Thursday, October 09, 2014

Links for 10-09-14

    Posted by on Thursday, October 9, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (174)


    Wednesday, October 08, 2014

    'How are Economic Inequality and Growth Connected?'

    Carter Price and Heather Boushey:

    How are economic inequality and growth connected?, by Carter C. Price and Heather Boushey: ... In the past several decades, economic inequality in the United States and other wealthy nations has risen sharply, spurring renewed interest in the question of whether and how changes in income distributions affect economic wellbeing. Over the same time period, economic inequality has persisted and even grown in many poorer economies.

    These trends have sparked economists to conduct empirical studies, analyzing data across states and countries, to see if there is a direct relationship between economic inequality, and economic growth and stability. Early empirical work on this question generally found inequality is harmful for economic growth. Improved data and techniques added to this body of research, but the newer literature was generally inconclusive, with some finding a negative relationship between economic growth and inequality while others finding the opposite.

    The latest research, however, provides nuance that can explain many of the conflicting trends within the earlier body of research. There is growing evidence that inequality is bad for growth in the long run. Specifically, a number of studies show that higher inequality is associated with slower income gains among those not at the top of the income and wealth spectrum. ...

    In this paper, we review the recent empirical economic literature that specifically examines the effect inequality has on economic growth, wellbeing, or stability. This newly available research looks across developing and advanced countries and within the United States. Most research shows that, in the long term, inequality is negatively related to economic growth and that countries with less disparity and a larger middle class boast stronger and more stable growth. Some studies do suggest that in the short run, inequality may spur growth before hindering it over the longer term, but overall there is growing evidence that, in the long run, more equitable societies are associated with higher rates of growth. ...

    Important as well for the purposes of this paper is this—the latest economic research we reviewed only examines the outcome of whether there are results for regressions that demonstrate positive or negative relationships between inequality and economic growth and stability. This means the paper cannot provide clear guidance for policymakers on exactly how to address inequality or mitigate its effects on growth. In other words, the research examined in this paper generally does not identify the channels or mechanisms by which inequality affects growth. ...

    This paper does not contain policy advice. Instead, it contains analysis that largely demonstrates there are direct, and possibly causal, relationships between economic inequality and growth—places that begin with a lower level of inequality subsequently tend to grow faster and have longer periods of growth than those with a higher level of inequality. In future research, we will focus on the channels...

      Posted by on Wednesday, October 8, 2014 at 08:46 AM in Economics, Income Distribution | Permalink  Comments (42)


      'Shadow Banking: U.S. Risks Persist'

      I've noted this several times in the past, but it's worth pointing out again. The problems in the shadow banking sector are still present for the most part. From Tim Taylor:

      Shadow Banking: U.S. Risks Persist: ...A "shadow bank" is any financial institution that gets funds from customers and then in some way lends the money to borrowers. However, a shadow bank doesn't have deposit insurance. And while the shadow bank often faces some regulation, it typically falls well short of the detailed level of risk regulation that real banks face. In this post in May, I tried to explain how shadow banking works in more detail. Many of the financial institutions at the heart of the financial crisis were "shadow banks." ...
      Five years past the end of the Great Recession, how vulnerable is the U.S. and the world economy to instability from shadow banking? ... The IMF devotes a chapter in its October 2014 Global Financial Stability Report to "Shadow Banking Around the Globe: How Large, and How Risky?" ...
      It is discomforting to me to read that for the U.S., shadow banking risks are "slightly below precrisis levels." In general, the policy approach here is clear enough. As the IMF notes: "Overall, the continued expansion of finance outside the regulatory perimeter calls for a more encompassing approach to regulation and supervision that combines a focus on both activities and entities and places greater emphasis on systemic risk and improved transparency."
      Easy for them to say! But when you dig down into the specifics of the shadow banking sector, not so easy to do. 

        Posted by on Wednesday, October 8, 2014 at 08:46 AM in Economics, Financial System, Regulation | Permalink  Comments (23)


        Wellbeing: Busts Hurt More Than Booms Help

        If the number of retweets of a link is any indication, there seems to be a lot of interest in this paper:

        Busts hurt more than booms help: New lessons for growth policy from global wellbeing surveys, by Jan-Emmanuel De Neve and Michael I. Norton, Vox EU: Wellbeing measures allow us to distinguish higher incomes from higher happiness. This column looks at new welfare measures and macroeconomic fluctuations. It presents evidence that the life satisfaction of individuals is between two and eight times more sensitive to negative economic growth than it is to positive economic growth. Engineering economic ‘booms’ that risk even short ‘busts’ is unlikely to improve societal wellbeing in the long run. 

        To say it another way, "policymakers seeking to raise wellbeing should focus more on preventing busts than inculcating booms."

          Posted by on Wednesday, October 8, 2014 at 12:15 AM in Economics, Policy | Permalink  Comments (17)


          Links for 10-08-14

            Posted by on Wednesday, October 8, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (134)


            Tuesday, October 07, 2014

            'It’s Not a Skills Gap That’s Holding Wages Down: It's the Weak Economy, Among Other Things'

            Jared Bernstein:

            It’s Not a Skills Gap That’s Holding Wages Down: It's the Weak Economy, Among Other Things: The inadequate quantity and quality of American jobs is one of the most fundamental economic challenges we face. It’s not the only challenge: Poverty, inequality, and stagnant mobility loom large, as well. But in a nation like ours, where wages and salaries are key to the living standards of working-age households, all these challenges flow from the labor market problem.
            OK, but this is a supposed to be an article about technology. What’s the linkage between technology and this fundamental problem? As a D.C.-based economist who’s been working on the issue of jobs and earnings for almost 25 years, trust me when I tell you that most policy makers believe the following:
            “Yes, there’s a problem of job quantity and quality, but it’s largely a skills problem. Because of recent technological advances, most notably computerization, an increasing share of the workforce lacks the skills to meet the demands of today’s workplaces.
            What’s more, the pace at which technology is replacing the inadequately skilled is accelerating—think robotics and artificial intelligence. These dynamics explain growing wage stagnation, wage inequality, and the structural unemployment of those without college degrees.”
            Problem is, most of that is wrong.
            Technology and employers’ skill demands have played a critical role in our job market forever, but they turn out to be of limited use in explaining the depressed incomes of today, or of the past decade. ...

            This is part of a post from three years ago when people were making similar arguments about the skills gap (another way of saying the problem is structural, not cyclical):

            I wish I'd remembered point three when I wrote recently about the difficulty of separating cyclical and structural unemployment. I was saying, essentially, the same thing that Peter Diamnond says here (via):

            ...Third, I am skeptical of the value of attempting to separate cyclical from structural unemployment over a business cycle.... The tighter the labor market and the more valuable the filling of a vacancy, the more a firm is willing to hire a worker who is a less good match, who may need more training.... [A] worker who might be viewed as structurally unemployed, as facing serious mismatch in the current state of the economy, may be readily employable in a tight labor market. The common practice of thinking about the extent of unemployment as a sum of frictional, structural and cyclical parts misses the point.... [D]irect measures of frictional or structural unemployment... dependent on the tightness of the labor market... have limited relevance for the role of demand stimulation policies. The idea that the US economy is not adaptable and capable of dealing with the need for skills and jobs to adapt to each other is peculiar, given the long history of unemployment going up and down. When the labor market is tight and firms have trouble finding workers, they reach out to places they have not looked before and extend training in order to find workers who can fill their needs. ...

            Here's (part of) the post of mine referred to above:

            Cyclical and structural unemployment can be hard to tell apart. For example, suppose that a business owner would like to hire someone to operate a complicated piece of machinery, and needs someone with experience. The owner offers $10 per hour, but, unfortunately, no one applies. Interviewed by the local paper, the owner complains that qualified workers simply aren't available.
            However, that is not true. There is an unemployed worker who has been running that kind of machine for 10 years. He's good at it, and only lost his job due to the fact that the place he had worked for the last 10 years shut its doors in the recession. At $15 per hour, or more, he would have taken the job. But $10 is just not enough to pay the bills and save the house, and he decides to hold out and hope that something better comes along.
            So whose fault is it? Should be blame the worker for being unwilling to take a decent job due to the fact that it doesn't pay enough (perhaps unemployment compensation is helping the worker to wait for a job that will pay enough to support the household)? Should we blame the store owner for not paying enough to attract workers with families to support? Neither, the problem is lack of demand.
            If times were better, i.e. demand were stronger, the business owner could afford to pay $15, and would -- problem solved. So, all that is needed is an increase in demand for the products the business sells (demand that would exist if the worker and others like him had jobs). But at current demand levels, which are depressed, it is not worth it to pay that much. The business owner would be losing money.
            So is the problem cyclical or structural?  It will look like structural unemployment in the data, the owner can't find anyone who is qualified who will take the job at the wage being offered, but the heart the problem is a lack in demand. ...

            Or, as I've told the story at other times, there is a worker in another city who is unemployed, well--trained for this job, but the wage that is offered does not provide enough income to justify moving. At a higher wage, it might. Again, a problem that looks structural is actually due to lack of demand. With more demand, and the ability to pay a higher wage, the firm would find the skilled worker it seeks.

            But I like the way Peter Diamond said it best.

              Posted by on Tuesday, October 7, 2014 at 09:45 AM in Economics, Unemployment | Permalink  Comments (73)


              'The Deficit' Is Not 'The Economy'

              Where have I seen this game played before? This is from Chris Dillow:

              "The economy", by Chris Dillow: On the Today programme yesterday, Nick Clegg said (2'11 in)... Then on PM yesterday (about 17'402 in), Carolyn Quinn said...

              In the context she's using the word, she clearly means not "fix the economy" but "fix the deficit".

              Now, I had thought that Clegg had merely mis-spoke. But it's unlikely that two people would mis-speak in exactly the same way within hours of each other. I suspect something else is going on - the construction of a hyperreality.

              They are trying to equate the deficit with the economy, to give the impression that good economic policy consists not in boosting real wages, cutting unemployment, or addressing the threat of secular stagnation but merely in "fixing the deficit." ...Clegg ... and Quinn ... are both in the same Bubble pushing the same quack mediamacro.

              Worse still, by "fixing the deficit" they mean some type of austerity. But there's a big difference between the two. We could - perhaps - fix the deficit by state-contingent fiscal rules, or by adopting a higher inflation target (or NGDP target) and thus using monetary stimulus to inflate our way out of government debt. ...

              Instead, the only economic policy permitted by the Bubble is the fake machismo of "tough choices." Not only are these tough only for other people - mostly the most vulnerable - but they don't even work in their own terms; one lesson we've learned since 2010 is that "tough decisions" to cut the deficit don't actually do so as much as their perpetrators hope. But then, in the Bubble's hyperreality, neither justice nor evidence count for anything.

              It's sad that so many people think the way to fix the economy, or the deficit, is to help the people who don't need it rather than helping those who do. Austerity that hurts those in need trickles up -- austerity financed tax cuts help those at the top -- but very little trickles back down again. Tax cuts for the wealthy do little to help the economy, and tax cuts certainly don't help the deficit. The claim that they somehow pay for themselves and reduce the deficit has no foundation in actual evidence, it is also "quack mediamacro" designed to fool people into supporting policies that benefit a key GOP political contingency.

                Posted by on Tuesday, October 7, 2014 at 08:13 AM Permalink  Comments (25)


                Fed Watch: The Labor Market Conditions Index: Use With Care

                Tim Duy:

                The Labor Market Conditions Index: Use With Care, by Tim Duy: I was curious to see how the press would report on the Federal Reserve Board's new Labor Market Conditions Index. My prior was that the reporting should be confusing at best. My favorite so far is from Reuters, via the WSJ:
                Fed Chairwoman Janet Yellen has cited the new index as a broader gauge of employment conditions than the unemployment rate, which has fallen faster than expected in recent months. The index’s slowdown over the summer could bolster the argument that the Fed should be patient in watching the economy improve before raising rates.
                But its pickup last month could strengthen the case that the labor market is tightening fast and officials should consider raising rates sooner than widely expected. Many investors anticipate the Fed will make its first move in the middle of next year, a perception some top officials have encouraged.
                Translation: We don't know what it means.
                Now, this is not exactly the fault of the press. The Fed appears to want you to believe the LCMI is important, but they really don't give you reason to believe it should be important. They don't even release the LCMI - the charts on Business Week and US News and World Report are titled erroneously. The Fed releases the monthly change of the LCMI, as noted by Business Insider. But wait, no that's not right either. They actually release the six-month moving average of the LCMI, which means we really don't know the monthly change.1 What the Fed releases might actually be more impacted by what left the average six months ago than the reading from the most recent month. And you should recognize the danger of the six-month moving average - the longer the smoothing process, the more likely to miss turning points in the data. Unless of course the Fed released the raw data to follow as well. Which they don't.
                The LCMI becomes even more confusing because it has been impressed upon the financial markets that it must have a dovish interpretation. From Business Insider:
                The index was first "made famous" by Fed Chair Janet Yellen in her speech at Jackson Hole, when she said, "This broadly based metric supports the conclusion that the labor market has improved significantly over the past year, but it also suggests that the decline in the unemployment rate over this period somewhat overstates the improvement in overall labor market conditions."
                Recall that at Jackson Hole, Yellen spoke about the labor market puzzle of a steadily declining unemployment rate and strong payroll gains against the backdrop of declining labor force participation and flat wages.
                Consider this in light of this from the Fed:

                LMCI2

                The first part of the associated commentary:
                Table 2 reports the cumulative and average monthly change in the LMCI during each of the NBER-defined contractions and expansions since 1980. Over that time period, the LMCI has fallen about an average of 20 points per month during a recession and risen about 4 points per month during an expansion. In terms of the average monthly changes, then, the labor market improvement seen in the current expansion has been roughly in line with its typical pace...
                If you look closely, the average monthly change during this expansion is faster than every recovery since the 1980-81 expansion. How does this fit with the conventional wisdom that we are experiencing a slow labor market recovery? Indeed, look at the chart:

                LMCI1

                According to this measure, the pace of improvement in this recovery exceeds than much of the 1990's. Think about that.
                Moreover, consider the next sentence of the commentary:
                ...That said, the cumulative increase in the index since July 2009 (290 index points) is still smaller in magnitude than the extraordinarily large decline during the Great Recession (over 350 points from January 2008 to June 2009).
                OK - so the Fed thinks the cumulative change is important. They think it is relevant that the LCMI has not retraced all of its losses. Let's take this idea further. Rather than using the recession dating, consider the even larger move from peak to trough. Between May 2007 to June 2009, the cumulative decrease in the LCMI was 398.4. Since then, the cumulative increase is 300.7, so the LCMI has retraced 75% of its losses.
                Now consider the unemployment rate. The unemployment rate increased 5.6 percentage points from a low of 4.4% to a high of 10%. SInce then it has retraced 4.1 percentage points of that gain to last month's 5.9% rate. 4.1 is 73% of 5.6. In other words, the unemployment rate has retraced 73% of it losses.
                The LCMI has retraced 75% of its losses. The unemployment rate has retraced 73% of it losses. So the LCMI shows the exact same amount of improvement in labor market conditions peak to trough as implied by the retracement of the unemployment rate.
                You see the problem. The LCMI (or the data made available to the public) suggests the same amount of improvement in labor market conditions as implied by the unemployment rate. The LCMI suggests a faster pace of improvement than that seen in the previous three recoveries. So how exactly does Yellen reach the conclusion that "the decline in the unemployment rate over this period somewhat overstates the improvement in overall labor market conditions"? I am not seeing it on the basis of the data provided. Indeed, where exactly is the research showing the LCMI has some policy relevance?
                Then again, this could be exactly why Yellen uses the modifier "somewhat" in the above quote. Perhaps she has no conviction that the LCMI provides information not already in the unemployment rate. If that's the case, then expect the LCMI to die on the vine, eventually relegated to be computed by whoever still has the p-star model on their list of assignments.
                Bottom Line: Use the Fed's new labor market index with caution. Extreme caution. They are not releasing the raw data. They don't appear to have research explaining its policy relevance. Yellen's halfhearted claim that it provides information above and beyond the unemployment rate is questionable with a simple look at the cumulative change of the index compared to that of unemployment. And her halfhearted claims are even more telling given that she was the impetus for the research. If it was policy relevant, you would think she would be a little more enthusiastic (think optimal control). Moreover, the faster pace of recovery of the index compared to previous recessions - as clearly indicated by the Fed - seems completely at odds with the story it is supposed to support. Simply put, the press and financial market participants should be pushing the Fed much harder to explain exactly why this measure is important.
                1. The LCMI data provided by the Fed is described as the "average monthly change." I am not sure why they don't explicitly provide the span of the averaging, but the website describes it as "Chart 1 plots the average monthly change in the LMCI since 1977. Except for the final bar, which covers the first quarter of 2014, each of the bars represents the average over a six-month period."

                  Posted by on Tuesday, October 7, 2014 at 12:15 AM in Economics, Fed Watch, Monetary Policy, Unemployment | Permalink  Comments (7)


                  Links for 10-07-14

                    Posted by on Tuesday, October 7, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (108)


                    Monday, October 06, 2014

                    'Is Keynesian Economics Left Wing?'

                    A small part of a much longer argument/post by Simon Wren-Lewis:

                    More asymmetries: Is Keynesian economics left wing?: ...So why is there this desire to deny the importance of Keynesian theory coming from the political right? Perhaps it is precisely because monetary policy is necessary to ensure aggregate demand is neither excessive nor deficient. Monetary policy is state intervention: by setting a market price, an arm of the state ensures the macroeconomy works. When this particular procedure fails to work, in a liquidity trap for example, state intervention of another kind is required (fiscal policy). While these statements are self-evident to many mainstream economists, to someone of a neoliberal or ordoliberal persuasion they are discomforting. At the macroeconomic level, things only work well because of state intervention. This was so discomforting that New Classical economists attempted to create an alternative theory of business cycles where booms and recessions were nothing to be concerned about, but just the optimal response of agents to exogenous shocks.
                    So my argument is that Keynesian theory is not left wing, because it is not about market failure - it is just about how the macroeconomy works. On the other hand anti-Keynesian views are often politically motivated, because the pivotal role the state plays in managing the macroeconomy does not fit the ideology. ...

                      Posted by on Monday, October 6, 2014 at 09:22 AM in Economics, Macroeconomics, Politics | Permalink  Comments (105)


                      Paul Krugman: Voodoo Economics, the Next Generation

                      Will Republicans "destroy the credibility of a very important institution"?:

                      Voodoo Economics, the Next Generation, by Paul Krugman, Commentary, NY Times: Even if Republicans take the Senate this year, gaining control of both houses of Congress, they won’t gain much in conventional terms: They’re already able to block legislation, and they still won’t be able to pass anything over the president’s veto. One thing they will be able to do, however, is impose their will on the Congressional Budget Office, heretofore a nonpartisan referee on policy proposals.
                      As a result, we may soon find ourselves in deep voodoo.
                      During his failed bid for the 1980 Republican presidential nomination George H. W. Bush famously described Ronald Reagan’s “supply side” doctrine — the claim that cutting taxes on high incomes would lead to spectacular economic growth, so that tax cuts would pay for themselves — as “voodoo economic policy.” Bush was right. ...
                      But now it looks as if voodoo is making a comeback. At the state level, Republican governors — and Gov. Sam Brownback of Kansas, in particular — have been going all in on tax cuts despite troubled budgets, with confident assertions that growth will solve all problems. It’s not happening... But the true believers show no sign of wavering.
                      Meanwhile, in Congress Paul Ryan, the chairman of the House Budget Committee, is dropping broad hints that after the election he and his colleagues will do what the Bushies never did, try to push the budget office into adopting “dynamic scoring,” that is, assuming a big economic payoff from tax cuts.
                      So why is this happening now? It’s not because voodoo economics has become any more credible. ... In fact,... researchers at the International Monetary Fund, surveying cross-country evidence, have found that redistribution of income from the affluent to the poor, which conservatives insist kills growth, actually seems to boost economies.
                      But facts won’t stop the voodoo comeback,... for years they have relied on magic asterisks — claims that they will make up for lost revenue by closing loopholes and slashing spending, details to follow. But this dodge has been losing effectiveness as the years go by and the specifics keep not coming. Inevitably, then, they’re feeling the pull of that old black magic — and if they take the Senate, they’ll be able to infuse voodoo into supposedly neutral analysis.
                      Would they actually do it? It would destroy the credibility of a very important institution, one that has served the country well. But have you seen any evidence that the modern conservative movement cares about such things?

                        Posted by on Monday, October 6, 2014 at 12:24 AM in Economics, Politics, Taxes | Permalink  Comments (88)


                        Links for 10-06-14

                          Posted by on Monday, October 6, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (64)


                          Sunday, October 05, 2014

                          Fed Watch: Is There a Wage Growth Puzzle?

                          Tim Duy:

                          Is There a Wage Growth Puzzle?, by Tim Duy: Is there a wage growth puzzle? Justin Wolfers says there is, and uses this picture:

                          WOLFERS

                          to claim:
                          This puzzle isn’t entirely new, as the usual link between unemployment and the rate of wage growth has totally broken down over recent years.
                          ​ The recent data have made a sharp departure from the usual textbook analysis in which a tighter labor market leads to faster wage growth, and subsequent cost pressures feed through to higher inflation.
                          But has the link between wage growth and unemployment "totally broken down"? Eyeball econometrics alone suggests reason to be cautious with this claim as the only deviation from the typical unemployment/wage growth relationship is the "swirlogram" of fairly high wage growth relative to unemployment through the end of 2011 or so. But is this a breakdown or a typical pattern of a fairly severe recession? While, it might seem unusual if you begin the sample at 1985 as Wolfers did, so let's see what the 1980-85 episode looks like:

                          PHILa100314

                          Same swirlogram. Compare the two recessions:

                          PHILd100314

                          Fairly similar patterns, although in the 80-85 episode there was more room to push down the inflation expectations component of wage growth. It would appear that in the face of severe contractions, wage adjustment is slow. Now consider the 1985-1990 period:

                          PHILb100314

                          Notice that wage growth is stagnant until unemployment moves below 6% - past experience thus suggests that we should not expect significant wage growth until we move well below 6% (you could argue the response actually began at 6.5%). Thus, it is premature to believe that there has been a breakdown in this relationship. So far, the response of wages is exactly what you should have expected in light of the 1980's dynamics. Which leads to two points:
                          1. I am no fan of Dallas Federal Reserve President Richard Fisher. That said, he did not pick 6.1% out of a hat when he said that was the point at which wage growth has tended to accelerate in the past. That number fell out of his staff's research for a reason and surprises me not one bit.
                          2. There is a reason the Fed picked 6.5% unemployment for the Evan's rule. There was absolutely no chance that that would be a meaningful number as far as labor market healing is concerned.
                          Consider now the sample since 1990:

                          PHILc100314

                          Note four points:
                          1. Notice the minor "swirlogram" associated with the early-90's recession. Again, not a breakdown.
                          2. After 1992, wage growth tends to move sideways until unemployment sinks below 6%.
                          3. Since 2012, the relationship is as traditional theory would suggest, a point that is actually evident on Wolfer's chart as well. The R-squared on the regression line is 0.75. Although notice that again, as wage growth moves into that 2.5% range, it appears to once again move mostly sideways. No mystery - nothing we haven't seen before.
                          4. Clearly, there is some noise in the relationship. You should be able to extract away from the noise and recognize that there is no sudden acceleration in wage growth.
                          Now let's take another step and consider the relationship between unemployment and real wages (note that the series ends in 2014:8 - we don't have the September PCE price data yet):

                          PHILf100314

                          The period of the Great Disinflation was generally associated with negative real wage growth. The period of the mid-90s to the Great Recession was generally associated with positive real wage growth. The swirlogram of the Great Recession is again evident, but notice that as unemployment approached the bottom end of the black regression line (R-squared = 0.65), real wage growth actually accelerated before returning to trend. I now have additional sympathy for firms that have complained in the past two years that they could not push wage growth through to higher prices. It does appear that real wage growth was faster than might be expected given the pace of economic activity and, by extension, the level of unemployment.
                          Oh - and real wage growth has reverted to the pre-Great Recession trend - pretty much exactly where you would expect it to be given the level of unemployment. Honestly, this one surprised me.
                          Which suggests that labor market healing has progressed much further than many progressives would like to admit. Many conservatives as well.
                          Which also means a lot of people are not going to like this chart.
                          And before you complain that the all-employee average wage data holds some great secret that is not in the production and nonsupervisory wage series (I have trouble taking seriously any sweeping generalizations of the business cycle dynamics of a series we only have through one business cycle), here is that version:

                          PHILg100314

                          Same swirlogram. Pretty much the same idea with wage growth heading right back to where you would expect prior to the great recession.
                          Bottom Line: Be cautious in assuming that this time is different. The unemployment and wage growth dynamics to date are actually very similar to what we have seen in the past. Low wage growth to date is not the "smoking gun" of proof of the importance of underemployment measures. There very well may have been much more labor market healing that many are willing to accept, even many FOMC members. The implications for monetary policy are straightforward - it suggests the risk leans toward tighter than anticipated policy.

                            Posted by on Sunday, October 5, 2014 at 12:18 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (36)


                            Links for 10-05-14

                              Posted by on Sunday, October 5, 2014 at 08:01 AM in Economics, Links | Permalink  Comments (48)


                              Saturday, October 04, 2014

                              Links for 10-04-14

                                Posted by on Saturday, October 4, 2014 at 09:19 AM Permalink  Comments (112)


                                Friday, October 03, 2014

                                'Comments on Employment Report: Party Like it's 1999!'

                                Bill McBride on today's employment report:

                                Comments on Employment Report: Party Like it's 1999!: Earlier: September Employment Report: 248,000 Jobs, 5.9% Unemployment Rate

                                This was a solid report with 248,000 jobs added and combined upward revisions to July and August of 69,000. As always we shouldn't read too much into one month of data, but at the current pace (through September), the economy will add 2.72 million jobs this year (2.64 million private sector jobs). Right now 2014 is on pace to be the best year for both total and private sector job growth since 1999.

                                A few other positives: the unemployment rate declined to 5.9% (the lowest level since July 2008), U-6 (an alternative measure for labor underutilization) was at the lowest level since 2008, the number of part time workers for economic reasons declined slightly (lowest since October 2008), and the number of long term unemployed declined to the lowest level since January 2009.

                                Unfortunately wage growth is still subdued. From the BLS: "Average hourly earnings for all employees on private nonfarm payrolls, at $24.53, changed little in September (-1 cent). Over the year, average hourly earnings have risen by 2.0 percent. In September, average hourly earnings of private-sector production and nonsupervisory employees were unchanged at $20.67."

                                With the unemployment rate at 5.9%, there is still little upward pressure on wages. Wages should pick up as the unemployment rate falls over the next couple of years, but with the currently low inflation and little wage pressure, the Fed will likely remain patient.

                                A few more numbers...

                                [Dean Baker's comments are here.]

                                  Posted by on Friday, October 3, 2014 at 08:10 AM in Economics, Unemployment | Permalink  Comments (89)


                                  Paul Krugman: Depression Denial Syndrome

                                  What is the price for getting it wrong?:

                                  Depression Denial Syndrome, by Paul Krugman, Commentary, NY Times: Last week, Bill Gross, the so-called bond king, abruptly left Pimco, the investment firm he had managed for decades. People who follow the financial industry were shocked but not exactly surprised; tales of internal troubles at Pimco had been all over the papers. But why should you care?
                                  The answer is that Mr. Gross’s fall is a symptom of a malady that continues to afflict major decision-makers, public and private. Call it depression denial syndrome: the refusal to acknowledge that the rules are different in a persistently depressed economy. ...
                                  Now, we normally think of deficits as a bad thing — government borrowing competes with private borrowing, driving up interest rates, hurting investment... But, since 2008, we have ... been stuck in a liquidity trap... In this situation,... deficits needn’t cause interest rates to rise. ...
                                  All this may sound strange and counterintuitive, but it’s what basic macroeconomic analysis tells you. ... But many, perhaps most, influential people in the alleged real world refused to believe...
                                  Which brings me back to Mr. Gross.
                                  For a time, Pimco — where Paul McCulley, a managing director at the time, was one of the leading voices explaining the logic of the liquidity trap — seemed admirably calm about deficits, and did very well as a result. ...
                                  Then something changed. Mr. McCulley left Pimco at the end of 2010..., and Mr. Gross joined the deficit hysterics, declaring that low interest rates were “robbing” investors and selling off all his holdings of U.S. debt. In particular, he predicted a spike in interest rates when the Fed ended a program of debt purchases in June 2011. He was completely wrong, and neither he nor Pimco ever recovered.
                                  So is this an edifying tale in which bad ideas were proved wrong by experience, people’s eyes were opened, and truth prevailed? Sorry, no. In fact, it’s very hard to find any examples of people who have changed their minds. People who were predicting soaring inflation and interest rates five years ago are still predicting soaring inflation and interest rates today, vigorously rejecting any suggestion that they should reconsider their views in light of experience.
                                  And that’s what makes the Bill Gross story interesting. He’s pretty much the only major deficit hysteric to pay a price for getting it wrong (even though he remains, of course, immensely rich). Pimco has taken a hit, but everywhere else the reign of error continues undisturbed.

                                    Posted by on Friday, October 3, 2014 at 12:24 AM in Budget Deficit, Economics | Permalink  Comments (83)


                                    Thinking the Unthinkable: The Effects of a Money-Financed Fiscal Stimulus

                                    Jordi Gali:

                                    Thinking the Unthinkable: The Effects of a Money-Financed Fiscal Stimulus, by Jordi Galí, Vox EU: Many unconventional policies adopted by central banks in response to the Crisis failed to boost the economy. This column discusses the effects of a temporary money-financed fiscal stimulus. When a more realistic model is allowed, such a stimulus can have a strong effect on output and employment, and a mild effect on inflation. 

                                    He ends with:

                                    The time may have come to leave old prejudices behind and come to terms with the urgent need to increase aggregate demand in a more foolproof way than tried up to now, especially in the Eurozone. The option of a money-financed fiscal stimulus should be considered seriously.

                                      Posted by on Friday, October 3, 2014 at 12:15 AM in Economics, Fiscal Policy | Permalink  Comments (68)


                                      Links for 10-03-14

                                        Posted by on Friday, October 3, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (59)


                                        Thursday, October 02, 2014

                                        Is Blogging or Tweeting about Research Papers Worth It?

                                        Via the Lindau blog:

                                        The verdict: is blogging or tweeting about research papers worth it?, by Melissa Terras: Eager to find out what impact blogging and social media could have on the dissemination of her work, Melissa Terras took all of her academic research, including papers that have been available online for years, to the web and found that her audience responded with a huge leap in interest...

                                        Just one quick note. This is what happened when one person started promoting her research through social media. If everyone does it, and there is much more competition for eyeballs, the results might differ.

                                          Posted by on Thursday, October 2, 2014 at 09:02 AM in Academic Papers, Economics, Weblogs | Permalink  Comments (7)


                                          Why is our Infant Mortality so Bad?

                                          Aaron Carroll:

                                          So why is our infant mortality so bad?: ...Everyone knows that in international comparisons, the infant mortality rate in the US is terrible. Some people think it’s because we code things differently and try harder to save premature babies. Others think that’s not true, and that this points to other problems in the health care system.
                                          As always, though, it’s probably a mixture of many things. A new NBER working paper gets at just that. “Why is Infant Mortality Higher in the US than in Europe?” ... What did they find?
                                          Reporting differences ... explained up to 40% of the disadvantage in US infant mortality. But that would only get us closer. It would still leave us way worse. ... What accounted for the real disadvantage was postneonatal mortality, or mortality from one month to one year of age. That difference was almost entirely due to excess inequality in the US. ...
                                          So there are two main takeaways from this paper. The first is that although reporting differences can account for some of our worse infant mortality statistics, most of the differences we see are not due to that explanation. The second is that most of the rest of the disadvantage is due to differences in postneonatal mortality, that likely require fixes to the healthcare system. Whether the ACA does so remains to be seen.

                                            Posted by on Thursday, October 2, 2014 at 08:50 AM in Economics, Health Care, Income Distribution | Permalink  Comments (22)


                                            Links for 10-02-14

                                              Posted by on Thursday, October 2, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (95)


                                              Wednesday, October 01, 2014

                                              The Contribution of Fiscal Policy to Real GDP Growth

                                              Fiscal_Impact9_30_14

                                              [From Brookings]

                                              The fiscal impact measure shows how much federal, state, and local government taxes and spending added to or subtracted from the overall pace of economic growth. Between 2008 and 2011, fiscal impact was positive, indicating that government policy was stimulative; in recent years, it has been negative, indicating restraint. (For more detail on how this measure was constructed and how to interpret it, see our methodology.)

                                                Posted by on Wednesday, October 1, 2014 at 10:26 AM in Economics, Fiscal Policy | Permalink  Comments (63)


                                                'Americans Work Too Long (and Too Often at Strange Times)'

                                                I'm not so sure that the solution to Americans working "strange hours" is "to revert to the shop-closing laws (Blue Laws) that prevailed in the US years ago." What do you think?:

                                                Americans work too long (and too often at strange times), by Daniel S. Hamermesh, Elena Stancanelli, Vox EU: The facts on work hours and timing The average US workweek is 41 hours, 3 hours longer than Britain’s and even longer than in Germany, France, Spain, or the Netherlands (see the Table below).

                                                • 32% of American employees work 45 or more hours, compared with 18% in Germany, and 4% in France.
                                                • Only in the UK does the percentage of employees putting in these long hours approach the US one.

                                                Over a year, the average American employee puts in 1,800 hours, which is more than any other wealthy country, even Japan. What is remarkable is the change during the past three decades. In 1979, Americans looked little different from workers in these other countries, working about the same number of hours per year as the French or the British, and many fewer hours than Japanese. Since then, employees in other countries have begun to take it easier, to enjoy their riches, but Americans have not.

                                                The picture is even bleaker than these numbers suggest. Not only do Americans work longer hours than their European counterparts, but they are much more likely to work at night and on weekends.

                                                • 27% of US employees perform some work between 10 p.m. and 6 a.m.
                                                • In France, the Netherlands, Spain, and Germany the comparable fractions are much lower. Even in the UK, only 19 % of workers are on the job at night. 

                                                Work on weekends is also more common in the US than in other rich countries, with 29% of American workers doing some work on weekends, far above Germany, France, Spain, and the Netherlands; and even in the UK only 25% of employees do some work on weekends. But despite their greater likelihood of working at these strange times, those Americans who work then put in no more hours per day than the smaller numbers of European workers who are on the job at nights and weekends.

                                                Table 1.  Characteristics of work hours in the US and elsewhere: Amounts and timing

                                                Voxeu1

                                                Source:  Hamermesh and Stancanelli (2014)

                                                Why these facts matter

                                                Weekend and night work is not attractive to most workers. Unsurprisingly, therefore, it generates, on average, higher pay per hour than work at ‘normal’ times—wage differentials that compensate for the undesirability of working at unattractive hours (Kostiuk 1990). Also unsurprisingly, it attracts workers with the least human capital. In the US and Germany, young workers, those with less education, and immigrants are more likely than other employees to work at these times. In the US, minorities are also more likely to perform weekend and night work (Hamermesh 1996). The burden of working at unpleasant times falls disproportionately on those who have the least earning power.

                                                Are the phenomena related?

                                                If Americans’ workweeks were shortened to European levels, would their likelihood of working at these strange times drop to European levels? Do the American labour market, institutions, and culture make night and weekend work more prevalent independent of the length of the workweek?

                                                To answer the titular question of this section, we examine the determinants of the probability of night work using data from various time-diary surveys for the US and France, Germany, the Netherlands, Spain, and the UK. For the US, we relate these probabilities to workers’ weekly work-hours and a large number of their demographic characteristics—age, immigrant and urban status, educational attainment, and others. 

                                                • Compared to those working 40 hours, American employees putting in 65+ hours per week are 44% more likely also to work on weekends, and 37% more likely to work at night. The phenomena of long hours and strange hours are related.

                                                If we simulate what would happen to the probabilities of weekend and night work if the US had the same distributions of weekly work-hours as each of the 5 European countries, not surprisingly, those probabilities would drop -- but not very much. Even with France’s short workweeks, 25% of American employees would still be working on weekends, as high as the highest percentage in any of these 5 countries; and 22% would still be working at night, well above even the highest percentage in Europe. Even if no American worked more than 45 hours per week, the percentage performing weekend work would fall only to 24, and the percentage doing night work would fall only to 25.

                                                Even with a reduction in American workweeks that lowered American work-hours down to European hours, Americans would be doing more night and weekend work than Europeans. Looking at time-diary data from the mid-1970s, this result should not be surprising. For example, at that time 26% of American employees worked on weekends, whereas only 14% of Dutch employees did so, both about the same as today, even though the Dutch and American workweeks were then much closer in length than they are today. 

                                                Why, and what to do (if anything)?

                                                Why are Americans so much more likely to work at strange times than Europeans? The results here show that it is not because Americans work more than Europeans.

                                                • One cause might be the greater inequality of earnings in the US that induces low-skilled workers -- earning relatively less than low-skilled Europeans -- to desire more work at times that pays a wage premium. 
                                                • Another possibility is cultural, so that Americans just enjoy working at these times more than their European counterparts. But citing cultural differences is an easy way to avoid thinking or doing anything about an issue. 

                                                Many European countries impose penalties on work at nights and on weekends, with some of the penalties being quite severe (Cardoso et al. 2012). The evidence in Cardoso et al. (2012) suggests that imposing penalties on night and/or weekend work will reduce its incidence. Work at different times of the week is substitutable, and employers are responsive to changing incentives to alter the timing of work. But that evidence also shows that even substantial incentives do not produce huge changes in work timing. If we really want to reduce the amount of work that occurs at times that are viewed as unpleasant, the solution may be to revert to the shop-closing laws (Blue Laws) that prevailed in the US years ago. No free-marketer would like this, but it may well be worth reviving these laws in order to get the US out of what might be a low-level, rat-race equilibrium.

                                                References:

                                                Cardoso, A R, D Hamermesh and J Varejão (2012), “The Timing of Labor Demand,” Annals of Economics and Statistics, 105/106, 15-34.

                                                Hamermesh, D (1996), Workdays, Workhours and Work Schedules: Evidence for the United States and Germany, Kalamazoo, MI: The W.E. Upjohn Institute.

                                                Hamermesh, D and E Stancanelli (2014), “Long Workweeks and Strange Hours,” National Bureau of Economic Research, Working Paper No. 20449.

                                                Kostiuk, P (1990), “Compensating Differentials for Shift Work,” Journal of Political Economy, 98(3), 1054-75.

                                                  Posted by on Wednesday, October 1, 2014 at 10:24 AM in Economics | Permalink  Comments (37)


                                                  The Unemployment Rate is an 'Inadequate Measure of Slack'

                                                  Jared Bernstein says there's more slack in the labor market than you'd think from just looking at the unemployment rate:

                                                  ...So why not just look at the unemployment rate and call it a day? Because special factors in play right now make the jobless rate an inadequate measure of slack. In fact, at 6.1 percent last month, it’s within spitting distance of the rate many economists consider to be consistent with full employment, about 5.5 percent (I think that’s too high, but that’s a different argument).
                                                  There are at least two special factors that are distorting the unemployment rate’s signal. First, there are over seven million involuntary part-time workers, almost 5 percent of the labor force, who want, but can’t find, full-time jobs. That’s still up two percentage points from its pre-recession trough. Importantly, the unemployment rate doesn’t capture this dimension of slack at all...
                                                  The second special factor masking the extent of slack as measured by unemployment has to do with participation in the labor force. Once you give up looking for work, you’re no longer counted in the unemployment rate, so if a bunch of people exit the labor force because of the very slack we’re trying to measure, it artificially lowers unemployment, making a weak labor market look better.
                                                  That’s certainly happened over the recession and throughout the recovery...

                                                  There's still plenty of room, and plenty of time for fiscal policymakers to do more to help the unemployed (and with infrastructure, our future economic growth at the same time). Unfortunately, Congress has been captured by other interests. As for monetary policy, let's hope that the FOMC listens to Charles Evans' call for patience. Raising rates too late and risking a temporary outbreak of inflation is far less of a mistake than raising them too early and slowing the recovery of employment. And there's this too: Unemployment Hurts Happiness More Than Modest Inflation.

                                                    Posted by on Wednesday, October 1, 2014 at 09:01 AM in Economics, Fiscal Policy, Monetary Policy, Politics, Unemployment | Permalink  Comments (24)


                                                    Links for 10-01-14

                                                      Posted by on Wednesday, October 1, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (143)


                                                      Tuesday, September 30, 2014

                                                      Highest Ranked, but It's Not Good News

                                                      Martin Wolf, in "Why inequality is such a drag on economies":

                                                      ...in 2012, says the Organisation for Economic Co-operation and Development, the US ranked highest among the high-income countries in the share of relatively low-paying jobs. ...

                                                        Posted by on Tuesday, September 30, 2014 at 11:50 AM in Economics, Income Distribution | Permalink  Comments (10)


                                                        'Why Have Policymakers Abandoned the Working Class?'

                                                        I have a new column:

                                                        Why Have Policymakers Abandoned the Working Class?, by Mark Thoma: The risks associated with a negative economic shock can vary widely depending on the wealth of a household. Wealthy households can, of course, absorb a shock much easier than poorer households. Thus, it’s important to think about how economic downturns impact various groups within the economy, and how policy can be used to offset the problems experienced by the most vulnerable among us.
                                                        When thinking about the effects of an increase in the Fed’s target interest rate, for example, it’s important to consider the impacts across income groups. I was very pleased to hear monetary policymakers talk about the asymmetric risks associated with increasing the interest rate too soon and slowing the recovery of employment and output, versus raising rates too late and risking inflation. ...
                                                        But there is more to it than this. ...

                                                          Posted by on Tuesday, September 30, 2014 at 07:28 AM in Economics, Fiscal Policy, Monetary Policy, Social Insurance | Permalink  Comments (56)


                                                          'The Silver Lining in Falling College Enrollment'

                                                          At MoneyWatch:

                                                          The silver lining in falling college enrollment, by Mark Thoma: College enrollment "declined by close to half a million (463,000) between 2012 and 2013, marking the second year in a row that a drop of this magnitude has occurred," according to a report from the Census Bureau. And it's the largest two-year drop since Census began collecting enrollment data in 1966. Notably, the decline was concentrated in two-year colleges.
                                                          It is, of course, desirable to have a more educated population, particularly in an era of globalization and technological change that makes it harder for low-skilled workers to find good jobs. But the report also has a silver lining. ...

                                                            Posted by on Tuesday, September 30, 2014 at 07:28 AM in Economics, Universities | Permalink  Comments (10)


                                                            Links for 9-30-14

                                                              Posted by on Tuesday, September 30, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (98)


                                                              Monday, September 29, 2014

                                                              'Why Are Economic Forecasts Wrong So Often?'

                                                              At MoneyWatch:

                                                              Why are economic forecasts wrong so often?: The Queen of England famously asked why economists failed to foresee the financial crisis in 2008. "Why did nobody notice it?" was her question when she visited the London School of Economics that year.
                                                              Economists' failure to accurately predict the economy's course isn't limited to the financial crisis and the Great Recession that followed. Macroeconomic computer models also aren't very useful for predicting how variables such as GDP, employment, interest rates and inflation will evolve over time.
                                                              Forecasting most things is fraught with difficulty. See the current dust-up between Nate Silver and Sam Wang over their conflicting predictions about the coming Senate elections. Why is forecasting so hard?
                                                              Because so many things can go wrong. For example...

                                                                Posted by on Monday, September 29, 2014 at 08:20 AM in Econometrics, Economics | Permalink  Comments (29)


                                                                'Reconstructing Macroeconomic Theory to Manage Economic Policy'

                                                                New paper from Joseph Stiglitz:

                                                                Reconstructing Macroeconomic Theory to Manage Economic Policy, by Joseph E. Stiglitz, NBER Working Paper No. 20517, September 2014 NBER: Macroeconomics has not done well in recent years: The standard models didn't predict the Great Recession; and even said it couldn't happen. After the bubble burst, the models did not predict the full consequences.
                                                                The paper traces the failures to the attempts, beginning in the 1970s, to reconcile macro and microeconomics, by making the former adopt the standard competitive micro-models that were under attack even then, from theories of imperfect and asymmetric information, game theory, and behavioral economics.
                                                                The paper argues that any theory of deep downturns has to answer these questions: What is the source of the disturbances? Why do seemingly small shocks have such large effects? Why do deep downturns last so long? Why is there such persistence, when we have the same human, physical, and natural resources today as we had before the crisis?
                                                                The paper presents a variety of hypotheses which provide answers to these questions, and argues that models based on these alternative assumptions have markedly different policy implications, including large multipliers. It explains why the apparent liquidity trap today is markedly different from that envisioned by Keynes in the Great Depression, and why the Zero Lower Bound is not the central impediment to the effectiveness of monetary policy in restoring the economy to full employment.

                                                                [I couldn't find an open link.]

                                                                  Posted by on Monday, September 29, 2014 at 08:16 AM in Academic Papers, Economics | Permalink  Comments (17)


                                                                  Paul Krugman: Our Invisible Rich

                                                                  The difference between the rich and the poor is larger than most people realize:

                                                                  Our Invisible Rich, by Paul Krugman, Commentary, NY Times: Half a century ago, a classic essay in The New Yorker titled “Our Invisible Poor” took on the then-prevalent myth that America was an affluent society with only a few “pockets of poverty.” For many, the facts about poverty came as a revelation...
                                                                  I don’t think the poor are invisible today... Instead, these days it’s the rich who are invisible. ... In fact, most Americans have no idea just how unequal our society has become.
                                                                  The latest piece of evidence to that effect is a survey asking people in various countries how much they thought top executives of major companies make relative to unskilled workers. In the United States the median respondent believed that chief executives make about 30 times as much as their employees, which was roughly true in the 1960s — but since then the gap has soared, so that today chief executives earn something like 300 times as much as ordinary workers.
                                                                  So Americans have no idea how much the Masters of the Universe are paid, a finding very much in line with evidence that Americans vastly underestimate the concentration of wealth at the top. ...
                                                                  So how can people be unaware of this development, or at least unaware of its scale? The main answer, I’d suggest, is that the truly rich are so removed from ordinary people’s lives that we never see what they have. We may notice, and feel aggrieved about, college kids driving luxury cars; but we don’t see private equity managers commuting by helicopter to their immense mansions in the Hamptons. The commanding heights of our economy are invisible because they’re lost in the clouds. ...
                                                                  Does the invisibility of the very rich matter? Politically, it matters a lot. Pundits sometimes wonder why American voters don’t care more about inequality; part of the answer is that they don’t realize how extreme it is. ...
                                                                  Most Americans say, if asked, that inequality is too high and something should be done about it — there is overwhelming support for higher minimum wages, and a majority favors higher taxes at the top. But at least so far confronting extreme inequality hasn’t been an election-winning issue. Maybe that would be true even if Americans knew the facts about our new Gilded Age. But we don’t know that. Today’s political balance rests on a foundation of ignorance, in which the public has no idea what our society is really like.

                                                                    Posted by on Monday, September 29, 2014 at 12:24 AM in Economics, Income Distribution | Permalink  Comments (139)


                                                                    Links for 9-29-14

                                                                      Posted by on Monday, September 29, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (80)


                                                                      Sunday, September 28, 2014

                                                                      'The Fed Would be Crazy to Worry about Runaway Wages'

                                                                      Rex Nutting:

                                                                      The Fed would be crazy to worry about runaway wages: Richard Fisher and Charles Plosser, the two biggest inflation hawks at the Federal Reserve, are retiring soon. But their pernicious ideas will stay alive at the Fed and elsewhere, threatening the middle class with another lost decade of underemployment and low wages.
                                                                      Fisher, Plosser and the other hawks say inflation is becoming our greatest economic worry. They want the Fed to raise interest rates soon to keep the unemployment rate from dropping too far and to prevent American workers from getting a raise.
                                                                      They would rather have you to stay jobless and poor.
                                                                      You may think I’m exaggerating their views, but I’m not. ...

                                                                        Posted by on Sunday, September 28, 2014 at 12:14 PM in Economics, Inflation, Monetary Policy | Permalink  Comments (33)


                                                                        'The rise of China and the Future of US Manufacturing'

                                                                        Acemoglu, Autor, Dor, Hansen, and Price (I've noted this paper once or twice already in recent months, but thought it worthwhile to post their summary of te work):

                                                                        The rise of China and the future of US manufacturing, by Daron Acemoglu, David Autor, David Dorn, Gordon H. Hanson, and Brendan Price, Vox EU: The end of the Great Recession has rekindled optimism about the future of US manufacturing. In the second quarter of 2010 the number of US workers employed in manufacturing registered positive growth – its first increase since 2006 – and subsequently recorded ten consecutive quarters of job gains, the longest expansion since the 1970s. Advocating for the potential of an industrial turnaround, some economists give a positive spin to US manufacturing’s earlier troubles: while employment may have fallen in the 2000s, value added in the sector has been growing as fast as the overall US economy. Its share of US GDP has kept stable, an achievement matched by few other high-income economies over the same period (Lawrence and Edwards 2013, Moran and Oldenski 2014). The business press has giddily coined the term ‘reshoring’ to describe the phenomenon – as yet not well documented empirically – of companies returning jobs to the United States that they had previously offshored to low-wage destinations. 
                                                                        Before we declare a renaissance for US manufacturing, it is worth re-examining the magnitude of the sector’s previous decline and considering the causal factors responsible for job loss. The scale of the employment decline is indeed stunning. Figure 1 shows that in 2000, 17.3 million US workers were employed in manufacturing, a level that with periodic ups and downs had changed only modestly since the early 1980s. By 2010, employment had dropped to 11.5 million workers, a 33% decrease from 2000. Strikingly, most of this decline came before the onset of the Great Recession. In the middle of 2007, on the eve of the Lehman Brothers collapse that paralysed global financial markets, US manufacturing employment had already dipped to 13.9 million workers, such that three-fifths of the job losses over the 2000 to 2010 period occurred prior to the US aggregate contraction. Figure 1 also reveals the paltriness of the recent manufacturing recovery. As of mid-2014, the number of manufacturing jobs had reached only 12.1 million, a level far below the already diminished pre-recession level.

                                                                        Figure 1. US employment , 1980q1-2014q3

                                                                        Source: US Bureau of Labor Statistics.

                                                                        We examine the reasons behind the recent decline in US manufacturing employment (Acemoglu et al. 2014). Our point of departure is the coincidence of the 2000s swoon in US manufacturing and a significant increase in import competition from China (Bernard et al. 2006). Between 1990 and 2011 the share of global manufacturing exports originating in China surged from two to 16% (Hanson 2012). This widely heralded export boom was the outcome of deep economic reforms that China enacted in the 1980s and 1990s, which were further extended by the country’s joining the World Trade Organization in 2001 (Brandt et al. 2012, Pierce and Schott 2013). China’s share in US manufacturing imports has expanded in concert with its global presence, rising from 5% in 1991 to 11% in 2001 before leaping to 23% in 2011. Could China’s rise be behind US manufacturing’s fall?
                                                                        The first step in our analysis is to estimate the direct impact of import competition from China on US manufacturing industries. Suppose that the economic opening in China allows the country to realise a comparative advantage in manufacturing that had lain dormant during the era of Maoist central planning, which entailed near prohibitive barriers to trade. As reform induces China to reallocate labour and capital from farms to factories and from inefficient state-owned enterprises to more efficient private businesses, output will expand in the sectors in which the country’s comparative advantage is strongest. China’s abundant labour supply and relatively scarce supply of arable land and natural resources make manufacturing the primary beneficiary of reform-induced industrial restructuring. The global implications of China’s reorientation toward manufacturing – strongly abetted by inflows of foreign direct investment – are immense. China accounts for three-quarters of all growth in manufacturing value added that has occurred in low and middle income economies since 1990.
                                                                        For many US manufacturing firms, intensifying import competition from China means a reduction in demand for the goods they produce and a corresponding contraction in the number of workers they employ. Looking across US manufacturing industries whose outputs compete with Chinese import goods, we estimate that had import penetration from China not grown after 1999, there would have been 560,000 fewer manufacturing jobs lost through 2011. Actual US manufacturing employment declined by 5.8 million workers from 1999 to 2011, making the counterfactual job loss from the direct effect of greater Chinese import penetration amount to 10% of the realised job decline in manufacturing.
                                                                        These direct effects of trade exposure do not capture the full impact of growing Chinese imports on US employment. Negative shocks to one industry are transmitted to other industries via economic linkages between sectors. One source of linkages is buyer-supplier relationships (Acemoglu et al. 2012). Rising import competition in apparel and furniture – two sectors in which China is strong – will cause these ‘downstream’ industries to reduce purchases from the ‘upstream’ sectors that supply them with fabric, lumber, and textile and woodworking machinery. Because buyers and suppliers often locate near one another, much of the impact of increased trade exposure in downstream industries is likely to transmit to suppliers in the same regional or national market. We use US input-output data to construct downstream trade shocks for both manufacturing and non-manufacturing industries. Estimates from this exercise indicate sizeable negative downstream effects. Applying the direct plus input-output measure of exposure increases our estimates of trade-induced job losses for 1999 to 2011 to 985,000 workers in manufacturing and to two million workers in the entire economy. Inter-industry linkages thus magnify the employment effects of trade shocks, almost doubling the size of the impact within manufacturing and producing an equally large employment effect outside of manufacturing.
                                                                        Two additional sources of linkages between sectors operate through changes in aggregate demand and the reallocation of labour. When manufacturing contracts, workers who have lost their jobs or suffered declines in their earnings subsequently reduce their spending on goods and services. The contraction in demand is multiplied throughout the economy via standard Keynesian mechanisms, depressing aggregate consumption and investment. Helping offset these negative aggregate demand effects, workers who exit manufacturing may take up jobs in the service sector or elsewhere in the economy, replacing some of the earnings lost in trade-exposed industries. Because aggregate demand and reallocation effects work in opposing directions, we can only detect their net impact on total employment. A further complication is that these impacts operate at the level of the aggregate economy – as opposed to direct and input-output effects of trade shocks which operate at the industry level – meaning we have only as many data points to detect their presence as we have years since the China trade shock commenced. Since China’s export surge did not hit with full force until the early 1990s, the available time series for the national US economy is disconcertingly short.
                                                                        To address this data challenge, we supplement our analysis of US industries with an analysis of US regional economies. We define regions to be ‘commuting zones’ which are aggregates of commercially linked counties that comprise well-defined local labour markets. Because commuting zones differ sharply in their patterns of industrial specialisation, they are differentially exposed to increased import competition from China (Autor et al. 2013). Asheville, North Carolina, is a furniture-making hub, putting it in the direct path of the China maelstrom. In contrast, Orlando, Florida (of Disney and Harry Potter World Fame), focuses on tourism, leaving it lightly affected by rising imports of manufactured goods. If the reallocation mechanism is operative, then when a local industry contracts as a result of Chinese competition, some other industry in the same commuting zone should expand. Aggregate demand effects should also operate within local labour markets, as shown by Mian and Sufi (2014) in the context of the recent US housing bust. If increased trade exposure lowers aggregate employment in a location, reduced earnings will decrease spending on non-traded local goods and services, magnifying the impact throughout the local economy.
                                                                        Our estimates of the net impact of aggregate demand and reallocation effects imply that import growth from China between 1999 and 2011 led to an employment reduction of 2.4 million workers. This figure is larger than the 2.0 million job loss estimate we obtain for national industries, which only captures direct and input-output effects. But it still likely understates the full consequences of the China shock on US employment. Neither our analysis for commuting zones nor for national industries fully incorporates all of the adjustment channels encompassed by the other. The national-industry estimates exclude reallocation and aggregate demand effects, whereas the commuting-zone estimates exclude the national component of these two effects, as well as the non-local component of input-output linkage effects. Because the commuting zone estimates suggest that aggregate forces magnify rather than offset the effects of import competition, we view our industry-level estimates of employment reduction as providing a conservative lower bound.
                                                                        What do our findings imply about the potential for a US manufacturing resurgence? The recent growth in manufacturing imports to the US is largely a consequence of China’s emergence on the global stage coupled with its deep comparative advantage in labour-intensive goods. The jobs in apparel, furniture, shoes, and other wage-sensitive products that the United States has lost to China are unlikely to return. Even as China’s labour costs rise, the factories that produce these goods are more likely to relocate to Bangladesh, Vietnam, or other countries rising in China’s wake than to reappear on US shores. Further, China’s impact on US manufacturing is far from complete. During the 2000s, the country rapidly expanded into the assembly of laptops and cell-phones, with production occurring increasingly under Chinese brands, such as Lenovo and Huawei. Despite this rather bleak panorama, there are sources of hope for manufacturing in the United States. Perhaps the most encouraging sign is that the response of many companies to increased trade pressure has been to increase investment in innovation (Bloom et al. 2011). The ensuing advance in technology may ultimately help create new markets for US producers. However, if the trend toward the automation of routine jobs in manufacturing continues (Autor and Dorn 2013), the application of these new technologies is likely to do much more to boost growth in value added than to expand employment on the factory floor.
                                                                        References
                                                                        Acemoglu D, V Carvalho, A Ozdaglar, and A Tahbaz-Salehi (2012), “The Network Origins of Aggregate Fluctuations.” Econometrica, 80(5): 1977-2016.
                                                                        Acemoglu D, D H Autor, D Dorn, G H Hanson, and B Price (2014), “Import Competition and the Great US Employment Sag of the 2000s.” NBER Working Paper No. 20395.
                                                                        Autor, D H and D Dorn (2013), “The Growth of Low Skill Service Jobs and the Polarization of the US Labor Market.” American Economic Review, 103(5), 1553-1597.
                                                                        Autor D H, D Dorn, and G H Hanson (2013a) “The China Syndrome: Local Labor Market Effects of Import Competition in the United States.” American Economic Review, 103(6): 2121-2168.
                                                                        Bernard A B, J B Jensen, and P K Schott (2006), “Survival of the Best Fit: Exposure to Low-Wage Countries and the (Uneven) Growth of US Manufacturing Plants.” Journal of International Economics, 68(1), 219-237.
                                                                        Bloom N, M Draca, and J Van Reenen (2012), “Trade Induced Technical Change? The Impact of Chinese Imports on Innovation, IT, and Productivity.” Mimeo, Stanford University.
                                                                        Brandt L, J Van Biesebroeck, and Y Zhang (2012), “Creative Accounting or Creative Destruction? Firm-Level Productivity Growth in Chinese Manufacturing.” Journal of Development Economics, 97(2): 339-351.
                                                                        Hanson, G (2012), “The Rise of Middle Kingdoms: Emerging Economies in Global Trade.” Journal of Economic Perspectives, 26(2): 41-64.
                                                                        Mian, A and A Sufi (2014), “What Explains the 2007-2009 Drop in Employment?” Econometrica, forthcoming.
                                                                        Pierce, J R and P K Schott (2013), “The Surprisingly Swift Decline of US Manufacturing Employment.” Yale Department of Economics Working Paper, November.

                                                                          Posted by on Sunday, September 28, 2014 at 08:19 AM in Economics, International Trade, Productivity, Technology, Unemployment | Permalink  Comments (52)


                                                                          Links for 9-28-14

                                                                            Posted by on Sunday, September 28, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (59)


                                                                            Saturday, September 27, 2014

                                                                            'Seven Bad ideas'

                                                                            Paul Krugman reviews Jeff Madrick's book “Seven Bad Ideas: How Mainstream Economists Have Damaged America and the World”:

                                                                            Seven Bad Ideas: The economics profession has not, to say the least, covered itself in glory these past six years. Hardly any economists predicted the 2008 crisis — and the handful who did tended to be people who also predicted crises that didn’t happen. More significant, many and arguably most economists were claiming, right up to the moment of collapse, that nothing like this could even happen.
                                                                            Furthermore, once crisis struck economists seemed unable to agree on a response. They’d had 75 years since the Great Depression to figure out what to do if something similar happened again, but the profession was utterly divided when the moment of truth arrived.
                                                                            In “Seven Bad Ideas: How Mainstream Economists Have Damaged America and the World,” Jeff Madrick — a contributing editor at Harper’s Magazine and a frequent writer on matters economic — argues that the professional failures since 2008 didn’t come out of the blue but were rooted in decades of intellectual malfeasance. ...

                                                                              Posted by on Saturday, September 27, 2014 at 09:36 AM in Books, Economics | Permalink  Comments (41)


                                                                              'Looking at Productivity as a State of Mind'

                                                                              Sendhil Mullainathan:

                                                                              Looking at Productivity as a State of Mind: Policy makers often fret about the pace of worker productivity. But each of us also frets about the pace of our own individual productivity.
                                                                              Type the phrase “being more” into Google: The autocomplete function suggests “being more productive” as the third-most-likely choice — right behind “being more assertive” and “being more confident.” That suggests that many people are searching for answers about productivity.
                                                                              But there is a disconnect. When we look at worker productivity at the macro level, we tend to limit ourselves to issues like skill shortages, new technologies or appropriate incentives.
                                                                              In our own lives, though, we see a personal struggle. Tomorrow we want to finish that memo, review several files and plan that project. We know that some of the work will be tedious, but benefits like career advancement, fulfillment or just sheer survival outweigh the costs. When tomorrow becomes today, though, we may discover that we have all kinds of pressing problems. The tedium we had anticipated suddenly feels very large. It is tempting to take a break and just let our minds wander. In our own lives self-control is a big problem — yet it is largely absent from high-level discussions about worker productivity.
                                                                              And that raises an obvious question: By focusing so heavily on classic big-picture issues, are policy makers overlooking something that may be even more important? ...

                                                                                Posted by on Saturday, September 27, 2014 at 09:07 AM in Economics | Permalink  Comments (40)


                                                                                Links for 9-27-14

                                                                                  Posted by on Saturday, September 27, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (62)


                                                                                  Friday, September 26, 2014

                                                                                  'Why the Fed Is So Wimpy'

                                                                                  Justin Fox:

                                                                                  Why the Fed Is So Wimpy, by Justin Fox: Regulatory capture — when regulators come to act mainly in the interest of the industries they regulate — is a phenomenon that economists, political scientists, and legal scholars have been writing about for decades.  Bank regulators in particular have been depicted as captives for years, and have even taken to describing themselves as such.
                                                                                  Actually witnessing capture in the wild is different, though, and the new This American Life episode with secret recordings of bank examiners at the Federal Reserve Bank of New York going about their jobs is going to focus a lot more attention on the phenomenon. It’s really well done, and you should listen to it, read the transcript, and/or read the story by ProPublica reporter Jake Bernstein.
                                                                                  Still, there is some context that’s inevitably missing, and as a former banking-regulation reporter for the American Banker, I feel called to fill some of it in. Much of it has to do with the structure of bank regulation in the U.S., which actually seems designed to encourage capture. But to start, there are a couple of revelations about Goldman Sachs in the story that are treated as smoking guns. One seems to have fired a blank, while the other may be even more explosive than it’s made out to be. ...

                                                                                    Posted by on Friday, September 26, 2014 at 01:51 PM in Economics, Financial System, Monetary Policy, Regulation | Permalink  Comments (11)


                                                                                    'The New Classical Clique'

                                                                                    Paul Krugman continues the conversation on New Classical economics::

                                                                                    The New Classical Clique: Simon Wren-Lewis thinks some more about macroeconomics gone astray; Robert J. Waldmann weighs in. For those new to this conversation, the question is why starting in the 1970s much of academic macroeconomics was taken over by a school of thought that began by denying any useful role for policies to raise demand in a slump, and eventually coalesced around denial that the demand side of the economy has any role in causing slumps.
                                                                                    I was a grad student and then an assistant professor as this was happening, albeit doing international economics – and international macro went in a different direction, for reasons I’ll get to in a bit. So I have some sense of what was really going on. And while both Wren-Lewis and Waldmann hit on most of the main points, neither I think gets at the important role of personal self-interest. New classical macro was and still is many things – an ideological bludgeon against liberals, a showcase for fancy math, a haven for people who want some kind of intellectual purity in a messy world. But it’s also a self-promoting clique. ...

                                                                                      Posted by on Friday, September 26, 2014 at 01:51 PM in Economics, Macroeconomics, Methodology | Permalink  Comments (33)


                                                                                      'Targeting Two'

                                                                                      Carola Binder:

                                                                                      Targeting Two: In the Washington Post, Jared Bernstein asks why the Fed's inflation target is 2 percent. "The fact is that the target is 2 percent because the target is 2 percent," he writes. Bernstein refers to a paper by Laurence Ball suggesting that a 4% target could be preferable by reducing the likelihood of the economy running up against the zero lower bound on nominal interest rates.

                                                                                      Paul Krugman chimes in, adding that a 2 percent target:

                                                                                      "was low enough that the price stability types could be persuaded, or were willing to concede as a possibility, that true inflation — taking account of quality changes — was really zero. Meanwhile, as of the mid 1990s modeling efforts suggested that 2 percent was enough to make sustained periods at the zero lower bound unlikely and to lubricate the labor market sufficiently that downward wage stickiness would have minor effects. So 2 percent it was, and this rough guess acquired force as a focal point, a respectable place that wouldn’t get you in trouble. 

                                                                                      The problem is that we now know that both the zero lower bound and wage stickiness are much bigger issues than anyone realized in the 1990s."

                                                                                      Krugman calls the target "the terrible two," and laments that "Unfortunately, it’s now very hard to change the target; anything above 2 isn’t considered respectable."

                                                                                      Dean Baker also has a post in which he explains that Krugman's discussion of the 2 percent target "argues that it is a pretty much arbitrary compromise between the idea that the target should be zero (the dollar keeps its value constant forever) and the idea that we need some inflation to keep the economy operating smoothly and avoid the zero lower bound for interest rates. This is far too generous... Not only is there not much justification for 2.0 percent, there is not much justification for any target."

                                                                                      I'll add three papers, in reverse chronological order, that should be relevant to this discussion. ...

                                                                                        Posted by on Friday, September 26, 2014 at 01:13 PM in Economics, Monetary Policy | Permalink  Comments (15)


                                                                                        'Long-term Unemployed Struggle as Economy Improves'

                                                                                        The long-term unemployed need more help than they are getting:

                                                                                        Long-term Unemployed Struggle as Economy Improves: While the unemployment rate for people out of work for six months or less has returned to prerecession levels, the levels of unemployment for workers who remain jobless for more than six months is among the most persistent, negative effects of the Great Recession, according to a new national study at Rutgers. In fact, one in five workers laid off from a job during the last five years are still unemployed and looking for work, researchers from the John J. Heldrich Center for Workforce Development found.

                                                                                        Among the key findings of "Left Behind: The Long-term Unemployed Struggle in an Improving Economy":

                                                                                        • Approximately half of the laid-off workers who found work were paid less in their new positions; one in four say their new job was only temporary.
                                                                                        • Only one in five of the long-term unemployed received help from a government agency when looking for a job; only 22 percent enrolled in a training program to develop skills for a new job; and 60 percent received no government assistance beyond unemployment benefits.
                                                                                        • Nearly two-thirds of Americans support increasing funds for long-term education and training programs, and greater spending on roads and highways in order to assist unemployed workers.

                                                                                        As of last August, 3 million Americans, nearly one in three unemployed workers, have been unemployed for more than six months and more than 2 million Americans have been out of work for more than a year...

                                                                                        This research provides a detailed record of the enduring effects of the Great Recession on the unemployed and long-term unemployed five years after the economy started growing again in June 2009.

                                                                                        The survey also found that:

                                                                                        • More than seven in 10 long-term unemployed say they have less in savings and income than they did five years ago.
                                                                                        • More than eight in 10 of the long-term unemployed rate their personal financial situation negatively as only fair or poor.
                                                                                        • More than six in 10 unemployed and long-term unemployed say they experienced stress in family relationships and close friendships during their time without a job.
                                                                                        • Fifty-five percent of the long-term unemployed say they will need to retire later than planned because of the recession, while 5 percent say the weak economy forced them into early retirement.
                                                                                        • Nearly half of the long-term unemployed say it will take three to 10 years for their families to recover financially. Another one in five say it will take longer than that or that they will never recover.

                                                                                        ..."These long-term unemployed workers have been left behind to fend for themselves as they struggle to pull their lives back together."

                                                                                          Posted by on Friday, September 26, 2014 at 08:23 AM in Economics, Social Insurance, Unemployment | Permalink  Comments (14)


                                                                                          Paul Krugman: The Show-Off Society

                                                                                          When it comes to the wealthy, is this time different?:

                                                                                          The Show-Off Society, by Paul Krugman, Commentary, NY Times: Liberals talk about circumstances; conservatives talk about character.
                                                                                          This intellectual divide is most obvious when the subject is the persistence of poverty... Liberals focus on the stagnation of real wages and the disappearance of jobs offering middle-class incomes, as well as the constant insecurity that comes with not having reliable jobs or assets. For conservatives, however, it’s all about not trying hard enough. ...
                                                                                          Let us, however, be fair: some conservatives are willing to censure the rich, too. ... Peggy Noonan writes about our “decadent elites”... Charles Murray, whose book “Coming Apart” is mainly about the alleged decay of values among the white working class, also denounces the “unseemliness” of the very rich, with their lavish lifestyles and gigantic houses.
                                                                                          But has there really been an explosion of elite ostentation? ...
                                                                                          I’ve just reread a remarkable article titled “How top executives live,” originally published in Fortune in 1955 and ... it turns out that the lives of an earlier generation’s elite were, indeed, far more restrained, more seemly if you like ... And why had the elite moved away from the ostentation of the past? ... The large yacht, Fortune tells us, “has foundered in the sea of progressive taxation.”
                                                                                          But that sea has since receded. ... And there’s no mystery about what happened to the good-old days of elite restraint. ... Extreme income inequality and low taxes at the top are back. ...
                                                                                          Is there any chance that moral exhortations, appeals to set a better example, might induce the wealthy to stop showing off so much? No.
                                                                                          It’s not just that people who can afford to live large tend to do just that. As Thorstein Veblen told us long ago, in a highly unequal society the wealthy feel obliged to engage in “conspicuous consumption”... And modern social science confirms his insight. For example, researchers at the Federal Reserve have shown that people living in highly unequal neighborhoods are more likely to buy luxury cars... Pretty clearly, high inequality brings a perceived need to spend money in ways that signal status.
                                                                                          The point is that while chiding the rich for their vulgarity may not be as offensive as lecturing the poor on their moral failings, it’s just as futile. Human nature being what it is, it’s silly to expect humility from a highly privileged elite. So if you think our society needs more humility, you should support policies that would reduce the elite’s privileges.

                                                                                            Posted by on Friday, September 26, 2014 at 12:24 AM in Economics, Income Distribution | Permalink  Comments (47)


                                                                                            Links for 9-26-14

                                                                                              Posted by on Friday, September 26, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (89)


                                                                                              Thursday, September 25, 2014

                                                                                              The Shrinking Social Safety Net: Historically Small Share of Jobless People Are Receiving Unemployment Insurance

                                                                                              Epi-ui
                                                                                              [More here]

                                                                                                Posted by on Thursday, September 25, 2014 at 09:10 AM Permalink  Comments (23)


                                                                                                'What Should Monetary Policy Be?'

                                                                                                Brad DeLong wants to know if he is off his rocker (on this particular point):

                                                                                                What Should Monetary Policy Be?: Chicago Federal Reserve Bank President Charles Evans’s position seems to me to be the position that ought to be the center of gravity of the Federal Open Market Committee’s thoughts right now, with wings on all sides of it taking different views as part of a diversified intellectual portfolio. ... Yet Evans is out there on his own–with perhaps Narayana Kocherlakota beside him. ...

                                                                                                As I see it:

                                                                                                1. The past decade has demonstrated that to properly reduce the risks of hitting the zero nominal lower bound on safe short-term interest rates, we need not a 5%/year but at least a 6.5%/year business-cycle peak safe short nominal rate.1 With a 3%/year short-term peak real natural interest rate, we need not a 2%/year but a 3.5%/year inflation target instead.

                                                                                                2. It is likely that the safe natural real rate of interest has fallen by 1%-point/year. That means that a healthy economy properly distant from the ZLB requires not a 3.5%/year but a 4.5%/year inflation target.

                                                                                                3. It is very important when the economy hits the zero lower bound on nominal interest rates that expectations be that the time spent at the ZLB will be short. To build those expectations, it is important that when the economy emerges from the ZLB it undergo a period in which the long-run inflation target is overshot.

                                                                                                4. The likelihood is that downward movements in labor force participation that are cementing into structural impediments to employment can be reversed if high demand pulls workers back into the labor force before the cement has set, but only with difficulty otherwise. The benefit-cost analysis thus calls for an additional inflation overshoot in order to satisfy the Federal Reserve’s dual mandate.

                                                                                                5. If the Federal Reserve aims at a 2%/year inflation target and fails to raise interest rates sufficiently early, it may wind up with 4%/year inflation and have to raise short-term real interest rates to 6%/year–a nominal interest rate of 10%/year–to return the economy to its inflation target. If the Federal Reserve prematurely raises interest rates, it may wind up with 0%/year inflation and wish to lower short-term real interest rates to -2%/year to return the economy to its inflation rate. With inflation at 0%/year, it cannot do that. Thus the risks are asymmetric: raising interest rates later than optimal under perfect foresight carries much lower risks than does raising interest rates earlier than optimal.

                                                                                                6. Since 1979 the Federal Reserve has built up enormous credibility as the guardian of price stability and has wrecked whatever credibility it had as the guardian of low unemployment. A situation in which the general expectation is that the Federal Reserve will do too little to guard against high unemployment is worse than a situation in which the general expectations is that the Federal Reserve will too little to guard against inflation–”it is worse, in an impoverished world, to provoke unemployment than to disappoint the rentier”.2

                                                                                                7. The PCE price index is now undershooting its pre-2008 trend by fully 5%: the proper optimal-control response to a large negative real demand shock is not a price level track that falls below but rather one that rises above the previously-anticipated trend path.

                                                                                                IMHO, you need to reject all 7 of the above points completely in order to think that the FOMC’s goal of returning inflation to 2%/year and keeping it there is anywhere close to an optimal-control path for an institution governed by its dual mandate. I really do not see how you can reject all seven.

                                                                                                Moreover, financial markets right now believe that the Federal Reserve’s policy is not going to attain 2%/year inflation–not now, not over the next five years. Since June the on-track-to-recovery Confidence Fairy–to the extent that she was present–has flown away...

                                                                                                Thus right now justifying the Federal Reserve’s policy track seems to me to require rejecting all seven of the points above, plus rejecting the financial markets’ read on monetary policy, plus rejecting the consideration that depressed financial markets–even irrationally-depressed financial markets–should be offset with additional demand stimulus.

                                                                                                Yet only two of the seventeen FOMC participants are with me. Am I off my rocker? Have they been consumed by groupthink? How am I to understand all this?

                                                                                                  Posted by on Thursday, September 25, 2014 at 08:29 AM in Economics, Inflation, Monetary Policy | Permalink  Comments (19)


                                                                                                  Links for 9-25-14

                                                                                                    Posted by on Thursday, September 25, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (82)


                                                                                                    Wednesday, September 24, 2014

                                                                                                    Where and When Macroeconomics Went Wrong

                                                                                                    Simon Wren-Lewis:

                                                                                                    Where macroeconomics went wrong: In my view, the answer is in the 1970/80s with the New Classical revolution (NCR). However I also think the new ideas that came with that revolution were progressive. I have defended rational expectations, I think intertemporal theory is the right place to start in thinking about consumption, and exploring the implications of time inconsistency is very important to macro policy, as well as many other areas of economics. I also think, along with nearly all macroeconomists, that the microfoundations approach to macro (DSGE models) is a progressive research strategy.
                                                                                                    That is why discussion about these issues can become so confused. New Classical economics made academic macroeconomics take a number of big steps forward, but a couple of big steps backward at the same time. The clue to the backward steps comes from the name NCR. The research program was anti-Keynesian (hence New Classical), and it did not want microfounded macro to be an alternative to the then dominant existing methodology, it wanted to replace it (hence revolution). Because the revolution succeeded (although the victory over Keynesian ideas was temporary), generations of students were taught that Keynesian economics was out of date. They were not taught about the pros and cons of the old and new methodologies, but were taught that the old methodology was simply wrong. And that teaching was/is a problem because it itself is wrong. ...

                                                                                                      Posted by on Wednesday, September 24, 2014 at 11:27 AM in Economics, Macroeconomics, Methodology | Permalink  Comments (39)