- Hair Meets Heirs - Paul Krugman
- Female Prisoners in the United States - Gender Matters
- Immigration – the way forward - VoxEU
- My socialism - Stumbling and Mumbling
- Does Fiscal Stimulus Work? - FRB Cleveland
- The Great Productivity Puzzle - The New Yorker
- Demystifying Monetary Finance - Adair Turner
- What's Really Wrong With the Unemployment Rate - Justin Fox
- Reducing Economic Inequality through Democratic Worker-Ownership - TCF
- The Seattle minimum-wage is doing what it’s supposed to do - Jared Bernstein
- The Man Who Saved The World From Nuclear Holocaust - EconoSpeak
- Donald Trump: My Whole Life I've Been Greedy... - Eric Schoenberg
- The economics of SSHRC research grants - Stephen Gordon
- Is Support for Democracy Eroding? - Tim Taylor
- The Performance of Community Banks over Time - WhiteHouse.gov
Thursday, August 11, 2016
Wednesday, August 10, 2016
Do DSGE Models Have a Future?: DSGE models have come to play a dominant role in macroeconomic research. Some see them as the sign that macroeconomics has become a mature science, organized around a microfounded common core. Others see them as a dangerous dead end.
I believe the first claim is exaggerated and the second is wrong. I see the current DSGE models as seriously flawed, but they are eminently improvable and central to the future of macroeconomics. To improve, however, they have to become less insular, by drawing on a much broader body of economic research. They also have to become less imperialistic and accept to share the scene with other approaches to modelization.
For those who are not macroeconomists, or for those macroeconomists who lived on a desert island for the last 20 years, here is a brief refresher. DSGE stands for “dynamic stochastic general equilibrium.” The models are indeed dynamic, stochastic, and characterize the general equilibrium of the economy. They make three strategic modeling choices: First, the behavior of consumers, firms, and financial intermediaries, when present, is formally derived from microfoundations. Second, the underlying economic environment is that of a competitive economy, but with a number of essential distortions added, from nominal rigidities to monopoly power to information problems. Third, the model is estimated as a system, rather than equation by equation in the previous generations of macroeconomic models. The earliest DSGE model, representing an economy without distortions, was the Real Business Cycle model developed by Edward C. Prescott and focused on the effects of productivity shocks. In later incarnations, a wider set of distortions, and a wider set of shocks, has come to play a larger role, and current DSGE models are best seen as large- scale versions of the New Keynesian model, which empha- sizes nominal rigidities and a role for aggregate demand.
There are many reasons to dislike current DSGE models. ...
- You can lower interest rates but can you raise inflation? - Antonio Fatas
- Points you may have missed on Trump’s ill-advised tax plan - Jared Bernstein
- Government Statistics May Be Wrong, But They're Not Manipulated - Justin Fox
- Currency Casus Belli? - Econbrowser
- The implications of Brexit for the City - VoxEU
- Brexit: a battle lost but who will fight the war? - mainly macro
- Immigrant entrepreneurship and employment growth - VoxEU
- Recent Developments in Consumer Credit Card Borrowing - Liberty Street
- Rents and the High Cost of High Finance: Q&A with Gerald Epstein - ProMarket
- Diamond Transfer Pricing and the Tax Rate in Dubai - EconoSpeak
- The economics of SSHRC research grants I - Stephen Gordon
- The FTC Will Not Leave Companies to Their Own Devices - RegBlog
- Transmitting liquidity shocks across borders - Bank Underground
Tuesday, August 09, 2016
Bosses pay: the right's problem: The High Pay Centre said yesterday that FTSE 100 CEOs’ pay rose 10% last year to an average of almost £5.5m. It’s obvious that the left should find this a problem. I want to suggest that it should also be a problem for the right too, for four reasons.
First, high CEO pay is due in at least part to a market failure. ...
Secondly, rising CEO pay, especially when accompanied by a degradation of “middle-class” jobs means we’re shifting from a bourgeois society to a “winner-take-all” one. This has potentially nasty cultural effects. ...
Thirdly, it’s possible – I put it no stronger than that – that high CEO pay is bad for overall productivity. ...
Finally, there’s a danger that rising inequality will produce a nasty backlash. ... Political instability is no friend of business or free markets. ...
My point here is a simple one. There are good reasons why Theresa May has spoken of the “irrational, unhealthy and growing gap” between bosses’ and workers’ pay. It’s because such a gap threatens the values and interests of many conservatives.
Many Marxists are relaxed about this; it just confirms our view that capitalism is a device through which the rich exploit others. Should rightists really also be relaxed? I mean, they can’t all be just hypocritical shills of the rich, can they?
(There is an explanation of each point in the full post.)
Murky Macroeconomics: ...I realized something not too flattering about myself: I’m feeling nostalgic for 2011 or so.
Why? It was, of course, a terrible time for much of the world, and especially for anyone without a job. But for ... an economist ... it was a time of wonderful intellectual clarity. Liquidity-trap macroeconomics ... had become the story of the day. And the basic message of the models — that everything changes when you hit the zero lower bound — was being overwhelmingly confirmed by experience.
The thing is, it was all beautifully hard-edged: a crisp boundary at zero, a sharp change in the impact of monetary and fiscal policy when you hit that boundary. And the predictions we made came out consistently right.
But now things have gotten a bit, well, murky. The zero lower bound is not, it turns out, quite as hard a boundary as we thought. ...I’d be surprised if any central bank is willing to go much if at all below minus one percent — but it turns out to be a sort of a fuzzy no-man’s-land rather than a line that cannot be crossed.
More important, probably, is the fact that two of the major advanced economies — the US and, believe it or not, Japan — are arguably quite close to full employment. We don’t know how close... But you can no longer argue that supply limits are no longer relevant.
Correspondingly, you can also no longer argue with confidence that there can be no crowding out, because the Fed won’t raise rates. You can argue that it shouldn’t — and I would — but we are maybe, possibly, on our way out of the liquidity trap.
So we’re not in the simple, depressed-economy world of 2011 anymore. But here’s the thing: we’re not in what we used to call a normal macroeconomic situation either. Maybe we’re close to full employment, but maybe not, and that’s with near-zero interest rates; also, it’s all too easy to imagine adverse shocks in the near future, and not at all clear how the Fed could or would respond. We are, if you like, half-out of the liquidity trap, with one foot on dry land — but the other foot is still hanging over the edge, and it wouldn’t take much to topple us right back in.
What I would argue is that in this murky, fragile situation we should be conducting policy largely as if we were still in the trap — because we badly need to get both feet firmly on dry land with some distance between us and the quicksand. ... But it’s not the crystalline case we used to be able to make.
Still, we need to deal with this murky situation right, which means embracing the uncertainty as part of the argument. Make murkiness great again!
The Failure of the Market for Presidential Candidates: Almost all economists believe in markets, and the tools economists use to analyze markets can be applied to a surprisingly large number of social interactions. Our attempts to use economics to examine questions that are traditionally the purview of sociology, psychology, and political science have not always been welcomed by those in other fields, and there’s no doubt that our methods are often applied naively without a full understanding of what researchers in other disciplines have learned. Nevertheless, I can’t help speculating on why the “market” for political candidates failed so spectacularly this year. ...
- Can Clinton or Trump Recapture Robust American Growth? - Robert Gordon
- Donald Trump Sells Out To Trickle-Down Economics - John Cassidy
- Trump agenda looks like more of the same - Dean Baker
- Stolper-Samuelson: An inconvenient iota of truth - The Economist
- ACA linked with better health care for low-income adults - EurekAlert!
- A Primer On Tax Deductions Versus Tax Credits - Jodi Beggs
- America’s Looming Debt Decision - Kenneth Rogoff
- Trump’s Economic Advisers and Me - Uneasy Money
- Brexit: Lessons from history - VoxEU
- A world without cash - John Cochrane
- Economics Without Math Is Trendy, But It Doesn't Add Up - Noah Smith
- Are European Stress Tests Stressful Enough? - Cecchetti & Schoenholtz
- Trump Claims US Has the Highest Corporate Tax Rate - EconoSpeak
- Grammar schools: the new Brexit - Stumbling and Mumbling
- Macro Musings Podcast: Jason Taylor - David Beckworth
- Use up-zoning, but don’t give it away - Richard Green
- A divided nation - mainly macro
- Variations in Agency Responses to Climate Change - RegBlog
- The Morale Effects of Pay Inequality - NBER
Monday, August 08, 2016
The Fed’s shifting perspective on the economy and its implications for monetary policy: ...The Federal Reserve has ... been revising its views on some key aspects of the economy, and that’s been affecting its outlook both for the economy and for monetary policy...
In short, over the past few years, and especially during the past 12 months, FOMC participants have significantly revised down their estimates of potential long-run U.S. economic growth, the long-run or “natural” rate of unemployment, and the long-run (“terminal”) value of the federal funds rate...
The two changes in participants’ views that have been most important in pushing the FOMC in a dovish direction are the downward revisions in the estimates of r* (the terminal funds rate) and u* (the natural unemployment rate). As mentioned, a lower value of r* implies that current policy is not as expansionary as thought. ... Likewise, the decline in estimated u* implies that bringing inflation up to the Fed’s target may well take a longer period of policy ease than previously believed. The downward revisions in estimated u* likely have also encouraged FOMC participants who see scope for further sustainable improvement in labor market conditions.
The downward revisions to estimates of y* have mixed implications for policy. On the one hand, lower potential output growth suggests that slow GDP growth may not be due primarily to inadequate monetary or fiscal policy support for aggregate demand, but rather reflects constraints on the supply side of the U.S. economy. ...
On the other hand, as mentioned earlier, the recent decline in productivity growth (and thus in potential output) has been both large and mostly unexpected. Some have hypothesized that this decline is not purely exogenous but has been influenced, to some extent, by short-term economic conditions. ... The ... possibility, that stronger economic growth today might have positive and lasting effects on the economy’s ability to grow, is for some an argument for erring on the side of more stimulative policies.
The bottom line is that, broadly speaking... The implications of these changes for policy are generally dovish, helping to explain the downward shifts in recent years in the Fed’s anticipated trajectory of rates. ...
What’s slowing growth? Sorry, conservatives: It’s not the size of governments: ... Let me telegraph the punchline: While overall growth has slowed in the United States in recent decades, it has also slowed in most other advanced economies. And governments in these economies have very different policy footprints, including taxes, social policy, and where they draw the line between the public and private sectors. This suggests there’s little in the way of correlation between the size of government and growth. So, when you hear the conservative mantras about “job-killing taxes” and “government spending that’s killing growth,” often with President Obama’s name sprinkled in there somewhere, be aware that it’s an ideological, not an empirical, claim. ...
We should be investing in infrastructure:
Time to Borrow, by Paul Krugman, NY Times: ...There are, of course, many ways our economic policy could be improved. But the most important thing we need is sharply increased public investment in everything from energy to transportation to wastewater treatment.
How should we pay for this investment? We shouldn’t — not now, or any time soon. Right now there is an overwhelming case for more government borrowing. ...
First, we have obvious, pressing needs for public investment in many areas. ... Meanwhile, the federal government can borrow at incredibly low interest rates: 10-year, inflation-protected bonds yielded just 0.09 percent on Friday. ...
Spending more now would mean a bigger economy later, which would mean more tax revenue..., probably be larger than any rise in future interest payments. And this analysis doesn’t even take into account the potential role of public investment in job creation...
So why aren’t we borrowing and investing? Here are some of the usual objections, and why they’re wrong.
We can’t borrow because we already have too much debt. ... But ... what matters is the comparison between the cost of servicing our debt and our ability to pay. And federal interest payments are only 1.3 percent of G.D.P., low by historical standards.
Borrowing costs ... might rise. Yes, maybe. But we’re talking about long-term borrowing that locks in today’s low rates. If 10 years isn’t long enough for you, how about 30-year, inflation-protected bonds? They’re only yielding 0.64 percent.
The government can’t do anything right. ... But to hold that view you have to turn your back on our own history: American greatness was in large part created by government investment or private investment shaped by public support, from the Erie Canal, to the transcontinental railroads, to the Interstate Highway System. ...
But will the next president be able to act...?
The good news is that elite discourse seems, finally, to be moving in the right direction. Five years ago the Beltway crowd was fixated on debt and deficits as the great evils. Today, not so much.
The bad news is that even if Hillary Clinton wins, she may well face the same kind of scorched-earth Republican opposition President Obama faced from day one. ... Will there be a strong enough Democratic wave to give Mrs. Clinton the ability to act?
But while the politics remain uncertain, it’s clear what we should be doing. It’s time for the federal government to borrow and invest.
- Growth and fairness aren’t a trade-off - Larry Summers
- Prudential Macro Policy - Paul Krugman
- More Employment Graphs - Calculated Risk
- What Was to Be Gained? - Economic Principals
- On causes of Brexit - Stumbling and Mumbling
- Can we trust Jeremy Corbyn over Europe? - mainly macro
- Spotlight: Rema Hanna – Gender Matters
Sunday, August 07, 2016
Saturday, August 06, 2016
- Negative rates, helicopter money and the Bank of England - mainly macro
- Globalization and its New Discontents - Joseph E. Stiglitz
- Copyright Protectionism - Marginal Revolution
- Big Government Keeps Getting Smaller - Justin Fox
- An ‘A’ for the B of E on policy design and communication - The Exchange
- The Tories' intellectual decline - Stumbling and Mumbling
- Fathers and Daughters - Gender Matters
- Time use: what's the Big Question? - Frances Woolley
- Minsky's Many Moments - INET
- Car finance – is the industry speeding? - Bank Underground
- The safety trap (shortage of safe assets) - MIT News
Friday, August 05, 2016
Employment Again Rises Sharply in July: The Labor Department reported the economy added 255,000 jobs in July. With the June number revised up to 292,000, the average for the last three months now stands at 190,000. The household survey also showed a positive picture, with employment rising by 420,000. With new people entering the labor force, the employment-to-population ratio (EPOP) edged up by 0.1 percentage point to 59.7 percent, while the unemployment rate remained unchanged at 4.9 percent.
The job gains in the establishment survey were broadly based. ...
Other news in the establishment survey was also positive. The length of the average workweek edged up by 0.1 hours leading to an increase in the index of aggregate weekly hours of 0.5 percent. There also is some evidence of more rapid wage growth. The year-over-year increase in the average hourly wage was 2.6 percent. The annual rate comparing the average for the last three months with the prior three months was 2.8 percent. If this continues, workers will be able to get back some of the share lost to profits in the downturn.
While the household survey is mostly positive, there are some aspects that continue to suggest labor market weakness. The duration measures of unemployment all increased in July, with the average duration of unemployment spells rising from 27.7 weeks to 28.1 weeks and the median from 10.3 weeks to 11.6 weeks. These durations are more consistent with a recession than a strong labor market.
Similarly, the number of people involuntarily working part-time rose slightly to 5.94 million. This followed a sharp drop in June, but it is nonetheless quite high for a labor market with an unemployment rate of 4.9 percent. Also, the percentage of unemployment due to voluntary job leavers remained at 10.7 percent. This compares with peaks of more than 12.0 percent before the recession and over 15.0 percent back in 2000.
One interesting note is that the least educated workers appear to be the biggest beneficiaries of recent job growth. The EPOP ratio for workers without high school degrees rose by 2.1 percentage points for the month and is 1.6 percentage points above its year ago level. The unemployment rate for this group is 1.9 percentage points below the year ago level. By contrast, the EPOP ratio for college grads is down by 0.5 percentage points from its year ago level while the unemployment rate is unchanged. The unemployment rate for workers with just a high school degree fell by 0.5 percentage points over the last year.
One positive item in this report is a sharp drop in black teen unemployment from 31.2 percent to 25.7 percent. These data are highly erratic, but the June level was a sharp reported rise from a low of 23.3 percent in February.
This is mostly a very positive report. In addition to the strong growth in jobs in the establishment survey, the household survey also showed a large jump in employment. The increase in hours, coupled with some evidence of more rapid wage growth, add to the positive picture. The labor market still has some way to go to fully recover, but it is making progress.
There's no reason for Democrats to change their agenda to attract Republicans fleeing from Trump:
No Right Turn, by Paul Krugman, NY Times: ...we’re finally seeing some prominent Republicans not just refusing to endorse Mr. Trump, but actually declaring their support for Mrs. Clinton. So how should she respond?
The obvious answer, you might think, is that she should keep doing what she is doing... But at least some commentators are calling on her to do something very different — to make a right turn, moving the Democratic agenda toward the preferences of those fleeing the sinking Republican ship. ...
I don’t think there’s much prospect that Mrs. Clinton will actually do that. But if by any chance she and those around her are tempted to take this recommendation seriously: Don’t.
First of all, let’s be clear about what she’s running on. It’s an unabashedly progressive program, but hardly extreme. ... And no, the program doesn’t need to be more “pro-growth.”
There’s absolutely no evidence that tax cuts for the rich and radical deregulation, which is what right-wingers mean when they talk about pro-growth policies, actually work, or that strengthening the social safety net does any harm. ...
It’s true that there are things we could do to boost the U.S. economy. The most important ... would be to ... expand public investment — which is something progressives support but conservatives oppose. So enough already with the notion that being on the center-left somehow means being anti-growth.
Now let’s talk about the politics.
The Trumpification of the G.O.P. didn’t come out of nowhere. On the contrary, it was the natural outcome of a cynical strategy: long ago, conservatives decided to harness racial resentment to sell right-wing economic policies to working-class whites, especially in the South. ...
So now the strategy that rightists had used to sell policies that were neither popular nor successful has blown up in their faces. And the Democratic response should be to adopt some of those policies? Say what? ...
Trumpism is basically a creation of the modern conservative movement, which used coded appeals to prejudice to make political gains, then found itself unable to rein in a candidate who skipped the coding.
If some conservatives find this too much and bolt the party, good for them, and they should be welcomed into the coalition of the sane. But they can’t expect policy concessions in return. When Dr. Frankenstein finally realizes that he has created a monster, he doesn’t get a reward. Mrs. Clinton and her party should stay the course.
- The Right Wants Glass-Steagall for the Wrong Reasons - Mike Konczal
- Donald Trump is the biggest threat to the recovery - Washington Post
- Labor Mobility in the United States - The Unassuming Economist
- The U.S. Can and Should Boost Growth - Narayana Kocherlakota
- The Greek crisis: An autopsy - VoxEU
- Renting in NOLA - Richard Green
- Sluggish Business Investment in the Euro Area - iMFdirect
- The Economic Consequences of Denying Teachers Tenure - American Prospect
- Inductive reasoning and the philosophy of science - Understanding Society
- Student loans and college quality - VoxEU
- The Global Tourism Industry - Tim Taylor
- A Look in the Mirror - The Grumpy Economist
- Okun’s Law: Fit at 55? - The Unassuming Economist
Thursday, August 04, 2016
If only someone had warned us: The title is pinched from a tweet by Tony Yates, who was one of many economists who did warn of the impact of Brexit. Of course we economists need to ask ourselves if and why our message was ignored, but that is no reason to stop us feeling angry that it happened. This post from the economist who did more than most to try and get the message across, John Van Reenen, expresses that anger better than I could.
What John’s work showed, backed up by similar analysis in the Treasury and elsewhere, is that Brexit would not just cause a short term economic downturn: cutting wages and increasing unemployment for just a year or two. By making it harder to trade with our immediate neighbours it will reduce UK trade overall, and the evidence suggests that this will permanently reduce people’s living standards. ...
The tricky thing to do now is know how much the current downturn is just a foretaste of that, and how much is something over and above that. To the extent that it is the latter, how much of that is offset by some short term benefit to exporters (before the impact of actual Brexit kicks in) as a result of the depreciation? That is initially the Bank of England’s problem.
Their response today, a cut of 0.25% plus more QE, tells us it is not just their problem. We are back at the lower bound for nominal interest rates, which is why the Bank is doing more QE. Because the impact of the QE is extremely uncertain, and in the absence of helicopter money, we now need fiscal action to back up this interest rate cut. ... When interest rates are at the lower bound, forget about the deficit and focus fiscal policy on avoiding a recession. As the Bank’s QE action makes clear, there is no good reason to delay this: it should happen now.
But Brexit was not the first time economists have been ignored. For some years now the clear consensus among academic economists is that, when rates are at their lower bound, you need fiscal stimulus. Although Conservatives have disowned 2015 Osborne austerity, they appear not to have backtracked on his 2010 version. If they do nothing now, we will know that they are wedded to pre-Keynesian 1930s economics.
- The Unbundled City - Paul Krugman
- Did Manufacturing Output Grow Faster than We Thought? - Dietrich Vollrath
- Update on Litmus Test Moments - Calculated Risk
- Economics: Singular currency - Jonathan Portes
- Is there a deficit of deficit hysteria? - Jared Bernstein
- Spotlight: Leah Boustan – Gender Matters
- Brexit Flu? – The Irish Economy
- In defence of Labour's fiscal rule - Stumbling and Mumbling
- Economic disadvantage and education inequality - Equitable Growth
- Summer 2016 Journal of Economic Perspectives - Tim Taylor
- Reluctance of Firms to Interview the Long-Term Unemployed - Liberty Street
- Who are Trump's economic advisers? - Economists for Hillary
- Professorial salaries and research performance - VoxEU
- Demand and Supply: Learning from the United States and Japan - Jason Furman
- Regulatory Capture is Not “Inevitable” - William Black
Wednesday, August 03, 2016
Experts, facts and media: Jean Pisani-Ferry has written a very interesting post about the need for trusted experts in a democracy. The post addresses the criticisms that economic experts have received as a result of the Brexit vote. ...
He also brings up the point that the lack of influence of economic experts is not that different from that of other experts (as illustrated by the debates on climate science, GMOs,...). ...
How to enhance the trust on experts? Not obvious, according to Pisani-Ferry. What is needed is a combination of of discipline among the community of experts, an education system that equips citizens with the tools to distinguish between facts and fiction and the development of better venues for dialogue and informed debate.
Good luck! Unfortunately we are very far from this ideal scenario. Education has reached more citizens than ever, more so in advanced economies, but we see little difference. It might be that the complexity of the issues that are being debated is at a level which still does not allow us to have an informed discussion based on facts and not ideology. Opinions that are expressed using either the wrong facts or no facts at all somehow are able to reach the public and have an influence that is as large as that of those who present the facts. And the media does not serve at all as a filter, maybe because controversy sells or maybe because there is a need to present a 'balanced' view of the debate or simply because of self-interest.
Here is my example of the day that illustrates this point: the Financial Times published two articles yesterday on the merits of quantitative easing. One argued for more QE under the logic that is working and we just need to increase the dosage. The second one presented the view that quantitative easing (as well as expansionary fiscal policy) are the wrong tools to use to generate a recovery and that they are likely to lead to a very unhappy ending.
If you read the second article you will notice the use of dubious facts and an economic logic that anyone who has ever taken any economics course should realize that is badly flawed. ... It is embarrassing that the Financial Times is willing to publish such a low quality article.
Will this article influence anyone's view on the debate on monetary policy? I do not know but what I know is that the pessimistic view presented in the article on the role that monetary and fiscal policy is popular enough that is still influencing both the debate around and also the outcome of current economic policies.
So we are very far from having informed and factual debates about the economic (and scientific) issues that shape economic and social outcomes. As an economist I continue to do my best by sharing my views and analysis with a wide audience through blog posts like this one but it is depressing to see how those that rely on flawed analysis often manage to reach the public through the validation of the most respected media.
- Which Market Indicators Best Forecast Recessions? - FEDS Notes
- Why Americans Think Crime Is Worse Than It Is - Justin Fox
- The progressive victory nobody’s talking about - Jared Bernstein
- Financialization and its Dicontents - INET
- Conspiracy Theory Kooks vs. Statistical Incompetence - Econbrowser
- Should economics be democratised? - mainly macro
- The shortfall in business investment - Brad DeLong
- Only One Candidate Can Make Wages Grow Again - Alan Blinder
- Self-Deception and Regulatory Compliance - RegBlog
Tuesday, August 02, 2016
Rethinking the Role of Government in Society: It may be hard to remember, but Americans once appreciated the government that serves them. That’s long gone.
Over the last six years, according to the Pew Research Center, four out of every five — or more — have said the government makes them feel either angry or frustrated. Last March, the ranks of the incensed included 78 percent of Bernie Sanders’s supporters and a whopping 98 percent of those backing Donald J. Trump. ...
These frustrated Americans may not fully realize it, under the influence of decades worth of sermons about government’s ultimate incompetence and venality. But there’s a strong case for more government — not less — as the most promising way to improve the nation’s standard of living. ...
Americans have long been more suspicious of a big, centralized government than Europeans, of course. But in recent decades, the nation’s difficult racial divide has played a crucial role in checking the growth of public services. ...
The American government pretty much stopped growing when the civil rights movement forced whites to share public space with blacks. Tax revenue as a share of the nation’s economic output hit a peak in 1969 that it would not attain again until 1996...
But for all the racial subtext to the election this year, times seem to be changing in unexpected ways. ...
This does not mean of course, that Big Government will get its day. For starters, small government Republican orthodoxy is likely to prevail in the House for years to come.
Still, a sense of opportunity is in the air. ...
Summary of ‘Gold Returns’ by Robert Barro and Sanjay Misra published in the August 2016 issue of the Economic Journal:
Gold Has Never Been a Great Hedge against Bad Economic Times: Evidence from decades of US and global data: Gold has not served very well as a hedge against bad macroeconomic and stock market outcomes. That is the central conclusion of research by Professors Robert Barro and Sanjay Misra, published in the August 2016 issue of the Economic Journal. Their study draws on evidence from long-term US data on gold returns, as well as gold returns during some of the worst macroeconomic disasters experienced across the world.
Gold has historically played a prominent role in transactions among financial institutions even in modern systems that rely on paper money. What’s more, many observers think that gold provides a hedge against major macroeconomic declines. But after assessing long-term US data on gold returns, the new research finds that gold has not served consistently as a hedge against large declines in real GDP or real stock prices. ... [more] ...
[Paper (October 2013 version)]
- Why Is The IMF Pushing Fiscal Consolidation in the Eurozone ? - Brad Setser
- How Liberalism Became Synonymous with its Antithesis - Uneasy Money
- Economists Overwhelmingly Favor Hillary Clinton - Economists for Hillary
- Climate Change Divide Bursts to Forefront in Presidential Campaign - NYTimes
- Trading changes how brain processes selling decisions - UChicago News
- Bank leverage and monetary policy's risk-taking channel - VoxEU
- Negotiators made sure the TPP reflects U.S. interests - Washington Post
- Wealth And Power: Does One Necessarily Lead To The Other? - EconoSpeak
- Which Households Have Negative Wealth? - Liberty Street Economics
- Prosecuting Corporate Criminals - ProMarket
- Aging and productivity growth - macromom
- The Value of Connections in 2008 - The Baseline Scenario
- Make Algorithms Accountable - The New York Times
- Dealing with public debt in the Eurozone - VoxEU
- Europe’s Brexit Hangover - Nouriel Roubini
- Macro Musings Podcast Brad DeLong - David Beckworth
- Spotlight: Claudia Olivetti - Gender Matters
- The World of ETFs - Cecchetti & Schoenholtz
- That second quarter GDP report: should we be worried? - Jared Bernstein
- 19 members, 12 voters, 1 policy - Jon Faust
- Ethnography of the far right - Understanding Society
- Market Mechanisms in the Paris Climate Agreement - Robert Stavins
Monday, August 01, 2016
What is Inclusive Growth?: "Inclusive growth" is an unquestionably astute rhetorical formulation. Those who use it can support both economic growth and helping the poor in a two-word phrase. But where did the term come from? Does the term have different content from seemingly similar terms like "broad-based growth" or "pro-poor growth"? Or do all these terms mean pretty much the same thing? Most of all, is "inclusive growth" a specific set of policies or just a desirable outcome?
Rafael Ranieri and Raquel Almeida Ramos explore the history of the "inclusive growth" terminology in "Inclusive Growth: Building up a Concept," published in May 2013 by the International Centre for Inclusive Growth (Working Paper #104). A little earlier, Elena Ianchovichina and Susanna Lundstrom produced a note on "What is inclusive growth?" for the World Bank in a note published on February 10, 2009.
Apparently, the term "inclusive growth" originated in an essay "What is Pro-poor Growth?" by Nanak Kakwani and Ernesto M. Pernia, which appeared in the Asian Development Review in 2000. They use the term "inclusive" growth only once, and in a way which makes it synonymous with "pro-poor growth." They write: "Broadly, pro-poor growth can be defined as one that enables the poor to actively participate in and significantly benefit from economic activity. It is a major departure from the trickle-down development concept. It is inclusive economic growth."
The reasons why "inclusive growth" or "pro-poor growth" seemed like a new thing back about two decades ago was rooted in how people used to talk about development economics . A common framework at that time was the notion that low-income countries were trapped in poverty, and needed big boost of investment capital to jolt themselves forward into a process of industrialization. The "Kuznets curve" held that a process of economic development first brings a period of greater inequality, as new industries take hold, which would then followed by a period of greater equality as prosperity spreads or diffuses through an economy.
All of these frameworks have been challenged in various ways. It's not clear that low-income countries are in a poverty "trap"--it's just that they have slow growth, which isn't necessarily the same thing. It wasn't clear that industrialization would necessarily diffuse through an economy: for example, Latin American countries had a reasonable degree of growth from the 1960s on, but with persistent and high levels of inequality. By the 1970s, arguments were emerging that poverty itself held back economic development, so rather than seeking development first and hoping it would reduce poverty eventually, a direct approach to improving the nutrition, health, education, and income-earning prospects of the poor could bring development. The greatest economic development success stories from the the 1960s through the 1980s, the East Asian "growth miracle" that saw the take-off of economies like South Korea, Thailand, and Taiwan didn't involve a large rise in inequality, nor did the earlier take-off of Japan's economy. As Ranieri and Ramos note:
Another core reason for the shift of development thinking towards a constructive, or at least not pernicious, relationship between growth and equity was the phenomenal developmental performance of the so-called Asian tigers: Hong Kong, Singapore, South Korea and Taiwan. The East Asian developmental experience, which unfolded over the course of a larger time span but received most attention from the 1970s into the 1980s and early 1990s, decisively challenged the existence of an inescapable trade-off between growth and equity. Combining rapid growth in per capita income with relatively stable and low inequality, it suggested that “there might be policy measures to foster the benign combination of high growth and rapid poverty reduction” ...
But as the goal of inclusive growth became common, a number of detailed questions emerged. For example, did inclusive growth mean an improvement in the level of standard of living for the poor, or did it mean that the standard of living for the poor needed to be faster than the average for the middle and upper income groups? To what extent did the word "inclusive" apply to the broader middle-class as well as the poor? Does inclusive growth refer to income that includes government transfers, or only to income earned in the market? Does inclusive growth include only private income, or does it also refer to improved provision of government services like education, health services, sanitation and water, or reliable electricity? Should the "inclusiveness" of growth be understood at least partially in terms of institutions for democratic representation and governance?
These different concepts of inclusive growth have different policy implications. While it's easy to feel an attraction to the concept of inclusive growth, it's not clear that it offers a growth formula that works. After all, for many low-income countries around the world, it hasn't seemed that their choice was between "inclusive growth" or "noninclusive growth," but rather they were just struggling to have meaningful growth of any kind.
There's no question that the conceptual problems with "inclusive growth" are severe. Rememver, the Ramieri and Ramos working paper is written for what is called the International Policy Center for Inclusive Growth (which in turn seems to be a joint venture between the UN Development Programme and the Brazilian government), and the writers nonetheless conclude:
"[G]overnments and multilateral development institutions speak of inclusive growth and devise and label objectives, strategies and policies accordingly. But there is no clarity about what is actually meant by inclusive growth; definitions vary and tend to be vague. In general, what seems to be implied is that inclusive growth involves improving the lot of underprivileged people in particular and overall making opportunities more plentiful while lessening barriers to the attainment of better living conditions. But exactly what these entail and whether and how they are interconnected is not made clear. As the meaning of inclusiveness determines policy objectives, while it remains unclear, so do the objectives to be sought in designing policies aimed at promoting inclusive growth."
But despite the conceptual confusion, it seems to me that the terminology of "inclusive growth" does capture some important themes. The great problem of economic development is we cannot yet enunciate any compact list of government policies that reliably leads to a growth miracle. Indeed, given the many different circumstances of nations and economies, it may be that no single list exists, and that instead each country must diagnose which economic or institutional constraints are holding it back. Or it may even be that such diagnosis is too faulty to be reliable, and the best a a country can do is to work on basics like education, health, physical infrastructure, rule of law, and hope for best.
But when thinking about either the inputs to the development process or the outputs of the process, the inclusive growth concept can offer a useful reminder. When thinking about policies to encourage development, it's a reminder that steps which help lower-income people in a direct way are worthwhile, not only because they might help to bring about economic growth but because benefiting those with lower incomes is beneficial in itself. In the general category of policies to help people in a direct way, I would include not just vaccinations and schooling and nutrition, but also policies that help people overcome the hurdles to starting a small business, or that allow people to monitor how public officials are spending money. When judging the results of development efforts, it's a useful reminder to look beyond the images of a huge and flash project like a dam, highway, factory, or mine, and consider the extent to which the project improved the day-to-day lives of lower-income people--whether through jobs and wages or through more affordable goods and services.
To steal a phrase from Ranieri and Ramos, the inclusive growth agenda is to search for a "constructive interaction of declining poverty and inequality and economic growth." That may be an insufficient agenda for economic development, in and of itself, but keep the potential for such constructive interactions in mind is surely worthwhile.
"The real sinners here are Republican leaders":
Worthy of Our Contempt, by Paul Krugman, NY Times: Donald Trump said some more disgusting things over the weekend. If this surprises you, you haven’t been paying attention. Also, don’t be surprised if a majority of Republicans approve of his attack on the parents of a dead war hero. After all, a YouGov survey found that 61 percent of Republicans support his call for Russian hacking of Hillary Clinton.
But this isn’t a column about Mr. Trump and the people who are O.K. with anything he says or does. It is, instead, about Republicans — probably a minority within the party, but a substantial one — who aren’t like that. These are people who aren’t racists, respect patriots even if they’re Muslim, believe that America should honor its international commitments, and in general sound like normal members of a normal political party.
Yet the great majority of these not-crazy Republicans are still supporting Mr. Trump for president. And we have a right to ask why.
True, a Clinton victory would mean a continuation of the center-left governance we’ve had under Barack Obama... But never mind: even if ... you don’t like Mrs. Clinton or what she stands for, it’s hard to see how you could view her possible victory with horror. And it’s hard to see how you could view Mr. Trump’s possible victory any other way.
How, then, can rational Republicans justify supporting Mr. Trump, or even remaining neutral, which is in effect giving him half a vote?
For rank-and-file Republicans, it’s presumably about feelings. Having spent so many years denouncing Democrats in general and Mrs. Clinton in particular, they have a hard time admitting that someone else could be much, much worse. But democracy isn’t about making a statement, it’s about exercising responsibility. And indulging your feelings at a time like this amounts to dereliction of your duty as a citizen.
And whatever one may say about ordinary voters, the real sinners here are Republican leaders — people like Paul Ryan and Mitch McConnell — who are actively supporting a candidate whom they know poses a danger to the nation.
It’s not hard to see why they’re doing this. Opposing their party’s nominee, no matter how awful he is, would probably end up being a career killer.
But there are times when you’re supposed to put such considerations aside. The willingness of some people who know better to support Donald Trump is understandable; it’s also despicable.
- Time to ditch Rawls? - Branko Milanovic
- The Republican Bankruptcy Illusion - Simon Johnson
- Brexit Beckons: Thinking ahead by leading economists - VoxEU
- The Economic Outlook and Implications for Monetary Policy - William Dudley
- The Economic Consequences of Trump vs. Clinton - Economists for Hillary
- The political economy of culture and ethnicity - VoxEU
- The Perils of Executive Action - James Surowiecki
- A Sea Change - Economic Principals
- Multiple Equilibria, Installment #2 (technical) - Stephen Williamson
- Has the global economy (finally) achieved escape velocity? - Gavyn Davies
Sunday, July 31, 2016
Saturday, July 30, 2016
Jacob Hacker and Paul Pierson:
The Path to Prosperity Is Blue: How can America’s leaders foster broad prosperity? For most Republicans — including Donald J. Trump — the main answer is to “cut and extract”: Cut taxes and business regulations, including pesky restrictions on the extraction of natural resources, and the economy will boom.
Mr. Trump and House Speaker Paul Ryan are united by the conviction that cutting taxes — especially on corporations and the wealthy — is what drives growth.
A look at the states, however, suggests that they’re wrong. Red states dominated by Republicans embrace cut and extract. Blue states dominated by Democrats do much more to maintain their investments in education, infrastructure, urban quality of life and human services — investments typically financed through more progressive state and local taxes. And despite what you may have heard, blue states are generally doing better. ...
- Why Growth Will Fall (Review of Gordon) - William D. Nordhaus
- Here’s What’s Going Right, and Wrong, in the U.S. Economy - NYTimes
- Are We Seeing a Turnaround in Male Labor Force Participation? - macroblog
- Who are Clinton's economics advisers? - Economists for Hillary
- Who cares about free trade? Not many Americans - Washington Post
- Why Voters Don’t Buy That Global Trade Is Good - Greg Mankiw
- A President’s Economic Decisions Matter … Eventually - FiveThirtyEight
- Real GDP increased at 1.2% Annualized Rate in Q2 - Calculated Risk
- Don't Count on That U.S. Economy Data Quite Yet - Justin Fox
- The public trusts economists but media are losing interest - Simon Wren-Lewis
- Survey research on right-wing extremism in Europe - Understanding Society
- Clinton vs. Trump on taxes - Economists for Hillary
- Anemic economic growth - Econbrowser
- Friedman’s as if Methodology - George Blackford
Friday, July 29, 2016
Hadn't heard this story before:
Why Does Economics Reject New Thinking?, by Rick McGahey: The Economist magazine is running a series on six big economic ideas that have shaped the field in recent decades, and they start with one of the best—George Akerlof’s 1970 “The Market for Lemons.”
The concepts in the paper were groundbreaking insights about the price distortions that come about when one party has more information than the other, and influence economics and regulation to this day. ...
Akerlof shared his Nobel with Joe Stiglitz and Michael Spence. All three economists questioned a basic premise of standard microeconomic theory—that parties to market transactions have equal and perfect information, and that information equality helps produce market-clearing prices (covering not only commodities, but labor and finance) resulting in fair competition between equally informed parties ... [and] ...optimal overall social returns. ...
But there is another essential part of the Akerlof story—the narrow-minded nature of academic economics. The paper was rejected from several major economics journals. His graduate students at Berkeley had to read the paper in mimeographed form, as Akerlof had trouble getting it published. He testifies that the American Economic Review and The Review of Economic Studies both rejected the paper on the grounds that the subject was trivial.
But the paper’s rejection from the Journal of Political Economy was the most telling. According to Akerlof, one reviewer recognized the profound issues in the paper, and rejected it on the basis that “if this paper was correct, economics would be different.” ...
...while it is good that The Economist and others recognize the power of Akerlof’s ideas, the story of “The Market for Lemons” also must remind us about how hard it was—and still is—for new economic thinking to be heard and accepted by most economists.
The forthcoming changes in capitalism?: Sometimes it’s useful to put symbolic dates on when a different era begins. The end of Thatcherism, it could be argued, came on July 10 in the then PM-candidate speech by Theresa May. It was perhaps appropriate that another woman, a Tory Prime Minister, would be credited with the ending of Thatcherism. The key words, which immediately attracted attention (see also Philip Stevens in today’s “Financial Times”) were not those about inequality (which has become a common place these days) but about the changes in the internal structure of capitalism: reintroduction of workers’ and consumers’ representatives on management boards, limits on the executive pay, reduction of job insecurity for the young people and much greater access to top jobs for those coming from less privileged backgrounds.
For the first time since the late 1970s (at the top level of policy-making), we are back to the issues of reforms in the way capitalism functions rather than discussing the ways in which the external environment would be made more market friendly. In essence, this is a confession that “civilizing” capitalism cannot be done only “externally” by relying on the “harmony of private interests” but that the state has a bigger role that goes beyond ensuring the protection of property rights, taxation and redistribution.
The past 35 years have shown that the neo-liberal conception of capitalism, combined with its global reach, has increased inequality to often unsustainable levels, left large segments of the population in the rich world without significant increase in real income and with heightened insecurity, and brought populist policies with a vengeance. ...
He goes on to identify three areas where he can imagine change.
women and econ blogs: I enjoy reading econ blogs. ... So why are there so few female economic bloggers? ... Here are some of my hypotheses:
1. Women with opinions are not well received. I have heard this one but I am not so sure. My gateway to tweeting and blogging was commenting on Marginal Revolution. I was tolerated (very few women comment there) but it was clear that some of the other commenters did not appreciate a woman with an opinion. I was once told that I was an example of why women should not have gotten the vote, hmm. In contrast, I have felt perfectly welcome in econ-dork Twitter. ...
2. Women are busy with other forms of service. ...many economist positions do not lend themselves well to blogging. There are many women working in government as economists ... I have never seen more female macroeconomists than at the Fed and I've enjoyed getting to know other female economists in government via DCWEP. But public service and blogging can be pretty tricky. And for junior women in academia it may be even riskier to blog. I don't understand why so few senior women in academia blog. Diane Coyle is on the only I can think of ... their absence makes me think blogging is a mistake. And of course, service goes beyond work ... there's family too.
3. Women underestimate what they would contribute by blogging. Blogs, for all their interesting ideas, have a bit of egos running amok too. ... I have sat in meetings with two male economists basically yelling at each other over something unknowable ... they finish and walk away pleased with their digs and I am drained just by listening. ... It is easy to think that showmanship is a part of blogging and maybe women are less likely to enjoy that. Or the ones who do are less likeable. But really blogs are about sharing ideas and all economists have plenty of ideas. Plus it is a very flexible format ... though maybe it is harder for women to imagine themselves as econ bloggers given the current landscape? ...
As with a lot causality debates, the reason why there are few women blogging is probably a complex mix of factors. But it's nothing set in stone either. In fact, I am always happy to see other women on Twitter, blogging ... or more generally voicing their opinion on economics. There is plenty of work to go around!
Republicans and the patriot act:
Who Loves America?, by Paul Krugman, NY Times: ...too many influential figures on the right are tribalists, not patriots.
We got a graphic demonstration of that reality after Michelle Obama’s speech, when she spoke of the wonder of watching her daughters play on the lawn of “a house that was built by slaves.” It was an uplifting and, yes, patriotic image, a celebration of a nation that is always seeking to become better, to transcend its flaws.
But many people on the right ... heard was a knock on white people. “They can’t stop talking about slavery,” complained Rush Limbaugh. The slaves had it good, insisted Bill O’Reilly: “They were well fed and had decent lodgings.” Both men were, in effect, saying that whites are their tribe and must never be criticized.
This same tribal urge surely underlies a lot of the right’s rhetoric about national security. Why are Republicans so fixated on the notion that the president must use the phrase “Islamic terrorism,” when actual experts on terrorism agree that this would actually hurt national security, by helping to alienate peaceful Muslims?
The answer, I’d argue, is that ... it’s all about drawing a line between us (white Christians) and them (everyone else), and national security has nothing to do with it.
Which brings us back to the Vlad-Donald bromance. Mr. Trump’s willingness to cast aside our nation’s hard-earned reputation as a reliable ally is remarkable. So is ... his support for Mr. Putin’s priorities... And he has offered only evasive non-answers to questions about his business ties to Putin-linked oligarchs.
But what strikes me most is the silence of so many leading Republicans in the face of behavior they would have denounced as treason coming from a Democrat...
What this tells you, I think, is that all the flag-waving and hawkish posturing had nothing to do with patriotism. It was, instead, about using alleged Democratic weakness on national security as a club with which to beat down domestic opponents, and serve the interests of the tribe.
Now comes Mr. Trump, doing the bidding of a foreign power and inviting it to intervene in our politics — and that’s O.K., because it also serves the tribe.
So if it seems strange to you that these days Democrats are sounding patriotic while Republicans aren’t, you just weren’t paying attention. The people who now seem to love America always did; the people who suddenly no longer sound like patriots never were.
- It’s time to address wage theft - Catherine Rampell
- Ensuring a Fair Day’s Pay - RegBlog
- Thinking About "Premature Deindustrialization" - Brad DeLong
- Economics Blogs and Trump - Economists for Hillary
- Abstraction vs. Radical Specificity – Paul Romer
- The strange death of the business vote - Chris Dillow
- Answering the Hardest Question in Economics - Bloomberg View
- Trump’s negativity is wrong. Real paychecks are growing. - Jared Bernstein
- U.S. Regional Job Growth Update, July 2016 - Josh Lehner
- China’s Reported Tourism Deficit Got Big, Fast - Brad Setser
- Hosting the Olympics can be a double-edged sword - Marcus Noland
- Adam Smith on Human Capacity for Self-Deceit - Tim Taylor
- Finite Horizon models of inflation as the horizon goes to infinity - Nick Rowe
Thursday, July 28, 2016
What Does 'Regulatory Capture' Mean to Business and the Economy?: In recent months, the idea of "regulatory capture" ... has been enjoying its star turn. ... Earlier this year, the Government Accountability Office revealed that it had (at the urging of two members of Congress) begun investigating whether the New York office of the Federal Reserve is too close to the financial institutions it is supposed to regulate. This is, apparently, the first GAO investigation of its kind. ...
For all the ubiquity of charges of capture, however, it can be difficult to grasp exactly what capture is, or how serious a social and economic problem it represents.
As it is commonly used, "capture" seems malleable enough to fit into the worldviews of both the left (evil corporations outfox, outspend, and manipulate regulators) and the right (state regulation is harmful to businesses). And yet, historically, capture theory embodies a more collusive view of the relationship between government and enterprise. Classic capturists argue that ... businesses accept regulations because they ultimately help improve profits. ...
Intuitively, though, we know that not all regulation benefits companies. ...
Some scholars are urging that we rethink the entire idea. A 2013 essay by William Novak, a law professor at the University of Michigan, ... accepts that regulatory capture exists, but he offers two refinements... One is that capture may be more likely among "vertical" regulators--those who enforce rules within a single industry, such as trucking--than among "horizontal" regulators, those whose mandates apply broadly across society, such as the Environmental Protection Agency or the Occupational Safety and Health Administration.
The second is that ... it is far from proven that regulators are any more prone to it than other institutions. The financial crisis ... was a regulatory failure, to be sure. But, as Novak said in an interview, "entire sectors of the government became enamored with financial interests, including Congress."
And thus, if we intend to tackle the problem of capture, we need more precise definitions and measurements. There is a risk of either weakening regulations that genuinely protect the public, or allowing some incumbents to continue their unearned free ride and squash disrupters. ...
The Case for a Financial Transactions Tax, The Century Foundation: There has been considerable interest in financial transactions taxes (FTTs) in the United States and other wealthy countries in the years since the financial crisis. An FTT can be a way to both raise a large amount of revenue and also rein in the financial sector. This report examines the evidence on the potential for raising revenue through an FTT, its impact on the economy, and also the possibility of using the revenue to defray in particular the cost of higher education. The report argues:
- A financial transactions tax could likely raise over $105 billion annually (0.6 percent of GDP) based on 2015 trading volume. This estimate is roughly in the middle of recent estimates that ranged from as high as $580 billion to as low as $30 billion.
- The full amount of this tax would be borne by the financial industry, and not individual holders of stock or pension funds and other institutional investors. Evidence suggests that trading volume is elastic with respect to price, meaning that any drop in trading volume resulting from the tax would reduce costs for end users by a larger amount than the tax would increase them.
- It is reasonable to believe that the industry would be no less effective in serving its productive use (allocating capital) after the tax is in place. This means that one of the primary effects of the tax would be to reduce waste in the financial sector, reducing costs while having little or no effect on its principal purpose: to allocate capital effectively.
- The revenue raised through an FTT would easily be large enough to cover the cost of free college tuition (among other social programs), although if nothing were done to stem the growth rate of college costs, it would eventually prove inadequate.
The report also notes that the financial sector is the main source of income for many of the highest earners in the economy. This means that downsizing the industry through an FTT could play an important role in reducing income inequality. ...
- A Brief History of (In)equality - J. Bradford DeLong
- Scarce versus Abundant TP Equilibria - Frances Woolley
- Never Were Truer Words Said - Econbrowser
- Asymmetric Information - The Economist
- 1916 (On Ireland) - Kevin O'Rourke
- How true? - Stumbling and Mumbling
- Why Argue With the Government When You Can Buy It? - ProMarket
- Zoning Has Had a Good 100 Years. Enough Already. - Justin Fox
- The Seattle Minimum Wage Experiment So Far - Economy.com
- How Big Is China’s External Surplus? Measurement Matters - Brad Setser
- How the MAC Would Help Restore Manufacturing - John Hansen
- Fighting Poverty in America - Tyson and Mendonca
- Matchmaker, matchmaker make me a mortgage - Bank Underground
- The Fed and Lehman - Alex Rodrigue
- Medicaid Works: 10 Key Facts - CBPP
Wednesday, July 27, 2016
Here's a link to the Fed's statement on its policy decision today:
Policy is unchanged, sees improvements in the economy, says short-term risks have fallen.
July FOMC Preview on Bloomberg: How long can doves at the Federal Reserve stand their ground?
The fight within the U.S. central bank continues at this week's Federal Open Market Committee (FOMC) meeting as both hawks and doves jockey for dominant position. This battle will go to the doves; the Fed is not expected to raise its interest rate target just yet. Both the hawks and the doves know this. Both camps also know that this meeting is about laying down markers for the September meeting. And while the doves have the upper hand this month, the current flow of data will increasingly place them on the defensive as the second half of the year progresses.
- Globalization: Restrained or reshaped - Jared Bernstein
- Expenditure Shares, Price Measurement, and Labor Productivity - Brad DeLong
- Trump Says He’s a Great Negotiator, Evidence Says Otherwise - Berkeley Blog
- The Forecasting Performance of Models for Cointegrated Data - Dave Giles
- Why Dropping the Trans-Pacific Partnership May Be a Bad Idea - NYTimes
- How the Federal Reserve System Was Formed - FRB ST. Louis
- More Banking Mystifications - The Baseline Scenario
- National Income and Its Discontents - Gregory Mankiw
- Thoughts from California about a year in Washington - Richard Green
- Blogging and Tweeting Economists - Mathew Kahn
- Seeing China Through Its Economic History - Bloomberg View
- High-Skilled Immigration - Tim Taylor
- The insurance sector and systemic risk - VoxEU
- As goes correspondent banking, so goes globalisation - FT Alphaville
- The Bubbling Concern Over Two Beer Giants’ Blockbuster Merger - TIME
- The Lowdown on U.S. Core Inflation - iMFdirect
Tuesday, July 26, 2016
Economists Give Up on Milton Friedman's Biggest Idea: One of the core pieces of modern macroeconomic theory, handed down to us by the great Milton Friedman, probably missed the mark. ...
The idea is called the permanent income hypothesis (PIH). ... The PIH says that people’s consumption doesn’t depend on how much they earn today, but on how much they expect to earn over their lifetime. ...
That assumption about human behavior has huge implications for policy. If true, the PIH means that the effectiveness of a fiscal stimulus is likely to be a lot lower than economists thought in the 1960s. ...
It’s also important for finance. ... Friedman’s idea says that consumers want to smooth out their consumption... So in theory people will spend a lot for financial assets that pay off during recessions, allowing them to avoid tightening their belts.
PIH is so dominant that almost all modern macroeconomic theories are based on it. ... Unfortunately, there’s just one small problem -- it’s almost certainly wrong. Not completely wrong, mind you, just somewhat wrong. ...
The mounting evidence against the PIH -- the papers I cited are only a small sampling -- is causing economists to cast around for an alternative. ...Narayana Kocherlakota ...thinks macroeconomists should set aside their big, complex formal models of the economy, since these elaborate constructions are built on a foundation that probably doesn’t describe reality all that well. He recommends that economists go back to the drawing board, and look around for new, more accurate kernels of insight with which to build the theories of tomorrow.
In the meantime, we should all recognize that Milton Friedman’s ideas might have been too influential. His impact on economics was deep and lasting, but this theory, at least, hasn’t stood the test of time.
Jeff Frankel at Econbrowser:
Trump Jr.’s Pants-on-Fire Allegation of Manipulated Jobs Numbers: When interviewed about the unemployment numbers, which have fallen steadily since 2010, Donald Trump Jr., replied “These are artificial numbers. These are numbers that are massaged to make the existing economy look good, to make this administration look good when, in fact, it’s a total disaster.” PolitiFact asked a variety of experts about the quote. Their bottom line: the quote from the younger Trump was a “Pants on Fire” lie. The truth is that presidents don’t and can’t manipulate the jobs numbers. No White House has even tried — at least not since Richard Nixon made a heavy-handed attempt in 1971 to interfere with BLS staffing. After that, extra firewalls were put in place.
Here is my own full response to PolitiFact’s question regarding the Trump claim...
Pax Trumpiana: With everything else going on, it may be hard to stay with the evolving Trump/Putin story. But it’s really crucial. I don’t think Trump is literally an agent of the Kremlin; instead, he’s someone Putin is aiding because he knows Trump is close to, probably financially entangled with friendly oligarchs. And equally important, Putin knows that Trump’s combination of ignorance and greed would quickly undermine the Western alliance: already we have, incredibly, a presidential candidate essentially proposing that we turn NATO into a protection racket, in which countries get defended only if they pay up.
All of this is, as it turns out, dovetailing with my bedtime reading.
I’m a huge fan of Adrian Goldsworthy’s histories, and I have a galley of his new opus, Pax Romana. Great fun as usual, plus lots of detail. ...
America is, one hopes, not ancient Rome; we aspired to universal values from the beginning, and the Pax Americana, while far from being perfect or even free from some evil, has surely been the most benign great-power domination in history. Still, there is some parallel between how we’ve run much of the world and what the Romans learned to do.
But Trump doesn’t care about any of that — he basically wants America to behave like Rome at its worst, to become the predatory power of Lucullus and Sulla.
And all those ultra-patriotic Republicans are cheering him on.
I have a new column:
Economists, Blogs, and Donald Trump: The reason I have this column can be credited to, or blamed on, George Bush.
During the presidential campaigns before the 2004 election, I was very unhappy with the coverage of Bush’s economic proposals in the press. The reporting on the claim that tax cuts would cause so much growth they would pay for themselves, and the discussion of Social Security privatization were particularly irksome, but there was a more general sense that people writing about economic issues were too easily lulled into “bothsideism” and swayed by political spin. Readers were not being informed about what economic theory and evidence says about the policies the candidates were proposing.
In an attempt to do whatever I could to change that, I started writing letters to the local paper followed by three op-eds. Then, one day in March of 2005 I started ablog. That eventually led to this column.
I wasn’t the only one who began using blogs to try and improve communication about economics. The number of economists with blogs has grown substantially, and it has made a difference. The press coverage of economic issues is much better than it was during the campaigns for president in 2004. It’s not perfect, there are still occasions when I want to tear my hair out in frustration, but it’s far better than it was. ...
So it’s been frustrating to see how little difference it has made in the current presidential campaign. ...
- Professionalism and the Academic Division of Labor – Paul Romer
- The Environmental Kuznet's Curve in a Nutshell - Stochastic Trend
- Brainard, Donning a Global Lens, Champions Low Rates at Fed - NYTimes
- Field-of-study homogamy: Evidence from the EU - VoxEU
- The Fed Has Some Explaining to Do - Narayana Kocherlakota
- The productivity impact of new technology - Microeconomic Insights
- Why Isn’t World Bank’s Choice of Chief Economist Controversial? – New School
- Evidence on Violence and Ethnic Groups in Africa - Dietrich Vollrath
- Why the Federal Reserve Was Founded - FRB St. Louis
- Regime changes in the global financial markets - Gavyn Davies
- Did the Great Recession reduce U.S. productivity growth? - Equitable Growth
- Macro Musings Podcast: David Andolfatto - David Beckworth
- The recent credit surge, seen in historical context - All About Finance
- The Lender of Last Resort and Lehman - Cecchetti & Schoenholtz
- Italian Banks, Pre-Stress Test - Brad Setser
- Tracking US GDP ex.-Government - Econbrowser
- Failed states and the paradox of civilisation - VoxEU
- The Great Growth Target Leak of 1961 - EconoSpeak
- Improving Benefit-Cost Analysis by Making it Simpler - RegBlog
Monday, July 25, 2016
Brexit: a blow to the low-paid?: The CBI reported today that manufacturers’ business confidence has fallen at its fastest rate since early 2009, causing falls in investment and hiring plans. This corroborates surveys by Deloitte, Markit (pdf), the Institute of Directors and, to a lesser extent the Bank of England* all of which suggest that the Brexit vote will depress economic activity. ...
What worries me is that the pain of this will disproportionately hit the low-paid. A new paper (pdf) from the Minneapolis Fed says:
It is precisely the households at the bottom of the wealth distribution with low savings rates and high propensities to consume out of current income that suffer the largest welfare losses from a severe recession. Further, these losses are much more severe than those sustained by the "average" household.
This is because the low-paid have no financial assets to cushion themselves against job loss and so must suffer either big falls in living standards or resort to high-cost payday lenders whereas the rich have savings and/or access to cheaper credit**. Also, firms faced with uncertainty might well respond by hoarding skilled labour – which is harder to find when needed – and trimming unskilled workers.
Although the coming downturn will probably not be as severe as the 2009 one, I suspect that these mechanisms will still operate. ...
What’s more, for now we are only seeing the short-run effect of increased uncertainty. In the long-run, it’s possible that by depressing world trade growth, the losers from Brexit will be those in more skilled manufacturing and finance jobs.
For now, though, it might be the low-paid that suffer the most from Brexit. These, though, were more likely (pdf) to have voted Leave. We might ask them Johnny Rotten’s famous question: ““Ever get the feeling you’ve been cheated?”
Marilyne Tolle at the Bank of England's Bank Underground blog:
Central bank digital currency: the end of monetary policy as we know it?: Central banks (CBs) have long issued paper currency. The development of Bitcoin and other private digital currencies has provided them with the technological means to issue their own digital currency. But should they?
Addressing this question is part of the Bank’s Research Agenda. In this post I sketch out how a CB digital currency – call it CBcoin – might affect the monetary and banking systems – setting aside other important and complex systemic implications that range from prudential regulation and financial stability to technology, operational and financial conduct.
I argue that taken to its most extreme conclusion, CBcoin issuance could have far-reaching consequences for commercial and central banking – divorcing payments from private bank deposits and even putting an end to banks’ ability to create money. By redefining the architecture of payment systems, CBcoin could thus challenge fractional reserve banking and reshape the conduct of monetary policy. ...
The phrase "trumped up" comes to mind:
Delusions of Chaos, by Paul Krugman, NY Times: Last year there were 352 murders in New York City. This was a bit higher than the number in 2014, but far below the 2245 murders ... in 1990, the city’s worst year. In fact..., New York is now basically as safe as it has ever been, going all the way back to the 19th century.
National crime statistics, and numbers for all violent crimes, paint an only slightly less cheerful picture. And it’s not just a matter of numbers; our big cities look and feel far safer than they did a generation ago...
How, then, was it even possible for Donald Trump to give a speech accepting the Republican nomination whose central premise was that crime is running rampant, and that “I alone” can bring the chaos under control? ...
Yet there’s no question that many voters — including, almost surely, a majority of white men — will indeed buy into that vision. Why? ...
Well, I do have a hypothesis..., Trump supporters really do feel, with some reason, that the social order they knew is coming apart. It’s not just race, where the country has become both more diverse and less racist (even if it still has a long way to go). It’s also about gender roles — when Mr. Trump talks about making America great again, you can be sure that many of his supporters are imagining a return to the (partly imagined) days of male breadwinners and stay-at-home wives. ...
But what are the consequences of these changes in the social order? Back when crime was rising, conservatives insistently drew a connection to social change — that was what the whole early ’90s fuss over “family values” was about. ...
Then a funny thing happened: Crime plunged instead of continuing to rise. Other indicators also improved dramatically — for example, the teen birthrate has fallen 60 percent since 1991. Instead of societal collapse, we’ve seen what amounts to a mass outbreak of societal health. The truth is that we don’t know exactly why. ...
The point, however, is that in the minds of those disturbed by social change, chaos in the streets was supposed to follow, and they are all too willing to believe that it did, in the teeth of the evidence.
The question now is how many such people, people determined to live in a nightmare of their own imagining, there really are. I guess we’ll find out in November.
Sunday, July 24, 2016
Dani Rodrik and Mr. Trump: David Brooks, of The New York Times, wrote the single best piece I read last week on the Republican convention: “Death of the Party.” Like him, I was riveted by Donald Trump’s acceptance speech. The scene seemed straight out of one of those dystopian Batman movies of the 1980s, ’90s, and ’00s, an outlandish character, sailing under false colors, bullying and threatening, preying on fears, selling Gotham a bill of goods, preparing chaos.
By the time the nominee bellowed, “I am your voice” to the hall of delegates, he seemed simply the latest in a long line of improbable adversaries: the Joker, the Penguin, the Riddler, Mr. Freeze, Poison Ivy, Ra’s al Ghul, the Scarecrow, Bane, Mr. Trump.
But then Batman movies depend on the Caped Crusader, the Dark Knight, to answer the Bat signal, expose the fraud, counter the villains’ plans, and save the city.
Batman in this case is Dani Rodrik, 58, of Harvard University’s Kennedy School of Government. He is likely to be the next economist to enter the pantheon of those who went to school in the ’70s whom much of the public knows today” Jeffrey Sachs, Paul Krugman, Larry Summers, Ben Bernanke. ...
Rodrik isn’t exactly fighting with Trump, the way Batman fights with those villains. He is, by his own account, recasting the globalization narrative, replacing the familiar triumphalist version with a more nuanced account, including the ill-effects of integration that gave rise to the Trump and Bernie Sanders campaigns, and those of H. Ross Perot and Pat Buchanan before them. (Meanwhile, Rodrik is interpreting events in Turkey as well.)
The Trump campaign supports no intellectual edifice whatsoever. For all its flaws, it is up to the Clinton campaign to begin translating into political terms the deeper understanding globalization – its costs as well as its benefits – that Rodrik, Unger, and many others have been working out.
Holy Hoodwink, Batman! Let’s get to work!