The profession appears to be changing it's mind about the permanence of large shocks to aggregate demand:
Potential Output and Recessions: Are We Fooling Ourselves?, by Robert F. Martin, Teyanna Munyan, and Beth Anne Wilson, Federal Reserve: The economic collapse in the wake of the global financial crises (GFC) and the weaker-than-expected recovery in many countries have led to questions about the impact of severe downturns on economic potential. Indeed, for several major economies, the level of output is nowhere near returning to pre-crisis trend (figure 1). Such developments have resulted in repeated downward revisions to estimates of potential output by private- and public-sector forecasters. In addition, this disappointment in post-recession growth has contributed to concerns that the U.S. economy, among others, is entering an era of secular stagnation. However, the historical experience of advanced economies around recessions indicates that the current experience is less unusual than one might think. First, output typically does not return to pre-crisis trend following recessions, especially deep ones. Second, in response, forecasters repeatedly revise down measures of trend.
... Economic models usually assume that recession-induced gaps will close over time, typically via a period of above trend growth. In our results, growth is not faster after the recession than before, implying that the recession-induced gap is closed primarily by revising estimates of trend output growth lower. Interestingly, much of the downward revision to estimates of trend output happens well into the recovery. In particular, as economies recover and the lower level of actual output persists, potential output is gradually revised down toward actual GDP. ...
Although these calculations are simple, they raise deeper questions about the impact of recessions on trend output. The finding that recessions tend to depress the long-run level of output may imply that demand shocks have permanent effects. The sustained deviation of the level of output from pre-crisis trend points to flaws in the way the economics profession models the recovery of output to economic shocks and raises further doubts about the reliance on measures of output gaps to determine economic slack. For policymakers, the results also point to the cost of recessions, especially deep and long ones, and provide a rationale for strong and rapid policy responses to economic downturns. ...
Disclaimer: IFDP Notes are articles in which Board economists offer their own views and present analysis on a range of topics in economics and finance. These articles are shorter and less technically oriented than IFDP Working Papers.
[There is quite a bit more detail -- tables, graphs, etc. -- in the full article describing how they arrive at this conclusion.]
One note: I want to emphasize that "the results also point to the cost of recessions, especially deep and long ones, and provide a rationale for strong and rapid policy responses to economic downturns." An important question is how much of the permanent effect can be avoided with a correct and timely policy response -- something we surely did not get with fiscal policy in the most recent episode.
Posted by Mark Thoma on Wednesday, November 12, 2014 at 09:34 AM in Economics |
Jeff Sachs seems to be pleased:
The climate breakthrough in Beijing gives the world a fighting chance: Today’s US-China joint announcement on climate change and energy is the most important advance on the climate change agenda in many years. ... What they’ve said gives the world a fighting chance – and no doubt the last one – for climate safety. ...
An announcement is just an announcement, of course. .. The US and China have yet to put their cards on the table on how they intend to achieve deep decarbonization. ...
Not surprisingly, the incoming Republican Senate majority leader Mitch McConnell piped up immediately that he and his colleagues would oppose the deal. No doubt they will try. Yet my guess is that Mr McConnell and his buddies are soon going to learn a lesson in real democracy.
While the fossil fuel lobby may have helped finance the Republican victories last week, the US public cares about its own survival and the world that their children will soon inherit. ... The Koch brothers may have bought some 44,000 paid ads this fall to help put favoured coal and oil candidates over the top, but they did not buy the souls of the American people, who by a large majority will be gratified today by the announcements from Beijing. ...
I'm not so sure that Republican opposition can be overcome so easily.
Posted by Mark Thoma on Wednesday, November 12, 2014 at 09:15 AM in Economics, Environment, Market Failure, Politics |
Posted by Mark Thoma on Wednesday, November 12, 2014 at 12:06 AM in Economics, Links |
Busy day today, so let me ask you a question. If you had the power, what policies would you enact to raise middle/working class income?:
The Great Wage Slowdown, Looming Over Politics, by David Leonhardt: A quiz: How does the Democratic Party plan to lift stagnant middle-class incomes?
I realize that liberal-leaning economists can give a long, substantive answer to this question, touching on health care costs, education and infrastructure. But most Americans would not be able to give a clear answer — which helps explain why the party took such a drubbing last week.
The Democratic Party’s short-term plan to help the middle class just isn’t very clear. Some of the policies that Democrats favor, such as broader access to good education, take years to pay off. Others, like reducing medical costs or building new roads, have an indirect, unnoticed effect on middle-class incomes. ...
Dean Baker's idea is here. (For me, it is a matter of distribution. The income is there -- the typical worker has earned more than he or she receives -- but the flow is distorted upward...)
Posted by Mark Thoma on Tuesday, November 11, 2014 at 09:15 AM in Economics, Income Distribution |
Posted by Mark Thoma on Tuesday, November 11, 2014 at 12:06 AM in Economics, Links |
Sylvain Leduc and Glenn Rudebusch of the Federal Reserve Bank of San Francisco.
The aging of the labor force, weak productivity growth, and possible long-run supply-side damage from the Great Recession have all suggested recently that the potential growth rate of the U.S. economy may be lower in the years ahead. According to standard economic theory, such slower growth would push down the level of the natural rate of interest. This natural rate, also called the neutral or equilibrium real interest rate, is the risk-free short-term interest rate adjusted for inflation that would prevail in normal times with full employment (Williams 2003).
Moreover, a decline in the natural rate of interest would tend to lower every other real and nominal interest rate in the economy. Therefore, understanding the linkage between economic growth and the natural rate is crucial for forecasting all types of interest rates. Indeed, this linkage has been at the center of recent fiscal and monetary policy forecasts. The Congressional Budget Office (CBO 2014) noted that its lower projections of U.S. Treasury yields and the federal government’s future debt servicing costs partly reflected reductions in its forecast for potential output. In addition, earlier this year, some Federal Open Market Committee (FOMC) participants appeared to reduce their estimates of the natural rate of interest because of an expectation of slower growth ahead for potential output.
This Economic Letter examines the linkage between growth and interest rates as embodied in recent projections by FOMC participants, the CBO, and private-sector forecasters. Although forecasts of potential growth or the natural rate are rarely reported, we can construct reasonable proxies from long-run forecasts of GDP growth, the short-term interest rate, and inflation. In essence, the long-run nature of these forecasts strips out cyclical variation and reveals the fundamental secular trends that underlie the concepts of potential growth and the natural rate of interest.
Although in the CBO and FOMC policy projections long-run forecasts of growth and the real interest rate have fallen together, private-sector forecasters do not anticipate a similar dual drop. In particular, the recent downward revisions in private-sector expectations for long-run growth have been associated with no change in their long-run projections of the real short-term interest rate. If the private-sector forecasters are correct, this would raise a concern that the CBO and FOMC may have overestimated the effects of slower potential growth toward reducing interest rates, which may introduce some upside risk to CBO and FOMC interest rate projections. ...
Skipping to the conclusions:
In this Letter, we document a range of views about the link between potential growth and the natural interest rate. In particular, while the CBO and many FOMC participants expect weaker long-run growth to translate into lower interest rates, private-sector forecasts do not seem to share this view. Thus, future downward pressure on interest rates may be more muted than indicated by current monetary and fiscal policy projections, which would translate into an upside risk to these longer-term interest rate forecasts.
Posted by Mark Thoma on Monday, November 10, 2014 at 10:00 AM in Economics |
Stephen Ziliak emails:
I thought you and readers of Economist's View would like to know about an essay, "Honest Abe Was a Co-op Dude: How the G.O.P. Can Save Us from Despotism", hot off the press. Here is the abstract:
Abstract: Abraham Lincoln was a co-op dude. He had a hip neck beard, sure. Everyone knows that. But few have bothered to notice that the first Republican President of the United States was an economic democrat who put labor above capital. Labor is prior to and independent of capital, Lincoln believed, and “deserves much the higher consideration”, he told Congress in his first annual address of 1861. Capital despotism is on the rise again, threatening the stability of the economy and union. The biggest problem of democracy now is not the failure to fully extend political rights, however important. The bigger problem is economic in nature. The threat today is from a lack of economic democracy—a lack of ownership, of self-reliance, of autonomy, and of justice in the distribution of rewards and punishments at work. From the appropriation of company revenue to lack of protection against pension raids, capital despotism is rife. “The road to serfdom” has many paths to choose from, Hayek warned in his important book of 1944. But too many Americans—including economists and policymakers—are neglecting the economic path, the road to serfdom caused by a lack of economic democracy. Cooperative banks and firms can help.
And here are a few excerpts:
“Labor is prior to and independent of capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration.”
"Economists in the know have acknowledged that the worker owned cooperative firm is the most perfect model of economic democracy and rational business organization dreamed up so far. That is true around the world, from Springfield all the way back to Shelbyville, economists who’ve examined such co-ops agree. Co-ops are more productive. And every worker is an owner."
"From the Dutch blossoming of commerce in the 1600s to the Asian Spring of the 2000s, socialists and capitalists alike have not produced, it seems, a better, more efficient and democratic form of economic production and distribution. Co-ops win. Not everyone is convinced."
"If co-ops are so great, why don’t they dominate the economy? Negligence and ignorance, more than any other possible cause, it would seem.
For example, the infamous “socialist calculation debate” in economics dragged on for two decades before a single word was said by either side, from Lange and Lerner to von Mises and Hayek, about the nature of the firm. Nary a peep from economists about how or even why firms choose to organize into production units of a certain scale, large or small. Ronald Coase’s article on “The Nature of the Firm” (1937) was good enough to fetch him a Nobel Prize. But Coase did not bring as much clarity to the debate as most economists believe.
Coase was vague and conventional to point of embarrassment. He made straw man assumptions about the firm being a hierarchical-capitalistic entity. Coase’s firm, though more “tractable” and “realistic” than previous notions, is assumed to be run by a “master” or masters, by capitalists who seek to maximize profit by bossing around “servants”—that is, wage earners possessing little autonomy, little or no ownership, and no voting rights on capital, their sole purpose being assumed to serve the “masters” of capital.
Said Coase, “If a workman moves from department Y to department X, he does not go because of a change in relative prices, but because he is ordered to do so.” But if Coase (himself a lovely man in person) would have taken a closer look at the real world, he could have found cooperative firms succeeding in stark contrast to the anti-democratic firms of his imagination."
Stephen T. Ziliak
Posted by Mark Thoma on Monday, November 10, 2014 at 09:50 AM in Academic Papers, Economics |
Do these people not understand, or care, how history will view them?
Death by Typo, by Paul Krugman, Commentary, NY Times: My parents used to own a small house with a large backyard, in which my mother cultivated a beautiful garden. At some point, however — I don’t remember why — my father looked at the official deed defining their property, and received a shock. According to the text, the Krugman lot wasn’t a rough rectangle; it was a triangle more than a hundred feet long but only around a yard wide at the base.
On examination, it was clear what had happened: Whoever wrote down the lot’s description had somehow skipped a clause. And of course the town clerk fixed the language. After all, it would have been ludicrous and cruel to take away most of my parents’ property on the basis of sloppy drafting, when the drafters’ intention was perfectly clear.
But it now appears possible that the Supreme Court may be willing to deprive millions of Americans of health care on the basis of an equally obvious typo. And if you think this possibility has anything to do with serious legal reasoning, as opposed to rabid partisanship, I have a long, skinny, unbuildable piece of land you might want to buy.
Last week the court shocked many observers by saying that it was willing to hear a case claiming that the wording of one clause in the Affordable Care Act sets drastic limits on subsidies to Americans who buy health insurance. It’s a ridiculous claim... But the fact that the suit is ridiculous is no guarantee that it won’t succeed — not in an environment in which all too many Republican judges have made it clear that partisan loyalty trumps respect for the rule of law. ...
Now, states could avoid this death spiral by establishing exchanges — which might involve nothing more than setting up links to the federal exchange. But how did we get to this point?
Once upon a time, this lawsuit would have been literally laughed out of court. Instead, however, it has actually been upheld in some lower courts, on straight party-line votes — and the willingness of the Supremes to hear it is a bad omen.
So let’s be clear about what’s happening here. Judges who support this cruel absurdity aren’t stupid; they know what they’re doing. What they are, instead, is corrupt, willing to pervert the law to serve political masters. And what we’ll find out in the months ahead is how deep the corruption goes.
Posted by Mark Thoma on Monday, November 10, 2014 at 12:24 AM in Economics, Health Care, Politics |
Posted by Mark Thoma on Monday, November 10, 2014 at 12:06 AM in Economics, Links |
Posted by Mark Thoma on Sunday, November 9, 2014 at 12:06 AM in Economics, Links |
How severe has the zero lower bound constraint been?: Summary In December 2008, the Fed lowered the federal funds rate to essentially zero and has kept it there since then. This column argues that, contrary to traditional macroeconomic thinking, monetary policy has not been severely constrained by the zero bound until mid-2011. The results imply that the Fed could have done more to ease monetary policy between 2009 and 2011. These findings could also help explain why the fiscal stimulus package adopted in 2009 did not bring the expected success.
Posted by Mark Thoma on Saturday, November 8, 2014 at 08:45 AM in Environment, Fiscal Policy, Monetary Policy |
I am at the Social Science History Association meetings in Toronto, and later today I'll be on a panel discussing Piketty's book (the theme of the conference is "Inequalities: Politics, Policy, and the Past"). So this was timely:
Inequality, migration and economists, by Chris Bertram: Tim Harford has a column in the Financial Times claiming that citizenship matters more than class for inequality. In many ways it isn’t a bad piece. I give him points for criticizing Piketty’s default assumption that the nation-state is the right unit for analysis. The trouble with the piece though is the immediate inference from two sets of inequality stats to a narrative about what matters most, as if the two things Harford is talking about are wholly independent variables. This is a vice to which economists are rather prone. ...
Well ... as Joseph Carens noticed long ago, and Harford would presumably endorse, nationality can function rather like feudal privilege of history. People are indeed sorted into categories, as they were in a feudal or class society, that confine them to particular life paths, limit their access to resources and so forth. But there’s a rather obvious point to make which rather cuts across the “X matters more than Y” narrative, which is that citizenship isn’t a barrier for the rich, or for those with valuable skills. It is the poor who are excluded, who are denied the right to better themselves in the wealthy economies, who drown in the Mediterranean, or who can’t live in the same country as the love of their life. Citizenship, nationality, borders are ways of controlling the mobility of the poor whilst the rich pass effortlessly through. It isn’t simply an alternative or competitor to class, it is also a way in which states enforce class-based inequality.
Posted by Mark Thoma on Saturday, November 8, 2014 at 08:05 AM in Economics, Income Distribution |
Lei Fang and Pedro Silos of the Atlanta Fed:
Wage Growth of Part-Time versus Full-Time Workers: Evidence from the SIPP: Debates about the sluggish recovery in output, the low growth in labor productivity, and the actual level of slack in the U.S. economy are common within policy circles (see, for example, this speech by Fed Chair Janet Yellen and previous macroblog posts—here and here). One of the defining features of the recovery from the Great Recession has been the rise in the number of people employed part-time. As reported by the U.S. Bureau of Labor Statistics, roughly 10 percent more people are working part-time in September 2014 than before the recession. Part-time workers generally earn less per hour than full-time workers, so lower hours and lower per-hour earnings both contribute to their lower incomes. Despite those differences in wage levels, less is known about wage growth of part-time relative to full-time workers. Has wage growth been different? Has wage inequality increased across the two groups of workers? ...
Chart 1 shows the median wage growth rate of individuals over time. During the recovery, the median growth rate of full-time workers has been higher than that of part-time workers. In particular, wage declines were more common among part-time workers.
To further analyze the wage growth pattern of full-time and part-time workers, we subdivide the sample by education. Chart 2 plots the median wage growth rates for those with at least a bachelor's degree and those with some college or less. The median wage growth rates for full-time workers are larger than for part-time workers within each education group and highest for college graduates working full-time. Also apparent is that the weak wage growth of part-time workers is significantly influenced by the sluggish wage growth among those with less than a bachelor's degree.
Overall, we find that part-time workers as a group appear to experiencing a lower average wage growth rate than full-time workers during the recovery from the Great Recession. Education matters for wage growth, but the pattern of lower wage growth for part-time workers persists for people with broadly similar educational attainment.
Posted by Mark Thoma on Saturday, November 8, 2014 at 08:01 AM
Posted by Mark Thoma on Saturday, November 8, 2014 at 12:06 AM in Economics, Links |
Employment Report, Yellen Speech, by Tim Duy: The October employment report was another solid albeit not spectacular read on the labor market. Job growth remained above the 200k mark, extending the ever-so-slight acceleration over the past year:
Upward revisions to the previous two months added another 31k jobs. The acceleration is a bit more evident in the year-over-year picture, albeit still modest:
The unemployment rate fell to 5.8% while the labor force participation rate ticked up. The labor market picture in the context of indicators previously cited by Federal Reserve Chair Janet Yellen looks like this:
Looks like steady, ongoing progress to meeting the Federal Reserve's goals that remains fairly consistent with expectations for a mid-year rate hike. Wage growth remains anemic, but as regular readers know I believe we are just entering the zone where we might expect upward pressure on wage growth:
I am wondering what the Fed will do if the unemployment rate touches 5% and wage growth and inflation remain anemic? Not my baseline scenario, but I am wondering how patient they will be before moving further along the normalization process. I suppose this is what Chicago Federal Reserve President Charles Evans wonders about as well. Via Reuters:
The Federal Reserve should be "extraordinarily patient" when it comes to raising interest rates, because doing so too soon could choke off recovery and force the U.S. central bank to cut rates back to zero again, a top Fed official said on Friday...
...But the biggest risk, he said, is raising rates prematurely, which could consign the United States to the kind of stagnation that affected it in the 1930s and that dogs Japan today.
Speaking of policy normalization, Yellen made some interesting remarks this morning:
As employment, economic activity, and inflation rates return to normal, monetary policy will eventually need to normalize too, although the speed and timing of this normalization will likely differ across countries based on differences in the pace of recovery in domestic conditions. This normalization could lead to some heightened financial volatility. But as I have noted on other occasions, for our part, the Federal Reserve will strive to clearly and transparently communicate its monetary policy strategy in order to minimize the likelihood of surprises that could disrupt financial markets, both at home and around the world. More importantly, the normalization of monetary policy will be an important sign that economic conditions more generally are finally emerging from the shadow of the Great Recession.
Take note of the specific emphasis on financial volatility. The message is that market participants should not expect the Fed to react to every twist and turn in equity markets. More to the point, they expect volatility as they progress toward policy normalization. Consequently, while they will keep an eye on the financial markets, they are primarily concerned with watching overall economic indicators as they consider the timing and pace of their next steps. In short, they are signalling that market participants misread the likely path of the Federal Reserve when 2 year yields collapsed last month:
That said, I am fairly concerned that the Fed is not taking the flattening of the yield curve seriously enough. I see that as a signal that they have less room for normalization than they might think they have.
Bottom Line: Steady as she goes.
Posted by Mark Thoma on Friday, November 7, 2014 at 10:54 AM in Economics, Fed Watch, Monetary Policy |
Nonsense, by Tim Duy: I stumbled across this piece in The America Spectator in which the authors argue against the prospect of the Federal Reserve pursuing a "triple mandate" by adding inequality to the current mandate of price stability and maximum employment. They claim the current mandate itself is unworkable:
...Replace the Fed’s current dual mandate with a single mandate—keep the price system as honest and stable as possible.
The dual mandate creates a contradictory tension that makes it practically impossible for the Fed to function effectively...
...The Fed currently finds itself unable to pursue that kind of price stability, because its unemployment mandate gets in the way. The Fed can induce a temporary boom by unexpectedly boosting inflation...
...If the Fed tinkers with interest rates and the money supply in an effort to reduce inequality, it puts further obstacles in the path of entrepreneurs, and hurts the very people it intends to help...If the Fed’s seeks to maintain a stable, predictable, and honest price system as its sole monetary policy objective, it will do more to lift people out of poverty than any double or triple mandate.
The implication is that the Fed is currently creating unexpected inflation to lower unemployment. The implication is that the Fed is not meeting its price stability mandate. The first thing that makes this such nonsense is the absolute absence of inflationary pressures for going on 30 years now:
There have been NO episodes of "unexpectedly boosting inflation." In fact, for all intents and purposes, the Phillips Curve has become nonexistent:
There is no "contradictory tension." The Fed can obviously meet both mandates concurrently. See Minneapolis Federal Reserve President Narayana Kocherlakota. It is pretty straightforward. And even if the Fed wanted to boost inflation beyond its current target, they would not want unexpected inflation. They would only do so because they needed more room to cushion against the zero bound. They would want higher expected inflation. It would be anything but unexpected. They would scream it from sea to sea.
Of course, inflation truthers will argue that the Fed's chosen price measure does not measure "real" inflation. Only "real" people, not economists, know what "real" inflation is. Well, if you ask "real" people, once again you get a flat Phillips Curve:
Sure, the public tends to overreact to gas prices (both up and down), but I have always thought the overall consistency of median inflation expectations among the public is pretty remarkable and under-appreciated. To be sure that is arguably because the Fed has generally made reality consistent with expectations. But perhaps not so much lately. Consider inflation expectations and acutal year ahead inflation:
Note that I used headline CPI inflation as it is arguably the best known price index. Interestingly, since 1983, average expected inflation was 3.1%, compared to an actual 2.9%. Remarkably close. And note that since 2007, actual inflation over the next twelve months has remained well below expectations. In other words, the US economy is experiencing unexpected disinflation. By the author's argument, shouldn't that mean that unemployment is now artificially high? (Note too that concerns about the Fed's credibility may be premature.)
The second thing that makes this such nonsense is that the authors seem to believe that if the Fed dumped its dual mandate in favor of a single price mandate, monetary policy would be tighter (because the current need to maintain low unemployment requires unexpected inflation, or loose policy). This is exactly opposite of reality. The reality is that if the Fed focused only on its price mandate, it would not be so eager to normalize policy. The Federal Reserve currently can neither hit its target nor anticipates hitting its target over the next two years. So what is driving the push for normalizing policy? They fear that falling unemployment falling toward their estimate of the natural rate (5.2-5.5%) will trigger an inflationary outbreak if not caught early with tighter policy! They want to arrest the decline in unemployment before it slides much below 5.2%.
Truth be told, oftentimes I would prefer the Fed abandon its dual mandate as well. I wish they would focus more on prices than unemployment at this point. But that's because I understand the implications for monetary policy. It would be looser, not tighter. Monetary policymakers would have one less excuse to justify normalizing policy when they still can't hit their inflation targets.
I would also add that the Fed isn't doing itself any favors when they argue that they need to keep policy loose to meet their employment mandate or give the impression that they intend to keep policy loose to address inequality. They could just point out they need to keep policy loose to meet their inflation target and by meeting their inflation target they foster conditions amenable to sustained maximum employment and by extension reducing inequality. Do themselves a favor and keep the price stability mandate front and center. Read Minneapolis Federal Reserve President Narayana Kocherlakota's statement on his dissent:
I felt that the FOMC needed to reduce possible downside risk to the credibility of its 2 percent inflation target by taking more purposeful steps to move inflation back up to 2 percent.
The arch-dove on the FOMC is a dove because his colleagues can't meet or are unwilling to meet their inflation target.
Bottom Line: The Fed is not using unexpected inflation to lower unemployment. Just isn't happening now. Not tomorrow. Or the day after that either. And if the Fed wants to reduce inequality, they don't need unexpected inflation in any event. What they need is to actually generate the inflation they promised.
Posted by Mark Thoma on Friday, November 7, 2014 at 08:05 AM in Economics, Fed Watch, Monetary Policy |
Why did Republicans do so well in the election?:
Triumph of the Wrong, by Paul Krugman, Commentary, NY Times: The race is not to the swift, nor the battle to the strong..., nor yet midterms to men of understanding. Or as I put it on the eve of another Republican Party sweep, politics determines who has the power, not who has the truth. Still, it’s not often that a party that is so wrong about so much does as well as Republicans...., the new rulers of Congress have been about, well, everything.
First, there’s economic policy. According to conservative dogma, which denounces any regulation of the sacred pursuit of profit, the financial crisis of 2008 ... shouldn’t have been possible. But Republicans ... invented an imaginary history in which the government was somehow responsible...
In 2009, when an ailing economy desperately needed aid, John Boehner ... declared: “It’s time for government to tighten their belts.”
So here we are, with years of experience..., and the lessons ... couldn’t be clearer. Predictions that deficit spending would lead to soaring interest rates, that easy money would lead to runaway inflation and debase the dollar, have been wrong again and again. ...
Then there’s health reform, where Republicans were very clear about what was supposed to happen: minimal enrollments, more people losing insurance than gaining it, soaring costs. Reality, so far, has begged to differ...
And we shouldn’t forget the most important wrongness of all, on climate change. ... Now these people will be in a position to block action for years to come, quite possibly pushing us past the point of no return.
But if Republicans have been so completely wrong..., why did voters give them such a big victory?
Part of the answer is that leading Republicans managed to mask their true positions. Perhaps most notably, Senator Mitch McConnell, the incoming majority leader, managed to convey the completely false impression that Kentucky could retain its impressive gains in health coverage even if Obamacare were repealed.
But the biggest secret of the Republican triumph surely lies in the discovery that obstructionism bordering on sabotage is a winning political strategy. ...
This was ... bad for America but good for Republicans. Most voters don’t know much about policy details, nor do they understand the legislative process. So all they saw was that the man in the White House wasn’t delivering prosperity — and they punished his party.
Will things change now that the G.O.P. can’t so easily evade responsibility? I guess we’ll find out.
Posted by Mark Thoma on Friday, November 7, 2014 at 12:24 AM in Economics, Politics |
Posted by Mark Thoma on Friday, November 7, 2014 at 12:06 AM in Economics, Links |
It's a travel day, and I don't have time for any more posts until later (hopefully). So I'll turn it over to you in comments to fill in the gap. Thanks.
Posted by Mark Thoma on Thursday, November 6, 2014 at 10:25 AM in Economics, Travel |
Understanding and Overcoming America's Plutocracy: Pity the American people for imagining that they have just elected the new Congress. In a formal way, they of course have. The public did vote. But in a substantive way, it's not true that they have chosen their government.
This was the billionaires' election, billionaires of both parties. And while the Republican and Democratic Party billionaires have some differences, what unites them is much stronger than what divides them, a few exceptions aside. Indeed, many of the richest individual and corporate donors give to both parties. The much-discussed left-right polarization is not polarization at all. The political system is actually relatively united and working very effectively for the richest of the rich. ...
Posted by Mark Thoma on Thursday, November 6, 2014 at 07:54 AM in Economics, Politics |
I can't claim to be unbiased, but fully agree with Brad DeLong:
Blog You Need to Read: Tim Duy's Fed Watch: Over at Equitable Growth As all of you surely know by now, I am a big fan of Tim Duy of the University of Oregon and his Fed Watch.
Here is a sample--ten very useful and informative takes from the past half-year or so:
Always judicious, always giving a fair shake to all the currents of thought in the Federal Reserve, to the data, and to the live and serious models of how the economy works.
Read Tim Duy, and you have a sophisticated, broad, and truly balanced understanding of what the Federal Reserve is thinking, what it is doing, why it is doing it, and what the likely outcomes of its actions are. That is a package that is very hard to find anyplace else.
It still surprises me that Tim Duy does not get significantly more airplay in the general conversational mix than he does...
Posted by Mark Thoma on Thursday, November 6, 2014 at 07:54 AM in Economics, Fed Watch, Weblogs |
Posted by Mark Thoma on Thursday, November 6, 2014 at 12:06 AM in Economics, Links |
If you have thoughts on the election...
Posted by Mark Thoma on Wednesday, November 5, 2014 at 09:49 AM in Economics, Politics |
Neo-Fisherites and the Scandinavian Flick: Noah Smith wonders if "reality might topple a beloved economic theory". Well, if you look at Sweden, reality just confirmed that beloved economic theory. The Riksbank raised interest rates because it was scared that low interest rates would cause financial instability. Lars Svensson resigned in protest. Then inflation fell, and the Riksbank needed to cut interest rates even lower than before.
That's only one data point. But there are loads more.
If you don't know how to drive a car, and you don't even have a clue whether you turn the steering wheel clockwise or counter-clockwise if you want to turn right, one good strategy is to borrow a car, and a wide open field, and experiment. Make a random turn of the wheel, and see what happens. The recent data point in Sweden was a natural experiment like that. But Sweden is not a wide open field, and it's hard to borrow a car to experiment like that on regular roads.
An alternative strategy is to ask an experienced driver which way to turn the wheel. Preferably a driver who has managed to keep his car out of the ditch for the last 20 years. Like the Bank of Canada. And if the Bank of Canada says that it cuts interest rates when inflation is falling below target, and it wants to bring inflation back up to target, you listen. They are either right, or wrong and very very lucky.
Never ignore the advice of experienced practitioners, who have had their hands on the steering wheel for a very long time. Unless you have a very good theory about why they might be deluded.
Theory says, and the data confirm, and the advice of experienced practitioners confirms, that if it wants to raise inflation the central bank should first lower interest rates. Then, when inflation and expected inflation starts to rise, it can raise interest rates, higher than they were before. Then, and only then, does the Fisher effect kick in, and we see a positive correlation between inflation and nominal interest rates. That is the Scandinavian flick we saw recently in Sweden. ...
Posted by Mark Thoma on Wednesday, November 5, 2014 at 09:25 AM in Economics, Inflation, Monetary Policy |
It's a mystery why inflation is such a mystery:
Forecasting Inflation with Fundamentals . . . It’s Hard!, by Jan Groen, Liberty Street Economics, NY Fed: Controlling inflation is at the core of monetary policymaking, and central bankers would like to have access to reliable inflation forecasts to assess their progress in achieving this goal. Producing accurate inflation forecasts, however, turns out not to be a trivial exercise. This posts reviews the key challenges in inflation forecasting and discusses some recent developments that attempt to deal with these challenges. ...
Posted by Mark Thoma on Wednesday, November 5, 2014 at 09:11 AM in Econometrics, Economics, Inflation |
Posted by Mark Thoma on Wednesday, November 5, 2014 at 12:06 AM in Economics, Links |
I have a new column:
What’s Next for the Fed?: Last week, the Federal Reserve announced an end to its quantitative easing program. This brings up the obvious question, what is next for the Fed? Before getting to that, here are a few notes on quantitative easing and what the Fed’s announcement means for the economy. ...
Posted by Mark Thoma on Tuesday, November 4, 2014 at 07:58 AM in Economics, Fiscal Times, Monetary Policy |
Stagnation: noise vs signal: A commenter on my previous post invites me to bet on the idea that economic growth is slowing. I'm going to decline the offer. This isn't (just) because I'm an empty blowhard: I was only raising the possibility of slower growth. Nor is it just because I'm risk-averse: in being scarred by memories of the early 80s recession, I am one of Malmendier and Nagel's Depression Babies (pdf).
Instead, I reject the bet because facts might not suffice to prove or disprove the secular stagnation hypothesis.
Even over a period as long as ten years - to take Matt's suggested time period - average GDP growth will be due in part to luck as well as to fundamental forces. ...
We can quantify this luck by measuring the standard error... Over a ten year period, the standard error is 0.7 percentage points. Our 1.5% growth might therefore mean simply that true growth was the same between 2014 and 2024 as it was between 1973 and 2013 and that we got unlucky, in drawing more bad years than good out of the hat. Or it might mean that there really has been secular stagnation and the growth rate has halved...
We can't tell for sure. ...
Posted by Mark Thoma on Tuesday, November 4, 2014 at 07:57 AM in Economics |
Paul Krugman has a question:
Why Don’t We See More Macroeconomic Populism?: As I’ve been noting recently, there’s a lot of opposition within Japan to the Bank of Japan’s policy of printing more money; there’s also a lot of pressure on the government to raise taxes. And that’s not really very different from what has been happening in the rest of the advanced world: central banks that have pursued quantitative easing have done so despite political pressure, not because of it, and fiscal austerity has been imposed almost everywhere.
The funny thing is that when you ask for justifications for pursuing hard money and tight budgets in a depressed, low-inflation economy, the answers you get often start from the presumption that money-printing and deficit finance are immensely tempting to politicians, so that you don’t dare let them get even a slight taste of these addictive drugs. This is often said in a tone of great wisdom, and presented as the lesson history teaches us.
Now, as Simon Wren-Lewis points out — and as I’ve pointed out in the past — history actually teaches us no such thing. ...
But ... populist politicians should love it when people tell them that printing money and running big deficits is OK — seems plausible. And things like this have happened in Latin America — indeed are happening again today in Venezuela and Argentina. So why don’t they ever happen in America, Europe, or Japan? Why, in a time of deflationary pressure, have calls for belt-tightening dominated the political scene?
I actually don’t know, although I continue to think about it. But it is a puzzle worth pondering.
Posted by Mark Thoma on Tuesday, November 4, 2014 at 07:56 AM in Economics, Fiscal Policy, Monetary Policy, Politics |
Posted by Mark Thoma on Tuesday, November 4, 2014 at 12:06 AM in Economics, Links |
The World Is Still Not Flat, by by Justin Fox: Globalization marches on. But the pace isn’t all that fast, and the overall level of global connectedness still hasn’t gotten back to its all-time peak of 2007. The overwhelming majority of commerce, investment, and other interactions still occur within — not between — nations.
That’s the message from the just-released DHL Global Connectedness Index 2014...
The big news..., other than global connectedness getting back close to its 2007 peak, is that the breadth of connectedness is still declining. Breadth is a measure that reflects how many different countries a particular country is interacting with and the distances over which interactions occur, among other things. ...
This global decline in the breadth of connectedness ... suggests that “with the big shift in economic activity to emerging markets, the world is in some sense getting pulled apart.” For the past couple of decades, globalization been largely driven by trade, investment, and other interactions between developed countries and developing ones. Now the action is among the developing countries (and formerly developing countries), which is having the effect of re-regionalizing many economic flows. ...
[There's quite a bit more in the full post.]
Posted by Mark Thoma on Monday, November 3, 2014 at 09:20 AM in Economics, International Trade |
Should policymakers listen to business leaders?:
Business vs. Economics, by Paul Krugman, Commentary, NY Times: The Bank of Japan ... has lately been making a big effort to end deflation, which has afflicted Japan’s economy for almost two decades. At first its efforts — which involve printing a lot of money and, even more important, trying to assure investors that it will keep printing money until inflation reaches 2 percent — seemed to be going well. But more recently the economy has lost momentum, and last week the bank announced new, even more aggressive monetary measures. ...
While the bank did the right thing, however,... the new stimulus was approved by only five of the bank board’s nine members, with those closest to business voting against. Which brings me to the subject of this column: the economic wisdom, or lack thereof, of business leaders.
Some of the people I’ve spoken to here argue that the opposition of many Japanese business leaders to the Bank of Japan’s actions shows that it’s on the wrong track. ... Actually,..., business leaders often give remarkably bad economic advice... Why? ...
National economic policy, even in small countries, needs to take into account kinds of feedback that rarely matter in business life. For example, even the biggest corporations sell only a small fraction of what they make to their own workers, whereas even very small countries mostly sell goods and services to themselves.
So think of what happens when a successful businessperson looks at a troubled economy and tries to apply the lessons of business experience. He or (rarely) she sees the troubled economy as something like a troubled company, which needs to cut costs and become competitive. To create jobs, the businessperson thinks, wages must come down, expenses must be reduced; in general, belts must be tightened. And surely gimmicks like deficit spending or printing more money can’t solve what must be a fundamental problem.
In reality, however, cutting wages and spending in a depressed economy just aggravates the real problem, which is inadequate demand. Deficit spending and aggressive money-printing, on the other hand, can help a lot.
But how can this kind of logic be sold to business leaders, especially when it comes from pointy-headed academic types? The fate of the world economy may hinge on the answer.
Here in Japan, the fight against deflation is all too likely to fail if conventional notions of prudence prevail. But can unconventionality triumph over the instincts of business leaders? Stay tuned.
Posted by Mark Thoma on Monday, November 3, 2014 at 12:24 AM in Economics, Policy |
Posted by Mark Thoma on Monday, November 3, 2014 at 12:06 AM in Economics, Links |
Fighting the last war: It is often said that generals fight the last war that they have won, even when those tactics are no longer appropriate to the war they are fighting today. The same point has been made about macroeconomic policy: policymakers cannot avoid thinking about the dangers of rising inflation, and in doing so they handicap efforts to fully recover from the Great Recession.
Another military idea is the benefit of using overwhelming force. In the case of inflation we have two legacies of the last war that are designed to prevent inflation reaching the heights of the late 1970s: inflation targets and in many countries independent central banks. Do we need both, or is just one sufficient? I think this question is relevant to the debate over helicopter money (financing deficits by printing money rather than selling debt).
Why are helicopter drops taboo in policy circles? Why is it illegal in the Eurozone? The answer is a fear that if you allow governments access to the printing presses, high inflation will surely follow at some point. ...
I think...: yes, in the grand scheme of things we should worry about inflation and debt, but right now we are worrying about them too much and therefore failing to deal with more pressing concerns.
Posted by Mark Thoma on Sunday, November 2, 2014 at 09:56 AM in Economics, Fiscal Policy, Inflation, Monetary Policy |
At Vox EU:
The impact of the maturity of US government debt on forward rates and the term premium: New results from old data, by Jagjit Chadha: Summary The impact of the stock and maturity of government debt on longer-term bond yields matters for monetary policy. This column assesses the magnitude and relative importance of overall bond supply and maturity effects on longer-term US Treasury interest rates using data from 1976 to 2008. Both factors have a significant impact on both forwards and term premia, but maturity of public debt appears to matter more. The results have implications for exit from unconventional policies, and also for the links between monetary and fiscal policy and debt management.
Posted by Mark Thoma on Sunday, November 2, 2014 at 09:56 AM in Budget Deficit, Economics, Fiscal Policy, Monetary Policy |
Posted by Mark Thoma on Sunday, November 2, 2014 at 12:06 AM in Economics, Links |
The Vital Role of the Occasional Voter, NY Times: Low voter turnout is a bad thing. Let’s get that out of the way immediately.
The midterm elections take place on Tuesday, but it’s highly likely that relatively few Americans will actually go to the polls. In 2010, in the last midterm election, only 37 percent of the voting-age population voted.
What’s more, voter turnout isn’t evenly dispersed... And even if low turnout were uniformly spread among economic and racial groups, it would still be disheartening. ...
But one type of nonvoter provides a silver lining in this otherwise gloomy state of affairs. These people, whom I call sporadic voters, don’t apathetically sit out all elections. They fail to go to the polls sometimes but do go at other times, presumably when they perceive the stakes to be high. And unlike apathetic nonvoters who undermine democracy, sporadic voters may actually bolster it. In fact, recent behavioral research suggests that this group may provide a reservoir of neutrality that can help keep democracy from going astray. ...
Posted by Mark Thoma on Saturday, November 1, 2014 at 12:36 PM in Economics |
... It ... seems appropriate to consider what we can learn from all the policy experiments conducted around the world since the 2008 crisis.
The main lesson is that government decisions on taxes and public spending have turned out to be more important as drivers of economic activity than the monetary experiments with zero interest rates and quantitative easing that have dominated media and market attention. ... While every major economy in the world has followed essentially the same monetary policy since 2008, their fiscal policies have been very different and the divergence in outcomes, especially when we compare the United States and Europe, has been exactly the opposite to what was implied by the rhetoric of most politicians and central banks. ...
Thus the six years since 2008 have provided strong empirical support for the supposedly outmoded Keynesian view that government borrowing is more powerful than monetary policy in stimulating severely depressed economies...
Posted by Mark Thoma on Saturday, November 1, 2014 at 09:50 AM in Economics, Fiscal Policy, Monetary Policy |
Posted by Mark Thoma on Saturday, November 1, 2014 at 12:06 AM in Economics, Links |
Another Kocherlakota Dissent, by Tim Duy: Minneapolis Federal Reserve President Narayana Kocherlakota released a statement regarding his dissenting vote at this week's FOMC meeting. He does not share his colleagues faith that inflation will return to target anytime soon:
...In my assessment, the medium-term outlook for inflation has shown no overall improvement since last December and, indeed, is arguably worse. Failing to act in response to this subdued inflation outlook increases the downside risk to the credibility of our 2 percent inflation target. Market-based measures of longer-term inflation expectations have fallen recently to unusually low levels, a decline that I believe reflects that kind of increased downside risk...
Today's reading on inflation is supportive of Kocherlakota's concerns:
He reiterated his preferred policy outcomes:
There are a number of possible actions that I would have seen as responsive to the evolution of the data. Let me describe two in particular. First, the Committee could have continued to buy $15 billion of longer-term assets per month. Second, it could have committed to keeping the target range for the federal funds rate at its current level at least until the one- to two-year-ahead inflation outlook has risen back to 2 percent, as long as risks to financial stability remain well-contained.
I find this interesting compared to his preferred language after his dissent in March:
For example, the Committee could have adopted language of the following form: “the Committee anticipates keeping the fed funds rate in its current range at least until the unemployment rate has fallen below 5.5 percent, as long as the one-to-two-year-ahead outlook for PCE inflation remains below 2 1/4 percent, longer-term inflation expectations remain well-anchored, and possible risks to financial stability remain well-contained.”
Notice that earlier this year the best he thought he could get from his colleagues was an allowance for 2.25% inflation. Now the best he could hope for has been downgraded to a 2%, suggesting - you guessed it - that the rest of the FOMC considers 2% a ceiling.
I think the inflation downgrade in Kocherlakota's suggested policy language suggests that low inflation is less of a concern for FOMC members now that unemployment is below 6% and measures of underemployment are improving. I believe that Kocherlakota is hearing from his colleagues that 1.) inflation will almost certainly move toward target as the unemployment rate falls further and that 2.) even if inflation remains below 2%, declining slack in the labor market suggests that less financial accommodation is necessary and failure to reduce accommodation will result in undesirable financial instability.
Bottom Line: Kocherlakota's dissent raises the possibility that labor data will trump inflation data in policy considerations. It also suggests that given the pace of labor market improvement, they are not writing off the possibility of a March rate hike (although that is not my baseline).
Posted by Mark Thoma on Friday, October 31, 2014 at 12:53 PM in Economics, Fed Watch, Monetary Policy |
What are the lessons we should learn from Japan?:
Apologizing to Japan, by Paul Krugman, Commentary, NY Times: For almost two decades, Japan has been held up as ... an object lesson on how not to run an advanced economy. After all, the island nation is the rising superpower that stumbled. One day, it seemed, it was on the road to high-tech domination of the world economy; the next it was suffering from seemingly endless stagnation and deflation. And Western economists were scathing in their criticisms of Japanese policy.
I was one of those critics... And these days, I often find myself thinking that we ought to apologize. ...
The ... West has, in fact, fallen into a slump similar to Japan’s — but worse. And that wasn’t supposed to happen. In the 1990s, we assumed that if the United States or Western Europe found themselves facing anything like Japan’s problems, we would respond much more effectively... But we didn’t, even though we had Japan’s experience to guide us. ... And Western workers have experienced a level of suffering that Japan has managed to avoid.
What policy failures am I talking about? ... Japanese fiscal policy didn’t do enough to help growth; Western fiscal policy actively destroyed growth.
Or consider monetary policy. The Bank of Japan ... has received a lot of criticism for reacting too slowly to the slide into deflation, and then for being too eager to raise interest rates at the first hint of recovery. That criticism is fair, but Japan’s central bank never did anything as wrongheaded as the European Central Bank’s decision to raise rates in 2011, helping to send Europe back into recession. And even that mistake is trivial compared with the awesomely wrongheaded behavior of ... Sweden’s central bank, which raised rates despite below-target inflation and relatively high unemployment, and appears, at this point, to have pushed Sweden into outright deflation. ...
As for why the West has done even worse than Japan, I suspect that it’s about the deep divisions within our societies. In America, conservatives have blocked efforts to fight unemployment out of a general hostility to government, especially a government that does anything to help Those People. ...
I’ll be writing more soon about what’s happening in Japan..., and the new lessons the West should be learning. For now, here’s what you should know: Japan used to be a cautionary tale, but the rest of us have messed up so badly that it almost looks like a role model instead.
Posted by Mark Thoma on Friday, October 31, 2014 at 12:15 AM
Posted by Mark Thoma on Friday, October 31, 2014 at 12:06 AM in Economics, Links |
BEA: Real GDP increased at 3.5% Annualized Rate in Q3: From the BEA: Gross Domestic Product, Third Quarter 2014 (Advance Estimate)
Real gross domestic product -- the value of the production of goods and services in the United States, adjusted for price changes -- increased at an annual rate of 3.5 percent in the third quarter of 2014, according to the "advance" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 4.6 percent. ... The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, nonresidential fixed investment, federal government spending, and state and local government spending that were partly offset by a negative contribution from private inventory investment. Imports, which are a subtraction in the calculation of GDP, decreased.
The advance Q3 GDP report, with 3.5% annualized growth, was above expectations of a 2.8% increase.
Personal consumption expenditures (PCE) increased at a 1.8% annualized rate - a slow pace. ...
Overall this was an OK report, however PCE was weak (I expect stronger PCE going forward).
Posted by Mark Thoma on Thursday, October 30, 2014 at 07:22 AM in Economics |
FOMC Recap, by Tim Duy: In broad terms, the FOMC meeting concluded as I had expected. To the extent there were any surprises, they were on the hawkish side. Or, I would say, hawkish mostly if you believed the events of the last few weeks justified a radical revision of the Fed's anticipated policy path. I didn't, but was too busy those same past few weeks to scream into the wind.
As I anticipated, the Fed dismissed the decline in market-based inflation expectations. They clearly believe financial markets over-reacted to the decline in oil prices, and that that decline would ultimately prove to be a one-time price shock rather than the beginning of a sustained disinflationary process.
This is why we watch core-inflation.
And note that the Fed sent a pretty big signal along the way. In contrast to conventional wisdom, they do not hold market-based measures of inflation expectations as the Holy Grail. Especially with unemployment below 6%, pay more attention to survey-based measures. And recognize they will discount even those if they feel they are unduly affected by energy prices in either direction.
Somewhat more hawkish than I anticipated, they did not explicitly hold out the hope of future asset purchases. The statement shifts directly to the issue of rate hikes. On that point, they did as I had expected, emphasize the data-dependent nature of future policy:
However, if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.
In my opinion, this suggests that they want to retain the baseline expectation of a mid-2014 rate hike with the option for an earlier hike. I don't think they see recent data or market action as by itself justifying the shift to the latter part of 2015. If anything, remember that recent data is pointing to accelerating growth and a rapid decline in unemployment.
And that rapid decline in unemployment is important, as I have trouble imagining a scenario in which the Fed is content to watch unemployment fall below 5.5% without at least beginning the rate hike cycle. Remember that they think that even as they increase rates, they believe that policy will continue to be accommodative. In other words, they do not fear raising rates as necessarily a tightening of policy. They will view it as a necessary adjustment in financial accommodation in response to a decline in labor market slack. Hence the line:
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.
I anticipated at least one dissent. In all honesty, this would have been a more impressive call if I had also indicated the direction of the dissent. I expected a hawk to reject the retention of the considerable time language. No such luck - quite the opposite, with noted-dove Minneapolis Federal Reserve President Narayana Kocherlakota protesting both the considerable time language (wanting a more firm commitment to ZIRP) and the decision to end QE. The hawks, in contrast, were generally comfortable with the direction of the discussion. Expect Dallas Federal Reserve President Richard Fisher to say as much soon.
The acceptance of the hawks with the general tone of the meeting is also important. Clearly hawkish in contrast with the shift in market expectations. Time will tell.
Bottom Line: Despite the market turbulence of recent weeks, the general outlook of monetary policymakers remain generally unchanged. In general, they continue to see the direction of activity pointing to a mid-year rate hike. The actual date is of course data dependent, but they have not seen sufficient data in either direction to change that baseline outlook.
Posted by Mark Thoma on Thursday, October 30, 2014 at 12:24 AM in Economics, Fed Watch, Monetary Policy |
In case you just can't get enough of Larry Summers talking about secular stagnation:
Reflections on the new 'Secular Stagnation hypothesis', by Larry Summers, Vox EU: The notion that Europe and other advanced economies are suffering secular stagnation is gaining traction. This column by Larry Summers – first published in the Vox eBook “Secular Stagnation: Facts, Causes and Cures” – explains the idea. It argues that a decline in the full-employment real interest rate coupled with low inflation could indefinitely prevent the attainment of full employment.
Here's the end of a relatively long discussion:
3 Conclusions and Implications
The case made here, if valid, is troubling. It suggests that monetary as currently structured and operated may have difficulty maintaining a posture of full employment and production at potential and that if these goals are attained there is likely to be price paid in terms of financial stability. A number of questions come to mind:
Alvin Hansen proclaimed the risk of secular stagnation at the end of the 1930s only to see the economy boom during the and after World War II. It is certainly possible that either some major exogenous event will occur that raises spending or lowers saving in a way that raises the FERIR in the industrial world and renders the concerns I have expressed irrelevant. Short of war, it is not obvious what such events might be. Moreover, most of the reasons adduced for falling FERIRs are likely to continue for at least the next decade. And there is no evidence that potential output forecasts are being increased even in countries like the US where there is some sign of growth acceleration.
On their own, secular stagnation ideas do not explain the decline in potential output that has been a major feature of the experience throughout the industrial world. The available evidence though is that potential output has declined almost everywhere and in near lockstep with declines in actual output; see Ball (2014) for a summary. This suggests a way in which economies may equilibrate in the face of real rates above the FERIR. As hysteresis theories which emphasize the adverse effects of recessions on subsequent output predict, supply potential may eventually decline to the level of demand when enough investment is discouraged in physical capital, work effort and new product innovation.
Perhaps Say’s dubious law has a more legitimate corollary – “Lack of Demand creates Lack of Supply”. In the long run, as the economy’s supply potential declines, the FERIR rises restoring equilibrium, albeit not a very good one.
- What about global aspects?
There is important work to be done elucidating the idea of secular stagnation in an open economy context. The best way to think about the analysis here is to treat it as referring the aggregate economy of the industrial world where – because of capital mobility – real interest rates tend to converge (though not immediately because of the possibility of expected movements in real exchange rates). If the FERIR for the industrialized economies were low enough one might expect capital outflows to emerging markets which would be associated with a declining real exchange rates for industrial countries, increased competitiveness and increased export demand. The difficulty is that this is something that emerging markets will accept only to a limited extent. Their response is likely to be either resistance to capital inflows or efforts to manage currency values to maintain competitiveness. In either case the result will be further downward pressure on interest rates in industrial countries.
4.What is to be done?
Broadly to the extent that secular stagnation is a problem, there are two possible strategies for addressing its pernicious impacts.
- The first is to find ways to further reduce real interest rates.
These might include operating with a higher inflation rate target so that a zero nominal rate corresponds to a lower real rate. Or it might include finding ways such as quantitative easing that operate to reduce credit or term premiums. These strategies have the difficulty of course that even if they increase the level of output, they are also likely to increase financial stability risks, which in turn may have output consequences.
- The alternative is to raise demand by increasing investment and reducing saving.
This operates to raise the FERIR and so to promote financial stability as well as increased output and employment. How can this be accomplished? Appropriate strategies will vary from country to country and situation to situation. But they should include increased public investment, reduction in structural barriers to private investment and measures to promote business confidence, a commitment to maintain basic social protections so as to maintain spending power and measures to reduce inequality and so redistribute income towards those with a higher propensity to spend.
Posted by Mark Thoma on Thursday, October 30, 2014 at 12:15 AM in Economics |
Posted by Mark Thoma on Thursday, October 30, 2014 at 12:06 AM in Economics, Links |
"In a panel discussion moderated by Dean Rich Lyons, Laura Tyson, professor of business administration and economics at the Haas School of Business, and Emmanuel Saez, economics professor and head of the Center for Equitable Growth at UC Berkeley, focus on income inequality, drawing from ideas central to Thomas Piketty's bestselling book Capital in the Twenty-First Century."
[Note: The discussion is summarized here.]
Posted by Mark Thoma on Wednesday, October 29, 2014 at 10:56 AM in Economics, Income Distribution, Video |
Riksbank and ECB: reverse asymmetry: The Swedish central bank just lowered interest rates to zero because of deflation risks. This action comes after ignoring repeated warnings from Lars Svensson who had joined the bank in 2007 and later resigned because of disagreements with monetary policy decisions. What it is interesting is the parallel between Riksbank decisions and ECB decisions. In both cases, these central banks went through a period of optimism that make them raise interest rates to deal with inflationary pressures. In the case of Sweden interest rates were raised from almost zero to 2% in 2012. In the case of the ECB interest rates were raised from 1% to 1.5% during 2011. Also, in both cases, after a significant expansion in their balance sheets following the 2008 crisis, there was a sharp reduction in the years that followed. ... Their policies stand in contrast with those of the US Federal Reserve and the Bank of England...
The consequences of the policies of the ECB and Riksbank are clear: a continuous fall in their inflation rates that has raised the risk of either a deflationary period or a period of too-low inflation. What is more surprising about their policy actions is their low speed of reaction as the data was clearly signaling that their monetary policy stance was too tight for months or years. ...
What we learned from these two examples is that central banks are much less accountable than what we thought about inflation targets. And they ... use ... a policy that is clearly asymmetric in nature. Taking some time to go from 0% inflation to 2% inflation is ok but if inflation was 4% I am sure that their actions will be much more desperate. In the case of the ECB their argument is that the inflation target is defined as an asymmetric target ("close to but below 2%"). But this asymmetry, which was never an issue before the current crisis, has very clear consequences on the ability of central banks to react to deep crisis with deflationary risks.
What we have learned during the current crisis is that an asymmetric 2% inflation target is too low. Raising the target might be the right thing to do but in the absence of a higher target, at a minimum we should reverse the asymmetry implied by the ECB mandate. Inflation should be close to but above 2% and this should lead to very strong reaction when inflation is persistently below the 2% target.
Posted by Mark Thoma on Wednesday, October 29, 2014 at 10:25 AM in Economics, Inflation, Monetary Policy |
Is (teaching) Economics doing more harm than good?: Every September thousands of students enter into universities and institutes of higher education. A large number of these take some economics courses. ... Economists also typically teach courses such as statistics, or introductory mathematics for social scientists. And yet, we have no idea whether or not this does any good. Much worse, we have no idea whether or not this does harm. Maybe we should find out? ...
He goes through a large body of evidence showing that "Economists are different," and how student attitudes may be changed by taking economics courses.
Posted by Mark Thoma on Wednesday, October 29, 2014 at 10:25 AM in Economics, Universities |
The digital divide:
Digital divide exacerbates US inequality, by David Crow, FT: The majority of families in some of the US’s poorest cities do not have a broadband connection, according to a Financial Times analysis of official data that shows how the “digital divide” is exacerbating inequality in the world’s biggest economy. ...
The OECD ranks the US 30th out of 33 countries for affordability...
There is a very strong correlation with race and income. Just 45 per cent of households with an income of less than $20,000 a year have broadband whereas the rate for those earning $75,000 or more is 91 per cent. About a third of African American and Hispanic households are unconnected compared to 20 per cent for white households and 10 per cent for Asian households.
Posted by Mark Thoma on Wednesday, October 29, 2014 at 10:25 AM in Economics, Income Distribution, Technology |