- John Maynard Keynes: Is the Economic System Self-Adjusting? - Brad DeLong
- GE Capital and Repatriation Taxes - EconoSpeak
- Why are interest rates so low - Ben Bernanke
- Economic consequences of gender identity - Vox EU
- The real "middle class" is even worse off than we thought - CBS News
- Bruce Bartlett's Complete History of the Laffer Curve - Brad DeLong
- A libertarian case for abolishing cash - Moneyness
- New Solutions to Old Problems - Roger Farmer
- Optimal Policy and Market-Based Expectations - FRBSF
- Economic Drags and the Outlook - Oregon Office of Economic Analysis
- Study says low wages cost US $153bn a year - FT.com
- Is College Worth It? - Marc Bellemere
- Ahead of IMF Meetings, a Look at Shifting Economic Risks - WSJ
- Intangibles assets and the labor share of income - Nick Bunker
- Documenting the Investment Slowdown - Tim Taylor
- Deflationary Pressure Seems To Be Subsiding - St. Louis Fed
- How the world reacted to the latest aid data - OECD
- Puerto Rico’s Troubling Out-Migration - Liberty Street Economics
- Cows Suck Up More Water Than Almonds - Justin Fox
Tuesday, April 14, 2015
Monday, April 13, 2015
A small part of a much longer post from David Andolfatto (followed by some comments of my own):
In defense of modern macro theory: The 2008 financial crisis was a traumatic event. Like all social trauma, it invoked a variety of emotional responses, including the natural (if unbecoming) human desire to find someone or something to blame. Some of the blame has been directed at segments of the economic profession. It is the nature of some of these criticisms that I'd like to talk about today. ...
The dynamic general equilibrium (DGE) approach is the dominant methodology in macro today. I think this is so because of its power to organize thinking in a logically consistent manner, its ability to generate reasonable conditional forecasts, as well as its great flexibility--a property that permits economists of all political persuasions to make use of the apparatus. ...
The point I want to make here is not that the DGE approach is the only way to go. I am not saying this at all. In fact, I personally believe in the coexistence of many different methodologies. The science of economics is not settled, after all. The point I am trying to make is that the DGE approach is not insensible (despite the claims of many critics who, I think, are sometimes driven by non-scientific concerns). ...
Once again (lest I be misunderstood, which I'm afraid seems unavoidable these days) I am not claiming that DGE is the be-all and end-all of macroeconomic theory. There is still a lot we do not know and I think it would be a good thing to draw on the insights offered by alternative approaches. I do not, however, buy into the accusation that there "too much math" in modern theory. Math is just a language. Most people do not understand this language and so they have a natural distrust of arguments written in it. .... Before criticizing, either learn the language or appeal to reliable translations...
As for the teaching of macroeconomics, if the crisis has led more professors to pay more attention to financial market frictions, then this is a welcome development. I also fall in the camp that stresses the desirability of teaching more economic history and placing greater emphasis on matching theory with data. ... Thus, one could reasonably expect a curriculum to be modified to include more history, history of thought, heterodox approaches, etc. But this is a far cry from calling for the abandonment of DGE theory. Do not blame the tools for how they were (or were not) used.
I've said a lot of what David says about modern macroeconomic models at one time or another in the past, for example it's not the tools of macroeconomics, it's how they are used. But I do think he leaves out one important factor, the need to ask the right question (and why we didn't prior to the crisis). This is from August, 2009:
In The Economist, Robert Lucas responds to recent criticism of macroeconomics ("In Defense of the Dismal Science"). Here's my entry at Free Exchange in response to his essay:
Lucas roundtable: Ask the right questions, by Mark Thoma: In his essay, Robert Lucas defends macroeconomics against the charge that it is "valueless, even harmful", and that the tools economists use are "spectacularly useless".
I agree that the analytical tools economists use are not the problem. We cannot fully understand how the economy works without employing models of some sort, and we cannot build coherent models without using analytic tools such as mathematics. Some of these tools are very complex, but there is nothing wrong with sophistication so long as sophistication itself does not become the main goal, and sophistication is not used as a barrier to entry into the theorist's club rather than an analytical device to understand the world.
But all the tools in the world are useless if we lack the imagination needed to build the right models. We ... have to ask the right questions before we can build the right models.
The problem wasn't the tools that macroeconomists use, it was the questions that we asked. The major debates in macroeconomics had nothing to do with the possibility of bubbles causing a financial system meltdown. That's not to say that there weren't models here and there that touched upon these questions, but the main focus of macroeconomic research was elsewhere. ...
The interesting question to me, then, is why we failed to ask the right questions. ...
Why did we, for the most part, fail to ask the right questions? Was it lack of imagination, was it the sociology within the profession, the concentration of power over what research gets highlighted, the inadequacy of the tools we brought to the problem, the fact that nobody will ever be able to predict these types of events, or something else?
It wasn't the tools, and it wasn't lack of imagination. As Brad DeLong points out, the voices were there—he points to Michael Mussa for one—but those voices were not heard. Nobody listened even though some people did see it coming. So I am more inclined to cite the sociology within the profession or the concentration of power as the main factors that caused us to dismiss these voices. ...
I don't know for sure the extent to which the ability of a small number of people in the field to control the academic discourse led to a concentration of power that stood in the way of alternative lines of investigation, or the extent to which the ideology that markets prices always tend to move toward their long-run equilibrium values caused us to ignore voices that foresaw the developing bubble and coming crisis. But something caused most of us to ask the wrong questions, and to dismiss the people who got it right, and I think one of our first orders of business is to understand how and why that happened.
Here's an interesting quote from Thomas Sargent along the same lines:
The criticism of real business cycle models and their close cousins, the so-called New Keynesian models, is misdirected and reflects a misunderstanding of the purpose for which those models were devised.6 These models were designed to describe aggregate economic fluctuations during normal times when markets can bring borrowers and lenders together in orderly ways, not during financial crises and market breakdowns.
Which to me is another way of saying we didn't foresee the need to ask questions (and build models) that would be useful in a financial crisis -- we were focused on models that would explain "normal times" (which is connected to the fact that we thought the Great Moderation would continue due to arrogance on behalf of economists leading to the belief that modern policy tools, particularly from the Fed, would prevent major meltdowns, financial or otherwise). That is happening now, so we'll be much more prepared if history repeats itself, but I have to wonder what other questions we should be asking, but aren't.
Let me add one more thing (a few excerpts from a post in 2010) about the sociology within economics:
I want to follow up on the post highlighting attempts to attack the messengers -- attempts to discredit Brad DeLong and Paul Krugman on macroeconomic policy in particular -- rather than engage academically with the message they are delivering (Krugman's response). ...
One of the objections often raised is that Krugman and DeLong are not, strictly speaking, macroeconomists. But if Krugman, DeLong, and others are expressing the theoretical and empirical results concerning macroeconomic policy accurately, does it really matter if we can strictly classify them as macroeconomists? Why is that important except as an attempt to discredit the message they are delivering? ... Attacking people rather than discussing ideas avoids even engaging on the issues. And when it comes to the ideas -- here I am talking most about fiscal policy -- as I've already noted in the previous post, the types of policies Krugman, DeLong, and others have advocated (and I should include myself as well) can be fully supported using modern macroeconomic models. ...
So, in answer to those who objected to my defending modern macro, you are partly right. I do think the tools and techniques macroeconomists use have value, and that the standard macro model in use today represents progress. But I also think the standard macro model used for policy analysis, the New Keynesian model, is unsatisfactory in many ways and I'm not sure it can be fixed. Maybe it can, but that's not at all clear to me. In any case, in my opinion the people who have strong, knee-jerk reactions whenever someone challenges the standard model in use today are the ones standing in the way of progress. It's fine to respond academically, a contest between the old and the new is exactly what we need to have, but the debate needs to be over ideas rather than an attack on the people issuing the challenges.
Cecchetti & Schoenholtz:
The mythic quest for early warnings: Economists and policymakers are on a quest. They are looking for the elixir that will protect their economies from financial crises. Their strategy is to find an indicator that provides an early warning of collapse, and then respond with preventative measures.
We think the approach of waiting for warnings is seriously flawed. The necessary information may never be in our grasp. And even if it were, our ability to respond rapidly and effectively is far from clear. Rather than treating the symptoms of illness after they start to develop, we believe the better strategy is early immunization: the more resilient the financial system, the less reliance we will have on faulty or nonexistent warnings.
To back up a bit, there are now an abundance of indices designed to measure financial system stress. ... [reviews work on scores of indicators] These findings are compelling. They tell us that forecasting systemic stress is extremely difficult and that ordinary financial market indicators efficiently summarize what information there is. ...
We do not mean to strike too harsh a tone. Having accurate measures of where we stand is extremely useful. ...
Will researchers eventually develop measures that tell us not just where we stand, but where we are going? Is the quest for early warning indicators destined to succeed? It’s possible that with more detailed data on what is going on in both financial institutions and financial markets that we will be able to anticipate big risks on the horizon. We hope so, but shouldn’t plan on it: there are important grounds for skepticism. ...
Where does this leave us? Our answer is that we have yet another reason to be skeptical of time-varying, discretionary regulatory policy. In an earlier post, we noted that the combination of high information requirements, long transmission lags and significant political resistance made it unlikely time-varying capital requirements will be effective in reducing financial vulnerabilities. Our conclusion then, which we reiterate now, is that the solution is to build a financial system that is safe and resilient all of the time, since we really never know what is coming. That means a regulatory system based on economic function, not legal form, with sufficient capital buffers to guard against all but the very worst possibilities.
In the end, a financial system that relies on an early warning indicator of imminent financial collapse seems destined to fail.
I don't think we should stop trying to find indicators that would be useful to regulators (and neither do they), just because we haven't found them yet doesn't mean no such indicators exist -- they may. But I fully agree that regulation should be based upon the state of the art, and presently we haven't found reliable indicators of forthcoming problems in financial markets.
In the upcoming presidential elections, political parties matter more than the particular candidates:
It Takes a Party, by Paul Krugman, Commentary, NY Times: So Hillary Clinton is officially running, to nobody’s surprise. And you know what’s coming: endless attempts to psychoanalyze the candidate,... endless thumb-sucking about her “positioning” on this or that issue.
Please pay no attention..., there has never been a time ... when the alleged personal traits of candidates mattered less. As we head into 2016, each party is quite unified on major policy issues — and these unified positions are very far from each other. ...
For example, any Democrat would, if elected, seek to maintain the basic U.S. social insurance programs — Social Security, Medicare, and Medicaid..., while also preserving and extending the Affordable Care Act. Any Republican would seek to destroy Obamacare, make deep cuts in Medicaid, and probably try to convert Medicare into a voucher system.
Any Democrat would retain the tax hikes on high-income Americans..., and possibly seek more. Any Republican would try to cut taxes on the wealthy ... while slashing programs that aid low-income families.
Any Democrat would try to preserve the 2010 financial reform... Any Republican would seek to roll it back...
And any Democrat would try to move forward on climate policy, through executive action if necessary, while any Republican ... would block efforts to limit greenhouse gas emissions.
How did the parties get this far apart? Political scientists suggest that it has a lot to do with income inequality. As the wealthy grow richer..., their policy preferences have moved to the right — and they have pulled the Republican Party ever further in their direction. Meanwhile, the influence of big money on Democrats has at least eroded a bit, now that Wall Street, furious over regulations and modest tax hikes, has deserted the party en masse. The result is a level of political polarization not seen since the Civil War. ...
As you can probably tell, I’m dreading the next 18 months, which will be full of sound bites and fury, signifying nothing. O.K., I guess we might learn a few things — Where will Ms. Clinton come out on ... the Trans-Pacific Partnership? ... — but the differences between the parties are so clear and dramatic that it’s hard to see how anyone who has been paying attention could be undecided even now, or be induced to change his or her mind between now and the election.
One thing is for sure: American voters will be getting a real choice. May the best party win.
- The Fed Can Be Patient About Raising Interest Rates - Alan Blinder
- Between Montgomery, Alabama, and the Stonewall Inn - David Warsh
- Macroeconomists need new tools to challenge consensus - FT.com
- Jeffrey Sachs’ Feeble Defense of David Cameron - EconoSpeak
- Who is right about the equilibrium interest rate? - Gavyn Davies
- The New Liberal Consensus Is A Force - Modeled Behavior
- UBI Caritas (the best things in life are free) - EconoSpeak
- Work makes Fritos - MaxSpeak
Sunday, April 12, 2015
- A Victory Against the Shadows - Paul Krugman
- Lessons from the 1982 Mexican Debt Crisis for Greece - Vox EU
- Do You Have to Choose Growth or Development? - Growth Economics
- Good Jobs First reveals top federal subsidy recipients - Ken Thomas
- Matter Over Mind - Paul Krugman
- Macro teaching and the financial crisis - mainly macro
- Sand Fiscal Foundations - Gloomy European Economist
Saturday, April 11, 2015
- The Laffer Swerve - Paul Krugman
- Middle Class, but Feeling Economically Insecure - NYTimes.com
- A historical look at deflation - Vox EU
- When Students Take Jobs in Finance - NYTimes.com
- End of Core Conservative Talking Point About Dodd-Frank - Rortybomb
- Creating skilled workers and higher-wage jobs - Brookings Institution
- Apple and the Self-Surveillance State - Paul Krugman
- The Defining Moment, and Hillary Rodham Clinton - Robert Reich
- The mistakes made by most development reformers - Chris Blattman
- What Causes Recessions? - Noah Smith
- The Panic of 1825 - Liberty Street Economics
Friday, April 10, 2015
"Thomas Piketty and Joseph E. Stiglitz discuss the causes of, consequences of, and remedies for inequality. With opening remarks from Clive Cowdery, George Soros, OECD Secretary General Angel Gurria, Institute President Rob Johnson and Institute Board Members Anatole Kaletsky and Lord Adair Turner."
Governments can and should step in when private markets fail to provide important goods and services:
Where Government Excels, by Paul Krugman, Commentary, NY Times: As Republican presidential hopefuls trot out their policy agendas — which always involve cutting taxes on the rich while slashing benefits for the poor and middle class — some real new thinking is happening on the other side of the aisle. Suddenly,... many Democrats have decided to break with Beltway orthodoxy, which always calls for cuts in “entitlements.” Instead, they’re proposing that Social Security benefits actually be expanded. ... Democrats finally seem to be standing up to antigovernment propaganda and recognizing ... there are some things the government does better than the private sector.
Like all advanced nations, America mainly relies on private markets ... to provide its citizens with the things they want and need, and hardly anyone ... would propose changing that. ...
Yet we also know that some things ... must be done by government. Every economics textbooks talks about “public goods” like national defense... But are public goods the only area where the government outperforms the private sector? By no means.
One classic example of government doing it better is health insurance. ... And there’s another major example...: providing retirement security. ...
In an idealized world, 25-year-old workers would base their decisions about how much to save on a realistic assessment of what they will need ... in their 70s. They’d also be smart ... in how they invested those savings...
In the real world, however, many and arguably most working Americans are saving much too little for their retirement. They’re also investing these savings badly. ...
And in the real world..., Social Security is a shining example of a system that works. ... It provides older Americans who worked hard all their lives with a chance of living decently in retirement... The only problem is that the decline of private pensions, and their replacement with inadequate 401(k)-type plans, has left a gap that Social Security isn’t currently big enough to fill. So why not make it bigger?
Needless to say, suggestions along these lines are already provoking near-hysterical reactions, not just from the right, but from self-proclaimed centrists..., calling for cuts to Social Security has long been seen inside the Beltway as a “badge of seriousness, a way of showing how statesmanlike and tough-minded you are.” ...
But true seriousness means looking at what works and what doesn’t. Privatized retirement schemes work very badly; Social Security works very well. And we should build on that success.
Larry Mishel of the EPI:
The Opportunity Dodge, The American Prospect: We think of America as the land of opportunity, but the United States actually has low rates of upward mobility relative to other advanced nations... Creating more opportunity is therefore a worthy goal. However, when the goal of more opportunity is offered instead of addressing income inequality, it’s a dodge and an empty promise—because opportunity does not thrive amid great inequalities. ...
The opportunity dodgers .... ignore that income inequality and intergenerational mobility are closely linked..., one of the most robust and long-standing social science research findings is that ... the circumstances in which children grow up ... greatly shapes educational advancement. So, promoting education solutions to mobility without addressing income inequality is ultimately playing pretend. We can’t substantially change opportunity without changing the actual lived circumstances of disadvantaged and working-class youth. ...
Acknowledging that income inequality and poverty greatly affect schooling success means we need to improve the circumstances of poor children’s lives by providing stable, adequate housing and healthy, safe environments. Decent income for their parents is essential. ...
Last, it is important to recognize that some people are always going to end up on the bottom and middle rungs since ... somebody has to be below average. Economic policy must also be concerned that low- and moderate-income families have decent incomes, health care, and retirement. The opportunity dodgers are really saying they do not care how low- and middle-income families actually live.
- Dynamic Efficiency, Private Capital, and Taxpayer... - Brad DeLong
- The robots aren’t threatening your job - The Washington Post
- Futures Markets for Babies - The Leisure of the Theory Class
- On the inherent instability of private money - Daniel R. Sanches
- Securities trading and credit supply - Vox EU
- Farmers Use Water. Get Over It. - Justin Fox
- Tea Party won’t purify market by tying the Fed’s hands - longandvariable
- Cyclically adjusted deficits and instability - mainly macro
- Secular stagnation, liquidity, and rent/price ratios - Nick Rowe
- Moderates who lean left on social ... - Environmental Economics
- The role of consumption in economic inequality - Nick Bunker
- Information equilibrium - Information Transfer Economics
- Bigotry Is Expensive - Noah Smith
Thursday, April 09, 2015
BB and the Permahawks: Ben Bernanke comes down firmly against the idea that concerns about financial instability should lead central banks to raise interest rates even in a depressed economy. Good — and I was especially pleased to see him citing the Swedish example and the Ignoring of Lars Svensson as a case study.
One odd thing, however, is that I’m not at all sure that most people — even economists — would be able to figure out who, exactly, Bernanke is arguing with. And that is, I think, an important omission. We can and should have a pure economics debate about appropriate interest rate policy; but if we’re trying to understand the political economy — and we should, because this is about getting good decisions as well as good analysis — it is definitely relevant to note that the people making the financial stability argument for higher rates are permahawks, who keep coming up with new justifications for an unchanging policy demand. ...
Anyway, I think Ben Bernanke did us a bit of a disservice by not linking to whoever it is he’s arguing with. It would help to know that John Taylor and the BIS are on the other side, because this would let readers place their position here in context with their other positions.
I really hope The Economist is right about this, but I'm a bit more pessimistic:
Economic history is dead; long live economic history?: Two years ago, in a very interesting paper, Peter Temin bemoaned the decline of economic history as a research topic at universities. He took the example of what happened at the Massachusetts Institute of Technology (MIT) to prove his point. There, the subject reached its peak in the 1970s, when three members of the faculty taught economic history. But from then it declined until economic history vanished both from the faculty and the graduate programme around 2010.
But is economic history really dead? Last weekend, Britain's Economic History Society hosted its annual three-day conference in Telford, attempting to show the subject was still alive and kicking. The economic historians present at the gathering were bullish about the future. Although the subject's woes at MIT have been echoed across research universities in both America and Europe, since the financial crisis there has been something of a minor revival.
What revival does the article have in mind?:
renewed vigour can be most clearly seen in the debates economists are now having with each other
Economic history may well be dead as a subject studied in independent academic departments, as it was at universities in the 1970s. But as a subject that is needed as part of the study of economics and the making of public policy, economic history is—and should be—very much alive.
Via Cezmi Dispinar:
Interview: Prof. Barry Eichengreen, University of California, Berkeley: Despite the similarities with the Great Depression, the policy makers’ failure to tackle the Great Recession was striking. What failures do you reckon as crucial in fundamental conceptual way?
Conceptually, the Great Moderation led to the mistaken belief that the business cycle had been tamed and additional risks could be safely taken Efficient-markets theory provided a convenient pretext for failure to address new risks created by financial innovation and to adequately regulate the shadow banking system and securitization markets. And then there was the tendency for macroeconomists to forget as many lessons of the Great Depression as they remembered.
How is it possible that the ideas of Austrian School without supporting evidence in practice still dominate the macroeconomic policy in Europe?
The answer, I think, is that the Austrian School got it half right: Hayek, Mises and others highlighted how credit booms and busts were intrinsic to the market system. The histories of the 1920s and 2000s both bear them out. But they, or at least some of their followers, then went on to endorse liquidationism as the appropriate response to these problems, which is a logical nonsequitur.
What, if at all possible, will the experience of the Great Recession change regarding economic thinking in the future?
The fact is that economic thinking changes only very slowly. Senior professors of economics, with tenure, are set in their ways. They’ve been at it too long to change how they think even in the face of evidence incompatible with their theories. Better to disregard the evidence in that case, the thinking goes.
The field changes as students graduate and new scholars influenced by the Great Recession, by historical evidence and by Big Data begin to repopulate the field, making economics a more fundamentally empirical and historical discipline. I see at least some signs that this is beginning to happen.
I am here today:
2015 Annual INET Conference
liberté, égalité, fragilitéApril 8-11, 2015 |Paris, France
PROGRAM (papers)PlenaryWednesday, April 8, 2015L’ESPACE PIERRE CARDIN1, Avenue Gabriel, 75008Paris, France______________________________________________________6.30PCocktail Reception7.00Opening RemarksRobert JohnsonAnatole KaletskyAdair TurnerGeorge SorosClive Cowdery
ProgramModerator: Clive CowderySpeakers: Angel Gurria, Thomas Piketty, and Joseph Stiglitz______________________________________________________
- A Dissent on the Importance of Non-Linear Models - Brad DeLong
- IMF Warns (Again) of Growing Shadow-Banking Risks - WSJ
- Remarks on Monetary Policy - Jerome Powell
- Diving into empty pools - OECD Insights Blog
- Why Is the "Middle Class" Stressed? - Brad DeLong
- QE, ‘European style’: Be bold but parsimonious - Vox EU
- Interview: Cecchetti and Schoenholtz - Acemaxx-Analytics
- Liquidity as static - Moneyness
- Tangles of pathology - interfluidity
Wednesday, April 08, 2015
Do You Have to Choose Growth or Development?: A number of posts/comments have been floating around the last few days that deal with the goals or the World Bank. Lant Pritchett published a piece that asks whether rich countries are in fact good partners for poor countries looking to develop. Pritchett is worried that rich-country development agencies (including the World Bank) have altered their focus from promoting overall economic development, and “defined development down” to be only about alleviating the conditions for the extremely poor – those earning less than $1 per day. ... Pritchett argues that this is to ignore the goals/values/hopes of actual people in those developing countries, who very much would like some material economic growth, please.
I’m very much on Pritchett’s side on this, with a caveat I’ll get to later in the post. I wrote a post back when I started this blog on defining development economics. I contrasted “development economics” with the “economics of poverty”. ...
Pritchett is arguing, in my mind, for the World Bank to return to thinking about growth economics, or about development in the classic sense. Looking for projects like ports, roads, energy generation, and the like. Scale-intensive activities that need someone to coordinate the investment, and investments that will not take place organically because they are essentially public goods. Things that might allow or push economies into sustained growth. ...
Acting to alleviate poverty is a noble, useful, moral activity. But you do not get sustained growth as a freebie on top of it. What Pritchett is arguing (I think. I’m putting words in his mouth here.) is that the Bank has presumed that their poverty alleviation efforts will generate growth as a byproduct. They haven’t, and most likely won’t. Growth is a distinct dimension of development different from poverty alleviation.
Now, here is my caveat to supporting Pritchett’s position. Who cares if it is specifically the World Bank that provides that infrastructure investment supporting economic growth? If the aims and goals of the World Bank have changed to poverty alleviation, fine. Let that be their focus, and the business of promoting growth can be left in the hands of other entities.
This has essentially already happened, and it isn’t clear why one should try to stop it. ... Development banks such as the Inter-American Development Bank, the African Development Bank, the Asian Development Bank, and the new bank proposed by China are all in the business of lending for large infrastructure projects. Let them.
I think Pritchett is wasting his time here, trying to turn the World Bank to a new (actually, old) heading. The Bank is a gargantuan organization, and has reached the point where self-perpetuation is as important as the actual mission. This isn’t to trash the World Bank, it’s no worse than any other large organization on this front. But if the nature of the interventions that the Bank wants to undertake has changed, so be it. Argue instead for increased funding to the existing development banks. Argue for the US to drop its opposition to the Chinese-led development bank. It may be useful or best to separate the poverty alleviation and growth-promotion, anyway. But you need both. Poverty alleviation alone is not a robust path to long-run sustained economic development.
From the St. Louis Fed blog On the Economy:
The Financial Pressures of the Middle Class: Many references to the “middle class” are based on a simplistic definition, such as the middle 50 percent of families by income or wealth. While this may be effective for discovering, for example, trends in wealth distribution over time, these definitions uncover little about the characteristics of individual middle-class families and about how these families fare over time. A recent report from the St. Louis Fed's Center for Household Financial Stability sought to provide a demographic definition of the middle class and found that the middle class may be under more financial pressure than has been otherwise reported.
Senior Economic Adviser William Emmons and Lead Policy Analyst Bryan Noeth, both with the center, noted, “Our version of the demographically defined middle class reveals that families that are neither rich nor poor may be under more downward economic and financial pressure than common but simplistic rank-based measures of income or wealth would suggest.”
Defining the Middle Class
Emmons and Noeth separated families into three groups, all headed by someone at least 40 years old:
- Thrivers, which are families likely to have income and wealth significantly above average in most year and are headed by someone with a two- or four-year college degree who is non-Hispanic white or Asian
- Middle class, which are families likely to have income and wealth near average in most year and are headed by someone who is white or Asian with exactly a high school diploma or black or Hispanic with a two- or four-year college degree
- Stragglers, which are families likely to have income and wealth significantly below average in most years and are headed by someone with no high school diploma of any race or ethnicity and black or Hispanic families with at most a high school diploma
The authors assigned black and Hispanic families with college degrees to the middle class and with high school degrees to the stragglers category due to the well-documented fact that black and Hispanic families typically have significantly lower income and wealth than their similarly educated white and Asian counterparts.
Income and Wealth
Using data from the Survey of Consumer Finances, Emmons and Noeth found that the median incomes of thrivers and stragglers were slightly higher in 2013 than in 1989, rising 2 percent and 8 percent, respectively. The middle class, however, experienced a decline in median income of 16 percent over the same period.
Regarding wealth, thrivers experienced an increase in median wealth of 22 percent over the period 1989-2013. The middle class and stragglers experienced large declines, with the median wealth of the middle class dropping 27 percent and of the stragglers dropping 54 percent over the same period.
Emmons and Noeth also examined the performance of each group relative to the population as a whole. They found that the median income of the middle class as they defined it grew 21 percent less than the overall median income from 1989 through 2013. The cumulative growth shortfall in wealth for the median demographically defined middle-class family was about 24 percent compared to overall median wealth. ...
Yunus Aksoy and Henrique Basso at Vox EU:
Demographic Structure and the Macroeconomy: The disappointing recovery after the crisis has sparked renewed interest in the medium-run outlook of advanced economies. Lower population growth and its impact on labour supply gained widespread prominence. This column takes a more general view identifying the impact of the evolution of demographic structure, or the entire age profile, on the macroeconomy. Age profile changes have significant implications for savings, investment and growth but also affect innovation activities. The population aging predicted for the next decades is found to be a significant factor in reducing output growth and real interest rates across OECD countries.
- The Fiscal Future II: Not Enough Debt? - Paul Krugman
- Should monetary policy and risks to financial stability - Ben Bernanke
- Bond bubbles - Noahpinion
- John Taylor Strikes Again - Uneasy Money
- Rand Paul and the Empty Box - Paul Krugman
- Raising Interest Rates - IGM Forum
- Economic history is dead; long live economic history? - The Economist
- It’s Hard to Lift Wages if the Fed Doesn’t Make It a Priority - NYTimes.com
- Catalyst? TTIP’s impact on the Rest - Vox EU
- Diamonds or fool's gold? - Stumbling and Mumbling
- Dani Rodrik on Growth, Development, and Modelling - Tim Taylor
- Inequality – What is to be done? - The Enlightened Economist
- Public earnings buying private firms - Updated Priors
- Economics of Love - Paul Krugman
- Secular stagnation and capital flows - Jérémie Cohen-Setton
Tuesday, April 07, 2015
I have a new column:
In Search of Better Macroeconomic Models: Modern macroeconomic models did not perform well during the Great Recession. What needs to be done to fix them? Can the existing models be patched up, or are brand new models needed? ...
It's mostly about the recent debate on whether we need microfoundations in macroeconomics.
Frank Muraca of the Richmond Fed:
How the Geography of Jobs Affects Unemployment: In postwar America, many families moved away from urban centers into the rapidly developing suburbs. Culturally, these new communities were associated with economic opportunity, signifying middle-class values and upward mobility.
The path to economic mobility is no longer a highway leading from downtown to the suburbs. For example, the number of suburban residents in poverty may now exceed the number of urban-dwellers in poverty. According to the Brookings Institution, suburban poverty rose from 10 million in 2000 to 16.5 million in 2012, compared to an increase in urban poverty from 10.4 million to 13.5 million over the same period...
This geographic picture of opportunity and wealth adds complexity to questions about whether unfortunate circumstances, such as poverty, might be determined in part by where someone lives. To be sure, where one chooses to live is about more than job opportunities, which are weighed against housing options, commuting costs, lifestyle choice, social networks, and more. In equilibrium, housing prices and wages should make households indifferent among locations. In other words, some people might choose to live far away from jobs, possibly accepting a costlier commute, because they are "compensated" by factors such as lower housing costs.
But the places where people are distributed by market forces seem to lead, in some cases, to worse labor market outcomes. An explanation of those outcomes was first identified in 1968 as an account of how black unemployment rates were elevated by discriminatory housing policies. That explanation, commonly known as the "spatial mismatch hypothesis," posits constraints on where people are able to live.
The scope of spatial mismatch research has broadened beyond discrimination. Researchers seek to understand the constraints that certain households face when deciding where to live, helping to explain phenomena like prolonged unemployment, lower wages, longer commutes, and geographically concentrated poverty. This research may shed some light on how anti-poverty programs could take geography into account to be more effective. ...
[There is quite a bit more in the article.]
Pat Higgins of the Atlanta Fed's Macroblog:
Is Measurement Error a Likely Explanation for the Lack of Productivity Growth in 2014?: Over the past three years nonfarm business sector labor productivity growth has averaged only around 0.75 percent—well below historical norms. In 2014 it was negative, as can be seen in chart 1.
The previous macroblog post by Atlanta Fed economist John Robertson looked at possible economic explanations for why the labor productivity data, taken at face value, have been relatively weak in recent years. In this post I look at the extent to which “measurement error” can account for the weakness we have seen in the data. By measurement error, I mean incomplete data and/or sampling errors that are reduced when more comprehensive data are available several years later. I do not mean the inherent difficulties in measuring productivity in sectors such as health care or information technology.
As seen in chart 1, negative four-quarter productivity growth rates have been quite infrequent in nonrecessionary periods since 1948. In S. Borağan Aruoba's 2008 Journal of Money, Credit and Banking article “Data Revisions Are Not Well Behaved,” he found that initial estimates of annual productivity growth are negatively correlated with subsequent revisions. That is, low productivity growth rates tend to be revised up while high rates tend to be revised down. This is illustrated in chart 2.
In each of the panels, points in the scatterplot represent an initial estimate of fourth-quarter over fourth-quarter productivity growth together with a revised estimate published either one or three years later. For example, the green points in each plot show estimates of productivity growth over the four quarters ending in the fourth quarter of 2011. In each plot, the x-coordinate shows the March 7, 2012, estimate of this growth rate (0.3 percent). The y-coordinate of the green dot in chart 2a shows the March 7, 2013, estimate of fourth-quarter 2011/fourth-quarter 2010 productivity growth (0.4 percent) while the y-coordinate of the green dot in chart 2b shows the March 5, 2015, estimate (0.0 percent).
In each chart, the red dashed line shows the predicted revised value of productivity growth as a function of the early estimate (using a simple linear regression). Chart 2a shows that, on average, we would expect almost no revision to the most recent estimate of four-quarter productivity growth one year later. Chart 2b, however, shows that low initial estimates of productivity growth tend to be revised up three years later while high estimates tend to be revised down. Based on this regression line, the current estimate of -0.1 percent fourth-quarter 2014/fourth-quarter 2013 productivity growth is expected to be revised up to 0.3 percent by April 2018.
The intuition for this is fairly straightforward. Low productivity growth could come about from either underestimating output growth, overestimating growth in hours worked, or a combination of the two. Which of these is most likely to occur, according to historical revisions? This is shown in chart 3, which plots the predicted revisions to four-quarter nonfarm employment growth and four-quarter nominal gross domestic product (GDP) growth conditional on two assumed values for the initial estimate of four-quarter productivity growth: 0 percent (low) and 4 percent (high).
Nominal GDP is used instead of real GDP as methodological changes to the latter (e.g., the introduction of chain-weighting starting in 1996) make an apples-to-apples comparison of pre- and post-revised values difficult. Using fourth-quarter over fourth-quarter growth rates since 1981, the diamonds on the solid lines in chart 3 show that an initial estimate of 0 percent productivity growth would, on average, be associated with a three-year upward revision of 0.39 percentage point to four-quarter nominal GDP growth and a three-year downward revision of 0.10 percentage point to four-quarter nonfarm payroll employment.
With 4 percent productivity growth, the diamonds on the dashed lines show predicted three-year revisions to nominal GDP growth and employment growth of -0.40 percentage point and 0.14 percentage point, respectively. As the chart shows, these estimates are sensitive to the sample period used to predict the revisions. Using only data since 1989 (not shown), the regression would not predict a downward revision to employment growth conditional on an initial estimate of 0 percent productivity growth. Overall, however, the plot suggests that revisions to output growth are more sensitive to initial estimates of productivity growth than revisions to payroll employment growth are. This is consistent with the sentiments expressed by Federal Reserve Vice Chairman Stanley Fischer and Atlanta Fed President Dennis Lockhart at the March 30–April 1 Financial Markets Conference that employment or unemployment data may be more reliably measured than GDP.
Nevertheless, according to charts 2 and 3, the importance of measurement error in productivity growth is fairly modest. Ex-ante, we should not expect last year's puzzlingly low productivity growth simply to be revised away.
- The Hyperbolic Case for Bigger Government - Paul Krugman
- Signs of hope for American workers - The Washington Post
- Raising Wages From the Bottom Up - American Prospect
- Intermediation in a Fragmented Market - Rajiv Sethi
- Have Long-Term Inflation Expectations Declined? - FRBSF
- A glimpse into a future of UK deflation - FT.com
- Price discrimination by big manufacturers - Vox EU
- Bond Bubbles, MMT, and Noah Smith - Brad DeLong
- Big Money Is Buying Off Criticism of Big Money - Robert Reich
- GDP and Social Welfare in the Long Run - Tim Taylor
- How the Geography of Jobs Affects Unemployment - FRB Richmond
- The Dropout Dilemma - FRB Richmond
- Zero matters - Cecchetti & Schoenholtz
Monday, April 06, 2015
Why don't voters penalize politicians for poor economic decisions?:
Economics and Elections, by Paul Krugman, Commentary, NY Times: Britain’s economic performance since the financial crisis struck has been startlingly bad. ... Yet as Britain prepares to go to the polls, the leaders of the coalition government that has ruled the country since 2010 are posing as the guardians of prosperity, the people who really know how to run the economy. And they are, by and large, getting away with it. ... Voters have fairly short memories, and they judge economic policy ... by recent growth. Over five years, the coalition’s record looks terrible. But over the past couple of quarters it looks pretty good, and that’s what matters politically. ...
This is ... a distressing result, because it says that there is little or no political reward for good policy. ... In fact, the evidence suggests that the politically smart thing might well be to impose a pointless depression on your country for much of your time in office, solely to leave room for a roaring recovery just before voters go to the polls.
Actually, that’s a pretty good description of what the current British government has done, although it’s not clear that it was deliberate.
The point, then, is that elections — which are supposed to hold politicians accountable — don’t seem to fulfill that function very well when it comes to economic policy. But can anything be done about this weakness?
One possible answer ... might be to remove economic policy making from the political sphere and turn it over to nonpartisan elite commissions. This presumes, however, that elites know what they are doing... After all, American elites spent years in the thrall of Bowles-Simpsonism, a completely misplaced obsession over budget deficits. European elites, with their commitment to punitive austerity, have been even worse.
A better, more democratic answer would be to seek a better-informed electorate. ... So reporting on economic issues could and should be vastly better. But political scientists would surely scoff at the idea that this would make much difference...
What, then, should those of us who study economic policy and care about real-world outcomes do? The answer, surely, is that we should do our jobs: Try to get it right, and explain our answers as clearly as we can. Realistically, the political impact will usually be marginal at best. Bad things will happen to good ideas, and vice versa. So be it. Elections determine who has the power, not who has the truth.
Back to Cranks: When John Makin, an economist long associated with the American Enterprise Institute, died last week, reporter Nick Timiraos gave him a gallant send-off in The Wall Street Journal: “Economist Who Elevated Think-Tank Discourse.”
Makin, 71, had long been a favorite source for serious journalists. ...
Makin’s hiring in 1984 was widely taken as a sign of AEI’s determination to buttress its reputation as a source of serious opinion-making.
A few years earlier, WSJ editorial writer Jude Wanniski had used a year in residence at AEI as a planform from which to launch his 1978 best-seller, The Way the World Works: How Economies Fail – and Succeed, one of the first in a series of works by various authors that later would be deemed “neo-conservative.”
With its twin contentions, that personal tax cuts would pay for themselves by boosting growth, and that the Smoot-Hawley Tariff Act of 1930 had caused the Great Depression, the book caused no end of embarrassment among the traditionally conservative economists at AEI.
With the election of Ronald Reagan in 1980, the AEI moved towards the center of the economic debate, hiring Makin, among others. There began in Washington what was, in retrospect, a golden age of consensus.
Congress raised taxes slightly in 1982 to prevent deficits arising from the Kemp-Roth tax cuts of the year before from spiraling out of control. In 1983 a “Gang of Nine” legislators negotiated measures advocated by the National Commission on Social Security Reform to put the US retirement system on a sound actuarial basis for another fifty years. Brandeis economist Stuart Butler floated his proposal for health-care reform – a legislated individual mandate – from the still-more conservative Heritage Foundation.
But the splintering of the conservative alliance had already begun. Wanniski, dismissed by the WSJ for political campaigning, advocated for presidential bids by US Rep. Jack Kemp (cosponsor of the 1982 tax cuts) and magazine publisher Steve Forbes. Data systems magnate H. Ross Perot ran as third- party candidate in 1992. Newt Gingrich delivered a Republican majority in the House of Representatives with his “Contract with America” in 1994. Fox News launched in October 1996. George W. Bush was inaugurated in 2001 and abruptly confused the issue.The Tea Party made its appearance in 2010.
Today the most peripatetic figure among the AEI’s roster of experts is probably attorney Peter Wallison, general counsel to the Treasury Department, 1981-85,. and White House counsel to Ronald, Reagan, 1986-87, but better known for his dissent-within-a-dissent to the Financial Crisis Inquiry Commission, 2011.
Three other Republican members of the commission – Bush administrations insiders Keith Hennessey and Douglas Holtz-Eakin and US Rep. Bill Thomas – dissented together from the majority report. They zeroed in on the financial panic that ensued after Lehman Brothers failed, Wallison felt their explanation was overly elaborate. The basic cause of the 2008 financial crisis, he argued, was simple. It was government housing policy, particularly the two giant government- sponsored enterprises, Fannie Mae and Freddie Mac, that bought mortgages from banks, savings and loan associations and other lenders,
A new book by Wallison, Hidden in Plain Sight: What Really Caused the World’s Worst Financial Crisis and Why It Could Happen Again (Encounter, 2015) extends the argument that that government policies were solely to blame, and that none of the other factors commonly cited – the flow of funds from abroad, financial deregulation, rapid innovation, shifting boundaries among firms, investors’ increased appetite for risk, lax credit- agency monitoring, the panic that followed the Lehman default – were significant contributors to the outcome. ...
Opinions about the reasons for the severity of the crisis can still be found all over the map, but they have begun to converge the center on the panic that occurred in markets for short-term funding that occurred after Lehman failed. This is the view of those who were there at the time: administration insiders Hennessey and Holtz-Eakin, expressed in the FCIC; former New York Federal Reserve Bank president Timothy Geithner, in his book Stress Test; Fed chairman Ben Bernanke, in a series of speeches and lectures...
In other words, in his single-minded emphasis on government housing policy, Wallison is way out beyond the consensus. ... He is ... a lawyer, with no sense of what constitutes a satisfying economic explanation. What makes him a crank is the affable certainty with which he asserts a partial truth explains the whole.
No sensible analyst thinks that political pandering to poor people is a sufficient explanation of the crisis. Probably not since Wanniski’s The Way the World Works has the gap been so great between a non-economist writing for a think-tank and the relevant community of professionals. John Makin stayed the course, remained well within the limits of matters on which experts can be expected to legitimately disagree. AEI has gone back to cranks. It is fairly well established by now that the GOP establishment has swung around against Tea Party thinking. If the Jeb Bush candidacy advances, it will be interesting to watch what happens in the think-tank world.
Time US leadership woke up to new economic era: This past month may be remembered as the moment the United States lost its role as the underwriter of the global economic system. ... This failure of strategy and tactics was a long time coming, and it should lead to a comprehensive review of the US approach to global economics. ...
Largely because of resistance from the right, the US stands alone in the world in failing to approve the International Monetary Fund governance reforms that Washington itself pushed for in 2009. ...
Meanwhile, pressures from the left have led to pervasive restrictions on infrastructure projects financed through existing development banks, which consequently have receded as funders, even as many developing countries now see infrastructure finance as their principle external funding need.
With US commitments unhonoured and US-backed policies blocking the kinds of finance other countries want to provide or receive through the existing institutions, the way was clear for China to establish the Asian Infrastructure Investment Bank. There is room for argument about the tactical approach that should have been taken once the initiative was put forward. But the larger question now is one of strategy. ...
What is crucial is that the events of the past month will be seen by future historians not as the end of an era, but as a salutary wake up call.
- Global growth report card: world slowdown causes concern - Gavyn Davies
- Trilemmas in capital flows, and domestic and international order - Vox EU
- Trade, Geography, and Microfoundations (Wonkish) - Paul Krugman
- Do economic inequality and political inequality go together? - Washington Post
- The Numbers That Matter Most from the Jobs Report - Mike Cassidy
- Tyler Cowen's Three-Card Monte on Inequality - Beat the Press
- How Criminals Built Capitalism - Clive Crook
- Funding the gerontocracy - Frances Woolley
Sunday, April 05, 2015
- Osbornia Revisited - Paul Krugman
- Debates about field experiments in the social sciences - Dan Little
- Banks’ home bias and public debt sustainability - Vox EU
- The True Myths on the Trans-Pacific Partnership - Beat the Press
- Do Not Fear the Shadow Chair - Carola Binder
- NK Models - Stephen Williamson
- Unsecured firm debt and the business cycle - Vox EU
- Macroeconomics = Fallacy of Composition - Cameron Murray
- How can Labour say it didn't crash the economy - mainly macro
Saturday, April 04, 2015
Simon Wren-Lewis takes a shot at answering Brad DeLong's question about microfoundations:
Do not underestimate the power of microfoundations: Brad DeLong asks why the New Keynesian (NK) model, which was originally put forth as simply a means of demonstrating how sticky prices within an RBC framework could produce Keynesian effects, has managed to become the workhorse of modern macro, despite its many empirical deficiencies. ... Brad says his question is closely related to the “question of why models that are microfounded in ways we know to be wrong are preferable in the discourse to models that try to get the aggregate emergent properties right.”...
Why are microfounded models so dominant? From my perspective this is a methodological question, about the relative importance of ‘internal’ (theoretical) versus ‘external’ (empirical) consistency. ...
I would argue that the New Classical (counter) revolution was essentially a methodological revolution. However..., it will be a struggle to get macroeconomists below a certain age to admit this is a methodological issue. Instead they view microfoundations as just putting right inadequacies with what went before.
So, for example, you will be told that internal consistency is clearly an essential feature of any model, even if it is achieved by abandoning external consistency. ... In essence, many macroeconomists today are blind to the fact that adopting microfoundations is a methodological choice, rather than simply a means of correcting the errors of the past.
I think this has two implications for those who want to question the microfoundations hegemony. The first is that the discussion needs to be about methodology, rather than individual models. Deficiencies with particular microfounded models, like the NK model, are generally well understood, and from a microfoundations point of view simply provide an agenda for more research. Second, lack of familiarity with methodology means that this discussion cannot presume knowledge that is not there. ... That makes discussion difficult, but I’m not sure it makes it impossible.
Germany's trade surplus is a problem: ...in recent years China has been working to reduce its dependence on exports and its trade surplus has declined accordingly. The distinction of having the largest trade surplus, both in absolute terms and relative to GDP, is shifting to Germany. ...
In a slow-growing world that is short aggregate demand, Germany’s trade surplus is a problem. Several other members of the euro zone are in deep recession,... and ... their fiscal situations don’t allow them to raise spending or cut taxes... Despite signs of recovery in the United States, growth is also generally slow outside the euro zone. The fact that Germany is selling so much more than it is buying redirects demand from its neighbors (as well as from other countries around the world), reducing output and employment outside Germany at a time at which monetary policy in many countries is reaching its limits.
Persistent imbalances within the euro zone are also unhealthy, as they lead to financial imbalances as well as to unbalanced growth. ...
Systems of fixed exchange rates, like the euro union or the gold standard, have historically suffered from the fact that countries with balance of payments deficits come under severe pressure to adjust, while countries with surpluses face no corresponding pressure. ...
Germany has little control over the value of the common currency, but it has several policy tools at its disposal to reduce its surplus—tools that, rather than involving sacrifice, would make most Germans better off. Here are three examples.
- Investment in public infrastructure. ...
- Raising the wages of German workers. ...
- Germany could increase domestic spending through targeted reforms, including for example increased tax incentives for private domestic investment; the removal of barriers to new housing construction; reforms in the retail and services sectors; and a review of financial regulations that may bias German banks to invest abroad rather than at home.
Seeking a better balance of trade should not prevent Germany from supporting the European Central Bank’s efforts to hit its inflation target...
...global imbalances are not only a Chinese and American issue.
- John Galt Hates Ben Bernanke - Paul Krugman
- It’s Not the Inequality; It’s the Immobility - Tyler Cowen
- Germany's trade surplus is a problem - Ben Bernanke
- Do not underestimate the power of microfoundations - mainly macro
- Total Jobs Sputter, Wages Continue to Sing the Same Slow Song - EPI
- Jobs and the Bernanke–Summers Secular-Stagnation Debate - John Cassidy
- Historical Echoes: Pop Culture Sold Savings Bonds - Liberty Street
- Bernanke and Low Real Interest Rates - Stephen Williamson
- Symmetric Scots - Paul Krugman
- Prediction Market Design - Rajiv Sethi
- Perceptual Sleaze - Paul Krugman
Friday, April 03, 2015
Air Pocket, by Tim Duy: The employment data hit an air pocket in March, in line with a variety of softer economic news in the first quarter. That said, it likely will have little near term impact on Fed policy; I anticipate they will tend to dismiss the number as expected volatility in the overall upward path of job growth.
Job growth was paltry 126k in March and, in what might be a greater indication that US labor markets are hitting an inflection point, the January and February numbers were revised downward. The three-month moving average dipped sharply, while the 12-month moving average is leveling out:
A clear slowdown in the good producing sector is contributing to the weaker numbers as the impact of lower oil prices works through mining. That factor, the stronger dollar, and the West coast port slowdown are also likely taking a toll on manufacturing. Flat construction numbers also contributed.
The unemployment rate was unchanged at 5.5% and wage growth remains tepid compared to last year. Payrolls in the context of indicators previously cited by Federal Reserve Chair Janet Yellen:
Broad yet still slow general improvement in underemployment indicators.
How does this impact the Fed's outlook? First, some recent quotes from policymakers, beginning with Federal Reserve Chair Janet Yellen:
...I anticipate that real gross domestic product is likely to expand somewhat faster than its potential in coming quarters, thereby promoting further gains in employment and declines in the unemployment rate.
...a significant pickup in incoming readings on core inflation will not be a precondition for me to judge that an initial increase in the federal funds rate would be warranted...
...That said, I would be uncomfortable raising the federal funds rate if readings on wage growth, core consumer prices, and other indicators of underlying inflation pressures were to weaken, if market-based measures of inflation compensation were to fall appreciably further, or if survey-based measures were to begin to decline noticeably...
San Francisco Federal Reserve President John Williams, via the Wall Street Journal:
“Things are looking better–in fact, they’re looking downright good,” the official said in a speech to be delivered to an audience in Sydney and Melbourne via video.
Given how much the economy has improved and is likely to continue to gain ground, “I think that by mid-year it will be the time to have a discussion about starting to raise rates,” Mr. Williams said.
The strength of the U.S. dollar against a “broad index” of currencies is not an impediment to the U.S. economy reaching real GDP growth of 2.5% this year, he said.
“The U.S. economy has good momentum…even with what is a rather large appreciation of the U.S. dollar,” Mr. Williams said.
Atlanta Federal Reserve President Dennis Lockhart, via the New York Times:
The slowness in the first quarter obviously raises concerns that we’re going to see a continuing or persistent slowdown, but that’s not my base case view. My base case view is that we’ll see a rebound in the second and third quarter and beyond and that we’ll stay on the basic track that has been our story, our narrative here, for the last year or more. And that is a 2.5 percent to 3 percent growth rate with continuing improvement on the employment front, and gradual rise in inflation toward the 2 percent target. So to some extent I’m taking on a Wilbur Mills position: That’s my story and I’m sticking to it.
St. Louis Federal Reserve President James Bullard, via the Wall Street Journal:
Mr. Bullard said he expects the economy to recover in the second quarter following a soft start to the year as low gasoline prices fuel consumer spending. He added the European Central Bank’s decision to begin buying government bonds is driving down bond yields in the U.S., too, keeping a lid on corporate and household borrowing costs.
“These facts put us in a position for normalization of us monetary policy in 2015,” Mr. Bullard told the City Week conference.
You get the picture. Federal Reserve officials are clearly looking past the first quarter. Hence, while the number was clearly disappointing, I will stick with my thoughts from earlier this week:
Yellen intends to look through any first quarter weakness in GDP data, seeing it as largely an aberration (like arguably the first quarter of last year), as long as the employment data continues to hold up. And even there, I doubt any one weak report would do much to undermine her confidence in the recovery; we should be focusing on the story told by the next three employment reports in aggregate.
That said, I would also add that this strengthens the case that the Federal Reserve will need to move further in the direction of financial markets toward a slower and lower path of normalization than currently anticipated by the Summary of Economic Projections. It may be that if the March number was an outlier to the downside, the strong job growth in November and December of last year where outliers to the upside. On net, then job growth is solid, but still less robust than anticipated at the end of last year. Combined with lower estimates of the natural rate of unemployment, this would naturally push back and down the policy path.
Bottom Line: One jobs report is just that - one report. It needs to be placed in context of subsequent reports to confirm or deny the underlying trend, at least as far as policymakers are concerned. At the moment they seem content to believe the first quarter will be an aberration overall. If it looks like less of an aberration come June, they will be forced to push normalization plans back into the fourth quarter. This would make them less than happy.
Workers need more bargaining power:
Power and Paychecks, by Paul Krugman, Commentary, NY Times: On Wednesday, McDonald’s — which has been facing demonstrations denouncing its low wages — announced that it would give workers a raise. The pay increase won’t, in itself, be a very big deal... But it’s at least possible that this latest announcement, like Walmart’s much bigger pay-raise announcement a couple of months ago, is a harbinger of an important change in U.S. labor relations.
Maybe it’s not that hard to give American workers a raise, after all.
Most people would surely agree that stagnant wages, and more broadly the shrinking number of jobs that can support middle-class status, are big problems for this country. But the general attitude to the decline in good jobs is fatalistic. Isn’t it just supply and demand? Haven’t labor-saving technology and global competition made it impossible to pay decent wages to workers unless they have a lot of education?
Strange to say, however, the more you know about labor economics the less likely you are to share this fatalism. For one thing, global competition is overrated as a factor in labor markets... And the evidence that technology is pushing down wages is a lot less clear than all the harrumphing about a “skills gap” might suggest.
Even more important is the fact that the market for labor isn’t like the markets for soybeans or pork bellies. Workers are people; relations between employers and employees are more complicated than simple supply and demand. And this complexity means that there’s a lot more wiggle room in wage determination than conventional wisdom would have you believe. We can, in fact, raise wages significantly if we want to....
Suppose that we were to give workers some bargaining power by raising minimum wages, making it easier for them to organize, and, crucially, aiming for full employment rather than finding reasons to choke off recovery despite low inflation. Given what we now know about labor markets, the results might be surprisingly big — because a moderate push might be all it takes to persuade much of American business to turn away from the low-wage strategy that has dominated our society for so many years. ...
The pay raises at Walmart and McDonald’s — brought on by a tightening job market plus activist pressure — offer a small taste of what could happen on a vastly larger scale. There’s no excuse for wage fatalism. We can give American workers a raise if we want to.
John Robertson at the Atlanta Fed's Macroblog:
What Seems to Be Holding Back Labor Productivity Growth, and Why It Matters: The Atlanta Fed recently released its online Annual Report. In his video introduction to the report, President Dennis Lockhart explained that the economic growth we have experienced in recent years has been driven much more by growth in hours worked (primarily due to employment growth) than by growth in the output produced per hour worked (so-called average labor productivity). For example, over the past three years, business sector output growth averaged close to 3 percent a year. Labor productivity growth accounted for only about 0.75 percentage point of these output gains. The rest was due primarily to growth in employment.
The recent performance of labor productivity stands in stark contrast to historical experience. Business sector labor productivity growth averaged 1.4 percent over the past 10 years. This is well below the labor productivity gains of 3 percent a year experienced during the information technology productivity boom from the mid-1990s through the mid-2000s.
John Fernald and collaborators at the San Francisco Fed have decomposed labor productivity growth into some economically relevant components. The decomposition can be used to provide some insight into why labor productivity growth has been so low recently. The four factors in the decomposition are:
- Changes in the composition of the workforce (labor quality), weighted by labor's share of income
- Changes in the amount and type of capital per hour that workers have to use (capital deepening), weighted by capital's share of income
- Changes in the cyclical intensity of utilization of labor and capital resources (utilization)
- Everything else—all the drivers of labor productivity growth that are not embodied in the other factors. This component is often called total factor productivity.
The chart below displays the decomposition of labor productivity for various time periods. The bar at the far right is for the last three years (the next bar is for the past 10 years). The colored segments in each bar sum to average annual labor productivity growth for each time period.
Taken at face value, the chart suggests that a primary reason for the sluggish average labor productivity growth we have seen over the past three years is that capital spending growth has not kept up with growth in hours worked—a reduction in capital deepening. Declining capital deepening is highly unusual.
Do we think this sluggishness will persist? No. In our medium-term outlook, we at the Atlanta Fed expect that factors that have held down labor productivity growth (particularly relatively weak capital spending) will dissipate as confidence in the economy improves further and firms increase the pace of investment spending, including on various types of equipment and intellectual capital. We currently anticipate that the trend in business sector labor productivity growth will improve to a level of about 2 percent a year, midway between the current pace and the pace experienced during the 1995–2004 period of strong productivity gains. That is, we are not productivity pessimists. Time will tell, of course.
Clearly, this optimistic labor productivity outlook is not without risk. For one thing, we have been somewhat surprised that labor productivity has remained so low for so long during the economic recovery. Moreover, the first quarter data don't suggest that a turning point has occurred. Gross domestic product (GDP) in the first quarter is likely to come in on the weak side (the latest GDPNow tracking estimate here is currently signaling essentially no GDP growth in the first quarter), whereas employment growth is likely to be quite robust (for example, the ADP employment report suggested solid employment gains). As a result, we anticipate another weak reading for labor productivity in the first quarter. We are not taking this as refutation of our medium-term outlook.
Continued weakness in labor productivity would raise many important questions about the outlook for both economic growth and wage and price inflation. For example, our forecast of stronger productivity gains also implies a similarly sized pickup in hourly wage growth. To see this, note that unit labor cost (the wage bill per unit of output) is thought to be an important factor in business pricing decisions. The following chart shows a decomposition of average growth in business sector unit labor costs into the part due to nominal hourly wage growth and the part offset by labor productivity growth:
The 1975–84 period experienced high unit labor costs because labor productivity growth didn't keep up with wage growth. In contrast, the relatively low and stable average unit labor cost growth we have experienced since the 1980s has been due to wage growth largely offset by gains in labor productivity. Our forecast of stronger labor productivity growth implies faster wage growth as well. That said, a rise in wage growth absent a pickup in labor productivity growth poses an upside risk to our inflation outlook.
Of course, the data on productivity and its components are estimates. It is possible that the data are not accurately reflecting reality in real time. For example, colleagues at the Board of Governors suggest that measurement issues associated with the price of high-tech equipment may be causing business investment to be somewhat understated. That is, capital deepening may not be as weak as the current data indicate. In a follow-up blog to this one, my Atlanta Fed colleague Patrick Higgins will explore the possibility that the weak labor productivity we have recently experienced is likely to be revised away with subsequent revisions to GDP and hours data.
Discounting Climate Change Under Secular Stagnation: ...low interest rates, and the possibility of secular stagnation, greatly affects the calculus surrounding optimal investments to curb climate change. The titans of environmental economics--Weitzman, Nordhaus and Pindyck--have been arguing about the discount rate we should use to weigh distant future benefits against near-future costs of abating greenhouse gas emissions. They're arguing about this because the right price for emissions is all about the discount rate. Everything else is chump change by comparison.
Nordhaus and Pindyck argue that we should use a higher discount rate and have a low price on greenhouse gas emissions. Basically, they claim that curbing greenhouse gas emissions involves a huge transfer of wealth from current, relatively poor to future supremely rich. And a lot of that conclusion comes from assuming 2%+ baseline growth forever. Weitzman counters that there's a small chance that climate change will be truly devastating, causing losses so great that the future may not be as well off as we expect. Paul Krugman has a great summary of this debate.
Anyway, it always bothered me that Nordhaus and Pindyck had so much optimism built into baseline projections. Today's low interest rates and the secular stagnation hypothesis paint a different picture. Quite aside from climate change, growth and real rates look lower than the 2% baseline many assume, and a lot more uncertain. And that means Weitzman-like discount rates (near zero) make sense even without fat-tailed uncertainty about climate change impacts.
- Contours of Macroeconomic Policy in the Future - Olivier Blanchard
- Yellen shoots for ‘equilibrium’ interest rates - Gavyn Davies
- Raising retirement age would widen benefit disparities - EurekAlert
- Evaluating systemic risk proxies empirically - Vox EU
- Coming of Age in the Great Recession - Lael Brainard
- What Seems to Be Holding Back Labor Productivity Growth - macroblog
- Price Deflation, Asset Prices, and Threats to Growth - Tim Taylor
- The sources of stock market fluctuations - John Cochrane
- Interview with Otmar Issing - Cecchetti & Schoenholtz
- The Housing Bubble and the Lesser Depression - Brad DeLong
- Jeb Bourbon - Paul Krugman
- Pressure in Repo Market Spreads - WSJ
Thursday, April 02, 2015
Marco Del Negro and Christopher A. Sims:
Central Bank Solvency and Inflation, Liberty Street Economics: The monetary base in the United States, defined as currency plus bank reserves, grew from about $800 billion in 2008 to $2 trillion in 2012, and to roughly $4 trillion at the end of 2014 (see chart below). Some commentators have viewed this increase in the monetary base as a sure harbinger of inflation. For example, one economist wrote that this “unprecedented expansion of the money supply could make the '70s look benign.” These predictions of inflation rest on the monetarist argument that nominal income is proportional to the money supply. The fact that the money supply has expanded rapidly while real income has grown very modestly means that sooner or later prices will have to catch up. Most academic economists (from Cochrane to Krugman and Mankiw) disagree. The monetarist argument arguably applies only to non-interest-bearing central bank liabilities, but since October 2008 a large fraction of the monetary base has consisted of reserves that pay interest (the so-called IOER, or interest on excess reserves) and one linchpin of the Fed’s “policy normalization principles” consists precisely in raising the IOER along with the federal funds rate. Since reserves pay close to market interest rates, they are close substitutes for other short-term assets such as Treasury bills from a bank’s perspective. As long as the central bank can affect the return on these short-term assets by adjusting the IOER, controlling inflation with a large balance sheet seems no different than it was before the Great Recession.
In fact, if we look at expansion of the central bank’s balance sheet (known as LSAP—large-scale asset purchases—within the Fed, and as QE—quantitative easing—to the rest of the world) from the perspective of the consolidated budget constraint of the U.S. government, we realize that the expansion shortened the maturity structure of the federal debt (at least for the part concerning the purchase of Treasuries), as explained in the LSE post “More Than Meets the Eye: Some Fiscal Implications of Monetary Policy.” When the Fed buys long-term Treasuries by issuing interest-bearing reserves, it effectively retires this long-term debt, at least temporarily, and replaces it with very short-term (overnight) debt reserves. Seen from this vantage point, the hyperinflation fears mentioned above appear misplaced: Why should a change in the maturity structure of the federal debt generate hyperinflation as long as the central bank continues to follow a Taylor-type rule for setting interest rates?
In our staff report “When Does a Central Bank’s Balance Sheet Require Fiscal Support?” we show that there is a potentially big difference between pre- and post-Great Recession central banking. We argue that a large, long-duration central bank balance sheet can, at least in principle, impair a central bank’s ability to control inflation if the fiscal authority (the Treasury) refuses to back under any circumstances the central bank’s balance sheet.
Our argument is very different from that dismissed at the beginning of this post. It rests on the observation that QE, almost by definition, resulted in a sizable maturity mismatch between the asset and the liability side of the central bank’s balance sheet. Many recent papers (for example, Hall and Reis; Carpenter et al.; Greenlaw, Hamilton, Hooper, and Mishkin; and Christensen, Lopez, and Rudebusch) have noted this mismatch, and have computed the implications of different interest rate renormalization paths for remittances from the central bank to the Treasury. Relative to these papers, we explicitly model the fact that seigniorage—revenues arising from currency creation—depends on the path of inflation and interest rates. We show that this endogeneity opens the door to the possibility of multiple equilibria in the absence of fiscal support.
Imagine that you are a Treasury investor and you know that the only resource the central bank can rely upon is seigniorage. You also know that the value of the central bank’s assets (long-term bonds) would fall below that of the bank’s interest-bearing liabilities (reserves, which are short-term) if high inflation and interest rates were to occur in the near future. Then you put two and two together and figure out that expectations of high inflation would actually force the central bank to rely on seigniorage, thereby validating such expectations. If you can convince your fellow investors that these expectations are to materialize, then your projection can become a self-fulfilling prophecy, reminiscent of second-generation currency crisis models.
Before we go any further, we should stress that this sort of self-fulfilling prophecy is unlikely to take hold in the United States for two reasons. First, we compute in our simulations that the expected present value of seigniorage for the central bank is very high, roughly the size of current U.S. GDP, under a most likely path for future interest rates. As a consequence, it would take very extreme expectations for interest rates to force the central bank to generate more seigniorage and validate the expectations. Moreover, there are reasons to believe that the assumption of no fiscal support under any circumstances is incorrect: if faced with the prospect of high inflation, the Treasury would eventually be willing to provide support to the central bank. Note that this support comes at no cost at all for the Treasury: simply being willing to provide it is enough to nip any hyperinflation in the bud.
What are the policy implications of all this? Certainly not that the central bank should not have engaged in QE. Much research has shown that QE successfully eased financial conditions, thereby promoting economic recovery. Rather, we argue that it would always be appropriate for a central bank to have access to, and be willing to ask for, support for its balance sheet by the fiscal authority. In other words, central bank independence does not mean that the central bank can control inflation regardless of the actions of the fiscal authority. As shown by history, it never has.
The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.
More on the secular stagnation debate from Paul Krugman:
Liquidity Traps, Local and Global: There’s been a really interesting back and forth between Ben Bernanke and Larry Summers over secular stagnation. I agree with most of what both have to say. But there’s a substantive difference in views, in which Bernanke correctly, I’d argue, criticizes Summers for insufficient attention to international capital flows – but then argues that once you do allow for international capital movement it obviates many of the secular stagnation concerns, which I believe is wrong.
As it happens, the role of capital flows in the logic of liquidity traps is an issue I tackled right at the beginning, back in 1998; and I’ve been trying to work out how it plays into the discussion of secular stagnation, which is basically the claim that countries can face very persistent, quasi-permanent liquidity traps. So I think I may have something useful to add here. ...
- Why are interest rates so low: The Global Savings Glut - Ben Bernanke
- Realism and empirical reasoning - Understanding Society
- Eurozone interbank lending market during the Global and EZ crises - Vox EU
- Discounting Climate Change Under Secular Stagnation - Michael Roberts
- Capital control measures: A new dataset - Vox EU
- The Effectiveness of Economic Boycotts - Econbrowser
- Deconstructing ShadowStats - Ed Dolan
- Can Abenomics Succeed? - The IMF Blog
- Economists vs. Business Leaders? - mainly macro
- Jeb Bourbon - Paul Krugman
- Illuminated Storytelling - Lindau Blog
- The socialism of the Incas - Alberto Mingardi
- Amazon hacks your homeflow - Digitopoly
- Central Bank Solvency and Inflation - Del Negro and Sims
- Enough with the replication police - Andrew Gelman
Wednesday, April 01, 2015
Speaking of Larry Summers:
Why More Education Won’t Fix Economic Inequality: Suppose you accept the persuasive data that inequality has been rising in the United States and most advanced nations in recent decades. But suppose you don’t want to fight inequality through politically polarizing steps like higher taxes on the wealthy or a more generous social welfare system.
There remains a plausible solution to rising inequality that avoids those polarizing ideas: strengthening education so that more Americans can benefit from the advances of the 21st-century economy. This is a solution that conservatives, centrists and liberals alike can comfortably get behind. After all, who doesn’t favor a stronger educational system? But a new paper shows why the math just doesn’t add up, at least if the goal is addressing the gap between the very rich and everyone else.
Brad Hershbein, Melissa Kearney and Lawrence Summers offer a simple little simulation that shows the limits of education as an inequality-fighter. In short, more education would be great news for middle and lower-income Americans, increasing their pay and economic security. It just isn’t up to the task of meaningfully reducing inequality, which is being driven by the sharp upward movement of the very top of the income distribution. ...
Larry Summers responds to Ben Bernanke:
On Secular Stagnation: A Response to Bernanke, by Larry Summers: Ben Bernanke has inaugurated his blog with a set of thoughtful observations on the determinants of real interest rates (see his post here) and the secular stagnation hypothesis that I have invoked in an effort to understand recent macroeconomic developments. I agree with much of what Ben writes and would highlight in particular his recognition that the Fed is in a sense a follower rather than a leader with respect to real interest rates – since they are determined by broad factors bearing on the supply and demand for capital – and his recognition that equilibrium real rates appear to have been trending downward for quite some time. His challenges to the secular stagnation hypothesis have helped me clarify my thinking and provide an opportunity to address a number of points where I think there has been some confusion in the public debate. ...
I would like nothing better than to be wrong as Alvin Hansen was with respect to secular stagnation. It may be that growth will soon take hold in the industrial world and allow interest rates and financial conditions to normalize. If so, those like Ben who judged slow recovery to be a reflection of temporary headwinds and misguided fiscal contractions will be vindicated and fears of secular stagnation will have been misplaced.
But throughout the industrial world the vast majority of the revisions in growth forecasts have been downwards for many years now. So, I continue to urge that it is worth taking seriously the possibility that we face a chronic problem of an excess of desired saving relative to investment. If this is the case, monetary policy will not be able to normalize, there will be a continuing need for expanded public and private investment, and there will be a need for global coordination to assure an adequate level of demand and its appropriate distribution. Macroeconomists can contribute by moving beyond their traditional models of business cycles to contemplate the possibility of secular stagnation.
- Huh? Martin Feldstein and the Interest Rate Path - Brad DeLong
- Missing Deflation and the Argument for Inflation - Paul Krugman
- The False Hope of a Smaller Government, Built on Tax Breaks - NYT
- Milton Friedman, Monetarism, and Depressions - Uneasy Money
- Overdrafts with 100% reserve banking - Nick Rowe
- Precautionary strategies and household saving - Vox EU
- Study on MOOCs provides new insights - MIT News
- Why are interest rates so low, part 2: Secular stagnation - Ben Bernanke
- Economists? Hubris? Surely not? - Enlightened Economist
- The Economics of Discrimination - Cheap Talk
- Increasing Education and Earnings Inequality - Hamilton Project
- Optimal Carbon Abatement in a DSGE Model with Climate Change - NBER
- A quick note on two recoveries - mainly macro
- The other deficit - Stumbling and Mumbling
- Human Rights are Eggs, and Economic Rights are Croquet Balls - Tim Taylor
- Economic Inequality: It’s Far Worse Than You Think - Scientific American
Tuesday, March 31, 2015
From the RES Conference at the University of Manchester:
Illegal Discrimination Still Significant and Persistent: If you are black, foreign, female, elderly, disabled, gay, obese or not a member of the dominant caste or religion in your community, you may face ‘significant and persistent discrimination’ when you go to apply for a job, rent a house or buy a product. That is the overall conclusion of a new survey by Judith Rich of 70 field studies of discrimination conducted during the last 15 years. Her report will be presented at the Royal Economic Society’s 2015 annual conference.
Field studies of discrimination in markets ensure that group identity is the only difference observed by the decision-maker about an individual. Carefully matched testers, one from the group that may be the victim of discrimination, apply for jobs, rental accommodation or to buy a house or flat, or to purchase goods or services. This can be done in person, over the telephone, (where testers are trained) or, in the majority of studies, in writing, usually by email (where content and style are equivalent).
Among the findings of the 70 experiments in the analysis:
The author notes that discrimination of this type is hard to counteract by developing additional skills: ‘Immigrant groups were discriminated against despite being educated in schools, and proficient in the language, of the country of residence.’
- An African-American applicant needed to apply to 50% more job vacancies than a white applicant to be offered an interview.
- Having a higher qualification made virtually no difference for African-Americans but it made a significant improvement in interview offers for whites.
- White applicants with a criminal record received more interviews than African-Americans with no criminal record.
- Older workers needed to make between two to three times as many job applications as a young worker to get an offer of interview.
- When purchasing products, higher prices were quoted to minority applicants buying used cars in the United State and Israel, drinks in nightclubs and bars in New Orleans, and seeking car repairs in Chicago.
It is illegal in many countries for an employer or estate agent to discriminate, but these studies indicate its continued covert existence. One problem is that it is difficult for a victim of this type of discrimination to find evidence to instigate legal action under current legislation, raising the issue of the adequacy of anti-discrimination laws. ...
Not so sure this is conclusive -- it seems like the survey question could have been sharpened:
Generous welfare benefits make people more likely to want to work, not less: Survey responses from 19,000 people in 18 European countries, including the UK, showed that "the notion that big welfare states are associated with widespread cultures of dependency, or other adverse consequences of poor short term incentives to work, receives little support."
Sociologists Dr Kjetil van der Wel and Dr Knut Halvorsen examined responses to the statement 'I would enjoy having a paid job even if I did not need the money' put to the interviewees for the European Social Survey in 2010.
In a paper published in the journal Work, employment and society they compare this response with the amount the country spent on welfare benefits and employment schemes, while taking into account the population differences between states.
The researchers, of Oslo and Akershus University College, Norway, found that the more a country paid to the unemployed or sick, and invested in employment schemes, the more its likely people were likely to agree with the statement, whether employed or not. ...
The researchers also found that government programmes that intervene in the labour market to help the unemployed find work made people in general more likely to agree that they wanted work even if they didn't need the money. In the more active countries around 80% agreed with the statement and in the least around 45%. ...
"This article concludes that there are few signs that groups with traditionally weaker bonds to the labour market are less motivated to work if they live in generous and activating welfare states.
"The notion that big welfare states are associated with widespread cultures of dependency, or other adverse consequences of poor short term incentives to work, receives little support.
"On the contrary, employment commitment was much higher in all the studied groups in bigger welfare states. ..."
Thoughts on Yellen's Speech, by Tim Duy: I came back from Spring Break vacation to find a detailed speech by Fed Chair Janet Yellen that further lays the groundwork for rate hikes to begin later this year. The speech is a remarkably clear elucidation of her views and provides plenty of insight into what we should be looking for as the Fed edges toward policy normalization. A speech like this once a month from a Federal Reserve Governor would, I think, go a long way toward enhancing the the Fed's communication strategy.
One of the most important takeaways from this speech is the importance of labor market data in the Fed's assessment of the appropriate level of accommodation:
Although the recovery of the labor market from the deep recession following the financial crisis was frustratingly slow for quite a long time, progress has been more rapid of late...Of course, we still have some way to go to reach our maximum employment goal..But I think we can all agree that the recovery in the labor market has been substantial.I am cautiously optimistic that, in the context of moderate growth in aggregate output and spending, labor market conditions are likely to improve further in coming months. In particular, and despite the somewhat disappointing tone of the recent retail sales data, I think consumer spending is likely to expand at a good clip this year given such robust fundamentals as strong employment gains, boosts to real incomes from lower energy prices, continued increases in household wealth, and a relatively high level of consumer confidence.
Yellen intends to look through any first quarter weakness in GDP data, seeing it as largely an aberration (like arguably the first quarter of last year), as long as the employment data continues to hold up. And even there, I doubt any one weak report would do much to undermine her confidence in the recovery; we should be focusing on the story told by the next three employment reports in aggregate.
Regarding inflation, she sees little that worries her:
...Some of the weakness in inflation likely reflects continuing slack in labor and product markets. However, much of this weakness stems from the sharp decline in the price of oil and other one-time factors that, in the FOMC's judgment, are likely to have only a transitory negative effect on inflation, provided that inflation expectations remain well anchored.In this regard, I take comfort from the continued stability of survey measures of longer-run inflation expectations. And although market-based measures of inflation compensation have declined appreciably since last summer and bear close watching, I suspect that these declines are primarily driven by changes in risk premiums and market factors that I expect to prove transitory...
Same story - as long as the employment data is solid, they will dismiss the inflation data. Regarding expectations for the first rate hike, she makes clear that a hike later this year is not likely just in the FOMC's opinion, but in hers as well:
Like most of my FOMC colleagues, I believe that the appropriate time has not yet arrived, but I expect that conditions may warrant an increase in the federal funds rate target sometime this year.
A beginning for her story is the implications of zero rates:
I would first note that the current stance of monetary policy is clearly providing considerable economic stimulus. The near-zero setting for the federal funds rate has facilitated a sizable reduction in labor market slack over the past two years and appears to be consistent with further substantial gains. A modest increase in the federal funds rate would be highly unlikely to halt this progress, although such an increase might slow its pace somewhat.
Note again that Yellen highlights the importance of labor market gains in assessing the stance of policy. Then she pulls out the long-lags story:
Second, we need to keep in mind the well-established fact that the full effects of monetary policy are felt only after long lags. This means that policymakers cannot wait until they have achieved their objectives to begin adjusting policy. I would not consider it prudent to postpone the onset of normalization until we have reached, or are on the verge of reaching, our inflation objective. Doing so would create too great a risk of significantly overshooting both our objectives of maximum sustainable employment and 2 percent inflation, potentially undermining economic growth and employment if the FOMC is subsequently forced to tighten policy markedly or abruptly.
Yellen simply believes that if the Fed waits until inflation is back to target before the Fed acts, policy will be behind the curve, thereby raising the risk that policy will need to tighten dramatically as some point in the future. There is also the secondary concern of financial instabilities. Moreover, Yellen has full faith in the Phillips Curve:
An important factor working to increase my confidence in the inflation outlook will be continued improvement in the labor market. A substantial body of theory, informed by considerable historical evidence, suggests that inflation will eventually begin to rise as resource utilization continues to tighten.
And that faith thereby negates the value of the current low readings on inflation:
It is largely for this reason that a significant pickup in incoming readings on core inflation will not be a precondition for me to judge that an initial increase in the federal funds rate would be warranted.
And then she completely dismisses the importance of wage growth in her assessment of the path of inflation:
With respect to wages, I anticipate that real wage gains for American workers are likely to pick up to a rate more in line with trend labor productivity growth as employment settles in at its maximum sustainable level. We could see nominal wage growth eventually running notably higher than the current roughly 2 percent pace. But the outlook for wages is highly uncertain even if price inflation does move back to 2 percent and labor market conditions continue to improve as projected. For example, we cannot be sure about the future pace of productivity growth; nor can we be sure about other factors, such as global competition, the nature of technological change, and trends in unionization, that may also influence the pace of real wage growth over time. These factors, which are outside of the Federal Reserve's control, likely explain why real wages have failed to keep pace with productivity growth for at least the past 15 years. For such reasons, we can never be sure what growth rate of nominal wages is consistent with stable consumer price inflation, and this uncertainty limits the usefulness of wage trends as an indicator of the Fed's progress in achieving its inflation objective.
An array of nominal wage growth outcomes might be consistent with 2 percent inflation, most of which are outside the purview of the Fed, according to Yellen. Hence:
I have argued that a pickup in neither wage nor price inflation is indispensable for me to achieve reasonable confidence that inflation will move back to 2 percent over time.
But she leaves an out:
That said, I would be uncomfortable raising the federal funds rate if readings on wage growth, core consumer prices, and other indicators of underlying inflation pressures were to weaken, if market-based measures of inflation compensation were to fall appreciably further, or if survey-based measures were to begin to decline noticeably.
She doesn't need to see any of this indicators to head up to justify a rate hike; they just can't head down. In that respect, today's reading on PCE inflation must be something of a comfort to her. The month-over-month number pulled up, although recent trends are in my opinion still weak:
All that said, she still believes that Taylor-type rules - using the correct equilibrium interest rate, of course - still justify a zero interest rate:
But the prescription offered by the Taylor rule changes significantly if one instead assumes, as I do, that appreciable slack still remains in the labor market, and that the economy's equilibrium real federal funds rate--that is, the real rate consistent with the economy achieving maximum employment and price stability over the medium term--is currently quite low by historical standards.Under assumptions that I consider more realistic under present circumstances, the same rules call for the federal funds rate to be close to zero.
And this prepares the listener for what I would argue is the most important part of her speech:
The FOMC will, of course, carefully deliberate about when to begin the process of removing policy accommodation. But the significance of this decision should not be overemphasized, because what matters for financial conditions and the broader economy is the entire expected path of short-term interest rates and not the precise timing of the first rate increase
The Fed very much wants to change the discussion from the timing of the first rate hike to the pace of subsequent rate hikes. On this topic, we need to delve further into the importance of the equilibrium real rate in assessing the path of policy:
The projected combination of a gradual rise in the nominal federal funds rate coupled with further progress on both legs of the dual mandate is consistent with an implicit assessment by the Committee that the equilibrium real federal funds rate--one measure of the economy's underlying strength--is rising only slowly over time. In the wake of the financial crisis, the equilibrium real rate apparently fell well below zero because of numerous persistent headwinds. These headwinds include tighter underwriting standards and restricted access to some forms of credit; the need for households to reduce their debt burdens; contractionary fiscal policy at all levels of government after the initial effects of the fiscal stimulus package had passed; and elevated uncertainty about the economic outlook that made firms hesitant to invest and hire, and households reluctant to buy houses, cars, and other discretionary goods.
So what is happening with the real equilibrium rate now:
Fortunately, the overall force of these headwinds appears to have diminished considerably over the past year or so, allowing employment to accelerate appreciably even as the level of the federal funds rate and the volume of our asset holdings remained nearly unchanged.
Employment is again the key indicator. The fact that employment growth is accelerating despite no change in monetary policy is, according to Yellen, fairly clear evidence that the equilibrium real rate is rising. In other words, monetary policy accommodation is actually increasing even as the Fed holds steady. She expects the equilibrium rate to continue rising over the next couple of years, thereby justifying the Fed's rate projections.
But that forecast is data dependent, of course. And then comes the portion of Yellen's speech as she highlights reasons to believe that the actual rate path may differ from the Fed's expectations. Note that primarily focuses on reasons to expect a more subdued rate path, thus sounding dovish. She begins with the uncertainty of the equilibrium real rate:
The first, which is closely related to my expectation that the headwinds holding back growth are likely to continue to abate gradually, pertains to the risk that the equilibrium real federal funds rate may not, in fact, recover as much or as quickly as I anticipate...The experience of Japan over the past 20 years, and Sweden more recently, demonstrates that a tightening of policy when the equilibrium real rate remains low can result in appreciable economic costs, delaying the attainment of a central bank's price stability objective.
The fact that she highlights the errors of the Riksbank is comforting; it speaks to the willingness to learn from others' mistakes. Next is a tacit admission that although they say they can return to quantitative easing, they really think they are pretty much out of bullets:
A second reason for the Committee to proceed cautiously in removing policy accommodation relates to asymmetries in the effectiveness of monetary policy in the vicinity of the zero lower bound. In the event that growth in employment and overall activity proves unexpectedly robust and inflation moves significantly above our 2 percent objective, the FOMC can and will raise interest rates as needed to rein in inflation. But if growth was to falter and inflation was to fall yet further, the effective lower bound on nominal interest rates could limit the Committee's ability to provide the needed degree of accommodation. With an already large balance sheet, for example, the FOMC might be concerned about potential costs and risks associated with further asset purchases.
On this point, it is again comforting that she is not ignoring the signals of the bond market:
That said, it is sobering to note that many market participants appear to assess the risks to the outlook quite differently. For example, respondents to the Survey of Primary Dealers in late January thought there was a 20 percent probability that, after liftoff, the funds rate would fall back to zero sometime at or before late 2017. In addition, both the remarkably low level of long-term government bond yields in advanced economies and the low prevailing level of inflation compensation suggest that financial market participants may hold more pessimistic views than FOMC participants concerning the risks to the global outlook. Since long-term yields reflect the market's probability-weighted average of all possible short-term interest rate paths, along with compensating term and risk premiums, the generally low level of yields in advanced economies suggests that investors place considerable odds on adverse scenarios that would necessitate a lower and flatter trajectory of the federal funds than envisioned in participants' modal SEP projections.
Finally, she harkens back to her optimal-control policy days:
A final argument for gradually adjusting policy relates to the desirability of achieving a prompt return of inflation to the FOMC's 2 percent goal, an objective that would be advanced by allowing the unemployment rate to decline for a time somewhat below estimates of its longer-run sustainable level. To a limited degree, such an outcome is envisioned in many participants' most recent SEP projections.
Still, the gradualist path is not without risks. First, inflation:
Of course, taking a gradualist approach is not without risks. Proceeding too slowly to tighten policy could have adverse consequences for the attainment of the Committee's inflation objective over time, especially if it were to undermine the FOMC's inflation credibility. Inflation could, for example, exhibit nonlinear dynamics in which high levels of unemployment place relatively little downward pressure on inflation, but tight labor markets generate marked upward pressure. If so, a decline in unemployment below its natural rate could cause inflation to quickly rise to an undesirably high level. Rapid increases in short-term interest rates to arrest such an unwelcome development could, in turn, have adverse effects on financial markets and the broader economy.
Here you see Yellen's fear of inflation, in particular the concern of nonlinear dynamics. Yellen fears that inflation will jump sharply higher is unemployment sinks too far below its natural rate. This fear I think extends to the Fed's resistance to a different inflation target or a price level target. It is also why the Fed fears falling too far behind the curve.
Bottom Line: Employment data are key; the rest is for the moment just noise. If that data continues to improve, while monetary policy remains unchanged, it is evidence of growing monetary accommodation which must eventually be constrained. Moreover, the steady fall in the unemployment rate is signaling above trend growth as well. And while you might argue that employment data are a lagging indicator, the Fed would reply that there is no indication from the more leading indicator of initial claims that something troubling is amiss. Somewhat surprisingly, even price data is currently just noise; rising inflation or wage growth are not necessary to begin raising rates. Still, either would justify the acceleration of subsequent rate hikes as they would be evidence of a more normal economy consistent with a higher equilibrium real interest rate. Yellen anticipates that the equilibrium rate will return to more normal levels over the next couple of years, but remains wary that this will not turn out to be the case. This is good news as it raises the odds that she will not cut the expansion short. Her lack of emphasis of wages as a policy signal and continued faith in the Phillips Curve will make her a target of left-leaning critics.
- Ben Bernanke Blog Blogging - Paul Krugman
- Why are interest rates so low? - Ben Bernanke
- Fed’s Fischer Floats Ideas for Regulating Shadow Banks - WSJ
- Did We Evolve the Capacity for Sustained Growth? - Growth Economics
- Boosting female jobs - Vox EU
- The rapid rise of human language - MIT News
- Adam Smith, income inequality and the rich - Branko Milanovic
- The Rise of the Working Poor and the Non-Working Rich - Robert Reich
- Demographics and GDP: 2% is the new 4% - Calculated Risk
- Middle-Sized Facts vs. IS-LMist Fundamentalism - EconoSpeak
- Majority of Hires Never Report Looking for a Job - FRBSF
- Cecchetti and Schoenholz on raising the inflation target - longandvariable
- More on: "I don't think these are 'very good points'" - Environmental Economics
- Ben Bernanke and the Secular Stagnation Debate - David Beckworth
- Monetary Policy: Bernanke and Yellen v. Taylor - EconoSpeak
- Is inclusiveness good for the economy? - The Washington Post
- The Monetarist Mistake - Brad DeLong
- Labor’s share lost? - Nick Bunker
- Highs and lows of the minimum wage - Tim Harford
- Is 2% still the solution? - Cecchetti & Schoenholtz
- Greece and other benefit scroungers - mainly macro
- Ben Bernanke Launches Blog - Real Time Economics
- Supply policies at the zero lower bound - Jérémie Cohen-Setton
- Why a Soda Tax Is Unlikely to Work - Marc Bellemare
Monday, March 30, 2015
The Economic Journal was among the first journals to come into existence. This is the first article of the 125th anniversary issue. The remaining articles are from notable economists (e.g. Stiglitz, Heckman, and many more) discussing seminal work that appeared in the Journal (the articles are relatively short):
Economic Journal 125th Anniversary Special Issue [under Creative Commons]: First published: 29 March 2015 Full publication history, DOI: 10.1111/ecoj.12230 View/save citation.
It is with great pleasure that we mark the 125th anniversary of the founding of the Economic Journal with this special issue. The EJ has published many seminal articles on a variety of topics over the years; in this issue we have selected some of what we think are the most important and asked leading economic thinkers of today to share their thoughts on the impact that these articles have had. The authors have explored the historic contribution of the articles and possible future ways to advance the subject. It has been an honour for us to work with these economists, whose own research is seminal to the future development of the profession. We thank them sincerely for their contributions to this project.
The Economic Journal was founded at a meeting convened by Professor Alfred Marshall at University College London, at the behest of Herbert Somerton Foxwell and Robert Harry Inglis Palgrave among others, and chaired by George Viscount Goschen, Chancellor of the Exchequer.1
The meeting was called to discuss setting up a journal of economics in England, and brought together around 200 people from surprisingly disparate backgrounds. Leading academics included Francis Ysidro Edgeworth, chair at King's College London and first editor of the Economic Journal; Mary Paley Marshall, one of the first female students at Cambridge and co-founder of economics at Bristol University with her husband; Henry Sidgwick, philosopher, economist, founder of Newnham College Cambridge and a supporter of women's education; and John Neville Keynes, renowned economist at Cambridge University. The hall at UCL was also packed with social philanthropists, journalists and businessmen. Notable names from the audience were Charles Booth, philanthropist and social researcher, who influenced the government in the establishment of the old age pension; Millicent Fawcett, radicalist and suffragette, who campaigned for women's rights and the better protection of children; Octavia Hill, social reformer and co-founder of the National Trust; Clara Collet, economist and reformist who sought to improve working conditions for women; Robert Giffen, economist and journalist at The Economist, the Daily News and The Times; and George Bernard Shaw, socialist, playwright and co-founder of the London School of Economics. There were also significant names who pledged their support to the cause in writing, including George Baden-Powell, the conservative politician; Sir Thomas Farrer, 1st Baron Farrer, civil servant and lawyer; Joseph Shield Nicholson, professor of political economy at Edinburgh; and George William Bramwell, judge.
There was unanimous agreement for the proposed journal of economics. Marshall had laid out the need for a journal to support the development of young economists. The aim of the journal was to encourage debate at the highest academic level and the audience unanimously carried the motion to establish the journal, cheering in support of the idea that the journal should incorporate diverse viewpoints for the benefit of the country at large.
George Bernard Shaw was the only person to introduce some controversy, by questioning the selection of a politician, Viscount Goschen, to lead the society in its publication aims. Marshall rather honestly confided that he was not a political supporter of Goschen but that they would be hard pressed to find a candidate for presidency who had no political views whatsoever.
The support for the EJ at its inauguration in 1890 only hinted at the impact the journal would achieve on a national scale. Numerous national newspapers reported on the meeting at UCL and pledged their support to the project. The Times, for example, stated that ‘the propriety of the proposal was unquestionable. Not a dissentient voice was raised'.2 Interest did not stop with the initiation of the Journal but continued with the subjects discussed in each issue.
In the first edition of the Journal, Editor Francis Ysidro Edgeworth proudly declared that:
The most opposite doctrines may meet here as on a fair field. Thus the difficulties of Socialism will be considered in the first number; the difficulties of Individualism in the second. Opposing theories of currency will be represented with equal impartiality. Nor will it be attempted to prescribe the method, any more than the result, of scientific investigation.3
The Standard heralded these aims, saying:
We want such a publication in this country, where questions of public well-being can be discussed without reference to the party cries of the hour.4
It went on to discuss the diverse topics published in the issue ranging from ‘The Eight Hour Day in Victoria’ by John Rae, to ‘The Fall of Silver’ by Henry Hucks Gibbs and ‘The Difficulties of Socialism’ by Leonard Courtney, which the newspaper declared ‘is [an article] which no person should miss reading.’ The second issue of the Journal was met with the same interest as the first. The Cape Town Argus said ‘its second number well maintains the high expectations with which it was started’. It picked out Sir Thomas Farrer's article entitled ‘Some English Railway Robberies of the Next Decade’ for particular mention, saying it was ‘admirably clear and succinct’. The Manchester Courier included in-depth description of all articles included in the issue, adding that the Journal was an ‘excellent and instructive publication’.5
While the subject matter and impact of the Journal has evolved considerably since its first issue, the editors are pleased to uphold the original simple values: to publish the best articles in economics in any field and to disseminate its research as widely as possible.
A note on 125 years of the Economic Journal would not be complete without mention of the bee motif, which marked its centenary in 2014. The bee was chosen as the seal of the Royal Economic Society when it received its Royal Charter and first appeared on the cover of the EJ in March 1904. There has been some debate as to the meaning and motivation for selection of this motif. It was proposed by Professor Mark Perlman that the bee was a symbol of the investigational method appropriate to the study of economics.6 He suggested that this notion was taken from Francis Bacon's Novum Organon, which was widely read in England in the nineteenth century:
Those who have handled the sciences have been either Empiricists or Rationalists. Empiricists, like ants, merely collect things and use them. The Rationalists, like spiders, spin webs out of themselves. The middle way is that of the bee, which gathers its material from the flowers of the garden and the field, but then transforms and digests it by a power of its own. And the true business of philosophy is much the same, for it does not rely only or chiefly on the powers of the mind, nor does it store the material supplied by natural history and practical experiments untouched in its memory, but lays it up in the understanding changed and refined. Thus from a closer and purer alliance of the two faculties- the experimental and the rational, such as has never yet been made- we have good reason for hope.7
Bacon's words seem to work not only as a metaphor for economic science but for the Economic Journal itself, which sought to combine approaches to economics and enable the study of the discipline through embracing different perspectives. However, a more prevalent theory is for the meaning of the bee is that it derived from The Fable of the Bees (1714) by Bernard Mandeville. This paradoxical thesis argued that social welfare, social progress, riches and benefits are all based on the human vices. The idea is said to underlie the theory of ‘the invisible hand’ of economic markets, developed by Adam Smith (1723–90). However, there is no documentary evidence to show categorically that either of these allegories was behind the selection of the bee motif.
Not all editors of the EJ have been fond of the busy bee. The stamp was removed from the Journal during the editorship of Brian Reddaway in a bid to modernise the cover. The symbol was reintroduced in 1990 by John Hey, as a mark of the centenary of the RES and the EJ. Austin Robinson, one of the longest serving editors of the Journal, applauded this move, admitting that he had ‘a certain affection for it [the bee]’.8 The reintroduction of the bee motif however also marked a re-design, and added further complexity to its possible significance. The quote ‘amor urget habendi’ (acquisitiveness impels) was added to the modernised image, a line taken from Virgil's Georgics:
‘ac ueluti lentis Cyclopes fulmina massis
cum properant, alii taurinis follibus auras
accipiunt redduntque, alii stridentia tingunt
aera lacu; gemit impositis incudibus Aetna;
illi inter sese magna ui bracchia tollunt
in numerum, uersantque tenaci forcipe ferrum
non aliter, si parua licet componere magnis
Cecropias innatus apes amor urget habendi
munere quamque suo.’9
‘As when the Cyclopses forge thunderbolts
Deftly of ductile metal, some of them
Pump air from bullhide bellows, others plunge
The hissing bronze in troughs, while Etna groans
Under the weight of anvils. Mightily
They raise their arms in alternating rhythm
And turn the metal with their gripping tongs.
Just so (if small may be compared with great)
Innate acquisitiveness impels the bees
To ply their several tasks.’10
Here the bee is related to hard work, industry and the division of labour. As such, the motif may relate to the industry of the Journal and the Royal Economic Society, or to a broader view of economics as a study of the human drive to obtain. There is no record of why this quote was selected for the refashioning of the bee image and it only serves to open up the possibilities of the bee's meaning.
To celebrate 125 years of the Journal and 100 years of the busy bee, we have, for one issue, reinstated the original bee of which Austin Robinson was so fond and included all of the bees on the back cover. We will leave it to the reader to ponder why it was selected to represent the Journal and the society all those years ago.
We are pleased as editors to be able to carry on the tradition of the Economic Journal, which has such a vibrant history and has made such an important contribution to the development of the field.
Joint Managing Editors
Martin Cripps University College London
Andrea Galeotti University of Essex
Rachel Griffith University of Manchester
Morten Ravn University College London
Kjell Salvanes Norwegian School of Economics
Stepahnie Seavers Institute for Fiscal Studies
Frederic Vermeulen University of Leuven
David Mayes University of Auckland
Stephanie Seavers Institute for Fiscal Studies
- For further details of the meeting see ‘The British Economic Association’, Economic Journal, vol. 1 (Mar 1891), pp. 1–14.
- The Times, 21 November 1890. RES Archive, London School of Economics RES_1/3/2 p. 3.
- ‘The British Economic Association’, Economic Journal, vol. 1 (Mar 1891), p. 1.
- The Standard, 9 April 1891. RES Archive, London School of Economics RES_1/3/2 p. 5.
- The Cape Town Argus, 12 August 1891. RES Archive, London School of Economics RES_1/3/2 p. 8.
- Letter to Economic Journal Editor Professor John Hey on 3rd April, 1990. RES archive.
- Francis Bacon, Novum Organum, Peter Urbach and John Gibson (trans. and ed.), Open Court Publishing: Peru, Illinois, 1994, reprinted 1996, paragraph 95, bk.1, p. 105.
- Letter to Professor Perlman, University of Pittsburgh, on 20 September 1990. RES archive.
- Virgil, Georgics, Richard F. Thomas (ed.), Cambridge Greek and Latin Classics, University of Cambridge Press: 1988, reprinted 2001, vol. 2, Bks 111-1V, bk IV, p. 24, lines 170 to 179.
- Virgil, The Georgics, L. P. Wilkinson (trans.), Penguin Classics: London, 1982, pp. 129–30.
Why doesn't the public know how successful Obamacare has been?:
Imaginary Health Care Horrors, by Paul Krugman, Commentary, NY Times: ...Representative Pete Sessions of Texas, the chairman of the House Rules Committee, recently ... declared the cost of Obamacare “unconscionable.” If you do “simple multiplication,” he insisted, you find that the coverage expansion is costing $5 million per recipient. But ... the actual cost per newly insured American is about $4,000.
Now, everyone makes mistakes. But this wasn’t a forgivable error..., one indisputable fact is that it’s costing taxpayers much less than expected — about 20 percent less...
But that is, of course, how it’s been all along with Obamacare. Before the law went into effect, opponents predicted disaster on all levels. What has happened instead is that the law is working pretty well. So how have the prophets of disaster responded? By pretending that the bad things they said would happen have, in fact, happened. ...
Remember, Obamacare was also supposed to be a huge job-killer. ... Well, Obamacare went into effect fully at the beginning of 2014 — and private-sector job growth actually accelerated, to a pace we haven’t seen since the Clinton years. ...
Finally, there’s the never-ending hunt for ... for ordinary, hard-working Americans who have suffered hardship thanks to health reform. ... Remarkably, however, they haven’t been able to find those stories. ...
In reality, the only people hurt by health reform are Americans with very high incomes, who have seen their taxes go up, and a relatively small number of people who have seen their premiums rise because they’re young and healthy...
In short, when it comes to the facts, the attack ... has come up empty-handed. But the public doesn’t know that. ...
And the favorable experiences of the roughly 16 million Americans who have gained insurance ... have had little effect on public perceptions. Partly that’s because the Affordable Care Act, by design, has had almost no effect on those who already had good health insurance..., they have seen no change in their status.
At a deeper level, however, what we’re looking at here is the impact of post-truth politics. We live in an era in which politicians and the supposed experts who serve them never feel obliged to acknowledge uncomfortable facts, in which no argument is ever dropped, no matter how overwhelming the evidence that it’s wrong.
And the result is that imaginary disasters can overshadow real successes. Obamacare isn’t perfect, but it has dramatically improved the lives of millions. Someone should tell the voters.