Curious what you think of this proposal from Dean Baker:
A Progressive Way to End Corporate Taxes, by Dean Baker, NY Times: Just about every American chief executive has the same dream: to get out from under the corporate income tax. ...
Suppose that, instead of taxing corporate profits, we required companies to turn over an amount of stock, in the form of nonvoting shares, to the government. ...
The shares would be nontransferable, except in the case of mergers or buyouts, but they otherwise would be treated just like any other shares. If the company paid a dividend to its other stockholders, then it would pay the same per share dividend to the government. If it bought back 10 percent of its shares, then it would buy back 10 percent of the government’s shares at the same price. In the event of a takeover, the buyer would have to pay the same per-share price to the government as it did to the holders of other shares.
This way, there is no way for a corporation to escape its liability. A portion of whatever profit it makes will automatically go to the government. It also eliminates the enormous cost and waste associated with complying with or avoiding the corporate income tax... And federal revenues will go up, because companies will have incentive to do what is most profitable, not what minimizes their tax liability. ...
Ideally, replacing the income tax with stock issuance would be mandatory. But it could be done on an optional basis. ...
The switch from a corporate income tax to ownership of shares wouldn’t be good news for the tax avoidance industry, or for leading tax-avoiding corporations. But it would be a huge gain for just about everyone else.
Posted by Mark Thoma on Friday, January 22, 2016 at 01:56 PM in Economics, Taxes |
The view of the economy from the SF Fed:
FRBSF FedViews: The Current Economy and the Outlook: Mark Spiegel, vice president at the Federal Reserve Bank of San Francisco, stated his views on the current economy and the outlook as of January 14, 2016.
- Real GDP has grown at an average annual rate of 2.2% over the first three quarters of 2015. However, a number of recent indicators suggest weaker growth in the fourth quarter, including declines in construction and existing home sales, as well as weaker manufacturing data and a sharp decline in inventory buildup.
- Despite the fourth quarter weakness, we expect real GDP to rebound in the first quarter of 2016, due to inventory payback and continued consumption strengths, and grow at an average annual rate of around 2¼% over the year as a whole.
- The labor market continues to surprise on the upside. The December payroll report was very strong, as the U.S. economy added 292,000 jobs and figures for October and November were revised upwards sharply. The six-month moving average remains well above 200,000 jobs per month, portending continued labor market tightening.
- The unemployment rate held steady in December at 5.0%, as increased labor force participation accompanied the growth in payroll employment. This suggests that some workers who were classified as out of the labor force have resumed searching for jobs, presumably due to improved expectations about chances for finding employment. As a result of the strong pace of job creation, we expect the unemployment rate to decline later this year to levels below the long-run natural rate of about 5%.
- Inflation remains substantially below the Federal Open Market Committee’s stated 2% target. Oil prices have decreased dramatically, with West Texas Intermediate oil falling below $30 a barrel. Other commodity prices have fallen sharply as well. In addition, the broad trade-weighted value of the dollar has continued to rise, also putting downward pressure on import prices and inflation.
- We project that headline inflation in 2016 will come in between 1% and 1¼% and rise gradually towards the 2% target as the effects of transitory shocks to energy prices and the exchange rate dissipate and as improving labor market conditions strengthen wage growth.
- The FOMC “lifted off” after its December 2015 meeting, raising the federal funds rate target range from 0–25 to 25–50 basis points. This policy change was accompanied by only mild financial market volatility, with muted movements in market yields before and after the announcement date. This suggests that the Federal Reserve successfully prepared financial markets for the liftoff announcement through its prior statements and communications.
- Yields on emerging market securities, as measured by the Emerging Market Bond Index (EMBI), also demonstrated little volatility immediately after the FOMC announcement.
- More recently, U.S. financial market volatility as measured by the VIX rate has turned up, largely because of concerns about financial volatility overseas, particularly in China. Chinese equity markets enjoyed a strong rally between the fall of 2014 and the summer of 2015, with values more than doubling. However, after a sharp selloff in the latter half of 2015, the Chinese government intervened in a variety of forms to stabilize equity prices. These efforts appeared to be temporarily successful, but prices resumed their downturn near the end of 2015 in response to additional weak news about Chinese economic fundamentals, particularly in its manufacturing sector. Technical factors, such as the on-off use of “circuit breakers” to limit sharp price changes, also appear to have exacerbated equity market volatility. Since the beginning of 2016, China’s stock market is down around 15%, more than erasing the overall gains in 2015.
- Another source of concern for Chinese investors has been the value of the renminbi. In August 2015, Chinese policymakers surprised markets with a devaluation of the renminbi against the dollar of approximately 4% and allowed greater flexibility in the exchange rate. The currency subsequently stabilized, but renewed depreciation of the renminbi occurred with the December 11 announcement that China would begin pegging its currency to a broad basket of currencies.
- The continued appreciation of the dollar against the renminbi and other currencies poses a downside risk to the U.S. inflation outlook.
The views expressed are those of the author, with input from the forecasting staff of the Federal Reserve Bank of San Francisco. They are not intended to represent the views of others within the Bank or within the Federal Reserve System.
Posted by Mark Thoma on Friday, January 22, 2016 at 11:09 AM in Economics |
Does transformational rhetoric lead to revolutionary change?:
How Change Happens, by Paul Krugman, Commentary, NY Times: There are still quite a few pundits determined to pretend that America’s two great parties are symmetric — equally unwilling to face reality, equally pushed into extreme positions by special interests and rabid partisans. It’s nonsense, of course. ...
Still, there are some currents in our political life that do run through both parties. And one of them is the persistent delusion that a hidden majority of American voters either supports or can be persuaded to support radical policies, if only the right person were to make the case with sufficient fervor.
You see this on the right among hard-line conservatives, who insist that only the cowardice of Republican leaders has prevented the rollback of every progressive program instituted in the past couple of generations. ...
Meanwhile, on the left there is always a contingent of idealistic voters eager to believe that a sufficiently high-minded leader can conjure up the better angels of America’s nature and persuade the broad public to support a radical overhaul of our institutions. In 2008 that contingent rallied behind Mr. Obama; now they’re backing Mr. Sanders...
But as Mr. Obama himself found out as soon as he took office, transformational rhetoric isn’t how change happens..., his achievements have depended ... on accepting half loaves as being better than none: health reform that leaves the system largely private, financial reform that seriously restricts Wall Street’s abuses without fully breaking its power, higher taxes on the rich but no full-scale assault on inequality. ...
And the question Sanders supporters should ask is, When has their theory of change ever worked? Even F.D.R., who rode the depths of the Great Depression to a huge majority, had to be politically pragmatic, working not just with special interest groups but also with Southern racists.
Remember, too, that the institutions F.D.R. created were add-ons, not replacements: Social Security didn’t replace private pensions, unlike the Sanders proposal to replace private health insurance with single-payer. Oh, and Social Security originally covered only half the work force, and ... largely excluded African-Americans. ...
The point is that while idealism is fine and essential — you have to dream of a better world — it’s not a virtue unless it goes along with hardheaded realism about the means that might achieve your ends. ...
Sorry, but there’s nothing noble about seeing your values defeated because you preferred happy dreams to hard thinking about means and ends. Don’t let idealism veer into destructive self-indulgence.
Posted by Mark Thoma on Friday, January 22, 2016 at 08:34 AM
Posted by Mark Thoma on Friday, January 22, 2016 at 12:06 AM in Economics, Links |
"We found that many of the so-called conditional cooperators are confused and do not seem to understand the public-goods game":
New experiments challenge economic game assumptions, EurekAlert: Too much confidence is placed in economic games, according to research by academics at Oxford University.
While traditional economic and evolutionary theory predicts that people will typically seek to maximize their own success, the results of economic games have shown people to be much more altruistic than expected.
But a series of experiments carried out by evolutionary biologists at Oxford found that people are just as generous towards computers, which cannot benefit materially from cooperation, and that simply misunderstanding the game may lead to altruism in many cases. ...
The Oxford research involved setting up public-goods games of varying complexity with humans and computers, and solely humans.
Dr Burton-Chellew said: 'We found that many of the so-called conditional cooperators are confused and do not seem to understand the public-goods game, appearing to think that being generous towards others will make them money. We primarily demonstrated this by having them play with computers, which cannot benefit from this cooperation, and showing that people behaved the same way regardless.
'The upshot of this is that these games are not reliably measuring motivations and therefore may not be informative of real-world behavior. This has obvious policy implications, as well as implications for our understanding of the evolution of social behavior. Furthermore, it casts doubt on the idea that there are fundamentally different social-types of people. I think it is more useful to focus on when and where people cooperate, rather than identifying who does and does not cooperate, especially in the artificial world of the lab.
'In short, I would argue that there is too much confidence placed in the results of these economic games; too much confidence in their ability to measure social preferences.'
Posted by Mark Thoma on Thursday, January 21, 2016 at 09:55 AM in Economics |
I haven't had the courage to read the comments:
What happens if robots take all the jobs?, by Mark Thoma: The theme of this year's World Economic Forum (WEF) meeting in Davos, Switzerland, can be summarized as the impact of the fourth industrial revolution on jobs, inequality and the quality of life.
How will digital revolution change our lives? Will robots take most of the good jobs? Are we headed for a future where a few people -- those who are fortunate enough to own the robots and other technology needed to produce goods and services -- receive most of the income, and those who don't struggle to find work that pays enough to feed their families? ...
Posted by Mark Thoma on Thursday, January 21, 2016 at 09:10 AM in Economics, Income Distribution, Unemployment |
Posted by Mark Thoma on Thursday, January 21, 2016 at 09:07 AM in Economics, Income Distribution |
Posted by Mark Thoma on Thursday, January 21, 2016 at 12:06 AM in Economics, Links |
A different kind of ash-hole problem: Does the distribution of costs matter to economists?. Environmental Economics: ... Coal-ash is a by-product of coals fired electricity production. The ash from burning coal is stored in big lagoon-like ponds called ash-impoundments, or as I like to call them, ash-holes. ...
Beyond the obvious yuck factor and potential standard externality problems associated with leakage and breeches of the lagoons, location of these ash-holes near low-income populations creates concerns over environmental justice.
A federal civil rights commission is holding a hearing this week about whether coal ash disproportionately affects low-income and minority populations.
Lenore Ostrowsky, a lawyer for the U.S. Commission on Civil Rights, said federal data already show that some of those populations bear the highest burden...
Ohio's coal-ash containment areas are mainly in rural, low-income areas, and most are along the Ohio River...
Economists are often bad at considering the distributional impacts of policies: To the point that we often ignore issues of equity in favor of the more objective measure of efficiency. If two policies were to result in the same net benefits to society, but different distribution of those benefits within society, the efficiency-oriented economist would have trouble distinguishing between the policies.
But what if one distribution of benefits (or costs) is socially preferred to another. Or put a different way, what if society were willing to forego resources (willing to pay?) to ensure a different distribution of benefits (or costs)? In that case, the distribution of resources might fit within the realm of the efficiency paradigm as now society can be viewed as better or worse off depending on the distribution of resources.
Of course this raises all kinds of questions about morals, ethics, social welfare, interdependent utility...but it is at least a recognition that the distribution of resources has real and tangible benefits and costs and might be considered within the neoclassical economic framework.
Just a thought.
Posted by Mark Thoma on Wednesday, January 20, 2016 at 10:58 AM
This is from Microeconomic Insights, a new "home for accessible summaries of high quality microeconomic research which informs the public about microeconomic issues that are, or should be, in the public’s eye." ( I edited four of the articles, but this is not one of them, Twitter: http://www.twitter.com/micro_econ, RSS: http://microeconomicinsights.org/feed/):
The impact of consumer financial regulation: evidence from the CARD Act: In the wake of the financial crisis, there has been a surge of interest in regulating consumer financial products (e.g., Campbell et al., 2011). In the United States, the 2010 Dodd-Frank “Wall Street Reform and Consumer Protection Act” established a Consumer Financial Protection Bureau to monitor and regulate mortgages, credit cards, and other similar products. In July 2013, the European Commission proposed new legislation to simplify disclosures and tighten guidance requirements for financial products.
Does such regulation benefit consumers? Critics have expressed skepticism about the effectiveness of regulation, while warning of unintended consequences. Proponents argue that it is necessary, as consumer financial markets have become increasingly unfair, with firms taking advantage of consumers’ behavioral biases—such as inattention and present bias—to earn large profits.
In Agarwal et al. (2015), we aim to advance this debate by examining the consequences of one such regulation. We study two aspects of the 2009 Credit Card Accountability Responsibility and Disclosure (CARD) Act in the United States:
- Restrictions on certain types of credit card fees and
- The introduction of a repayment “nudge.”
We find, first, that consumer fees declined after the regulation. But we find no evidence of an offsetting increase in interest rates or the reduced access to credit that critics had warned of (American Bankers Association, 2013). Second, we find that the repayment nudge had a small but significant effect on consumer behavior.
These findings come from a panel dataset of 160 million credit card accounts held by the eight largest banks in the US. The data include account-level information on contract terms, utilization, and payments at the monthly level from January 2008 to December 2012. They also include consumers with different levels of credit worthiness: about 30% of consumers in our data have a FICO score of “fair or lower” (below 660) and about 17% have a score of “bad” (below 620). ...
Posted by Mark Thoma on Wednesday, January 20, 2016 at 09:23 AM in Economics, Microeconomics |
Posted by Mark Thoma on Wednesday, January 20, 2016 at 12:06 AM in Economics, Links |
Who Lost the White Working Class: Why did the white working class abandon the Democrats? The conventional answer is that Republicans skillfully played the race card. In the wake of the Civil Rights Act, segregationists like Alabama Governor George C. Wallace led southern whites out of the Democratic Party. Later, Republicans charged Democrats with coddling black “welfare queens” (Ronald Reagan popularized the term), being soft on black crime (George W. Bush’s “Willie Horton” ads in 1988), and trying to give jobs to less-qualified blacks over more-qualified whites (the battle over affirmative action).
The bigotry now spewing forth from Donald Trump and several of his Republican rivals is an extension of this old race card, now applied to Mexicans and Muslims – with much the same effect on the white working class voters, who don’t trust Democrats to be as “tough.”
But this doesn’t tell the whole story. Democrats also abandoned the white working class. ...
In part, it was because Democrats bought the snake oil of the “suburban swing voter” – so-called “soccer moms” in the 1990s and affluent politically-independent professionals in the 2000s – who supposedly determined electoral outcomes.
Meanwhile, as early as the 1980s they began drinking from the same campaign funding trough as the Republicans – big corporations, Wall Street, and the very wealthy. ...
Nothing in politics is ever final. Democrats could still win back the white working class – putting together a coalition of the working class and poor, of whites, blacks, and Latinos.
This would give them the political clout to restructure the economy – rather than merely enact palliative programs papering over the increasing concentration of wealth and power in America.
But to do this they’d have to stop obsessing over upper-income suburban swing voters, and end their financial dependence on big corporations, Wall Street, and the wealthy. Will they? If not, a third party might emerge that does it instead.
Posted by Mark Thoma on Tuesday, January 19, 2016 at 11:13 AM in Economics, Politics |
"Why oh why can't we have a better press corps?" This is Simon Wren-Lewis:
The political right’s dangerous support for economic quackery: You may remember Niall Ferguson’s disastrous attempt to claim that George Osborne’s imagined success proved Keynesians and Keynes were wrong. That kind of nonsense makes it into a serious paper like the Financial Times because it is written by a famous history professor, or maybe on other occasions by a senior policy maker. But for those who only read this serious press, it is in fact one example of many. There is a little cottage industry out there of so called journalists and think tanks who peddle economic quackery to support right wing policies.
Take, for example, this recent piece by James Bartholomew in the Spectator. Deficit spending by the government never works, he claims. Presumably the opposite also holds, which is that fiscal consolidation (aka austerity) never hurt anyone. Mainstream economics has it all wrong. One of the skills writers like this have is to make very little evidence seem like a lot. ...
To his credit Bartholomew does admit that logically Keynesian policies should work. But there is an awful lot he does not tell you. ... There is no way that his article is a measured piece of journalism. It is designed to discredit the economics that is taught to every student the world over.
There is plenty of this on the left too: people who want to tell you mainstream economics is all wrong. Yet until very recently at least, the influence of this group on politicians on the mainstream left had been minimal, and this group has a far smaller public presence than their equivalent on the right. On the right they are ubiquitous. ...
This is dangerous for two reasons. The first is that it can lead to major macroeconomic policy errors: in the UK think money supply targets, entering the ERM at an overvalued rate, and 2010 fiscal consolidation, in the Eurozone think of the Stability and Growth Pact and the 2011-13 recession. The second is that it encourages a lazy anti-science attitude, all too evident in climate change denial. If the political right in the UK and Europe want to see where this could lead, look across the Atlantic. With the left in disarray and flirting with non-mainstream economics, the right has an excellent opportunity (when a new Chancellor takes over in the UK, for example) to re-engage with mainstream economics, and cast off the quackery of the Ferguson and Bartholomew ilk.
Posted by Mark Thoma on Tuesday, January 19, 2016 at 08:32 AM
Posted by Mark Thoma on Tuesday, January 19, 2016 at 12:06 AM in Economics, Links |
This song is stuck in my head today. Can't imagine why:
You say you want a revolution
Well, you know
We all want to change the world
You tell me that it's evolution
Well, you know
We all want to change the world ...
You say you got a real solution
Well, you know
We'd all love to see the plan...
But if you go carrying pictures of chairman Mao
You ain't going to make it with anyone anyhow...
Don't you know know it's gonna be alright
Posted by Mark Thoma on Monday, January 18, 2016 at 12:21 PM
Dean Baker (this was posted at Econospeak instead of CEPR due to website troubles -- assuming CPER's Creative Commons license still applies):
Paul Krugman, Bernie Sanders, and Medicare for All: Paul Krugman weighs in this morning on the debate between Bernie Sanders and Hillary Clinton as to whether we should be trying to get universal Medicare or whether the best route forward is to try to extend and improve the Affordable Care Act. Krugman comes down clearly on the side of Hillary Clinton, arguing that it is implausible that we could get the sort of political force necessary to implement a universal Medicare system.
Getting universal Medicare would require overcoming opposition not only from insurers and drug companies, but doctors and hospital administrators, both of whom are paid at levels two to three times higher than their counterparts in other wealthy countries. There would also be opposition from a massive web of health-related industries, including everything from manufacturers of medical equipment and diagnostic tools to pharmacy benefit managers who survive by intermediating between insurers and drug companies.
Krugman is largely right, but I would make two major qualifications to his argument. The first is that it is necessary to keep reminding the public that we are getting ripped off by the health care industry in order to make any progress at all. The lobbyists for the industry are always there. Money is at stake if they can get higher prices for their drugs, larger compensation packages for doctors or hospitals, or weaker regulation on insurers.
The public doesn’t have lobbyists to work the other side. The best we can hope is that groups that have a general interest in lower health care costs, like AARP, labor unions, and various consumer groups can put some pressure on politicians to counter the industry groups. In this context, Bernie Sanders’ push for universal Medicare can play an important role in energizing the public and keeping the pressure on.
Those who think this sounds like stardust and fairy tales should read the column by Krugman’s fellow NYT columnist, health economist Austin Frakt. Frakt reports on a new study that finds evidence that public debate on drug prices and measures to constrain the industry had the effect of slowing the growth of drug prices. In short getting out the pitchforks has a real impact on the industry’s behavior.
The implication is that we need people like Senator Sanders to constantly push the envelope. Even if this may not get us to universal Medicare in one big leap, it will create a political environment in which we can move forward rather than backward.
The other point has to do with an issue that Krugman raises in his blogpost on the topic. He argues that part of the story of lower health care costs in Canada and other countries involves saying “no,” by which he means refusing to pay for various drugs and treatments that are considered too expensive for the benefit they provide.
While there is some truth to this story, it is important to step back for a moment. In the vast majority of cases, the drugs in question are not actually expensive to manufacture. The way the drug industry justifies high prices is that they must recover their research costs. While the industry does in fact spend a considerable amount of money on research (although they likely exaggerate this figure), at the point the drug is being administered this is a sunk cost. In other words, the resources devoted to this research have already been used; the economy doesn’t somehow get back the researchers’ time and the capital expended if fewer people take a drug that is developed from their work.
Ordinarily economists treat it as an absolute article of faith that we want all goods and services to sell at their marginal cost without interference from the government, like a trade tariff or quota. However in the case of prescription drugs, economists seem content to ignore the patent monopolies granted to the industry, which allow it to charge prices that are often ten or even a hundred times the free market price. (The hepatitis C drug Sovaldi has a list price in the United States of $84,000. High quality generic versions are available in India for a few hundred dollars per treatment.) In this case, we are effectively looking at a tariff that is not the 10-20 percent that we might see in trade policy, but rather 1,000 percent or even 10,000 percent.
This sort of gap between price and marginal cost leads to exactly the sort of distortions that economists predict when the government intervenes in a market with trade tariffs, except the distortions are hugely larger with drugs. Companies have incentive to engage in massive marketing efforts, they push their drugs for conditions for which they may not be appropriate, and they conceal evidence suggesting their drugs may be less effective than advertised, or possibly even harmful. They also lobby politicians for ever longer and stronger patent protection, and they use the legal system to harass potential competitors, both generic and brand. Even research is distorted by this incentive structure, with large portions of the industry’s budget being devoted to developing copycat drugs to gain a share of a competitor’s patent rents.
Perhaps the worst part of this story is that the patent monopolies put us in a situation where we might have to say no. The industry’s monopoly allows it to say that it will not turn over a life-saving drug for less than $100,000, $200,000, or whatever price tag it chooses. However, if there was no patent monopoly, we would be looking at buying this drug at its cost of production. That will rarely be more than $1,000 and generally much less. At those prices, it will rarely make sense to say no. (The same issue arises with most medical equipment – once we have the technology, producing an MRI is relatively cheap, as would be the cost of an individual screening.)
We do have to pay for the research, but the way we are now doing it is incredibly backward. It is like paying the firefighters when they show up at the burning house with our family inside. Of course we would pay them millions to save our family (if we had the money), but it is nutty to design a system that puts us in this situation.
We should be looking for a system that pays for the research upfront. There are various mechanisms to accomplish this goal. (Here’s my plan for a system of publicly funded clinical trials.) Obviously overhauling our system for financing drug research is not something that is done overnight, but it is an issue that needs attention. The current system is incredibly wasteful and it needlessly puts in a situation where we have to say no in contexts where the costs to society of administering treatment are actually very low.
This doesn’t mean that we would pay for everything for everybody. There are some procedures that actually are very expensive, for example surgeries requiring many hours of the time of highly skilled surgeons. But we should be trying to design a system that minimizes these sorts of situations, rather than making them an everyday occurrence.
Posted by Mark Thoma on Monday, January 18, 2016 at 09:07 AM in Economics, Health Care |
Would it be worth it to try to enact single-payer health care system?:
Health Reform Realities, by Paul Krugman, Commentary, NY Times: ... Obamacare is ... a somewhat awkward, clumsy device with lots of moving parts. This makes it more expensive than it should be, and will probably always cause a significant number of people to fall through the cracks.
The question for progressives — a question that is now central to the Democratic primary — is whether these failings mean that they should re-litigate their own biggest political success in almost half a century, and try for something better.
My answer ... is that they shouldn’t, that they should seek incremental change on health care (Bring back the public option!) and focus their main efforts on other issues...
If we could start from scratch, many, perhaps most, health economists would recommend single-payer, a Medicare-type program covering everyone. But single-payer wasn’t a politically feasible goal in America, for three big reasons...
First, like it or not, incumbent players have a lot of power. ...
Second, single-payer would require a lot of additional tax revenue — and we would be talking about taxes on the middle class...
Finally, and I suspect most important, switching to single-payer would impose a lot of disruption on tens of millions of families who currently have good coverage through their employers. ...
What this means, as the health policy expert Harold Pollack points out, is that a simple, straightforward single-payer system just isn’t going to happen. ...
Which brings me to the Affordable Care Act, which was designed to bypass these obstacles. ... Even so, achieving this reform was a close-run thing: Democrats barely got it through during the brief period when they controlled Congress. Is there any realistic prospect that a drastic overhaul could be enacted any time soon — say, in the next eight years? No.
You might say that it’s still worth trying. But politics, like life, involves trade-offs.
There are many items on the progressive agenda, ranging from an effective climate change policy, to making college affordable for all, to restoring some of the lost bargaining power of workers. Making progress on any of these items is going to be a hard slog, even if Democrats hold the White House and, less likely, retake the Senate. ...
So progressives must set some priorities. And it’s really hard to see, given this picture, why it makes any sense to spend political capital on a quixotic attempt at a do-over, not of a political failure, but of health reform — their biggest victory in many years.
Posted by Mark Thoma on Monday, January 18, 2016 at 08:16 AM in Economics, Health Care, Politics |
Posted by Mark Thoma on Monday, January 18, 2016 at 12:06 AM in Economics, Links |
The Price of Oil, China, and Stock Market Herding: The stock market movements of the last two weeks are puzzling.
Take the China explanation. A collapse of growth in China would indeed be a world changing event. But there is just no evidence of such a collapse. ...
Take the oil price explanation. It is even more puzzling. Traditionally, it was taken for granted that a decrease in the price of oil was good news for oil importing countries such as the United States. ... We learned in the last year that, in the short run, the adverse effect on investment on energy producing firms could come quickly and temporarily slow down the effect, but this surely does not undo the general conclusion. Yet the headlines are now about low oil prices leading to low stock prices. ...
Maybe we should not believe the market commentaries. Maybe it was neither oil nor China. Maybe what we are seeing is a delayed reaction to the slowdown in the world economy... Maybe…
I think the explanation is largely elsewhere. I believe that to a large extent, herding is at play. If other investors sell, it must be because they know something you do not know. Thus, you should sell, and you do, and so down go stock prices. Why now? Perhaps because we have entered a period of higher uncertainty. ...
So how much should we worry? This is where economics ... gives the dreaded two-handed answer. If it becomes clear within a few days or a few weeks that fundamentals are in fact not so bad, stock prices will recover... If, however, the stock market slump lasts longer or gets worse, it can become self-fulfilling. Low stock prices lasting for long lead to lower consumption, lower demand, and, potentially, to a recession. The ability of the Fed, fresh out of the zero lower bound, to counteract a slowdown in demand remains limited. One has to hope for the first scenario, but worry about the second.
Posted by Mark Thoma on Sunday, January 17, 2016 at 02:01 PM in China, Economics, Financial System, Oil |
Posted by Mark Thoma on Sunday, January 17, 2016 at 12:06 AM in Economics, Links |
Oil Goes Nonlinear: When oil prices began their big plunge, it was widely assumed that the economic effects would be positive. Some of us were a bit skeptical. But maybe not skeptical enough: taking a global view, there’s a pretty good case that the oil plunge is having a distinctly negative impact. Why? ...
I believe ... there’s an important nonlinearity in the effects of oil fluctuations. A 10 or 20 percent decline in the price might work in the conventional way. But a 70 percent decline has really drastic effects on producers; they become more, not less, likely to be liquidity-constrained than consumers. Saudi Arabia is forced into drastic austerity policies; highly indebted fracking companies find themselves facing balance-sheet crises.
Or to put it differently: small oil price declines may be expansionary through usual channels, but really big declines set in motion a process of forced deleveraging among producers that can be a significant drag on the world economy, especially with the whole advanced world still in or near a liquidity trap.
Posted by Mark Thoma on Saturday, January 16, 2016 at 10:20 AM in Economics, Oil |
Posted by Mark Thoma on Saturday, January 16, 2016 at 12:06 AM in Economics, Links |
From the Atlanta Fed's Macroblog:
Are Long-Term Inflation Expectations Declining? Not So Fast, Says Atlanta Fed:
"Convincing evidence that longer-term inflation expectations have moved lower would be a concern because declines in consumer and business expectations about inflation could put downward pressure on actual inflation, making the attainment of our 2 percent inflation goal more difficult."
—Fed Chair Janet Yellen, in a December 2, 2015, speech to the Economic Club of Washington
To be sure, Chair Yellen's claim is not controversial. Modern macroeconomics gives inflation expectations a central role in the evolution of actual inflation, and the stability of those expectations is crucial to the Fed's ability to achieve its price stability mandate.
The real question on everyone's mind is, of course, what might constitute "convincing evidence" of changes in inflation expectations. Recently, several economists, including former Treasury Secretary Larry Summers and St. Louis Fed President James Bullard, have weighed in on this issue. Yesterday, President Bullard cited downward movements in the five-year/five-year forward breakeven rates from the five- and 10-year nominal and inflation-protected Treasury bond yields. In November, Summers appealed to measures based on inflation swap contracts. The view that inflation expectations are declining has also been echoed by the New York Fed President William Dudley and former Minneapolis Fed President Narayana Kocherlakota.
Broadly speaking, there seems to be a growing view that market-based long-run inflation expectations are declining and drifting significantly away from the Fed's 2 percent target and that this decline is troublingly correlated with oil prices.
A problem with this line of argument is that the breakeven and swap rates are not necessarily clean measures of inflation expectations. They are really better referred to as measures of inflation compensation because, in addition to inflation expectations, these measures also include factors related to liquidity conditions in the markets for these securities, technical features of the inflation protection in each security, and inflation risk premia. Here at the Atlanta Fed, we've built a model to separate these different components and isolate a better measure of true inflation expectations (IE).
In technical terms, we estimate an affine term structure model—similar to that of D'Amico, Kim and Wei (2014)—that incorporates information from the markets for U.S. Treasuries, Treasury Inflation-Protected Securities (TIPS), inflation swaps, and inflation options (caps and floors). Details are provided in "Forecasts of Inflation and Interest Rates in No-Arbitrage Affine Models," a forthcoming Atlanta Fed working paper by Nikolay Gospodinov and Bin Wei. (You can also see Gospodinov and Wei (2015) for further analysis.) Essentially, we ask: what level of inflation expectations is consistent with this entire set of financial market data? And we then follow this measure over time.
As chart 1 illustrates, we draw a very different conclusion about the behavior of long-term inflation expectations. The chart plots the five-year/five-year forward TIPS breakeven inflation (BEI) and the model-implied inflation expectations (IE) for the period January 1999–November 2015 at a weekly frequency. Unlike the raw BEI, our measure is quite smooth, suggesting that long-term inflation expectations have been, and still are, well anchored.
After making an adjustment for the inflation risk premium, we term the difference between BEI and IEs a "liquidity premium," but it really includes a variety of other factors. Our more careful look at the liquidity premium reveals that it is partly made up of factors specific to the structure of inflation-indexed TIPS bonds. For example, since TIPS are based on the non-seasonally adjusted consumer price index (CPI) of all items, TIPS yields incorporate a large positive seasonal carry yield in the first half of the year and a large negative seasonal carry yield in the second half. Chart 2 illustrates this point by plotting CPI seasonality (computed as the accumulated difference between non-seasonally adjusted and seasonally adjusted CPI) and the five-year breakeven inflation.
Redemptions, reallocations, and hedging in the TIPS market after oil price drops and global financial market turbulence can further exacerbate this seasonal pattern. Taken together, these factors are the source of correlation between the BEI measures and oil prices. To confirm this, chart 3 plots (the negative of) our liquidity premium estimate and the log oil price (proxied by the nearest futures price).
Our measure of long-term inflation expectations is also consistent with long-term measures from surveys. Chart 4 presents the median along with the 10th and 90th percentiles of the five-year/five-year forward CPI inflation expectations from the Philadelphia Fed's Survey of Professional Forecasters (SPF) at quarterly frequency. This measure can be compared directly with our IE measure. Both the level and the dynamics of the median SPF inflation expectation are remarkably close to that for our market-based IE. It is also interesting to observe that the level of inflation "disagreement" (measured as the difference between the 10th and 90th percentiles) is at a level similar to the level seen before the financial crisis.
Finally, we note that TIPS and SPF are based on CPI rather than the Fed's preferred personal consumption expenditure (PCE) measure. CPI inflation has historically run above PCE inflation by about 30 basis points. Accounting for this difference brings our measure of the level of long-term inflation expectations close to the Fed's 2 percent target.
To summarize, our analysis suggests that (1) long-run inflation expectations remain stable and anchored, (2) the seemingly large correlation of market-implied inflation compensation with oil prices arises mainly from the dynamics of the TIPS liquidity premium, and (3) long-run market- and survey-based inflation expectations are remarkably close in terms of level and dynamics over time. Of course, further softness in the global economy and commodity markets may eventually drag down long-term expectations. We will continue to monitor the pure measure of inflation expectations for such developments.
Posted by Mark Thoma on Friday, January 15, 2016 at 02:10 PM in Economics, Monetary Policy |
Time to put the Gini back in the bottle:
Is Vast Inequality Necessary?, by Paul Krugman, Commentary, NY Times: How rich do we need the rich to be?
That’s not an idle question. It is, arguably, what U.S. politics are substantively about. Liberals want to raise taxes on high incomes and use the proceeds to strengthen the social safety net; conservatives want to do the reverse, claiming that tax-the-rich policies hurt everyone by reducing the incentives to create wealth.
Now, recent experience has not been kind to the conservative position. ... Is there, however, a longer-term case in favor of vast inequality? ...
I find it helpful to think in terms of three stylized models of where extreme inequality might come from, with the real economy involving elements from all three.
First, we could have huge inequality because individuals vary hugely in their productivity..
Second, we could have huge inequality based largely on luck..., those who hit the jackpot ... just happen to be in the right place at the right time.
Third, we could have huge inequality based on power: executives at large corporations who get to set their own compensation, financial wheeler-dealers who get rich on inside information or by collecting undeserved fees from naïve investors.
As I said, the real economy contains elements of all three stories. ...
But the real question, in any case, is whether we can redistribute some of the income currently going to the elite few to other purposes without crippling economic progress.
Don’t say that redistribution is inherently wrong. Even if high incomes perfectly reflected productivity, market outcomes aren’t the same as moral justification. And given the reality that wealth often reflects either luck or power, there’s a strong case to be made for collecting some of that wealth in taxes and using it to make society as a whole stronger, as long as it doesn’t destroy the incentive to keep creating more wealth.
And there’s no reason to believe that it would. Historically, America achieved its most rapid growth and technological progress ever during the 1950s and 1960s, despite much higher top tax rates and much lower inequality than it has today.
In today’s world, high-tax, low-inequality countries like Sweden are also both highly innovative and home to many business start-ups. This may in part be because a strong safety net encourages risk-taking...
So coming back to my original question, no, the rich don’t have to be as rich as they are. Inequality is inevitable; the vast inequality of America today isn’t.
Posted by Mark Thoma on Friday, January 15, 2016 at 01:11 AM in Economics, Income Distribution |
Posted by Mark Thoma on Friday, January 15, 2016 at 12:06 AM in Economics, Links |
So You Think A Recession Is Imminent, Yield Curve Edition, by Tim Duy: If I had to rely on only two leading indicators of recessions, they would be initial unemployment claims and the yield curve (next in line would be housing). I talked about initial claims in the context of employment data in my last post. This post is about the yield curve.
An inversion of the yield curve has typically given a 12 month or better signal ahead of recessions:
Note also that it is the inversion that is important. The yield curve was fairly flat in the late-90's, a period of supercharged growth in the US economy. So when the Financial Times fueled the recession fears last week with this:
The US government bond market is blowing raspberries at the Federal Reserve. This could indicate trouble ahead for the American economy.
Last month, the Fed lifted interest rates for the first time in nine years, and short-term bond yields have duly climbed higher. But longer-term Treasury bonds have shrugged, with yields actually falling since the US central bank tightened monetary policy.
I was less concerned. In fact, I don't think the flattening yield curve should be any surprise as that is almost always the case after the Fed tightens policy:
The yield curve typically flattens to a 50bp spread between 10 and 2 year rates within a year of the initial Fed rate hike. Only the 1986 episode is unusual. Not only that, but the flattening begins immediately:
Even after the 1986 tightening the yield curve was flatter after the first 60 days.
Currently, the flattening of the yield curve - and the lack of any upward movement in 10 year yields at all - is consistent with my long-standing concern that the Federal Reserve's long-run projection of the federal funds rate - 3.5% as of December - is a pipe dream. Also why I was wary about the Fed's determination to raise rates. My preference was the Fed to wait until they were absolutely sure rates could be "normalized."
Optimally, my concerns will prove to be unwarranted. The economy may progress better than expected, productivity rises, the Fed pares down its stock of fixed income assets, the term premium rises, and the entire yield curve shifts up and the secular stagnation story dies. We are back in Kansas. No more flying monkeys. That is a perfectly acceptable, well-reasoned forecast and one I am sympathetic to, but I am not yet seeing it realized. What I am seeing at the moment is that the global pull of zero interest rates is sufficient to limit the ability of the Federal Reserve to "normalize" policy. We are stuck in Oz.
There is a school of thought that the yield curve is irrelevant now that we are near the zero bound. After all, you can't invert the yield curve very easily! And just look at Japan. Clearly the Japanese economy still experiences recession. If we are heading down the Japanese path, then I would expect longer term yield US yields to plunge below 1%. That is not my baseline, I don't think it is very likely, but I can't discount the possibility entirely.
Bottom Line: Don't discount the yield curve just yet. I think it is signaling something important about the limits of monetary policy "normalization." But it is also a signal that recession concerns are overblown. Even in a zero short rate world, the long end needs to plunge much deeper before the yield curve becomes a concern.
Posted by Mark Thoma on Thursday, January 14, 2016 at 03:41 PM in Economics, Fed Watch |
More on the "risk" of inflation. This is from Narayana Kocherlakota:
Information in Inflation Breakevens about Fed Credibility: The Federal Open Market Committee has been gradually tightening monetary policy since mid-2013. Concurrent with the Fed’s actions, five year-five year forward inflation breakevens have declined by almost a full percentage point since mid-2014. I’ve been concerned about this decline for some time (as an FOMC member, I dissented from Committee actions in October and December 2014 exactly because of this concern). In this post, I explain why I see a decline in inflation breakevens as being a very worrisome signal about the FOMC”s credibility (which I define to be investor/public confidence in the Fed’s ability and/or willingness to achieve its mandated objectives over an extended period of time).
First, terminology. ...
Conceptually, the five-year five-year forward breakeven can be thought of as the sum of two components:
1. investors’ best forecast about what inflation will average 5 to 10 years from now
2. the inflation risk premium over a horizon five to ten years from now - that is, the extra yield over that horizon that investors demand for bearing the inflation risk embedded in standard Treasuries.
(There’s also a liquidity premium component, but movements in this component have not been all that important in the past two years.)
There is often a lot of discussion about how to divide a given change in breakevens in these two components. My own assessment is that both components have declined. But my main point will be a decline in either component is a troubling signal about FOMC credibility.
It is well-understood why a decline in the first component should be seen as problematic for FOMC credibility. The FOMC has pledged to deliver 2% inflation over the long run. If investors see this pledge as credible, their best forecast of inflation over five to ten year horizon should also be 2%. A decline in the first component of breakevens signals a decline in this form of credibility.
Let me turn then to the inflation risk premium (which is generally thought to move around a lot more than inflation forecasts). A decline in the inflation risk premium means that investors are demanding less compensation (in terms of yield) for bearing inflation risk. In other words, they increasingly see standard Treasuries as being a better hedge against macroeconomic risks than TIPs.
But Treasuries are only a better hedge than TIPs against macroeconomic risk if inflation turns out to be low when economic activity turns out to be low. This observation is why a decline in the inflation risk premium has information about FOMC credibility. The decline reflects investors’ assigning increasing probability to a scenario in which inflation is low over an extended period at the same time that employment is low - that is, increasing probability to a scenario in which both employment and prices are too low relative to the FOMC’s goals.
Should we see such a change in investor beliefs since mid-2014 as being “crazy” or “irrational”? The FOMC is continuing to tighten monetary policy in the face of marked disinflationary pressures, including those from commodity price declines. Through these actions, the Committee is communicating an aversion to the use of its primary monetary policy tools: extraordinarily low interest rates and large assetholdings. Isn’t it natural, given this communication, that investors would increasingly put weight on the possibility of an extended period in which prices and employment are too low relative to the FOMC’s goals?
To sum up: we’ve seen a marked decline in the five year-five year forward inflation breakevens since mid-2014. This decline is likely attributable to a simultaneous fall in investors’ forecasts of future inflation and to a fall in the inflation risk premium. My main point is that both of these changes suggest that there has been a decline in the FOMC’s credibility.
To be clear: as I well know, in the world of policymaking, no signal comes without noise. But the risks for monetary policymakers associated with a slippage in the inflation anchor are considerable. Given these risks, I do believe that it would be wise for the Committee to be responsive to the ongoing decline in inflation breakevens by reversing course on its current tightening path.
Posted by Mark Thoma on Thursday, January 14, 2016 at 12:33 PM in Economics, Inflation, Monetary Policy |
Paul Krugman in April 2014:
Permahawkery: Martin Feldstein warns us that the Fed isn’t taking the risk of rapidly rising inflation seriously enough. Certainly nobody can accuse him of that failing: he’s been warning about looming inflation for four years, eleven months, and two weeks, and hasn’t let the fact that inflation has kept falling below target alter his concerns in the slightest.
In fact, Marty’s new column is almost identical in its argument to what he wrote in April 2009: he warns that the Fed won’t pull back the liquidity it created when the economy recovers, and inflation will soar. ...
But being an inflation hawk means never having to say you’re sorry.
Paul Krugman in June of 2015:
The Inflationista Puzzle: Martin Feldstein has a new column on what he calls the “inflation puzzle” — the failure of inflation to soar despite the Fed’s large asset purchases, which led to a very large rise in the monetary base. As Tony Yates points out, however, there’s nothing puzzling at all about what happened; it’s exactly what you should expect when interest rates are near zero. ...
Anyway, inflation is just around the corner, the same way it has been all these years.
Martin Feldstein yesterday:
...the Fed is planning a path for short-term interest rates that is likely to raise the rate of inflation too rapidly in the next two years. The December FOMC minutes show that members expect to have a negative real federal-funds interest rate until sometime in 2017, much too low for an economy already at full employment. The danger is that very low interest rates in this environment would lead to a higher rate of inflation and higher long-term rates. The Fed could prevent that faster rise in inflation by increasing the federal-funds rate more rapidly this year and next. ...
Posted by Mark Thoma on Thursday, January 14, 2016 at 09:15 AM in Economics, Inflation |
So You Think A Recession Is Imminent, Employment Edition, by Tim Duy: The recession drumbeat grows louder. This is not unexpected. Most forecasters have an asymmetric loss function; the cost of being wrong by missing a recession exceeds the cost of being wrong on a recession call. Hence economists tend to over-predict recessions. Eight of the last four recessions or so the joke goes. And while I don't believe a recession is imminent, there are perfectly good reasons to be wary that a recession will bear down on the economy in the not-so-distant future. Historically, when the Fed begins a tightening cycle, the clock is ticking for the expansion. By that time, the economy is typically in a late-mid to late-stage expansion, and you are looking at two to three years before the cycle turns, four at the outside.
Of course there are some not so good reasons for worrying about a recession. Like listening to an investor talking their book. Or someone who needs to whip up a never ending stream of apocalyptic visions to hawk gold.
So what I am looking for when it comes to a recession? It's not a recession until you see it economy wide in the labor markets. When it's there, you will see it everywhere. Clearly, we weren't seeing it in the final quarter of last year. But, you say, employment is a lagging indicator, so last quarter tells you nothing. Not nothing, I would say, but a fair point nonetheless. One would need to look for the leading indicators within the employment data.
First, since the manufacturing sector is the proximate cause of these recession concerns, we would look to leading indicators in that sector. One I watch is hours worked:
Hours worked are off their peak, just as prior to the 1900 and 2001 recessions, but not the 2007 recession (lagging indicator that time). But hours also dropped in 1994, 1998, 2002, and 2005. And that would be an extra four recessions that didn't happen. To add a bit more confusion, hours works are coming off a peak not seen since, sit down for this, World War II:
That caught me by surprise; I am thinking the surge in hours worked was not sustainable in any event. Overtime hours worked holds a bit more promise:
OK, not much more promise. Best as a leading indicator ahead of 2001, not counting 1994 and and 1998. Not particularly useful for 1990 and somewhat useful ahead of 2007. On balance, I would say manufacturing hours worked data is necessary but not sufficient for a recession call.
Perhaps the JOLTS data offers something more:
Unfortunately we a working with only two cycles here, and then only barely so. But it seems reasonable that manufacturing hires might be a coincident indicator (maybe leading by the few data points ahead of the 2001 recession) and layoffs/discharges a lagging indicator. But if a manufacturing "recession" were underway, then we would expect hiring to drop off quickly here.
Quits, however looks like a leading indicator:
Looks like quits in manufacturing dropped sharply ahead of 2001, modestly during 2007, but were still rising at the end of 2015. If quit rates aren't dropping among those at the front lines, the pain can't be reaching recessionary levels just yet.
But manufacturing is just one sector of the economy - just 8.8% of employment. The real hypothesis the recessionists are proposing is that manufacturing is an indicator of an economy wide shock. Here I would say the JOLTS data is less supportive:
If we are entering a recession, firms are a minimum should be pulling back on the pace of hiring. We are not seeing that yet. And workers should be wary of quitting:
Again, the workers are on the front lines of the economy. If the economy is in trouble, they know it, and quit rates start declining. Not there yet.
I also have a soft spot for the temporary help series as it as rolled over twelve months or more ahead of the last two recessions:
So if we were to see temporary help roll over now, we would still not see recession until 2017.
And finally, there is initial jobless claims, which typically lead a recession by six to twelve months:
Not seeing it. If claims started rising now, and continued rising for six months, then the probability of recession would rise sharply, and if they rose continuously for twelve months, the probability of recession would approach 1. But now? Nothing to fear.
Bottom Line: From a labor market perspective, I am not seeing conclusive evidence of an impending recession in manufacturing, let alone the overall economy. Might be at the tip of one, but even that will take a year to evolve. I have more sympathy for the view that the economy has evolved into a mid-late to late stage of the cycle, and the transition and associated uncertainty results in some not-surprising volatility in financial markets.
Posted by Mark Thoma on Thursday, January 14, 2016 at 12:15 AM in Economics, Fed Watch |
Posted by Mark Thoma on Thursday, January 14, 2016 at 12:06 AM in Economics, Links |
TPP not equal to 'free trade': I have written extensively/a> on this point: there’s a big difference between those magical words “free trade” that everyone invokes in this town whenever the topic comes up, and actual trade deals. But I think Rep. Sandy Levin thoroughly nailed this distinction in testimony before the International Trade Commission this morning:
We all recognize that trade can be beneficial. The issue is not whether Members of Congress such as myself could pass an Econ 101 class, as President George W. Bush’s Chair of the Council of Economic Advisers, Gregory Mankiw, recently put it. Instead, the issue is whether we are going to face up to the fact that our trading system today is much more complex than the simplistic trade model presented in an Econ 101 class.
What do David Ricardo and Adam Smith have to say about the inclusion of investor-state dispute settlement in our trade agreements? What do they have to say about providing a five-year or an eight-year monopoly for the sale of biologic medicines? About the need to ensure that our trading partners meet basic labor and environmental standards? How about the issue of currency manipulation? And what about trade in services on the internet or the offshoring of jobs that result from greater capital mobility? Does the theory of comparative advantage address these new issues? No – and yet those are the kinds of issues at the crux of the debate over the TPP Agreement today.
Levin’s full testimony is here and looks very thoughtful.
He points to a new World Bank report that models the growth impact of the TPP by 2030 on both member and non-member countries. The magnitude of the US impact–maybe 0.3-0.4 percent–belies a lot of the noise you hear about this sort of thing, and is surely statistically indistinguishable from no change at all.
But if such modelling is in the ball park at all, the benefits of the deal are substantial to some emerging economies. The Bank predicts that the TPP will boost Vietnam’s exports by 30%. However, to their credit, they also simulated the impact of non-member countries, which lose export share to TPP members, showing that once again, the punchline is that “free trade” is a misnomer, a mixed bag with winners and losers.
Posted by Mark Thoma on Wednesday, January 13, 2016 at 11:56 AM in Economics, International Trade |
Is mainstream academic macroeconomics eclectic?: For economists, and those interested in macroeconomics as a discipline
Eric Lonergan has a short little post that is well worth reading..., it makes an important point in a clear and simple way that cuts through a lot of the nonsense written on macroeconomics nowadays. The big models/schools of thought are not right or wrong, they are just more or less applicable to different situations. You need New Keynesian models in recessions, but Real Business Cycle models may describe some inflation free booms. You need Minsky in a financial crisis, and in order to prevent the next one. As Dani Rodrik says, there are many models, and the key questions are about their applicability.
If we take that as given, the question I want to ask is whether current mainstream academic macroeconomics is also eclectic. ... My answer is yes and no.
Let’s take the five ‘schools’ that Eric talks about. ... Indeed the variety of models that academic macro currently uses is far wider than this.
Does this mean academic macroeconomics is fragmented into lots of cliques, some big and some small? Not really... This is because these models (unlike those of 40+ years ago) use a common language. ...
It means that the range of assumptions that models (DSGE models if you like) can make is huge. There is nothing formally that says every model must contain perfectly competitive labour markets where the simple marginal product theory of distribution holds, or even where there is no involuntary unemployment, as some heterodox economists sometimes assert. Most of the time individuals in these models are optimising, but I know of papers in the top journals that incorporate some non-optimising agents into DSGE models. So there is no reason in principle why behavioural economics could not be incorporated. If too many academic models do appear otherwise, I think this reflects the sociology of macroeconomics and the history of macroeconomic thought more than anything (see below).
It also means that the range of issues that models (DSGE models) can address is also huge. ...
The common theme of the work I have talked about so far is that it is microfounded. Models are built up from individual behaviour.
You may have noted that I have so far missed out one of Eric’s schools: Marxian theory. What Eric want to point out here is clear in his first sentence. “Although economists are notorious for modelling individuals as self-interested, most macroeconomists ignore the likelihood that groups also act in their self-interest.” Here I think we do have to say that mainstream macro is not eclectic. Microfoundations is all about grounding macro behaviour in the aggregate of individual behaviour.
I have many posts where I argue that this non-eclecticism in terms of excluding non-microfounded work is deeply problematic. Not so much for an inability to handle Marxian theory (I plead agnosticism on that), but in excluding the investigation of other parts of the real macroeconomic world. ...
The confusion goes right back, as I will argue in a forthcoming paper, to the New Classical Counter Revolution of the 1970s and 1980s. That revolution, like most revolutions, was not eclectic! It was primarily a revolution about methodology, about arguing that all models should be microfounded, and in terms of mainstream macro it was completely successful. It also tried to link this to a revolution about policy, about overthrowing Keynesian economics, and this ultimately failed. But perhaps as a result, methodology and policy get confused. Mainstream academic macro is very eclectic in the range of policy questions it can address, and conclusions it can arrive at, but in terms of methodology it is quite the opposite.
Posted by Mark Thoma on Wednesday, January 13, 2016 at 09:27 AM in Economics, Macroeconomics, Methodology |
Validity of the Neo-Fisherian Hypothesis: Warning: Super-Technical Material Follows
The neo-Fisherian hypothesis is as follows: If the central bank commits to peg the nominal interest rate at R, then the long-run level of inflation in the economy is increasing in R. Using finite horizon models, I show that the neo-Fisherian hypothesis is only valid if long-run inflation expectations rise at least one for one with the peg R. However, in an infinite horizon model, the neo-Fisherian hypothesis is always true. I argue that this result indicates why macroeconomists should use finite horizon models, not infinite horizon models. See this linked note and my recent NBER working paper for technical details.
In any finite horizon economy, the validity of the neo-Fisherian hypothesis depends on how sensitive long-run inflation expectations are to the specification of the interest rate peg.
- If long-run inflation expectations rise less than one-for-one (or fall) with the interest rate peg, then the neo-Fisherian hypothesis is false.
- If long-run inflation expectations rise at least one-for-one with the interest rate peg, then the neo-Fisherian hypothesis is true.
Intuitively, when the peg R is high, people anticipate tight future monetary policy. The future tightness of monetary policy pushes down on current inflation. The only way to offset this effect is for long-run inflation expectations to rise sufficiently in response to the peg.
In contrast, in an infinite horizon model, the neo-Fisherian hypothesis is valid - but only because of an odd discontinuity. As the horizon length converges to infinity, the level of inflation becomes infinitely sensitive to long-run inflation expectations. This means that, for almost all specifications of long-run inflation expectations, inflation converges to infinity or negative infinity as the horizon converges to infinity. Users of infinite horizon models typically discard all of these limiting “infinity” equilibria by setting the long-run expected inflation rate to be equal to the difference between R and r*. In this way, the use of an infinite horizon - as opposed to a long but finite horizon - creates a tight implicit restriction on the dependence of long-run inflation expectations on the interest rate peg
To summarize: The validity of the neo-Fisherian hypothesis depends on an empirical question: how do long-run inflation expectations depend on the central bank's peg? This empirical question is eliminated when we use infinite horizon models - but this is a reason not to use infinite horizon models.
In case you missed this from George Evans and Bruce McGough over the holidays (on learning models and the validity of the Neo-Fisherian Hyposthesis, also "super-technical"):
The Neo-Fisherian View and the Macro Learning Approach
I've been surprised that none of the Neo-Fisherians have responded.
Posted by Mark Thoma on Wednesday, January 13, 2016 at 12:24 AM in Economics, Inflation, Macroeconomics, Monetary Policy |
Posted by Mark Thoma on Wednesday, January 13, 2016 at 12:06 AM in Economics, Links |
Republican Candidates Turn to a Touchy Topic: Poverty: On Saturday ... six Republican hopefuls gathered at a convention center here to talk about poverty. Donald Trump and Ted Cruz, the top two, weren’t there. But still, poverty?
Not even Democrats, who by Republicans’ own admission pretty much own the subject, have dedicated this kind of campaign time to those at the very bottom of the ladder. The votes simply aren’t there. And that’s especially true for Republicans.
What’s going on? ...Republicans ... have a coherent theory about the causes of America’s entrenched poverty that fits well with their underlying worldview: it’s largely the government’s fault. ...
“From the government standpoint, we have actually been building a trap,” Mr. Ryan said.
Trouble is, the evidence doesn’t much mesh with this view. ...
... Consider the huge tax cuts offered up by most Republican candidates. ... All of them provide most of their benefits to the rich.
Meanwhile, the House Republicans’ 2016 budget plan, drafted largely by Mr. Ryan, includes some $3 trillion, over 10 years, in cuts to programs that serve people of limited means.
As an antipoverty strategy, it’s impossible to square the circle of the largess of Republican tax plans and military spending plans with their parsimony everywhere else. As Senator Rubio of Florida noted: “What the other side is going to say is the Republicans, the conservatives, they are just looking to gut the antipoverty programs.”
Yes, they will. And Republicans’ priorities are helping the other side make its case.
Posted by Mark Thoma on Tuesday, January 12, 2016 at 12:50 PM in Economics, Politics, Social Insurance |
I have a new column:
Three Ways to Help the Working Class: ... In graduate school, I was once told that “people don’t have marginal products, jobs do.” What does this mean? ...
I wish I would have connected the last part to the Supreme Court case on public unions.
Posted by Mark Thoma on Tuesday, January 12, 2016 at 08:23 AM in Economics, Fiscal Times, Income Distribution |
Posted by Mark Thoma on Tuesday, January 12, 2016 at 12:15 AM in Economics, Links |
"The conservative economic orthodoxy dominating the Republican Party is very, very wrong":
The Obama Boom, by Paul Krugman, Commentary, NY Times: Do you remember the “Bush boom”? Probably not. Anyway, the administration of George W. Bush began its tenure with a recession, followed by an extended “jobless recovery.” By the summer of 2003, however, the economy began adding jobs again. The pace of job creation wasn’t anything special..., but conservatives insisted that the job gains ... represented a huge triumph, a vindication of the Bush tax cuts.
So what should we say about the Obama job record? Private-sector employment ... hit its low point in February 2010. Since then we’ve gained 14 million jobs,... roughly double the number of jobs added during the supposed Bush boom...
The point ... is that ... Mr. Obama ... has been attacked at every stage of his presidency for policies that his critics allege are “job-killing”...
What did Mr. Obama do that was supposed to kill jobs? ... He signed the 2010 Dodd-Frank financial reform... He raised taxes on high incomes... And he enacted a health reform...
Yet none of the dire predicted consequences of these policies have materialized. ...
So what do we learn from this impressive failure to fail? That the conservative economic orthodoxy dominating the Republican Party is very, very wrong. In a way, that should have been obvious. ...
On one side, this elite is presumed to be a bunch of economic superheroes, able to deliver universal prosperity by summoning the magic of the marketplace. On the other side, they’re depicted as incredibly sensitive flowers who wilt in the face of adversity — raise their taxes a bit, subject them to a few regulations, or for that matter hurt their feelings in a speech or two, and they’ll stop creating jobs and go sulk in their tents, or more likely their mansions.
It’s a doctrine that doesn’t make much sense, but it ... turns out to be very convenient for the elite: namely, that injustice is a law of nature, that we’d better not do anything to make our society less unequal or protect ordinary families from financial risks. Because if we do ... we’ll be severely punished by the invisible hand, which will collapse the economy. ...
The ... Obama economy offers a powerful lesson... From a conservative point of view, Mr. Obama did everything wrong, afflicting the comfortable (slightly) and comforting the afflicted (a lot), and nothing bad happened. We can, it turns out, make our society better after all.
Posted by Mark Thoma on Monday, January 11, 2016 at 05:05 AM in Economics, Politics |
I missed this from Narayana Kocherlakota a little over a week ago:
Overly Tight Macroeconomic Policy: The level of public debt is high by historical standards in many countries. Central banks have set their nominal interest rate targets to extraordinarily low - sometimes negative - levels. Despite these historical comparisons, though, macroeconomic outcomes tell a clear story: Macroeconomic policy remains much too tight in the US and around the world.
In terms of monetary policy, inflation remains low, and is expected to remain low for years. Indeed, financial market participants are betting that most major central banks will fall short of their inflation targets over the next decade or two. Nonetheless, those same central banks (including the Federal Reserve) continue to communicate a strong desire to "normalize" - that is, tighten - monetary policy over the medium term.
In terms of fiscal policy, many governments are able to borrow long-term at unusually low real interest rates. They could invest those funds in needed physical and human infrastructure. Or they could return the funds to their citizens through tax cuts - tax cuts that could be tailored to incentivize physical investment or R&D. But the relevant governments instead continue to emphasize the need to further restrict the level of public debt.
Economic policymakers can do better. The key is to focus a lot more on the question of how to use available policy tools to achieve desirable macroeconomic outcomes, and a lot less on historical empirical regularities. Just because debt is high by historical standards doesn't mean that governments cannot make their citizens better off by issuing more debt Just because nominal interest rates are low by historical standards doesn't mean that central banks can't achieve their objectives more rapidly by lowering them still further.
We are only beginning to see the impact of tight policy choices on our economies. We all know what has been happening in Spanish and Greek labor markets. But even in the US - which supposedly has a near-normal labor market - the fraction of men aged 25-34 who do not have a job is over 50%(!) higher than it was in 2007. Given these kinds of macroeconomic outcomes, it should not be surprising that we see increasing signs of social fracturing and disengagement in many developed countries.
I've said that economic policymakers can do better. Indeed, I increasingly believe that they must do better.
See here for more of his thoughts on macroeconomic policy.
Posted by Mark Thoma on Monday, January 11, 2016 at 12:33 AM in Economics, Fiscal Policy, Monetary Policy |
College Sports and Deadweight Loss: The amount of money generated by college sports is staggering: broadcast rights alone are worth over a billion dollars annually, and this doesn't include tickets sales for live events, revenue from merchandise, or fees from licensing. But the athletes on whose talent and effort the entire enterprise is built get very little in return. As Donald Yee points out in a recent article, these athletes are "making enormous sums of money for everyone but themselves." Even the educational benefits are limited, with "contrived majors" built around athletic schedules and terribly low graduation rates.
Since colleges cannot compete for athletes by bidding up salaries, they compete in absurd and enormously wasteful ways:
Clemson’s new football facility will have a miniature-golf course, a sand volleyball pit and laser tag, as well as a barber shop, a movie theater and bowling lanes. The University of Oregon had so much money to spend on its football facility that it resorted to sourcing exotic building materials from all over the world.
The benefit that athletes (or anyone else for that matter) derives from exotic building materials used for this purpose are negligible in relation to the cost. Only slightly less wasteful are the bowling lanes and other frills at the Clemson facility. The intended beneficiaries would be much better off if they were to receive the amounts spent on these excesses in the form of direct cash payments. This is what economists refer to as deadweight loss.
But are competitive salaries really the best alternative to the current system? I think it's worth thinking creatively about compensation schemes that could provide greater monetary benefits to athletes while also improving academic preparation more broadly. Here's an idea. Suppose that athletes are paid competitive salaries but (with the exception of an allowance to cover living expenses) these are held in escrow until successful graduation. Upon graduation the funds are divided, with one-half going to the athlete as taxable income, and the rest distributed on a pro-rata basis to each primary and secondary school attended by the athlete prior to college. A failure to graduate would result in no payments to schools, and a reduced payment to the athlete.
This would provide both resources and incentives to improve academic preparation as well as athletic development at grade schools. Those talented few who make it to the highest competitive levels in college sports would clearly benefit, since their compensation would be in cash rather than exotic building materials. But the benefits would extend to entire communities, and link academic and athletic performance in a manner both healthy and enduring. It's admittedly a more paternalistic approach than pure cash payments, but surely less paternalistic than the status quo.
Posted by Mark Thoma on Monday, January 11, 2016 at 12:24 AM in Economics, Sports, Universities |
BIS redefines inflation (again): An interview with Hyun Song Shin, economic adviser and head of research at the BIS, reposted in the BIS web site reminds us of the strange and heterodox views that the BIS (and others) have about the behavior of inflation. The views run contrary to most of what we all teach about inflation. They can only be understood if one has a very special and radical view on what determines inflation and are supported by a unique reading of the data. You probably need to read the whole interview to understand what I mean but here is a summary of the new BIS theory of inflation:
1. Inflation is a global phenomenon, not a national one. Monetary policy has very little influence on inflation, demographics and globalization are much more relevant factors.
2. The idea that monetary policy affects demand and possibly inflation is a "short-term" story that is too simple to understand the recent behavior of inflation.
3. Deflation is not that bad. The Great Depression is a special historical event that holds no lessons for what we have witnessed during the Great Recession.
4. While central banks are powerless at controlling domestic inflation, they are very powerful at distorting interest rates and rates of returns for long periods of time (decades).
5. Central banks have a problem when inflation is the only goal (they end up creating distortions in financial markets).
6. Monetary policy is a cause of all China's problems (he admits that there are other causes as well).
In summary, central banks are evil. Their only goal is to control inflation but they cannot really control it and because of their superpowers to distort all interest rates they only end up causing volatility and crises. And this is coming from an organization whose members are central banks and its mission is "to serve central banks". Surreal.
Posted by Mark Thoma on Monday, January 11, 2016 at 12:15 AM in Economics, Inflation |
Posted by Mark Thoma on Monday, January 11, 2016 at 12:06 AM in Economics, Links |
I wonder if conditioning on the type of bubble (e.g. driven by housing) would make a difference (though not sure it would be possible to fit them into tidy categories). I guess another way to ask the question is whether the cases of a "dramatic market rise followed by an equally spectacular fall" have anything in common:
Market Bubbles: What Goes Up Doesn't Always Come Down, by Matt Nesvisky, NBER Digest: The great majority of booms during which market values doubled in a single year were not followed by crashes wiping out those gains.
Do market booms inevitably result in busts? History suggests not, according to William N. Goetzmann in Bubble Investing: Learning from History (NBER Working Paper No. 21693).
A dramatic market rise followed by an equally spectacular fall, such as a doubling in prices that is followed by a halving in value, is often regarded as a bubble followed by a bust. Seeking out such events, Goetzmann analyzes returns for 42 stock markets around the world from 1900 through 2014. He finds that bubble-and-bust episodes are uncommon, and urges caution in drawing conclusions from the widely-reported and discussed great bubbles of history.
Conditional upon a market boom amounting to a stock price increase of 100 percent or more in a three-year period, crashes gave back prior gains only 10 percent of the time. Market prices were more likely to double again following a 100 percent price boom. The frequency of a market crash over a five-year period is significantly higher when that market has just experienced a boom, but the frequency of doubling over the next five years is not much affected by whether a market has recently boomed. Thus a boom does raise the probability of a crash, but the probability of a crash remains low. Probabilities of a crash following a boom in which prices doubled in a single calendar year were also higher, however the great majority of such extreme events were not followed by crashes that wiped out those gains.
Goetzmann suggests that his findings are relevant for regulators who are considering the desirability of deflating bubbles. If bubbles are often associated with investment in promising, albeit risky, new technologies, then when considering policies that may deflate them, policy-makers may face a tradeoff between staving off a financial crisis and encouraging fruitful investment. They may evaluate this trade-off differently if the probability of a crash following a boom is low rather than high.
Posted by Mark Thoma on Sunday, January 10, 2016 at 12:15 AM in Economics, Financial System, Regulation |
Posted by Mark Thoma on Sunday, January 10, 2016 at 12:06 AM in Economics, Links |
From the NBER Digest
'Who Owns U.S. Business? How Much Tax Do They Pay?', by Laurent Belsie, NBER Digest: In 1980, pass-through entities accounted for 20.7 percent of U.S. business income; by 2011, they represented 54.2 percent.
The importance of pass-through business entities has soared in the past three decades. Over the same period, the amount of pass-through business income flowing to the top 1 percent of income earners has increased sharply, according to Business in the United States: Who Owns It and How Much Tax Do They Pay? (NBER Working Paper No. 21651).
"Despite this profound change in the organization of U.S. business activity, we lack clean, clear facts about the consequences of this change for the distribution and taxation of business income," write Michael Cooper, John McClelland, James Pearce, Richard Prisinzano, Joseph Sullivan, Danny Yagan, Owen Zidar, and Eric Zwick. "This problem is especially severe for partnerships, which constitute the largest, most opaque, and fastest growing type of pass-through."
Pass-through entities — partnerships, tax code subchapter S corporations, and sole proprietorships — are not subject to corporate income tax. Their income passes directly to their owners and is taxed under whatever tax rules those owners face. In contrast, the income of traditional corporations, more specifically subchapter C corporations, is subject to corporate income taxes, and after-tax income distributed from the corporation to its owners is also taxable.
In 1980, pass-through entities accounted for 20.7 percent of U.S. business income; by 2011, they represented 54.2 percent. Over roughly the same period, the income share of the top 1 percent of income earners doubled. Previous research has shown that the two phenomena are linked: The growth of income from pass-through entities accounted for 41 percent of the rise in the income of the top 1 percent. By linking 2011 partnership and S corporation tax returns with federal individual income tax returns, in particular Form 1065 and Form 1120S K-1 returns, the researchers find that over 66 percent of pass-through business income received by individuals goes to the top 1 percent. The concentration of partnership and S corporation income is much greater than the concentration of dividend income (45 percent to the top 1 percent) which proxies for income from C corporations (traditional corporations). While taxpayers in the top 1 percent are eight times as likely to receive dividends as taxpayers in the bottom 50 percent, the ratio for partnerships is more than 50 to 1.
Many partnerships are opaque. A fifth of partnership income was earned by partners that the study's authors were not able to classify into one of several categories, such as a domestic individual or a foreign corporation. In addition, some partnerships are circular, in the sense that they are owned by other partnerships, which could in turn be owned by yet other partnerships.
Pass-through business income faces lower tax rates than traditional corporate income. The tax rate on the income earned by pass-through partnerships is a relatively low 15.9 percent, excluding interest payments and unrepatriated foreign income. That compares with a 31.6 percent rate for C corporations and a 24.9 percent rate for S corporations. Only sole proprietorships have a lower average rate, 13.6 percent. Combining both taxes on corporations and taxes on investors, the researchers calculate that the U.S. business sector as a whole pays an average tax rate of 24.3 percent.
The lower average tax rate for pass-through entities than for traditional corporations translates into reduced federal revenues, the researchers conclude. They estimate that in 2011, if the share of pass-through tax returns had been at its 1980 level, when traditional C corporations and sole proprietorships dominated, the average rate would have been 3.8 percentage points higher and the Treasury would have collected $100 billion more in tax revenue.
One reason partnerships pay such a low average tax rate is that nearly half their income (45 percent) is classified as capital gains and dividend income, which is taxed at preferential rates. Another 15 percent of their income is earned by tax-exempt and foreign entities, for which the effective tax rate is less than five percent. The roughly 30 percent of partnership income that is earned by unidentifiable and circular partnerships is taxed at an estimated 14.7 percent rate.
"A long-standing rationale for the entity-level corporate income tax is that it can serve as a backstop to the personal income tax system," the researchers conclude. "Our inability to unambiguously trace 30 percent of partnership income to either the ultimate owner or the originating partnership underscores the concern that the current U.S. tax code encourages firms to organize opaquely in partnership form in order to minimize tax burdens."
Posted by Mark Thoma on Saturday, January 9, 2016 at 08:51 AM in Economics, Income Distribution, Taxes |
Posted by Mark Thoma on Saturday, January 9, 2016 at 12:06 AM in Economics, Links |
Will China be 2008 all over again? Maybe, but maybe not:
When China Stumbles, by Paul Krugman, Commentary, NY Times: So, will China’s problems cause a global crisis? The good news is that the numbers, as I read them, don’t seem big enough. The bad news is that I could be wrong...
China’s economic model, which involves very high saving and very low consumption, was ... possible when China had vast reserves of underemployed rural labor. But that’s no longer true, and China now faces the tricky task of transitioning to much lower growth without stumbling into recession.
A reasonable strategy would have been to buy time with credit expansion and infrastructure spending while reforming the economy in ways that put more purchasing power into families’ hands. Unfortunately, China pursued only the first half of that strategy... The result has been rapidly rising debt, much of it owed to poorly regulated “shadow banks,” and a threat of financial meltdown.
So the Chinese situation looks fairly grim...
As I suggested..., however, I have a hard time making the numbers for ... catastrophe work. ...China buys more than $2 trillion ... from the rest of the world each year. But it’s a big world, with a total gross domestic product excluding China of more than $60 trillion. Even a drastic fall in Chinese imports would be only a modest hit to world spending.
What about financial linkages? ... China has capital controls ... so there’s very little direct spillover from plunging stocks or even domestic debt defaults...
But I have to admit that I’m not as relaxed about this as ... I should be. ... And if my worries come true, we are woefully unready to deal with the shock. ...
Monetary policy would probably be of little help. With interest rates still close to zero and inflation still below target, the Fed would have limited ability to fight an economic downdraft... Meanwhile, the European Central Bank is already pushing to the limits of its political mandate in its own so far unsuccessful effort to raise inflation.
And while fiscal policy ... would surely work, how many people believe that Republicans would be receptive to a new Obama stimulus plan, or that German politicians would look kindly on a proposal for bigger deficits in Europe?
Now, my best guess is still that things won’t be that bad — nasty in China, but just a bit of turbulence elsewhere. And I really, really hope that guess is right, because we don’t seem to have a plan B anywhere in sight.
Posted by Mark Thoma on Friday, January 8, 2016 at 10:50 AM in China, Economics |
It's Time to Return to Market-Based Antitrust Law: Tim Lee makes an interesting argument today. He notes that cell phone plans have gotten a lot better lately ...
Why has this happened? Because for the past couple of years T-Mobile has been competing ferociously with cheaper, more consumer-friendly plans, and the rest of the industry has had to keep up. But what prompted T-Mobile to become the UnCarrier in the first place?
Back in 2011, AT&T was on the verge of gobbling up T-Mobile, which would have turned the industry's Big Four into the Big Three and eliminated the industry's most unpredictable company....But then the Obama administration intervened to block the merger. With a merger off the table, T-Mobile decided to become a thorn in the side of its larger rivals, cutting prices and offering more attractive service plans. The result, says Mark Cooper, a researcher at the Consumer Federation of America, has been an "outbreak of competition" that's resulted in tens of billions of dollars in consumer savings. ...
Antitrust law in America has been off track for decades, and it's time to get back on. The ... feds should concentrate on one simple thing: making sure there's real competition in every industry. Then let the market figure things out. There are exceptions here and there to this rule, but not many.
Competition is good. Corporations may not like it, and they'll fight tooth and nail for their rents. But it's good for everyone else.
Posted by Mark Thoma on Friday, January 8, 2016 at 12:33 AM in Economics, Market Failure, Regulation |
Posted by Mark Thoma on Friday, January 8, 2016 at 12:24 AM in Economics, Methodology, Video |
Posted by Mark Thoma on Friday, January 8, 2016 at 12:15 AM in Economics, Monetary Policy, Video |