflect current and past inflation movements, and do not contain a lot of useful forward-looking information. Idiosyncratic market forces and inflation risk premiums appear to be important drivers of market-based inflation expectations. Overall, it is important to keep this caveat in mind when interpreting market-based inflation expectations.

                                                    Posted by on Monday, September 21, 2015 at 10:30 AM in Economics, Inflation, Monetary Policy | Permalink  Comments (14) 

                                                    Paul Krugman: The Rage of the Bankers

                                                    Why are bankers so angry about the Fed's decision not to raise interest rates?:

                                                    The Rage of the Bankers, by Paul Krugman, Commentary, NY Times: Last week the Federal Reserve chose not to raise interest rates. It was the right decision. In fact, I’m among the economists wondering why we’re even thinking about raising rates right now. ... Yet the Fed has faced constant criticism for its low-rate policy. Why?
                                                    The ... story keeps changing. In 2010-2011 the Fed’s critics issued dire warnings about looming inflation. You might have expected some change in tune when inflation failed to materialize. Instead, however, those who used to demand higher rates to head off inflation are still demanding higher rates, but for different reasons. The justification du jour is “financial stability,” the claim that low interest rates breed bubbles and crashes. ... Why does anyone take this stuff seriously?
                                                    Well, when you see ever-changing rationales for never-changing policy demands, it’s a good bet that there’s an ulterior motive. And the rate rage of the bankers — combined with the plunge in bank stocks that followed the Fed’s decision not to hike — offers a powerful clue... It’s the bank profits, stupid. ...
                                                    For banks make their profits by taking in deposits and lending the funds out at a higher rate of interest. And this business gets squeezed in a low-interest environment... The ... difference between the interest rate banks receive on loans and the rate they pay on deposits ... has fallen sharply over the past five years.
                                                    The appropriate response of policy makers ... should be, “So?” There’s no reason to believe that what’s good for bankers is good for America. But bankers are different from you and me: they have a lot more influence. Monetary officials meet with them all the time, and in many cases expect to join their ranks when they come out on the other side of the revolving door. ...
                                                    So we shouldn’t be surprised to see institutions that cater to bankers, not to mention much of the financial press, spinning elaborate justifications for a rate hike that makes no sense in terms of basic economics. And the debate of the past few months, in which the Fed has seemed weirdly eager to raise rates..., suggests that even U.S. monetary officials aren’t immune.
                                                    But the Fed did the right thing last week: nothing. And the howling of the bankers should be taken not as a reason to reconsider, but as a demonstration that the clamor for higher rates has nothing to do with the public interest.

                                                      Posted by on Monday, September 21, 2015 at 01:08 AM in Economics, Monetary Policy | Permalink  Comments (205) 

                                                      The Lifecycle of Scholarly Articles across Fields of Economic Research

                                                      This might interest some of you:

                                                      The lifecycle of scholarly articles across fields of economic research, by Sebastian Galiani, Ramiro Gálvez, Maria Victoria Anauati, Vox EU: Citation counts stand as the de facto methodology for measuring the influence of scholarly articles in today’s economics profession. Nevertheless, a great deal of criticism has been made of the practice of naively using citation analysis to compare the impact of scholarly articles without taking into account other factors which may affect citation patterns (see Bornmann and Daniel 2008).
                                                      One recurrent criticism focuses on ‘field-dependent factors’... In a recent paper (Anauati et al. 2015), we analyze if the ‘field-dependent factors’ critique is also valid for fields of research inside economics. Our approach began by assigning into one of four fields of economic research (applied, applied theory, econometric methods and theory) every paper published in the top five economics journals –  The American Economic Review, Econometrica, the Journal of Political Economy, The Quarterly Journal of Economics, and The Review of Economic Studies.
                                                      The sample consisted of 9,672 articles published in the top five journals between 1970 and 2000. It did not include notes, comments, announcements or American Economic Review Papers and Proceedings issues. ...

                                                      What did they find?:

                                                      Conclusions Even though citation counts are an extremely valuable tool for measuring the importance of academic articles, the patterns observed for the lifecycles of papers across fields of economic research support the ‘field-dependent factors’ inside this discipline. Evidence seems to provide a basis for a caveat regarding the use of citation counts as a ‘one-size-fits-all’ yardstick to measure research outcomes in economics across fields of research, as the incentives generated by their use can be detrimental for fields of research which effectively generate valuable (but perhaps more specialized) knowledge, not only in economics but in other disciplines as well.
                                                      According to our findings, pure theoretical economic research is the clear loser in terms of citation counts. Therefore, if specialized journals' impact factors are calculated solely on the basis of citations during the first years after an article’s publication, then theoretical research will clearly not be attractive to departments, universities or journals that are trying to improve their rankings or to researchers who use their citation records when applying for better university positions or for grants. The opposite is true for applied papers and applied theory papers – these fields of research are the outright winners when citation counts are used as a measurement of articles' importance, and their citation patterns over time are highly attractive for all concerned. Econometric method papers are a special case; their citation patterns vary a great deal across different levels of success.

                                                        Posted by on Monday, September 21, 2015 at 12:51 AM in Academic Papers, Economics | Permalink  Comments (1) 

                                                        Links for 09-21-15

                                                          Posted by on Monday, September 21, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (88) 

                                                          Sunday, September 20, 2015

                                                          'The Pope & the Market'

                                                          William D. Nordhaus reviews Pope Francis’s encyclical on the environment and capitalism (Laudato Si’: On Care for Our Common Home, an encyclical letter by Pope Francis, Vatican Press, 184 pp., available at

                                                          The Pope & the Market, NYRB: Pope Francis’s encyclical on the environment and capitalism, Laudato Si’, is an eloquent description of the natural world and its relationship to human societies.1 ... Most commentaries have focused on the pope’s endorsement of climate science, but my focus here is primarily on the social sciences, particularly economics.

                                                          My major point is that the encyclical overlooks the central part that markets, particularly market-based environmental policies such as carbon pricing, must play if countries are to make substantial progress in slowing global warming. ...

                                                          Unfortunately, Laudato Si’ does not recognize the fact that environmental problems are caused by market distortions rather than by markets per se. This is seen in the condemnation of “carbon credits”... Many commentators have interpreted this passage as a condemnation of cap-and-trade... Whatever the specific target, this part of the encyclical is clearly a critique of market-based environmental approaches. ...

                                                          Cap-and-trade has in fact been successfully used, for example to phase out lead from gasoline, to limit sulfur dioxide emissions in the United States by more than half, and to limit carbon dioxide emissions both in the European Union and more recently in major Chinese municipalities. The alternative to cap-and-trade is carbon taxation, which raises carbon prices by taxing carbon emissions. Such a tax is simpler and avoids any of the potential corruption, market volatility, and distributional issues that might arise with cap-and-trade systems.

                                                          Given the successes of cap-and-trade and other market mechanisms to improve the environment, it is unfortunate that they are the target of Pope Francis’s criticism. ... He does indeed acknowledge the soundness of the science and the reality of global warming. It is unfortunate that he does not endorse a market-based solution, particularly carbon pricing, as the only practical policy tool we have to bend down the dangerous curves of climate change and the damages they cause.

                                                          [I left out quite a bit. All of his points, and much more, are fully explained in the review.]

                                                            Posted by on Sunday, September 20, 2015 at 09:18 AM in Economics, Environment | Permalink  Comments (60) 

                                                            Links for 09-20-15

                                                              Posted by on Sunday, September 20, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (215) 

                                                              Saturday, September 19, 2015

                                                              'Less Worried about a Hard Landing for China'

                                                              SF Fed President John Williams on China:

                                                              China, Rates, and the Outlook: May the (Economic) Force Be with You: ...China has garnered almost as much editorial ink in the past month as U.S. presidential candidates—which may or may not be a complimentary comparison. I don’t want to sound pejorative by calling some of the commentary “hand-wringing”—though to be fair, some of it has been downright apocalyptic—but I don’t see the situation as dire. I’ve said publicly over the past few months that after going to China, and after talking to academics and officials there, I came away a lot less concerned than when I arrived. And I have to say that recent events have not changed my thinking to any serious extent.
                                                              This is where I’ll reuse one of the more helpful quotes for forecasting: “It’s difficult to make predictions, especially about the future.” With the dangers of prognostication acknowledged, I’ll tread into that territory anyway.
                                                              The China story is remarkable, and its growth over the past 30 years has been unprecedented.5 But now China’s at something of a crossroads, facing tradeoffs in their goals, dealing with a new normal for growth expectations, and pivoting to a new source of economic momentum.
                                                              It’s important to see the situation not through the filters of our own paradigms, but from the perspective of China’s unique position. China is not the U.S. Or the U.K. Or Japan. Its goals, structure, government, and place on its growth trajectory are very different, and looking to impose foreign expectations on China’s markets or actions can lead one astray.
                                                              Growth versus reform
                                                              In a nutshell, China is facing a tradeoff between its short-term growth goals and its longer-term reform agenda.
                                                              China’s government has made it abundantly clear that it is willing to intervene when necessary, ensuring that growth stays on its target path, even if that means extending the timeline on reform. That willingness to do “whatever it takes” to keep growth on target is what made me less worried about a hard landing for China.
                                                              Of course, that very disposition for intervention is the source of much hue and cry on this side of the globe. China has made important incremental steps on the road to liberalization, and from the perspective of a fully open, free-market, Western-oriented paradigm or advocacy, the recent stock market interventions seem anathema to that goal. But that’s a view through a narrow lens that may obscure the bigger picture.
                                                              For all its moves towards liberalization, China’s markets are not the same as ours. Yes, they have a reform agenda, but it’s a mistake to think that in the foreseeable future China will have fully open capital and financial markets in the way that we in the U.S. and other countries think about them. They are relaxing their grip on the exchange rate—allowing the renminbi to respond to economic news, letting its value be more market-determined—and as a policy approach, this is a positive; it’s something we as economists wanted to see happen. But it’s very clear that China is not going to let its exchange rate float completely freely. They’ll continue to have buffers to ensure that, should some dramatic event unfold, they can step in again and stop that interfering with their other goals. To some extent, we can see these moves as something akin to beta-testing liberalization. It is happening, which is a remarkable shift. But completely free, open markets are not in the cards, and the government has made clear that those are not their intention.
                                                              This, incidentally, is why talk about the renminbi replacing the dollar as an international reserve currency is unrealistic. The role of a reserve currency is to be a harbor during a storm; it’s where people flock when the unexpected happens. As we saw in the financial crisis, as we’ve seen in other crises, the market’s instinct is, when in doubt, go to the dollar. As long as China has controls in place to mediate the free flow of money, the dollar will be the refuge, not the renminbi.
                                                              In the context of China’s dual—oftentimes conflicting—goals, the recent stock market intervention by the government should be seen as what I believe it was: A move to keep growth on pace. It’s a pattern we’ve seen before. When the Chinese authorities see growth struggling, or other economic warning lights, they take steps, including reversing or postponing reforms, to keep growth at pace. Fiscal and economic policymakers can pull a number of levers and the Chinese government has proved again and again its willingness to do just that.
                                                              China’s growth rate
                                                              In balancing these objectives, the Chinese government has realistically moderated its expectations for growth. For decades we all marveled at China’s double-digit growth, and there was, perhaps, some expectation that it would persist in perpetuity. But growth like that is unsustainable. If you look at the progression of Japan, for instance, from the 1960s to the 1980s, or South Korea from the 1980s to the 2000s, you see the pattern China will likely follow.6 At low income levels, growth can be rapid, because low domestic wages make exports very competitive and there is so much untapped potential in moving workers to more productive pursuits.
                                                              But as income or GDP per capita rise, these advantages begin to ebb, and growth naturally slows. The pattern is clear, with a rapid decline in the growth rate and eventual leveling out as domestic income and wages rise. This is the natural progression of economies moving into maturity. The further they have to go, the faster they can grow; but once they’ve come to a place like Japan or Korea—that is, around 80 or 90 percent of U.S. per capita GDP—their growth expectations will be lower because they’re closer to the finish line. China obviously isn’t close yet, but it’s a good indicator of how much further it can go. What China’s accomplished has been amazing—but we also called Japan a growth miracle and Korea’s success was remarkable as well. There were challenges along the way for both countries, but ultimately, what slowed growth was entering the middle-income bracket and the inevitability of slower growth for wealthier countries.   
                                                              The officials and economists I spoke to in China know that not only are the days of 10 percent growth behind them, but that it will move below the current 7 percent target. Seven will likely become 6, which will become 5, and so on as their economy moves into a middle-income economy and progresses to a high-income one.
                                                              Shift in focus
                                                              Of course, China faces challenges in continuing that advance. One is a refocus of its economic engine. Given the global environment, how do they successfully pivot their economy to more domestic consumption, moving the emphasis more toward services and away from manufacturing? That’s clearly a challenge, but also a central objective of the government.
                                                              For people who have concerns about China, one of the red flags they point to is that industrial production has slowed a lot, more so than the economy overall. I fall on the side of commentators who’ve pointed out that this isn’t surprising.7 China’s been talking for years about switching from industry to services. They’re moving from making steel and concrete to making consumer goods. One of the interesting things I heard this summer was the plan to build more tourism in China for China. That’s something that’s virtually nonexistent at the moment. They don’t have the abundance of recreational resources we do; in California alone, you can go skiing or surfing, to wine country or Disneyland. As high- or low-brow as you want it, we as Americans have become incredibly used to spending our leisure dollars domestically. That’s something China’s looking to do for itself.
                                                              When you look at where China’s priorities lie—in switching to services, in expanding tourism—it makes absolute sense that industrial production is slowing.
                                                              Liberalization and the impact of risks from abroad
                                                              I’ve mentioned that China is seen by some as a risk; but conversely, what effect does U.S. policy have on them? Right now, China is more susceptible to the shifts in U.S. monetary policy. But as they liberalize their exchange rate, it will automatically adjust to changes in situations around the world. This is a huge advantage and an automatic stabilizer. When China pegs to the dollar, they’re too linked to U.S. policy, so that when the U.S. tightens or loosens, they effectively follow suit. By allowing market-based influence, China will have a buffer when the U.S. economy is moving in a different direction than theirs. And that’s going to make it easier in the end for China to manage its economy.
                                                              An outside observer might ask why they haven’t done this already. I think that China was wary that unpegging would’ve interrupted the double-digit growth. When a country’s exchange rate and capital flows suddenly start shifting around dramatically, it can interfere with the ability to deliver on growth targets. As China’s growth targets have come down, and as they begin to shift away from an export-reliant economy, instead fueling itself via domestic consumption, they can start allowing their exchange rate to move—though again, it won’t be the free floating exchange rate that we have.
                                                              This is all just one economist’s take. ...

                                                                Posted by on Saturday, September 19, 2015 at 10:57 AM in China, Economics, Monetary Policy | Permalink  Comments (14) 

                                                                'Is the Fed Pulling or Pushing?'

                                                                John Cochrane:

                                                                Is the Fed Pulling or Pushing?: ... Is the Fed in fact "holding down" interest rates? Is there some sort of natural market equilibrium that features higher rates now, but the Fed is pushing down rates? That's the conventional view...
                                                                Well, let's think about that. If a central bank were holding down rates, what would it do? Answer, it would lend a lot of money at low rates. Money would be flowing out the discount window (that's where the Fed lends to banks), to banks, and through banks to the rest of the economy, flooding the place with low-rate loans. The interest rate the Fed pays on reserves and banks pay to borrow from the Fed would be low compared to market rates; credit and term spreads would be large, as the Fed would be trying to drag down those market rates.
                                                                That is, of course, the exact opposite of what's happening now. Banks are lending the Fed about $3 trillion worth of reserves, reserves the banks could go out and lend elsewhere if the market were producing great opportunities. Spreads of other rates over the rates banks lend to or borrow from the Fed are very low, not very high. Deposits are flooding in to banks, not loans out of banks.
                                                                If you just look out the window, our economy looks a lot more like one in which the Fed is keeping rates high, by sucking deposits out of the economy and paying banks more than they can get elsewhere; not pushing rates down, by lending a lot to banks at rates lower than they can get elsewhere.

                                                                  Posted by on Saturday, September 19, 2015 at 10:25 AM in Economics, Monetary Policy | Permalink  Comments (30) 

                                                                  Unemployment Insurance and Progressive Taxation as Automatic Stabilizers

                                                                  Some preliminary results from a working paper by Alisdair Mckay and Ricardo Reis:

                                                                  Optimal Automatic Stabilizers, by Alisdair McKay and Ricardo Reis: 1 Introduction How generous should the unemployment insurance system be? How progressive should the tax system be? These questions have been studied extensively and there are well-known trade-offs between social insurance and incentives. Typically these issues are explored in the context of a stationary economy. These policies, however, also serve as automatic stabilizers that alter the dynamics of the business cycle. The purpose of this paper is to ask how and when aggregate stabilization objectives call for, say, more generous unemployment benefits or a more progressive tax system than would be desirable in a stationary economy. ...
                                                                  We consider two classic automatic stabilizers: unemployment benefits and progressive taxation. Both of these policies have roles in redistributing income and in providing social insurance. Redistribution affects aggregate demand in our model because households differ in their marginal propensities to consume. Social insurance affects aggregate demand through precautionary savings decisions because markets are incomplete. In addition to unemployment insurance and progressive taxation, we also consider a fiscal rule that makes government spending respond automatically to the state of the economy.
                                                                  Our focus is on the manner in which the optimal fiscal structure of the economy is altered by aggregate stabilization concerns. Increasing the scope of the automatic stabilizers can lead to welfare gains if they raise equilibrium output when it would otherwise be inefficiently low and vice versa. Therefore, it is not stabilization per se that is the objective but rather eliminating inefficient fluctuations. An important aspect of the model specification is therefore the extent of inefficient business cycle fluctuations. Our model generates inefficient fluctuations because prices are sticky and monetary policy cannot fully eliminate the distortions. We show that in a reasonable calibration, more generous unemployment benefits and more progressive taxation are helpful in reducing these inefficiencies. Simply put, if unemployment is high when there is a negative output gap, a larger unemployment benefit will stimulate aggregate demand when it is inefficiently low thereby raising welfare. Similarly, if idiosyncratic risk is high when there is a negative output gap,1 providing social insurance through more progressive taxation will also increase welfare....

                                                                    Posted by on Saturday, September 19, 2015 at 12:23 AM in Academic Papers, Economics, Fiscal Policy, Social Insurance | Permalink  Comments (25) 

                                                                    Links for 09-19-15

                                                                      Posted by on Saturday, September 19, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (207) 

                                                                      Friday, September 18, 2015

                                                                      'The Typical Male U.S. Worker Earned Less in 2014 Than in 1973'

                                                                      More on income stagnation and inequality:

                                                                      The typical male U.S. worker earned less in 2014 than in 1973: The median male worker who was employed year-round and full time earned less in 2014 than a similarly situated worker earned four decades ago. And those are the ones who had jobs. ...
                                                                      What about women? Well, they haven’t closed the pay gap with men, but the inflation-adjusted earnings of the median female worker increased more than 30% between 1973 and 2014... But back to men. Why are wages for the typical male worker stagnating? ... I contacted Larry Katz, the Harvard University labor economist. He identified three factors to explain the stagnation of men’s wages:
                                                                      1. Although this is not the major factor, workers have been getting more of their compensation in benefits as opposed to the cash wages that the Census tallies. ...
                                                                      2. Labor’s share of national income has been declining since 2000 and capital’s share has been rising. Labor’s compensation (wages and benefits) has not been keeping pace with productivity growth. ...EPI’s Josh Bivens and Larry Mishel argue, “ This decoupling coincided with the passage of many policies that explicitly aimed to erode the bargaining power of low- and moderate-wage workers in the labor market.”
                                                                      3. The “most important factor,” Mr. Katz says, is the rise in wage inequality, the gap between the earnings of the best-paid workers and the ones at the middle and the bottom that has been widening steadily since about 1980. Economists differ over how much of this is the result of globalization, technological change, changing social mores, and government policies, but there is no longer much dispute about the fact that inequality is increasing.
                                                                      ... It’s not hard to understand why so many voters ... are drawn to candidates who acknowledge this reality, lambast incumbents for not doing more to address it, and style themselves as outsiders with fresh approaches to one of the nation’s most alarming economic problems.

                                                                      To me, it's interesting how much the explanation for inequality has shifted away from the "skill-biased technical change" and technological based arguments and towards "changing social mores, and government policies." Even so, I think these types of arguments -- those that explain the decline in bargaining power in wage negotiations -- have more explanatory power than many people acknowledge. But even if we acknowledge that we aren't sure about the degree to which inequality can be explained by market-based versus institutional structure arguments, what seems clear to me is that the market won't solve this problem by itself. There do not appear to be forces within capitalism that necessarily push us toward an equal distribution of income. Thus, there is no assurance that heeding calls for government to get out of the way would help to reduce inequality, and it could make it worse. To me, policies that increase the ability of workers to bargain for a fair share of what they produce holds the most promise for solving the inequality problem (in a way that avoids direct redistribution). How to actually accomplish this is a difficult problem, unions have less power in a world where the threat of moving production to another country is very real (or a region within the US where the laws are more favorable), but at the very least we ought to ensure that new legislation does not make the highly unequal wage bargaining problem any worse (see Scott Walker).

                                                                        Posted by on Friday, September 18, 2015 at 12:32 PM in Economics, Income Distribution | Permalink  Comments (66) 

                                                                        'A Knee-Jerk Free Trader Response is Faith-Based'

                                                                        Dani Rodrik:

                                                                        Trade within versus between nations: ...economics does not offer unconditional policy prescriptions. Every graduate student learns that depending on the background specifications, any policy x  can be good or bad. A minimum wage can lower or raise employment (depending on whether employers have monopsony power); a natural resource discovery can raise or lower growth (depending on the likelihood of the Dutch disease); fiscal consolidation can expand or contract output (depending on the respective strengths of expectational versus Keynesian effects). And yes, the dictum that free trade benefits a nation depends on a long list of qualifying conditions.
                                                                        So the proper response to the question “is free trade good?” is, as always, “it depends.” When an economist says “I support free trade” s/he must mean that s/he judges the circumstances under which free trade would not be desirable to be very rare or unlikely to obtain in the context at hand.
                                                                        Many of the conditions under which free trade between nations is guaranteed to be desirable are unlikely to hold in practice. Market imperfections, returns to scale, macro imbalances, absence of first-best policy instruments are ubiquitous in the real world, particularly in the developing world on which I spend most of my time. This does not guarantee that import restrictions will be necessarily desirable. There are many ways in which governments can screw up, even when they mean well. But it does mean that a knee-jerk free trader response is faith-based rather than science-based. ...

                                                                        [He goes on to answer a question about differential support for trade within nations versus trade between nations.]

                                                                          Posted by on Friday, September 18, 2015 at 10:50 AM in Economics, International Trade, Market Failure | Permalink  Comments (16) 

                                                                          Republicans and Climate Change

                                                                          I often forget to post the link to my MoneyWatch pieces:

                                                                          Republicans and Climate Change: What should we do about climate change? When Jake Tapper asked that question at the Republican debate Wednesday night, the candidates were united in their view that the economic costs of fighting climate change are much larger than the potential benefits.
                                                                          Florida Senator Marco Rubio, for example, said "Every proposal they (Democrats) put forward will make it harder to do business in America. Harder to create jobs in America." New Jersey Governor Chris Christie had similar sentiments. "We shouldn't be destroying our economy in order to chase some wild left-wing idea that somehow us by ourselves is going to fix the climate," he said. And Wisconsin Governor Scott Walker responded with: "We're going to put people -- manufacturing jobs -- this administration is going to put them at risk."
                                                                          The skepticism among those on the political right about the benefits of addressing climate change could be at least partly based on the apparent pause in global warming from 1998-2013. But according to work from a group of researchers at Stanford University, that "hiatus" is a statistical artifact. The climb in temperatures hasn't paused at all.
                                                                          Given that, and the voluminous scientific evidence indicating that global warming is a substantial threat, it's important to understand the extent to which climate change will affect the economy. Will the loss to GDP be large (so that the benefits of abatement are also large)? Will the impacts be equally distributed across geographic regions? Is it possible that some regions will actually benefit from global warming? ...

                                                                            Posted by on Friday, September 18, 2015 at 10:01 AM in Economics, Environment, MoneyWatch | Permalink  Comments (12) 

                                                                            Paul Krugman: Fantasies and Fictions at G.O.P. Debate

                                                                            The Republican debate was "scary":

                                                                            Fantasies and Fictions at G.O.P. Debate, by Paul Krugman, Commentary, Ny Times: I’ve been going over what was said at Wednesday’s Republican debate, and I’m terrified. You should be, too. After all, given the vagaries of elections, there’s a pretty good chance that one of these people will end up in the White House.
                                                                            Why is that scary? ...G.O.P. candidates are calling for policies that would be deeply destructive at home, abroad, or both. ...
                                                                            Let’s start at the shallow end, with the fantasy economics of the establishment candidates.
                                                                            You’re probably tired of hearing this, but modern G.O.P. economic discourse is completely dominated by an economic doctrine — the sovereign importance of low taxes on the rich — that has failed completely and utterly in practice over the past generation. ... Yet the hold of this failed dogma on Republican politics is stronger than ever...
                                                                            If the discussion of economics was alarming, the discussion of foreign policy was practically demented. Almost all the candidates seem to believe that American military strength can shock-and-awe other countries into doing what we want without any need for negotiations, and that we shouldn’t even talk with foreign leaders we don’t like. ...
                                                                            The real revelation on Wednesday, however, was the ... candidates ... making outright false assertions, and probably doing so knowingly, which turns those false assertions into what are technically known as “lies.”
                                                                            For example, Chris Christie asserted, as he did in the first G.O.P. debate, that he was named U.S. attorney the day before 9/11. It’s still not true ...
                                                                            Mr. Christie’s mendacity pales, however, in comparison to that of Carly Fiorina, who was widely hailed as the “winner” of the debate.
                                                                            Some of Mrs. Fiorina’s fibs involved repeating thoroughly debunked claims about her business record. ... But the truly awesome moment came when she asserted that the videos being used to attack Planned Parenthood show “a fully formed fetus on the table, its heart beating, its legs kicking while someone says we have to keep it alive to harvest its brain.” No, they don’t. ...
                                                                            I began writing for The Times during the 2000 election campaign, and what I remember above all from that campaign is the way the conventions of “evenhanded” reporting allowed then-candidate George W. Bush to make clearly false assertions — about his tax cuts, about Social Security — without paying any price. ...
                                                                            Now we have presidential candidates who make Mr. Bush look like Abe Lincoln. But who will tell the people?

                                                                              Posted by on Friday, September 18, 2015 at 01:08 AM in Economics, Politics | Permalink  Comments (80) 

                                                                              Links for 09-18-15

                                                                                Posted by on Friday, September 18, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (65) 

                                                                                Thursday, September 17, 2015

                                                                                No Rate Hike

                                                                                Tim Duy called it. No rate hike (and only one dissent, lacker). Here's the statement:

                                                                                Press Release, Release Date: September 17, 2015: Information received since the Federal Open Market Committee met in July suggests that economic activity is expanding at a moderate pace. Household spending and business fixed investment have been increasing moderately, and the housing sector has improved further; however, net exports have been soft. The labor market continued to improve, with solid job gains and declining unemployment. On balance, labor market indicators show that underutilization of labor resources has diminished since early this year. Inflation has continued to run below the Committee's longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation moved lower; survey-based measures of longer-term inflation expectations have remained stable.
                                                                                Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term. Nonetheless, the Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring developments abroad. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.
                                                                                To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
                                                                                The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
                                                                                When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
                                                                                Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams. Voting against the action was Jeffrey M. Lacker, who preferred to raise the target range for the federal funds rate by 25 basis points at this meeting.

                                                                                  Posted by on Thursday, September 17, 2015 at 11:05 AM in Economics, Monetary Policy | Permalink  Comments (59) 

                                                                                  'The Implications of Growing Gap in Life Span by Income for Entitlement Programs'

                                                                                  On raising the retirement age for Social Security (and other social insurance programs):

                                                                                  New report examines implications of growing gap in life span by income for entitlement programs, National Academy of Sciences, EurekAlert!: As the gap in life expectancy between the highest and lowest earners in the U.S. has widened over time, high earners have disproportionately received larger lifetime benefits from government programs such as Social Security and Medicare, says a new congressionally mandated report from the National Academies of Sciences, Engineering, and Medicine. The report looked at life expectancy patterns among a group of Americans born in 1930 and compared those with projections for a group born in 1960.

                                                                                  "Life expectancy has risen significantly in the U.S. over the past century, and it has long been the case that people who are better-educated and earn higher incomes live longer, on average, than those with less education and lower incomes," said Peter Orszag, co-chair of the committee that carried out the study and wrote the report, and vice chairman of Citigroup in New York City. "What has changed is that the life expectancy gap across different income groups has become so much bigger."

                                                                                  Men born in 1930 in the highest of five earnings levels who survived to age 50 could expect to live to be about 82 years old, on average, while men born in 1960 in the same earnings bracket are projected to live an average of 89 years - a substantial gain. In contrast, life expectancy for men with the lowest earnings was found to decline slightly, from 77 years old on average for men born in 1930 to 76 years old on average for men born in 1960. The projections for women show a similar pattern, in that life expectancy gains have been larger for higher earners than lower earners. ...

                                                                                  "The increasing gap in longevity by socio-economic status is important in itself, but it also means that high earners will increasingly collect some government benefits over more years than will lower earners," said committee co-chair Ronald Lee, professor of demography and economics at the University of California, Berkeley. "Policymakers considering changes to put entitlement programs on firmer financial footing should take into account how such policy changes interact with these differential trends in life expectancy." ...

                                                                                  [They go on to evaluate various changes in eligibility for Social Security and Medicare, and how the changes would impact low and high income households. For example, "Increasing the earliest eligibility age for Social Security from 62 to 64 would not generate significant savings for the Social Security system and would slightly widen the gap in benefits received between high earners and low earners."]

                                                                                    Posted by on Thursday, September 17, 2015 at 10:57 AM in Economics, Social Insurance, Social Security | Permalink  Comments (57) 

                                                                                    'Temperate Temperance' (for the Poor)

                                                                                    This is via Tim Taylor (who posted it as part of a longer discussion on new poverty statistics):

                                                                          's a short essay from Charles Dickens. It was published in a magazine called All the Year Round that Dickens edited during the 1860s. This particular essay, "Temperate Temperance," appeared in the issue of March 18, 1863. The articles in the magazine did not name its authors , but a group of Australian researchers attributed it to Dickens by using "computational stylistics"--which is basically using a computer analysis of the style of the writing and comparing it to manuscripts whose authorship is known to determine the author. ... And here's the full 1863 essay.

                                                                                    TEMPERATE TEMPERANCE
                                                                                    WE want to know, and we always have wanted to know, why the English workman is to be patronised? Why are his dwelling-place, his house-keeping arrangements, the organisation of his cellar, and his larder — nay, the occupation of his leisure hours even — why are all these things regarded as the business of everybody except himself? Why is his beer to be a question agitating the minds of society, more than our sherry? Why is his visit to the gallery of the theatre, a more suspicious proceeding than our visit to the stalls? Why is his perusal of his penny newspaper so aggravating to the philanthropical world, that it longs to snatch it out of his hand and substitute a number of the Band of Hope Review?
                                                                                    It is not the endeavour really and honestly to improve the condition of the lower classes which we would discourage, but the way in which that endeavour is made. Heaven knows, the working classes, and especially the lowest working classes, want a helping hand sorely enough. No one who is at all familiar with a poor neighbourhood can doubt that. But you must help them judiciously. You must look at things with their eyes, a little; you must not always expect them to see with your eyes. The weak point in almost every attempt which has been made to deal with the lower classes is invariably the same — too much is expected of them. You ask them to do, simply the most difficult thing in the world — you ask them to change their habits. Your standard is too high. The transition from the Whitechapel cellar to the comfortable rooms in the model-house, is too violent; the habits which the cellar involved would have to be abandoned; a great effort would have to be made; and to abandon habits and make great efforts is hard work even for clever, good, and educated people.
                                                                                    The position of the lowest poor in London and elsewhere, is so terrible, they are so unmanageable, so deprived of energy through vice and low living and bad lodging, and so little ready to second any efforts that are made for their benefit, that those who have dealings with them are continually tempted to abandon their philanthropic endeavours as desperate, and to turn their attention towards another class: those, namely, who are one degree higher in the social scale, and one degree less hopeless.
                                                                                    It is proposed just now, as everybody knows, to establish, in different poor neighbourhoods, certain great dining-halls and kitchens for the use of poor people, on the plan of those establishments which have been highly successful in Glasgow and Manchester. The plan is a good one, and we wish it every success — on certain conditions. The poor man who attends one of these eating-houses must be treated as the rich man is treated who goes to a tavern. The thing must not be made a favour of. The custom of the diner-out is to be solicited as a thing on which the prosperity of the establishment depends. The officials, cooks, and all persons who are paid to be the servants of the man who dines, are to behave respectfully to him, as hired servants should; he is not to be patronised, or ordered about, or read to, or made speeches at, or in any respect used less respectfully than he would be in a beef and pudding shop, or other house of entertainment. Above all, he is to be jolly, he is to enjoy himself, he is to have his beer to drink; while, if he show any sign of being drunk or disorderly, he is to be turned out, just as I should be ejected from a club, or turned out of the Wellington or the Albion Tavern this very day, if I got drunk there.
                                                                                    There must be none of that Sunday-school mawkishness, which too much pervades our dealings with the lower classes; and we must get it into our heads — which seems harder to do than many people would imagine — that the working man is neither a felon, nor necessarily a drunkard, nor a very little child. Our wholesome plan is to get him to co-operate with us. Encourage him to take an interest in the success of the undertaking, and, above all things, be very sure that it pays, and pays well, so that the scheme is worth going into without any philanthropic flourishes at all. He is already flourished to death, and he hates to be flourished to, or flourished about. 
                                                                                    There is a tendency in the officials who are engaged in institutions organised for the benefit of the poor, to fall into one of two errors; to be rough and brutal, which is the Poor-law Board style; or cheerfully condescending, which is the Charitable Committee style. Both these tones are offensive to the poor, and well they may be. The proper tone is that of the tradesman at whose shop the workman deals, who is glad to serve him, and who makes a profit out of his custom. Who has not been outraged by observing that cheerfully patronising mode of dealing with poor people which is in vogue at our soup-kitchens and other depôts of alms? There is a particular manner of looking at the soup through a gold double eye-glass, or of tasting it, and saying, " Monstrous good — monstrous good indeed; why, I should like to dine off it myself!" which is more than flesh and blood can bear.
                                                                                    We must get rid of all idea of enforcing what is miscalled temperance — which is in itself anything but a temperate idea. A man must be allowed to have his beer with his dinner, though he must not be allowed to make a beast of himself. Some account was given not long since, in these pages, of a certain soldiers' institute at Chatham; it was then urged that by all means the soldiers ought to be supplied with beer on the premises, in order that the institution might compete on fair terms with the public-house. It was decided, however, by those in authority, or by some of them, that this beer was not to be. The consequence is, as was predicted, that the undertaking, which had every other element of success, is very far from being in a flourishing condition. And similarly, this excellent idea of dining-rooms for the working classes will also be in danger of failing, if that important ingredient in a poor man's dinner — a mug of beer — is not to be a part of it.
                                                                                    The cause of temperance is not promoted by any intemperate measures. It is intemperate conduct to assert that fermented liquors ought not to be drunk at all, because, when taken in excess, they do harm. Wine, and beer, and spirits, have their place in the world. We should try to convince the working man that he is acting foolishly if he give more importance to drink than it ought to have. But we have no right to inveigh against drink, though we have a distinct right to inveigh against drunkenness. There is no intrinsic harm in beer; far from it; and so, by raving against it, we take up a line of argument from which we may be beaten quite easily by any person who has the simplest power of reasoning. The real temperance cause is injured by intemperate advocacy; and an
                                                                                    argument which we cannot honestly sustain is injurious to the cause it is enlisted to support. Suppose you forbid the introduction of beer into one of these institutions, and you are asked your reason for doing so, what is your answer? That you are afraid of drunkenness. There is some danger in the introduction of gas into a building. You don't exclude it; but you place it under certain restrictions, and use certain precautions to prevent explosions. Why don't you do so with beer?

                                                                                    He (Tim Taylor) adds:

                                                                                    For those with a taste for this subject, last year when the Census Bureau released its poverty line statistics I discussed a passage from George Orwell's 1937 book, The Road to Wigan Pier, which details the lives of the poor and working poor in northern industrial areas of Britain like Lancashire and Yorkshire during the Depression. Orwell is writing from a leftist and socialist perspective, with deep sympathy for the poor. But Orwell is also painfully honest: for example, he laments that the poor make such rotten choices about food--but then he also points out how unsatisfactory it feels to patronizingly tell those with low incomes how to spend what little they have. Indeed, as I pointed out last year, there's some evidence in the behavioral economics literature that poverty can encourage some of the behaviors, like a short-run mentality, which can then tend to perpetuate poverty.

                                                                                      Posted by on Thursday, September 17, 2015 at 10:07 AM Permalink  Comments (2) 

                                                                                      ''Global Warming 'Hiatus' Never Happened''

                                                                                      About that supposed pause in global warming:

                                                                                      Global warming 'hiatus' never happened, Stanford scientists say: An apparent lull in the recent rate of global warming that has been widely accepted as fact is actually an artifact arising from faulty statistical methods, Stanford scientists say. ...The finding calls into question the idea that global warming "stalled" or "paused" during the period between 1998 and 2013. ...
                                                                                      Using a novel statistical framework that was developed specifically for studying geophysical processes such as global temperature fluctuations, Rajaratnam and his team of Stanford collaborators have shown that the hiatus never happened.
                                                                                      "Our results clearly show that, in terms of the statistics of the long-term global temperature data, there never was a hiatus, a pause or a slowdown in global warming," said Noah Diffenbaugh, a climate scientist in the School of Earth, Energy & Environmental Sciences, and a co-author of the study.
                                                                                      Faulty ocean buoys
                                                                                      The Stanford group's findings are the latest in a growing series of papers to cast doubt on the existence of a hiatus. ...
                                                                                      The Stanford scientists say their findings should go a long way toward restoring confidence in the basic science and climate computer models that form the foundation for climate change predictions.
                                                                                      "Global warming is like other noisy systems that fluctuate wildly but still follow a trend," Diffenbaugh said. "Think of the U.S. stock market: There have been bull markets and bear markets, but overall it has grown a lot over the past century. What is clear from analyzing the long-term data in a rigorous statistical framework is that, even though climate varies from year-to-year and decade-to-decade, global temperature has increased in the long term, and the recent period does not stand out as being abnormal."

                                                                                      [I omitted the detailed discussion of the research.]

                                                                                        Posted by on Thursday, September 17, 2015 at 09:49 AM in Economics, Environment | Permalink  Comments (13) 

                                                                                        Fed Watch: Final Thoughts On September

                                                                                        Tim Duy:

                                                                                        Final Thoughts On September, by Tim Duy: Everyone's bets are placed for the outcome of tomorrow's FOMC statement and subsequent press conference. Final thoughts heading into the meeting:
                                                                                        I expect the Fed will pass on raising rates this meeting. This is a highly contentious issue, and reasonable arguments can be made for either case. Economists appear to be roughly split, while financial market participants taking the under with a roughly 25% probability of a rate hike. Whatever the outcome, roughly half of the economists on Wall Street will be wrong. Good thing, as misery loves company.
                                                                                        I believe FOMC participants will arrive at a consensus for the timing and direction of policy for subsequent meetings. The FOMC has had something of a luxury in that economic conditions have not forced them to choose a defined policy path. I believe they no longer have that luxury. They will need to commit policy to one side of the mandate or the other. At this meeting they will decide if their Phillips curve view of the world in concert with their estimate of the natural rate of unemployment dominates the fact that inflation continues to drift away from their target.
                                                                                        I expect the Fed will ultimately pledge allegiance to the Phillips curve. I think they believe that stable inflation is incompatible with sub-5% unemployment if short term interest rates remain at zero. Hence, they will signal that the first rate hike is imminent.
                                                                                        Fed Chair Janet Yellen has the opportunity to prove her mettle. Assuming that I am correct that the Fed needs to forge a consensus, Yellen will be the guiding influence on that consensus. The best outcome for her is a consensus with no dissenting votes. That said, it may be that only an immediate rate hike would be acceptable to Richmond Federal Reserve President Jeffrey Lacker.
                                                                                        I expect Yellen will make a strong attempt to open the door for October. The Fed has established expectations that, outside of obvious exigent circumstances, they can only make major decisions when there is a scheduled press conference. Yellen will push back hard. Indeed, I think there is a possibility that this becomes the "rate hike" press conference in spirit, with the actual hike in October. Something to think about.
                                                                                        The Fed will try to take the sting out of any hawkish signals with a dovish message. I expect the terminal rate forecasts in the dot plot to drift lower. In addition, I expect Yellen will emphasize that low inflation provides room for a slow and halting pace of rate increases. (My expectation, however, is that assuming the first hike goes smoothly, subsequent hikes will come at regular intervals.) Finally, the estimate of the natural rate of unemployment may drift down further. 
                                                                                        If I am wrong...two potential alternatives. First is that everything above remains the same, but they pull the trigger today. They tend not to surprise, but maybe this time is different. Maybe they don't need to built a consensus, although I think that unlikely.  Second is that Yellen pushes the FOMC into a dramatically more dovish direction that re-emphasizes the issue of underemployment and shifts expectations to 2016. I don't think that is likely as I think she is fairly entrenched in the 5% NAIRU camp, but we will see tomorrow.
                                                                                        Enjoy the day's excitement!

                                                                                          Posted by on Thursday, September 17, 2015 at 12:15 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (24) 

                                                                                          Links for 09-17-15

                                                                                            Posted by on Thursday, September 17, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (141) 

                                                                                            Wednesday, September 16, 2015

                                                                                            'Bernie Sanders Wants to Spend $18 Trillion: So What?'

                                                                                            James Kwak (Dean Baker makes the same point):

                                                                                            Bernie Sanders Wants to Spend $18 Trillion: So What?: The front page of yesterday’s Wall Street Journal featured an article claiming that Bernie Sanders wants to increase federal government spending by $18 trillion over the next ten years—an increase of about one-third over that time period. This was apparently supposed to raise some kind of alarm—what kind of maniac is this?—and I’m sure both Republicans and Hillary Clinton are happy the Journal is doing their work for them.
                                                                                            The problem is that a spending figure, even one as big as $18 trillion, is meaningless on its own.
                                                                                            Most of that money—$15 trillion—is the expansion of Medicare to cover all Americans. Yes, that’s a lot of money. But we are already spending a ton of money on  health care—with embarrassingly poor results. In 2013,... Americans ... paid ... $1.4 trillion... Project that out for ten years, add health care inflation, and you’re talking about a lot more than $15 trillion.
                                                                                            At the end of the day, what matters isn’t the amount of money that the federal government spends for health care. What matters is the amount of money that the American people spend for health care. The government is just a device that we use to provide certain services that are better handled collectively than individually. If the government can provide equivalent service at lower prices, then the gross dollar amount involved doesn’t matter. ...
                                                                                            Now the big issue, I admit, is whether the government can provide equivalent service at lower prices. For the vast majority of consumer goods and services, it can’t. ... But real economists have known for more than half a century that health care doesn’t behave like ordinary consumer goods. ...
                                                                                            If you don’t want to read economics papers, the best evidence that health care is different comes from comparing the United States to other rich countries, which all have something closer to a single payer model for health insurance. As is well known, we spend a lot more money and have comparable or worse aggregate health outcomes. There is a huge ongoing adebate about why this is, which I’m not going to try to settle here.
                                                                                            The main point, however, is that if you want to argue against the Bernie Sanders health care plan, you have to make the case that Medicare for all will actually produce worse outcomes or higher costs than our current system. The fact that it costs a lot of money is beside the point.

                                                                                              Posted by on Wednesday, September 16, 2015 at 10:40 AM in Economics, Health Care, Market Failure, Politics | Permalink  Comments (47) 

                                                                                              'Income Stagnation in 2014'

                                                                                              [Source: EPI]

                                                                                                Posted by on Wednesday, September 16, 2015 at 10:17 AM in Economics, Income Distribution | Permalink  Comments (31) 

                                                                                                Lessons from the 'Great Crisis'

                                                                                                The Gloomy European Economist, Francesco Sarsceno, says before complaining about US policy, take a look at Europe:

                                                                                                Lessons from Lehman: Jared Bernstein has a very interesting piece on the lessons we (did not) learn from the great crisis. He basically makes two points:
                                                                                                First, the attitude towards lenders, while somewhat schizophrenic (Bear Sterns, up; Lehman, down. Why? We still don’t know), was forgiving to say the least. in his words, ” Borrowers get austerity, joblessness, and poverty. Lenders get bailouts when credit is scarce and bribes not to lend when it’s too plentiful”. He then argues that both letting lenders fail and bailing them out has large costs, that should be avoided ex ante through better regulation (and we are not there, yet).
                                                                                                Bernstein is perfectly right, but he neglects mentioning a third option, that was advocated at the time, for example by Joe Stiglitz: temporary bank nationalization. ... Temporary nationalization ... would have avoided the “Heads I win Tail you lose” feature of financial sector bailouts.
                                                                                                The second point Bernstein makes is that regardless of the strategy chosen to save the financial sector, fiscal policy should have been much more aggressive in fighting the downturn. ...
                                                                                                Well, he says it all. What drives me nuts, is that the he complains about the US, THE US, where the Fed showed incredible activism, where the Obama administration voted and implemented a huge stimulus package (the American Recovery and Reinvestment Act) just weeks after been sworn in office, while it took us 7 years, to decide to adopt a cumbersome investment plan that will make little or no difference.
                                                                                                Without even mentioning the fact that the whole Greek crisis, since 2010, has been managed with an eye to (mostly German and French) lenders’ needs, rather than to the well-being of European (and in particular Greek) taxpayers.
                                                                                                I really would like to know what would Bernstein say, were he to comment the EMU lessons from the crisis…

                                                                                                  Posted by on Wednesday, September 16, 2015 at 10:04 AM in Economics, Financial System | Permalink  Comments (18) 

                                                                                                  Links for 09-16-15

                                                                                                    Posted by on Wednesday, September 16, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (219) 

                                                                                                    Tuesday, September 15, 2015

                                                                                                    'Collecting Taxes Is Government Work'

                                                                                                    This was in links a day or two ago, but it's worth highlighting:

                                                                                                    Collecting Taxes Is Government Work, Editorial, NY Times: Buried in the Senate-passed version of the big highway bill is a provision that would require the Treasury secretary to use private debt collectors to collect unpaid back taxes.
                                                                                                    The provision, added to the bill by Republican leaders, is ostensibly intended to help pay for highways. But it’s a bad idea that should be kept out of the House version of the bill and out of any final compromise version.
                                                                                                    Private tax collection was tried in the 1990s and in the 2000s. Both times it lost money. It increases the cost of handling complaints and appeals at the Internal Revenue Service, and it is far less efficient than simply increasing the collection budget of the I.R.S.
                                                                                                    Worse, it fosters taxpayer abuse. The debts involved are ones that the I.R.S. has not been able to collect, in part because the taxpayers are too hard-pressed to pay up. A private company is probably not going to have better luck unless it uses abusive tactics.
                                                                                                    And yet, private tax collection is an idea that keeps resurfacing. Why? One reason is that it would be a cash cow for the four companies likely to win tax-collection contracts...
                                                                                                    Senator Chuck Schumer, Democrat of New York, has argued in the past that using federal money to pay private companies for tax collection would create jobs at those companies. But it would be better to increase the I.R.S. budget to create middle-class public-sector jobs in professional tax collection than to throw money at low-paying private-sector contractors who cannot do the job as well. ...

                                                                                                    I've posted this before (in 2006) (I left out his two other examples of the Bush administration trying to take us "back to the 16th century"):

                                                                                                    Back to a bad old future:

                                                                                                    Tax Farmers, Mercenaries and Viceroys, by Paul Krugman, A Monarchy Commentary, NY Times: Yesterday The New York Times reported that the Internal Revenue Service would outsource collection of unpaid back taxes to private debt collectors, who would receive a share of the proceeds.

                                                                                                    It’s an awful idea. Privatizing tax collection will cost far more than hiring additional I.R.S. agents, raise less revenue and pose obvious risks of abuse. But what’s really amazing is the extent to which this plan is a retreat from modern principles of government. I used to say that conservatives want to take us back to the 1920’s, but the Bush administration seemingly wants to go back to the 16th century....

                                                                                                    In the bad old days, ...[t]here was no bureaucracy to collect taxes, so the king subcontracted the job to private “tax farmers,” who often engaged in extortion. There was no regular army, so the king hired mercenaries, who tended to wander off and pillage the nearest village. There was no regular system of administration, so the king assigned the task to favored courtiers, who tended to be corrupt, incompetent or both.

                                                                                                    Modern governments solved these problems by creating a professional revenue department to collect taxes, a professional officer corps to enforce military discipline, and a professional civil service. But President Bush apparently doesn’t like these innovations, preferring to govern as if he were King Louis XII.

                                                                                                    So the tax farmers are coming back...

                                                                                                    Tax farmers, mercenaries and viceroys: why does the Bush administration want to run a modern superpower as if it were a 16th-century monarchy? Maybe people who’ve spent their political careers denouncing government as the root of all evil can’t grasp the idea of governing well. Or maybe it’s cynical politics: privatization provides both an opportunity to evade accountability and a vast source of patronage.

                                                                                                    But the price is enormous. This administration has thrown away centuries of lessons about how to make government work. No wonder it has failed at everything except fearmongering.

                                                                                                      Posted by on Tuesday, September 15, 2015 at 02:36 PM in Economics, Politics, Taxes | Permalink  Comments (47)