Wednesday, August 19, 2015

The MC and MB of Habits

"The brain’s habit-forming circuits may also be wired for efficiency":

Wired for habit, by Elizabeth Dougherty, McGovern Institute for Brain Research August 19, 2015: We are creatures of habit, nearly mindlessly executing routine after routine. Some habits we feel good about; others, less so. Habits are, after all, thought to be driven by reward-seeking mechanisms that are built into the brain. It turns out, however, that the brain’s habit-forming circuits may also be wired for efficiency.
New research from MIT shows that habit formation, at least in primates, is driven by neurons that represent the cost of a habit, as well as the reward. “The brain seems to be wired to seek some near optimality of cost and benefit,” says Ann Graybiel, an Institute Professor at MIT and also a member of the McGovern Institute for Brain Research.
This study is the first to show that cost considerations are wired into the learning of habits. ...
“To know there are other brain signals like cost hiding under the reward signal is very exciting,” says Yael Niv, an associate professor of psychology at Princeton University and an affiliate of the Princeton Neuroscience Institute who was not involved in this work. “This study suggests that we should not be blinded by reward. Reward is only one side of the coin. The other side is how much do you have to pay for it.”...

    Posted by on Wednesday, August 19, 2015 at 09:15 AM in Economics | Permalink  Comments (3)


    Links for 08-19-15

      Posted by on Wednesday, August 19, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (135)


      Tuesday, August 18, 2015

      'What Is The Chinese Economic System?

      Barkley Rosser:

      What Is The Chinese Economic System?: In a recent post Paul Krugman criticizing China's interventions in forex markets..., he labeled the Chinese system as being "rapacious crony capitalism." This has led various commentators in various papers to have varying degrees of vapors. But even if we grant that "rapacious" is not a scientific term that may be dramatic for blogging but is not useful for seriously categorizing the Chinese economic system, the hard fact is that it is not obvious what it is, and it may simply be too complicatedly mixed and large for any of the usual categories to really fit.

      This is actually a current professional problem for me and my wife, who are nearing completing the third edition of our textbook, Comparative Economics in a Transforming World Economy, MIT Press. ... From the standpoint of professional comparative economics, what the heck the Chinese system is is a matter of serious and substantial debate. ...

      As it was, China never was that much of a full-blown command socialist economy. It was always more decentralized than the old USSR, with this partly due to its sheer size and diversity...

      The ... Chinese government itself [says] ... China is a "socialist market economy." OK, it is indeed a market economy. It probably was not during the Mao era, even if command central planning was much weaker than in the old USSR. There was still command planning, but a lot of it was decentralized to local levels. After Deng Xiaoping took control in 1978, he pretty much undid most of the command central planning apparatus, moving the economy to being predominantly a market one.

      The more complicated issue involves property ownership, and here there is no agreement. A major part of this is that China has property forms that are not seen anywhere else in the world. One of the larger parts of the Chinese economy, which used to get lots of publicity but has not received much lately, is what was called the Town and Village Enterprise (TVE) sector. This is the sector that lies between the remaining state-owned sector (from the center) and the fully privatized corporate capitalist sector of the Chinese economy. There are at least four different property forms in this mostly rural part of the Chinese economy, with them varying from being somewhat more publicly (if locally) owned to being more privately, although in some cases cooperatively so, owned. Much of this sector, which as more than a third of the whole economy, is very hard to characterize as being either socialist or capitalist, although clearly the Chinese like to consider it more socialist.

      Now this odd term is close to others that have been or still are used to describe economies around the world. One is "market socialist." That was most famously used to describe the former Yugoslavia, which also had a form of workers' management that attracted lots of attention from comparative economists. Other nations also were called this, especially Hungary, which lacked the workers' management part. They had forms of collective or state ownership, but no (or little) command central planning. The state-owned enterprises operated in market environments. ...

      The other similar term is "social market economy," which Germany uses to label its system ("sozialmarktwirtschaft" in German). This is really a fully market capitalist system, but one with a large social safety net. And the Germans have that, certainly compared to the US, and many have commented on the generally better functioning of that economy (which also has lots of labor-management cooperation) than many other economies around.

      So, the Chinese system is not like either the old Yugoslav or the current German system, even though it has a lot of state or collective ownership, and certainly is heavily a market system. Clunky and not precisely accurate and vaguely propagandistic as it is, "socialist market economy" may be the best we can do.

        Posted by on Tuesday, August 18, 2015 at 12:18 PM in Economics | Permalink  Comments (76)


        'Wealth and Income Distribution: New Theories Needed for a New Era '

        More from Joe Stiglitz (along with Ravi Kanbur) on what needs to change in economics:

        Wealth and income distribution: New theories needed for a new era, Vox EU: Six decades ago, Nicholas Kaldor (1957) put forward a set of stylized facts on growth and distribution for mature industrial economies. The first and most prominent of these was the constancy of the share of capital relative to that of wealth in national income. At about the same time, Simon Kuznets (1955) put forward a second set of stylized facts -- that while the interpersonal inequality of income distribution might increase in the early stages of development, it declines as industrialized economies mature.

        These empirical formulations brought forth a generation of growth and development theories whose object was to explain the stylized facts. Kaldor himself presented a growth model which claimed to produce outcomes consistent with constancy of factor shares, as did Robert Solow. Kuznets also developed a model of rural-urban transition consistent with his prediction, as did many others (Kanbur 2012).

        Kaldor-Kuznets facts no longer hold

        However, the Kaldor-Kuznets stylized facts no longer hold for advanced economies. The share of capital as conventionally measured has been on the rise, as has interpersonal inequality of income and wealth. Of course, there are variations and subtleties of data and interpretation, and the pattern is not uniform. But these are the stylized facts of our time. Bringing these facts center stage has been the achievement of research leading up to Piketty (2014).

        It stands to reason that theories developed to explain constancy of factor shares cannot explain a rising share of capital. The theories developed to explain the earlier stylized facts cannot very easily explain the new trends, or the turnaround. At the same time, rising inequality has opened once again a set of questions on the normative significance of inequality of outcomes versus inequality of opportunity. New theoretical developments are needed for positive and normative analysis in this new era.

        What sort of new theories? In the realm of positive analysis, Piketty has himself put forward a theory based on the empirical observation that the rate of return to capital, r, systematically exceeds the rate of growth, g; the famous r > g relation. Much of the commentary on Piketty’s facts and theorizing has tried to make the stylized fact of rising share of capital consistent with a standard production function F (K, L) with capital ‘K’ and labor ‘L’. But in this framework a rising share of capital can be consistent with the other stylized fact of rising capital-output ratio only if the elasticity of substitution between capital and labor is greater than unity, which is not consistent with the broad empirical findings (Stiglitz, 2014a). Further, what Piketty and others measure as wealth ‘W’ is a measure of control over resources, not a measure of capital K, in the sense that that is used in the context of a production function.

        Differences between K and W

        There is a fundamental distinction between capital K, thought of as physical inputs to production, and wealth W, thought of as including land and the capitalized value of other rents which give command over purchasing power. This distinction will be crucial in any theorizing to explain the new stylized facts. ‘K’ can be going down even as ‘W’ increases; and some increases in W may actually lower economic productivity. In particular, new theories explaining the evolution of inequality will have to address directly changes in rents and their capitalized value (Stiglitz 2014). Two examples will illustrate what we have in mind.

        • Consider first the case of all sea-front property on the French Riviera.

        As demand for these properties rises, perhaps from rich foreigners seeking a refuge for their funds, the value of sea frontage will be bid up. The current owners will get rents from their ownership of this fixed factor. Their wealth will go up and their ability to command purchasing power in the economy will rise correspondingly. But the actual physical input to production has not increased. All else constant, national output will not rise; there will only be a pure distributional effect.

        • Consider the case where the government gives an implicit guarantee to bail out banks.

        This contingent support to income flows from ownership of bank shares will be capitalized into the value of these shares. Of course, there is an equal and opposite contingent liability on all others in the economy, in particular on workers -- the owners of human capital. Again, without any necessary impact on total output, the political economy has created rents for share owners, and the increase in their wealth will be reflected in rising inequality. One can see this without going through a conventional production function analysis. Of course, the rents once created will provide further resources for rentiers to lobby the political system to maintain and further increase rents. This will set in motion a spiral of increasing inequality, which again does not go through the production system at all -- except to the extent that the associated distortions represent a downward shift in the productivity of the economy (at any level of inputs of ‘K’ and labor).

        Analyzing the role of land rents in increases in inequality can be done in a variant of standard neoclassical models -- by expanding inputs to include land; but explaining increase in inequality as a result of an increase in other forms of rent will need a theory of rents which takes us beyond the competitive determination of factor rewards.

        Differences in inequality: Capital income versus labor income

        The translation from factor shares to interpersonal inequality has usually been made through the assumption that capital income is more unequally distributed than labor income. Inequality of capital ownership then translates into inequality of capital income, while inequality of income from labor is assumed to be much smaller. The assumption is made in its starkest form in models where there are owners of capital who save and workers who do not.

        These stylized assumptions no longer provide a fully satisfactory explanation of income inequality because: (i) there is more widespread ownership of wealth through life cycle savings in various forms including pensions; and (ii) increasingly unequal returns to increasingly unequally distributed human capital has led to sharply rising inequality of labor income.

        Sharply rising inequality of labor income focuses attention on inequality of human capital in its most general sense:

        • Starting with unequal prenatal development of the foetus;
        • Followed by unequal early childhood development and investments by parents;
        • Unequal educational investments by parents and society; and
        • Unequal returns to human capital because of discrimination at one end and use of parental connections in the job market at the other end.

        Discrimination continues to play a role, not only in the determination of factor returns given the ownership of assets, including human capital; but also on the distribution of asset ownership.

        • At each step, inequality of parental resources is translated into inequality of children’s outcomes.

        An exploration of this type of inequality requires a different type of empirical and theoretical analysis from the conventional macro-level analysis of production functions and factor shares (Heckman and Mosso, 2014, Stiglitz, 2015).

        In particular, intergenerational transmission of inequality is more than simple inheritance of physical and financial wealth. Layered upon genetic inequalities are the inequalities of parental resources. Income inequality across parents, due to inequality of income from physical and financial capital on the one hand, and inequality due to inequality of human capital on the other, is translated into inequality of financial and human capital of the next generation. Human capital inequality perpetuates itself through intergenerational transmission just as wealth inequality caused by politically created rents perpetuates itself.

        Given such transmission across generations, it can be shown that the long-run, ‘dynastic’ inequality will also be higher (Kanbur and Stiglitz 2015). Although there have been advances in recent years, we still need fully developed theories of how the different mechanisms interact with each other to explain the dramatic rises in interpersonal inequality in advanced economies in the last three decades.1

        High inequality: New realities and old debates

        The new realities of high inequality have revived old debates on policy interventions and their ethical and economic rationale (Stiglitz 2012). Standard analysis which balances the tradeoff between efficiency and equity would suggest that taxation should now become more progressive to balance the greater inherent inequality against the incentive effects of progressive taxation (Kanbur and Tuomala,1994 ).

        One counter argument is that what matters is not inequality of ‘outcome’ but inequality of ‘opportunity’. According to this argument, so long as the prospects are the same for all children, the inequality of income across parents should not matter ethically. What we should aim for is equality of opportunity, not income equality. However, when income inequality across parents translates into inequality of prospects across children, even starting in the womb, then the distinction between opportunity and income begins to fade and the case for progressive taxation is not undermined by the ‘equality of opportunity’ objective (Kanbur and Wagstaff 2015).

        Concluding remarks

        Thus, the new stylized facts of our era demand new theories of income distribution.

        • First, we need to break away from competitive marginal productivity theories of factor returns and model mechanisms which generate rents with consequences for wealth inequality.

        This will entail a greater focus on the ‘rules of the game.’ (Stiglitz et al 2015).

        • Second, we need to focus on the interaction between income from physical and financial capital and income from human capital in determining snapshot inequality, but also in determining the intergenerational transmission of inequality.
        • Third, we need to further develop normative theories of equity which can address mechanisms of inequality transmission from generation to generation.2

        References

        Bevan, D and J E Stiglitz (1979), "Intergenerational Transfers and Inequality", The Greek Economic Review, 1(1), August, pp. 8-26.

        Heckman, J and S Mosso (2014), "The Economics of Human Development and Social Mobility", Annual Reviews of Economics, 6: 689-733.

        Kaldor, N (1957), "A Model of Economic Growth", The Economic Journal, 67(268): 591-624.

        Kanbur, R (2012), "Does Kuznets Still Matter?" in S. Kochhar (ed.), Policy-Making for Indian Planning: Essays on Contemporary Issues in Honor of Montek S. Ahluwalia, Academic Foundation Press, pp. 115-128, 2012.

        Kanbur, R and J E Stiglitz (2015), "Dynastic Inequality, Mobility and Equality of Opportunity", CEPR Discussion Paper No. 10542.

        Kanbur, R and M Tuomala (1994), ‘‘Inherent Inequality and the Optimal Graduation of Marginal Tax Rates", (with M. Tuomala), Scandinavian Journal of Economics, Vol. 96, No. 2, pp. 275-282, 1994.

        Kuznets, S (1955), "Economic Growth and Income Inequality", The American Economic Review, 45(1): 1-28.

        Piketty, T (2014), Capital in the Twenty-First Century, Cambridge Massachusetts: The Belknap Press of Harvard University Press.

        Piketty, T, E Saez, and S Stantcheva (2011), “Taxing the 1%: Why the top tax rate could be over 80%”, VoxEU.org, 8 December.

        Roemer, J E and A Trannoy (2014), "Equality of Opportunity", in A B Atkinson and F Bourguignon (eds.) Handbook of Income Distribution SET Vols 2A-2B. Elsevier.

        Stiglitz, J E, et. al. (2015) "Rewriting the Rules of the American Economy", Roosevelt Institute.

        Stiglitz, J E (1969), "Distribution of Income and Wealth Among Individuals", Econometrica, 37(3), July, pp. 382-397. (Presented at the December 1966 meetings of the Econometric Society, San Francisco.)

        Stiglitz, J E (2012), The Price of Inequality: How Today’s Divided Society Endangers Our Future, New York: W.W. Norton.

        Stiglitz, J E (2014), "New Theoretical Perspectives on the Distribution of Income and Wealth Among Individuals", paper presented to the International Economic Association World Congress, Dead Sea, June and forthcoming in Inequality and Growth: Patterns and Policy, Volume 1: Concepts and Analysis, to be published by Palgrave MacMillan.

        Stiglitz, J E (2015), "New Theoretical Perspectives on the Distribution of Income and Wealth Among Individuals: Parts I-IV", NBER Working Papers 21189-21192, May.

        Footnotes

        1 For early discussions of such transmission processes, see Stiglitz (1969) and Bevan and Stiglitz (1979).

        2 Developments in this area are exemplified by Roemer and Trannoy (2014).

          Posted by on Tuesday, August 18, 2015 at 10:52 AM in Economics, Income Distribution | Permalink  Comments (28)


          Fed Watch: Some Thoughts On Productivity And The Fed

          Tim Duy:

          Some Thoughts On Productivity And The Fed, by Tim Duy: Will flagging productivity growth trigger a hawkish response from the Fed? That is a question I have been asking myself since Federal Reserve Chair Janet Yellen discounted the cyclical influences of low wage growth in her July 10 speech:
          The most important factor determining continued advances in living standards is productivity growth, defined as the rate of increase in how much a worker can produce in an hour of work. Over time, sustained increases in productivity are necessary to support rising household incomes…Here the recent data have been disappointing. The growth rate of output per hour worked in the business sector has averaged about 1‑1/4 percent per year since the recession began in late 2007 and has been essentially flat over the past year. In contrast, annual productivity gains averaged 2-3/4 percent over the decade preceding the Great Recession. I mentioned earlier the sluggish pace of wage gains in recent years, and while I do think that this is evidence of some persisting labor market slack, it also may reflect, at least in part, fairly weak productivity growth.
          Goldman Sachs economists led by Jan Hatzius hypothesize that productivity growth is low only because growth is mis-measured, undercounting the value of free or improved software and digital content made possible by information technology (although see Greg Ip’s opposing view). It seems that Yellen is leaning in the direction of taking the productivity numbers at face value and seeing low wage growth as consistent with the view that the productivity slowdown is real.
          Indeed, the productivity trends may be even grimmer than 1-1/4 percent that Yellen cited in her speech. Consider for example two measures of underlying productivity growth trends, a moving average measure and the result from a simple unobserved components model:

          PROD081617

          The downtrend since 2000 is more easily discerned by focusing only on the trends:

          PRODa081617

          The unobserved component approach suggests that productivity growth decelerated to an annualized pace of just 0.82 percent by the second quarter of this year. That is interesting because it must be somewhat similar to the Fed staff estimates. The accidentally released Fed staff estimates of potential GDP growth range from roughly 1.6 to 1.8 percent through 2020. That is exactly what you might expect with productivity growth of around 0.8 percent and labor force growth in the between 0.8 to 1.0 percent (roughly the recent range). It seems the Fed staff have adopted the pessimistic view of the productivity numbers. It is not about measurement error.
          What are the implications for policy? Yellen might think back to the 1990’s, when a surprise rise in productivity growth temporarily lowered the natural rate of unemployment. Slow wage adjustment meant higher than expected productivity growth had a disinflationary impact on the economy, allowing for then Federal Reserve Chairman Alan Greenspan to hold interest rates relatively low. Yellen might reverse that logic now and think that the arguments for tighter policy are stronger. Hence another reason why low wage growth is not an impediment to raising rates.
          Any increase in the natural rate of unemployment, however, would be temporary. After wage growth adjusts, we would expect the equilibrium real interest rate to fall in response to lower productivity growth. Lower productivity growth reduces the expected return on capital, thus requiring lower interest rates to maintain neutral policy.
          The trick then is determining whether we are still in the short-run or already in the long-run. It may be that wages have already adjusted. Real wage growth was fairly high during the recession and it’s aftermath:

          PHILLIPS081617

          Real wage growth – using core-PCE as the deflator – was high as wages adjusted during the recession, but then remained high even when unemployment was above six percent. Now real wages are running low. Could it be that the wage adjustment to lower productivity growth occurred during the recession? If so, the Fed would be in error to believe that now is the time to tighten policy in response to low productivity growth. In effect, the zero bound unintentionally did that job for them. Not only did wage growth adjust, but any potential inflationary impacts were overwhelmed by the disinflationary impacts of the recession.
          The bond market, with ten-year Treasury yields hovering between 2 and 2.5 percent, appears to be fiercely discounting the lower-for-longer story consistent with low productivity growth. Furthermore, low TIPS-based inflation expectations and a modest expected path for short rates also suggest little need for the Fed to tighten policy to avoid a 1970’s style inflation. The FOMC, however, has a more hawkish view, anticipating a more aggressive policy over the next few years. The Fed staff split the difference in their forecasts. The direction the FOMC ultimately takes could be the difference in an expansion that last four more years or only two.
          Bottom Line: Fed policy increasingly reflects the view that the productivity growth slowdown is real. We see it in falling estimates of potential GDP growth, falling expectations for the terminal federal funds rate, and now we see it as a reason to anticipate low wage growth. The first and third reactions seem to have had a hawkish impact on policy - not only is low wage growth not an impediment to raising rates, but San Francisco Federal Reserve President John Williams argued the Fed needs to engineer a substantial slowdown in growth next year. But the FOMC has yet to act on that relative hawkishness; to date they have moved in the direction of market participants. Indeed, while I suspect the odds favor a September hike, we don’t even know they will raise rates this year at all! The question is whether they would be quick to act on that hawkishness in the face of any unexpectedly high inflation or wage growth numbers. I am thinking low-productivity growth coupled with memories of the 1970s may prime FOMC members in that direction.

            Posted by on Tuesday, August 18, 2015 at 12:15 AM Permalink  Comments (45)


            Links for 08-18-15

              Posted by on Tuesday, August 18, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (162)


              Monday, August 17, 2015

              Stiglitz: Towards a General Theory of Deep Downturns

              This is the abstract, introduction, and final section of a recent paper by Joe Stiglitz on theoretical models of deep depressions (as he notes, it's "an extension of the Presidential Address to the International Economic Association"):

              Towards a General Theory of Deep Downturns, by Joseph E. Stiglitz, NBER Working Paper No. 21444, August 2015: Abstract This paper, an extension of the Presidential Address to the International Economic Association, evaluates alternative strands of macro-economics in terms of the three basic questions posed by deep downturns: What is the source of large perturbations? How can we explain the magnitude of volatility? How do we explain persistence? The paper argues that while real business cycles and New Keynesian theories with nominal rigidities may help explain certain historical episodes, alternative strands of New Keynesian economics focusing on financial market imperfections, credit, and real rigidities provides a more convincing interpretation of deep downturns, such as the Great Depression and the Great Recession, giving a more plausible explanation of the origins of downturns, their depth and duration. Since excessive credit expansions have preceded many deep downturns, particularly important is an understanding of finance, the credit creation process and banking, which in a modern economy are markedly different from the way envisioned in more traditional models.
              Introduction The world has been plagued by episodic deep downturns. The crisis that began in 2008 in the United States was the most recent, the deepest and longest in three quarters of a century. It came in spite of alleged “better” knowledge of how our economic system works, and belief among many that we had put economic fluctuations behind us. Our economic leaders touted the achievement of the Great Moderation.[2] As it turned out, belief in those models actually contributed to the crisis. It was the assumption that markets were efficient and self-regulating and that economic actors had the ability and incentives to manage their own risks that had led to the belief that self-regulation was all that was required to ensure that the financial system worked well , an d that there was no need to worry about a bubble . The idea that the economy could, through diversification, effectively eliminate risk contributed to complacency — even after it was evident that there had been a bubble. Indeed, even after the bubble broke, Bernanke could boast that the risks were contained.[3] These beliefs were supported by (pre-crisis) DSGE models — models which may have done well in more normal times, but had little to say about crises. Of course, almost any “decent” model would do reasonably well in normal times. And it mattered little if, in normal times , one model did a slightly better job in predicting next quarter’s growth. What matters is predicting — and preventing — crises, episodes in which there is an enormous loss in well-being. These models did not see the crisis coming, and they had given confidence to our policy makers that, so long as inflation was contained — and monetary authorities boasted that they had done this — the economy would perform well. At best, they can be thought of as (borrowing the term from Guzman (2014) “models of the Great Moderation,” predicting “well” so long as nothing unusual happens. More generally, the DSGE models have done a poor job explaining the actual frequency of crises.[4]
              Of course, deep downturns have marked capitalist economies since the beginning. It took enormous hubris to believe that the economic forces which had given rise to crises in the past were either not present, or had been tamed, through sound monetary and fiscal policy.[5] It took even greater hubris given that in many countries conservatives had succeeded in dismantling the regulatory regimes and automatic stabilizers that had helped prevent crises since the Great Depression. It is noteworthy that my teacher, Charles Kindleberger, in his great study of the booms and panics that afflicted market economies over the past several hundred years had noted similar hubris exhibited in earlier crises. (Kindleberger, 1978)
              Those who attempted to defend the failed economic models and the policies which were derived from them suggested that no model could (or should) predict well a “once in a hundred year flood.” But it was not just a hundred year flood — crises have become common . It was not just something that had happened to the economy. The crisis was man-made — created by the economic system. Clearly, something is wrong with the models.
              Studying crises is important, not just to prevent these calamities and to understand how to respond to them — though I do believe that the same inadequate models that failed to predict the crisis also failed in providing adequate responses. (Although those in the US Administration boast about having prevented another Great Depression, I believe the downturn was certainly far longer, and probably far deeper, than it need to have been.) I also believe understanding the dynamics of crises can provide us insight into the behavior of our economic system in less extreme times.
              This lecture consists of three parts. In the first, I will outline the three basic questions posed by deep downturns. In the second, I will sketch the three alternative approaches that have competed with each other over the past three decades, suggesting that one is a far better basis for future research than the other two. The final section will center on one aspect of that third approach that I believe is crucial — credit. I focus on the capitalist economy as a credit economy , and how viewing it in this way changes our understanding of the financial system and monetary policy. ...

              He concludes with:

              IV. The crisis in economics The 2008 crisis was not only a crisis in the economy, but it was also a crisis for economics — or at least that should have been the case. As we have noted, the standard models didn’t do very well. The criticism is not just that the models did not anticipate or predict the crisis (even shortly before it occurred); they did not contemplate the possibility of a crisis, or at least a crisis of this sort. Because markets were supposed to be efficient, there weren’t supposed to be bubbles. The shocks to the economy were supposed to be exogenous: this one was created by the market itself. Thus, the standard model said the crisis couldn’t or wouldn’t happen ; and the standard model had no insights into what generated it.
              Not surprisingly, as we again have noted, the standard models provided inadequate guidance on how to respond. Even after the bubble broke, it was argued that diversification of risk meant that the macroeconomic consequences would be limited. The standard theory also has had little to say about why the downturn has been so prolonged: Years after the onset of the crisis, large parts of the world are operating well below their potential. In some countries and in some dimension, the downturn is as bad or worse than the Great Depression. Moreover, there is a risk of significant hysteresis effects from protracted unemployment, especially of youth.
              The Real Business Cycle and New Keynesian Theories got off to a bad start. They originated out of work undertaken in the 1970s attempting to reconcile the two seemingly distant branches of economics, macro-economics, centering on explaining the major market failure of unemployment, and microeconomics, the center piece of which was the Fundamental Theorems of Welfare Economics, demonstrating the efficiency of markets.[66] Real Business Cycle Theory (and its predecessor, New Classical Economics) took one route: using the assumptions of standard micro-economics to construct an analysis of the aggregative behavior of the economy. In doing so, they left Hamlet out of the play: almost by assumption unemployment and other market failures didn’t exist. The timing of their work couldn’t have been worse: for it was just around the same time that economists developed alternative micro-theories, based on asymmetric information, game theory, and behavioral economics, which provided better explanations of a wide range of micro-behavior than did the traditional theory on which the “new macro - economics” was being constructed. At the same time, Sonnenschein (1972) and Mantel (1974) showed that the standard theory provided essentially no structure for macro- economics — essentially any demand or supply function could have been generated by a set of diverse rational consumers. It was the unrealistic assumption of the representative agent that gave theoretical structure to the macro-economic models that were being developed. (As we noted, New Keynesian DSGE models were but a simple variant of these Real Business Cycles, assuming nominal wage and price rigidities — with explanations, we have suggested, that were hardly persuasive.)
              There are alternative models to both Real Business Cycles and the New Keynesian DSGE models that provide better insights into the functioning of the macroeconomy, and are more consistent with micro- behavior, with new developments of micro-economics, with what has happened in this and other deep downturns . While these new models differ from the older ones in a multitude of ways, at the center of these models is a wide variety of financial market imperfections and a deep analysis of the process of credit creation. These models provide alternative (and I believe better) insights into what kinds of macroeconomic policies would restore the economy to prosperity and maintain macro-stability.
              This lecture has attempted to sketch some elements of these alternative approaches. There is a rich research agenda ahead.

                Posted by on Monday, August 17, 2015 at 11:34 AM in Academic Papers, Economics, Macroeconomics, Methodology | Permalink  Comments (79)


                Greenspan: Shelve Dodd-Frank

                We should listen to Alan Greenspan on bank regulation, especially regulation of the shadow banking sector. After all, he was the one who argued we didn't need to worry about financial markets because the market would force them to self-regulate.

                We all know how that turned out, including Greenspan's famous mea culpa on this issue. Greenspan says, as though we should listen, that Dodd-Frank financial reform needs to be reversed:

                Higher reserves will secure the financial system with less pain, by Alan Greenspan, Commentary, Financial Times: ... What the 2008 crisis exposed was a fragile underpinning of a highly leveraged financial system. Had bank capital been adequate and fraud statutes been more vigorously enforced, the crisis would very likely have been a financial episode of only passing consequence.
                If average bank capital in 2008 had been, say, 20 or even 30 per cent of assets (instead of the recent levels of 10 to 11 per cent), serial debt default contagion would arguably never have been triggered. ...
                Lawmakers and regulators, given elevated capital buffers, need to be far less concerned about the quality of the banks’ loan and securities portfolios since any losses would be absorbed by shareholders, not taxpayers. This would enable the Dodd-Frank Act on financial regulation of 2010 to be shelved, ending its potential to distort the markets — a potential seen in the recent decline in market liquidity and flexibility. ...

                Actually, I agree on higher capital requirements, but we depart when he asserts that is all that is needed. In any case, had he been willing to push for something like this when he had control of the policy levers instead of steadfastly standing against it with a 'markets are always right' argument, maybe things turn out better.

                Note: On his assertion about the recent decline in bond market liquidity, the NY Fed says:

                Overall, our evidence is fairly favorable about the current state of Treasury market liquidity. Direct measures such as the bid-ask spread point toward liquidity that is quite good by recent historical standards. Other measures such as quote depth and price impact imply some recent deterioration in liquidity, albeit from unusually liquid conditions. The evidence suggests that market participants’ liquidity concerns are not emanating from average levels of liquidity in the benchmark Treasury notes.

                If average liquidity is generally good by historical standards, then why all the liquidity concerns? ...

                I'll take a shot at answering that. Could it be a means to attack Dodd-Frank, and regulation more generally?

                Two other observers, Cecchetti & Schoenholtz, also look at bond market liquidity:

                ...when knowledgeable people express concerns that regulatory changes are causing bond markets to malfunction (see, for example, here), it leads us to ask some tough questions. Are these markets somehow impaired? Is enhanced financial regulation to blame? Is this creating risks to the financial system as a whole?

                To anticipate our conclusion, while bond markets are clearly evolving, we do not see reasons for immediate concern about the financial system as a whole. In fact, our expectation is that the capital and liquidity requirements that have made financial intermediaries more resilient to economic downturns and to interest rate spikes, also have improved their ability to stabilize bond markets. ...

                Put another way, better regulation has removed the public subsidy to trading activity that banks and others were able to capture prior to the crisis...

                  Posted by on Monday, August 17, 2015 at 10:33 AM Permalink  Comments (29)


                  Paul Krugman: Republicans Against Retirement

                  Why do Republicans want to get rid of Social Security?:

                  Republicans Against Retirement, by Paul Krugman, Commentary, NY Times: Something strange is happening in the Republican primary — something strange, that is, besides the Trump phenomenon. For some reason, just about all the leading candidates other than The Donald have taken a deeply unpopular position, a known political loser, on a major domestic policy issue. And it’s interesting to ask why.
                  The issue in question is the future of Social Security... The retirement program is, of course, both extremely popular and a long-term target of conservatives, who want to kill it precisely because its popularity helps legitimize government action in general. ...
                  What’s puzzling about the renewed Republican assault on Social Security is that it looks like bad politics as well as bad policy. Americans love Social Security, so why aren’t the candidates at least pretending to share that sentiment?
                  The answer, I’d suggest, is that it’s all about the big money.
                  Wealthy individuals have long played a disproportionate role in politics, but we’ve never seen anything like what’s happening now: domination of campaign finance, especially on the Republican side, by a tiny group of immensely wealthy donors. Indeed, more than half the funds raised by Republican candidates through June came from just 130 families.
                  And while most Americans love Social Security, the wealthy don’t. ... By a very wide margin, ordinary Americans want to see Social Security expanded. But by an even wider margin, Americans in the top 1 percent want to see it cut. And guess whose preferences are prevailing among Republican candidates.
                  You often see political analyses pointing out, rightly, that voting in actual primaries is preceded by an “invisible primary” in which candidates compete for the support of crucial elites. But who are these elites? In the past, it might have been members of the political establishment and other opinion leaders. But what the new attack on Social Security tells us is that the rules have changed. Nowadays, at least on the Republican side, the invisible primary has been reduced to a stark competition for the affections and, of course, the money of a few dozen plutocrats.
                  What this means, in turn, is that the eventual Republican nominee — assuming that it’s not Mr. Trump —will be committed not just to a renewed attack on Social Security but to a broader plutocratic agenda. Whatever the rhetoric, the GOP is on track to nominate someone who has won over the big money by promising government by the 1 percent, for the 1 percent.

                    Posted by on Monday, August 17, 2015 at 09:33 AM in Economics, Politics, Social Insurance, Social Security | Permalink  Comments (51)


                    'The Labor Market Effect of Opening the Border to Immigrant Workers'

                    Andreas Beerli and Giovanni Peri at Vox EU:

                    The labor market effect of opening the border to immigrant workers, by Andreas Beerli and Giovanni Peri, Vox EU: The case for immigration restrictions is periodically debated in the political arena. The refugee crisis in southern Europe in recent months and the increased number of asylum seekers, who may turn into undocumented economic immigrants, has spurred discussion for stricter border enforcement and controls. In the UK, David Cameron promised few years ago to bring annual net migration down to ‘tens of thousands’ and put a cap on skilled non-European immigrants. With the British economy recovering, the cap has become binding for the first time in June of this year. Firms report problems in finding the right type of workers (Economist 2015a), yet relaxing immigration restrictions has little to no support among parties in the UK (Economist 2015b). In February 2014, Swiss voters narrowly approved a referendum to curb immigration from the EU after resentment to immigration grew, following the opening of labour markets to European workers (New York Times 2014).

                    The effects of immigration restrictions on the inflow of immigrants and, in turn, on native workers’ employment outcomes are prominently discussed among policymakers. In spite of high sounding statement about the need of ‘pulling up the draw-bridge’ to avoid a flood of immigrants who can take away jobs, there is little direct evidence in the economic literature on how more open immigration policies affect immigration flows and, in turn, native labor market outcomes. Existing studies have analyzed the effects of immigration flows, comparing regions that receive more or fewer immigrants within a country, and interpreting the differences in outcomes as driven by immigration. However, examples in which different policies were adopted in otherwise similar regions – allowing a causal analysis of immigration policies on flows and on native labor markets – are rare.

                    The literature has leveraged the tendency of immigrants to settle in regions with a network of compatriots (e.g. Card 2001, Peri and Sparber 2009, Dustmann et al. 2013) or it has used ‘push episodes’ from sending countries such as the collapse of the Soviet Union (Borjas & Doran 2015) or the wave of refugees from Cuba (Card 1990) to learn about their labor market effects. These episodes, however, are not under the control of the receiving country and therefore from them we do not learn much about the effectiveness and labor market consequences of different immigration policies.

                    In a recent paper, we exploit the Swiss integration into the European labor market after 1999 and study the causal effect of removing restrictions on immigrant flows and on native employment and wages (Beerli and Peri 2015).

                    Access to the Swiss labor market: border vs. non-border regions

                    The Swiss case was unique in that two different parts of the country experienced different timing in the implementation of the free movement policy. Labor market access for cross-border workers (foreign workers commuting from Italy, France, Germany, and Austria), was gradually eased beginning in 1999 and fully liberalized in 2004.

                    • This type of workers could only work in the border region (BR), which encompasses municipalities close to the national border.
                    • They were not allowed in the non-border region (NBR).

                    Labor market access for other immigrants, who intended to work and settle in Switzerland, was also eased between 1999 and 2007 but symmetrically in all regions.

                    After 2007, the free movement policy was fully executed for cross-border workers and for all other EU immigrants in both regions.

                    Thus, the two different schedules created a time-window between 1999 and 2004, in which the border region became gradually more open to immigrants than the non-border due to cross-border workers. The difference in openness became most pronounced between 2004 and 2007 when cross-border workers had free access to border regions but no access to non-border regions.

                    We leverage this differential degree of openness of the border relative to the non-border to analyze the effect of removing immigration barriers on the inflow of new immigrants and on native labor market outcomes. As cross-border workers and other immigrants had similar demographic characteristics and skills, we look at the total share of foreign-born in the labor force and we adopt a flexible difference-in-difference framework. We analyze differential outcomes in the period 1999-2004, during which border region progressively eased the entry of cross-border workers, and in the period 2004-2007, in which cross-border liberalization was fully executed in the border region.1

                    The effect on immigration

                    Figure 1 displays the evolution of the labor force share of new immigrants in border and non-border regions (top panel) and the difference between them (bottom panel) during the period 1994-2010. The figure shows that the share of new immigrants moved together prior to 1999 (pre-reform), with a difference around 7 percentage points. Between 1999 and 2010, however, the share of new immigrants increased from 12.6% to 18.2% in the border regions, and from 5.5% to 7.4% in the non-border regions. Hence, new immigrants as share of the workforce increased by 3.7 percentage points more in the border compared to the non-border region.

                    Figure 1. Share of new immigrants in BR and NBR (top panel) and their difference (bottom panel)

                    Peri fig1a 14 aug

                    Peri fig1b 14 aug

                    Notes: The left panel plots the evolution of the share of new immigrants on the total workforce in the border region (BR, left y-axis) and the same share in the non-border region (NBR, right y-axis). The right panel plots the difference in the share of new immigrants between both regions.

                    A more rigorous regression exercise yields a similar finding. The difference in share of new immigrants between border and non-border regions was stable prior to 1999 but it increased thereafter by about 4 percentage points up until 2010. Figure 2 shows that the cumulated gap in immigrant share, after controlling for several labor market characteristics, was significantly different from 0 for the first time in 2004 and remained significant after 2007.

                    Figure 2. Estimated difference in immigrant share, between BR and NBR, coefficients and 5%-confidence intervals (base year = 1998)

                    Peri fig2 14 aug

                    Notes: The figure plots coefficients (straight line) and the 5%-confidence interval (dashed lines) of a difference-in-difference estimate with immigrants as share of labor force and including municipality and year fixed effects as controls for local, industry-driven demand shocks.

                    The effect on labor market outcomes

                    Having established that relaxing the restrictions on EU immigrants induced a significant growth, although certainly not a flood of immigrants, the next question we tackle is whether and how this influx affected natives’ labor markets. We exploit the same differential policy treatment between border and the non-border regions and find that average wages and hours worked by natives were not affected by it.

                    • However, when analyzing the effects separately by education group, we find that natives with a college degree benefited from the liberalization policy in terms of higher wages;
                    • Middle-educated workers (with upper secondary education but no college degree) suffered some decline in employment.
                    • Low-educated native workers were not affected.

                    This finding is puzzling at first, as the largest group of newly arriving immigrants was college educated and a standard model with skill complementarity would suggest that highly educated natives compete most directly with immigrants and should endure more negative effects.

                    To explore this puzzle, we investigate whether immigration had an effect on the job specialization of natives. Previous research (Peri and Sparber, 2009, 2011, Foged and Peri 2013) suggests that natives’ job specialization is likely to respond to the inflow of immigrants. As more immigrants take jobs, natives move to occupations where competition from immigrants is lower and complementarity effects are stronger. We find that highly educated natives were able to climb into higher management positions in response to the inflow of similarly educated immigrants, explaining some of their wage gains. On the other hand, middle-educated natives did not upgrade their positions but, instead, were reallocated to less-challenging job tasks and were replaced by immigrants in the ‘intermediate task’ range. So while in general natives responded to immigrant inflow, highly educated experienced an ‘upgrade’ of their jobs while middle-educated did not.

                    Discussion and conclusions

                    Our findings add to the existing evidence on the effects of immigration on native workers.

                    • First, by directly tackling immigration policies, we see that fully opening the border to neighbor countries increased immigrants only by 4 percentage points of the labor force over eight years.
                    • Second, we find that such an increased inflow did not have significant aggregate effects. Some groups of workers, however, experienced wage benefits while other experienced employment losses.

                    The recent research in this area has recognized the importance of looking at policy changes within countries to learn about their causal impact on foreign workers and labor markets. Dustmann et al. (2015), using an episode that allowed cross-border Czech workers into Germany, showed that in the short-run a substantial influx of unskilled workers reduced wages of unskilled young natives while unskilled older workers suffer employment declines. They explain this finding with the fact that old workers might either have larger labor supply elasticity (due to attractive outside options) or face larger wage rigidity than young workers. Our analysis shows that employment responses might also depend on the degree of occupation and task adjustment by native workers with different education levels. Such adjustment affects wage and employment effects.

                    References

                    Beerli, A and G Peri (2015), “The Labor Market Effect of Opening the Border: New Evidence from Switzerland”, NBER Working Paper 21319.

                    Borjas, G J  and K Doran (2015), “Cognitive Mobility: Native Responses to Supply Shocks in the Space of Ideas”, Journal of Labor Economics, 33 (1), 109—145.

                    Card, D (1990), “The Impact of the Mariel Boatlift on the Miami Labor Market”, Industrial and Labor Relations Review, 43 (2), 245—257.

                    Card, D (2001), “Immigrant Inflows, Native Outflows, and the Local Labor Market Impacts of Higher Immigration”, Journal of Labor Economics, 19 (1), 22—64.

                    Dustmann, C, U Schönberg and J Stuhler (2015), “Labor Supply Shocks and the Dynamics of Local Wages and Employment”, Manuscript, University College London, March 2015.

                    The Economist (2015a), “How to kneecap the recovery”, 18 June.

                    The Economist (2015b), “Raise the Drawbridge”, 9 April.

                    Glitz, A (2012), “The Labor Market Impact of Immigration: A Quasi-Experiment Exploiting Immigrant Location Rules in Germany”, Journal of Labor Economics, 30 (1), 175—213.

                    The New York Times (2014), “Swiss Voters Narrowly Approve Curbs on Immigration”, 9 February.

                    Peri, G and C Sparber (2009), “Task Specialization, Immigration, and Wages”, American Economic Journal: Applied Economics, 1 (3), 135—169.

                    Footnote

                    1 An important concern is that both regions could have experienced different pre- or post-1999 economic trends after the burst of the dot-com bubble. In the paper we establish that both regions are similar in terms of their industrial structure, and we control for local, industry-specific demand shocks and show similar pre-1999 economic trends.

                      Posted by on Monday, August 17, 2015 at 12:24 AM in Economics, Immigration | Permalink  Comments (18)


                      Links for 08-17-15

                        Posted by on Monday, August 17, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (196)


                        Sunday, August 16, 2015

                        'The U.S. Foreclosure Crisis Was Not Just a Subprime Event'

                        From the NBER Digest:

                        The U.S. Foreclosure Crisis Was Not Just a Subprime Event, by Les Picker, NBER: Many studies of the housing market collapse of the last decade, and the associated sharp rise in defaults and foreclosures, focus on the role of the subprime mortgage sector. Yet subprime loans comprise a relatively small share of the U.S. housing market, usually about 15 percent and never more than 21 percent. Many studies also focus on the period leading up to 2008, even though most foreclosures occurred subsequently. In "A New Look at the U.S. Foreclosure Crisis: Panel Data Evidence of Prime and Subprime Borrowers from 1997 to 2012" (NBER Working Paper No. 21261), Fernando Ferreira and Joseph Gyourko provide new facts about the foreclosure crisis and investigate various explanations of why homeowners lost their homes during the housing bust. They employ microdata that track outcomes well past the beginning of the crisis and cover all types of house purchase financing—prime and subprime mortgages, Federal Housing Administration (FHA)/Veterans Administration (VA)-insured loans, loans from small or infrequent lenders, and all-cash buyers. Their data contain information on over 33 million unique ownership sequences in just over 19 million distinct owner-occupied housing units from 1997-2012.

                         

                        The researchers find that the crisis was not solely, or even primarily, a subprime sector event. It began that way, but quickly expanded into a much broader phenomenon dominated by prime borrowers' loss of homes. There were only seven quarters, all concentrated at the beginning of the housing market bust, when more homes were lost by subprime than by prime borrowers. In this period 39,094 more subprime than prime borrowers lost their homes. This small difference was reversed by the beginning of 2009. Between 2009 and 2012, 656,003 more prime than subprime borrowers lost their homes. Twice as many prime borrowers as subprime borrowers lost their homes over the full sample period.
                        The authors suggest that one reason for this pattern is that the number of prime borrowers dwarfs that of subprime borrowers and the other borrower/owner categories they consider. The prime borrower share averages around 60 percent and did not decline during the housing boom. Although the subprime borrower share nearly doubled during the boom, it peaked at just over 20 percent of the market. Subprime's increasing share came at the expense of the FHA/VA-insured sector, not the prime sector.
                        The authors' key empirical finding is that negative equity conditions can explain virtually all of the difference in foreclosure and short sale outcomes of prime borrowers compared to all cash owners. Negative equity also accounts for approximately two-thirds of the variation in subprime borrower distress. Both are true on average, over time, and across metropolitan areas.
                        None of the other 'usual suspects' raised by previous research or public commentators—housing quality, race and gender demographics, buyer income, and speculator status—were found to have had a major impact. Certain loan-related attributes such as initial loan-to-value (LTV), whether a refinancing occurred or a second mortgage was taken on, and loan cohort origination quarter did have some independent influence, but much weaker than that of current LTV.
                        The authors' findings imply that large numbers of prime borrowers who did not start out with extremely high LTVs still lost their homes to foreclosure. They conclude that the economic cycle was more important than initial buyer, housing and mortgage conditions in explaining the foreclosure crisis. These findings suggest that effective regulation is not just a matter of restricting certain exotic subprime contracts associated with extremely high default rates.

                          Posted by on Sunday, August 16, 2015 at 12:24 AM in Academic Papers, Economics, Financial System, Housing | Permalink  Comments (92)


                          Links for 08-16-15

                            Posted by on Sunday, August 16, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (210)


                            Saturday, August 15, 2015

                            'Marxists and Conservatives Have More in Common than Either Side Would Like to Admit'

                            Chris Dillow on common ground between Marxists and Conservatives:

                            Fairness, decentralization & capitalism: Marxists and Conservatives have more in common than either side would like to admit. This thought occurred to me whilst reading a superb piece by Andrew Lilico.

                            He describes the Brams-Taylor procedure for cutting a cake in a fair way - in the sense of ensuring envy-freeness - and says that this shows that a central agency such as the state is unnecessary to achieve fairness:...

                            The appropriate mechanism here is one in which there is a balance of power, such that no individual can say: "take it or leave it."

                            This is where Marxism enters. Marxists claim that, under capitalism, the appropriate mechanism is absent. Marx stressed that ... the labour market is an arena in which power is unbalanced...

                            Nor do Marxists expect the state to correct this, because the state is captured by capitalists - it is "a committee for managing the common affairs of the whole bourgeoisie."...

                            Instead, Marx thought that fairness can only be achieved by abolishing both capitalism and the state - something which is only feasible at a high level of economic development - and replacing it with some forms of decentralized decision-making. ...

                            In this sense, Marxists agree with Andrew: people can find fair allocations themselves without a central agency. ...

                              Posted by on Saturday, August 15, 2015 at 09:10 AM in Economics, Income Distribution, Unions | Permalink  Comments (32)


                              Links for 08-15-15

                                Posted by on Saturday, August 15, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (133)


                                Friday, August 14, 2015

                                Paul Krugman: Bungling Beijing’s Stock Markets

                                The Chinese leadership appears to be "imagining that it can order markets around":

                                Bungling Beijing’s Stock Markets, by Paul Krugman, Commentary, NY Times: ... Is it possible that after all these years Beijing still doesn’t get how this “markets” thing works?
                                The background: China’s economy is ... slowing as China runs out of surplus labor. ... The ... problem is how to sustain spending during the transition. And that’s where things have gotten weird.
                                At first, the Chinese government supported the economy in part through infrastructure spending, which is the standard remedy for economic weakness. But it also did so by funneling cheap credit to state-owned enterprises. The result was a run-up in these enterprises’ debt, which by last year was high enough to raise worries about financial stability.
                                Next, China adopted an official policy of boosting stock prices... But the consequence was an obvious bubble, which began deflating earlier this year.
                                The response of the Chinese authorities was remarkable: They pulled out all the stops to support the market — suspending trading in many stocks, banning short-selling, pushing large investors to buy, and instructing graduating economics students to chant “Revive A-shares, benefit the people.”
                                All of this has stabilized the market for the time being. But it is at the cost of tying China’s credibility to its ability to keep stock prices from ever falling. And the Chinese economy still needs more support.
                                So this week China decided to let the value of its currency decline... But Chinese authorities seem to have imagined that they could control the renminbi’s descent, taking it a couple of percent at a time.
                                They appear to have been taken completely by surprise by the market’s predictable reaction; namely, the initial devaluation of the renminbi was ... a sign of much bigger declines to come. Investors began fleeing China, and policy makers abruptly pivoted from promoting currency devaluation to an all-out effort to support the renminbi’s value.
                                The common theme in these wild policy swings is that China’s leadership keeps imagining that it can order markets around, telling them what prices to reach. ... Do the country’s leaders really not understand why that won’t work?
                                If they really don’t, that’s a big concern. China is an economic superpower — not quite as super as the United States or the European Union, yet, but big enough to matter a lot. And it’s facing tough times. So if its leadership is really as clueless as it has been looking lately, that bodes ill, not just for China, but for the world as a whole.

                                  Posted by on Friday, August 14, 2015 at 01:06 AM in China, Economics, Financial System, Politics | Permalink  Comments (233)


                                  Is Economic Success Inherited?

                                  This is by Abdul Alasaad:

                                  Is Financial Success a Product of Inherited Genes?, INET: How much does a family’s wealth determine a child’s financial prospects? ... In his ... essay, Defending the One Percent, Gerg Mankiw links the correlation between people’s earnings with those of their parents to genetic factors. ...
                                  Is Mankiw right to link this strong relationship to genetic factors? Well,.. four economists, in an NBER working paper, compared the wealth of adoptive children to the wealth of their adoptive and biological parents. ...
                                  The relationship between the wealth ranking of adoptive children and with those of their adoptive parents is strikingly positive and almost as strong as the relationship between parents and their biological children...
                                  More conclusively..., a child’s wealth is more strongly correlated with the wealth of their adoptive parents than to the wealth of their biological parents. Nurture, when it comes to wealth, is far more important than nature.
                                  But overall, who had a higher net wealth at the age of 44 prior to any inheritance? Biological children or adopted ones? ... It turns out that the biological children had in fact accumulated more net worth; but by a very small, and almost irrelevant, margin. ...
                                  Equally interesting, the researchers study the variation in attainment of education levels between adopted children and biological ones. If genetic factors matter more than access to opportunity, then biological children of affluent parents must attain higher levels of education than their adopted counterparts. Is this true? Well, The data suggest otherwise. ...
                                  Wealth, like most things in life, has more to do with environmental factors than genetic ones. ...

                                    Posted by on Friday, August 14, 2015 at 12:33 AM Permalink  Comments (20)


                                    Iceland, Greece and Hectoring by Foreign Officials

                                    Public hectoring is counterproductive:

                                    Iceland, Greece and political hectoring, by Jon Danielsson, Vox EU: In observing what has been happening in Greece, I am struck by many parallels with the Icelandic crisis (Buiter and Sibert 2008). The two crises demonstrate that the commonalities in crisis tend to be bigger than the differences.
                                    Leaving the economics aside, here I want to focus on the political and international relations aspects, and in particular how the Icelandic Icesave dispute has many echoes in how the Greek crisis is playing out and the impact of subjecting debt agreements to referenda.
                                    A brief background to the Icesave dispute
                                    I have discussed this before here on Vox (Danielsson 2010), so here is just a brief synopsis. An Icelandic bank, regulated and deposit insured in Iceland, when rejected by professional creditors in 2007 opted to get funding by opening online branches in Britain and the Netherlands, under the name of Icesave. It was quite successful, not least because it offered above market interest rates.
                                    However, ultimately the professionals proved right and the bank failed in October 2008. This was at the height of the Global Crisis, and the UK and Dutch authorities opted to unilaterally bail out Icesave’s retail depositors, motivated by a desire to prevent even more disruption to financial markets.
                                    After spending €3.9 billion on the bailout, the British and Dutch tried to claim the money back from the Icelandic deposit insurance fund. They found it lacking and hence wanted the Icelandic government to repay them instead. It hesitated, after all this amounted to 42% of GDP and a sovereign default was looming.
                                    However, the legal case was always uncertain and when the case was ultimately decided by international courts, it ruled in Iceland's favor. Ultimately, it turned out to be a storm in a teacup, the estate of Icesave had more than enough money to make everybody whole. The British and the Dutch governments even profited from the whole thing.
                                    Dictating an Icesave deal
                                    The government of Iceland initially accepted the British and the Dutch claims and assembled a team to negotiate the terms. They were heavily outgunned. At the time, I likened this to Iceland sending my local first division football team, Grotta, to play against Manchester United.
                                    The Icelanders soon realized that the agreement was lacking and that its authorities were less than competent in their negotiations with the foreign powers. Opposition to the Icesave agreement started to build and an acrimonious debate started, both domestically and with the outside world.
                                    At the time, Iceland came under very strong pressure from every relevant government to give in. Trade sanctions were threatened, the IMF held up its aid package to force Iceland to accept the claim, and Iceland's main international friend, Norway, took on the role of main enforcer. The Icelanders got the impression that they stood alone against the world, with Poland being the only country offering support.
                                    In the debate, Britain kept a very low profile; I do not recall any of its politicians commenting on Icesave publicly. It was different in the Netherlands where Icesave became a major political issue.
                                    Two men stand out – the foreign minister, Maxime Verhagen, and the finance minister, Wouter Bos. Both frequently commented on Icesave, threatening Iceland if it did not pay back the Icesave money. Their domestic comments were immediately translated into Icelandic, influencing public opinion. At the time, Iceland was negotiating with the EU for membership and Mr Verhagen linked membership to Iceland accepting the Icesave obligations.
                                    The Dutch officials were joined by political leaders from across Europe.
                                    Still, all this public hectoring was counterproductive.
                                    There were several reasons for this. The pressure and public exhortations were perceived as unreasonable. The Icelanders thought that the Dutch authorities were equally responsible; after all, they had been repeatedly warned against allowing the Icesave bank to start operations. They worried that adding on a foreign currency debt of 42% of GDP might trigger a sovereign default.
                                    Ultimately, the Icelanders bristled at being dictated to by hectoring foreign officials.
                                    The desire for reform needs to come from within
                                    So what does this have to do with Greece? The parallel is in how the international community pressured Iceland to give in and how the Icelanders reacted to the pressure.
                                    Greece has been under continuous and very public pressure to reform its economy. Leaving aside the question of whether these reforms are needed, all the public hectoring seems to be quite counterproductive at least in terms of voter perceptions.
                                    In their dealings with Greece, the foreign authorities have repeatedly and loudly told the Greek people they have to reform, that their way of doing things is wrong and that the way of the foreigners is right. I don't think this will work, and the recent referendum clearly suggests that voters would like to take an even harder line than their current leaders. This has ominous implications for the next election.
                                    After all, the Greek economy was collapsing when the troika was being obeyed. Leaving aside the question of whether there is causality, the voters certainly did see one.
                                    Referenda
                                    Iceland has another factor in common with Greece – they are the only two countries that have subjected sovereign debt settlements to a referendum, as analyzed by Curtis et al. (2014).
                                    They argue that while the vote was supposedly about economics and Europe, it really was about domestic politics and attitude of the voters to the government. The outcomes therefore signal the political direction of the countries.
                                    In addition, attitudes towards national sovereignty played a key role in both countries. Nationalists were more likely to say “no”, and the pro-European cosmopolitans “yes”.
                                    One long-term consequence of the Icesave dispute has been the hardening of its anti-European and isolationist views. And in the subsequent national elections, the Icelanders voted in parties that had campaigned against both the Icesave deal and EU membership (Danielsson 2013), including a prime minister who built his career on the “no” vote.
                                    One important difference between the Icelandic and Greek referendums is that in the former case, the question was clear and so were the consequences. In the Greek case that is not so, and this reflects the differences in the outcome – 61% of Greeks said no, and over 90% of Icelanders.
                                    Conclusion
                                    The lesson from Iceland is that the population will instinctively reject foreign pressure. It doesn't matter whether it is sensible or not, so long as it is imposed, it will be resisted.
                                    If the Greeks don’t want to reform their economy, the foreign authorities wanting that for them will be disabused. The hectoring by foreign officials, who are addressing their own voters as much as the Greeks, is likely to be counterproductive.
                                    At the end of the day, the will to reform needs to come from within, and the sooner the Troika realizes this, the easier it will be to deal with the Greek situation.
                                    References
                                    Buiter, W and A Sibert (2008), “The collapse of Iceland’s banks: the predictable end of a non-viable business model”, VoxEU.org, 20 October.
                                    Curtis, A, J Jupille and D Leblang (2014), “Greece isn’t the first country to have a debt referendum. Does Iceland provide useful lessons?”, Washington Post, 4 July.
                                    Danielsson, J (2010), “The saga of Icesave: A new CEPR Policy Insight”, VoxEU.org, 26 January. 
                                    Danielsson, J (2013), “Iceland’s post-Crisis economy: A myth or a miracle?”, 21 May. 

                                      Posted by on Friday, August 14, 2015 at 12:24 AM Permalink  Comments (10)


                                      Links for 08-14-15

                                        Posted by on Friday, August 14, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (67)


                                        Thursday, August 13, 2015

                                        'The Future of Work: Why Wages Aren't Keeping Up'

                                        This is from Robert Solow writing at Pacific Standard magazine:

                                        The Future of Work: Why Wages Aren't Keeping Up: One of the more puzzling and damaging features of the American labor market in the last few decades has been the failure of real (i.e. inflation-adjusted) wages and benefits to keep up with the increase in productivity. ...
                                        The custom is to think of value added in a corporation (or in the economy as a whole) as just the sum of the return to labor and the return to capital. But that is not quite right. There is a third component which I will call “monopoly rent” or, better still, just “rent.” ...
                                        The suggestion I want to make is that one important reason for the failure of real wages to keep up with productivity is that the division of rent in industry has been shifting against the labor side for several decades. This is a hard hypothesis to test in the absence of direct measurement. But the decay of unions and collective bargaining, the explicit hardening of business attitudes, the popularity of right-to-work laws, and the fact that the wage lag seems to have begun at about the same time as the Reagan presidency all point in the same direction: the share of wages in national value added may have fallen because the social bargaining power of labor has diminished. ...
                                        Now I would like to connect this hypothesis with another change taking place in the labor market..., the casualization of labor. The proportion of part-time workers has been rising... So are the numbers of workers on fixed-term contracts and independent contractors...
                                        Casual workers have little or no effective claim to the rent component of any firm’s value added... If the division of corporate rents has indeed been shifting against labor, an increasingly casual work force will find it very hard to reverse that trend.

                                          Posted by on Thursday, August 13, 2015 at 12:51 AM in Economics, Income Distribution, Market Failure, Productivity | Permalink  Comments (125)


                                          'The Shrinking Deficit'

                                          Bill McBride:

                                          The Shrinking Deficit: From the WSJ: Budget Deficit Totaled $488 Billion For Year Ended July, Down 9% From Year Earlier...
                                          The most recent CBO projection was for the fiscal 2015 budget deficit to be 2.7% of GDP. Right now it looks like fiscal 2015 will be under 2.4% (a significant improvement). ...

                                          Is that a good thing?

                                            Posted by on Thursday, August 13, 2015 at 12:42 AM in Budget Deficit, Economics | Permalink  Comments (46)


                                            'International Money Mania'

                                            Paul Krugman:

                                            International Money Mania: China is claiming that it’s not devaluing the renminbi to gain competitive advantage, it’s adding flexibility to prepare for the yuan as an international reserve currency, becoming part of the basket in the IMF’s SDRs and all that. That’s highly implausible as a story about what’s happening right now; but it may be true that China’s urge to loosen capital controls is driven in part by its global-currency ambitions. ...
                                            So what are the advantages of owning a reserve currency? ...
                                            What you’re left with, basically, is seigniorage: the fact that some people outside your country hold your currency, which means that in effect America gets a zero-interest loan corresponding to the stash of dollar bills — or, mainly $100 bills — held in the hoards of tax evaders, drug dealers, and other friends around the world. In normal times this privilege is worth something like $20-30 billion a year; that’s not a tiny number, but it’s only a small fraction of one percent of GDP.
                                            The point is that while reserve-currency status may have political symbolism attached, it’s essentially irrelevant as an economic goal — and definitely not worth distorting policy to achieve. Someone needs to tell the Chinese, you shall not crucify this country on a cross of SDRs.

                                              Posted by on Thursday, August 13, 2015 at 12:33 AM in Economics, International Finance, Politics | Permalink  Comments (30)


                                              'Do Asset Purchase Programs Push Capital Abroad?'

                                              Thomas Klitgaard and David Lucca at the NY Fed's Liberty Street Economics"

                                              Do Asset Purchase Programs Push Capital Abroad?: Euro area sovereign bond yields fell to record lows and the euro weakened after the European Central Bank (ECB) dramatically expanded its asset purchase program in early 2015. Some analysts predicted massive financial outflows spilling out of the euro area and affecting global markets as investors sought higher yields abroad. These arguments ignore balance of payments accounting, which requires any financial outflow from the euro area to be matched by a similar-sized inflow, absent a quick and substantial current account improvement. The focus on cross-border financial flows also is misguided since, according to asset pricing principles, the euro and global asset prices can move without any change in financial outflows. ...
                                              The recent experience with quantitative easing in Japan helps illustrate our point. In late 2012, the yen started to depreciate with the increased likelihood that the country would expand its asset purchase program. In April 2013, when the policy was actually implemented, commentary similar to that on the ECB program anticipated a “wall of money” flowing out of Japan in search of higher yields and affecting global asset prices. Indeed, analysts worried that emerging countries would have trouble absorbing these flows, leading to asset price bubbles. While asset prices and exchange rates adjusted in Japan and abroad, a surge in outflows never occurred. ... The wall of money never materialized.
                                              Nor does euro area data suggest substantial financial outflows. ...
                                              The euro’s fall has been a key channel through which the ECB’s asset purchase policy has affected financial markets in the rest the world. However, the idea that foreign asset prices would be pushed up by a surge in money flowing out of the region, as some observers predicted, runs contrary to balance of payments accounting and asset pricing principles and should be discounted.

                                                Posted by on Thursday, August 13, 2015 at 12:24 AM in Economics, Financial System, International Finance, Monetary Policy | Permalink  Comments (3)


                                                'Expectations in Dynamic Macroeconomic Models'

                                                I will be here tomorrow:

                                                Expectations in Dynamic Macroeconomic Models
                                                Eugene Hilton, Vista Room I, Floor 12
                                                August 13 - 15 2015
                                                Organizers: George Evans, Roger Guesnerie, Bruce McGough and Bruce Preston Sponsors: INEX C and University of Oregon
                                                Thursday, August 13
                                                7:30 am Continental Breakfast (Vista Room II, Floor 12)
                                                8:45 am Opening Remarks
                                                9:00am Cars Hommes, University of Amsterdam, "Behavioral Learning Equilibria for the New Keynesian Model"
                                                Discussant: George Waters
                                                10.00 am Coffee
                                                10:30 am Jasmina Arifovic, Simon Fraser University, "Escaping Expectations - Driven Liquidity Traps"
                                                Discussant: John Duffy
                                                11:30 am Bill Branch, University of California, Irvine Perpetual, "Learning  and  Stability in Macroeconomic Models"
                                                Discussant: Cars Hommes
                                                12:30 pm Lunch
                                                2.00 pm Mordecai Kurz, Stanford University, "Stabilizing Wage Policy"
                                                Discussant: George Evans
                                                3:00 pm Diogo Pinheiro, CUNY Brooklyn, "Refinement of Dynamic Equilibriun"
                                                Discussant: Bruce McGough
                                                4.00 pm Coffee
                                                4:30 pm Arunima Sinha, Fordham University, "A Lesson from the Great Depression that the Fed Might have Learned: A Comparison of the 1932 Open Market Purchases with Quantitative Easing"
                                                Discussant: Vasco Curdia
                                                6:45 pm Conference Dinner, with address by James Bullard, President and CEO, Federal Reserve Bank of St. Louis.
                                                Friday, August 14
                                                7:30 am Continental Breakfast (Vista Room II, Floor 12)
                                                8.30 am Damjan Pfajfar, University of Tilberg, "Are Survey Expectations Theory - Consistent? The Role of Central Bank Communication and News"
                                                Discussant: Fernanda Nechio
                                                9:30 am Stefano Eusepi, Federal Reserve Bank of New York, "In Search of a Nominal Anchor: What Drives Inflation Expectations?"
                                                Discussant: Sergey Slobodyan
                                                10:30 am Coffee
                                                11:00 am In - Koo Cho, University of Illinois, "Gresham’s Law of Model Averaging"
                                                Discussant: Noah Williams
                                                12:00 p m Martin Ellison, Oxford University, "Time - Consistent Institutional Design"
                                                Discussant: Sergio Santoro
                                                1:00 pm Lunch
                                                2:00 pm Klaus Adam, University of Mannheim, "Can a Financial Transaction Tax Prevent Stock Price Booms?"
                                                Discussant: Pei Kuang
                                                3.00 pm Kevin Lansing, Federal Reserve Bank of San Francisco, "Explaining the Boom - Bust Cycle in the US Housing Market: A Reverse - Engineering Approach"
                                                Discussant: Paul Shea
                                                4:00 pm Coffee
                                                4:30 pm Thomas Sargent, New York University, "Sets of Models and Prices of Uncertainty"
                                                6:00 pm Adjourn
                                                7: 00 pm Reception
                                                Saturday, August 15
                                                7:30 am Continental Breakfast (Wilder Room, Lobby Level)
                                                8:30 am David Evans, University of Oregon, "Optimal Taxation with Persistent Idiosyncratic Investment Risk"
                                                Discussant: Max Croce
                                                9:30 am Anmol Bhandari, "Fiscal policy and debt management with incomplete markets"
                                                Discussant: Kenneth Kasa
                                                10:30 am Coffee
                                                11:00 am Chris Gibbs, University of New South Wales, "Disinflationary Policies with Imperfect Credibility"
                                                Discussant: Eric Gaus
                                                12:00 pm Kaushik Mitra, University of Birmingham, UK Comparing Inflation and Price Level Targeting: the Role of Forward Guidance and Transparency"
                                                Discussant: Bruce Preston

                                                  Posted by on Thursday, August 13, 2015 at 12:15 AM in Conferences, Economics | Permalink  Comments (2)


                                                  Links for 08-13-15

                                                    Posted by on Thursday, August 13, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (85)


                                                    Wednesday, August 12, 2015

                                                    Trumping the Party and the Pollsters

                                                    Bruce Bartlett:

                                                    Will Donald Trump Crack-up the Republican/Tea Party Alliance?: ... It appeared that Trump was the favored candidate of Fox News before the debate... Trump was clearly shocked by the sharpness of the questions at the debate...
                                                    With Trump and Fox now on opposite sides and the Republican establishment eager to quash his threat to run next year as a third party candidate, which would virtually guarantee a Democratic victory, conservatives began to choose sides. Erick Erickson, a paid Fox contributor who runs the politically powerful RedState website, publicly disinvited Trump to an Atlanta gathering at which most other Republican candidates appeared.
                                                    Of particular interest, I think, is that two of talk radio’s most powerful voices, Rush Limbaugh and Mark Levin, quickly came to Trump’s defense. I suspect this was as much a market-driven decision as an honest personal one – talk radio has long catered to the more downscale, less educated wing of conservatism, where most Trump supporters dwell. Whatever else one thinks of Limbaugh and Levin, they are enormously useful allies in the sort of fight Trump is waging.
                                                    It is too soon to know whether Trump is in this for the long haul, but I would not underestimate his ego or willingness to spend freely from his vast fortune to secure the Republican nomination. Early signs are that his support remains firm in post-debate polls and he is still leading the pack. If the Republican field stays divided, preventing consolidation around the strongest non-Trump candidate, one cannot dismiss his chances of success.
                                                    Of more importance to me is that if the forces for and against Trump play out as they have so far, with Fox and Tea Party leaders siding with the GOP establishment while talk radio and large numbers of the Tea Party grassroots are committed to Trump, we may see the crackup of the Republican coalition that controls Congress, many state legislatures and governorships. The Tea Party will go down in history as just another populist movement that lacked staying power and Donald Trump will be its William Jennings Bryan.

                                                    Paul Krugman:

                                                    Tea and Trumpism: Memo to pollsters: while I’m having as much fun as everyone else watching the unsinkable Donald defy predictions of his assured collapse, what I really want to see at this point is a profile of his supporters. What characteristics predispose someone to like this guy, as opposed to accepting the establishment candidates? ...
                                                    OK, here’s my guess: they look a lot like Tea Party supporters. And we do know a fair bit about that group.
                                                    First of all, Tea Party supporters are for the most part not working-class, at least in the senses that group is often defined. They’re relatively affluent, and not especially lacking in college degrees.
                                                    So what is distinctive about them? Alan Abramowitz:
                                                    While conservatism is by far the strongest predictor of support for the Tea Party movement, racial hostility also has a significant impact on support.
                                                    So maybe Trump’s base is angry, fairly affluent white racists — sort of like The Donald himself, only not as rich? And maybe they’re not being hoodwinked? ...
                                                    Again, this is just guesswork until we have a real profile of typical Trump supporter. But for what it’s worth, I think the Trump phenomenon is much more grounded in fundamentals than the commentariat yet grasps.

                                                      Posted by on Wednesday, August 12, 2015 at 12:33 AM in Politics | Permalink  Comments (88)


                                                      Worst Forecaster at the Fed

                                                      Brad DeLong:

                                                      Worst Fed Forecaster: It is quite an accomplishment to both be (a) the worst economic forecaster among your peers, and yet (b) engage in no public reflection and discussion of how and why you got the past wrong, and how you are changing your model of the economy in order to get it less wrong when you forecast in the future.
                                                      Charles Plosser has managed that accomplishment.
                                                      Those close to him in the WSJ rankings of Fed forecasting success--Bullard, Lacker, Kocherlakota, Williams, and Bernanke--have all discussed, sometimes at great length, what they got wrong, why they think they got it wrong, and what they think they have learned. Not Charles Plosser--at least, nowhere that I have seen. I have not even found any recognition by Charles Plosser that every single year he was President of the Federal Reserve Bank of Philadelphia he did get it wrong, did misjudge the economy, and was recommending monetary policies that would be unduly and inappropriately restrictive. None.

                                                        Posted by on Wednesday, August 12, 2015 at 12:24 AM in Economics, Monetary Policy | Permalink  Comments (72)


                                                        'The Aftermath of LIBOR and Penny-Shaving Attacks'

                                                        Tim Taylor:

                                                        The Aftermath of LIBOR and Penny-Shaving Attacks: Anyone remember the LIBOR scandal from back in spring 2008? A trader for UBS Group and Citigroup named Tom Hayes was just sentenced by a British court to 14 years imprisonment for his role as a ringleader of the scandal. Darrell Duffie and Jeremy C. Stein discuss both the scandal and--perhaps more interesting to those of us who bleed economics--the economic function of financial market benchmarks in  "Reforming LIBOR and Other Financial Market Benchmarks," in the Spring 2015 issue of the Journal of Economic Perspectives. (All JEP articles back to the first issue in 1987 are freely available online courtesy of the American Economic Association. Full disclosure: I've worked as Managing Editor of the JEP since that first issue.)

                                                        For those who have blotted the episode from their memories, LIBOR stands for London Interbank Offered Rate. It's the interest rate at which big international banks borrow overnight from each other. A main use of LIBOR in financial markets was as a "benchmark" for adjustable interest rates. For example, if you are a potential borrower or lender worried about the risk that interest rates might shift, you might be able to agree on a loan where the interest rate was, say, the LIBOR rate plus 4%. Duffie and Stein point out that using LIBOR as a benchmark interest rate for international loans dates back to 1969, when "a consortium of London-based banks led by Manufacturers Hanover introduced LIBOR in order to entice international borrowers such as the Shah of Iran to borrow from them." 

                                                        Two key details set the state for the LIBOR fraud. The first detail is that after LIBOR became well-established as a basis for interest rates on loans, the finance industry began to use LIBOR as the basis for lots of more complex financial transactions: for example, "exchange-traded eurodollar futures and options available from Chicago Mercantile Exchange Group, and over-the-counter derivatives including caps, floors, and swaptions (that is, an option to engage in a swap contract)." I won't plow through an explanation of those terms here. The key takeaway is that the benchmark LIBOR interest rate wasn't just linked to about $17 trillion in US dollar loans. It was also linked to $106 trillion in interest rate swap agreements, and tens of trillions more in interest rate options and futures, as well as cross-currency swaps. As a result, if you had some information on how LIBOR was likely to change on a day-to-day basis--even if the change was a seemingly tiny amount that didn't much matter to borrowers or lenders--you could make a substantial amount of money in these more complex financial markets. 

                                                        The second detail involves how LIBOR was actually calculated. Banks did not actually submit data on the costs of borrowing; indeed, someone at a bank responded to a survey each day with an estimate of what it would cost that bank to borrow--even though on a given day many of these banks weren't actually borrowing from other banks. In addition, during the financial crisis as it erupted in 2007 and 2008, no bank wanted to admit that it would have been charged a higher interest rate if it wanted to borrow, because financial market would be quick to infer that such bank might be in a shaky financial position. 

                                                        So on one side, LIBOR is a key financial benchmark that affects literally tens of trillions of dollars of continuously traded and complicated financial instruments.  On the other side, you have this key benchmark being determined by a survey of the opinions of fairly junior bank officers who have some incentive to shade the numbers. The British court found that Tom Hayes led a group of traders who sent messages to the bankers who responded to the LIBOR survey, requesting that the LIBOR rate be jerked a little higher one day, or pushed a little lower another day. Again, those who were just using the LIBOR rate as a benchmark for loans probably wouldn't even notice these fluctuations. But traders who knew in advance how the LIBOR was going to twitch up and down could make big money in the options and futures markets. 

                                                        What's the solution here? Duffie and Stein point out that financial benchmarks like LIBOR are extremely useful in financial markets. However, you need to design the benchmark with some care. For example, instead of using a survey of bank officers, it makes a lot more sense to use an actual market-determined interest rate for a benchmark. Moreover, the LIBOR rate is based on banks borrowing from banks, and so it will reflect risk in the banking sector. For certain kinds of lending and borrowing, it's not clear that you would want your interest rate to rise and fall with changes in the riskiness of the banking sector. Thus, they discuss the virtues of benchmark rates that are market-determined and not linked to the banking sector--like the interest rate for short-term borrowing by the US government. (They also discuss the merits of using some other less well-known  benchmark interest rates, like the Treasury general collateral repurchase rate or the  overnight index swap rate, fo those who want such details.)

                                                        More broadly, it seems to me that the LIBOR scandal is the actual real-life version of what seems to be an urban legend plot: the story of how a fraudster finds a way to program the computers of a bank or financial institution so that a tiny amount of certain transaction is siphoned off into a different account (for examples, see the 1983 movie Superman III, or the 1999 movie Office Space). The problem with these "penny-shaving" or "salami-slicing" attacks in real life is that if you steal a little bit from a large number of transactions, it's quite possible that no individual party will notice. But if you take a few million dollars out of a financial institution, the accountants are going to notice! 

                                                        In the LIBOR scandal, however, the fraud happened by knowing about tiny little changes in LIBOR a day in advance. Those who lost out from not knowing these changes in advance had no way of knowing that they were being cheated. In a similar scandal from earlier this year, Citicorp, JPMorgan, Barclays, Royal Bank of Scotland and UBS pled guilty to felony charges for their actions in foreign exchange markets. Again, these are very large markets, and so small acts of dishonesty can add up to large amounts. As the US. Department of Justice described it:

                                                        "According to plea agreements to be filed in the District of Connecticut, between December 2007 and January 2013, euro-dollar traders at Citicorp, JPMorgan, Barclays and RBS – self-described members of “The Cartel” – used an exclusive electronic chat room and coded language to manipulate benchmark exchange rates. Those rates are set through, among other ways, two major daily “fixes,” the 1:15 p.m. European Central Bank fix and the 4:00 p.m. World Markets/Reuters fix. Third parties collect trading data at these times to calculate and publish a daily “fix rate,” which in turn is used to price orders for many large customers. “The Cartel” traders coordinated their trading of U.S. dollars and euros to manipulate the benchmark rates set at the 1:15 p.m. and 4:00 p.m. fixes in an effort to increase their profits.

                                                        As detailed in the plea agreements, these traders also used their exclusive electronic chats to manipulate the euro-dollar exchange rate in other ways. Members of “The Cartel” manipulated the euro-dollar exchange rate by agreeing to withhold bids or offers for euros or dollars to avoid moving the exchange rate in a direction adverse to open positions held by co-conspirators. By agreeing not to buy or sell at certain times, the traders protected each other’s trading positions by withholding supply of or demand for currency and suppressing competition in the FX market."

                                                        A trader at Barclay's reportedly wrote in the group's electronic chat room: “If you aint cheating, you aint trying,” Clearly, situations where relatively small groups of people can cause relatively small and almost imperceptible  tweaks in values that affect a very large market are ripe for manipulation. 

                                                          Posted by on Wednesday, August 12, 2015 at 12:15 AM in Economics, Financial System | Permalink  Comments (5)


                                                          Links for 08-12-15

                                                            Posted by on Wednesday, August 12, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (220)


                                                            Tuesday, August 11, 2015

                                                            Macroeconomics: The Roads Not Yet Taken

                                                            My editor suggested that I might want to write about an article in New Scientist, After the crash, can biologists fix economics?, so I did:

                                                            Macroeconomics: The Roads Not Yet Taken: Anyone who is even vaguely familiar with economics knows that modern macroeconomic models did not fare well before and during the Great Recession. For example, when the recession hit many of us reached into the policy response toolkit provided by modern macro models and came up mostly empty.
                                                            The problem was that modern models were built to explain periods of mild economic fluctuations, a period known as the Great Moderation, and while the models provided very good policy advice in that setting they had little to offer in response to major economic downturns. That changed to some extent as the recession dragged on and modern models were quickly amended to incorporate important missing elements, but even then the policy advice was far from satisfactory and mostly echoed what we already knew from the “old-fashioned” Keynesian model. (The Keynesian model was built to answer the important policy questions that come with major economic downturns, so it is not surprising that amended modern models reached many of the same conclusions.)
                                                            How can we fix modern models? ...

                                                              Posted by on Tuesday, August 11, 2015 at 08:35 AM in Economics, Fiscal Times, Macroeconomics, Methodology | Permalink  Comments (56)


                                                              'Is China’s Growth Miracle Over?'

                                                              This is by Zheng Liu, "a senior research advisor in the Economic Research Department of the Federal Reserve Bank of San Francisco": 

                                                              Is China’s Growth Miracle Over?, by Zheng Liu, BRBSF Economic Letter: China’s economy grew 10% per year for over 30 years beginning in the early 1980s. No other country in modern history has achieved such exceptional growth for so long. Before the global financial crisis, China’s growth was primarily driven by productivity gains. Since 2008, however, growth has slowed and become increasingly dependent on investment.
                                                              Because China has been a large and expanding market for other countries, its growth prospects have important implications not just for the Chinese people but also for the global economy. This Letter examines the sources of China’s growth and some factors contributing to the recent slowdown, and offers a cautiously optimistic view of China’s future growth.
                                                              China’s growth miracle
                                                              Since the early 1980s, China’s open-door policy and economic reforms have led to a remarkable growth performance. As Figure 1 shows, China’s real GDP grew about 10% per year on average for 30 years before the recent slowdown. At that rate, national income doubles every seven years. No other country in modern history has achieved such high growth for so long.

                                                              Figure 1
                                                              China’s real GDP growth, annual percent change

                                                              China’s real GDP growth, annual percent change

                                                              Source: IMF World Economic Outlook, CEIC.

                                                              Rapid economic growth has significantly raised the living standards of the Chinese people. According to data from the Penn World Tables, China’s real GDP per person rose steadily from around 5% of the U.S. level in 1980 to about 20% in 2011. The World Bank estimates that, during the same period, over 600 million people in China have been lifted out of extreme poverty, defined as living for under $1.25 per day.
                                                              Engines of China’s growth
                                                              Theory suggests that three factors contribute to economic growth: capital accumulation, labor force expansion, and productivity improvement. Empirical evidence in China’s case suggests that growth in the third factor, known as total factor productivity, has been an important contributor to the three-decade growth miracle (see Zhu 2012). A series of domestic economic reforms beginning in the 1980s led to more efficient allocations of capital and labor and also better aligned private incentives. The open-door policy attracted foreign direct investment, which in turn brought new management practices, technological know-how, and access to the world market for Chinese businesses. These policy changes boosted productivity. As productivity improved over time, investment and production expanded. Although capital investment also contributed to growth, its contribution is limited by diminishing returns and thus, investment cannot be the main driving force of sustainable growth.

                                                              Figure 2
                                                              Accounting for China’s growth

                                                              Accounting for China’s growth

                                                              Source: Penn World Tables and author’s calculations.

                                                              Figure 2 shows the contribution of each of the three factors to China’s growth since 1980. The calculation follows the growth accounting approach described by Zhu (2012), with China’s labor income share fixed at 0.5. The data for real GDP, employment adjusted for human capital levels measured by years of schooling, and capital stocks are taken from the latest version of the Penn World Tables (version 8.1; see Feenstra, Inklaar, and Timmer 2015 for a summary of the data).
                                                              As shown in Figure 2, China’s rapid growth was driven mostly by productivity gains and investment rather than employment growth. For example, out of the roughly 10 percentage points of average growth in the 1990s, capital accumulation accounts for about half of it, productivity improvement accounts for another 4 percentage points, and employment gains account for the remaining 1 percentage point. Labor’s limited role in part reflects China’s one-child policy that limits population growth and restrictive policies on internal migration, such as the “Hukou” system that restricts citizens’ abilities to work in cities other than where they were born. The figure also reveals a significant decline in the contribution of total factor productivity since 2008. Accordingly, China’s growth has become more dependent on capital investment in this more recent period.
                                                              The recent slowdown and new policy measures
                                                              During the global financial crisis, demand for Chinese exports fell substantially. Meanwhile, waning productivity gains presented further challenges for sustaining high growth. The Chinese government responded to the crisis by adopting a large-scale fiscal stimulus package, which was announced in November 2008 and implemented quickly in 2009 and early 2010 (Wong 2011; Faust, Lin, and Luo 2012). This policy accommodation significantly boosted investment growth, especially in targeted areas such as infrastructure and construction, and led to short-run booms in output in 2009 and 2010. Nonetheless, growth has slowed substantially since 2011. The average growth rate between 2011 and 2014 was about 8% (see Figure 1). Growth slowed further to 7% in the first two quarters of 2015, and the Chinese government officially lowered its growth target to 7% for the year. Although this rate is still quite remarkable by international standards, it is significantly lower than the 10% average recorded in the previous three decades.
                                                              The recent slowdown has raised the concern that China might be falling into a pattern commonly referred to as the “middle-income trap” (see, for example, Eichengreen, Park, and Shin 2011). Historically, fast-growing countries have often fallen into such a trap, in which growth slows sharply as income reaches a threshold level and wages rise sufficiently to erode a country’s comparative advantage.
                                                              However, some countries have successfully avoided the middle-income trap and moved to high-income status, which the Organization for Economic Co-operation and Development defines as GDP per capita of $12,500 based on 2011 constant international prices. These include China’s neighboring countries Japan and South Korea. In the 1960s, Japan had per capita real GDP of about $6,000 and an average growth rate of over 10% (see Figure 3). In subsequent decades, however, Japan’s GDP per capita rose and its growth slowed. By 2011, Japan’s GDP reached over $30,000 per capita and growth slowed to about 1.25%. South Korea has followed a similar path since the 1980s.

                                                              Figure 3
                                                              Will China follow Japan and South Korea?

                                                              Will China follow Japan and South Korea?

                                                              Source: Penn World Tables, IMF. Curved line shows fitted trend.

                                                              China had a real GDP per capita of about $2,000 in the 1980s, which rose steadily to about $5,000 in the 2000s and to over $10,000 in 2014. If China continues to grow at a rate of 6 or 7%, it could move into high-income status in the not-so-distant future. However, if China’s experience mirrors that of its neighbors, it could slow to about 3% average growth by the 2020s, when its per capita income is expected to rise to about $25,000.
                                                              This may appear to be quite a pessimistic scenario for China, but China’s long-term growth prospects are challenged by a number of structural imbalances. These include financial repression, the lack of a social safety net, an export-oriented growth strategy, and capital account restrictions, all of which contributed to excessively high domestic savings and trade imbalances. According to the National Bureau of Statistics of China, the household saving rate increased from 15% in 1990 to over 30% in 2014. High savings have boosted domestic investment, but allocations of credit and capital remain highly inefficient. The banking sector is largely state-controlled, and bank loans disproportionately favor state-owned enterprises (SOEs) at the expense of more productive private firms. According to one estimate, the misallocation of capital has significantly depressed productivity in China. If efficiency of capital allocations could be improved to a level similar to that in the United States, then China’s total factor productivity could be increased 30–50% (Hsieh and Klenow 2009).
                                                              To address structural imbalances and thus achieve sustainable long-term growth, the Chinese government announced a blueprint of economic reforms at the Third Plenum in November 2013. The proposed reforms include (1) financial sector reforms—liberalizing interest rates, establishing deposit insurance, and strengthening financial supervision and regulation; (2) fiscal reforms—strengthening social safety nets, introducing more efficient and redistributive taxes, and improving health insurance and pension coverage; (3) structural reforms—reforming the SOEs and the Hukou system and further opening up markets; and (4) external sector reforms—liberalizing the exchange rate and capital account controls.
                                                              If these reform blueprints can be successfully implemented, then China should be able to avoid the middle-income trap and sustain long-term growth at a reasonable pace. In the transition process, however, structural reforms may contribute to a slowdown in economic growth.
                                                              Growth prospects
                                                              China’s growth is expected to slow further in the coming years. The International Monetary Fund (IMF) forecasts that growth will be about 6.8% for 2015. With an aging population, slowing productivity growth, and the policy adjustments required to implement structural reforms, growth is projected to slow further to 6.3% in 2016 and 6% by 2017.
                                                              Despite the slowdown, there are several reasons for optimism. First, China’s existing allocations of capital and labor leave a lot of room to improve efficiency. If the proposals for financial liberalization and fiscal and labor market reforms can be successfully put in place, improved resource allocations could provide a much-needed boost to productivity. Second, China’s technology is still far behind advanced countries’. According to the Penn World Tables, China’s total factor productivity remains about 40% of the U.S. level. If trade policies such as exchange rate pegs and capital controls are liberalized—as intended in the reform blueprints—then China could boost its productivity through catching up with the world technology frontier. Third, China is a large country, with highly uneven regional development. While the coastal area has been growing rapidly in the past 35 years, its interior region has lagged. As policy focus shifts to interior region development, growth in the less-developed regions should accelerate. With the high-speed rails, airports, and highways already built in the past few years, China has paved the way for this development. As the interior area catches up with the coastal region, convergence within the country should also help boost China’s overall growth (Malkin and Spiegel 2012).
                                                              Continued robust growth in China would be beneficial for the global economy as well. China’s market for U.S. exports has grown steadily from 4% in 2004 to over 7% in 2014. According to an IMF estimate, China contributed about one-third of the world’s growth in 2013.
                                                              Conclusion
                                                              China’s growth miracle since the early 1980s has significantly raised the standards of living in China. It has also made China an increasingly important contributor to world economic growth and a large and growing market for U.S. exports. The rapid growth was driven primarily by productivity gains and capital investment. The recent growth slowdown has raised the concern that China’s growth miracle could be ending.
                                                              However, if the structural reform plans from China’s Third Plenum can be successfully implemented, then the recent slowdown could be a smooth transition rather than a hard landing. This gives a reason for optimism that China will avoid the middle-income trap and follow the paths of Japan and South Korea to achieve high-income status.

                                                              References

                                                              Eichengreen, Barry, Donghyun Park, and Kwanho Shin. 2012. “When Fast Growing Economies Slow Down: International Evidence and Implications for China.” Asian Economic Papers 11(1, February), pp. 42–87.

                                                              Feenstra, Robert C., Robert Inklaar, and Marcel P. Timmer. 2015. “The Next Generation of the Penn World Table.” American Economic Review (forthcoming).

                                                              Hsieh, Chang-Tai, and Peter J. Klenow. 2009. “Misallocation and Manufacturing TFP in China and India.” Quarterly Journal of Economics 124(4), pp. 1,403–1,448.

                                                              Malkin, Israel, and Mark M. Spiegel. 2012. “Is China Due for a Slowdown?” FRBSF Economic Letter 2012-31 (October 15). http://www.frbsf.org/economic-research/publications/economic-letter/2012/october/is-china-due-for-a-slowdown/

                                                              Wong, Christine. 2011. “The Fiscal Stimulus Programme and Public Governance Issues in China.” OECD Journal on Budgeting 2011(3). http://www.oecd.org/gov/budgeting/Public%20Governance%20Issues%20in%20China.pdf

                                                              Zhu, Xiaodong. 2012. “Understanding China’s Growth: Past, Present and Future.” Journal of Economic Perspectives 26(4), pp. 103–124.

                                                                Posted by on Tuesday, August 11, 2015 at 12:33 AM in China, Economics | Permalink  Comments (270)


                                                                The Macroeconomic Divide

                                                                Paul Krugman:

                                                                Trash Talk and the Macroeconomic Divide: ... In Lucas and Sargent, much is made of stagflation; the coexistence of inflation and high unemployment is their main, indeed pretty much only, piece of evidence that all of Keynesian economics is useless. That was wrong, but never mind; how did they respond in the face of strong evidence that their own approach didn’t work?
                                                                Such evidence wasn’t long in coming. In the early 1980s the Federal Reserve sharply tightened monetary policy; it did so openly, with much public discussion, and anyone who opened a newspaper should have been aware of what was happening. The clear implication of Lucas-type models was that such an announced, well-understood monetary change should have had no real effect, being reflected only in the price level.
                                                                In fact, however, there was a very severe recession — and a dramatic recovery once the Fed, again quite openly, shifted toward monetary expansion.
                                                                These events definitely showed that Lucas-type models were wrong, and also that anticipated monetary shocks have real effects. But there was no reconsideration on the part of the freshwater economists; my guess is that they were in part trapped by their earlier trash-talking. Instead, they plunged into real business cycle theory (which had no explanation for the obvious real effects of Fed policy) and shut themselves off from outside ideas. ...

                                                                  Posted by on Tuesday, August 11, 2015 at 12:24 AM in Economics, Macroeconomics, Methodology | Permalink  Comments (19)


                                                                  'The History of Discount Window Stigma'

                                                                  Liberty Street Economics with the history of the Fed's discount window:

                                                                  History of Discount Window Stigma, by Olivier Armantier, Helene Lee, and Asani Sarkar, FRBNY: In August 2007, at the onset of the recent financial crisis, the Federal Reserve encouraged banks to borrow from the discount window (DW) but few did so. This lack of DW borrowing has been widely attributed to stigma—concerns that, if discount borrowing were detected, depositors, creditors, and analysts could interpret it as a sign of financial weakness. In this post, we review the history of the DW up until 2003, when the current DW regime was established, and argue that some past policies may have inadvertently contributed to a reluctance to borrow from the DW that persists to this day.
                                                                  The Discount Window’s Tradition against Borrowing
                                                                  The Fed was established in 1913 to create an elastic money supply that would expand to meet high demand for liquidity during times of stress and contract once conditions improved. At that time, there were no open market operations (the buying and selling of government securities in the open market) to conduct monetary policy. Instead, the Fed adjusted the money supply by lending directly to banks through the DW. During these initial years, the DW was used extensively, and there appears to have been no mention of stigma attached to DW borrowing.
                                                                  From the late 1920s, the DW gradually fell into disuse as the Fed began to take a dim view of DW borrowing and adopted a stance against the practice. The Fed observed that banks were becoming habitual borrowers from the DW, and it was concerned that an overreliance on DW borrowings would weaken banks and make them more prone to failure. Moreover, the Fed had switched to open market operations as its primary tool for conducting monetary policy. Accordingly, it viewed the DW as playing a more subordinate role by providing limited amounts of short-term credit to banks, to meet emergency needs, for example.
                                                                  Although it discouraged DW borrowing, the Fed generally kept the DW rate below the market rate, in part because the Fed lacked independence from the Treasury and was obliged to keep the DW rate below the market rate to help the federal government finance its deficits at low rates. The Treasury–Federal Reserve Accord of 1951 freed the Fed from pressure from the Treasury, but the Fed continued to maintain the DW rate below the market rate despite recommendations to the contrary. It did so because it believed that banks that legitimately needed DW funds should not face a punitive rate. Thus, between 1914 and 2003, the DW rate was generally below the market rate on banks’ primary sources for short-term funding (in other words, the commercial paper rate before 1954 and the federal funds rate since 1954; see chart below).

                                                                  » Continue reading "'The History of Discount Window Stigma'"

                                                                    Posted by on Tuesday, August 11, 2015 at 12:15 AM in Economics, Monetary Policy | Permalink  Comments (2)


                                                                    Links for 08-11-15

                                                                      Posted by on Tuesday, August 11, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (131)


                                                                      Monday, August 10, 2015

                                                                      Job Training and Government Multipliers

                                                                      Two new papers from the NBER:

                                                                      What Works? A Meta Analysis of Recent Active Labor Market Program Evaluations, by David Card, Jochen Kluve, and Andrea Weber, NBER Working Paper No. 21431 Issued in July 2015: We present a meta-analysis of impact estimates from over 200 recent econometric evaluations of active labor market programs from around the world. We classify estimates by program type and participant group, and distinguish between three different post-program time horizons. Using meta-analytic models for the effect size of a given estimate (for studies that model the probability of employment) and for the sign and significance of the estimate (for all the studies in our sample) we conclude that: (1) average impacts are close to zero in the short run, but become more positive 2-3 years after completion of the program; (2) the time profile of impacts varies by type of program, with larger gains for programs that emphasize human capital accumulation; (3) there is systematic heterogeneity across participant groups, with larger impacts for females and participants who enter from long term unemployment; (4) active labor market programs are more likely to show positive impacts in a recession. [open link]

                                                                      And:

                                                                      Clearing Up the Fiscal Multiplier Morass: Prior and Posterior Analysis, by Eric M. Leeper, Nora Traum, and Todd B. Walker, NBER Working Paper No. 21433 Issued in July 2015: We use Bayesian prior and posterior analysis of a monetary DSGE model, extended to include fiscal details and two distinct monetary-fiscal policy regimes, to quantify government spending multipliers in U.S. data. The combination of model specification, observable data, and relatively diffuse priors for some parameters lands posterior estimates in regions of the parameter space that yield fresh perspectives on the transmission mechanisms that underlie government spending multipliers. Posterior mean estimates of short-run output multipliers are comparable across regimes—about 1.4 on impact—but much larger after 10 years under passive money/active fiscal than under active money/passive fiscal—means of 1.9 versus 0.7 in present value. [open link]

                                                                        Posted by on Monday, August 10, 2015 at 10:19 AM in Academic Papers, Economics, Fiscal Policy, Unemployment | Permalink  Comments (8)


                                                                        Paul Krugman: G.O.P. Candidates and Obama’s Failure to Fail

                                                                        The GOP has failed again and again at predicting failure:

                                                                        G.O.P. Candidates and Obama’s Failure to Fail, by Paul Krugman, Commentary, NY Times: What did the men who would be president talk about during last week’s prime-time Republican debate? Well, there were 19 references to God, while the economy rated only 10 mentions. Republicans in Congress have voted dozens of times to repeal all or part of Obamacare, but the candidates only named President Obama’s signature policy nine times over the course of two hours. And energy, another erstwhile G.O.P. favorite, came up only four times.
                                                                        Strange, isn’t it? The shared premise of everyone on the Republican side is that the Obama years have been a time of policy disaster on every front. Yet the candidates on that stage had almost nothing to say about any of the supposed disaster areas.
                                                                        And there was a good reason they seemed so tongue-tied: Out there in the real world, none of the disasters their party predicted have actually come to pass. President Obama just keeps failing to fail. And that’s a big problem for the G.O.P. — even bigger than Donald Trump. ...
                                                                        What’s the common theme linking all the disasters that Republicans predicted, but which failed to materialize? If I had to summarize the G.O.P.’s attitude on domestic policy, it would be that no good deed goes unpunished. Try to help the unfortunate, support the economy in hard times, or limit pollution, and you will face the wrath of the invisible hand. The only way to thrive, the right insists, is to be nice to the rich and cruel to the poor, while letting corporations do as they please.
                                                                        According to this worldview, a leader like President Obama who raises taxes on the 1 percent while subsidizing health care for lower-income families, who provides stimulus in a recession, who regulates banks and expands environmental protection, will surely preside over disaster in every direction.
                                                                        But he hasn’t. I’m not saying that America is in great shape, because it isn’t. Economic recovery has come too slowly, and is still incomplete; Obamacare isn’t the system anyone would have designed from scratch; and we’re nowhere close to doing enough on climate change. But we’re doing far better than any of those guys in Cleveland will ever admit.

                                                                          Posted by on Monday, August 10, 2015 at 09:14 AM in Economics, Politics | Permalink  Comments (64)


                                                                          'Corporate Long-Termism'

                                                                          Larry Summers:

                                                                          Taking a long view on corporate reform: ..Matters are not as clear as is often suggested regarding short-term-driven “quarterly capitalism,” and I believe skepticism is appropriate toward arguments that horizons should be lengthened in all cases. A generation ago, Japan’s keiretsu system, which insulated corporate management from share price pressure by tying large companies together, was widely seen as a great Japanese strength; yet even apart from Japan’s manifest macroeconomic difficulties, Japanese companies lacking market discipline have squandered leads in sectors ranging from electronics to automobiles to information technology. Managements of companies that are dissipating the most value, such as General Motors before it needed to be bailed out, have often been the most enthusiastic champions of long-termism. Market participants who willingly place huge valuations on many Silicon Valley companies that lack any profits and have little revenue may be placing too much, not too little, weight on the distant future. That, at least, is the implication of the technology bubbles we have seen. ...

                                                                            Posted by on Monday, August 10, 2015 at 12:15 AM in Economics | Permalink  Comments (34)


                                                                            Links for 08-10-15

                                                                              Posted by on Monday, August 10, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (182)


                                                                              Sunday, August 09, 2015

                                                                              'Analyzing Environmental Benefits from Driving Electric Vehicles'

                                                                              On the environmental benefits of electric cars:

                                                                              Analyzing environmental benefits from driving electric vehicles, by Stephen P. Holland, Erin T. Mansur, Nicholas Z. Muller, and Andrew J. Yates, Vox EU: After remaining relatively quiet for more than a century, the market for electric vehicles is undergoing a remarkable worldwide renaissance. This is most apparent in Norway, where the market share of electric vehicles has exceeded 15% of sales every month this year. Market shares are much smaller outside Norway, but nevertheless they are increasing year over year in places like England, France, and the US.

                                                                              Sales and benefits of electric cars

                                                                              At least part of the reason for this increase are subsidies and tax incentives that governments in each of these countries provide for the purchase of electric vehicles. Li et al. (2015) attribute approximately 50% of electric vehicle sales in the US to the $7,500 subsidy provided by the Federal Qualified Plug-in Electric Drive Motor Vehicle Credit.

                                                                              There are a variety of motivations put forth to justify these subsidies. The overarching idea is that electric vehicles create public benefits relative to gasoline vehicles. And, because individual consumers may not consider these benefits when deciding what vehicle to purchase, electric cars should be subsidized to encourage adoption.

                                                                              We can roughly classify these benefits into four categories: environmental, reduced oil consumption, innovation, and network benefits.

                                                                              • Environmental benefits stem from the difference between pollution generated by the manufacture and use of gasoline and electric vehicles.
                                                                              • Oil consumption benefits occur because electric vehicle use does not entail the risk of oil supply interruptions nor military expenditures to reduce this risk.
                                                                              • Innovation benefits may not be fully captured by innovating companies and thus may justify subsidizing the electric car market.
                                                                              • Network benefits occur when subsidizing electric vehicles today leads to incentives to develop charging infrastructure, which in turn increases adoption in the future, when presumably the electricity grid will be cleaner.

                                                                              New research

                                                                              We focus here on the first category – environmental benefits – as they are prominently cited by proponents of electric vehicles. However, researchers have found evidence questioning this assertion. Michalek et al. (2011) present a lifecycle analysis of environmental benefits. They consider environmental impacts associated with vehicle operation (burning gasoline or generating electricity) and other considerations such as manufacturing the vehicle and the battery, as well as processing gasoline and fuels for electricity generation. They find that an electric vehicle generates approximately $1100 greater environmental harm than a gasoline vehicle.1

                                                                              In a recent paper (Holland et al. 2015), we study how the environmental benefit of vehicle operation varies from place to place in the US. We combine an econometric model of emissions from the electricity sector with a sophisticated model of damages from pollution to calculate the environmental benefit at the county level, as shown below in Figure 1.

                                                                              Figure 1. County-level environmental benefit

                                                                              Holland fig1 7 aug

                                                                              • The benefit is large and positive in many places in the west because the western electricity grid is relatively clean – primarily a mix of hydro, nuclear, and natural gas.
                                                                              • The benefit is large and negative in many places in the east because the eastern electricity grid primarily relies more heavily on coal and natural gas.
                                                                              There are a few exceptions in the east, e.g. places like Atlanta in which the large population implies severe damages from gasoline cars so that electric cars have a small positive environmental benefit in spite of the dirty grid. Aggregating to the level of the state, the environmental benefits imply an electric vehicle purchase subsidy ranging from $3,000 in California to -$4,500 in North Dakota. On average, the implied subsidy from operating an electric vehicle is -$750. Although this analysis does not incorporate life-cycle benefits, the large differences in benefits across places suggest that whether or not an electric vehicle generates environmental benefits is critically dependent on local conditions.
                                                                              • Our second finding is that electric vehicles export pollution across state borders to a much greater extent that gasoline vehicles.
                                                                              Figure 2a shows the increase in particulate matter pollution associated with driving a fleet of gasoline vehicles in Fulton County Georgia. Most of the pollution is concentrated on the few counties in the immediate proximity. Figure 2b shows the increase in particulate matter pollution associated with driving a fleet of electric vehicles that are charged in Fulton County. The resulting pollution is distributed throughout the entire east coast and in fact most of it occurs outside the state of Georgia. A similar story occurs throughout the country. We determine that over 90% of damages from non-greenhouse gas emissions from driving an electric car in one state are exported to other states. In contrast, the figure is only 18% for gasoline vehicles. In the majority of states, driving an electric car makes that state’s air cleaner, but leads to increases in pollution in other states to such a degree that the overall environmental benefit from vehicle operation is negative.

                                                                              Figure 2a. Increase in PM2.5 from driving gasoline cars in Fulton County

                                                                              Holland fig2a 7 aug

                                                                              Figure 2b. Increase in PM2.5 from charging electric cars in SERC region

                                                                              Holland fig2b 7 aug

                                                                              Conclusions
                                                                              So should electric vehicles be subsidized for environmental reasons? The results in Michalek et al. (2011) and in our recent work suggest that it is difficult to justify a large uniform subsidy based on environmental benefits alone. In some states the subsidy should indeed be large and positive, but in others it should be large and negative. Of course, this conclusion may need to be revisited in the future as the electricity grid becomes cleaner.
                                                                              References
                                                                              Michalek, J, M Chester, P Jaramillo, C Samaras, C Shiau, and L Lave (2011), “Valuation of plug-in vehicle life-cycle air emissions and oil displacement benefits”, Proceedings of the National Academy of Sciences, 108: 16554-16558.
                                                                              Li, S, L Tong, J Xing, and Y Zhou (2015), “The market for electric vehicles: Indirect network effects and policy impacts”, working paper, Cornell University.
                                                                              Holland, S, E Mansur, N Muller, and A Yates (2015) “Environmental benefits of electric vehicles?”, NBER working paper w21291.
                                                                              Footnote
                                                                              1 See Table S-25. The life-cycle environmental costs of an electric vehicle (BEV240) are $4,668. The lifecycle environmental costs of a gasoline vehicle (CV, excluding the oil premium of $1,284) are $3,517.

                                                                                Posted by on Sunday, August 9, 2015 at 12:15 AM in Economics, Environment | Permalink  Comments (38)


                                                                                Links for 08-09-15

                                                                                  Posted by on Sunday, August 9, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (238)


                                                                                  Saturday, August 08, 2015

                                                                                  Links for 08-08-15

                                                                                    Posted by on Saturday, August 8, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (287)


                                                                                    Friday, August 07, 2015

                                                                                    Paul Krugman: From Trump on Down, the Republicans Can’t Be Serious

                                                                                    They're all nuts:

                                                                                    From Trump on Down, the Republicans Can’t Be Serious, by Paul Krugman, Commentary, NY Times: This was, according to many commentators, going to be the election cycle Republicans got to show off their “deep bench.” The race for the nomination would include experienced governors like Jeb Bush and Scott Walker, fresh thinkers like Rand Paul, and attractive new players like Marco Rubio. Instead, however, Donald Trump leads the field by a wide margin. What happened?
                                                                                    The answer, according to many of those who didn’t see it coming, is gullibility: People can’t tell the difference between someone who sounds as if he knows what he’s talking about and someone who is actually serious about the issues. And for sure there’s a lot of gullibility out there. But if you ask me, the pundits have been at least as gullible as the public, and still are.
                                                                                    For while it’s true that Mr. Trump is, fundamentally, an absurd figure, so are his rivals. If you pay attention to what any one of them is actually saying, as opposed to how he says it, you discover incoherence and extremism every bit as bad as anything Mr. Trump has to offer. And that’s not an accident: Talking nonsense is what you have to do to get anywhere in today’s Republican Party. ...
                                                                                    The point is that while media puff pieces have portrayed Mr. Trump’s rivals as serious men — Jeb the moderate, Rand the original thinker, Marco the face of a new generation — their supposed seriousness is all surface. Judge them by positions as opposed to image, and what you have is a lineup of cranks. And as I said, this is no accident.
                                                                                    It has long been obvious that the conventions of political reporting and political commentary make it almost impossible to say the obvious — namely, that one of our two major parties has gone off the deep end. ...
                                                                                    Until now, however, leading Republicans have generally tried to preserve a facade of respectability, helping the news media to maintain the pretense that it was dealing with a normal political party. What distinguishes Mr. Trump is not so much his positions as it is his lack of interest in maintaining appearances. And it turns out that the party’s base, which demands extremist positions, also prefers those positions delivered straight. Why is anyone surprised?
                                                                                    Remember how Mr. Trump was supposed to implode after his attack on John McCain? Mr. McCain epitomizes the strategy of sounding moderate while taking extreme positions, and is much loved by the press corps, which puts him on TV all the time. But Republican voters, it turns out, couldn’t care less about him.
                                                                                    Can Mr. Trump actually win the nomination? I have no idea. But even if he is eventually pushed aside, pay no attention to all the analyses you will read declaring a return to normal politics. That’s not going to happen; normal politics left the G.O.P. a long time ago. At most, we’ll see a return to normal hypocrisy, the kind that cloaks radical policies and contempt for evidence in conventional-sounding rhetoric. And that won’t be an improvement.

                                                                                      Posted by on Friday, August 7, 2015 at 09:08 AM in Economics, Politics | Permalink  Comments (109)


                                                                                      'Job Growth Remains Strong in July'

                                                                                      Dean Baker on the employment report:

                                                                                      Job Growth Remains Strong in July: Weak wage growth and low EPOPs indicate persisting slack in labor market.
                                                                                      The Labor Department reported the economy added 215,000 jobs in July, while the overall unemployment rate was unchanged at 5.3 percent. The unemployment rate for African Americans fell from 9.5 percent to 9.1 percent, the lowest level since February of 2008. The employment-to-population ratio (EPOP) remained unchanged at 59.3 percent for the population as a whole and 55.8 percent for African Americans.
                                                                                      While the unemployment rate has been falling sharply in the last four years, the EPOP has moved much less, having risen by just 1.1 percentage points from its low point in 2011. Only a small portion of this decline can be explained by demographics as the EPOP for prime-age men (ages 25-54) is still down by almost three percentage points from its pre-recession level. This is almost certainly an indication of ongoing weakness in the labor market.

                                                                                      EPOP, Prime-Age Men, 1996-2015

                                                                                       Most of the other data in the household survey showed little change. The median duration of unemployment spells remained constant, while the average duration and share of long-term unemployment both increased slightly, but were still below May levels. The share of unemployment due to voluntary quits increased to 10.2 percent, the same as the March level.
                                                                                      There has been an interesting shift in the age distribution of employment growth in the last year. Earlier in the recovery, workers over age 55 had accounted for the bulk of growth in employment. This group accounted for 68.1 percent of employment growth from July of 2010 to July of 2013; however, they account for just 42.7 percent of employment growth over the last two years.
                                                                                      This is primarily a story of lower employment growth among women over age 55. Employment growth for women over age 55 had averaged 679,000 in the two years from July 2011 to July 2013; it has averaged just 374,000 in the last two years. This likely reflects the impact of the Affordable Care Act, as many pre-Medicare age women no longer need to rely on their jobs to get insurance for themselves or family members. Younger workers, between the ages of 25-34, may have been the beneficiaries of this decision as there has been a notable uptick in employment growth among this group.
                                                                                      In addition to the healthy job growth in July, the increases for May and June in the establishment data were also revised up slightly to bring the 3-month average to 235,000. However, there is still no evidence of this job growth leading to wage pressures. The average hourly wage rose 5 cents in July, but this followed a drop of 1 cent in June. This brings the annual growth rate for the last three months compared to the prior three months to just 1.9 percent, compared with a 2.1 percent increase over the last year.
                                                                                      The mix of jobs was a bit peculiar with the non-durable manufacturing sector adding 23,000 jobs. This is the biggest gain in the sector since a gain of 26,000 in August of 1991. This was driven by gains of 9,100 in food processing and 5,800 in plastics and rubber products. By contrast, health care had slower growth, adding 27,900 jobs after adding an average of 45,900 jobs the prior three months. Insurance carriers were again a big job gainer, adding 9,600 jobs. Retail added 35,900 jobs and restaurants added 29,300, both roughly in line with their averages over the last year.
                                                                                      The management services sector added 13,700 jobs. This sector has grown especially rapidly in the recovery adding 356,000 jobs in the last five years, an increase of 19 percent. The temporary employment sector lost 8,900 jobs. The government sector had a gain of 5,000 jobs driven by a gain of 8,000 at the local level.
                                                                                      The overall story in this report is moderately positive, but still indicates the labor market has a long way to go to recover from the downturn. It is important to recognize that these are healthy job growth numbers, but not what we would expect after a steep downturn. At its peak growth, the economy was adding more than 400 thousand jobs a month following the 1981–82 recession. This would be equivalent to 600 thousand a month in today’s labor market.

                                                                                      See also Calculated Risk (here too).

                                                                                        Posted by on Friday, August 7, 2015 at 08:56 AM Permalink  Comments (31)


                                                                                        'Inventing Prizes: A Historical Perspective on Innovation Awards and Technology Policy'

                                                                                        Kevin Bryan:

                                                                                        “Inventing Prizes: A Historical Perspective on Innovation Awards and Technology Policy,” B. Z. Khan (2015): B. Zorina Khan is an excellent and underrated historian of innovation policy. In her new working paper, she questions the shift toward prizes as an innovation inducement mechanism. The basic problem ... is that patents are costly in terms of litigation, largely due to their uncertainty, that patents impose deadweight loss by granting inventors market power... (as noted at least as far back as Nordhaus 1969), and that patent rights can lead to an anticommons which in some cases harms follow-on innovation (see Scotchmer and Green and Bessen and Maskin for the theory, and papers like Heidi Williams’ genome paper for empirics).
                                                                                        There are three main alternatives to patents, as I see them. First, you can give prizes, determined ex-ante or ex-post. Second, you can fund R&D directly with government, as the NIH does for huge portions of medical research. Third, you can rely on inventors accruing rents to cover the R&D without any government action, such as by keeping their invention secret, relying on first mover advantage, or having market power in complementary goods. We have quite a bit of evidence that the second, in biotech, and the third, in almost every other field, is the primary driver of innovative activity.
                                                                                        Prizes, however, are becoming more and more common. ... What Khan notes is that prizes have been used frequently in the history of innovation, and were frankly common in the late 18th and 19th century. How useful were they?
                                                                                        Unfortunately, prizes seem to have suffered many problems. ..., prize designers don’t know enough about the relative import of various ideas to set price amounts optimally, prizes in practice are often too small to have much effect, and prizes lead to more lobbying and biased rewards than patents. We shouldn’t go too far here; prizes still may be an important part of the innovation policy toolkit. But the history Khan lays out certainly makes me more sanguine that they are a panacea. ...
                                                                                        [July 2015 NBER Working Paper (RePEc IDEAS). I’m afraid the paper is gated if you don’t have an NBER subscription, and I was unable to find an ungated copy.]

                                                                                          Posted by on Friday, August 7, 2015 at 08:54 AM in Economics, Market Failure | Permalink  Comments (15)


                                                                                          Links for 08-07-15

                                                                                            Posted by on Friday, August 7, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (140)


                                                                                            Thursday, August 06, 2015

                                                                                            'Buying Locally'

                                                                                            Via the blog A Fine Theorem:

                                                                                            “Buying Locally,” G. J. Mailath, A. Postlewaite & L. Samuelson (2015): Arrangements where agents commit to buy only from selected vendors, even when there are more preferred products at better prices from other vendors, are common. Consider local currencies like “Ithaca Hours”, which can only be used at other participating stores and which are not generally convertible, or trading circles among co-ethnics even when trust or unobserved product quality is not important. The intuition people have for “buying locally” is to, in some sense, “keep the profits in the community”; that is, even if you don’t care at all about friendly local service or some other utility-enhancing aspect of the local store, you should still patronize it. The fruit vendor, should buy from the local bookstore even when her selection is subpar, and the book vendor should in turn patronize you even when fruits are cheaper at the supermarket.
                                                                                            At first blush, this seems odd to an economist. Why would people voluntarily buy something they don’t prefer? What Mailath and his coauthors show is that, actually, the noneconomist intuition is at least partially correct when individuals are both sellers and buyers. Here’s the idea. ....
                                                                                            One thing that isn’t explicit in the paper, perhaps because it is too trivial despite its importance, is how buy local arrangements affect welfare..., an intriguing possibility is that “buy local” arrangements may not harm social welfare at all, even if they are beneficial to in-group members. ...
                                                                                            [May 2015 working paper (RePEc IDEAS version)]

                                                                                              Posted by on Thursday, August 6, 2015 at 12:29 PM in Academic Papers, Economics | Permalink  Comments (12)


                                                                                              'The Declining Impact of U.S. Income Taxes on Wealth Inequality'

                                                                                              Nick Bunker:

                                                                                              The declining impact of U.S. income taxes on wealth inequality: A growing number of papers measuring U.S. wealth inequality and its continuing growth were published over the past year. One of those key papers, by economists Emmanuel Saez of the University of California-Berkeley and Gabriel Zucman of the London School of Economics, finds that the share of wealth held by the top 0.1 percent of families in the United States grew from about 7 percent in the late 1970s to 22 percent in 2012. Yet it’s important to note that Saez and Zucman’s results and similar estimates look at the distribution of wealth before accounting for the impact of taxation. A new paper looks at the post-tax distribution of wealth and finds that the federal income tax system is doing significantly less to reduce wealth inequality than in the past. And there are signs that the federal tax system in recent years might actually be increasing wealth inequality.
                                                                                              The paper by economists Adam Looney at the Brookings Institution and Kevin B. Moore at the U.S. Federal Reserve looks at trends in wealth inequality from 1989 to 2013 using data from the Fed’s Survey of Consumer Finances. ...
                                                                                              Looney and Moore’s analysis is, as they note, the first attempt to analyze trends in post-tax wealth inequality. So their paper is just the beginning of the investigation into this area. But if their results hold up they would have strong implications for how we think about the tax code and wealth inequality.

                                                                                                Posted by on Thursday, August 6, 2015 at 10:35 AM in Economics, Income Distribution, Taxes | Permalink  Comments (32)


                                                                                                'Unwavering Fealty to a Failed Theory'

                                                                                                Bad economic theory (but good if you are rich) has trickled down to this cycle's Republican presidential candidates:

                                                                                                Unwavering Fealty to a Failed Theory, by David Madland, US News and World Report: With their first debate set for tonight, Republican candidates have been trying mightily to claim they can help address the economic problems most Americans face. ...
                                                                                                While Jeb Bush declared in February that "the opportunity gap is the defining issue of our time," more recently he's been forced to backtrack from his statement that Americans "need to work longer hours" in order to boost their incomes. Sen. Marco Rubio's argument that if the United States is to "remain an exceptional nation, we must close this gap in opportunity," rings a bit hollow next to his tax plan that disproportionately benefits the wealthy. Gov. Scott Walker says he wants to help families achieve the "American Dream," but thinks the minimum wage is "lame," has stripped the words "living wage" from state laws, and has attacked workers' right to join together to collectively bargain for better wages.
                                                                                                Looking beyond the rhetoric and individual policies, however, lies the Republican Party's major problem: unwavering fealty to trickle-down economics. Virtually all Republicans since Ronald Reagan was elected president have run on a platform of supply-side policies, and the 2016 election will be no different. But it should be, because there is now a growing recognition that trickle-down economics has failed....

                                                                                                  Posted by on Thursday, August 6, 2015 at 10:16 AM in Economics, Politics, Taxes | Permalink  Comments (21)


                                                                                                  Links for 08-06-15

                                                                                                    Posted by on Thursday, August 6, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (150)


                                                                                                    Wednesday, August 05, 2015

                                                                                                    Should the Christensen Self-Disruption Playbook Be Thrown Out?

                                                                                                    Joshua Gans at Digitopoly:

                                                                                                    Google Plus exemplifies why self-disruption doesn’t work: Google is slowly but clearly shuttering Google Plus; its latest failed social network. In many respects this is not a surprise. As I wrote upon its launch in 2011, Google Plus demonstrated precisely why Google didn’t get social as it, by default, asked people to think about restricting their social activity rather than by encouraging it as a default. It nudged people in precisely the wrong direction in its attempt to differentiate itself from Facebook. Thus, even though it had many ‘pros’ in the network effects ledger — in particular, millions with Gmail accounts — this ‘con’ combined with Facebook’s already significant network put it well behind. It didn’t seem to stand a chance.
                                                                                                    So why did it happen in the first place? It is not like Google weren’t already dominant in search and online advertising and remain so today. It is hard to know but in reading things like this Mashable account I have a theory. I’ll admit that this theory will reflect my current theoretical biases but that doesn’t make it less of a theory; just that the evidence, should it ever emerge, may not support it.
                                                                                                    Here it is: Google Plus was launched and organized according to Clay Christensen‘s self-disruption playbook. ...

                                                                                                    After a long explanation, he ends with:

                                                                                                    I would ... suggest that self-disruption has never actually worked and the Christensen playbook on this should be thrown out. But that is a post for another day.

                                                                                                    Simple things like the ability to automatically share blog posts were missing. The rise -- such as it was -- and fall of Google+ is not surprising at all.

                                                                                                      Posted by on Wednesday, August 5, 2015 at 12:17 PM Permalink  Comments (2)