Comments on this?:
What is the price of freedom?, by James Choi: Are some things still
worth dying for? Is the American idea one such thing? Are you up for a
thought experiment? What if we chose to regard the 2,973 innocents killed in
the atrocities of 9/11 not as victims but as democratic martyrs, “sacrifices
on the altar of freedom”? In other words, what if we decided that a certain
baseline vulnerability to terrorism is part of the price of the American
idea? And, thus, that ours is a generation of Americans called to make great
sacrifices in order to preserve our democratic way of life—sacrifices not
just of our soldiers and money but of our personal safety and comfort? In
still other words, what if we chose to accept the fact that every few years,
despite all reasonable precautions, some hundreds or thousands of us may die
in the sort of ghastly terrorist attack that a democratic republic cannot
100-percent protect itself from without subverting the very principles that
make it worth protecting? Is this thought experiment monstrous? Would it be
monstrous to refer to the 40,000-plus domestic highway deaths we accept each
year because the mobility and autonomy of the car are evidently worth that
high price? ... What are the effects on the American idea of Guantánamo, Abu
Ghraib, PATRIOT Acts I and II, warrantless surveillance, Executive Order
13233, corporate contractors performing military functions, the Military
Commissions Act, NSPD 51, etc., etc.? Assume for a moment that some of these
measures really have helped make our persons and property safer—are they
worth it? --David Foster Wallace, The Atlantic, on the
trade-off between liberty and security.
Posted by Mark Thoma on Saturday, June 8, 2013 at 09:55 AM in Economics, Terrorism |
Just a quick note to say how impressed I've been with the progress that
The Toulouse School of
Economics (TSE) has made in attracting first-rate scholars to their program.
They have an excellent department -- I didn't realize how excellent it was until
I got here (which, I suppose, was part of the reason to bring me here to the TIGER forum). I talked
to Olivier Blanchard a bit about the progress that Europe more generally has
made in economics, and he told me that there were some fairly special conditions
that allowed Toulouse to make such great progress, and he also cited a few other
universities that have also made large strides (again, also due to special
conditions, in particular having advocates within the bureaucratic structure).
But, special conditions or not, it is clear that Europe is making more progress
than I was aware of, and it has attracted far more high powered brain power in
macroeconomics than I realized (it is highly probable that the same is true in
microeconomics, but since I mainly attended the macrofinance seminars at this
conference, I can't speak to that first-hand -- but all the evidence points
strongly in that direction). The sessions I attended were every bit as good as
any NBER session, and the gains that Europe is making is an encouraging
development. If the universities that have made the greatest strides continue to
be successful, then perhaps lessons will be learned and it won't be necessary to
exploit special conditions to the same degree in order for European universities
to prosper academically (though there are significant institutional hurdles).
Toulouse itself is also a wonderful place to visit, and some of the
sessions/dinners were hold in awesome places (e.g. Trichet's talk was at at the
Augustins museum). The hospitality has been unsurpassed (thanks to Paul
Seabright for all the tips about places to visit while I'm here, this is my
first time to France so I really appreciated that and am taking full advantage
of his suggestions). If you get a chance to attend this conference, go for it!
I'm looking forward to returning in 2014 (this was their first attempt, and it
will only get better in future years).
Posted by Mark Thoma on Saturday, June 8, 2013 at 09:42 AM in Economics, Universities |
Good news. TypePad says they can now "whitelist" specific commenters, so when I release your comments from here on I will also send them the info they need to add you to the list. *If* this works, it should help quite a bit.
Posted by Mark Thoma on Saturday, June 8, 2013 at 05:33 AM in Economics, Weblogs |
Posted by Mark Thoma on Saturday, June 8, 2013 at 12:03 AM in Economics, Links |
Total information awareness?, Understanding Society: I'm finding myself
increasingly distressed at this week's revelations about government
surveillance of citizens' communications and Internet activity. First was
the revelation in the Guardian of a wholesale FISA court order to
Verizon to provide all customer "meta-data" for a three-month period -- and
the clarification that this order is simply a renewal of orders that have
been in place since 2007. (One would certainly assume that there are similar
orders for other communications providers.) And commentators are now
spelling out how comprehensive this data is about each of us -- who we call,
who those people call, when, where, … This comprehensive data collection
permits the mother of all social network analysis projects -- to reconstruct
the widening circles of persons with whom person X is associated. This is
its value from an intelligence point of view; but it is also a dark,
brooding risk to the constitutional rights and liberties of all of us.
Second is the even more shocking disclosure -- also in the Guardian --
of an NSA program called PRISM that claims (based on the secret powerpoint
training document published by the Guardian) to have reached
agreements with the major Internet companies to permit direct government
access to their servers, without the intermediary of warrants and requests
for specific information. (The companies have denied knowledge of such a
program; but it's hard to see how the Guardian document could be a
simple fake.) And the document claims that the program gives the
intelligence agencies direct access to users' emails, videos, chats, search
histories, and other forms of Internet activity.
Among the political rights that we hold most basic are the rights of
political expression and association. It doesn't matter much if a government
agency is able to work out the network graph of people with whom I am
associated around the project of youth soccer in my neighborhood. But if I
were an Occupy Wall Street organizer, I would be VERY concerned about the
fact that government is able to work out the full graph of my associates,
their associates, and times and place of communication. At the least this
fact has a chilling effect on political organization and protest -- both of
which are constitutionally protected rights of US citizens. At the worst it
makes possible police intervention and suppression based on the
"intelligence" that is gathered. And the activities of the FBI in the 1960s
against legal Civil Rights organizations make it clear that agencies are
fully capable of undertaking actions in excess of their legal mandate. For
that matter, the rogue activities of an IRS office with respect to the
tax-exempt status of conservative political organizations illustrates the
same point in the same news cycle!
The whole point of a constitution is to express clearly and publicly what
rights citizens have, and to place bright-line limits on the scope of
government action. But the revelations of this week make one doubt whether a
constitutional limitation has any meaning anymore. These data collection and
surveillance programs are wrapped in tight secrecy -- providers are not
permitted to make public the requests that have been presented to them. So
the public has no legitimate way of knowing what kind of information
collection, surveillance, and intelligence activity is being undertaken with
respect to their activities. In the name of homeland security, the evidence
says that government is prepared to transgress what we thought of as
"rights" with abandon, and with massive force. (The NSA data center under
construction in Utah gives some sense of the massiveness of these data
We are assured by government spokespersons that appropriate safeguards are
in place to ensure and preserve the constitutional rights of all of us. But
there are two problems with those assurances, both having to do with
secrecy. Citizens are not provided with any account by government about how
these programs are designed to work, and what safeguards are incorporated.
And citizens are prevented from knowing what the exercise and effects of
these programs are -- by the prohibition against telecom providers of giving
any public information about the nature of requests that are being made
under these programs. So secrecy prevents the very possibility of citizen
knowledge and believable judicial oversight. By design there is no
transparency about these crucial new tools and data collection methods.
All of this makes one think that the science and technology of encryption is
politically crucial in the Internet age, for preserving some of our most
basic rights of legal political activity. Being able to securely encrypt
one's communications so only the intended recipients can gain access to them
sounds like a crucial right of self-protection against the surveillance
state. And being able to anonymize one's location and IP address -- through
services like TOR router systems -- also seems like an important ability
that everyone ought to consider making use of. Voice services like Skype
seem to be fully compromised -- Microsoft, the owner of Skype, was the first
company to accept the PRISM program, according to the secret powerpoint. But
perhaps new Internet-based voice technologies using "trust no one"
encryption and TOR routers will return the balance to the user.
Intelligence and law enforcement agencies sometimes suggest that only
people with something to hide would use an anonymizer in their interactions
on the Web. But given the MASSIVE personalized data collection that
government is engaged in, it would seem that every citizen has an interest
in preserving his or her privacy to whatever extent possible. Privacy is an
important human value in general; and it is a crucial value when it comes to
the exercise of our constitutional rights of expression and association.
Government has surely overstepped through creation of these programs of data
collection and surveillance; and it is hard to see how to put the genie back
in the bottle. One step would be the creation of much more stringent legal
limits on the data collection capacity of agencies like NSA (and commercial
agencies, for that matter). But how can we trust that those limits will be
respected by agencies that are accustomed to working in the dark?
Posted by Mark Thoma on Friday, June 7, 2013 at 02:03 PM in Economics, Technology |
In a long response to my complaint about coments and the post recommending people avoid TypePad (actually two responses after (I reactred a bitr negatively to the first), I'm told it's a top priority, blah, blah, assured it's more than lip service, and that:
We're also working on integrating Disqus as an option. That will take a lot of testing but it's in progress.
Hoping we'll get that option soon (or the spam filter begins behaving).
Posted by Mark Thoma on Friday, June 7, 2013 at 02:01 PM in Economics, Weblogs |
More of the Same, by Tim Duy: Unless you thought the job market tanked
in May, the employment report contained little if any new information. The
labor market continues to grind upward at a pace that most of us consider
subpar, but fast enough that monetary policymakers are willing to consider
pulling back on asset purchases as early as September. I don't see anything
is this report that will alter the Fed's rhetoric on tapering one way or the
other. Expect policymakers to continue to say "Not now, maybe in a few
Nonfarm payrolls rose 175k in May, just above the consensus forecast of
167k. March was revised up, April down, for a net loss of 12k compared to
previous estimates. The payroll gain was almost exactly the twelve-month
Taken in context of the Yellen indicators, tough to say that much has
The unemployment rate did tick up as the labor force rose. In theory, a
rapid rise in labor force participation could dissuade the Fed from tapering
as it would push back the expected date
of hitting the 6.5% unemployment threshold. But the little gain in this
month's report would be considered just noise at this point.
Other labor market indicators are generally holding their previous trends,
for better or worse:
The lack of wages gains is a disappointment and a clear signal that plenty
of slack remains in the labor market. That slack is revealed in
underemployment indicators, which remain elevated and making only gradual
A hint of good news in the decline of those not in the labor force, but
available for work. Perhaps an early sign of a more general acceleration in
labor markets? Too early to tell, but something to watch.
Bottom line: An unexciting report. Little to change the view that the
economy continues to shuffle forward despite the numerous negative shocks
since the recovery began. At best, some hints of future strength in the
labor force gains. Overall, little reason to believe the employment report
will alter thinking on Constitution Ave.
Posted by Mark Thoma on Friday, June 7, 2013 at 08:28 AM in Economics, Fed Watch, Monetary Policy, Unemployment |
Why are many Republican-dominated states opting out of Obamacare's federally financed expansion of Medicaid?:
The Spite Club, by Paul Krugman, Commentary, NY Times: House
Republicans have voted 37 times to repeal ObamaRomneyCare... Nonetheless,
almost all of the act will go fully into effect at the beginning of next
There is, however, one form of obstruction still available to the G.O.P.
Last year’s Supreme Court decision upholding the law’s constitutionality
also gave states the right to opt out of one piece of the plan, a federally
financed expansion of Medicaid. Sure enough, a number of
Republican-dominated states seem set to reject Medicaid expansion, at least
And why would they do this? ... The ... only way to understand the refusal to expand Medicaid is as an act
of sheer spite. And the cost of that spite won’t just come in the form of
lost dollars; it will also come in the form of gratuitous hardship for some
of our most vulnerable citizens. ...
A new study from the RAND Corporation ... examines the consequences if 14
states whose governors have declared their opposition to Medicaid expansion
do, in fact, reject the expansion. The result ... would be a huge financial
hit: the rejectionist states would lose more than $8 billion a year in
federal aid, and would also find themselves on the hook for roughly $1
billion more to cover the losses hospitals incur when treating the
Meanwhile, Medicaid rejectionism will deny health coverage to roughly 3.6
million Americans, with essentially all of the victims living near or below
the poverty line. And since past experience shows that Medicaid expansion is
associated with significant declines in mortality, this would mean a lot of
avoidable deaths: about 19,000 a year, the study estimated.
Just think about this... It’s one thing when politicians refuse
to spend money helping the poor and vulnerable; that’s just business as
usual. But here we have a case in which politicians are, in effect, spending
large sums, in the form of rejected aid, not to help the poor but to hurt
And ... it doesn’t even make sense as cynical politics. ... What it might do
... is drive home to lower-income voters — many of them nonwhite — just how
little the G.O.P. cares about their well-being, and reinforce the already
strong Democratic advantage among Latinos, in particular.
Rationally, in other words, Republicans should accept defeat on health care,
at least for now, and move on. Instead, however, their spitefulness appears
to override all other considerations. And millions of Americans will pay the
Posted by Mark Thoma on Friday, June 7, 2013 at 02:45 AM in Economics, Health Care, Politics |
Posted by Mark Thoma on Friday, June 7, 2013 at 12:03 AM in Economics, Links |
I just let Typepad know that the comment situation is unacceptable. They need to allow me to approve commenters by IP so this doesn't happen, fix it themselves, or I am going to have to switch to a new blog provider. I can't take this much longer.
For now, if you are thinkig of starting a blog, I'd recommend something other than Typepad.
Posted by Mark Thoma on Thursday, June 6, 2013 at 06:38 AM in Economics, Weblogs |
The Hidden Jobless Disaster, by Edward Lazear, Commentary, WSJ: The ...
unemployment rate is not the best guide to the strength of the labor market,
particularly during this recession and recovery. Instead, the Fed and the
rest of us should be watching the employment rate. There are two reasons.
First, the better measure of a strong labor market is the proportion of the
population that is working, not the proportion that isn't. ... By this
measure, the labor market's health has barely changed over the past three
Second... Every time the unemployment rate changes, analysts and reporters
try to determine whether unemployment changed because more people were
actually working or because people simply dropped out of the labor market
entirely, reducing the number actively seeking work. The employment
rate—that is, the employment-to-population ratio—eliminates this issue by
going straight to the bottom line...
While the unemployment rate has fallen over the past 3½ years, the
employment-to-population ratio has stayed almost constant at about 58.5%,
well below the prerecession peak. ...
The U.S. is not getting back many of the jobs that were lost during the
recession. At the present slow pace of job growth, it will require more than
a decade to get back to full employment defined by prerecession standards.
No problems so far, but the next part goes off the rails:
Why have so many workers dropped out of the labor force and stopped actively
seeking work? Partly this is due to sluggish economic growth. But research
by the University of Chicago's Casey Mulligan has suggested that because
government benefits are lost when income rises, some people forgo poor jobs
in lieu of government benefits—unemployment insurance, food stamps and
disability benefits among the most obvious. ...
These disincentives to seek work may also help explain the unusually high
proportion of the unemployed who have been out of work for more than 26
If the Mulligan story doesn't hold, then the conclusion about QE below
doesn't hold either (notice the qualifier "may" in Lazear's statement
"disincentives to seek work may also help explain the unusually high proportion
of the unemployed")
The Fed may draw two inferences from the experience of the past few years.
The first is that it may be a very long time before the labor market
strengthens enough to declare that the slump is over. The lackluster job
creation and hiring that is reflected in the low employment-to-population
ratio has persisted for three years and shows no clear signs of improving.
The second is that the various programs of quantitative easing (and other
fiscal and monetary policies) have not been particularly effective at
stimulating job growth. Consequently, the Fed may want to reconsider its
decision to maintain a loose-money policy until the unemployment rate dips
We don't know what job growth would have been without fiscal policy and QE --
it could have been even worse (as many econometric examinations imply).
Why am I skeptical about the claim above? There's no evidence that I'm aware
of that shows conclusively (or at all) that the supply of workers rather than
the demand for workers is the problem. That is, with the ratio of the number of
people seeking jobs to the number of available jobs so high, how is it that jobs
are going unfilled due to social insurance programs? Do we see, for example,
wages rising as firms have trouble finding workers (because they are all
enjoying the meager benefits they get so much that there is a shortage)?
Maybe I'm missing something, but if no jobs are going unfilled, then how are
social insurance programs holding back the recovery rather than making life a
bit less miserable for those who cannot find work?
Posted by Mark Thoma on Thursday, June 6, 2013 at 02:08 AM in Economics, Social Insurance, Unemployment |
The end of an era?:
Persuasion, Great and Intimate, by David Warsh: ...The
Great Persuasion: Reinventing Free Markets Since the Depression by Angus
Burgin, of Johns Hopkins University ... is the latest of a lengthening shelf
of books by intellectual historians that seek to explain the election of
Ronald Reagan in 1980 in terms of the influence of ideas or money or both.
To most of those writing the narrative of American politics in the 1970s,
the enthusiasm for markets and reduced government that accompanied “the
Reagan revolution” (or, earlier, the deregulation of transportation, under
Jimmy Carter, or finance, under Richard Nixon and Gerald Ford), seemed to
come out of nowhere. They were expecting, per Keynes and Schumpeter, “the
end of laissez-faire.”
Burgin’s argument is that a group of market advocates formed in the late
1930s, around a discussion of Walter Lippmann’s The Good
Society, then took flight after World War II as the Mont
Pelerin Society, and subsequently influenced the evolution of postwar
economic and political thought. That thought isn’t
new, but Burgin’s is the by far the best account of the organization’s
history. The MPS was the brainchild of Austrian economist and social
philosopher Friedrich von Hayek, then in the process of relocating from
London to Chicago. He intended the organization to be “something
halfway between a scholarly association and a political society.”
Thirty nine persons attended its first meeting, in April 1947, at a mountain
hotel near Vevey, Switzerland, on the north shore of Lake Geneva, not far
Among them were
economists (Hayek, Lionel Robbins, Maurice Allais, Fritz Machlup, Ludwig von
Mises, Frank Knight, Milton Friedman, George Stigler, Aaron Director);
philosophers (Karl Popper, Michael Polanyi, Bertrand de Jouvenal);
journalists (Henry Hazlitt, John Davenport); and activists (Leonard Read and
representatives of the Volker Fund, the Kansas City, Mo., foundation that
bankrolled the Americans’ participation) – a regular Who’s Who of young men
(only one woman, British historian Veronica
Wedgewood, was included). They would become influential theorists of the
turn towards markets.
Burgin, a historian, shows that from the beginning the group comprised two
factions, European traditionalists and American upstarts. The
Europeans were concerned with the difficulty of reconciling capitalism with
social traditions that had evolved over the centuries. The Americans were
not. Eventually, Burgin writes, Milton Friedman got the upper hand and
brought in “a more strident version” of market fundamentalism. His
predecessors’ work, Burgin writes, had been “ingrained with a sense of
caution at the knife’s edge of catastrophe. Friedman’s was infused with Cold
War dualisms…. Friedman’s philosophical models brooked no concessions to
communism, and the America of his time found a ready audience for a
philosophy that did not allow itself to be measured in degrees.”
For all his fascination with Friedman, Burgin does not pay much attention to
developments in economics itself. Robert Solow, of the Massachusetts
Institute of Technology, has
written that Burgin tends to endow the MPS with more significance than
it ever really has, whether within the economics profession or in the world
at large.” And surely Burgin stints the debates that gave rise to the
Mont Pelerin Society. He doesn’t mention the “calculation debate”
about the technical possibility of planning that had preoccupied the
Austrians economists since Germany’s surprisingly successful administration
of its national economy during World War I; nor the controversy over the New
Deal’s National Industrial Recovery Act of 1933, which was the background
for the Lippmann book; nor the various crises of peacetime planning that
were unfolding in Europe as the group first met.
Moreover, as a historian of ideas, Burgin ignores various more purely
experiential means of persuasion by which faith in markets was renewed in
the 1960s,’70s and ’80s. There was the success of Toyota, for example,
in improving standards of automotive quality. Then, too, the Cultural
Revolution in China and the Prague Spring of 1968 had powerful effects on
views of political economy, in both East and West; so did the US war in
Vietnam. Populism, meaning the durable sectional rivalries within the
US itself (Midwest vs. the Coasts, South vs. North) played a role as well.
So did rivalries between the United States and Europe.
For my money, Burgin’s real find (apparently for his, too, since his book
ends with an account of it) is a 1988 essay by Milton and Rose Friedman (his
economist wife and collaborator) tucked away in a Hoover Institution
volume, Thinking About America: The United States in the 1990s. In “The Tide
in the Affairs of Men,” they discerned a tendency of powerful social
movements to begin as works of opinion, spread eventually to the conduct of
policy, then generate (often) their own reversal, only to be succeeded by
another tide. The Friedmans discerned three such movements in the past 250
years – a laissez-faire or Adam Smith tide, beginning in 1776 and lasting
until around 1883 in Britain and the United States (with policy lagging:
1820-1900 in Britain, 1840-1930 in the US); a Welfare State or Fabian
tide, beginning around 1883 and lasting until 1950 in Britain and 1970 in
the US (policy tide 1900-1978 in Britain, 1930-1980 in the US); and a
resurgence of free markets or Hayek tide, beginning around 1950 in Britain
and 1980 in the US, whose opinion phase was “approaching middle age” and
whose policy phase twenty-five years ago was “still in its infancy.”
This is standard cycle theory, familiar to readers of Ralph Waldo Emerson,
Henry Adams, Arthur Schlesinger Sr. and Jr, Albert Hirschman and a host of
others, unexceptional except insofar as it portends, even in the Friedmans’
view, not exactly the end of laissez-faire, but the beginning of some new
tide of emphasis on the social. Burgin doesn’t make much of it except
to note that, at the height of the financial crisis, in the autumn of 2008,
“commentators on both sides of the political aisle declared that a long era
in American political history was drawing to a close.” ...
Posted by Mark Thoma on Thursday, June 6, 2013 at 01:28 AM in Economics |
A paper I need to read:
Complexity and Monetary Policy, by Athanasios Orphanides and Volker Wieland,
CFS Working Paper: Abstract
The complexity resulting from intertwined uncertainties regarding model
misspecification and mismeasurement of the state of the economy defines the
monetary policy landscape. Using the euro area as laboratory this paper
explores the design of robust policy guides aiming to maintain stability in
the economy while recognizing this complexity. We document substantial
output gap mismeasurement and make use of a new model data base to capture
the evolution of model specification. A simple interest rate rule is
employed to interpret ECB policy since 1999. An evaluation of alternative
policy rules across 11 models of the euro area confirms the fragility of
policy analysis optimized for any specific model and shows the merits of
model averaging in policy design. Interestingly, a simple difference rule
with the same coefficients on inflation and output growth as the one used to
interpret ECB policy is quite robust as long as it responds to current
outcomes of these variables.
Posted by Mark Thoma on Thursday, June 6, 2013 at 01:19 AM in Academic Papers, Economics, Monetary Policy |
Posted by Mark Thoma on Thursday, June 6, 2013 at 12:03 AM in Economics, Links |
Falling Inflation Expectations, by Tim Duy: I had thought that early iterations of quantitative easing were flawed
because they were based on a fixed amounts of total purchases. The size and
length of the programs were effectively arbitrary as they were not linked to
economic outcomes. This, combined with clear indications that policymakers
desired to reduce the balance sheet as soon as possible, meant that the Fed was
not able to sufficiently affect longer term expectations about the future price
level or inflation to yield sustained improvement in economic activity.
In effect, the Fed was shooting itself in the foot with temporary programs.
I had thought that open-ended quantitative easing tied to economic outcomes
would resolve the problem of stabilizing expectations of future inflation, thus
supporting a "stronger and sustainable" recovery.
The initial gains in inflation expectations seemed to justify such optimism.
But a funny thing happened on the way to the show - inflation expectations
TIPS-measured inflation expectations began falling in March, and now stand at
pre-QE3 levels. Also telling is the Cleveland Federal Reserve Measures of
inflation expectations. Longer run expectations remain well below 2%:
and, with perhaps more important policy implications, the term structure of
expected future inflation has shifted down over the past year:
Arguably, by these measures a lot of policy has gone into accomplishing very
little. The Fed, however, will tend to take solace from the Survey of
The median is hovering near 2%, but at the bottom end of the range. So even if
financial markets are anticipating lower inflation, professional forecasters are
not. But professional forecasters really have not deviated from 2% since prior
to the crisis, whereas the Fed has seen sufficient numerous threats to price
stability to engage in repeated asset purchase programs. So one wonders how
much weight the Fed places on this measure. Or, probably more accurately, they
place more weight on this measure when it suits their purposes, such as if they
are interested in ending the asset purchase program.
Form the perspective of policy, however, I am not so confident the survey is
the best measure of inflation expectations. The Federal Reserve transmits
policy through financial markets, and if those markets are not signaling stable
or, more importantly, higher inflation expectations, then it is arguable that by
itself, quantitative easing has limited impacts on economic activity. It can
put a floor under the economy, but not accelerate activity.
Perhaps at best, quantitative easing does not cause higher inflation. At
worst, some argue it
is actually deflationary. The latter argument, however, will not get much
support at the Federal Reserve, at least not yet.
Alternatively, one could argue that the Fed can indeed affect inflation
expectations and really what is going on is that the Fed botched policy. Again.
This is the "they have some slow learners on Constitution Avenue" story.
Inflation expectations turned down in March, just when the Fed
started sending signals that tapering was on the horizon. In this story,
the Fed extrapolated a handful of data into the future and decided enough was
enough. But that data was endogenous to Fed policy, and threatening to remove
that policy once again undermined the economic outlook. In short, just by
talking about tapering in an uncertain economic environment, the Fed pulled the
plug on a successful policy.
But what should the Fed do now? Can they reverse the decline of inflation
expectations merely by ending expectations of tapering? I am somewhat doubtful;
the cat is out of the bag. They may very well have to expand asset purchases if
they want market participants to believe "no, we were just kidding."
Indeed, I suspect that at least one policymaker, current voting member St.
Louis Federal Reserve President James Bullard, would push for expanding asset
purchases given the inflation and inflation expectations data. It would be
interesting if he dissented a "hold steady" statement at the next meeting on
There will be, however, strong resistance to raising the pace of asset
purchases. Yes, I know the Fed said they could move up or down. But I think the
idea of "up" would only come after a "down." And clearly, if inflation
expectations are any guide, market participants are getting the message that
"down" is what is coming. And they are not getting that from just the hawkish
policymakers. The doves too have been getting
in on the action.
Moreover, I have to imagine that the recent market action in Tokyo has made
some policymakers a little bit nervous about the limits to quantitative easing.
The Nikkei's rise and fall seems to indicate that at some point asset purchases
do in fact become destabilizing.
My view is that asset purchases would be most effective if coupled with
fiscal stimulus. Working only through financial markets may be simply too
restrictive to yield broad-based economic improvement. It is almost as if the
Fed is trying to force a fire hose of policy through a garden hose. Keep
turning up the volume, and eventually that hose bursts. And that might be what
we are seeing in Japan.
Bottom Line: Inflation expectations are falling, and that by itself should
complicate the Fed's expectation that they can start scaling back asset
purchases at the end of the summer. But falling inflation expectations may
complicate monetary policy more broadly by revealing the limits to quantitative
easing. And Japan isn't helping.
Posted by Mark Thoma on Wednesday, June 5, 2013 at 02:12 PM in Economics, Fed Watch, Monetary Policy |
Deficit reduction as a "sacred excuse for ... cruelty":
Welfare for the Wealthy, by Mark Bittman, Commentary, NY Times: The
critically important Farm Bill is impenetrably arcane, yet as it worms its
way through Congress, Americans who care about justice ... can parse enough of it to become outraged. The legislation costs
around $100 billion annually, determining policies on matters that are
The current versions of the Farm Bill in ... the House ... is proposing $20 billion in cuts to SNAP —
equivalent ... to “almost half of all the charitable food assistance that
food banks and food charities provide to people in need.”
Deficit reduction is the sacred excuse for such cruelty, but the first could
be achieved without the second. Two of the most expensive programs are food
stamps, the cost of which has justifiably soared since the beginning of the
Great Recession, and direct subsidy payments.
This pits the ability of poor people to eat — not well, but sort of enough —
against the production of agricultural commodities. That would be a
difficult choice if the subsidies were going to farmers who could be crushed
by failure, but in reality most direct payments go to those who need them
Among them is Congressman Stephen Fincher, Republican of Tennessee, who
justifies SNAP cuts by quoting 2 Thessalonians 3:10: “For even when we were
with you, we gave you this command: Anyone unwilling to work should not
Even if this quote were not taken out of context... [there is no need] to
break a sweat countering his “argument”... 45 percent of food stamp
recipients are children, and in 2010, the U.S.D.A. reported that as many as
41 percent are working poor. ... Fincher himself [is] a hypocrite.
For the God-fearing Fincher is one of the largest recipients of U.S.D.A.
farm subsidies in Tennessee history; he raked in $3.48 million in taxpayer
cash from 1999 to 2012, $70,574 last year alone. The average SNAP recipient
in Tennessee gets $132.20 in food aid a month; Fincher received $193 a day.
Fincher is not alone in disgrace, even among his Congressional colleagues,
but he makes a lovely poster boy for a policy that steals taxpayer money
from the poor and so-called middle class to pay the rich...
Posted by Mark Thoma on Wednesday, June 5, 2013 at 08:10 AM in Budget Deficit, Economics, Social Insurance |
I am at the TIGER Forum: Economic
Growth: Challenges for Regulatory Change in Toulouse, France today (TIGER = Toulouse - Industry - Globalization - Environment - Regulation).
Lots of good speakers, e.g. Jean-Claude Trichet talks tomorrow evening.
Posted by Mark Thoma on Wednesday, June 5, 2013 at 08:01 AM in Conferences, Economics |
Posted by Mark Thoma on Wednesday, June 5, 2013 at 12:03 AM in Economics, Links |
Quick one, then I have to figure out how to get to Toulouse (missed
connection, in Paris now ... but should be able to get there ... long day so far):
Is the Information Technology Revolution Over?, by David M. Byrne, Stephen
D. Oliner, and Daniel E. Sichel, FRB: Abstract: Given
the slowdown in labor productivity growth in the mid-2000s, some have argued
that the boost to labor productivity from IT may have run its course. This
paper contributes three types of evidence to this debate. First, we show
that since 2004, IT has continued to make a significant contribution to
labor productivity growth in the United States, though it is no longer
providing the boost it did during the productivity resurgence from 1995 to
2004. Second, we present evidence that semiconductor technology, a key
ingredient of the IT revolution, has continued to advance at a rapid pace
and that the BLS price index for microprocesssors may have substantially
understated the rate of decline in prices in recent years. Finally, we
develop projections of growth in trend labor productivity in the nonfarm
business sector. The baseline projection of about 1¾ percent a year is
better than recent history but is still below the long-run average of 2¼
percent. However, we see a reasonable prospect--particularly given the
ongoing advance in semiconductors--that the pace of labor productivity
growth could rise back up to or exceed the long-run average. While the
evidence is far from conclusive, we judge that "No, the IT revolution is not
Posted by Mark Thoma on Tuesday, June 4, 2013 at 06:07 AM
How a College Education Can Close the Income Gap
The title doesn't quite capture the main topic -- it's a plea to do more to help students from low income households attend
Posted by Mark Thoma on Tuesday, June 4, 2013 at 05:49 AM in Economics, Income Distribution, Universities |
Posted by Mark Thoma on Tuesday, June 4, 2013 at 12:03 AM in Economics, Links |
Long, long travel day ahead, and to add to the fun a flight delay means I'll miss a connection in Paris (tomorrow's links may be a bit delayed), so a
quick one before departure:
Fiscal Headwinds: Is the Other Shoe About to Drop?, by Brian
Lucking and Daniel Wilson, FRBSF Economic Letter: Federal fiscal policy
during the recession was abnormally expansionary by historical standards.
However, over the past 2½ years it has become unusually contractionary as a
result of several deficit reduction measures passed by Congress. During the
next three years, we estimate that federal budgetary policy could restrain
economic growth by as much as 1 percentage point annually beyond the normal
fiscal drag that occurs during recoveries.
The current recovery has been disappointingly weak compared with past U.S.
economic recoveries. Researchers and policymakers have pointed to a number
of potential causes for this unusual weakness, including contractionary
fiscal policy. For example, Federal Reserve Vice Chair Janet Yellen (2013)
argues that three tailwinds that typically help drive strong
recoveries—investment in housing, consumer confidence, and discretionary
fiscal policy—have been absent or turned into headwinds this time.
Changes in fiscal policy have been substantial over the past two years,
including passage of the Budget Control Act of 2011, which led to
sequestration spending cuts. In addition, temporary payroll tax cuts expired
and income tax rates for higher-income taxpayers rose following passage of
the American Taxpayer Relief Act of 2012. Two important questions are how
much has federal fiscal policy been a drag on growth in the recovery to date
and to what extent will it affect growth over the next few years? Moreover,
is this fiscal drag unusual or part of the normal pattern in which
government spending tends to fall and tax collections tend to rise as
economic activity gains momentum?
In this Economic Letter, we examine these questions by estimating
what fiscal policy would be if it followed historical patterns in the
relationship between fiscal policy and the business cycle. We then compare
this historically based estimate with actual fiscal policy during the
recession and recovery to date. We also look at government projections of
fiscal policy over the next three years to see how these compare with
estimates based on the historical norm. Finally, we discuss what these
trends in federal fiscal policy imply for economic growth.
The historical norm of federal fiscal policy
Historically, fiscal policy tends to be expansionary in recessions. As
economic activity slows, tax revenue falls and government spending rises,
giving a boost to the economy. The opposite occurs during expansions, as tax
revenue rises and government spending falls. Much of this countercyclical
pattern is by design. During a recession, so-called automatic stabilizers
kick in. These are programs that boost government spending and reduce tax
receipts without explicit legislative action. For example, income taxes fall
and unemployment insurance and Medicaid automatically rise during downturns,
adding to the federal deficit and ideally stimulating economic activity.
During upturns, the process automatically reverses as spending on safety net
and income-support programs falls and tax revenue rises, trimming the
Much of the analysis of the countercyclical effects of federal fiscal policy
only takes these automatic stabilizer programs into account. For instance,
the Congressional Budget Office regularly produces estimates of the cyclical
component of the federal deficit based on automatic stabilizers (CBO 2013).
Yet, automatic programs are only part of the picture. Discretionary fiscal
policy, that is, legislated tax and spending changes, often tends to be
countercyclical. Congress commonly passes temporary tax cuts or stimulus
spending to counteract downturns. Therefore, to fully capture the cyclical
effects of government budgetary trends, we consider both automatic
stabilizers and discretionary fiscal policy.
To analyze whether recent fiscal policy has followed historical patterns, we
use a statistical model of the relationship between fiscal policy and the
business cycle based on three variables: government spending other than
interest payments, tax revenue, and the difference between the two, which is
known as the primary deficit (see Lucking and Wilson 2012). We measure these
over time as a share of gross domestic product. We measure the business
cycle using the difference between actual GDP and the CBO’s estimate of
potential GDP, which is known as the output gap.
Our model allows us to estimate what fiscal policy is likely to be at any
point in time given the state of the business cycle. We call these estimates
the historical norm since they are based on the average historical
relationship between fiscal policy and the business cycle. We can also use
this model to estimate a historical-norm level of fiscal policy in coming
years given CBO’s projections of the output gap.
Fiscal policy in the recession and the recovery
Figure 1 compares actual fiscal policy with estimates based on the
historical norm for noninterest federal spending, tax revenue, and the
primary deficit. It shows that federal fiscal policy was unusually
expansionary during the Great Recession. Federal spending grew more and tax
receipts fell more than usual, even taking into account the recession’s
severe depth and duration, and the resulting very large output gap. This
reflects both automatic stabilizers and discretionary changes in spending
and tax policy, such as the American Recovery and Reinvestment Act, the
economic stimulus program passed by Congress in 2009. As a consequence,
federal government saving in the recession fell faster—that is, the deficit
grew faster—than our historical norm would predict.
This more-expansionary-than-usual federal fiscal policy continued through
the recession and into the early part of the recovery. But in mid-2010,
fiscal policy sharply reversed course. Since then, federal fiscal policy has
been much more contractionary than normal. Spending has fallen sharply since
2011, and tax revenue has grown faster than usual given the weak recovery.
However, the larger-than-usual deficit growth early in the recovery has
offset the larger-than-usual drop in the deficit since mid-2010. As a
result, overall for the recovery, fiscal policy has been only slightly more
contractionary than the historical norm.
U.S. fiscal policy: Projections vs. historical norm
Source: Bureau of Economic Analysis, CBO, and authors’ calculations.
Measuring excess fiscal drag in the recovery
Analysts often measure the “fiscal impetus” of policy, that is, how much
policy changes contribute to real GDP growth over a given period. Positive
impetus indicates expansionary policy changes and negative impetus,
contractionary changes. Thus, fiscal impetus can be thought of as measuring
the degree to which policy is a tailwind or headwind for economic growth.
Estimating fiscal impetus has two components. The first is the change in
fiscal policy as a share of GDP. The second is the multiplier, that
is, the change in GDP caused by a given change in government spending or
taxes. Researchers do not agree on what multipliers are most accurate. Here,
we use a multiplier of one, which is near the middle of the range of
empirical estimates (see Wilson 2012). Doing so allows us to focus on the
effects of changes in fiscal policy on fiscal impetus.
Figure 1 shows our calculations of fiscal impetus based on actual and
historical-norm estimates of noninterest spending, tax revenue, and the
primary deficit. In Figure 1, the vertical line divides our results into two
periods: the recovery from mid-2009 to the end of 2012, and the three years
through the end of 2015. We refer to the difference between historical-norm
and actual fiscal impetus as the excess drag of fiscal policy. The excess
drag tells exactly how much fiscal policy is slowing the current recovery
beyond the historical norm.
Panel C of Figure 1 shows the actual and the historical-norm primary
deficits. The fiscal impetus based on both the actual and historical-norm
deficits since the start of the recovery has been identical, −0.2 percentage
point per year. In other words, federal fiscal policy has been a modest
headwind to economic growth so far in the recovery, but no more so than
usual given the weak pace of growth.
Fiscal drag in coming years
To assess whether fiscal policies might cause excess drag in the future, we
look at projections through 2015 from the CBO for the output gap, as well as
for federal spending, revenue, and the deficit. We base our calculations on
the CBO’s February 2013 outlook report, which contained scenarios both with
and without the sequestration budget cuts, rather than the most recent May
report, which omitted the scenario without sequestration. The results for
the scenario including sequestration using the May projections are very
similar to those based on the February projections.
While our estimates show that fiscal policy has held back the recovery
slightly to date, the effect over the next three years looks much bigger.
The CBO projects that the federal deficit as a share of GDP will drop 1.4
percentage points per year over the next three years. This projection would
ease slightly to 1.2 percentage points per year if sequestration spending
cuts were reversed. By contrast, our calculation of the historical-norm
deficit decline through 2015 is 0.4 percentage point per year based on the
CBO’s output gap projections. This implies that the excess drag from the
rapidly shrinking deficit would reduce real GDP growth annually by between
0.8 and 1.0 percentage point, depending on whether sequestration is
reversed. Thus, with or without sequestration, fiscal policy is expected to
be a much greater drag on economic growth over the next three years than it
has been so far.
Surprisingly, despite all the attention federal spending cuts and
sequestration have received, our calculations suggest they are not the main
contributors to this projected drag. The excess fiscal drag on the horizon
comes almost entirely from rising taxes. Specifically, we calculate that
nine-tenths of that projected 1 percentage point excess fiscal drag comes
from tax revenue rising faster than normal as a share of the economy. As
Panel B shows, at the end of 2012, taxes as a share of GDP were below both
their historical norm in relation to the business cycle and their long-run
average of about 18%. However, over the next three years, they are projected
to rise much faster than our estimate of the usual cyclical pattern would
indicate. The CBO points to several factors underlying this “super-cyclical”
rise, including higher income tax rates for high-income households, the
recent expiration of temporary Social Security payroll tax cuts, and new
taxes associated with the Obama Administration’s health-care legislation.
Federal fiscal policy has been a modest headwind to economic growth so far
during the recovery. This is typical for recovery periods and in line with
the historical relationship between the business cycle and fiscal policy.
However, CBO projections and our estimate based on the countercyclical
history of fiscal policy suggest that federal budget trends will weigh on
growth much more severely over the next three years. The federal deficit is
projected to decline faster than normal over the next three years, largely
because tax revenue is projected to rise faster than usual. Given reasonable
assumptions regarding the economic multiplier on government spending and
taxes, the rapid decline in the federal deficit implies a drag on real GDP
growth about 1 percentage point per year larger than the normal drag from
fiscal policy during recoveries.
Congressional Budget Office. 2013. “The
Effects of Automatic Stabilizers on the Federal Budget as of 2013.” Report,
Lucking, Brian and Daniel Wilson. 2012. “U.S.
Fiscal Policy: Headwind or Tailwind?” FRBSF Economic Letter 2012-20
Wilson, Daniel. 2012. “Government
Spending: An Economic Boost?” FRBSF Economic Letter 2012-04
Yellen, Janet. 2013. “A
Painfully Slow Recovery for America’s Workers: Causes, Implications, and the
Federal Reserve’s Response.” Remarks at the “A Trans-Atlantic Agenda for
Shared Prosperity,” conference sponsored by the AFL-CIO, Friedrich Ebert
Stiftung, and IMK Macroeconomic Policy Institute, Washington, DC (February
Posted by Mark Thoma on Monday, June 3, 2013 at 04:15 PM
One more from Tim Duy:
More Tapering Talk, by Tim Duy: Despite
the soft ISM number this morning, two Federal Reserve policymakers
reiterated their expectation that asset purchases will slow in the months ahead.
First up is Atlanta Federal Reserve President Dennis Lockhart, who was on the
speaking circuit today. Via the
Wall Street Journal:
“We are approaching a period in which an adjustment to the asset purchase
policy can be considered,” Mr. Lockhart said in the interview. Referring to
coming Fed policy meetings, he said of a potential slowing in the purchases:
“Whether that’s June, August, September or later in the year, to me, isn’t
really the issue,” even as he acknowledged, “It’s the issue for the
Of course, June is probably out of the question:
It would be too soon to pull back now, Mr. Lockhart said. “I don’t think
that as of today we have a set of conditions that absolutely justify an
adjustment,” he explained. While the official suggested the most likely
direction would be to slow the buying from its current pace, he said he
doesn’t have “a fixed sense” of how the Fed should slow down on the buying.
No, June is too early - they are waiting for more jobs data before making a
move. Lockhart is also selling the story that less is not really less:
If the Fed does slow the pace of its bond buying, “this is not a decisive
removal of accommodation. This is a calibration to the state of the economy
and the outlook. It is not a big policy shift, and I would hope the markets
understand that,” Mr. Lockhart said.
I know that the Fed does not want market participants to associate a slowing
of asset purchases with tighter policy. I am not sure, however, that it will be
easy to persuade Wall Street otherwise. After all, if the Fed wanted looser
policy, they would increase the pace of asset purchases. If more is "looser,"
then why isn't less "tighter?" Alternatively, is "less accommodative" really
different from "tighter"?
Lockhart adds this:
The central banker acknowledged that markets are struggling with the
issue, and he said any perception that the Fed has been sending mixed
messages is mainly a function of the complexity of the ongoing debate Fed
officials are having about the issue. But he also cautioned market
participants not to get ahead of themselves in trying to divine the
Isn't that one of the jobs of market participants? To engage in various
trading strategies based on the expected path of, among other things, monetary
policy? After all, that seems to be the primary reason for the intense interest
Separately, San Francisco Federal Reserve President also reiterated his
expectation that policy would be making a shift sooner or later. Again, via the
Wall Street Journal:
“If the forecast goes as I hope and we see continuing good signs from the
labor market [and] overall economic conditions [and] continued confidence in
that forecast of substantial improvement, I could see, my own view is that
as early as this summer [there could be] some adjustment, maybe modest
adjustment downward, in our purchase program,” San Francisco Fed President John
Williams told reporters on the sidelines of a conference here.
The outlook is of course data dependent. At the current pace of data flow,
however, policymakers have their eye on tapering. Williams also makes some
comments on inflation, via
Williams noted that underlying inflation was at 1 percent, below the
Fed's target of 2 percent. Speaking on the sidelines of a seminar in the
Swedish capital, he said he saw temporary factors as being the main reason
inflation was being held low and expected the inflation rate to return to 2
Still, it was one of the factors the Fed should watch when deciding on
policy, he said.
"If we see continued low inflation and, more worrisome, a fall in
long-term inflation expectations, well below 2 percent, then those would be
factors that argue for, all else equal, greater total purchases for our
program than otherwise," he said.
If the employment outlook holds steady, but price trends conspire to put the
Fed's inflation forecast in jeopardy, expect the Fed to push back the timing of
a policy shift.
Bottom Line: Fed is looking to pull back on asset purchases. They expect
the data to give them room to do so.
Posted by Mark Thoma on Monday, June 3, 2013 at 03:08 PM in Economics, Fed Watch, Monetary Policy |
Slow Start, by Tim Duy: ISM data came in on the soft side this morning,
with a sub-50 reading:
I would be a little cautious about saying that "manufacturing is
contracting" based on a diffusion index. That said, the headline number
suggests overall weakness. What is the source of that weakness? I think
once again the external sector is a drag. While new orders were down
exports orders were down sharply:
But note that import orders held their ground:
Import orders should be a reflection of domestic demand. The steady reading
in those suggests that manufacturing weakness in the headline numbers stems
from external sources which has not yet filtered broadly into the domestic
That, at least, is the optimistic view. Also more optimistic was the 52.3
manufacturing number from the competing
Markit report. But optimism aside, put this morning's ISM report under
the "delay tapering" column.
Posted by Mark Thoma on Monday, June 3, 2013 at 01:21 PM in Economics, Fed Watch, Monetary Policy |
All the hand-wringing you hear over the cost of social insurance programs
such as Medicare and Social Security is a ploy from the right designed to get
you to support cuts -- don't fall for it:
The Geezers Are All Right, by Paul Krugman, Commentary, NY Times: Last
month the Congressional Budget Office released its
much-anticipated projections for debt and deficits, and there were cries of
lamentation from the deficit scolds who have had so much influence on our
policy discourse. The problem, you see, was that the budget office numbers
looked, well, O.K... But if you’ve built your career around proclamations of
imminent fiscal doom, this definitely wasn’t the report you wanted to see.
Still... Doesn’t the rising tide of retirees mean that Social Security and
Medicare are doomed unless we radically change those programs now now now?
To be fair, the reports of the Social Security and Medicare trustees
released Friday do suggest that America’s retirement system needs some
significant work. The ratio of Americans over 65 to those of working age
will rise inexorably over the decades ahead, and this will translate into
rising spending on Social Security and Medicare as a share of national
But the numbers aren’t nearly as overwhelming as you might have imagined,...
the data suggest that we can, if we choose, maintain social insurance as we
know it with only modest adjustments. ...
So what are we looking at here? The latest projections show the combined
cost of Social Security and Medicare rising by a bit more than 3 percent of
G.D.P. between now and 2035, and that number could easily come down with
more effort on the health care front. Now, 3 percent of G.D.P. is a big
number, but it’s not an economy-crushing number. The United States could,
for example, close that gap entirely through tax increases, with no
reduction in benefits at all, and still have one of the lowest overall tax
rates in the advanced world.
But haven’t all the great and the good been telling us that Social Security
and Medicare ... are unsustainable, that they must be totally revamped — and
made much less generous? Why yes, they have; they’ve also been telling us
that we must slash spending right away or we’ll face a Greek-style fiscal
crisis. They were wrong about that, and they’re wrong about the longer run,
The truth is that the long-term outlook for Social Security and Medicare,
while not great, actually isn’t all that bad. It’s time to stop obsessing
about how we’ll pay benefits to retirees in 2035 and focus instead on how
we’re going to provide jobs to unemployed Americans in the here and now.
Posted by Mark Thoma on Monday, June 3, 2013 at 12:24 AM in Economics, Social Insurance |
On September. by Tim Duy: We are heading into a big data week, beginning
with ISM and culminating with the employment report for May. As I believe
the Fed is seriously looking at September to pull back on QE, I will be
looking for data that pushes that timing off to December. The employment
report is the most important release of course, not just for what nonfarm
payrolls tell us about "stronger and sustainable," but also the unemployment
rate. The latter is the specific concern of the threshold condition for
reviewing the stance of interest rates, but it is also a concern for the
pace of asset purchases. The faster we are moving toward 6.5%, the sooner
policymakers will want to pull the plug on QE.
Consider the path of unemployment:
Unemployment is declining at a very steady pace, and at that pace will hit
the 6.5% threshold in September of 2014. To be sure, past performance is no
guarantee of future performance. We may see, for example, the long-awaiting
return to rising labor force participation rates. But we could also see an
acceleration in job growth, perhaps sufficient to more than offset any
increase in labor force participation, and thus the unemployment rate falls
faster than anticipated. A safe bet, however, is more of the same steady
decline in rates that we have seen since 2010.
The Fed, I suspect, wants to conclude asset purchases well before they hit
the 6.5% threshold and have to make a decision about interest rates. That will take at least three months, but they would probably error on the side of caution
and shoot for six months out. That suggests they would like to wind down
quantitative easing by March of 2014. Assume further that they do not want
to go cold turkey, but rather reduce the pace of purchases across multiple
meetings, maybe slowly at first, but more quickly later. So you need about
6 months, or 4 meetings, to wind down asset purchases. That pretty much
pushes you back to the September meeting of this year.
To be sure, everything is data dependent. But my point is that the calendar
is probably a driving force in timing the end of QE. Just estimate when the
unemployment rate will hit 6.5%, work backwards, and it becomes evident why
so many Fed officials appear to be leaning toward ending quantitative easing
sooner rather than later.
But, you wisely say, but what about inflation? Because inflation is clearly
not a problem - or, more specifically, high inflation is not a problem.
Arguably low inflation is a problem:
Clearly trending down and away from the Fed's definition of price stability,
or 2% inflation. Smoking gun, you say. The Fed can't think about backing
off QE with inflation trending down.
Perhaps. But let me offer another interpretation. Consider the claim that
the failure of inflation to fall further was taken by some as evidence that
the economy was near potential output, and that much of the unemployment was
structural. The counterargument was that downward nominal wage rigidities
keep a floor on wage gains, and thus there is a floor on inflation as well.
Thus, the failure of inflation to fall even further, or tip into deflation,
tells us little about structural unemployment.
Indeed, the fact that inflation has fallen even as unemployment rates come
down is further evidence that structural unemployment was limited. Score
one for the importance of downward nominal wage rigidities.
But now those rigidities become a double-edged sword. Policymakers can be
relatively confident that deflation will not emerge even when the economy is
faced with substantially unemployment gap. Consequently, there is very
little chance of deflation, inflation expectations are thus well-anchored,
and there is no reason that low inflation should dissuade the Fed from
slowing the pace of asset purchases as long as we continue to see "stronger
and sustainable" improvement in labor markets.
By extension, policymakers will have an asymmetric response to inflation
because they see a lower bound on the downside, but no such bound on the
upside. But we can come back to that when rising inflation is a problem.
But what if inflation falls even further? There must be some non-negative
rates that prompts additional easing, or, at a minimum, a halt to efforts to
reduce asset purchases? Yes, one would be rational to believe that the Fed
pushes any policy shift back to December if inflation continues to decline.
That said, however, I think you are also still in the world of costs and
benefits, and here I will hazard another another conjecture: If I was an
monetary policymaker, and I were to look at some of the crazy volatility in
Japan, I might reasonably conclude that yes, there may be a point where the
destabilizing impacts outweigh the benefits. And the benefits to further
action may be very limited considering that the steady decline in the
unemployment rate suggests that monetary policy can put a floor under the
economy, but may not be able to further lift the pace of activity.
Bottom Line: As always, the data will drive the Fed's next move. My
expectation is that data evolves in such a way that policy will shift in
September. I think there is currently a bias toward ending QE, so I
anticipate a willingness of policymakers to focus on stronger numbers and
downplay the importance of weaker numbers. In other words, I think we need
to see some reasonably big downside misses to push policy back to December
or later. Policymakers will be watching the unemployment rate, realizing
that it has steadily declined despite a number of negative shocks since the
recession ended. Expectations of continued declines help focus policymakers
on winding down by the end of this year or early next year. If they want to
meet that goal while not cutting asset purchases abruptly, then they will
need to begin sooner than later. Hence why September comes into focus.
Posted by Mark Thoma on Monday, June 3, 2013 at 12:15 AM in Economics, Fed Watch, Monetary Policy |
Posted by Mark Thoma on Monday, June 3, 2013 at 12:03 AM in Economics, Links |
Is this a clue about Bernanke's plans for the future (i.e. if he wants to be
renewed as Fed chair)?:
I wrote recently to inquire about the status of my leave from the
It's in the introduction to a
graduation speech he gave at Princeton. Calculated Risk
comments: on a different passage:
I enjoyed this speech, but Bernanke's comment that "careful economic
analysis ... can help kill ideas that are completely logically inconsistent
or wildly at variance with the data" is at odds with the sequestration
budget cuts, "debt ceiling" nonsense, expansionary austerity, and more. I
wish data and careful analysis could actually kill bad ideas, but I'm not
sure what Paul Ryan would do with his life.
Yep. [Update: I probably should have noted that, for the most part, the speech has been widely praised.]
Update: On his inquiry about leave from Princeton, not sure when this footnote was added, but I just noticed it:
Note to journalists: This is a joke. My leave from Princeton expired in
Posted by Mark Thoma on Sunday, June 2, 2013 at 12:27 PM in Economics, Monetary Policy |
Senator Bernie Sanders:
We must not accept this economic 'new normal', by Bernie Sanders,
guardian.co.uk: The front pages of American newspapers are filled with
stories about how the US economy is recovering. ... But in the midst of this
slow recovery, we must not accept a "new normal".
We must not be content with an economic reality in which the middle class of
this country continues to disappear, poverty is near an all-time high and
the gap between the very rich and everyone else grows wider and wider. ...
The American people get the economic realities. According to a Gallup poll,
nearly six out of 10 believe that money and wealth should be more evenly
distributed among a larger percentage of the people in the US, while only a
third of Americans think the current distribution is fair. A record-breaking
52% of the American people believe that the federal "government should
redistribute wealth by heavy taxes on the rich".
The United States Congress and the president must begin listening to the
American people. While there clearly has been some improvement in the
economy over the last five years, much more needs to be done. We need a
major jobs program which puts millions back to work rebuilding our crumbling
infrastructure. We need to tackle the planetary crisis of global warming by
creating jobs transforming our energy system away from fossil fuels and into
energy efficiency and sustainable energy.
We need to end the scandal of one of four corporations paying nothing in
federal taxes while we balance the budget on the backs of the elderly, the
children, the sick and the poor.
It would be better termed the "New Abnormal" and there's no reason to accept that it's inevitable.
Posted by Mark Thoma on Sunday, June 2, 2013 at 10:24 AM in Economics, Income Distribution, Unemployment |
Peter Dorman would like to know if he's wrong:
Why You Don’t See the Aggregate Supply—Aggregate Demand Model in the Econ
Blogosphere: Introductory textbooks are supposed to give you simplified
versions of the models that professionals use in their own work. The
blogosphere is a realm where people from a range of backgrounds discuss
current issues often using simplified concepts so everyone can be on the
But while the dominant framework used in introductory macro textbooks is
aggregate supply—aggregate demand (AS-AD), it is almost never mentioned in
the econ blogs. My guess is that anyone who tried to make an argument about
current macropolicy using an AS-AD diagram would just invite snickers. This
is not true on the micro side, where it’s perfectly normal to make an
argument with a standard issue, partial equilibrium supply and demand
diagram. What’s going on here?
I’ve been writing the part of my textbook where I describe what happened in
macro during the period from the mid 70s to the mid 00s, and part of the
story is the rise of textbook AS-AD. Here’s the line I take:
The dominant macro model, now crystallized in DSGE, is much too complex for
intro students. It is based on intertemporal optimization and general
equilibrium theory. There is no possible way to explain it to students in
their first exposure to economics. But the mainstream has rejected the old
income-expenditure models that graced intro texts in the 1970s and were, in
skeleton form, the basis for the forecasting models used back in those days. So what to do?
The solution has been to use AS-AD as a placeholder. It allows instructors
to talk about both prices and quantities in a rough market context. By
putting Y on one axis and P on another, you can locate any macroeconomic
outcome in the upper-right quadrant. It gets students “thinking like
Unfortunately the model is unsound. If you dig into it you find
contradictions that can’t be papered over. One example is that the AS curve
depends on the idea that input prices for firms systematically lag output
prices, but do you really want to argue the theoretical and empirical case
for this? Or try the AD assumption that, even as the price level and real
output in the economy go up or down, the money supply remains fixed.
That’s why AS-AD is simply a placeholder. It has no intrinsic value as an
economic model. No one uses it for policy purposes. It can’t be found in
the econ blogs. It’s not a stripped down version of DSGE. Its only role is
to occupy student brain cells until the real work of macroeconomic
instruction can begin in a more advanced course.
If I’m wrong I’d like to know before I cut off all lines of retreat.
This won't fully answer the question (many DSGE adherents deny the existence of something called an AD curve), but here are a few counterexamples. One
from today (here),
and two from the past (via Tim Duy
Update: Paul Krugman comments here.
Posted by Mark Thoma on Sunday, June 2, 2013 at 12:15 AM in Economics, Macroeconomics, Methodology |
Posted by Mark Thoma on Sunday, June 2, 2013 at 12:03 AM in Economics, Links |
My verdict on NGDP Targets:
At the beginning of the year I decided I
needed to firm up my views on nominal GDP (NGDP) targets... I
think I have now done enough to reach a tentative conclusion. I also
gave a policy talk at the Bank of England yesterday, which was a useful
incentive to get my thoughts in order.
Here is a
link to the slides from my presentation. What I first do is compare
targeting the level of NGDP to an ideal discretionary monetary policy.
That is a demanding standard of comparison, but I argue that NGDP
targets have the potential advantage over discretion that they may allow
central banks to pursue a time inconsistent policy after inflation
shocks that would otherwise be politically difficult (see this post).
More speculatively, the uncertainty for borrowers of NGDP variation may
be more costly than uncertainty over inflation, as Sheedy argues (see
Against these advantages, I see two major negatives. First, following a
shock to inflation, I think NGDP targets would hit output more than is
optimal (see here and here).
Second, if there is inflation inertia..., then targeting the level of
NGDP is welfare reducing, because it is better in that case to let
bygones be bygones. (There is a related point about ignoring welfare
irrelevant movements in non-core inflation, but that probably needs an
additional post to develop.)
So far, so typical two handed economist. But now let’s shift the
comparison to actual monetary policy, rather than some ideal. Or in
other words, how does actual policy as practiced in the UK, US and
Eurozone compare to an ideal policy? While NGDP targets may well hit
output too hard following inflation shocks (and more generally gets the short
run output inflation trade off wrong), current policy seems even worse. One
interpretation of this is that policymakers are obsessed with fighting what they
see as the last war. Outside the US this is often institutionalized by having
inflation targets... As
attitudes or institutional frameworks are unlikely to change soon,
moving to NGDP targets represent a move towards optimality.
This bias in policy is particularly unfortunate when we are at the zero
lower bound (ZLB), because unconventional monetary policy is far
less predictable and efficient. Although fiscal stimulus is likely
costly as a way of raising output at the ZLB than committing to
higher future inflation, monetary policy has to work with fiscal policy as it
is. (However policymakers have a responsibility to let the public know when
inappropriate fiscal policy is making it difficult for monetary policy to meet
With perverse fiscal policy and uncertain unconventional monetary
policy, we need to raise inflation expectations as a means of overcoming
the ZLB and raising demand. Here I agree with Christina
Romer: we need to indicate something rather more fundamental than
the kind of marginal change implied by the forward guidance we currently
have in the US and are likely to have soon in the UK. My proposal is
therefore the adoption of a target path for the level of NGDP that
monetary policy can use as a guide to efficiently achieving either the
dual mandate, or the inflation target if we are stuck with that.
NGDP would not replace the ultimate objectives of monetary policy, and
policymakers would not be obliged to try and hit that reference path
come what may, but this path for NGDP would become their starting point
for judging policy, and if policy did not move in the way indicated by
that path they would have to explain why.
To some supporters of NGDP targets this advocacy may seem a little
wimpish. Why limit NGDP to an intermediate target that can be
overridden? Given the problems with NGDP targets that I mention above,
it would I believe be foolish to force monetary policymakers to follow
them regardless. In general I think intermediate targets should never
supplant ultimate objectives, and NGDP is an intermediate target. ...
Posted by Mark Thoma on Saturday, June 1, 2013 at 11:12 AM in Economics, Monetary Policy |
Remember those predictions that we'd have runaway inflation by now?:
Little Cause for Inflation Worries, by Catherine Rampell, NYT:
Periodically I am asked whether we should worry about inflation, given how
much money the Federal Reserve has pumped into the economy. Based on the Bureau
of Economic Analysis data released Friday morning, this answer is still
The personal consumption expenditures, or P.C.E., price index, which the Fed
has said it prefers to
other measures of inflation, fell from March to April by 0.25 percent. On a
year-over-year basis, it was up by just 0.74 percent. Those figures are
quite low by historical standards...
When looking at price changes, a lot of economists like to strip out food
and energy, since costs in those spending categories can be volatile.
Instead they focus on so-called “core inflation.” On a monthly basis, core
inflation was flat. But year over year, this core index grew just 1.05
percent, which is the lowest pace since the government started keeping track
more than five decades ago. ...
Posted by Mark Thoma on Saturday, June 1, 2013 at 12:24 AM in Economics, Inflation, Unemployment |
Posted by Mark Thoma on Saturday, June 1, 2013 at 12:03 AM in Economics, Links |
Posted by Mark Thoma on Friday, May 31, 2013 at 06:54 PM in Economics, Science |
Remember all those calls from both conservatives and liberals for
(sufficiently) equal opportunity? How's that working out?:
Public colleges are often no bargain for the poor, by Renee Schoof,
McClatchy: Many public colleges and universities expect their poorest
students to pay a third, half or even more of their families’ annual incomes
each year for college, a new study of college costs has found.
With most American students enrolling in their states’ public institutions
in hopes of gaining affordable degrees, the new data shows that the net
price – the full cost of attending college minus scholarships – can be
surprisingly high for families that make $30,000 a year or less.
The numbers track with larger national trends: the growing student-loan debt
and decline in college completion among low-income students.
Because of the high net price, “these students are left with little choice
but to take on heavy debt loads or engage in activities that lessen their
likelihood of earning their degrees, such as working full time while
enrolled or dropping out until they can afford to return,” Stephen Burd
wrote in a recent report for the New America Foundation...
There's a graphic in the article that shows the "Average net annual cost of
public 4-year schools for in-state students in families earning $30,000" (scroll
over a state to see the cost). For Oregon, it's $10,701 according to their
Posted by Mark Thoma on Friday, May 31, 2013 at 11:27 AM in Economics, Income Distribution, Universities |
The other day I posted a link to an article at Spiegel titled "Austerity
About-Face: German Government to Gamble on Stimulus." Here's Gavyn Davies on
whether this is really "The beginning of the end for Eurozone austerity?":
Fiscal austerity, a concept which German Chancellor Merkel says meant
nothing to her before the crisis, may have passed its heyday in the eurozone.
this may not be the end of eurozone austerity, or even the beginning of the
end, but it is the end of the beginning.
Posted by Mark Thoma on Friday, May 31, 2013 at 11:04 AM in Economics, Fiscal Policy |
The "ugly, destructive war against food stamps":
From the Mouths of Babes, by Paul Krugman, Commentary, NY Times: ...I
usually read reports about political goings-on with a sort of weary
cynicism. Every once in a while, however, politicians do something so wrong,
substantively and morally, that cynicism just won’t cut it; it’s time to get
really angry instead. So it is with the ugly, destructive war against food
Food stamps have played an especially useful — indeed, almost heroic — role
in recent years. In fact, they have done triple duty. First, as millions of
workers lost their jobs..., food stamps ... did significantly mitigate their
misery. Food stamps were especially helpful to children...
But there’s more. ... We desperately needed (and still need) public policies
to promote higher spending on a temporary basis — and the expansion of food
stamps ... is just such a policy. Indeed, estimates from ... Moody’s
Analytics suggest that each dollar spent on food stamps in a depressed
economy raises G.D.P. by about $1.70...
Wait, we’re not done yet. Food stamps greatly reduce food insecurity among
low-income children, which, in turn, greatly enhances their chances of ...
growing up to be successful, productive adults. So food stamps are ... an
investment in the nation’s future...
So what do Republicans want to do with this paragon of programs? First,
shrink it; then, effectively kill it.
The shrinking part comes from the latest farm bill released by the House
Agriculture Committee... That bill would push about two million people off
the program. ...
These cuts are, however, just the beginning... Remember,... Paul Ryan’s
budget is still the official G.O.P. position..., and that budget calls for
converting food stamps into a block grant program with sharply reduced
spending. If this proposal had been in effect when the Great Recession
struck,... it ... would have meant vastly more hardship, including a lot of
outright hunger, for millions of Americans, and for children in particular.
Look, I understand the supposed rationale: We’re becoming a nation of
takers, and doing stuff like feeding poor children and giving them adequate
health care are just creating a culture of dependency — and that culture of
dependency, not runaway bankers, somehow caused our economic crisis.
But I wonder whether even Republicans really believe that story — or at
least are confident enough in their diagnosis to justify policies that more
or less literally take food from the mouths of hungry children. As I said,
there are times when cynicism just doesn’t cut it; this is a time to get
really, really angry.
Posted by Mark Thoma on Friday, May 31, 2013 at 12:24 AM in Budget Deficit, Economics, Politics, Social Insurance |
Posted by Mark Thoma on Friday, May 31, 2013 at 12:03 AM in Economics, Links |
I haven't read this paper, so I can't say a lot about how much confidence to
place in the results, but it did grab my attention (and I believe it's in one of
the top journals for sociology):
Labor union decline, not computerization, main cause of rising corporate
profits, EurekAlert: A new study suggests that the decline of labor
unions, partly as an outcome of computerization, is the main reason why U.S.
corporate profits have surged as a share of national income while workers'
wages and other compensation have declined.
The study, "The Capitalist Machine: Computerization, Workers' Power, and the
Decline in Labor's Share within U.S. Industries," which appears in the June
issue of the American Sociological Review, explores an important dimension
of economic inequality...
Tali Kristal, an assistant professor of sociology at the University of Haifa
in Israel ... found that from 1979 through 2007, labor's share of national
income in the U.S. private sector decreased by six percentage points. This
means that if labor's share had stayed at its 1979 level (about 64 percent
of national income), the 120 million American workers employed in the
private sector in 2007 would have received as a group an additional $600
billion, or an average of more than $5,000 per worker, Kristal said.
"However, this huge amount of money did not go to the workers," Kristal
said. "Instead, it went to corporate profits, mostly benefiting very wealthy
The question is: why did this happen?
"Some economists contend that computerization is the primary cause and that
it has increased the productivity of machines and skilled workers, prompting
firms to reduce their overall demand for labor, which resulted in the rise
of corporate profits at the expense of workers' compensation," Kristal said.
"But, if that were the case,... then labor's share should have declined in
all economic sectors, reflecting the fact that computerization has occurred
across the board in the past 30 to 40 years."
This is not the case, however... "It was highly unionized industries —
construction, manufacturing, and transportation — that saw a large decline
in labor's share of income," Kristal said. "By contrast, in the lightly
unionized industries of trade, finance, and services, workers' share stayed
relatively constant or even increased. So, what we have is a large decrease
in labor's share of income and a significant increase in capitalists' share
in industries where unionization declined, and hardly any change in
industries where unions never had much of a presence. This suggests that
waning unionization, which led to the erosion of rank-and file workers'
bargaining power, was the main force behind the decline in labor's share of
In addition to the erosion of labor unions, Kristal found that rising
unemployment as well as increasing imports from less-developed countries
contributed to the decline in labor's share.
"All of these factors placed U.S. workers in a disadvantageous bargaining
position versus their employers," said Kristal...
Posted by Mark Thoma on Thursday, May 30, 2013 at 01:22 PM in Economics, Income Distribution, Technology, Unions |
Arin Dube (via email):
Spurred by renewed interest on the topic, especially as evidenced by the
work by Kimball and Wang, I decided to finally post this short working
paper on my website that
builds on my guest
blog post from a month and half ago:
A Note on Debt, Growth and Causality: Abstract: This
note documents the timing in the relationship between the debt-to-GDP ratio
and real GDP growth in advanced economies during the post World War II
period using the Reinhart and Rogoff dataset. I first show that the
debt ratio is more clearly associated with the 5-year past average growth
rate, rather than the 5-year forward average growth rate–indicating a
problem of reverse causality. Indeed, there is little evidence of a lower
growth rate above the 90 percent threshold when using the 5-year forward
average growth rate. I use a number of simple tools to account for some of
the reverse causality in the bivariate regression–such as using forward
growth rate, instrumenting the current debt ratio with its lag, and
controlling for lagged GDP growth rates. These simple methods of
accounting for reverse causality diminish the size of the association by
between 50 and 70 percent, with the linear regression estimate
indistinguishable from zero. Finally non- and semi-parametric plots provide
visual confirmation that the relationship between debt-to-GDP ratio and
growth is essentially flat for debt ratios exceeding 30 percent when we (1)
use forward growth rates, (2) control for past GDP growth, or both.
Here's the Kimball and Wang work he mentions:
After Crunching Reinhart and Rogoff’s Data, We Found No Evidence That High Debt
Posted by Mark Thoma on Thursday, May 30, 2013 at 01:04 PM in Budget Deficit, Economics |
One more from Tim Duy:
Steady As She Goes, by Tim Duy: The BEA released revisions to Q1 GDP
numbers today, taking growth down a hair from the original 2.5% to 2.4%. Bloomberg
is claiming that the downward revision to GDP and a rise in initial
unemployment claims account for today's gain in equities. The idea is that
the weaker data will dissuade the Fed from slowing down the pace of asset
purchases this year.
It is of course dangerous to assign a cause to every fluctuation in asset
prices. In this case, I am hard pressed to see that today's data has any
meaningful impact on policy. If anything, a focus on the data over a longer
period rather than the month-to-month or quarter-to-quarter movements should
convince you that little has changed since 2010. Gross domestic product and
income in levels:
Gross domestic product and income year-over-year:
Abstracting from inventory changes, look at the remarkable consistency of
real final sales growth:
And as far as initial claims are concerned, you must have pretty sharp
eyesight to conclude that something fundamentally changed last week:
Also note the the Fed may discount soft GDP numbers in any event. Recall
the words of New York Federal Reserve President William Dudley:
“The important thing to recognize about the U.S. economy is that things
are actually improving underneath the surface,” Dudley said in the
interview. “We don’t really see that so much in the activity data yet
because of the large amount of fiscal drag.”
Policymakers are trying to look past the fiscal drag to see if it is
bleeding through to the broader economy. If not, they will conclude that
growth is set to jump next year as the fiscal impact wanes. And they want
to be ahead of the jump with respect to QE. Hence why the next few months
of data are so important.
Bottom Line: Today's data is not likely to have an impact on monetary
Posted by Mark Thoma on Thursday, May 30, 2013 at 11:24 AM in Economics, Fed Watch, Monetary Policy |
More Uncertainty?, by Tim Duy: I was reading this
Business Insider report on an analyst's mea culpa on a bad trade
when this jumped out:
Last week, we advised investors to add to their 7s/30s and 10s/30s yield
curve steepening positions with the view that Chairman Bernanke would calm
expectations for tapering by September this year – helping keep rates and
volatility low. These curves have since flattened back to the levels at
which we suggested investors enter steepeners. Given the uncertainty
Bernanke injected into the market, we suggest investors pare down positions
to more sustainable levels. At the same time, we keep to our core
steepening view. [emphasis added]
I find it curious the analyst believes that Federal Reserve Chairman Ben
Bernanke increased uncertainty. I think it was just the opposite. Prior to
Bernanke's remarks, opinion on policy was scattered among some looking for the
Fed to scale back asset purchases as early as June and as late as 2014. Bernake
narrowed that range to September as a likely date, and cleared the way for New
York Federal Reserve President WIlliam Dudley and Boston Federal Reserve
President Eric Rosengren to point us at September as well. Overall, it looks
like more, not less, certainty.
Perhaps market participants are unhappy with the path Bernanke laid out, but
that path is more obvious than it was a week ago.
Posted by Mark Thoma on Thursday, May 30, 2013 at 12:15 AM in Economics, Fed Watch, Monetary Policy |
Posted by Mark Thoma on Thursday, May 30, 2013 at 12:03 AM in Economics, Links |
This is a brief follow-up to this post from Noah Smith (see this post for the
abstract to the Marco Del Negro, Marc P. Giannoni, and Frank
Schorfheide paper he discusses):
DSGE + financial frictions = macro that works?: In my
last post, I wrote:
So far, we don't seem to have gotten a heck of a lot of a return from the
massive amount of intellectual capital that we have invested in making,
exploring, and applying [DSGE] models. In principle, though, there's no
reason why they can't be useful.
One of the areas I cited was forecasting. In addition to the studies I cited
by Refet Gurkaynak, many people have criticized macro models for missing the big
recession of 2008Q4-2009. For example, in this
blog post, Volker Wieland and Maik Wolters demonstrate how DSGE models
failed to forecast the big recession, even after the financial crisis itself had
This would seem to be a problem.
But it's worth it to note that, since the 2008 crisis, the macro profession
does not seem to have dropped DSGE like a dirty dishrag. ... Why are they
not abandoning DSGE? Many "sociological" explanations are possible, of course -
herd behavior, sunk cost fallacy, hysteresis and heterogeneous human capital
(i.e. DSGE may be all they know how to do), and so on. But there's also another
possibility, which is that maybe DSGE models, augmented by financial frictions,
really do have promise as a technology.
This is the position taken by Marco Del Negro, Marc P. Giannoni, and Frank
Schorfheide of the New York Fed. In a 2013 working paper, they demonstrate that a
certain DSGE model was able to forecast the big post-crisis recession.
The model they use is a combination of two existing models: 1) the famous and
(2007) New Keynesian model that I discussed in my last post, and 2) the
"financial accelerator" model of Bernanke,
Gertler, and Gilchrist (1999). They find that this hybrid financial New
Keynesian model is able to predict the recession pretty well as of 2008Q3! Check
out these graphs (red lines are 2008Q3 forecasts, dotted black lines are real
I don't know about you, but to me that looks pretty darn good!
I don't want to downplay or pooh-pooh this result. I want to see this
checked carefully, of course, with some tables that quantify the model's
forecasting performance, including its long-term forecasting
performance. I will need more convincing, as will the macroeconomics
profession and the world at large. And forecasting is, of course, not the
only purpose of
macro models. But this does look really good, and I think it supports my
statement that "in principle, there is no reason why [DSGEs] can't be
However, I do have an observation to make. The Bernanke et al. (1999)
financial-accelerator model has been around for quite a while. It was
certainly around well before the 2008 crisis. And we had certainly had
financial crises before, as had many other countries. Why was the Bernanke
model not widely used to warn of the economic dangers of a financial crisis?
Why was it not universally used for forecasting? Why are we only looking
carefully at financial frictions after they blew a giant gaping hole
in the world economy?
It seems to me that it must have to do with the scientific culture of
macroeconomics. If macro as a whole had demanded good quantitative results
from its models, then people would not have been satisfied with the
pre-crisis finance-less New Keynesian models, or with the RBC models before
them. They would have said "This approach might work, but it's not working
yet, let's keep changing things to see what does work." Of course, some
people said this, but apparently not enough.
Instead, my guess is that many people in the macro field were probably
content to use DSGE models for storytelling purposes, and had little hope
that the models could ever really forecast the actual economy. With low
expectations, people didn't push to improve the existing models as hard as
they might have. But that is just my guess; I wasn't really around.
So to people who want to throw DSGE in the dustbin of history, I say: You
might want to rethink that. But to people who view the del Negro paper as a
vindication of modern macro theory, I say: Why didn't we do this back in
2007? And are we condemned to "always fight the last war"?
My take on why these models weren't used is a bit different.
My argument all along has been that we had the tools and models to explain
what happened, but we didn't understand that this particular combination of
models -- standard DSGE augmented by financial frictions -- was the important
model to use. As I'll note below, part of the reason was empirical -- the
evidenced did matter (though it was not interpreted correctly) -- but the bigger
problem was that our arrogance caused us to overlook the important questions.
There are many, many "modules" we can plug into a model to make it do various
things. Need to propagate a shock, i.e. make it persist over time? Toss in an
adjustment cost of some sort (there are other ways to do this as well). Do you
need changes in monetary policy to affect real output? Insert a price, wage, or
information friction. And so on.
Unfortunately, adding every possible complication to make one grand model
that explains everything is way too hard and complex. That's not possible.
Instead, depending upon the questions we ask, we put these pieces together in
particular ways to isolate the important relationships, and ignore the more
trivial ones. This is the art of model building, to isolate what is important
and provide insight into the question of interest.
We could have put the model described above together before the crisis, all
of the pieces were there, and some people did things along these lines. But this
was not the model most people used. Why? Because we didn't think the question
was important. We didn't think that financial frictions were an important
feature of modern business cycles because technology and deregulation had mostly
solved this problem. If the banking system couldn't collapse, why build and
emphasize models that say it will? (The empirical evidence for the financial
frictions channel was a bit wobbly, and that was also part of the reason these
models were not emphasized. But that evidence was based upon normal times, not
deep recessions, and it didn't tell us as much as we thought about the
usefulness of models that incorporate financial frictions.)
Ex-post, it's easy to look back and say aha -- this was the model that would
have worked. Ex-ante, the problem is much harder. Will the next big recession be
driven by a financial collapse? If so, then a model like this might be useful.
But what if the shock comes from some other source? Is that shock in the model?
When the time comes, will we be asking the right questions, and hence building
models that can help to answer them, or will we be focused on the wrong thing --
fighting the last war? We have the tools and techniques to build all sorts of
models, but they won't do us much good if we aren't asking the right questions.
How do we do that? We must have a strong sense of history, I think, at a
minimum be able to look back and understand how various economic downturns
happened and be sure those "modules" are in the baseline model. And we also need
to have the humility to understand that we probably haven't progressed so much
that it (e.g. a financial collapse) can't happen again. History alone is not
enough, of course, new things can always happen -- things where history provides
little guidance -- but we should at least incorporate things we know can be
It wasn't our tools and techniques that failed us prior to the Great
Recession. It was our arrogance, our belief that we had solved the problem of
financial meltdowns through financial innovation, deregulation, and the like
that closed our eyes to the important questions we should have been asking. We
are asking them now, but is that enough? What else should we be asking?
Posted by Mark Thoma on Wednesday, May 29, 2013 at 03:41 PM in Economics, Macroeconomics, Methodology |
September Looking Good, by Tim Duy: Boston Federal Reserve President Eric
Rosengren, considered to be on the dovish side of the Federal Reserve,
had this to say about the outlook for monetary policy:
However, I would also say that it may be undesirable to abruptly stop
purchases, so it may make sense to consider a modest reduction in the pace
of asset purchases if we see a few months more of gradual improvement in
labor markets and improvement in the overall growth rate in the economy –
consistent, by the way, with my forecast, which is somewhat more optimistic
than that of many private forecasters.
A "few more months" I interpret as June, July, and August, which puts the
beginning of tapering at the September FOMC meeting. I think that Fed speakers
are sending pretty clear signals to prepare for a September policy change.
Some big names on Wall Street don't agree. Vincent Reinhart at Morgan
Stanley believes the data will
push the Fed back to December. The view at Goldman Sachs is
reportedly similar. To be sure, the data might cut in that direction, but I
think that the bar to tapering might be lower than believed by those looking for
a shift in December. We may believe the Federal Reserve's dual mandate argues
for a longer period of QE at its current pace, but I am thinking that for the
Federal Reserve, the dual mandate has more to do with the lift-off date from
ZIRP than the end of QE. They have tended to argue for more or less QE on the
basis of "stronger and sustainable" improvement in labor markets, and, given the
obvious shift in tone among Fed speakers, I think we have reached that
benchmark. At this point, they are just looking for a little more confirmation,
in their minds erring on the side of being "too easy."
A lot of data will be coming in the door over the next week and a half,
culminating in the all-important employment report on Friday, June 5. I think
even a moderately positive run of data will further cement a September shift.
And I think the Federal Reserve would place less weight on a weak employment
report than a strong employment report. The recent pattern of general upward
revisions argues for a asymmetrical response. Moreover, I sense they are wary
of being trapped by one weak number - I don't think they would have expanded QE
last September if they knew that job growth for August was 165k rather than
the initially reported 96k. They don't want to make that mistake again.
Bottom Line: I think the Federal Reserve is leaning toward a September
policy shift. While it is as always data dependent, I think the data will need
to be pretty weak to push the Fed to December.
Posted by Mark Thoma on Wednesday, May 29, 2013 at 01:34 PM in Economics, Fed Watch, Monetary Policy |
I just realesed 150+ comments trapped in spam (many were duplicates, I tried to only post the original comment when that happened).
Apologies for getting so far behind, and for the continuing problems with the spam filter.
Posted by Mark Thoma on Wednesday, May 29, 2013 at 12:45 PM in Economics, Weblogs |
Ezra Klein on the equality of opportunity:
No one really believes in ‘equality of opportunity’, by Ezra Klein:
...Everyone in American life professes to believe in equality of
opportunity. But nobody really believes in it. ... You can’t have real
equality of opportunity without equality of outcome. A rich parent can
purchase test prep a poor parent can’t. A rich parent can usher their
children into social networks a poor parent can’t. A rich parent can make
donations to Harvard that a poor parent can’t. ...
When people say they believe in “equality of opportunity,” they really mean
they believe in “sufficiency of opportunity.” They don’t believe all
children should start from the same place. But they believe all children
should start from a good enough place. They believe they should have decent
nutrition and functioning schools and a safe community and loving parents.
They believe they should have a chance.
The question is what they’re willing to do about that belief. Democrats who
believe in sufficiency of opportunity tend to want to spend more on health
care and education for the poor. ... They believe that the less children or
their parents need to worry about staying afloat, the more they’ll be free
to work to get ahead.
On the Republican side, Rep. Paul Ryan (Wis.) has taken the lead in arguing
that conservatives should focus on opportunity. But his approach largely
consists of cuts to the safety net. ... These are not policies required by
the finances of government. ... Rather, they’re required by Ryan’s theory of
opportunity, which is that a key problem for the poor is the transformation
of “our social safety net into a hammock, which lulls able-bodied people
into lives of complacency and dependency.” His budget reflects this
theory. According to the Center on Budget and Policy Priorities, almost
two-thirds of his cuts come from programs that serve the poor.
Helping the poor by cutting the programs they rely on is, to say the
least, a risky theory of uplift. It’s easier to see what Ryan’s plan does to
impede sufficiency of opportunity than to spread it. ...
I don't see how we can achieve equality of opportunity without some degree of
income redistribution. Republicans, of course, generally oppose income
I've obscured the point of Ezra Klein's post in the extract above, it's mostly about
whether "conservative reformers" who profess to believe in equal opportunity are
serious, or simply using the mantra of "equal opportunity" to defend the same
old policies that favor key constituencies. There are certainly people in the
Republican Party who truly believe that government intervention harms the poor,
but for the most part this looks like an excuse to pursue "you're on your own"
polices that lower taxes and favor those at the top.
[Note: I have been battling an allergic reaction for the last several days,
nothing serious but it is a big annoyance and distraction (the itchiest hives
you can imagine from head to toe along with scary tongue swelling, hands a bit
swollen, etc., no idea what causes it but Benadryl in large doses provides relief). I'm hoping it will be over soon, in the past it
has never lasted this long and I'm "itching" for it to end, but in the meantime
it's been hard to focus on blogging (or anything else) -- hence the mostly "echo
blogging" the last few days.]
Posted by Mark Thoma on Wednesday, May 29, 2013 at 12:24 PM in Economics, Income Distribution, Social Insurance |
The Real IRS Scandal, ataxingmatter: ... It does not appear to be quite so
clear that the IRS actions were either "outrageous" (as so many hopping on the
IRS "scandal" bandwagon suggest) or even "inappropriate". ...
Most of the media--which is generally right of center--has foamed at the
mouth over the "scandal", puffing it up to bigger and bigger proportions with
each day. ... A great deal of that coverage (much of it from the right)
involves super emphasis on the word "scandal" and not much emphasis on the
underlying facts of the matter.
So kudos to the New York Times for a recent story on the issue that probes
the question of politicking much more closely. Confessore & Luo, Groups
Targeted by IRS Tested Rules on Politics, New York Times (May 26, 2013). See
also Barker & Elliot,
6 things you need to know about dark money groups, Salon.com (May 27, 2013).
Here are the Times writers' descriptions of a few of the groups that applied
for C-4 status and "cried foul" about the IRS's selection of them for closer
scrutiny for politicking:
- CVFC: "its biggest expenditure [the year it applied for
C-4 status] was several thousand dollars in radio ads backing a Republican
candidate for Congress"
- Wetumpka Tea Party, Alabama: in the year it applied, it
"sponsored training for a get-out-the-vote initiative dedicated to the
'defeat of President Barack Obama' "
- Ohio Liberty Coalition: its head "sent out e-mails to
members about Mitt Romney campaign events and organized members to
distribute Mr. Romney’s presidential campaign literature"
As noted in the report, "a close examination of these groups and others
reveals an array of election activities that tax experts and former I.R.S.
officials said would provide a legitimate basis for flagging them for closer
review." That is what the IRS is supposed to do, suggesting that much of
the scandal mongering that is going on is more about furthering the
anti-tax/anti-government rightwing goal of "starving the beast" than it is about
ensuring that the law is appropriately enforced. The stakes are high,
since the ability of politicking groups to use C-4 status permits high-powered
donors and strategists to cloak their campaign activities behind the veneer of
social welfare activity.
Which is probably why of the right-wing bloviators are bloviating over this
in Congress, calling for jail time for IRS employees, calling for a special
prosecutor, insisting that this is a "scandal" along the lines of Watergate that
goes to the heart of Obama's presidency. Hogwash, folks, pure and simple.
This so-called "scandal" is just another instance of right-wing obstructionism
that is willing to sacrifice good government for maintaining or increasing
Posted by Mark Thoma on Wednesday, May 29, 2013 at 12:24 AM in Economics, Politics, Taxes |
DSGE models are "surprisingly accurate":
Inflation in the Great Recession and New Keynesian Models, by Marco Del
Negro, Marc P. Giannoni, and Frank Schorfheide: It has been argued that
existing DSGE models cannot properly account for the evolution of key
macroeconomic variables during and following the recent Great Recession, and
that models in which inflation depends on economic slack cannot explain the
recent muted behavior of inflation, given the sharp drop in output that
occurred in 2008-09. In this paper, we use a standard DSGE model available
prior to the recent crisis and estimated with data up to the third quarter
of 2008 to explain the behavior of key macroeconomic variables since the
crisis. We show that as soon as the financial stress jumped in the fourth
quarter of 2008, the model successfully predicts a sharp contraction in
economic activity along with a modest and more protracted decline in
inflation. The model does so even though inflation remains very dependent on
the evolution of both economic activity and monetary policy. We conclude
that while the model considered does not capture all short-term fluctuations
in key macroeconomic variables, it has proven surprisingly accurate during
the recent crisis and the subsequent recovery. [pdf]
Posted by Mark Thoma on Wednesday, May 29, 2013 at 12:15 AM in Academic Papers, Economics, Macroeconomics |