Friday, May 15, 2015

'Mathiness in the Theory of Economic Growth'

Paul Romer:

My Paper “Mathiness in the Theory of Economic Growth”: I have a new paper in the Papers and Proceedings Volume of the AER that is out in print and on the AER website. A short version of the supporting appendix is available here. It should eventually be available on the AER website but has not been posted yet. A longer version with more details behind the calculations is available here.

The point of the paper is that if we want economics to be a science, we have to recognize that it is not ok for macroeconomists to hole up in separate camps, one that supports its version of the geocentric model of the solar system and another that supports the heliocentric model. As scientists, we have to hold ourselves to a standard that requires us to reach a consensus about which model is right, and then to move on to other questions.

The alternative to science is academic politics, where persistent disagreement is encouraged as a way to create distinctive sub-group identities.

The usual way to protect a scientific discussion from the factionalism of academic politics is to exclude people who opt out of the norms of science. The challenge lies in knowing how to identify them.

From my paper:

The style that I am calling mathiness lets academic politics masquerade as science. Like mathematical theory, mathiness uses a mixture of words and symbols, but instead of making tight links, it leaves ample room for slippage between statements in natural versus formal language and between statements with theoretical as opposed to empirical content.

Persistent disagreement is a sign that some of the participants in a discussion are not committed to the norms of science. Mathiness is a symptom of this deeper problem, but one that is particularly damaging because it can generate a broad backlash against the genuine mathematical theory that it mimics. If the participants in a discussion are committed to science, mathematical theory can encourage a unique clarity and precision in both reasoning and communication. It would be a serious setback for our discipline if economists lose their commitment to careful mathematical reasoning.

I focus on mathiness in growth models because growth is the field I know best, one that gave me a chance to observe closely the behavior I describe. ...

The goal in starting this discussion is to ensure that economics is a science that makes progress toward truth. ... Science is the most important human accomplishment. An investment in science can offer a higher social rate of return than any other a person can make. It would be tragic if economists did not stay current on the periodic maintenance needed to protect our shared norms of science from infection by the norms of politics.

[I cut quite a bit -- see the full post for more.]

    Posted by on Friday, May 15, 2015 at 08:54 AM in Economics, Macroeconomics, Methodology | Permalink  Comments (66)


    'Why You Shouldn't Copy In Class'

      Posted by on Friday, May 15, 2015 at 08:36 AM in Economics, Video | Permalink  Comments (6)


      Paul Krugman: Fraternity of Failure

      Mistakes were made:

      Fraternity of Failure, by Paul Krugman, Commentary, NY Times: Jeb Bush wants to stop talking about past controversies. And you can see why. ... The big “Let’s move on” story of the past few days involved Mr. Bush’s response when asked ... whether, knowing what he knows now, he would have supported the 2003 invasion of Iraq. He answered that yes, he would. ...
      Then he tried to walk it back. He “interpreted the question wrong,” and isn’t interested in engaging “hypotheticals.” Anyway, “going back in time” is a “disservice” to those who served in the war.
      Take a moment to savor the cowardice and vileness of that last remark. ... Mr. Bush is trying to hide behind the troops, pretending that any criticism ... is an attack on the courage and patriotism of those who paid the price for their superiors’ mistakes. That’s sinking very low, and it tells us a lot ... about the candidate’s character...
      Wait, there’s more: Incredibly, Mr. Bush resorted to the old passive-voice dodge, admitting only that “mistakes were made.” Indeed. By whom? Well, earlier this year Mr. Bush released a list of his chief advisers on foreign policy, and it was a who’s-who of mistake-makers ... in the Iraq disaster and other debacles. ...
      In Bushworld, in other words, playing a central role in catastrophic policy failure doesn’t disqualify you from future influence. ...
      Take my usual focus, economic policy. ... Having been completely wrong about the economy, like having been completely wrong about Iraq, seems to be a required credential.
      What’s going on here? My best explanation is that we’re witnessing the effects of extreme tribalism. On the modern right, everything is a political litmus test. Anyone who tried to think through the pros and cons of the Iraq war was, by definition, an enemy of President George W. Bush and probably hated America; anyone who questioned whether the Federal Reserve was really debasing the currency was surely an enemy of capitalism and freedom.
      It doesn’t matter that the skeptics have been proved right. Simply raising questions about the orthodoxies of the moment leads to excommunication, from which there is no coming back. So the only “experts” left standing are those who made all the approved mistakes. It’s kind of a fraternity of failure: men and women united by a shared history of getting everything wrong, and refusing to admit it. Will they get the chance to add more chapters to their reign of error?

        Posted by on Friday, May 15, 2015 at 08:30 AM in Economics, Politics | Permalink  Comments (21)


        Links for 05-15-15

          Posted by on Friday, May 15, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (154)


          Thursday, May 14, 2015

          Fed Watch: Get Used To It

          Tim Duy:

          Get Used To It, by Tim Duy: As is well known, second quarter GDP growth is not off to a strong start, at least according to the Atlanta Federal Reserve staff:

          Gdpnow-forecast-evolution

          If this forecast holds, then the first half of 2015 will be very weak if not flat, slow enough that commentators might be tempted to refer to growth as at "stall speed". But quarterly GDP numbers are fairly volatile. Would two consecutive weak quarters be terribly unexpected, or even suggestive of a troubling undercurrent in the economy? It is somewhat difficult to panic about the GDP numbers just yet, especially in the context of the continuous slide in the forward-looking unemployment claims indicator:

          CLAIMS051315

          Moreover, should we be surprised by the occasionally GDP number in the context of lower estimate of potential growth? As Calculated Risk likes to say:
          Right now, due to demographics, 2% GDP growth is the new 4%.
          A simple way to think about this is to look at the confidence interval around the one-step ahead GDP forecast from an AR2 model:

          GDP051315

          Prior to the Great Depression, it would be very unusual for the confidence interval to include a negative read on GDP outside of a recession. Following the Great Depression, however, the confidence interval around the forecast almost always captures the possibility of a negative outcome. This is likely the consequence of two factors, the downshifting of GDP growth as described by Calculated Risk and an increased GDP growth volatility in the most recent sample.
          Bottom Line: We probably need to get used to the occasional negative GDP growth numbers in the context of overall expansion for the US economy. The concept of "stall speed" will need to be revised accordingly.

            Posted by on Thursday, May 14, 2015 at 12:16 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (12)


            'Fighting for History'

            "Progressives need to fight back":

            Fighting for History, by Paul Krugman: ...Progressives ... are much too willing to cede history to the other side. Legends about the past matter. Really bad economics flourishes in part because Republicans constantly extol the Reagan record, while Democrats rarely mention how shabby that record was compared with the growth in jobs and incomes under Clinton. The combination of lies, incompetence, and corruption that made the Iraq venture the moral and policy disaster it was should not be allowed to slip into the mists. ...
            There’s a reason conservatives constantly publish books and articles glorifying Harding and Coolidge while sliming FDR; there’s a reason they’re still running against Jimmy Carter; and there’s a reason they’re doing their best to rehabilitate W. And progressives need to fight back.

              Posted by on Thursday, May 14, 2015 at 10:09 AM in Economics, Politics | Permalink  Comments (31)


              'Weekly Initial Unemployment Claims Decreased to Lowest 4-Week Average in 15 Years'

              Calculated Risk:

              ... The following graph shows the 4-week moving average of weekly claims since January 2000.

              WeeklyClaimsMay142015

              The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased to 271,750.

              This was well below the consensus forecast of 276,000, and the low level of the 4-week average suggests few layoffs. This is the lowest 4-week average in 15 years (since April 2000).

              Note: If the 4-week average falls to 266,000, it will be the lowest in 40 years!

                Posted by on Thursday, May 14, 2015 at 09:32 AM in Economics, Unemployment | Permalink  Comments (4)


                'Defend Workers and the Environment Before Voting Fast Track'

                Jeff Sachs weighs in on the TPP, TTIP, and TPA:

                Defend Workers and the Environment Before Voting Fast Track: President Barack Obama is making a full-court press for two new international business agreements, one with Asian-Pacific countries known as Trans-Pacific Partnership (TPP) and the other with European countries known as the Trans-Atlantic Trade and Investment Partnership (TTIP). To secure these, he is calling on Congress to pass Trade Promotion Authority (TPA), also known as "fast track," so that when TPP and TTIP come up for a Congressional vote, they can only be voted up or down, without amendments. ...
                The president portrays TPP and TTIP as part of an overall program of "middle-class economics" in which "everybody gets a fair shot, everyone does his fair share, and everybody plays by the same set of rules." That means "making sure that everybody has got a good education," "women are getting paid the same as men for doing the same work," "making sure that folks have to have sick leave and family leave," and "increasing the minimum wage across the country." It means pushing for investments in infrastructure and faster Internet.
                The problem, however, is that the president has not succeeded in getting any of those middle-class policies in place. ...
                If the U.S. were a fairer society, in which Obama's vision of everybody getting a fair shot truly applied, then TPP and TTIP would be much easier calls. The losers from trade and offshoring would reliably get help from the winners; workers hit by the agreements would have a clear path to new skills, re-training, family support, adjustment assistance, a higher minimum wage, and all of the other protections that the president rightly seeks but can't secure. Yet America today is not that kind of society. The TPP and TTIP would hand another gift to the multinational companies that are lobbying so hard for the two agreements without providing real protections for workers (and for the environment as well). ...
                Obama and the Republicans in Congress have not made the case to American workers that trade policies under TPP and TTIP will be part of a fair, middle-class, and environmentally sustainable economy.

                  Posted by on Thursday, May 14, 2015 at 09:19 AM in Economics, International Trade, Politics, Social Insurance | Permalink  Comments (33)


                  Links for 05-14-15

                    Posted by on Thursday, May 14, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (107)


                    Wednesday, May 13, 2015

                    'China and India Overtake Mexico for Inflow of Foreign-Born US Residents'

                    Tim Taylor:

                    China and India Overtake Mexico for Inflow of Foreign-Born US Residents: During my adult life, the main source of immigration to the U.S. has always been Mexico. Thus, I was surprised to see that for 2013, immigration from China and India exceeded that from Mexico. The data comes from analysts at the US Census Bureau, Eric B. Jensen, Anthony Knapp, C. Peter Borsella, and Kathleen Nestor, and presented at a recent conference under the title, "The Place-of-Birth Composition of Immigrants to the United States: 2000 to 2013."
                    Here's a takeaway figure. It's a measure of those who are foreign-born, and who were living outside the US a year ago--in other words, it's a measure of migration to the US in the previous year.

                    As I have noted in the past, immigration from Mexico has dropped off substantially in the last few years. Indeed, a few years ago when the U.S. unemployment rate was still so elevated in the aftermath of the Great Recession, net migration from the US to Mexico--that is, new arrivals minus departures--may have been slightly negative. Over the last decade or so, a combination of stronger enforcement at the border, along with a gradually stronger economy in Mexico and fewer children per women in Mexico have meant fewer young people on the move looking for work. ...

                      Posted by on Wednesday, May 13, 2015 at 09:48 AM in Economics, Immigration | Permalink  Comments (31)


                      Video: Stiglitz on Inequality, Wealth, and Growth: Why Capitalism is Failing

                        Posted by on Wednesday, May 13, 2015 at 09:48 AM in Economics, Income Distribution, Video | Permalink  Comments (43)


                        'Wyoming’s War on Microbiology'

                        Mike the Mad Biologist:

                        Wyoming’s War on Microbiology: Well, they’re not calling it that, but this Wyoming law is definitely not going to make our water cleaner, or stop the spread of antibiotic resistance genes...:
                        …the new law makes it a crime to gather data about the condition of the environment across most of the state if you plan to share that data with the state or federal government. The reason? The state wants to conceal the fact that many of its streams are contaminated by E. coli bacteria, strains of which can cause serious health problems, even death. ... Rather than engaging in an honest public debate about the cause or extent of the problem, Wyoming prefers to pretend the problem doesn’t exist. And under the new law, the state threatens anyone who would challenge that belief by producing information to the contrary with a term in jail...
                        The new law is of breathtaking scope. It makes it a crime to “collect resource data” from any “open land,” meaning any land outside of a city or town, whether it’s federal, state, or privately owned. The statute defines the word collect as any method to “preserve information in any form,” including taking a “photograph” so long as the person gathering that information intends to submit it to a federal or state agency. In other words, if you discover an environmental disaster in Wyoming, even one that poses an imminent threat to public health, you’re obliged, according to this law, to keep it to yourself.
                        While this law will probably be ruled unconstitutional, its intent is horrendous...
                        For me personally, the timing is ironic, as I’ve spent the last week involved in various agriculture-related microbiology meetings, and the constant refrain was “we need more data on what people are doing” (e.g., how are they using antibiotics?). In the areas of food and water safety, we desperately need more data. ...

                          Posted by on Wednesday, May 13, 2015 at 08:51 AM in Economics, Politics, Regulation | Permalink  Comments (8)


                          Links for 05-13-15

                            Posted by on Wednesday, May 13, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (175)


                            Tuesday, May 12, 2015

                            Video: Game Theory

                              Posted by on Tuesday, May 12, 2015 at 11:13 AM in Economics, Video | Permalink  Comments (2)


                              'The Rules are What Matter for Inequality'

                              Mike Konczal:

                              The Rules are What Matter for Inequality: Our New Report: I’m very excited to announce the release of “Rewriting the Rules of the American Economy” (pdf report), Roosevelt Institute’s new inequality agenda report by Joe Stiglitz. I’m thrilled to be one of the co-authors...
                              As we argue, inequality is not inevitable: it is a choice that we’ve made with the rules that structure our economy. Over the past 35 years, the rules, or the regulatory, legal and institutional frameworks, that make up the economy and condition the market have changed. These rules are a major driver of the income distribution we see, including runaway top incomes and weak or precarious income growth for most others. Crucially, however, these changes in the rules have not made our economy better off than we would be otherwise; in many cases we are weaker for these changes. We also now know that “deregulation” is, in fact, “reregulation”—that is, a new set of rules for governing the economy that favor a specific set of actors, and that there's no way out of these difficult choices. But what were these changes? ...
                              This report describes what has happened, going far deeper than this summary here. It also has a policy agenda focused on both taming the top and growing the rest of the economy. Some may emphasize some pieces more than others; but no matter what this argument about the rules is what is missing in the current debates over the economy. ...

                                Posted by on Tuesday, May 12, 2015 at 09:37 AM in Economics, Income Distribution, Policy, Politics | Permalink  Comments (54)


                                Links for 05-12-15

                                  Posted by on Tuesday, May 12, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (134)


                                  Monday, May 11, 2015

                                  'A Note on Nominal GDP Targeting and the Zero Lower Bound'

                                  Roberto M. Billi, senior researcher at the Sveriges Riksbank, has a new paper on nominal GDP targeting:

                                  ”A Note on Nominal GDP Targeting and the Zero Lower Bound,” Sveriges Riksbank Working Paper Series No. 270, Revised May 2015: Abstract: I compare nominal GDP level targeting to strict price level targeting in a small New Keynesian model, with the central bank operating under optimal discretion and facing a zero lower bound on nominal interest rates. I show that, if the economy is only buffeted by purely temporary shocks to inflation, nominal GDP level targeting may be preferable because it requires the burden of the shocks to be shared by prices and output. But in the presence of persistent supply and demand shocks, strict price level targeting may be superior because it induces greater policy inertia and improves the tradeoffs faced by the central bank. During lower bound episodes, somewhat paradoxically, nominal GDP level targeting leads to larger falls in nominal GDP.

                                    Posted by on Monday, May 11, 2015 at 02:43 PM in Academic Papers, Economics, Monetary Policy | Permalink  Comments (9)


                                    'An Open Letter to Bill McNabb, CEO of Vanguard Group'

                                    Stephen G. Cecchetti and Kermit L. Schoenholtz (sort of a follow up on the claim that financial reform is working -- perhaps -- but as noted in the post below this one there is more to do):

                                    An Open Letter to Bill McNabb, CEO of Vanguard Group: Dear Mr. McNabb,
                                    We find your WSJ op-ed (Wednesday, May 6) misleading, short-sighted, self-serving, and very disappointing.
                                    Vanguard has been in the forefront of providing low-cost, reliable access to U.S. and global capital markets to millions of customers, including ourselves. Following the financial crisis of 2007-2009, the firm naturally should be a leader in promoting a more resilient financial system. Your op-ed sadly goes in the opposite direction.
                                    Let’s start with the most stunning example: your defense of money market mutual funds. MMMFs are simply banks masquerading as professionally managed investment products. Like banks, they engage in liquidity and maturity transformation. Like banks, they faced runs in 2008 that ended only when the federal government provided a guarantee that put taxpayers at risk. Even with that guarantee, the government still had to support many healthy U.S. corporations with household names that – having previously relied on MMMF purchases of their commercial paper – suddenly faced a severe credit crunch. And, to limit a fire sale amidst the crisis, the Federal Reserve had to provide special funding to buyers to help MMMFs unload their assets.
                                    Unsurprisingly, fund sponsors and their clients – both creditors and borrowers – want to keep these opaque federal subsidies (especially the implicit guarantees that only become explicit and transparent in a crisis). Like them, you make the false, but popular claim that power-hungry regulators (who wish to limit the subsidies that make future crises more likely) are attacking (taxing!) Main Street instead of Wall Street.
                                    In fact, the investment company industry captured its primary regulator long ago, and hasn’t let go. The Securities and Exchange Commission’s 2014 “reform” of MMMFs is exhibit A. It almost surely makes these funds more, not less, liable to runs (see here and here). And – what a surprise – Congress seems to find protecting U.S. taxpayers from contingent liabilities (like implicit financial guarantees to your industry) less attractive than the largesse of financial lobbyists. Even the voluminous Dodd-Frank Act didn’t address MMMFs! ...

                                    After quite a bit more, they conclude with:

                                    As the CEO of one of the largest mutual fund companies in the world that is dedicated to serving and protecting small investors, you should be in the vanguard of advocating reforms that enhance stability.
                                    Instead of complaining about regulation under the guise of protecting Main Street, you should highlight the vulnerabilities in our financial system and make the case for efficient regulation that treats all activities equally. You should also promote investment vehicles that are likely to prove robust in a crisis, while warning about existing products that probably won’t be.
                                    Only greater resilience in the system can make investors confident that capital markets here and elsewhere will remain strong. That is in Vanguard’s interest, too.
                                    Sincerely,
                                    Stephen G. Cecchetti and Kermit L. Schoenholtz

                                      Posted by on Monday, May 11, 2015 at 11:06 AM in Economics, Financial System, Regulation | Permalink  Comments (112)


                                      Paul Krugman: Wall Street Vampires

                                      Financial reform seems to be working:

                                      Wall Street Vampires, by Paul Krugman, Commentary, NY Times: Last year the vampires of finance bought themselves a Congress. I know it’s not nice to call them that, but I have my reasons, which I’ll explain in a bit. For now, however, let’s just note that these days Wall Street, which used to split its support between the parties, overwhelmingly favors the G.O.P. And the Republicans who came to power this year are returning the favor by trying to kill Dodd-Frank, the financial reform enacted in 2010.
                                      And why must Dodd-Frank die? Because it’s working. ...
                                      For one thing, the Consumer Financial Protection Bureau — the brainchild of Senator Elizabeth Warren — is, by all accounts, having a major chilling effect on abusive lending practices. And early indications are that enhanced regulation of financial derivatives — which played a major role in the 2008 crisis — is having similar effects, increasing transparency and reducing the profits of middlemen.
                                      What about the problem of ... “too big to fail”? There, too, Dodd-Frank seems to be yielding real results, in fact, more than many supporters expected. ...
                                      All of this seems to be working: “Shadow banking,” which created bank-type risks while evading bank-type regulation, is in retreat. ...
                                      But the vampires are fighting back.
                                      O.K., why do I call them that? Not because they drain the economy of its lifeblood, although they do: there’s a lot of evidence that oversize, overpaid financial industries — like ours — hurt economic growth and stability. Even the International Monetary Fund agrees.
                                      But what really makes the word apt in this context is that the enemies of reform can’t withstand sunlight. Open defenses of Wall Street’s right to go back to its old ways are hard to find. When right-wing think tanks do try to claim that regulation is a bad thing that will hurt the economy, their hearts don’t seem to be in it. ...
                                      Republicans would love to undo Dodd-Frank, but they are, rightly, afraid of the glare of publicity that defenders of reform like Senator Warren — who inspires a remarkable amount of fear in the unrighteous — would shine on their efforts.
                                      Does this mean that all is well on the financial front? Of course not. Dodd-Frank is much better than nothing, but far from being all we need. And the vampires are still lurking in their coffins, waiting to strike again. But things could be worse.

                                        Posted by on Monday, May 11, 2015 at 08:52 AM in Economics, Financial System, Regulation | Permalink  Comments (64)


                                        Links for 05-11-15

                                          Posted by on Monday, May 11, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (140)


                                          Sunday, May 10, 2015

                                          Video: Measuring the Connectedness of the Financial System - Implications for Systemic Risk Measurement and Management

                                          Robert Merton: Measuring the Connectedness of the Financial System: Implications for Systemic Risk Measurement and Management Abstract: Macrofinancial systemic risk is an enormous issue for both governments and large asset pools. The increasing globalization of the financial system, while surely a positive for economic development and growth, does increase the potential impact of systemic risk propagation across geopolitical borders, making its control and repairing the damage caused a more complex and longer process. As we have seen, the impact of the realization of systemic risk can be devastating for entire economies. The Financial Crisis of 2008-2009 and the subsequent European Debt Crisis were centered around credit risk, particularly credit risk of financial institutions and sovereigns, and the interplay of the two. The propagation of credit risk among financial institutions and sovereigns is related to the degree of “connectedness” among them. The effective measurement of potential systemic risk exposures from credit risk may allow the realization of that risk to be avoided through policy actions. Even if it is not feasible to avoid the systemic effects, the impact of those effects on the economy may be reduced by dissemination of that information and subsequent actions to protect against those effects and to subsequently repair the damage more rapidly. This paper applies the structural credit models of finance to develop a model of systemic risk propagation among financial institutions and sovereigns. Tools for applying the model for measuring connectedness and its dynamic changes are presented using network theory and econometric techniques. Unlike other methods that require accounting or institutional positions data as inputs for determining connectedness, the approach taken here develops a reduced-form model applying only capital market data to implement it. Thus, this model can be refreshed almost continuously with “forward-looking” data at low cost and therefore, may be more effective in identifying dynamic changes in connectedness more rapidly than the traditional models. This new research is still in progress. The basic approach and the empirical findings are encouraging and it would seem that at a minimum, this approach will provide “good “questions, if not always their answers, so that overseers and policy makers know better where to look and devote resources to discovery among the myriad of places within the global financial system. In particular, it holds promise for creating endogenously specified stress test formulations. The talk closes with some discussion of the importance of a more integrated approach to monetary, fiscal and stability policies so as to better recognize the unintended consequences of policy actions in one of these on the others.

                                            Posted by on Sunday, May 10, 2015 at 09:48 AM Permalink  Comments (9)


                                            Links for 05-10-15

                                              Posted by on Sunday, May 10, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (169)


                                              Saturday, May 09, 2015

                                              'Social Costs of the Financial Sector'

                                              Via Tim Taylor, a quotation from Luigi Zingales ("watch video of the lecture or read the talk at his website"):

                                              While there is no doubt that a developed economy needs a sophisticated financial sector, at the current state of knowledge there is no theoretical reason or empirical evidence to support the notion that all the growth of the financial sector in the last forty years has been beneficial to society. In fact, we have both theoretical reasons and empirical evidence to claim that a component has been pure rent seeking. ...
                                              There is a large body of evidence documenting that on average a bigger banking sector (often measured as the ratio of private credit to GDP) is correlated with higher growth, both cross-sectionally and over time. ... [I]in this large body there is precious little evidence that shows the positive role of other forms of financial development, particularly important in the United States: equity market, junk bond market, option and future markets, interest rate swaps, etc. ...
                                              If anything, the empirical evidence suggests that the credit expansion in the United States was excessive. The problem is even more severe for other parts of the financial system. There is remarkably little evidence that the existence or the size of an equity market matters for growth. ...  I am not aware of any evidence that the creation and growth of the junk bond market, the option and futures market, or the development of over-the-counter derivatives are positively correlated with economic growth. ...

                                              Reminds me of this graph from the IMF blog:

                                              Financial-deepening

                                                Posted by on Saturday, May 9, 2015 at 11:35 AM in Economics, Financial System | Permalink  Comments (57)


                                                Links for 05-09-15

                                                  Posted by on Saturday, May 9, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (172)


                                                  Friday, May 08, 2015

                                                  Paul Krugman: Triumph of the Unthinking

                                                   Why do bad economic ideas resonate with voters?:

                                                  Triumph of the Unthinking, by Paul Krugman, Commentary, NY Times: “Words,” wrote John Maynard Keynes, “ought to be a little wild, for they are the assault of thoughts on the unthinking.” I’ve always loved that quote, and have tried to apply it to my own writing. But I have to admit that in the long slump that followed the 2008 financial crisis — a slump that we had both the tools and the knowledge to end quickly, but didn’t — the unthinking were quite successful in fending off unwelcome thoughts.
                                                  And nowhere was the triumph of inanity more complete than in Keynes’s homeland, which is going to the polls as I write this. Britain’s election should be a referendum on a failed economic doctrine, but it isn’t, because nobody with influence is challenging transparently false claims and bad ideas.
                                                  Before I bash the Brits, however, let me admit that we’ve done pretty badly ourselves. ...
                                                  It’s true that in practice Mr. Obama pushed through a stimulus that, while too small and short-lived, helped diminish the depth and duration of the slump. But when Republicans began talking nonsense, declaring that the government should match the belt-tightening of ordinary families — a recipe for full-on depression — Mr. Obama didn’t challenge their position. Instead,... the very same nonsense became a standard line in his speeches, even though his economists knew better, and so did he...
                                                  Like Mr. Obama and company,... Labour hasn’t tried to push back, probably because they considered this a political fight they couldn’t win. But why?
                                                  Mr. Wren-Lewis suggests that it has a lot to do with the power of misleading analogies between governments and households, and also with the malign influence of economists working for the financial industry, who in Britain as in America constantly peddle scare stories about deficits and pay no price for being consistently wrong. If U.S. experience is any guide, my guess is that Britain also suffers from the desire of public figures to sound serious, a pose which they associate with stern talk about the need to make hard choices (at other people’s expense, of course.)
                                                  Still, it’s quite amazing. The fact is that Britain and America didn’t need to make hard choices in the aftermath of crisis. What they needed, instead, was hard thinking...
                                                  But hard thinking has been virtually excluded from British public discourse. As a result, we just have to hope that whoever ends up running Britain’s economy isn’t as foolish as he pretends to be.

                                                    Posted by on Friday, May 8, 2015 at 08:17 AM in Economics, Politics, Press | Permalink  Comments (113)


                                                    'Rising Trade Deficit Slows Job Growth in Manufacturing'

                                                    Dean Baker on the employment report:

                                                    Rising Trade Deficit Slows Job Growth in Manufacturing: Employment rates for prime age workers in the U.S. are low compared to other countries.
                                                    The Labor Department reported the economy created 223,000 jobs in April. This is disappointing since the already weak March number was revised down by 41,000 to 85,000. Since the March number was held down by unusually bad weather, it was reasonable to expect more of a bounceback in April. With the downward revision, the two-month average is just 154,000, a considerable falloff from last year’s pace.

                                                    There were few sectors showing much strength in the month. Professional and business services added 62,000 jobs, 20,700 of which were in the relatively high-paying professional and technical services sector. Construction added 45,000 after a reported loss of 9,000 in March. Health care added 45,200 jobs, up considerably from its average of 33,000 over the last year. Restaurants added 26,000 jobs after losing 7,400 jobs in March. Over the last year, job growth averaged more than 32,000 a month. The government sector added 10,000 jobs in April, reversing a loss of 9,000 jobs in March.

                                                    Manufacturing employment has essentially gone flat, adding just 1,000 jobs. Employment in the sector is up by just 4,000 since January, and because the average workweek has declined, the index of aggregate weekly hours in manufacturing is down by 0.5 percent from its January level. Overtime hours are also down sharply over the last year. This is consistent with the data showing a rise in the trade deficit due to the stronger dollar.

                                                    A downward revision to last month’s wages eliminated the little evidence we had seen of accelerating wage growth. The annual rate of growth over the last three months compared with the prior three months is 2.3 percent, compared to 2.2 percent over the last year.

                                                    The news is a bit better in the household survey. The unemployment rate edged down slightly to 5.4 percent. The number of involuntary part-time workers fell by 125,000 from the March level and is now down by 880,000 from its year-ago level. Meanwhile, the number of people who choose to work part-time rose by 320,000 from March and is up by 1,140,000 (6.0 percent) from its year-ago level. This is likely due to the increased flexibility offered by the Affordable Care Act.

                                                    Interestingly, college educated workers are not doing especially well in the recovery. The employment-to-population ratio (EPOP) for college grads is down by 0.2 percentage points over the last year and is down by 4.0 percentage points from its pre-recession level. By contrast, the EPOP for workers without high school degrees has risen by 1.4 percentage points over the last year and is down by less than 2.0 percentage points from its pre-recession level.

                                                    buffie-cashman-2015-03-25

                                                    The share of unemployment due to people voluntarily quitting their jobs fell back to 9.7 percent after being at 10.2 percent the last two months. The average duration of unemployment was near its lowest level throughout the recovery, and the share of long-term unemployed fell to near its lowest level in the recovery.

                                                    There continues to be a debate among economists over the extent to which the fall in employment rates is cyclical. In this respect, it is worth noting that much of the decline is among prime age workers (25-54), not the result of the retirement of the baby boomers. The United States is doing far worse in employing prime age workers than its competitors. Its prime age EPOP fell from just under 80.0 percent before the downturn to slightly above 77.0 percent in the most recent quarterly data. By contrast, Germany and Japan have both seen sharp rises in EPOPs to 83.4 percent and 82.6 percent, respectively. Even France, which has seen a modest decline in prime age EPOPs, still has an EPOP of 80.4 percent.

                                                    If the March and April jobs reports are taken together, they give a picture of job growth at a considerably slower pace than what we saw last year. This is more consistent with the rate of economic growth that we saw in 2014, and which may have slowed further in the first quarter (after accounting for weather). Productivity growth has been extraordinarily weak through the recovery and has actually been negative in the last two quarters. Without some additional spur to growth to offset the trade deficit, it appears that a return to trend productivity growth is likely to be associated with slower job growth.

                                                    See also: Calculated Risk.

                                                      Posted by on Friday, May 8, 2015 at 08:11 AM in Economics, Unemployment | Permalink  Comments (71)


                                                      'Childhood Medicaid Coverage Improves Adult Earning and Health'

                                                      I highlighted the second article below, and many others reaching similar conclusions, in my last column:

                                                      Childhood Medicaid Coverage Improves Adult Earning and Health, NBER Digest: Medicaid today covers more Americans than any other public health insurance program. Introduced in 1965, its coverage was expanded substantially, particularly to low-income children, during the 1980s and the early 1990s.
                                                      Throughout Medicaid's history, there has been debate over whether the program improves health outcomes. Two new NBER studies exploit variation in children's eligibility for Medicaid, across birth cohorts and across states with different Medicaid programs, along with rich longitudinal data on health care utilization and earnings, to estimate the long-run effects of Medicaid eligibility on health, earnings, and transfer program participation.
                                                      In Childhood Medicaid Coverage and Later Life Health Care Utilization (NBER Working Paper No. 20929), Laura R. Wherry, Sarah Miller, Robert Kaestner, and Bruce D. Meyer find that among individuals who grew up in low-income families, rates of hospitalizations and emergency department visits in adulthood are negatively related to the number of years of Medicaid eligibility in childhood. The authors exploit the fact that one of the substantial expansions of Medicaid eligibility applied only to children who were born after September 30, 1983. This resulted in a large discontinuity in the lifetime years of Medicaid eligibility for children born before and after this birthdate cutoff. Children in families with incomes between 75 and 100 percent of the poverty line experienced about 4.5 more years of Medicaid eligibility if they were born just after the September 1983 cutoff than if they were born just before, with the gain occurring between the ages of 8 and 14. The authors compare children who they estimate were in low-income families, and otherwise similar circumstances, who were born just before or just after this date, to determine how the number of years of childhood Medicaid eligibility is related to health in early adulthood. Their finding of reduced health care utilization among adults who had more years of childhood Medicaid eligibility is concentrated among African Americans, those with chronic illness conditions, and those living in low-income zip codes. The authors calculate that reduced health care utilization during one year in adulthood offsets between 3 and 5 percent of the costs of extending Medicaid coverage to a child.
                                                      In Medicaid as an Investment in Children: What is the Long-Term Impact on Tax Receipts? (NBER Working Paper No. 20835), David W. Brown, Amanda E. Kowalski, and Ithai Z. Lurie conclude that each additional year of childhood Medicaid eligibility increases cumulative federal tax payments by age 28 by $247 for women, and $127 for men. Their empirical strategy for evaluating the impact of Medicaid relies on variation in program eligibility during childhood that is associated with both birth cohort and state of residence. The authors study longitudinal data on actual tax payments until individuals are in their late 20s, and they extrapolate this information to make projections for these individuals at older ages. When they compare the incremental discounted value of lifetime tax payments with the cost of additional Medicaid coverage, they conclude that "the government will recoup 56 cents of each dollar spent on childhood Medicaid by the time these children reach age 60." This calculation is based on federal tax receipts alone, and does not consider state tax receipts or potential reductions in the use of transfer payments in adulthood.
                                                      Both studies use large databases of administrative records to analyze the long-term effects of Medicaid. The first study measures health utilization using the Healthcare Cost and Utilization Project (HCUP) State Inpatient Databases for Arizona, Iowa, New York, Oregon, and Wisconsin in 1999, and those states plus Maryland and New Jersey in 2009. State hospital discharge data were also available from Texas and California. Data on all outpatient emergency department visits were available for six states in 2009. The second study examines data on federal tax payments and constructs longitudinal earnings histories for individuals who were born between 1981 and 1984. It also analyzes administrative records on Medicaid eligibility of children in this cohort.

                                                        Posted by on Friday, May 8, 2015 at 08:10 AM in Academic Papers, Economics, Health Care, Social Insurance | Permalink  Comments (2)


                                                        Links for 05-08-15

                                                          Posted by on Friday, May 8, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (115)


                                                          Thursday, May 07, 2015

                                                          'When Bosses Recruit Employees into Politics'

                                                          Is a secret ballot enough to protect against this?:

                                                          When Bosses Recruit Employees into Politics - Evidence from a New National Survey, by Alexander Hertel-Fernandez, Harvard University: ...As part of my doctoral research on the many facets of shifting business involvement in U.S. politics, I recently commissioned the research firm SRSS to conduct a nationwide, statistically representative telephone survey of more than 1,000 U.S. employees. Survey respondents were asked whether their bosses or supervisors had tried to engage them in politics and, if so, how and with what kinds of messages. Overall, a quarter of employees reported that their bosses have tried to engage them in politics...
                                                          Startlingly, about seven percent of employees reported clearly coercive kinds of political contact at work – messages that made workers uncomfortable or included threats of plant closures, cuts in hours, or layoffs. Given the overall margin of error in my survey, the bottom line result is that somewhere between 3% and 10% of all U.S. employees – about 4 to 14 million Americans – are experiencing intimidating forms of political contact at work...
                                                          Most commentary about Citizens United has focused on the new leeway it grants corporations to spend on elections. However, Citizens United also makes it legal for corporate managers to campaign for their preferred political candidates in the workplace. Businesses can even go so far as to mandate that their workers participate in politics in certain ways – such as attending a rally for a favored politician. That happened during the 2012 election, when an Ohio coal mine required its workers to attend a rally for Republican presidential candidate Mitt Romney. Miners were not paid for their time, but some said they were afraid they could lose their jobs if they did not participate in the rally. ...
                                                          What can be done to curb the most coercive political communications from employers while leaving constructive firm efforts untouched? ... A precedent exists in the state of Oregon, where the Worker Freedom Act prohibits employers from holding mandatory meetings at work related to political issues, and protects employees from retaliation if they choose not to receive workplace political communications. ... My national survey revealed broad bipartisan support for such legal guidelines... The United States has long prided itself on being a model democracy, so the upward creep of workplace political intimidation should be a major concern for anyone who cares about citizen rights in the workplace as well as at the ballot box.

                                                          I don't think employers ought to be able to force employees to attend a rally, etc., and workers ought to be protected if they refuse.

                                                            Posted by on Thursday, May 7, 2015 at 09:49 AM in Economics, Politics | Permalink  Comments (20)


                                                            Interview with Sheila Bair

                                                            From a Cecchetti & Schoenholtz interview of Sheila Bair (I disagree with her view on low interest rates, I think the benefits exceed the costs):

                                                            Has the experience of the crisis changed your view of the central bank policy tool kit?
                                                            Chairman Bair: It has made me more – not less – worried about the considerable power of the Fed. I am more concerned about how extensively their power has been used and could be used in the future, and the way that power has and could disrupt markets now and in the future.
                                                            Zero interest rates have gone on for far too long. We had a crisis that was based on solvency problems: banks and households were borrowing too much. They needed to go through a process of deleveraging. Monetary policy cannot address that.
                                                            That deleveraging is a process that needs to take place. It has taken place to some extent, in some sectors more than others. But, we've seen debt increasing on the public and corporate balance sheets. Though household and bank debt have decreased, total public and private sector debt have increased. And that is a function of monetary policy, which has made it very cheap to borrow. That is what low interest rates do: they encourage borrowing and penalize savings. 
                                                            So, I am very concerned that we've distorted the markets. ... Monetary policy has been used too long and too aggressively in ways that have not been helpful.
                                                            I also fear the Fed’s power to do bailouts. If you think about the tremendous lending programs that the Fed undertook during the crisis, some were needed, but some were quite generous. They perhaps went beyond what was needed. Of course, hindsight is always 20/20. But I do think that the ability of the Fed to do unfettered bailouts – including supporting institutions that were poorly managed and that should be punished by the markets – that power, in and of itself, distorts market discipline. It creates incentives for risk taking.
                                                            So I was very supportive of the Dodd-Frank limitations, modest as they are, on the Fed’s bailout authority. ... They should be able to provide generally available assistance to healthy institutions, but not to insolvent institutions. I think it was appropriate to create a separate regime under Dodd-Frank to force insolvent firms into a bankruptcy-type process. And I hope that these modest reform limitations are maintained by the Federal Reserve. I know they would like to get rid of them, but there need to be limits on their power, and this is an appropriate one.

                                                            [She answers other questions as well.]

                                                              Posted by on Thursday, May 7, 2015 at 09:11 AM Permalink  Comments (50)


                                                              Links for 05-07-15

                                                                Posted by on Thursday, May 7, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (119)


                                                                Wednesday, May 06, 2015

                                                                'The GOP’s War on Science Gets Worse'

                                                                Elizabeth Kolbert at the New Yorker:

                                                                The G.O.P.’s War on Science Gets Worse: During last fall’s midterm election campaign, “I’m not a scientist” became a standard Republican answer to questions about climate change. ... Now, it seems, they are trying to go one better. They are trying to prevent even scientists from being scientists.
                                                                Last week, the House Science, Space, and Technology Committee, headed by Texas Republican Lamar Smith, approved a bill that would slash at least three hundred million dollars from NASA’s earth-science budget. “Earth science, of course, includes climate science,” Representative Eddie Bernice Johnson, a Texas Democrat who is also on the committee, noted. ... Defunding NASA’s earth-science program takes willed ignorance one giant leap further. It means that not only will climate studies be ignored; some potentially useful data won’t even be collected. ...
                                                                The vote on the NASA bill came just a week after the same House committee approved major funding cuts to the National Science Foundation’s geosciences program, as well as cuts to Department of Energy programs that support research into new energy sources. ...
                                                                “It’s hard to believe that in order to serve an ideological agenda, the majority is willing to slash the science that helps us have a better understanding of our home planet,” Representative Johnson wrote. Hard to believe, but, unfortunately, true.

                                                                  Posted by on Wednesday, May 6, 2015 at 09:39 AM in Economics, Environment, Politics | Permalink  Comments (85)


                                                                  Foreclosures Fueled Racial Segregation

                                                                  Via EurekAlert!:

                                                                  Study finds foreclosures fueled racial segregation in US: Some 9 million American families lost their homes to foreclosure during the late 2000s housing bust, driving many to economic ruin and in search of new residences. Hardest hit were black, Latino, and racially integrated neighborhoods, according to a new Cornell University analysis of the crisis.
                                                                  Led by demographer Matthew Hall, researchers estimate racial segregation grew between Latinos and whites by nearly 50 percent and between blacks and whites by about 20 percent as whites abandoned and minorities moved into areas most heavily distressed by foreclosures.
                                                                  Forthcoming in the June print issue of the American Sociological Review and recently published online, the paper, "Neighborhood Foreclosures, Racial/Ethnic Transitions, and Residential Segregation," noted that the crisis spurred one of the largest migrations in U.S. history, changes that could alter the complexion of American cities for a generation or more. ...
                                                                  Examining virtually all urban residential foreclosures from 2005 to 2009, Hall and co-authors find that mostly black and mostly Latino neighborhoods lost homes at rates approximately three times higher than white areas, with ethnically mixed communities also deeply affected. They estimate that the typical neighborhood experienced 4.5 foreclosures per 100 homes during the crisis, but the figure rises to 8.1 and 6.2 homes in predominately black and Latino areas, respectively, while white neighborhoods lost only 2.3 homes on average. ...
                                                                  "Not only were white households less likely to be foreclosed on, but they also were among the first to leave neighborhoods where foreclosures were high, particularly those with racially diverse residents," said Hall. ...

                                                                    Posted by on Wednesday, May 6, 2015 at 09:21 AM in Economics, Housing | Permalink  Comments (2)


                                                                    'Richard Thaler Misbehaves–or, Rather, Behaves'

                                                                    Brad DeLong:

                                                                    Richard Thaler Misbehaves–or, Rather, Behaves: A good review by Jonathan Knee of the exteremely-sharp Richard Thaler’s truly excellent new book, Misbehaving. The intellectual evolution of the Chicago School is very interesting indeed. Back in 1950 Milton Friedman would argue that economists should reason as if people were rational optimizers as long as such reasoning produce predictions about economic variables–prices and quantities–that fit the the data. He left to one side the consideration even if the prices and quantities were right the assessments of societal well-being would be wrong.

                                                                    By the time I entered the profession 30 years later, however, the Chicago School–but not Milton Friedman–had evolved so that it no longer cared whether its models actually fit the data or not. The canonical Chicago empirical paper seized the high ground of the null hypothesis for the efficient market thesis and then carefully restricted the range and type of evidence allowed into the room to achieve the goal of failing to reject the null at 0.05 confidence. The canonical Chicago theoretical paper became an explanation of why a population of rational optimizing agents could route around and neutralize the impact of any specified market failure.

                                                                    Note that Friedman and to a lesser degree Stigler had little patience with these lines of reasoning. Friedman increasingly based his policy recommendations on the moral value of free choice to live one’s life as one thought best–thinking that for people to be told or even nudged what to do–and on the inability of voters to have even a chance of curbing government failures arising out of bureaucracy, machine corruption, plutocratic corruption, and simply the poorly-informed do-gooder “there oughta be a law!” impulse. Stigler tended to focus on the incoherence and complexity of government policy in, for example, antitrust: arising out of a combination of scholastic autonomous legal doctrine development and of legislatures that at different times had sought to curb monopoly, empower small-scale entrepreneurs, protect large-scale intellectual and other property interests, and promote economies of scale. At the intellectual level making the point that the result was incoherent and substantially self-neutralizing policy was easy–but it was not Stigler but rather later generations eager to jump to the unwarranted conclusion that we would be better off with the entire edifice razed to the ground.

                                                                    As I say often, doing real economics is very very hard. You have to start with how people actually behave, with what the institutions are that curb or amplify their behavioral and calculation successes or failures at choosing rational actions, and with what emergent regularities we see in the aggregates. And I have been often struck by Chicago-School baron Robert Lucas’s declaration that we cannot hope to do real economics–that all we can do is grind out papers on how the economy would behave if institutions were transparent and all humans were rational optimizers, for both actual institutions and actual human psychology remain beyond our grasp:

                                                                    Economics tries to… make predictions about the way… 280 million people are going to respond if you change something…. Kahnemann and Tversky… can’t even tell us anything interesting about how a couple that’s been married for ten years splits or makes decisions about what city to live in–let alone 250 million…. We’re not going to build up useful economics… starting from individuals…. Behavioral economics should be on the reading list…. But… as an alternative to what macroeconomics or public finance people are doing… it’s not going to come from behavioral economics… at least in my lifetime…

                                                                    Yet it is not impossible to do real economics, and thus to be a good economist.

                                                                    But it does mean that, as John Maynard Keynes wrote in his 1924 obituary for his teacher Alfred Marshall, while:

                                                                    the study of economics does not seem to require any specialised gifts of an unusually high order…. Is it not… a very easy subject compared with the higher branches of philosophy and pure science? Yet good, or even competent, economists are the rarest of birds.

                                                                    And Keynes continues:

                                                                    An easy subject, at which very few excel! The paradox finds its explanation, perhaps, in that the master-economist must possess a rare combination of gifts… mathematician, historian, statesman, philosopher… understand symbols and speak in words… contemplate the particular in terms of the general… touch abstract and concrete in the same flight of thought… study the present in the light of the past for the purposes of the future. No part of man’s nature or his institutions must lie entirely outside his regard…. Much, but not all, of this ideal many-sidedness Marshall possessed…

                                                                    John Maynard Keynes would see Richard Thaler as a very good economist indeed. ...

                                                                      Posted by on Wednesday, May 6, 2015 at 09:20 AM in Economics, Methodology | Permalink  Comments (29)


                                                                      Links for 05-06-15

                                                                        Posted by on Wednesday, May 6, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (146)


                                                                        Tuesday, May 05, 2015

                                                                        Supply-Side Social Insurance

                                                                        I have a new column:

                                                                        Supply-Side Social Insurance: David Brooks’ claim that “the federal government spent nearly $14,000 per poor person” in 2013 and his claim that “over the last 30 years the poverty rate has scarcely changed” have both been thoroughly debunked. The responses show very clearly that spending is nowhere near as large as Brooks claims, and that using a measure of poverty that overcomes some of the problems with the standard measure shows a decline in the poverty rate, though the decline has been slower than we’d prefer. ...
                                                                        Even if the number had been calculated correctly, it would overstate the true cost of social insurance programs due to the failure to consider “dynamic effects.” That is, these programs don’t just provide income to struggling households in times of need, income that can have a valuable stimulative effect during economic downturns; social insurance programs are also an investment in our future. ...

                                                                        Not sure why "Doesn't Work" was added to the title -- my point is that it does, if only Republicans would support it.

                                                                          Posted by on Tuesday, May 5, 2015 at 08:20 AM in Economics, Fiscal Times, Productivity, Social Insurance | Permalink  Comments (29)


                                                                          Explaining US Inequality Exceptionalism

                                                                          Paul Krugman:

                                                                          Explaining US Inequality Exceptionalism: Disposable income in the United States is more unequally distributed than in most other advanced countries. But why? ... Janet Gornick and Branko Milanovic at the CUNY Graduate Center’s Luxembourg Income Study Center shed light on the question, partly overturning what all of us believed until recently. They explain their findings in the first Research Brief in a new series launched on the LIS Center website.
                                                                          The standard story up until now has been that the source of US inequality exceptionalism lies in the unusually low amount of redistribution we do through our tax and transfer system. ...
                                                                          But can this be right? We know that the US has unusually weak unions, a low minimum wage, an exceptionally wide skills premium and, of course, an exceptionally imperial one percent. Shouldn’t all this leave some mark on market income?
                                                                          What Gornick and Milanovic realized (helped by suggestions from a number of colleagues, notably Larry Mishel at EPI) was that true US market inequality might be being masked by another exceptional piece of the US system – delayed retirement, causing many older households to have positive market income where comparable households in other countries have no or very little market income. ...
                                                                          To correct for this possible problem, they recalculated the numbers for households containing only persons under age 60... The US remains the most unequal nation (after taxes and transfers), but now a main driver of that inequality is market inequality. ... Indeed, America also does less redistribution than several other rich countries, European countries in particular, so that’s still part of the story, but it’s not the whole story or even most of it. ...

                                                                            Posted by on Tuesday, May 5, 2015 at 08:19 AM in Economics, Income Distribution | Permalink  Comments (4)


                                                                            'Inflation Expectations and Recovery from the Depression in 1933'

                                                                            Andrew Jalil and Gisela Rua:

                                                                            Inflation Expectations and Recovery from the Depression in 1933: Evidence from the Narrative Record, by Andrew Jalil and Gisela Rua, April 2015: Abstract This paper uses the historical narrative record to determine whether inflation expectations shifted during the second quarter of 1933, precisely as the recovery from the Great Depression took hold. First, by examining the historical news record and the forecasts of contemporary business analysts, we show that inflation expectations increased dramatically. Second, using an event - studies approach, we identify the impact on financial markets of the key events that shifted inflation expectations. Third, we gather new evidence — both quantitative and narrative — that indicates that the shift in inflation expectations played a causal role in stimulating the recovery.

                                                                              Posted by on Tuesday, May 5, 2015 at 08:10 AM in Economics, Inflation, Monetary Policy | Permalink  Comments (39)


                                                                              'Urbanization Passes the Pritchett Test'

                                                                              Paul Romer:

                                                                              Urbanization Passes the Pritchett Test: The data presented here convinces me that policy-induced changes in the urban share of the population could have big effects on GDP per capita and could operate on a scale that affects the quality of life for billions of people. So in research on development policy, I am not persuaded that economists should narrow their focus to the analysis of such easily evaluated micro-initiatives as funding women’s self-help groups. Neither is Lant Pritchett.
                                                                              In a characteristically incisive blog post, Lant expresses skepticism about the value of micro-initiatives that are being tried as strategies for encouraging economic development because they are easy to evaluate rather than because experience suggests that they have worked at a scale that is comparable to the problem that policy should address.
                                                                              He recalls his experience as a member of a team with members from many developed countries that was evaluating a program in India that financed women’s self-help groups. A woman from West Bengal who had answered their questions said to the team, “You all are from countries that are much richer and doing much better than our country so your country’s women’s self-help groups must also be much better, tell us how women’s self-help groups work in your country.” Quoting now from Lant’s account:
                                                                              We all looked at each other blankly as none of us had any idea whether there even were at any time in our countries’ history such a thing as “women’s self-help groups” … (much less government program for promoting them). We also had no idea how to explain that, yes, all of our countries are now developed but no, all of our countries did this without a major role from women’s self-help groups at any time (or if there were a role we development experts were collectively ignorant of it), but yes, women’s self-help groups promote development.
                                                                              Pritchett proposes a basic, four part test that economists could consider when someone claims that governments or donors should experiment with policies designed to promote variable X because more X is good for development:
                                                                              1. In a contemporary cross section, do countries that are more developed have more X?
                                                                              2. When we look at the few countries for which we have long historical records, do the ones that become much more developed also acquire much more X?
                                                                              3. In a more recent cross-sectional comparison of growth rates, do countries that have rapid growth in X also tend to experience a rapid increase in standards of living?
                                                                              4. If we look for countries that switch from a regime of slow economic development to a regime of rapid development, do we see a parallel shift in the rate of growth of change in X?
                                                                              The historical question, #2, deserves a separate treatment. Here I’ll show that when we consider the urban share of the population as our candidate variable (without any attempt at correcting for the quality of urbanization) the data from many countries in the years from 1955 to 2010 give us confidence that the answer to questions 1, 3, and 4 is yes, more urbanization is associated with income per capita. ...

                                                                              [There's quite a bit more at the original post.]

                                                                                Posted by on Tuesday, May 5, 2015 at 12:15 AM in Economics | Permalink  Comments (29)


                                                                                Links for 05-05-15

                                                                                  Posted by on Tuesday, May 5, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (148)


                                                                                  Monday, May 04, 2015

                                                                                  'Okun’s Equality and Efficiency'

                                                                                  An excerpt from Larry Summers' prepared remarks delivered at the Brookings Institute on the 40th anniversary of Okun’s "Equality and Efficiency: The Big Tradeoff":

                                                                                  Okun’s Equality and Efficiency: ... For many years now, it has been the case that the income distribution has been growing much more unequal. ... Certainly because of what has happened in the economy, I would in thinking about tax policy put much more emphasis on distributional issues relative to efficiency issues than I would have during much of my career.  Similarly, I believe that concern with issues relating to the cost of capital and the adverse effects of taxes in increasing it has been very legitimate at points in the past. At present, when zero interest rates make capital costs as low as they have ever been but corporate profits are at record levels, there needs to be much less concern with capital costs and more concern with the distributional aspects of capital taxation.
                                                                                  The same basic idea that rising inequality tips the balance between fairness and efficiency applies in other areas of policy as well. ... I would judge that he benefit cost ratio seems tilted towards minimum wage increases and towards relaxation of the rules regarding the rights of private sector workers to bargain with management.
                                                                                  Another area where conditions have changed over the years is with respect to policy directed at the financial sector and corporate governance. The financial sector has shown itself to be less of a source of diversification and stability and more of a source of instability than most judged a generation ago.  At the same time compensation levels in the sector, and in firms engaged with the sector has gone up rapidly. The simultaneous emergence of high profits and low interest rates raises the question of whether monopoly power is on the increase. So the question of regulatory actions looms much larger than it has for many years. ...

                                                                                    Posted by on Monday, May 4, 2015 at 11:53 AM in Economics, Equity | Permalink  Comments (46)


                                                                                    'Rumors Have It'

                                                                                    Trying to debunk political rumors can make them stronger:

                                                                                    Rumors have it: Bad news, fans of rational political discourse: A study by an MIT researcher shows that attempts to debunk political rumors may only reinforce their strength.
                                                                                    "Rumors are sticky," says Adam Berinsky, a professor of political science at MIT, and author of a paper detailing the study. "Corrections are difficult, and in some cases can even make the problem worse."
                                                                                    More specifically, Berinsky found in an experiment concerning the Affordable Care Act (ACA) that rebuttals of political rumors about the supposed existence of "death panels" sometimes increased belief in the myth among the public.
                                                                                    "Pure repetition, we know from psychology, makes information more powerful," Berinsky says.
                                                                                    In the case of the "death panels," Berinsky's research indicates that the best way to counteract these rumors is to find a political figure who could credibly debunk the rumor based on their broader political stand -- a Republican senator, for instance. ...

                                                                                    Yes, that's going to happen. Anyway:

                                                                                    Berinsky's experiment also produced new data about the attachment of the electorate to myths in general. He asked respondents whether they believed in any or all of seven different myths, six of which concerned politics -- such as the myth that President Barack Obama is a Muslim, or the rumor that vote fraud in Ohio swung the 2004 presidential election to then-President George W. Bush. Only 5 percent of the population believed four or more of the seven rumors, but on average, people believed 1.8 of the rumors.
                                                                                    As Berinsky sees it, that means belief in seemingly outlandish ideas is not the province of a relatively small portion of uninformed, conspiracy-minded voters.
                                                                                    "It's not that there are some people who believe a lot of crazy things," Berinsky says. "There are a lot of people who believe some crazy things." ...

                                                                                      Posted by on Monday, May 4, 2015 at 10:28 AM Permalink  Comments (14)


                                                                                      Paul Krugman: Race, Class and Neglect

                                                                                      Inequality and lack of opportunity are destructive:

                                                                                      Race, Class and Neglect, by Paul Krugman, Commentary, NY Times: ...the riots in Baltimore, destructive as they are, have served at least one useful purpose: drawing attention to the grotesque inequalities that poison the lives of too many Americans.
                                                                                      Yet I do worry that the centrality of race and racism to this particular story may convey the false impression that debilitating poverty and alienation from society are uniquely black experiences. In fact, much though by no means all of the horror one sees in Baltimore and many other places is really about class, about the devastating effects of extreme and rising inequality.
                                                                                      Take, for example, issues of health and mortality. Many people have pointed out that there are ... black neighborhoods in Baltimore where life expectancy compares unfavorably with impoverished Third World nations. But what’s really striking on a national basis is the way class disparities in death rates have been soaring even among whites.
                                                                                      Most notably,... life expectancy among less educated whites has been falling at rates reminiscent of the collapse of life expectancy in post-Communist Russia. And yes, these excess deaths are the result of inequality and lack of opportunity...
                                                                                      It has been disheartening to see some commentators still writing as if poverty were simply a matter of values, as if the poor just mysteriously make bad choices and all would be well if they adopted middle-class values. ...
                                                                                      The great sociologist William Julius Wilson argued long ago that widely-decried social changes among blacks, like the decline of traditional families, were actually caused by the disappearance of well-paying jobs in inner cities. His argument contained an implicit prediction: if other racial groups were to face a similar loss of job opportunity, their behavior would change in similar ways.
                                                                                      And so it has proved. Lagging wages — actually declining in real terms for half of working men — and work instability have been followed by sharp declines in marriage, rising births out of wedlock, and more. ...
                                                                                      The point is that there is no excuse for fatalism as we contemplate the evils of poverty in America. Shrugging your shoulders as you attribute it all to values is an act of malign neglect. The poor don’t need lectures on morality, they need more resources — which we can afford to provide — and better economic opportunities, which we can also afford to provide through everything from training and subsidies to higher minimum wages. Baltimore, and America, don’t have to be as unjust as they are.

                                                                                        Posted by on Monday, May 4, 2015 at 09:18 AM Permalink  Comments (19)


                                                                                        Ben Bernanke's Bad Example

                                                                                        At MoneyWatch:

                                                                                        Ben Bernanke's bad example, by Mark Thoma: The recent announcements that former Federal Reserve Chairman Ben Bernanke has accepted a position as a senior adviser at Pimco and a similar position at hedge fund Citadel have raised questions about whether the "revolving door" between government and private sector jobs ought to be restricted.
                                                                                        Perhaps, for example, Federal Reserve officials should be subject to a five-year waiting period before they can take jobs in the financial sector. The idea would be to reduce the chance that bank regulators could be influenced through formal and informal ties to previous Fed officials.
                                                                                        My concern is somewhat different: The incentive for Federal Reserve Board members to step down before their terms are up and accept lucrative private sector positions has the potential to damage the Fed as an independent institution...

                                                                                          Posted by on Monday, May 4, 2015 at 09:08 AM in Economics, Monetary Policy | Permalink  Comments (42)


                                                                                          Links for 05-04-15

                                                                                            Posted by on Monday, May 4, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (116)


                                                                                            Sunday, May 03, 2015

                                                                                            'US External Debt: A Curious Case'

                                                                                            Should we be worried about the U.S. net international investment position (the difference between US assets abroad and foreign claims on the US)? Paul Krugman says it's "actually a symptom of US relative strength":

                                                                                            As Tim Taylor notes, the U.S. net international investment position ... has moved substantially deeper into the red in recent years...
                                                                                            But why? You might be tempted to say that it’s obvious: we’ve been running big budget deficits, borrowing the money from foreigners, so of course our debt to those foreigners is surging. But that story implicitly requires a surge in the trade deficit (or more precisely the current account deficit, which includes investment income), which hasn’t happened. ...
                                                                                            So it’s not about borrowing vast sums abroad... But what is it? ... The big move is a sharp rise in the value of foreign holdings of US equity, not matched by any comparable rise in US holdings of foreign equity. What’s that about?
                                                                                            The answer, I believe, is that we’re looking at the differential performance of stock markets. ... So the value of foreign holdings of US equities ... has surged along with the Obama stock market, while US holdings abroad have seen no comparable boost.
                                                                                            And this means that the plunge in the U.S. international investment position, far from showing weakness, is actually a symptom of US relative strength, reflected in strong stock prices.
                                                                                            I think I’m right about this, although happy to hear alternative stories.

                                                                                              Posted by on Sunday, May 3, 2015 at 09:01 AM in Economics, International Finance | Permalink  Comments (75)


                                                                                              Milanovic on Solow on Rents and the Decoupling of Productivity and Wages

                                                                                              Branko Milanovic:

                                                                                              Bob Solow on rents and decoupling of productivity and wages: Atypical or difficult to explain movements in the capital/labor ratio, productivity per worker and real wages have stimulated recent attempts to square them with neoclassical economics, make some adjustments in the neoclassical paradigm or scrap it altogether. ...
                                                                                              Bob Solow explored a ... possibility. Going back to his own initial work on the theory of growth, some 60 years ago, Solow asked...: why did we assume that there is perfect competition and that factors are paid their perfect completion marginal products? ... Solow said: “I could not find a good reason, but since theory and facts were broadly in accord, nobody bothered much with the assumption”. That is, until recently. How can we explain, continued Solow, a sustained ... divergence between nonfarm sector productivity and the real wage..., that goes against everything we thought we knew! ...
                                                                                              However, if you assume a model of imperfect competition..., there is also a rent (due to the fact that price is greater than the marginal revenue product), the issue becomes: how is that rent going to be distributed between labor and capital? And until the early 1980, due to trade union density (“The treaty of Detroit”), relative shortage of labor, trilateral (government-capital-labor) negotiations etc., the rent was divided in a way that favored labor. But with the decline of the unions, ideological assault on labor (the Reagan revolution) and a huge expansion of available wage-labor worldwide (as China and Eastern Europe rejoined the world economy), the bargaining power of labor waned and that of capital increased. Consequently, the share of capital in national income increased, and productivity growth got decoupled from real wage growth.
                                                                                              This is my interpretation of Solow’s talk..., I might have gotten something wrong. ...
                                                                                              If, as Solow said, we came up with an estimate that (say) 20-30% of national income is rent, then surely political factors can explain why capital share is up. If our estimate of rent is 2-3% of national income, then this is not a promising story. So, it is back to empirics!—a nice theory to test where many a young economist can hope to make a difference...

                                                                                                Posted by on Sunday, May 3, 2015 at 12:24 AM in Economics, Income Distribution | Permalink  Comments (115)


                                                                                                Links for 05-03-15

                                                                                                  Posted by on Sunday, May 3, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (103)


                                                                                                  Saturday, May 02, 2015

                                                                                                  'Needed: New Economic Frameworks for a Disappointing New Normal'

                                                                                                  Brad DeLong ends a post on the need for "New Economic Frameworks for a Disappointing New Normal" with:

                                                                                                  ... Our government, here in the U.S. at least, has been starved of proper funding for infrastructure of all kinds since the election of Ronald Reagan. Our confidence in our institutions’ ability to manage aggregate demand properly is in shreds–and for the good reason of demonstrated incompetence and large-scale failure. Our political system now has a bias toward austerity and idle potential workers rather than toward expansion and inflation. Our political system now has a bias away from desirable borrow-and-invest. And the equity return premium is back to immediate post-Great Depression levels–and we also have an enormous and costly hypertrophy of the financial sector that is, as best as we can tell, delivering no social value in exchange for its extra size.
                                                                                                  We badly need a new framework for thinking about policy-relevant macroeconomics given that our new normal is as different from the late-1970s as that era’s normal was different from the 1920s, and as that era’s normal was different from the 1870s.
                                                                                                  But I do not have one to offer.

                                                                                                    Posted by on Saturday, May 2, 2015 at 10:09 AM in Economics, Macroeconomics | Permalink  Comments (46)


                                                                                                    'Assessing the Effects of Monetary and Fiscal Policy'

                                                                                                    From the NBER Reporter:

                                                                                                    Assessing the Effects of Monetary and Fiscal Policy, by Emi Nakamura and Jón Steinsson, NBER Reporter 2015 Number 1: Research Summary: Monetary and fiscal policies are central tools of macroeconomic management. This has been particularly evident since the onset of the Great Recession in 2008. In response to the global financial crisis, U.S. short-term interest rates were lowered to zero, a large fiscal stimulus package was implemented, and the Federal Reserve engaged in a broad array of unconventional policies.
                                                                                                    Despite their centrality, the question of how effective these policies are and therefore how the government should employ them is in dispute. Many economists have been highly critical of the government's aggressive use of monetary and fiscal policy during this period, in some cases arguing that the policies employed were ineffective and in other cases warning of serious negative consequences. On the other hand, others have argued that the aggressive employment of these policies has "walk[ed] the American economy back from the edge of a second Great Depression."1
                                                                                                    In our view, the reason for this controversy is the absence of conclusive empirical evidence about the effectiveness of these policies. Scientific questions about how the world works are settled by conclusive empirical evidence. In the case of monetary and fiscal policy, unfortunately, it is very difficult to establish such evidence. The difficulty is a familiar one in economics, namely endogeneity. ..

                                                                                                    After explaining the endogeneity problem, empirical evidence on price rigidity and its importance for assessing policy, structural modeling, natural experiments, and so on, they turn to their evidence:

                                                                                                    Our identification approach is to study how real interest rates respond to monetary shocks in the 30-minute intervals around Federal Open Market Committee announcements. We find that in these short intervals, nominal and real interest rates for maturities as long as several years move roughly one-for-one with each other. Changes in nominal interest rates at the time of monetary announcements therefore translate almost entirely into changes in real interest rates, while expected inflation moves very little except at very long horizons.
                                                                                                    We use this evidence to estimate the parameters of a conventional monetary business cycle model. ... This approach suggests that monetary non-neutrality is large. Intuitively, our evidence indicates that a monetary shock that yields a substantial response for real interest rates also yields a very small response for inflation. This suggests that prices respond quite sluggishly to changes in aggregate economic conditions and that monetary policy can have large effects on the economy.
                                                                                                    Another area in which there has been rapid progress in using innovative identification schemes to estimate the impact of macroeconomic policy is that of fiscal stimulus.9 ... Much of the literature on fiscal stimulus that makes use of natural experiments focuses on the effects of war-time spending, since it is assumed that in some cases such spending is unrelated to the state of the economy. Fortunately - though unfortunately for empirical researchers - there are only so many large wars, so the number of data points available from this approach is limited.
                                                                                                    In our work, we use cross-state variation in military spending to shed light on the fiscal multiplier.10 The basic idea is that when the U.S. experiences a military build-up, military spending will increase in states such as California - a major producer of military goods - relative to states, such as Illinois, where there is little military production. This approach uses a lot more data than the earlier literature on military spending but makes weaker assumptions, since we require only that the U.S. did not undertake a military build-up in response to the relative weakness of the economy in California vs. Illinois. We show that a $1 increase in military spending in California relative to Illinois yields a relative increase in output of $1.50. In other words, the "relative" multiplier is quite substantial.11
                                                                                                    There is an important issue of interpretation here. We find evidence of a large "relative multiplier," but does this imply that the aggregate multiplier also will be large? The challenge that arises in interpreting these kinds of relative estimates is that there are general equilibrium effects that are expected to operate at an aggregate but not at a local level. In particular, if government spending is increased at the aggregate level, this will induce the Federal Reserve to tighten monetary policy, which will then counteract some of the stimulative effect of the increased government spending. This type of general equilibrium effect does not arise at the local level, since the Fed can't raise interest rates in California vs. Illinois in response to increased military spending in California relative to Illinois.
                                                                                                    We show in our paper, however, that the relative multiplier does have a very interesting counterpart at the level of the aggregate economy. Even in the aggregate setting, the general equilibrium response of monetary policy to fiscal policy will be constrained when the risk-free nominal interest rate is constrained by its lower bound of zero. Our relative multiplier corresponds more closely to the aggregate multiplier in this case.12 Our estimates are, therefore, very useful in distinguishing between new Keynesian models, which generate large multipliers in these scenarios, and plain vanilla real business cycle models, which always generate small multipliers.
                                                                                                    The evidence from our research on both fiscal and monetary policy suggests that demand shocks can have large effects on output. Models with price-adjustment frictions can explain such output effects, as well as (by design) the microeconomic evidence on price rigidity. Perhaps this evidence is still not conclusive, but it helps to narrow the field of plausible models. This new evidence will, we hope, help limit the scope of policy predictions of macroeconomic models that policymakers need to consider the next time they face a great challenge. ...

                                                                                                      Posted by on Saturday, May 2, 2015 at 09:52 AM in Academic Papers, Economics, Fiscal Policy, Monetary Policy | Permalink  Comments (11)