Friday, June 19, 2015

'Shared Security, Shared Growth'

The last paragraph of a long essay by Nick Hanauer & David Rolf on Shared Security, Shared Growth:

... We must do more than just offer voters a new economic theory—we must draw a sharp contrast with conservatives by proposing bold new policies predicated on the economic primacy of the middle class. The Shared Security System is one such proposal. But more than just demonstrating an innovative solution to providing economic security that is adapted to the sharing economy, a bold new proposal like the Shared Security System would demonstrate progressives’ unwavering and unequivocal commitment to the middle class—to the proposition that growth and prosperity come not from tax cuts for the rich, but from inclusive policies focused on creating a secure middle class. By establishing our twenty-first-century Shared Security System, we will usher in a new era of middle-class economic security, and by so doing also provide American businesses with the economic stability and certainty that they demand.

    Posted by on Friday, June 19, 2015 at 10:30 AM in Economics, Social Insurance | Permalink  Comments (95)

    Paul Krugman: Voodoo, Jeb! Style

     Selling tax cuts for the wealthy with unrealistic promises about growth:

    Voodoo, Jeb! Style, by Paul Krugman, Commentary, NY Times: On Monday Jeb Bush — or I guess that’s Jeb!,... gave us a first view of his policy goals. First, he says that if elected he would double America’s rate of economic growth to 4 percent. Second, he would make it possible for every American to lose as much weight as he or she wants, without any need for dieting or exercise.
    O.K., he didn’t actually make that second promise. But he might as well have. It would have been just as realistic as promising 4 percent growth, and considerably less irresponsible. ...
    Mr. Bush ... believes that the growth in Florida’s economy during his time as governor offers a role model for the nation as a whole. Why is that funny? Because everyone except Mr. Bush knows that, during those years, Florida was booming thanks to the mother of all housing bubbles. When the bubble burst, the state plunged into a deep slump... The key to Mr. Bush’s record of success, then, was good political timing: He managed to leave office before the unsustainable nature of the boom he now invokes became obvious.
    But Mr. Bush’s economic promises reflect more than self-aggrandizement. They also reflect his party’s habit of boasting about its ability to deliver rapid economic growth, even though there’s no evidence at all to justify such boasts. It’s as if a bunch of relatively short men made a regular practice of swaggering around, telling everyone they see that they’re 6 feet 2 inches tall. ...
    Why, then, all the boasting about growth? The short answer, surely, is that it’s mainly about finding ways to sell tax cuts for the wealthy..., low taxes on the rich are an overriding policy priority on the right — and promises of growth miracles let conservatives claim that everyone will benefit from trickle-down, and maybe even that tax cuts will pay for themselves.
    There is, of course, a term for basing a national program on this kind of self-serving (and plutocrat-serving) wishful thinking. Way back in 1980, George H.W. Bush, running against Reagan for the presidential nomination, famously called it “voodoo economic policy.” And while Reaganolatry is now obligatory in the G.O.P., the truth is that he was right.
    So what does it say about the state of the party that Mr. Bush’s son — often portrayed as the moderate, reasonable member of the family — has chosen to make himself a high priest of voodoo economics? Nothing good.

      Posted by on Friday, June 19, 2015 at 09:01 AM in Economics, Politics | Permalink  Comments (190)

      Links for 06-19-15

        Posted by on Friday, June 19, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (153)

        Thursday, June 18, 2015

        'Wage Increases Do Not Signal Impending Inflation'

        This note from Carola Binder was intended for the Fed meeting earlier this week, but it applies equally well to meetings yet to come:

        Wage Increases Do Not Signal Impending Inflation: When the FOMC meets..., they will surely be looking for signs of impending inflation. Even though actual inflation is below target, any hint that pressure is building will be seized upon by more hawkish committee members as impetus for an earlier rate rise. The relatively strong May jobs report and uptick in nominal wage inflation are likely to draw attention in this respect.
        Hopefully the FOMC members are aware of new research by two of the Fed's own economists, Ekaterina Peneva and Jeremy Rudd, on the passthrough (or lack thereof) of labor costs to price inflation. The research, which fails to find an important role for labor costs in driving inflation movements, casts doubts on wage-based explanations of inflation dynamics in recent years. They conclude that "price inflation now responds less persistently to changes in real activity or costs; at the same time, the joint dynamics of inflation and compensation no longer manifest the type of wage–price spiral that was evident in earlier decades." ...

          Posted by on Thursday, June 18, 2015 at 10:15 AM in Economics, Inflation, Monetary Policy, Unemployment | Permalink  Comments (31)

          Blow Up the Tax Code and Start Over???

          Here we go again with the flat tax proposals. This time it's Rand Paul:

          Blow Up the Tax Code and Start Over, by Rand Paul: Some of my fellow Republican candidates for the presidency have proposed plans to fix the tax system. These proposals are a step in the right direction, but the tax code has grown so corrupt, complicated, intrusive and antigrowth that I’ve concluded the system isn’t fixable.
          So on Thursday I am announcing an over $2 trillion tax cut that would repeal the entire IRS tax code—more than 70,000 pages—and replace it with a low, broad-based tax of 14.5% on individuals and businesses. I would eliminate nearly every special-interest loophole. The plan also eliminates the payroll tax on workers and several federal taxes outright, including gift and estate taxes, telephone taxes, and all duties and tariffs. I call this “The Fair and Flat Tax.” ...

          He might call it that, but even he admits the rich will pay a lower rate:

          The left will argue that the plan is a tax cut for the wealthy. But most of the loopholes in the tax code were designed by the rich and politically connected. Though the rich will pay a lower rate along with everyone else, they won’t have special provisions to avoid paying lower than 14.5%.

          Why not just get rid of the special provisions? Why is a flat tax more equitable than taxes based upon ability to pay (i.e. a progressive structure)?

          And, of course, this won't provide enough revenue to fund government. How does he solve this? With two pieces of magic. First, magic budget cuts that he leaves unspecified (because proposing what it would actually take to close the budget gap would require severe cuts to social programs that people want to retain), and second, magic economic growth.

          On the budget cuts, we get: 

          my plan would actually reduce the national debt by trillions of dollars over time when combined with my package of spending cuts.

          That's it. Somehow, the spending cuts will magically occur (and since we are imagining, guess who they would fall on?). But the biggest magic is the effect on the economy. It's an "economic steroid injection"!!!:

          As a senator, I have proposed balanced budgets and I pledge to balance the budget as president.
          Here’s why this plan would balance the budget: We asked the experts at the nonpartisan Tax Foundation to estimate what this plan would mean for jobs, and whether we are raising enough money to fund the government. The analysis is positive news: The plan is an economic steroid injection. Because the Fair and Flat Tax rewards work, saving, investment and small business creation, the Tax Foundation estimates that in 10 years it will increase gross domestic product by about 10%, and create at least 1.4 million new jobs.
          And because the best way to balance the budget and pay down government debt is to put Americans back to work, my plan would actually reduce the national debt by trillions of dollars over time when combined with my package of spending cuts.

          I bet it would almost be as good for the economy as the Bush tax cuts. Oh wait...

            Posted by on Thursday, June 18, 2015 at 09:12 AM in Budget Deficit, Economics, Social Insurance, Taxes | Permalink  Comments (45)

            'Thinking About the All Too Thinkable'

            Paul Krugman:

            Thinking About the All Too Thinkable: The path toward non-Grexit — toward Greece and its creditors reaching a deal that keeps it in the euro — is getting narrower, although it’s not yet completely closed. ...
            At this point quite a few people on the creditor/Troika side of the negotiations seem almost to welcome the prospect. But this is bizarre in terms of their underlying interests. Yes, the lives of the officials would become easier, for a while, because they wouldn’t have to deal with Syriza. But from the point of view of the creditors, Grexit would be a pure negative. They would almost surely receive less in payments than they would under any deal that keeps Greece in, and the proof that the euro is in fact reversible would grease the rails for future crises, even if the ECB is able to contain this one.
            And as Martin Wolf points out, Greece will still be there, and will still need dealing with.
            The Greeks, on the other hand, should feel conflicted. There would probably be a lot of financial chaos in the immediate aftermath of euro exit. And maybe the apocalyptic warning from the Bank of Greece that devaluation would push the nation back into the Third World is right, although I’d like to know about the model and historical examples that would justify this claim. But absent that kind of implosion, a devalued currency should eventually produce an export-led recovery — I understand the cynicism one hears, but demand curves do slope downwards even in Greece.
            The point is that nobody should be casual or confident here. But the creditors should actually be even more worried than the Greeks about a potential exit that has no upside for the rest of Europe.

              Posted by on Thursday, June 18, 2015 at 09:09 AM in Economics, Financial System, International Finance | Permalink  Comments (26)

              Links for 06-18-15

                Posted by on Thursday, June 18, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (155)

                Wednesday, June 17, 2015

                Fed Watch: June FOMC Recap

                Tim Duy:

                June FOMC Recap, by Tim Duy: The FOMC meeting ended largely as expected with a nod toward recent data improvement but no change in policy. It is still reasonable to believe that lift-off will occur in September, but only if incoming data removes any residual concern about the sloppy data from earlier this year. Still, as Federal Reserve Chair Janet Yellen emphasized today, the lift-off itself is less important than the subsequent path of rates. That path remains subdued.
                The FOMC statement itself was little changed - see the Wall Street Journal statement tracker here. Key is the opening line that validates the belief that the first quarter weakness was largely transitory:
                Information received since the Federal Open Market Committee met in April suggests that economic activity has been expanding moderately after having changed little during the first quarter.
                Otherwise, growth is expected to continue at a moderate pace that justifies an extended period of low interest rates. The updated forecasts saw reduced growth expectations this year as expected, while the near-term unemployment forecast was raised modestly (I had felt the Fed would be wary of doing this given their tendency to be overly pessimistic on this point). Longer term forecasts were essentially unchanged. The forecasts:


                The highest interest rate forecasts for 2015 were eliminated as was virtually required given the lack of any rate hike today. The median rate forecast suggests a rate hike this year, as did Yellen in her press conference. Still, she also said they are looking for decisive evidence to justify a rate hike, and I suspect that evidence will not arrive prior to the July meeting. Maybe September. Maybe not. It's all meeting by meeting now, you know.
                Interestingly, although the inflation and unemployment forecasts for 2016 and 2017 were largely unchanged, the median interest rate projection fell along with the most hawkish forecasts. See this handy chart from Fulcrum Asset Management:


                No change in the inflation and unemployment forecasts combined with a slower and longer path to normal rates suggests a modest change in the reaction function. In effect, the Fed has turned more dovish as the timing of lift-off is delayed. Even with unemployment falling to current estimates of full employment next year, they do not believe the economy needs (or maybe could withstand) a rapid pace of hikes. Persistently low inflation and wage growth is taking its toll on policy expectations. And even the most hawkish participants are falling in line with this story.
                Bottom Line: Fed policy unchanged as expected, door still open for a rate hike in September, but the lower rate path indicates a modestly more dovish Fed resigned to a persistent low interest rate environment. It's the rate path we need to be watching, not the timing of the first hike.

                  Posted by on Wednesday, June 17, 2015 at 02:02 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (24)

                  'TPP Versus NAFTA'

                  Paul Krugman:

                  TPP Versus NAFTA: Many people — myself included — thought that TPP would, in the end, follow the model of NAFTA: a Democratic president would push the agreement through Congress, but the bulk of the votes would be Republican. But it doesn’t seem to be going that way. Why?
                  Lydia DePillis suggests that procedural differences and the changed political environment are what changed. Maybe. But I’d suggest three additional factors.
                  First, while non-trade issues like dispute settlement and intellectual property already loomed large in NAFTA, it was nonetheless more of a genuine trade agreement than TPP...
                  Despite this, the real case for NAFTA involved foreign policy — which is also true for TPP (administration officials tell me that it’s really about geopolitics.) But that case was much more compelling for NAFTA, which was about rewarding Mexican reformers. ...
                  Finally, I think it’s fair to say that the liberal intelligentsia has been somewhat radicalized by Republican extremism; making common cause with those who share your basic values matters more than it seemed to a couple of decades ago. ...
                  So it really is a different game, and TPP supporters need to realize that old rules no longer apply.

                    Posted by on Wednesday, June 17, 2015 at 12:17 PM in Economics, International Trade, Politics | Permalink  Comments (39)

                    'Why Anti-Keynesian Views Survive'

                    Simon Wren-Lewis:

                    Speak for yourself, or why anti-Keynesian views survive:
                    The evidence for the Keynesian worldview is very mixed. Most economists come down in favor or against it because of their prior ideological beliefs. Krugman is a Keynesian because he wants bigger government. I’m an anti-Keynesian because I want smaller government.
                    Statements like this tell us rather a lot about those who make them. As statements about why people hold macroeconomic views they are wide of the mark. Of course there is confirmation bias, and ideological bias, but as the term ‘bias’ suggests, it does not mean that evidence has no impact on the views of the majority of academics.
                    The big/small government idea makes no theoretical sense. Why would wanting a larger state make someone a Keynesian? Many Keynesians, and most New Keynesians, nowadays acknowledge that monetary policy should be used to manage demand when it can. They also know that any fiscal stimulus only works, or at least works best, if it involves temporary increases in government spending. So being a Keynesian is not a very effective way of getting a larger state.
                    It is also obviously false empirically. ...
                    Parts of the political right have always had a deep ideological problem with Keynesian analysis. As Colander and Landreth describe, the first US Keynesian textbook was banned. New Classical economists, for all the many positive contributions they brought to macro (in the view of most mainstream Keynesians), also tried to overthrow Keynesian analysis and they failed. 
                    When anti-Keynesians tell you that support or otherwise for Keynesian macroeconomics depends on belief about the size of the state, they are telling something about where their own views come from. When they tell you everyone ignores evidence that conflicts with their views, they are telling you how they treat evidence. And the fact that some on the right take this position tells you why anti-Keynesian views continue to survive despite overwhelming evidence in favor of Keynesian theory.

                      Posted by on Wednesday, June 17, 2015 at 08:31 AM Permalink  Comments (181)

                      'Microcredit: Neither Miracle nor Mirage'

                      On microcredit:

                      Microcredit: Neither miracle nor mirage, by Orazio Attanasio, Britta Augsburg, Ralph De Haas, Heike Harmgart, Costas Meghir, Vox EU: Recent years have seen an intense debate between microfinance proponents and detractors on whether microcredit can lift people out of poverty. The microfinance industry has long painted a picture – often backed by inspiring individual success stories – in which households can escape poverty once they receive a microloan. Women are thought to benefit in particular as access to credit allows them to become economically and socially more independent. More recently, doubts have emerged about the ability of microcredit to improve living standards in a structural way. Some point out that many villages where microcredit was first introduced in the 1970s are still as poor today as they were then. Others take offense at the very high interest rates that some microfinance institutions (MFIs) charge.

                      What has been absent from this heated debate is solid evidence. To fill this gap, a number of research teams across the world started randomized evaluations (large field experiments) to rigorously measure the impact of access to microcredit on borrowers and their households. Studies were set up in Bosnia and Herzegovina, Ethiopia, India, Mexico, Mongolia, Morocco, and the Philippines. Research took place in both urban and rural areas and evaluated both individual-liability and joint-liability (group) loans. Some of the participating microfinance institutions were for-profit organizations whereas others were non-profits. Nominal annual interest rates varied between 12% (Ethiopia) and 110% (Mexico).

                      Four main lessons

                      Together, these studies have produced a rigorous body of evidence on the impact of microcredit in a wide variety of settings. Earlier this year the research results were published in a special issue of the American Economic Journal: Applied Economics (references at the end of this article). They paint a remarkably consistent picture and contain four main lessons:

                      • Across all seven studies, microcredit did not lead to substantial increases in borrowers’ income. It did not help to lift poor households out of poverty. This holds both when measured over the short term (18 months) and over the longer run (three to six years).

                      A possible explanation for this finding is that while microcredit clients overwhelmingly reported using loans at least partially for business purposes, many of them also reported to have used part of their loans for consumption. Another possible explanation is that not all borrowers are natural entrepreneurs. Of those that use microcredit to open or expand a small business, some borrowers are more successful than others. Though business investments and expenses increased for borrowers in several countries, researchers did not find any overall effect on borrowers’ profits in Bosnia and Herzegovina, Ethiopia, India, Mexico, and Mongolia. In the evaluation in Bosnia, we only found positive profit impacts among a small segment of all borrowers.

                      • Access to microcredit also did not appear to have tangible impacts on borrowers’ well-being or the well-being of others in their households.

                      For instance, three of four studies found no effect on female decision-making power and independence. In Mexico, where the microfinance institutions emphasized empowerment, women did enjoy a small but significant increase in decision-making power. In six studies, microcredit access did not increase children’s schooling.

                      • On the upside, the data collected by the research teams show that households with access to microcredit enjoyed greater freedom in deciding how they earned and spent money.

                      In Bosnia and Herzegovina and in Morocco, microcredit allowed people to change their mix of employment activities, reducing earnings from wage labor and increasing income from self-employment activities. In the Philippines, it also helped households insure themselves against income shocks and to manage risk. In Mexico, households with access to microcredit did not need to sell off assets when hit by an income shock.

                      • Importantly, there is no evidence of systematic harmful impacts of access to microcredit.

                      For instance, overall stress levels among borrowers were no different from the comparison group in Bosnia and Herzegovina or the Philippines, though male borrowers experienced significantly higher levels of stress in the Philippines.

                      Implications for the microfinance industry

                      Small changes to product design may have a big influence on how people use and benefit from microcredit. For instance, repayment begins for the typical microloan two weeks after loan disbursement and payment is usually required on an inflexible weekly basis. This can be an effective strategy to limit default, but may also limit borrowers’ income growth. In India, granting (some) borrowers a grace period – so that they can build a business before they need to start repaying – led to increased short-run business investment and long-run profits, but also increased default rates (Field et al. 2013). In addition, monthly or seasonal repayment schedules that better reflect borrowers’ income flows can help borrowers to make better use of their loans. For instance, microfinance institutions like Enda Arabe in Tunisia and FINCA in Armenia offer loan products where repayment schedules are matched with expected cash flows (which depend on the seasonality of agricultural products). Further research is needed to evaluate the impact of such flexible loan products in terms of repayment rates and poverty outcomes. In Mali, researchers found that a credit product designed around agricultural timing had positive impacts and did not lead to increased defaults (Beaman et al. 2014).

                      Related to the previous point, microfinance institutions and borrowers could benefit from better segmenting the market and offering larger, more flexible products to clients most likely to perform well, and smaller, less flexible loans to less promising borrowers. Better ex ante differentiation is, however, not straightforward and would require better screening methodologies (Fafchamps and Woodruff  2014).

                      In addition, financial institutions can pilot better ways to help high-performing micro-entrepreneurs become eligible for small and medium enterprises (SME) lending. Today, successful and growing clients that need more funding may get stuck, too large for microfinance but not yet viable clients at traditional lending institutions. Microfinance institutions could set up arrangements with local banks to transfer such successful clients (for a fee) to a bank so that they can continue their growth trajectory. Likewise, banks with both microfinance and SME department should ensure that fast-growing micro clients can easily graduate to SME status.

                      Lastly, we note that the rapid expansion of lender competition can tempt some clients to borrow from various lenders (double dipping) which may result in over-borrowing and repayment problems. A potential mechanism to prevent such problems is to let lenders share borrower information via a credit registry. These considerations are particularly urgent for countries, such as Tunisia, that are currently opening up their microfinance sector to increased competition.


                      Angelucci, M, D Karlan and J Zinman (2015), “Microcredit Impacts: Evidence from a Randomized Microcredit Program Placement Experiment by Compartamos Banco”, American Economic Journal: Applied Economics 7(1), 151-82.

                      Attanasio, O, B Augsburg, R De Haas, E Fitzsimons and H Harmgart (2015), “The Impacts of Microfinance: Evidence from Joint-Liability in Mongolia”, American Economic Journal: Applied Economics 7(1), 90-122.

                      Augsburg, B, R De Haas, H Harmgart and C Meghir (2015), “The Impacts of Microcredit: Evidence from Bosnia and Herzegovina”, American Economic Journal: Applied Economics 7(1), 183-203.

                      Beaman, L, D Karlan, B Thuysbaert and C Udry (2014), “Self-Selection into Credit Markets: Evidence from Agriculture in Mali”, mimeo.

                      Banerjee, A, E Duflo, R Glennerster and C Kinnan (2015), “The Miracle of Microfinance? Evidence from a Randomized Evaluation”, American Economic Journal: Applied Economics 7(1), 22-53.

                      Banerjee, A, D Karlan and J Zinman (2015), “Six Randomized Evaluations of Microcredit: Introduction and Further Steps”, American Economic Journal: Applied Economics 7(1), 1-21.

                      Crépon, B, F Devoto, E Duflo and W Parienté (2015), “Estimating the Impact of Microcredit on Those Who Take It Up: Evidence from a Randomized Experiment in Morocco”, American Economic Journal: Applied Economics 7(1), 123-50.

                      Fafchamps, M and C Woodruff (2014), “Identifying Gazelles: Expert Panels vs. Surveys as a Means to Identify Firms with Rapid Growth Potential”, CAGE Online Working Paper Series 213.

                      Field, E, R Pande, J Papp and N Rigol (2013), “Does the Classic Microfinance Model Discourage Entrepreneurship among the Poor? Experimental Evidence from India”, The American Economic Review, 103(6), 2196-2226.

                      Karlan, D and J Zinman (2011), “Microcredit in Theory and Practice: Using Randomized Credit Scoring for Impact Evaluation”, Science 332(6035), 1278-1284.

                      Tarozzi, A, J Desai and K Johnson (2015), “The Impacts of Microcredit: Evidence from Ethiopia”, American Economic Journal: Applied Economics 7(1), 54-89.

                        Posted by on Wednesday, June 17, 2015 at 08:10 AM Permalink  Comments (2)

                        Links for 06-17-15

                          Posted by on Wednesday, June 17, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (123)

                          Tuesday, June 16, 2015

                          Fed Watch: FOMC Preview

                          Tim Duy:

                          FOMC Preview: This month my FOMC preview is over at Bloomberg.  The intro:

                          The Federal Open Market Committee meets this week to discuss the path of monetary policy.

                          Any possibility of a rate hike at the meeting’s conclusion on Wednesday was already crushed under the weight of weak data early in the year. To be sure, the data support the transitory nature of the weakness, justifying Federal Reserve Chair Janet Yellen’s optimism last month, but it remains too little, too late. Instead, turn to September as the next opportunity for the first rate hike of this cycle. 

                          To read the rest, please visit Bloomberg.

                            Posted by on Tuesday, June 16, 2015 at 09:42 AM Permalink  Comments (16)

                            The Good and Bad Parts of Online Education

                            I have a new column:

                            The Good and Bad Parts of Online Education: Is online education the solution to widening inequality, rapidly rising costs, and lack of access to high quality courses? Will it lead to the demise of traditional “brick and mortar” institutions? I was initially very skeptical about the claims being made about online education, but after teaching several of these course during the past academic year my own assessment has become much more positive.
                            My main worry, as expressed in a previous column, was that the availability of online courses degrees would create a two-tiered education system and exaggerate inequality instead of reducing it. I still worry about that, but I didn’t give online education enough credit for the things that it can do. Here are some of the positives and negatives of online versus traditional education gleaned from my experience teaching both types of courses. ...

                              Posted by on Tuesday, June 16, 2015 at 07:59 AM in Economics, Technology, Universities | Permalink  Comments (30)

                              Links for 06-16-15

                                Posted by on Tuesday, June 16, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (165)

                                Monday, June 15, 2015

                                'The Gordon Gekko Effect: The Role of Culture in the Financial Industry'

                                Andrew Lo:

                                The Gordon Gekko Effect: The Role of Culture in the Financial Industry, NBER Working Paper No. 21267 Issued in June 2015: Culture is a potent force in shaping individual and group behavior, yet it has received scant attention in the context of financial risk management and the recent financial crisis. I present a brief overview of the role of culture according to psychologists, sociologists, and economists, and then present a specific framework for analyzing culture in the context of financial practices and institutions in which three questions are answered: (1) What is culture?; (2) Does it matter?; and (3) Can it be changed? I illustrate the utility of this framework by applying it to five concrete situations—Long Term Capital Management; AIG Financial Products; Lehman Brothers and Repo 105; Société Générale’s rogue trader; and the SEC and the Madoff Ponzi scheme—and conclude with a proposal to change culture via “behavioral risk management.”

                                [Open Link]

                                  Posted by on Monday, June 15, 2015 at 11:48 AM Permalink  Comments (17)

                                  Paul Krugman: Democrats Being Democrats

                                  "The Democratic Party is becoming more assertive about its traditional values":

                                  Democrats Being Democrats, by Paul Krugman, Commentary, NY Times: On Friday, House Democrats shocked almost everyone by rejecting key provisions needed to complete the Trans-Pacific Partnership, an agreement the White House wants but much of the party doesn’t. On Saturday Hillary Clinton formally began her campaign for president, and surprised most observers with an unapologetically liberal and populist speech.
                                  These are, of course, related events. The Democratic Party is becoming more assertive about its traditional values...
                                  Democrats, despite defeats in midterm elections, believe — rightly or wrongly — that the political wind is at their backs. Growing ethnic diversity is producing what should be a more favorable electorate; growing tolerance is turning social issues, once a source of Republican strength, into a Democratic advantage instead. ...
                                  But the party’s change isn’t just about politics, it’s also about policy.
                                  On one side, the success of Obamacare and related policies — millions covered for substantially less than expected, surprisingly effective cost control for Medicare — have helped to inoculate the party against blanket assertions that government programs never work. And on the other side, the Davos Democrats who used to be a powerful force arguing against progressive policies have lost much of their credibility.
                                  I’m referring to the kind of people — many, though not all, from Wall Street — who go to lots of international meetings where they assure each other that prosperity is all about competing in the global economy, and that this means supporting trade agreements and cutting social spending. ...
                                  As it turns out, however,... the purported wise men blithely assured us that we had nothing to fear from financial deregulation; we did. After crisis struck, thanks in large part to that very deregulation, they warned us that we should be very afraid of bond investors, who would punish America for its budget deficits; they didn’t. So why believe them when they insist that we must approve an unpopular trade deal? ...
                                  As I said, you can describe all of this as a move to the left, but there’s more to it than that...
                                  Of course, changes in ideology matter only to the extent that they can influence policy. And while the electoral odds probably favor Mrs. Clinton, and Democrats could retake the Senate, they have very little chance of retaking the House. So changes in the Democratic Party may take a while to change America as a whole. But something important is happening, and in the long run it will matter a great deal.

                                    Posted by on Monday, June 15, 2015 at 09:03 AM in Economics, Politics | Permalink  Comments (137)

                                    Links for 06-15-15

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

                                      Sunday, June 14, 2015

                                      'What Assumptions Matter for Growth Theory?'

                                      Dietz Vollrath explains the "mathiness" debate (and also Euler's theorem in a part of the post I left out). Glad he's interpreting Romer -- it's very helpful:

                                      What Assumptions Matter for Growth Theory?: The whole “mathiness” debate that Paul Romer started tumbled onwards this week... I was able to get a little clarity in this whole “price-taking” versus “market power” part of the debate. I’ll circle back to the actual “mathiness” issue at the end of the post.
                                      There are really two questions we are dealing with here. First, do inputs to production earn their marginal product? Second, do the owners of non-rival ideas have market power or not? We can answer the first without having to answer the second.
                                      Just to refresh, a production function tells us that output is determined by some combination of non-rival inputs and rival inputs. Non-rival inputs are things like ideas that can be used by many firms or people at once without limiting the use by others. Think of blueprints. Rival inputs are things that can only be used by one person or firm at a time. Think of nails. The income earned by both rival and non-rival inputs has to add up to total output.
                                      Okay, given all that setup, here are three statements that could be true.
                                      1. Output is constant returns to scale in rival inputs
                                      2. Non-rival inputs receive some portion of output
                                      3. Rival inputs receive output equal to their marginal product
                                      Pick two.
                                      Romer’s argument is that (1) and (2) are true. (1) he asserts through replication arguments, like my example of replicating Earth. (2) he takes as an empirical fact. Therefore, (3) cannot be true. If the owners of non-rival inputs are compensated in any way, then it is necessarily true that rival inputs earn less than their marginal product. Notice that I don’t need to say anything about how the non-rival inputs are compensated here. But if they earn anything, then from Romer’s assumptions the rival inputs cannot be earning their marginal product.
                                      Different authors have made different choices than Romer. McGrattan and Prescott abandoned (1) in favor of (2) and (3). Boldrin and Levine dropped (2) and accepted (1) and (3). Romer’s issue with these papers is that (1) and (2) are clearly true, so writing down a model that abandons one of these assumptions gives you a model that makes no sense in describing growth. ...
                                      The “mathiness” comes from authors trying to elide the fact that they are abandoning (1) or (2). ...

                                      [There's a lot more in the full post. Also, Romer comments on Vollrath here.]

                                        Posted by on Sunday, June 14, 2015 at 09:35 AM in Economics, Macroeconomics, Methodology | Permalink  Comments (48)

                                        Links for 06-14-15

                                          Posted by on Sunday, June 14, 2015 at 01:01 AM in Economics, Links | Permalink  Comments (175)

                                          Saturday, June 13, 2015

                                          'Decline and Fall of the Davos Democrats'

                                          Paul Krugman:

                                          Decline and Fall of the Davos Democrats: OK, I didn’t see that coming: even though I have come out as a lukewarm opponent of TPP, I assumed that it would happen anyway... But no, or not so far. ...
                                          Or to put it another way, one way to see this is as the last stand of the Davos Democrats.
                                          If you talk to administration officials — or at least if I talk to them (they may be telling me what they think I want to hear) — they offer a fairly sophisticated defense of this deal. ...
                                          I’m not fully convinced, but this is a reasonable discussion.
                                          But the overall selling of TPP, to some extent by the administration and much more so by its business allies, has been nothing like this. Instead, it has been all lectures from Those Who Know How the Global Economy Works — the kind of people who go to Davos and participate in earnest panels on the skills gap and the case for putting Alan Simpson in charge of everything — to the ignorant hippies who don’t. You know, ignorant hippies like Joseph Stiglitz and Elizabeth Warren.
                                          This kind of thing worked in the 1990s, when Davos Man actually did seem to know how the world works. But now Davos Democrats are known as the people who told us to trust unregulated finance and fear invisible bond vigilantes. They just don’t have the credibility to pull off arguments from authority any more. And it doesn’t say much for their perspicacity that they apparently had no idea that the world has changed.
                                          TPP’s Democratic supporters thought they could dictate to their party like it’s 1999. They can’t.

                                            Posted by on Saturday, June 13, 2015 at 08:04 AM in Economics, International Trade, Politics | Permalink  Comments (128)

                                            Links for 06-13-15

                                              Posted by on Saturday, June 13, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (144)

                                              Friday, June 12, 2015

                                              The Education-Deficit Does Not Explain Rising Inequality

                                              Brad DeLong:

                                              Discussion of Matthew Rognlie: "Deciphering the Fall and Rise in the Net Capital Share": The Honest Broker for the Week of June 14, 2015, b J. Bradford DeLong: ... I was weaned on the education-deficit explanation of recent trends in US inequality, perhaps best set out by the very sharp Claudia Goldin and Larry Katz (2009) in The Race Between Education and Technology. In their view, the bulk of U.S. inequality trends since the 1980s were driven by education's losing this race. In the era that had begun in 1636 the United States-to-be had made increasing the educational level of the population a priority. But that era came to an end in the 1970s, while skill-biased technological change continues. That meant that the return to education-based skills began to rise. And it was that rise that was the principal driver of rising income inequality.
                                              But, recently, reality does not seem to agree with what had once seemed to me to be a satisfactory explanation. First, to get large swings in the income distribution out of small changes in the relative supply of educated workers requires relatively low substitutability between college-taught skills and other factors of production. As inequality has risen, the required substitutability to fit the data has dropped to what now feels to me an unreasonably low magnitude. Second, while it is true that we have seen higher experience-skill premiums and sharply higher education-skill premiums, the real action in inequality appears now to be unduly concentrated in the upper tail. The distribution of the rise in inequality does not seem to match the distribution of technology-complementary skills at all. ...
                                              Looking simply at my own family history, my Grandfather Bill reached not just the 1% or the 0.1% but the 0.01% back in the late 1960s in the days before the rise in inequality by selling his construction company to a conglomerate back in 1968. A good many of those of us who are his grandchildren have been very successful... But even should any of us be as lucky as my Grandfather Bill was in terms of our peak income and wealth as a multiple of median earnings, we would still be a multiple of his rank further down in the percentile income distribution.
                                              Today, you need roughly 3.5 times the wealth now in the U.S. and 8 times the wealth worldwide to achieve the same percentile rank in the distribution... I find it simply impossible to conceptualize such an extreme concentration as in any way a return to a factor of production obtained as the product of "hours spent studying" times "brainpower", even when you also multiply by a factor "luck" and a factor "winner-take-all-economy".
                                              So what, then, is going on and driving the sharp rise in inequality, if not some interaction between our education policy on the one hand and the continued progress of technology on the other? Thomas Piketty (2014) has a guess. Piketty guesses that the real explanation is that 1914-1980 is the anomaly. Without great political disturbances, wealth accumulates, concentrates, and dominates. The inequality trends we have seen over the past generation are simply a return to the normal pattern of income distribution in an industrialized market economy in which productivity growth is not unusually fast and political, depression, and military shocks not unusually large and prevalent. ...

                                              [He goes on to talk about Matthew Rognlie's "Deciphering the Fall and Rise in the Net Capital Share."]

                                                Posted by on Friday, June 12, 2015 at 11:38 AM in Economics, Income Distribution | Permalink  Comments (21)

                                                Paul Krugman: Seriously Bad Ideas

                                                Why do bad ideas prevail?:

                                                Seriously Bad Ideas, by Paul Krugman, Commentary, NY Times: One thing we’ve learned in the years since the financial crisis is that seriously bad ideas — by which I mean bad ideas that appeal to the prejudices of Very Serious People — have remarkable staying power. ...
                                                What makes something qualify as a seriously bad idea? In general, to sound serious it must invoke big causes to explain big events... It must also absolve corporate interests and the wealthy from responsibility for what went wrong, and call for hard choices and sacrifice on the part of the little people. ...
                                                And the ultimate example of a seriously bad idea is the determination, in the teeth of all the evidence, to declare government spending that helps the less fortunate a crucial cause of our economic problems. In the United States, I’m happy to say, this idea seems to be on the ropes... Here in Britain, however, it still reigns supreme. In particular, one important factor in the recent Conservative election triumph was the way Britain’s news media told voters, again and again, that excessive government spending under Labour caused the financial crisis. It takes almost no homework to show that this claim is absurd...
                                                The ... really bad news is that Britain’s leaders seem to believe their own propaganda. On Wednesday, George Osborne, the chancellor of the Exchequer and the architect of the government’s austerity policies, announced his intention to make these policies permanent. Britain, he said, should have a law requiring that the government run a budget surplus ... when the economy is growing.
                                                It’s a remarkable proposal, and I mean that in the worst way. ... For Britain does not have a public debt problem. ... Meanwhile, Britain’s real economy is still ailing..., surely the combination of a still-weak economy, terrible productivity performance and negative borrowing costs says that this is a time to increase investment in things like infrastructure. ... Yet the Osborne proposal would kill any such initiative.
                                                But Mr. Osborne sounds very serious, and, if history is any guide, the Labour Party won’t make any effective counterarguments.
                                                Now, some readers are probably thinking that I’m giving the likes of Mr. Osborne too much credit for sincerity. Isn’t all this deficit obsession just an excuse to slash social programs? And I’m sure that’s part of it. But I don’t think that’s the whole story. Seriously bad ideas, I’d argue, have a life of their own. And they rule our world.

                                                  Posted by on Friday, June 12, 2015 at 09:08 AM in Economics, Fiscal Policy, Politics | Permalink  Comments (43)

                                                  Links for 06-12-15

                                                    Posted by on Friday, June 12, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (189)

                                                    Thursday, June 11, 2015

                                                    'Disaster Risk and Asset Pricing'

                                                    Jerry Tsai and Jessica Wachter at Vox EU:

                                                    Disaster risk and asset pricing, Jerry Tsai, Jessica Wachter, Vox EU: A persistently puzzling feature of the US stock market is the high return to holding a diversified equity portfolio. On average, over the last 60 years, equities have outperformed short-term bonds by 7.5% a year. The difference, when cumulated over time, is dramatic. ...$1 invested in 1947 in a value-weighted portfolio of equities traded on major exchanges would have increased 100-fold (in 1947 dollars), while a strategy of rolling over short-term Treasury bills would have barely kept up with inflation. The 2008 Global Crisis resulted in a very temporary dip in this performance. ...
                                                    Why do equities earn such a high rate of return?
                                                    The most obvious possibility is that this high return is a compensation for risk. However, while equity markets are very risky (the standard deviation of the above portfolio is 18% per year), this risk is not reflected in the broader economy. For long-run investors who are willing to ride out the ups and downs of the stock market, the risk that matters is the risk in actual consumption. And that standard deviation has historically been less than 2% a year, even when taking the Great Recession into account. This disconnect between the return to holding stocks and the risk of the overall economy, is known as the equity premium puzzle (Mehra and Prescott 1985).
                                                    In a recent article (Tsai and Wachter 2015), we argue that this equity premium reflects the risk of an economy-wide disaster. Our argument builds on work by Robert Barro (2006), further developed with co-authors Emi Nakamura, John Steinssen and Jose Ursua (Barro and Ursua 2008, Nakamura et al. 2011). ...
                                                    Once we account for the possibility of rare disasters, the equity premium is no longer a puzzle. High equity returns do not represent a ‘free lunch’ in which investors receive high returns without taking on risk. On the other hand, equities do not represent something that prudent investors should avoid. Rather high returns on equities reward investors for bearing the risk of a large decline in stock prices during an economic disaster.
                                                    Stock market volatility
                                                    Another basic question about the stock market pertains to the level of volatility. Various studies, beginning with Shiller (1981) have concluded that the volatility in the stock market is too great to represent forecasts of future dividends or other measures of cash flows of corporations. As memorably described by Shiller, the stock market appears to exhibit ‘excess’ volatility, namely volatility that cannot be attributed to rational factors and rather reflects (in the words of Keynes) the ‘animal spirits’ of investors. 
                                                    Rare disaster models offer an alternative way to understand excess volatility. Rather than reflecting the day-to-day whims of investors, stock market fluctuations could reflect investors' changing views of the probability of a rare disaster..., stock returns, which incorporate these probabilities, can be far more volatile than dividends or consumption, which reflect (primarily) the disaster itself. ...
                                                    Low interest rates
                                                    As is well-known, the Global Crisis and its aftermath have been characterised by interest rates that are extremely low by historical standards. ... Of course, many factors influence interest rates. However, the same model that can explain a high equity premium and high stock market volatility, can also explain this seemingly anomalous interest rate behaviour. When the risk of a rare disaster rises, investors want to save to protect their assets for the future. This lowers the required return on savings, namely the interest rate, even as it raises the implicit rate of return on equities. This could contribute to the challenge facing central banks when conducting monetary policy. According to this view, raising interest rates may not be a matter of a simple policy decision, and may require the far-harder task of altering investors' perceptions of risk. ...
                                                    Recent research demonstrates how rare disasters can explain both a high equity premium and high stock market volatility. Time-varying disaster risk offers a compelling explanation for the patterns in equity values, consumption, and interest rates during the recent Global Crisis and its aftermath. While significant attention has rightly been paid to reducing or eliminating risk in the aftermath of the Crisis, research on disasters suggests that this is a risk that, to some extent, has long been present and accounted for in equity markets. While policymakers struggle with strategies to avoid crises, investors may have decided that a risk of a crisis can never be truly eliminated, and have acted accordingly. ...

                                                      Posted by on Thursday, June 11, 2015 at 11:27 AM in Economics, Financial System | Permalink  Comments (39)

                                                      'The Mutability of Wages'

                                                      Paul Krugman:

                                                      Arindrajit Dube enlarges on my post about efficiency wages, pointing out that the same logic applies to firms that have monopsony power. That’s a very good point — and I think we’re circling in on an important part of the logic behind the “new view” on inequality policy, which says that policies to enhance worker bargaining power can have major effects on the distribution of market income. ...
                                                      What Dube, I, and many others are suggesting is ... that for quite a few employers — including large service-sector companies — the situation looks ... like this:

                                                      There isn’t a sharply defined “going wage”, either because the firm has monopsony power — it can, in effect, choose the going wage in its local labor market — or because efficiency wage considerations lead it to pay more than the minimum, so that there are normally more applicants than places. And as I’ve drawn it, the top of the hill relating the wage rate to profits is fairly flat. In particular, the firm shouldn’t mind very much paying a somewhat higher wage, because this will produce offsetting benefits — a larger supply of labor if it has monoposony power, lower turnover or higher productivity if efficiency wages are an issue, maybe all of the above.
                                                      The point is that under these circumstances it needn’t be all that hard to push up wages: the threat of union organizing or a consumer boycott, even moral suasion from the government might be enough. So the standard view that it’s very hard to change the distribution of market income, that policy must involve after-market taxes and transfers, may be quite wrong.

                                                        Posted by on Thursday, June 11, 2015 at 10:53 AM Permalink  Comments (27)

                                                        'Why Currency Manipulation Matters'

                                                        Joseph E. Gagnon:

                                                        Why Currency Manipulation Matters: Currency manipulation (CM) by foreign countries has become a major part of the debate over Trade Promotion Authority (TPA) in Congress. Lawmakers opposed to TPA have charged that China’s efforts to keep the value of its currency down in order to expand exports contributed to US job losses since the turn of the century. Previously, Fred Bergsten and I raised the possibility of including currency chapters in trade agreements as one of several possible strategies for countering CM. This post, however, focuses exclusively on the costs of CM to the US economy.
                                                        Some observers describe the cost of CM entirely in terms of jobs lost for US workers; others dispute the notion that CM has any effect on US employment. But the truth is more complicated than these simple nostrums.
                                                        Economic circumstances determine whether CM has any effect on total employment. In the recent past [when the economy was in a deep recession], CM held down US employment to a major extent. In the near future [when the economy has fully recovered], CM probably will have a negligible effect on employment.
                                                        However, CM imposes costs on the US economy even when we are at full employment. These costs are roughly comparable in magnitude to all of the gains that are projected from trade agreements with Asia-Pacific countries. ...

                                                          Posted by on Thursday, June 11, 2015 at 10:53 AM in Economics, International Finance, Unemployment | Permalink  Comments (9)

                                                          Links for 06-11-15

                                                            Posted by on Thursday, June 11, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (137)

                                                            Wednesday, June 10, 2015

                                                            'Inequality of Opportunity: Useful Policy Construct or Will o’ the Wisp?'

                                                            Can economic opportunity be separated from economic outcomes?:

                                                            Inequality of opportunity as a policy construct: ...Concluding remarks
                                                            Any attempt to separate circumstances from effort – to identify that portion of the inequality of outcomes which is a legitimate target for redistribution – is fraught with empirical and conceptual difficulties.[4] Fine-grained distinctions between inequality of opportunity and inequality of outcomes do not hold water in practice, and we are likely to greatly underestimate inequality of opportunity and hence the need for intervention.
                                                            Further, what if one person’s effort becomes another person’s circumstance, as when income generated through parents’ effort provides a better start in life for some children? Or when freely made choices by one group of upper-income house buyers push up prices for others who may have lower incomes? Is it legitimate or is it not legitimate to intervene in this case?
                                                            These arguments support the case for generalised social protection in dimensions such as income, health and education, irrespective of whether the outcomes can be specifically attributed to circumstance or to effort.
                                                            The important questions then relate to what the best available policy instruments are for delivering this social protection, what effects they have on incentives, and how best they can be deployed. To be sure, we may make some Type I and Type II errors in doing so; we may penalize effort when we should not, and we may not fully compensate for circumstances when we should. But this is preferable to being frozen into perpetually underestimating the need for intervention by a focus on that will o’ the wisp, inequality of opportunity.

                                                              Posted by on Wednesday, June 10, 2015 at 10:17 AM in Econometrics, Income Distribution | Permalink  Comments (18)

                                                              'Social Sciences are Just as Important as STEM Disciplines'

                                                              Social science research "can improve our national security, create jobs and enhance our economic competitiveness":

                                                              Why social sciences are just as important as STEM disciplines, by Lance R. Collins, Washington Post: In a shortsighted effort to save money, Congress is moving ahead with a plan to cut investment in the social sciences. The America Competes Act under consideration on Capitol Hill would reauthorize funding for the National Science Foundation and other agencies that supply the financial lifeblood to engineering and the physical sciences. However, as passed by the House, the bill would cut the foundation’s funding for the social sciences by about half in order to direct more money to science, technology, engineering and mathematics — the STEM disciplines.
                                                              As an engineer and an educator, I deeply appreciate our national policymakers’ recognition that funding STEM research can improve our national security, create jobs and enhance our economic competitiveness. But I disagree with the notion that the social sciences are not just as important for the same reasons.
                                                              In fact, the social sciences are more important today than ever...
                                                              As Congress works its way through the reauthorization of the funding for the National Science Foundation, I urge our elected officials to pause and recognize the essential role of science — including social science —to our nation’s well being.

                                                                Posted by on Wednesday, June 10, 2015 at 09:48 AM in Economics | Permalink  Comments (12)

                                                                Walmart and Wages

                                                                Paul Krugman:

                                                                Notes on Walmart and Wages (Wonkish): Walmart reports that its recent wage hike is paying off via reduced turnover, which produces cost savings that offset the direct expense of the higher wages. In other words, efficiency wage theory is vindicated. What are the political/policy implications? What follows is a slightly wonkish note, largely to myself.
                                                                Efficiency wage theory is the idea that for any of a number of reasons, employers get more out of their workers when they pay more. It could be effort, it could be morale, it could be turnover. The causes of the efficiency gain could lie in psychology, or simply in the fact that workers are less willing to risk better-paying jobs with bad behavior. ...
                                                                Or to put it differently, efficiency wages suggest right away that the invisible hand’s grip on labor is a lot looser than people imagine, that wages are relatively easy to shift with social and political pressure. And this is one important reason attempts to reduce inequality can and should involve working on the distribution of market income as well as ex-post redistribution through taxes and transfers.

                                                                  Posted by on Wednesday, June 10, 2015 at 09:33 AM in Economics, Income Distribution | Permalink  Comments (21)

                                                                  Links for 06-10-15

                                                                    Posted by on Wednesday, June 10, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (183)

                                                                    Tuesday, June 09, 2015

                                                                    'The Party of Fiscal Responsibility in Action'

                                                                    Paul Krugman:

                                                                    The Party of Fiscal Responsibility in Action: One of the greatest confidence tricks ever pulled in American politics was the way Republicans managed, for a while anyway, to convince centrists that they were apostles of fiscal responsibility. Paul Ryan presented budgets that combined huge tax cuts for the rich with not quite as huge benefit cuts for the poor, added some magic asterisks — basically deficit-increasing redistribution from the have-nots to the haves, with added fraudulence — and received awards for fiscal responsibility.
                                                                    Anyway, at this point we have evidence of what such politicians actually do in office, thanks to the many US states where Republicans control both the governor’s office and the legislature. And the result is an epidemic of fiscal crisis, despite a recovering economy. Yes, some Democrat-controlled states are also having problems. But they didn’t go around pretending to be the nation’s fiscal saviors, and the biggest state controlled by Democrats, California — which was supposed to be a basket case — is in quite good fiscal shape.
                                                                    And yes, I think this observation is a lot more important than Marco Rubio’s personal financial difficulties, although those are pretty bizarre.

                                                                      Posted by on Tuesday, June 9, 2015 at 09:58 AM in Economics, Fiscal Policy, Politics | Permalink  Comments (48)

                                                                      'What is it about German Economics?'

                                                                      Can you help Simon Wren-Lewis figure this out?:

                                                                      What is it about German economics?: ...Keynesian ideas are pretty mainstream elsewhere...: why does macroeconomics in Germany seem to be an outlier? Given the damage done by austerity in the Eurozone, and the central role that the views of German policy makers have played in that, this is a question I have asked for many years. The textbooks used to teach macroeconomics in Germany seem to be as Keynesian as elsewhere, yet Peter Bofinger is the only Keynesian on their Council of Economic Experts, and he confirmed to me how much this minority status is typical. [1]
                                                                      There are two explanations that are popular outside Germany that I now think on their own are inadequate. The first is that Germany is preoccupied by inflation as a result of the hyperinflation of the Weimar republic, and that this spills over into their attitude to government debt. (The recession of the 1930s helped create a more serious disaster, and here is a provocative account of why the memory of hyperinflation dominates.) A second idea is that Germans are culturally debt averse, and people normally note that the German for debt is also their word for guilt. The trouble with both stories is that they imply that German government debt should be much lower than in other countries, but it is not. (In 2000, the German government’s net financial liabilities as a percentage of GDP were at the same level as France, and slightly above the UK and US.) ...
                                                                      It is as if in some respects economic thinking in Germany has not moved on since the 1970s: Keynesian ideas are still viewed as anti-market rather than correcting market failure...
                                                                      One of the distinctive characteristics of the German economy appears to be very far from neoliberalism, and that is co-determination: the importance of workers organisations in management, and more generally the recognition that unions play an important role in the economy. Yet I wonder whether this may have had an unintended consequence: the polarisation and politicisation of economic policy advice. ... If conflict over wages is institutionalised at the national level, perhaps the influence of ideology on economic policy - in so far as it influences that conflict (see footnote [1]) - is bound to be greater. 
                                                                      As you can see, I remain some way from answering the question posed in the title of this post, but I think I’m a bit further forward than I was.

                                                                        Posted by on Tuesday, June 9, 2015 at 09:58 AM in Economics, Macroeconomics | Permalink  Comments (70)

                                                                        'Interest Rates: Natural or Artificial?'

                                                                        Antonio Fatás:

                                                                        Interest rates: natural or artificial?: The debate about who is responsible for the low level of interest rates that has prevailed in most economies over the last years heated up when Ben Bernanke wrote a series of blog posts on what determines interest rates. He argued, once again, that it is the global dynamics of saving and investment the one that created a downward trend in interest rates starting in the mid 90s and that it accelerated as a result of the crisis. In his story, central banks are simply reacting to economic conditions rather than driving the interest rate (always refreshing to see a former central banker explaining how powerless central banks are). What Bernanke described can be interpreted as a decrease in what economists called the natural real interest rate.
                                                                        There are, however, those who have a very different interpretation of the persistent low levels of interest rates. They see central banks as the main drivers of this trend and they think about current levels of interest rates as being artificially low and forced on us by central banks. The popular press is full of references to artificially low interest rates causing bubbles, imbalances, hurting savers and being the seed of the future crisis (about 1 million results if you do a Google search).
                                                                        From the academic world, John Taylor has been very vocal about the negative effects of artificially low interest rates. He stresses the fact that interest rates have been below what a Taylor rule indicates, a sign that there is a mispricing created by central banks. ...

                                                                        After discussion, he concludes:

                                                                        In summary, there are two very simple facts that provide strong support to the Bernanke hypothesis on why interest rates are (naturally) low:
                                                                        1. Interest rates are low everywhere in the world.
                                                                        2. Inflation remains low everywhere in the world.
                                                                        These two facts are very difficult to square with a world where the US federal reserve is keeping interest rates artificially low for many years.

                                                                          Posted by on Tuesday, June 9, 2015 at 12:24 AM in Economics, Monetary Policy | Permalink  Comments (109)

                                                                          Links for 06-09-15

                                                                            Posted by on Tuesday, June 9, 2015 at 12:01 AM in Economics, Links | Permalink  Comments (83)

                                                                            Monday, June 08, 2015

                                                                            Falling Job Tenure: Labor as Just another Commodity

                                                                            Julie L. Hotchkiss and  Christopher J. Macpherson at the Atlanta Fed's Macroblog:

                                                                            Falling Job Tenure: It's Not Just about Millennials: The image of a worker in the 1950s is one of a man (for the most part) who plans on spending his entire career with one employer. We hear today, however, that "...long gone is the lifelong loyalty to a corporation with steadfast servitude for years on end." One report tells us that "people entering the workforce within the past few years may have more than 10 different jobs before they retire." The reason? "Millennials don't like commitments." Well, the explanation is probably not that simple, but even simply measuring trends in job tenure is also not all that straightforward.
                                                                            Despite a strong impression that entire careers spent with one employer are a thing of the past, some have declared the image of job-hopping millennials a myth. (You can read some discussions at, CNBC, and Marketwatch, for example.) These reports are all based on a September 2014 news release from the U.S. Bureau of Labor Statistics (BLS) stating that among every employee age group (even the youngest), median job tenure has not declined from when it was reported 10 years earlier. (Median job tenure is basically the "middle" amount of job tenure. If all workers are lined up from lowest tenure to highest tenure, the median tenure would be the amount of time the person in the middle of that line has been with his/her employer.)
                                                                            Chart 1 illustrates the biennial data on job tenure reported by the BLS and interpreted by the reports mentioned above as indication that job tenure is not falling. Each line represents an age range, from 20- to 30-year-olds at the bottom (the lowest median tenure among all age groups) to 61- to 70-year-olds on the top (the age group with the highest median tenure). It sure doesn't look as though workers at each age group are staying with their jobs for shorter periods.
                                                                            However, the problem with simply comparing median tenure across time by age group is that different ages at different time periods face different labor market institutions, incentives, and expectations. There are generational, or cohort, differences in what the labor market looks like and has to offer a 25-year-old born in 1923 and a 25-year-old born in 1993. In other words, each generation is represented across the age groups at different points in time.
                                                                            The different colored points across age groups in chart 1 indicate the range of years the people in that particular year, in that age group, were born (and to what named generation they belong). The labor market facing a 31-to 40-year-old baby boomer in 1996 looks quite different from the labor market facing a 31-to-40-year-old Gen Xer in 2012, and the social, economic, and behavioral differences are even more dramatic the farther apart the generations become.
                                                                            For example, one of the most dramatic changes facing workers has been the transformation from defined-benefit to defined-contribution retirement plans. The number of years a worker spends with an employer is no longer an investment in the employee's retirement. (William Even and David Macpherson (1996) illustrated the important link between the presence of an employer-sponsored retirement plan and worker tenure in their paper "Employer Size and Labor Turnover: The Role of Pensions.")
                                                                            Additionally, the share of those 25 and over with a college degree in the United States has increased from 5 percent in 1950 to 32 percent in 2014, according to data from the U.S. Census Bureau. A more educated workforce is one with more general, or transferable, human capital, reducing the need to stay with just one employer to reap a return on one's investment in human capital. The transition of the U.S. economy from a basis in manufacturing to one based in services, supported by technology, also means employers require more general, rather than specific, human capital.
                                                                            Firms have also changed the way they invest in workers, offering less on-the-job training than they used to, weakening their ties to the worker. And on top of all of this, because of near-instantaneous access to information, movies, and music brought by the digital age, younger cohorts are purported to have shorter attention spans than older cohorts (as reported here). All these factors shape the environment in which workers and employers view the value of longevity in their relationship.
                                                                            To get a more accurate picture of the lifetime pattern of median job tenure and how it has changed across generations, we use the same BLS data used to produce the chart above to group workers into cohorts, or people who have similar experiences by virtue of when they were born. In other words, we rearrange the data used in chart 1 to line people up by birth year rather than by calendar year in order to illustrate (in chart 2) that median job tenure is indeed declining through the generations.
                                                                            What we see in this chart—using the 20- to 30-year-olds, for example—is that the median job tenure was four years among those born in 1953 (baby boomers) when they were between 20 and 30 years old. For 20- to 30-year-olds born in 1993 (millennials), however, median job tenure is only one year. Similar—and some even more dramatic—declines occur across cohorts within each age group.
                                                                            Declining job tenure is not just all about millennials having short attention spans. In fact, there is a greater (five-year) decline in median job tenure between 41- and 50-year-old "Depression babies" (born in 1933) and 41- to 50-year-old Gen Xers (born in 1973). So, just as our colleagues here at the Atlanta Fed discovered with regard to declines in first-time home mortgages, millennials aren't to blame for everything!
                                                                            So what does declining job tenure mean for the U.S. labor market? From the perspective of the worker, portable retirement savings and, now, portable health insurance mean that workers confront a world of possibilities that our parents and grandparents never dreamt of. Yes, perhaps the days of predictability in one's career is a thing of the past. But so is the "eggs-in-one-basket" loss of retirement savings when your employer goes out of business as well as potentially slower career progression within a single firm.
                                                                            From the economy's perspective, the flexibility of workers seeking their highest rents and the flexibility of firms to seek better matches for their needed skills mean greater productivity—not to mention growth—all around.

                                                                              Posted by on Monday, June 8, 2015 at 02:24 PM in Economics, Unemployment | Permalink  Comments (42)

                                                                              'Why the Mortgage Interest Tax Deduction Should Disappear, But Won't'

                                                                              Cecchetti & Schoenholtz:

                                                                              Why the mortgage interest tax deduction should disappear, but won't: In the run-up to the 2012 U.S. Presidential election, Planet Money asked five economists from across the political spectrum for proposals that they would like to see in the platform of the candidates. The diverse group agreed, first and foremost, on the wisdom of eliminating the tax deductibility of mortgage interest. 
                                                                              The vast majority of economists probably agree. We certainly do. But it won’t happen, because politicians with aspirations for reelection find it toxic. ...
                                                                              The ... tax deductibility of mortgage interest ... raises inequality and reduces economic efficiency.
                                                                              The source of increased inequality is simple. The private benefits of the mortgage interest deduction rise both with a person’s income and with the cost of their house. The higher your income, the higher your marginal tax rate; and the bigger your house, the bigger the possible mortgage. When either rises, the value of the tax deduction rises, too. ...
                                                                              Aside from inequality concerns, there are other powerful reasons to dislike the mortgage interest deduction. Above all, it is inefficient. By subsidizing bigger, more expensive houses, the policy misallocates scarce savings away from productive investments that raise living standards through income- and job-creating innovations. It also makes our financial system more vulnerable: as we wrote in an earlier post, it encourages people to take on risks – in the form of large, subsidized mortgages – that they are not equipped to bear. In the recent crisis, risky mortgage debt was sufficient to put the entire financial system at risk. ...
                                                                              Unfortunately, the tax deductibility of mortgage interest is here to stay. Nearly 50 million U.S. households currently have mortgages, and politicians don’t wish to alienate them.  
                                                                              But the borrowers are only the most obvious beneficiaries.  In fact, all homeowners would suffer if the mortgage deduction were eliminated. The reason is that the value of everyone’s house would fall...
                                                                              A simple computation allows us to estimate the economy-wide impact. ... If the subsidy were eliminated, homeowners would lose ... about $4.1 trillion. ... For comparison, the plunge of real estate value from the 2006 peak to the 2011 trough was $6.4 trillion. ...
                                                                              Aside from the contractionary impact on the economy, many people would see such a drop in house prices as dramatically unfair. It’s true that the biggest losers in monetary terms would be the owners of the most valuable (oversized) houses; but the less well-off would suffer, too. While it is a progressive policy, all 80 million households that own homes would take a hit.
                                                                              It is tempting to just give up and admit political defeat, but there may be a way out. Our suggestion is to build on past reforms that capped the tax deduction by limiting the size of eligible mortgages. ... Since roughly 10% of U.S. homes are worth more than $500,000, our proposal is to set the limit at the interest payments on a $400,000 mortgage (indexed appropriately). This would promote both efficiency and equality. ...
                                                                              Policies that provide asset owners large “rents” (payments unwarranted by the scarcity of the asset itself) are incredibly difficult to eliminate, even when they are both unfair and inefficient. Such rents create an entire ecosystem of beneficiaries (in this case, ranging from construction firms and workers, to real estate brokers, to mortgage lenders and borrowers) who constitute a powerful political constituency blocking almost any reform. ...

                                                                                Posted by on Monday, June 8, 2015 at 09:47 AM in Economics, Housing, Politics, Taxes | Permalink  Comments (55)

                                                                                Paul Krugman: Fighting the Derp

                                                                                "How can you protect yourself against derpitude?":

                                                                                Fighting the Derp, by Paul Krugman, Commentary, NY Times: When it comes to economics — and other subjects, but I’ll focus on what I know best — we live in an age of derp and cheap cynicism. ...
                                                                                What am I talking about here? “Derp” is a term borrowed from the cartoon “South Park”...: people who keep saying the same thing no matter how much evidence accumulates that it’s completely wrong. ...
                                                                                And there’s a lot of derp out there. Inflation derp, in particular, has become more or less a required position among Republicans. ... And that tells you why derp abides: it’s basically political. ...
                                                                                Still, doesn’t everyone do this? No... There’s also plenty of genuine, honest analysis out there — and you don’t have to be a technical expert to tell the difference.
                                                                                I’ve already mentioned one telltale sign of derp: predictions that just keep being repeated no matter how wrong they’ve been in the past. Another sign is the never-changing policy prescription, like the assertion that slashing tax rates on the wealthy, which you advocate all the time, just so happens to also be the perfect response to a financial crisis nobody expected.
                                                                                Yet another is a call for long-term responses to short-term events – for example, a permanent downsizing of government in response to a recession. ...
                                                                                So ... how can you ... protect yourself against derpitude? The first line of defense, I’d argue, is to always be suspicious of people telling you what you want to hear.
                                                                                Thus, if you’re a conservative opposed to a stronger safety net, you should be extra skeptical about claims that health reform is about to crash and burn, especially coming from people who made the same prediction last year and the year before (Obamacare derp runs almost as deep as inflation derp).
                                                                                But if you’re a liberal who believes that we should reduce inequality, you should similarly be cautious about studies purporting to show that inequality is responsible for many of our economic ills, from slow growth to financial instability. Those studies might be correct — the fact is that there’s less derp on America’s left than there is on the right — but you nonetheless need to fight the temptation to let political convenience dictate your beliefs.
                                                                                Fighting the derp can be hard, not least because it can upset friends who want to be reassured in their beliefs. But you should do it anyway: it’s your civic duty.

                                                                                  Posted by on Monday, June 8, 2015 at 09:01 AM in Economics | Permalink  Comments (40)

                                                                                  Links for 06-08-15

                                                                                    Posted by on Monday, June 8, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (136)

                                                                                    Sunday, June 07, 2015

                                                                                    'Cyclical Variation in Real Wages'

                                                                                    More than 75 years ago, the EJ – under Keynes’ editorship - published a series of papers on the behavior of real wages that have had a lasting impact on the discipline – this special anniversary session discusses debates then and now about real wage dynamics, unemployment fluctuations and wage flexibility.


                                                                                    • Keynesian Controversies on Compensation; Presented by John Pencavel (Stanford University)
                                                                                    • Unemployment and Business Cycles; Presented by Lawrence Christiano (Northwestern University)
                                                                                    • Unemployment Fluctuations, Match Quality and Wage Cyclicality of New Hires: Presented by Christopher Huckfeldt (Cornell University) and Antonella Trigari (Bocconi University)
                                                                                    • Does the New Keynesian Model have a Uniqueness Problem? Presented by Benjamin Johannsen (Federal Reserve Board)

                                                                                    I really enjoyed this session, particularly the history of "Keynesian controversies" over wages by John Pencavel at the beginning of the session.

                                                                                      Posted by on Sunday, June 7, 2015 at 11:24 AM in Academic Papers, Economics, Video | Permalink  Comments (1)

                                                                                      'Austerity as a Knowledge Transmission Mechanism failure'

                                                                                      Related to the post after this one, from Simon Wren-Lewis:

                                                                                      Austerity as a Knowledge Transmission Mechanism failure: In this post I talked about the Knowledge Transmission Mechanism: the process by which academic ideas do or do not get translated into economic policy. I pointed to the importance of what I called ‘policy intermediaries’ in this process: civil servants, think tanks, policy entrepreneurs, the media, and occasionally financial sector economists and central banks. Here I want to ask whether thinking about these intermediaries could help explain the continuing popularity amongst policy makers of austerity during a liquidity trap, even though there is an academic consensus behind the idea that austerity now would harm output. ...

                                                                                        Posted by on Sunday, June 7, 2015 at 11:24 AM in Economics, Fiscal Policy, Politics | Permalink  Comments (16)

                                                                                        'The Economic Consequences of Austerity'

                                                                                        From today's links, Amartya Sen on the turn to austerity during the Great Recession (there's a lot more in the full text):

                                                                                        The economic consequences of austerity, by Amartya Sen: ...As it is quite common these days to blame economists for failing to see the real world, I take this opportunity to note that very few professionally trained economists were persuaded by the direction in which those in charge of European finances decided to take Europe. The European debacle demonstrated, in effect, that you do not need economists to generate a holy mess: the financial sector can generate its own gory calamity with the greatest of elegance and ease. Further, if the policy of austerity deepened Europe’s economic problems, it did not help in the aimed objective of reducing the ratio of debt to GDP to any significant extent – in fact, sometimes quite the contrary. ...
                                                                                        If failing to understand some basic Keynesian relations is a part of the explanation of what happened, there was also another, and more subtle, story behind the confounded economics of austerity. There was an odd confusion in policy thinking between the real need for institutional reform in Europe and the imagined need for austerity – two quite different things. There can be little doubt that Europe has needed, for quite some time, many serious institutional reforms – from the avoidance of tax evasion and the fixing of more reasonable retiring ages to sensible working hours and the elimination of institutional rigidities, including those in the labour markets. But the real (and strong) case for institutional reform has to be distinguished from an imagined case for indiscriminate austerity, which does not do anything to change a system while hugely inflicting pain. ...
                                                                                        An analogy can help to make the point clearer: it is as if a person had asked for an antibiotic for his fever, and been given a mixed tablet with antibiotic and rat poison. You cannot have the antibiotic without also having the rat poison. We were in effect being told that if you want economic reform then you must also have, along with it, economic austerity, although there is absolutely no reason whatsoever why the two must be put together as a chemical compound. For example, having sensible retiring ages, which many European countries do not (a much-needed institutional reform), is not similar to cutting severely the pensions on which the lives of the working poor may depend (a favourite of austeritarians). The compounding of the two – not least in the demands made on Greece – has made it much harder to pursue institutional reforms. ...

                                                                                          Posted by on Sunday, June 7, 2015 at 11:24 AM in Economics, Fiscal Policy, Politics | Permalink  Comments (4)

                                                                                          Links for 06-07-15

                                                                                            Posted by on Sunday, June 7, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (134)

                                                                                            Saturday, June 06, 2015

                                                                                            'A Crisis at the Edge of Physics'

                                                                                            Seems like much the same can be said about modern macroeconomics (except perhaps the "given the field its credibility" part):

                                                                                            A Crisis at the Edge of Physics, by Adam Frank and Marcelo Gleiser, NY Times: Do physicists need empirical evidence to confirm their theories?
                                                                                            You may think that the answer is an obvious yes, experimental confirmation being the very heart of science. But a growing controversy at the frontiers of physics and cosmology suggests that the situation is not so simple.
                                                                                            A few months ago in the journal Nature, two leading researchers, George Ellis and Joseph Silk, published a controversial piece called “Scientific Method: Defend the Integrity of Physics.” They criticized a newfound willingness among some scientists to explicitly set aside the need for experimental confirmation of today’s most ambitious cosmic theories — so long as those theories are “sufficiently elegant and explanatory.” Despite working at the cutting edge of knowledge, such scientists are, for Professors Ellis and Silk, “breaking with centuries of philosophical tradition of defining scientific knowledge as empirical.”
                                                                                            Whether or not you agree with them, the professors have identified a mounting concern in fundamental physics: Today, our most ambitious science can seem at odds with the empirical methodology that has historically given the field its credibility. ...

                                                                                              Posted by on Saturday, June 6, 2015 at 10:58 AM in Econometrics, Economics, Macroeconomics, Methodology | Permalink  Comments (22)

                                                                                              'Views Differ on Shape of Macroeconomics'

                                                                                              Paul Krugman:

                                                                                              Views Differ on Shape of Macroeconomics: The doctrine of expansionary austerity ... was immensely popular among policymakers in 2010, as the great turn toward austerity began. But the statistical underpinnings of the doctrine fell apart under scrutiny... So at this point research economists overwhelmingly believe that austerity is contractionary (and that stimulus is expansionary). ...

                                                                                              Nonetheless, Simon Wren-Lewis points us to Robert Peston of the BBC declaring

                                                                                              I am simply pointing out that there is a debate here (though Krugman, Wren-Lewis and Portes are utterly persuaded they’ve won this match – and take the somewhat patronising view that voters who think differently are ignorant sheep led astray by a malign or blinkered media).

                                                                                              Wow. Yes, I suppose that “there is a debate” — there are debates about lots of things, from climate change to evolution to alien spaceships hidden in Area 51. But to suggest that this debate is at all symmetric is just wrong — and deeply misleading to one’s audience.

                                                                                              As for the claim that it’s somehow patronizing to suggest that voters are ill-informed when (a) macroeconomics is a technical subject, and (b) the media have indeed misreported the state of the professional debate — well, this is sort of an economic version of the line that one must not suggest that the Iraq war was launched on false pretenses, because this would be disrespectful to the troops. If you’re being accused of misleading reporting, it’s hardly a defense to say that the public believed your misinformation — more like a self-indictment. ...

                                                                                                Posted by on Saturday, June 6, 2015 at 10:58 AM in Economics, Macroeconomics, Press | Permalink  Comments (17)

                                                                                                'Crisis Chronicles: Railway Mania, the Hungry Forties, and the Commercial Crisis of 1847'

                                                                                                James Narron and Don Morgan

                                                                                                Crisis Chronicles: Railway Mania, the Hungry Forties, and the Commercial Crisis of 1847, by James Narron and Don Morgan, Liberty Street: Money was plentiful in the United Kingdom in 1842, and with low yields on government bonds and railway shares paying handsome dividends, the desire to speculate spread—as one observer put it, “the contagion passed to all, and from the clerk to the capitalist the fever reigned uncontrollable and uncontrolled” (Francis’s History of the Bank of England). And so began railway mania. Just as that bubble began to burst, a massive harvest failure in England and Ireland led to surging food imports, which drained gold reserves from the Bank of England. Constrained by the Bank Charter Act, the Bank responded by tightening policy. When food prices fell in the spring of 1847 on the prospects for a successful harvest, commodity speculators were caught short and a crisis, one of the worst in British history (Bordo), ensued. In this edition of Crisis Chronicles, we cover the Commercial Crisis of 1847.

                                                                                                Here's the part I want to highlight:

                                                                                                The Bank of England’s ability to contain the crisis as a lender of last resort was severely constrained by the Bank Charter Act of 1844 (Humphrey and Keleher). The Act gave the Bank of England a monopoly on new note (essentially money) issuance but required that all new notes be backed by gold or government debt. The intent, per Currency School doctrine, was to prevent financial crises and inflation by inhibiting currency creation. Adherents recognized that the Act might also limit the central bank’s discretion to manage crises, but they argued that limiting currency creation would prevent financial crises in the first place, thus obviating the need for a lender of last resort. But, of course, not all crises originate in the financial sector. In the case of the Commercial Crisis, the perverse effect of the Act was to cause the Bank to tighten monetary conditions in both April and October as gold reserves drained from the Bank (Dornbusch and Frenkel). In July, a coalition of merchants, bankers, and traders issued a letter against the Bank Charter Act, blaming it for “an extent of monetary pressure, such as is without precedent” (Gregory 1929, quoted in Dornbusch and Frenkel).
                                                                                                The panic culminated in a “Week of Terror,” October 17-23, with multiple banks failing or suspending payments to depositors in the midst of runs. The Royal Bank of Liverpool shuttered its doors on Tuesday, followed by three other banks, and by the end of the week the Bank of England held less than two million pounds in reserve, down from eight million in January. Systemic collapse seemed imminent. On Saturday of that week, London bankers petitioned Parliament to suspend the Bank Act, and by midday Monday it had done so, thus enabling the Bank to issue new notes without gold backing and to “enlarge the amount of their discounts and advances upon approved security” (J. Russell and Charles Wood, Bank of England). The ability to expand fiat note issuance increased liquidity and helped the Bank restore confidence, and the seven percent discount rate the Bank was charging attracted gold reserves back to its vaults (hence the maxim “seven percent will draw gold from the moon”). By December, interest rates were down substantially from their panic levels.

                                                                                                And the big question:

                                                                                                In contrast to the Bank of England in 1847, the Federal Reserve during the Panic of 2007-2008 was authorized to act as lender of last resort, and, in fact, the Fed acted aggressively to provide liquidity to the financial system in unprecedented ways. Through a variety of newly created facilities, the Fed expanded the types of institutions it would lend to, including nonbanks, and the types of collateral it would lend against, including asset-backed securities.
                                                                                                While some observers have praised the Fed’s actions, others, including some within the Fed, have been more critical. Partly in response to such criticism, the Dodd-Frank Act limits the Fed’s ability to lend to individual firms, as the Fed did during the panic, and a more recently proposed bill would further constrain the Fed’s emergency lending discretion. Will these reforms curb the moral hazard (excess risk-taking) that last-resort lending might invite? Might they aggravate future crises by curbing the Fed’s discretion as lender of last resort?

                                                                                                I have always believed that if another big financial crisis hits, the associated fear and panic would cause the Fed's emergency lending discretion to be restored.

                                                                                                  Posted by on Saturday, June 6, 2015 at 10:58 AM in Economics, Financial System, Monetary Policy | Permalink  Comments (8)

                                                                                                  Links for 06-06-15

                                                                                                    Posted by on Saturday, June 6, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (172)

                                                                                                    Friday, June 05, 2015

                                                                                                    Fed Watch: Solid Employment Report

                                                                                                    Tim Duy:

                                                                                                    Solid Employment Report, by Tim Duy: The May employment report should help ease concerns about the health of the economy, but will have little impact on the outcome of next week's FOMC meeting. Fed officials had largely already written off the June meeting, and I think it is too little too late to expect them to reverse course now. Instead, the report puts the focus squarely on September.
                                                                                                    Nonfarm payrolls gained 280k for the month, with upward revisions adding 32k to the previous two months. The March slowdown now looks like what it was - the typical kind of variability we see in this report:


                                                                                                    The unemployment rate edged up on the back of an increase in the labor force participation rate, a positive development in light of the downward demographic push on the labor force. In the context of indicators previously identified by Fed Chair Janet Yellen, the overall picture looks like:



                                                                                                    Sustained improvement in labor markets as slack slowly dries up. And I would say the signs that wage growth is gaining traction are increasing; the three-month trend is heading up:


                                                                                                    I am not ready to sound the "all clear," but I am optimistic that we are getting there. That said, not getting there fast enough to dramatically change the path of monetary policy just yet. Data since the beginning of the year, especially the GDP data, spooked Fed officials pretty badly - they just weren't sure what was persistent and what was temporary. The employment data suggests the latter is largely at play. Moreover, I don't think they fully appreciate the implications of a lower growth trajectory on the quarterly GDP readings. These zero and sub-zero events are more likely to happen than in the past. The upshot is that a June rate hike was essentially off the table before this report, and is after this report as well.
                                                                                                    Bottom Line: The resilience of the job market - clearly foreshadowed by the initial claims data - suggests that the weakness in recent GDP numbers is less than meets the eye. That weakness, however, already deterred Fed officials from a June rate hike, leaving next week's meeting something of a nonevent. Fed Chair Janet Yellen will likely use the press conference to outline the case for a 2015 rate hike, but emphasize the data dependent nature of that decision and, more importantly, a focus on the path of rate hikes after the first hike. That is what the Fed would like us to be watching, and the data still suggests a fairly modest pace of tightening. Attention now shifts to the September meeting as the first in which we might anticipate sufficient data to support a rate hike. Given how badly the Fed was spooked by the first quarter, it seems unlikely that sufficient data will pile up by the July meeting. So that pretty opens up all of our summer schedules.
                                                                                                    PS: Sabbatical soon ending, so frequency of posts likely to increase.

                                                                                                      Posted by on Friday, June 5, 2015 at 10:41 AM Permalink  Comments (25)