Why haven't we heard more about Clinton and Trump's positions on climate change?:
What About the Planet?, by Paul Krugman, NY Times: Our two major political parties are at odds on many issues, but nowhere is the gap bigger or more consequential than on climate.
If Hillary Clinton wins, she will move forward with the Obama administration’s combination of domestic clean-energy policies and international negotiation — a one-two punch that offers some hope of reining in greenhouse gas emissions before climate change turns into climate catastrophe.
If Donald Trump wins, the paranoid style in climate politics — the belief that global warming is a hoax perpetrated by a vast international conspiracy of scientists — will become official doctrine, and catastrophe will become all but inevitable. ...
So there is a huge, incredibly consequential divide on climate policy. Not only is there a vast gap between the parties and their candidates, but this gap arguably matters more for the future than any of their other disagreements. So why don’t we hear more about it?
I’m not saying that there has been no reporting on the partisan climate divide, but there has been nothing like, say, the drumbeat of stories about Mrs. Clinton’s email server. And it’s really stunning that in the three nationally televised forums we’ve had so far — the “commander in chief” forum involving Mrs. Clinton and Mr. Trump, the first presidential debate and the vice-presidential debate — the moderators have asked not a single question about climate. ...
And this blind spot matters a lot. Polling suggests that millennial voters, in particular, care a lot about environmental protection and renewable energy. But it also suggests that more than 40 percent of young voters believe that there is no difference between the candidates on these issues.
Yes, I know, people should be paying more attention — but this nonetheless tells us how easy it is for voters who rely on TV news or don’t read stories deep inside the paper to miss what should be a central issue in this campaign.
The good news is that there are still two debates to go, offering the opportunity to make some amends.
It’s time to end the blackout on climate change as an issue. It needs to be front and center — and questions must be accompanied by real-time fact-checking, not relegated to the limbo of he-said-she-said, because this is one of the issues where the truth often gets lost in a blizzard of lies.
There is, quite simply, no other issue this important, and letting it slide would be almost criminally irresponsible.
Posted by Mark Thoma on Friday, October 7, 2016 at 09:31 AM in Economics, Environment, Politics |
I have a new column:
The Anti-Trust Election of 2016: A report on the “Benefits of Competition and Indicators of Market Power” from the White House Council of Economic Advisors documents that monopoly power has been increasing the last few decades, and it argues persuasively “that consumers and workers would benefit from additional policy actions by the government to promote competition within a variety of industries.” The report is part of an initiative by the Obama administration last spring to promote a “fair, efficient, and competitive marketplace” through stricter enforcement of antitrust regulations, and through other measures such as patent reform and the reform of occupational licensing.
To those who believe more aggressive enforcement of antitrust laws is needed, and I am one of them, Hillary Clinton’s recent announcement of “A new commitment to promote competition, address excessive concentration and the abuse of economic power, and strengthen antitrust laws and enforcement” is an encouraging sign that if Clinton is elected the Obama administration’s initiative will not end when he leaves office.
The presence of monopoly power harms the economy in several ways. ...
Donald Trump has promised to make deregulation one of the focal points of his presidency. If Trump is elected, the trend toward rising market concentration and all of the problems that come with it are likely to continue. We’ll hear the usual arguments about ineffective government and the magic of markets to justify ignoring the problem. If Clinton is elected, it’s unlikely that her administration would be active enough in antitrust enforcement for my taste. But at least she acknowledges that something needs to be done about this growing problem, and any movement toward more aggressive enforcement of antitrust regulation would be more than welcome.
Posted by Mark Thoma on Friday, October 7, 2016 at 09:03 AM in Economics, Fiscal Times, Market Failure, Politics, Regulation |
Posted by Mark Thoma on Friday, October 7, 2016 at 12:06 AM in Economics, Links |
From the NBER Digest:
Did a Legal Ivory Sale Increase Smuggling and Poaching?: After the experimental 2008 sale, there was a discontinuous jump in the proportion of wild elephants poached and in seizures of contraband ivory leaving Africa.
Advocates of legalizing the purchase of goods sold in black markets argue that allowing legal trade will displace illegal buying and selling, reduce criminal activity, and permit greater control of the previously illegal goods. New research indicates that this is not always the case.
In Does Legalization Reduce Black Market Activity? Evidence from a Global Ivory Experiment and Elephant Poaching Data (NBER Working Paper No. 22314), Solomon Hsiang and Nitin Sekar show that the production of black market elephant ivory expanded by an estimated 66 percent following a one-time legal sale in 2008. Seizures of contraband ivory leaving African countries also increased, from 4.8 to 8.4 seizures per country per year. The weight of ivory in the seizures increased by an average of 335 kilograms per year.
In 1989, the Convention on the International Trade of Endangered Species (CITES) banned international trade in ivory in order to protect the wild African elephant. Individual countries continued to regulate their domestic ivory trade. Poaching slowed, and elephant populations began to recover. African governments kept stockpiles of ivory harvested from animals that died naturally.
Poaching began increasing again in the mid-1990s. Following a single legal sale from stockpiles to Japan in 1999, China and Japan requested the right to make an additional purchase. After years of debate, the governments of those countries were able to purchase 62 and 45 tons of legal ivory, respectively, at auction in 2008. The governments continue to resell that ivory in their domestic markets.
After the legal sale in 1999, CITES established the Monitoring the Illegal Killing of Elephants (MIKE) program at 79 sites in 40 countries in Africa and Asia. Preliminary data collection began in mid-2002. The Proportion of Illegally Killed Elephants (PIKE) Index is the fraction of "detected elephant carcasses that were illegally killed," a measure designed to correct for fluctuating elephant populations and field worker effort.
The researchers examine how poachers responded to the 2008 sale by studying annual PIKE data from 2003 to 2013. They find a clear discontinuous increase in the index after the 2008 sale. They cannot explain this increase with changes in natural elephant mortality rates, or with economic variables such as China's or Japan's per capita GDP, Chinese or Japanese trade with elephant range countries, measures of China's physical presence in range countries, or per capita GDP in PIKE-reporting countries.
The researchers conclude that the legal sale of ivory "triggered an increase in black market ivory production by increasing consumer demand and/or reducing the cost of supplying black market ivory." Supplier costs may be reduced if legalization of a product makes it more difficult to detect and monitor illegal provision of that product. Consumer demand may rise because legalization may reduce the stigma around a previously banned product.
Posted by Mark Thoma on Thursday, October 6, 2016 at 01:12 PM in Academic Papers, Economics |
An editorial at the FT:
Trump’s mudslinging puts the Fed in danger: So many extraordinary accusations and denunciations emanate from Donald Trump... One of the more potentially damaging is the contention that the Federal Reserve is setting policy to ensure the election of his opponent, Hillary Clinton.
Political criticism of the US central bank has been going on for decades. ...
Yet it is offensive and absurd to suggest that Janet Yellen, the Fed chair, and her colleagues are deliberately trying to engineer the election of another Democratic president. At a time when the Fed has a low standing in the public mind, perhaps more disturbing than Mr Trump’s eccentric claims is that congressional Republicans, who should know better, are joining in. ...
It is beyond hope that Mr Trump will see sense and moderate his attacks. His fellow Republicans, unless they are ready to endanger one of the pillars of US economic stability, should resist the urge to follow his example.
Posted by Mark Thoma on Thursday, October 6, 2016 at 10:57 AM in Economics, Monetary Policy, Politics |
Posted by Mark Thoma on Thursday, October 6, 2016 at 12:06 AM in Economics, Links |
Hard To Say That November Is Really "Live," by Tim Duy: If there is one thing that I am fairly sure that monetary policymakers hate, it is the idea that the outcomes of their meetings are preordained. November appears to be just such a meeting. To be sure, Fed hawks want to believe the meeting is "live." The sizable group that dissented - or would have dissented if they were voting members - likely sees the case for a rate hike in November as even more pressing than in September. Remember, it is all about preemptive policy action from that contingent. If you thought delay was bad in September, it must be worse in November. But the doves - including a powerful group of permanent voting members - will likely have none of it. From their point of view, the case for a rate hike is no more pressing in November than September. Indeed, according to the the dot-plot, at least three would be happy taking a pass in December as well. And, although they would be loathe to admit it, within the context of a risk management framework the timing of the election argues against a hike as well. As I see it, the best the hawks can hope for is a strong statement about December. The data would have to very quickly turn very strong to give the hawks an upper hand in November.
I did get a chuckle out of this last week:
The only way to reinforce the idea that November is a "live" meeting is to continue to hold out the hope of a rate hike. But unless the doves budge between now and November, a rate hike is not happening. And the doves aren't likely to budge anymore than the hawks. It's kind of a stalemate at the moment, and everyone knows it. So reinforcing the the idea that a hike is going to happen when it isn't is not really an effective communication strategy. It is not exactly good policy guidance.
Cleveland Federal Reserve President Loretta Master would also like you to believe November is "live." From Monday, via Bloomberg:
Federal Reserve Bank of Cleveland President Loretta Mester said the economy is ripe for an interest-rate increase and repeated that the Fed’s November meeting should be viewed as “live” for a policy decision, despite its proximity to the U.S. presidential election.
“I would expect that the case would remain compelling” for a rate hike when the Federal Open Market Committee gathers in Washington Nov. 1-2, the week before Americans head to the polls, she told Kathleen Hays in an interview on Bloomberg Television Monday. Mester added that politics wouldn’t affect the decision.
Of course she wants November to be "live." She wanted to hike rates at the last meeting. And I suspect she believes that unless the hawks can push up rate hike expectations to something closer to 50% (from the current 13% or so), they have no chance of pushing through a rate hike. Not that I think they have much of a chance even then. Seems that his amounts to trying to manipulate market expectations to obtain an advantage at the FOMC meeting. I sense this is what hawks have attempted more than once this year. In my opinion, this too is not a good communications strategy.
Like the outcome of the November meeting, Mester's dissent is also preordained.
Mester also repeats the "politics are irrelevant" story. And, broadly, I agree. I don't believe, for example, the Federal Reserve Chair Janet Yellen is holding rates low simply to help President Obama or enhance Hillary Clinton's election chances. That is ludicrous. So if you are saying that the Fed won't hike in November for those reasons, I think you are wrong.
But I am going to give some on this issue in another dimension. Elections are risk events, and a risk management strategy thus demands that they be considered when making policy. And we know that in fact the Federal Reserve considers elections when making policy. New York Times reporter Binyamin Appelbaum caught Yellen by surprise at the press conference with this question:
BINYAMIN APPELBAUM. Binya Appelbaum, the New York Times. In the run-up to the Brexit vote earlier this year, several Fed policymakers cited it as a reason that they were reluctant to raise rates in June because of the uncertainty associated with that vote. In the run-up to the presidential election, I have not heard any Fed policymaker give that as a reason that they might want to delay raising rates in November. Could you explain why the Fed regards Brexit as a greater danger to the American economy than the presidential election that’s actually happening here? And, second, there were three dissents at this meeting. Could you explain what the cause of disagreement was, what those policymakers thought?
CHAIR YELLEN. So we are very focused on evaluating, given the way the economy is operating, what is the right policy to foster our goals, and I’m not going to get into politics.
Appelbaum nailed that one - we can't credibly believe that the Brexit vote is a more relevant risk for the US economy than this presidential election. Yet the Fed is asking us to believe exactly that. If you can't comment on how US elections impact Fed policy, you shouldn't comment on how foreign elections impact Fed policy. Just chalk it up to "global economic uncertainty" and move one. The Fed really messed up by identifying the Brexit vote as a reason to hold rates steady.
This also doesn't seem like a win for the Fed's communication strategy. Live and learn.
Finally, when considering the risk management issues, don't let New York Federal Reserve President William Dudley's latest speech slip by you. He questions the effectiveness of unconventional monetary policy:
Given the initial novelty of unconventional monetary policy tools, central banks did not have a well-developed body of research to draw on to design the programs and calibrate their impact. While it will take time to build this body of work, research to date varies in terms of the estimated effectiveness of unconventional policy. Several studies indicate that the FOMC’s first asset purchase program helped to reduce long-term interest rates, while the subsequent programs had smaller though still significant effects on rates. However, Professor Summers, who is participating in our program, has recently questioned the effectiveness of the Fed’s asset purchase programs when financial markets are well-functioning.
And then he considers the implications for monetary policy (emphasis added):
There is a related concern given that the federal funds rate is still close to zero at this point in the expansion. While I’m on record as saying that expansions do not simply die of old age, some economists are concerned that the risk of a recession is increasing. As I indicated earlier, the FOMC was able to reduce the federal funds rate by more than 5 percentage points in an effort to offset the effects of the last recession. If another recession were to happen in the next few years, it is likely that the FOMC would be unable to respond with a cut of such magnitude. In this case, the effectiveness of unconventional monetary policy in providing accommodation would again become a central issue, as Chair Yellen discussed in her recent Jackson Hole speech. A risk management approach to monetary policy would suggest that the more concerned one is with the effectiveness of these policies at the zero lower bound, the more cautious one would be in the process of removing accommodation. So, even though we are now slightly off the zero lower bound, an assessment of the effectiveness of unconventional monetary policy has implications with respect to the current stance of monetary policy.
Recessions don't die of old age, that's true. But the fact that Dudley even mentions rising risks of recession among "some economists" is notable. And note the time horizon of his concerns - the next few years! He must have a tingle in the back of his head saying that we are closer to the end than the beginning, and we still don't have adequate policy room, nor can we get adequate policy room by hiking rates because that will only accelerate the onset of the next recession. So the only thing they can do is delay (although not clear why he should consider a rate hike wise at all if he concedes to recession concerns). Such an argument will continue to dominate over the preemptive strike argument (see Richmond Federal Reserve President Jeffrey Lacker for the extreme view on that point) in November.
My takeaways on Fed communications over the last week are thus:
- If you are only going to hike once a year, it is difficult to see why that hike would come at a meeting without a press conference. Clearly, it is not as if the timing of that one hike is really all that critical. You just have to learn to live with the reality that it will be hard to describe all eight meetings a year as "live" when you hike in only one of them. Live with the fact that at least half will end up effectively as "dead." And guess what? You determined which were "dead" with the decision to only have a press conference at every other meeting.
- Don't try to talk up a rate hike with the only purpose of keeping the drama surrounding the meeting alive. That is not helping market participants understand the factors driving policy.
- Don't try to talk up the market odds of a meeting just to attempt to gain a tactical advantage at that meeting. That seems to me to be what Fed hawks have been doing this year. The doves just aren't buying the preemptive strike argument. And they won't if market odds for a meeting are 50% rather than 15%. Wait until December.
- If US politics are off limits, then foreign politics need to be off limits. It is very hard to explain why US politics don't matter for policy when foreign politics do matter.
Bottom Line: I am hard pressed to see the way forward to a November rate hike. Seems that delay will still dominate over preemptive strikes in November.
Posted by Mark Thoma on Wednesday, October 5, 2016 at 08:54 AM in Economics, Fed Watch, Monetary Policy |
"Federico S. Mandelman, a research economist and associate policy adviser in the in the Atlanta Fed's research department, and Andrei Zlate, a senior financial economist in the Boston Fed's Risk and Policy Analysis Unit":
The Slump in Undocumented Immigration to the United States: Immigration is a challenging and often controversial topic. We have written some on the economic benefits and costs associated with the inflows of low-skilled (possibly undocumented) immigrant workers into the United States here and here. In this macroblog post, we discuss some interesting trends in undocumented immigration.
There are no official records of undocumented immigration flows into the United States. However, one crude proxy for this flow is the number of apprehensions at the U.S. border. As pointed out in Hanson (2006), the number of individuals arrested when attempting to cross the U.S.-Mexico border, provided by the Department of Homeland Security (DHS), is likely to be positively correlated with the flows of attempted illegal border crossings (see chart 1).
The apprehensions series displays spikes that coincide with well-known episodes of increased illegal immigration into the United States, such as after the financial crisis in Mexico in 1995 or during the U.S. housing boom in the early 2000s. Importantly, the series also shows a sharp decline in the flows of illegal immigration at the U.S.-Mexico border during the last recession, and those flows have remained at historically low levels since then.
A better proxy for illegal immigration from Mexico would adjust the number of apprehensions for the intensity of U.S. border enforcement (for example, the number of border patrol officers). The intuition is straightforward: for the same level of attempted illegal crossings, greater enforcement is likely to result in more apprehensions. Chart 2 shows the border patrol staffing levels as an indicator of enforcement intensity.
As the chart shows, the sharp decrease in apprehensions after the Great Recession occurred despite a remarkable increase in border enforcement, indicating that the decline in migration flows in recent years may have been even more abrupt than implied by the (unadjusted) border apprehensions shown in chart 1.
The measure of inflows shown in chart 1 is largely consistent with estimates of the stock of undocumented immigrants in the United States, such as those provided by a new study by the Pew Research Center based on data from the U.S. Census Bureau. After having peaked at 12.2 million in 2007, the stock of unauthorized immigrants fell during the Great Recession and remained stable afterwards, most recently at 11.1 million in 2014. Also, the composition of this stock has shifted since the Great Recession. Although the population of undocumented Mexican immigrants fell by more than one million from its 6.9 million peak in 2007, the number of undocumented immigrants from Asia, Central America, and sub-Saharan Africa remained relatively steady as of 2014 and even increased in some cases. For example, the population of unauthorized immigrants from India rose by about 130,000 between 2009 and 2014. However, a lot of this type of unauthorized immigration is a result of overstayed visas rather than from people crossing the border without a visa.
What do these numbers suggest about the future? It is likely that the flows of undocumented immigrant labor between Mexico and the United States reflect differences in demographic patterns and economic opportunities between the two economies. In the United States, the baby boom came to an abrupt halt in the 1960s, causing a notable slowdown in the native-born labor supply two decades later. In contrast, Mexico's fertility rate remained high for much longer, hovering at 6.7 births per woman in 1970 versus 2.5 in the United States (see chart 3).
Mexico's labor force expanded rapidly during the 1980s, which, juxtaposed with the Mexican economic slump of the early 1980s, unleashed a wave of Mexican migration to the United States (Hanson and McIntosh, 2010). Also encouraging this flow was the steady U.S. economic growth during the "Great Moderation" period from the mid-1980s up through 2007 (Bernanke, 2004). More recently, however, Mexico's fertility rate has fallen (as in some Central American economies), and economic growth there has mostly outpaced that of the United States. Therefore, it is perhaps not too surprising that demographic trends—along with greater enforcement—have caused the inflows of undocumented migration at the U.S.-Mexico border to slow in recent years. Shifts in demographic and economic factors across countries are likely to continue to influence undocumented immigration in the United States.
Note: The views expressed here are those of the authors and do not necessarily reflect the views of the Federal Reserve Banks of Atlanta or Boston.
Posted by Mark Thoma on Wednesday, October 5, 2016 at 08:53 AM in Economics, Immigration |
Posted by Mark Thoma on Wednesday, October 5, 2016 at 12:06 AM in Economics, Links |
Does the one percent deserve what it gets?: The rich are not like you and me. They contribute far more to society than everybody else, so argues Harvard University economist Gregory Mankiw in his essay “Defending the One Percent.” Mankiw’s praise for talented superstars such as Steven Jobs, J.K. Rowling, and Steven Spielberg quickly blooms into a more general argument that competitive labor markets pay workers what they deserve. This is music to the ears of high earners, and it sings to a very human desire to believe that the world is fair.
But this argument is based on neoclassical economic theories that define the domain of human choice in narrow terms, minimizing the effects of bad luck, bad markets, and bad inequalities that often predetermine market outcomes. Mankiw’s argument leaves room for corporate bad behavior defined in narrow terms as “gaming the system.” But what he most deplores is government meddling with the system.
Most economists do not explicitly endorse such views. But years of schooling in neoclassical economic theories predispose them to the view that perfectly competitive markets yield equitable as well as efficient outcomes. As a result, they often assess “rent seeking,” or efforts to get rich at someone else’s expense, by comparison with hypothetical market outcomes.
Rent seeking becomes just another name for interference with the magic meritocracy of the marketplace. From this perspective, efforts to increase the minimum wage can be considered just as unfair as efforts to challenge compensation practices for corporate chief executives and other well-heeled top managers.
Like neoclassical economic theory in general, this approach is too narrow. Competitive markets comprise a relatively small part of an economy dominated by large multinational corporations—marketplaces and firms that are embedded in a global environment of unpriced goods and services.
Efforts to get rich at someone else’s expense, which fall under the academic rubric of distributional conflict, are multidimensional. Forms of collective bargaining power based on citizenship, class, race and ethnicity, and gender, as well as other aspects of group identity, influence the resources that individuals bring to the labor market. They also influence the power that individuals possess to modify labor market outcomes.
Some of us contribute more than members of the top one percent to the economy, and some of us contribute less. None of us gets exactly what we deserve. One difference between the rich and us is that they have more money. They also enjoy—both as cause and effect—a lot more power.
Link to paper.
Posted by Mark Thoma on Tuesday, October 4, 2016 at 10:46 AM in Economics, Income Distribution |
Part of a much longer article by Binyamin Appelbaum:
Why Are Politicians So Obsessed With Manufacturing?: ...Trump has made the revival of American manufacturing a signature issue... Hillary Clinton has campaigned on a broader economic agenda, but when it came time to describe those plans, she chose a factory outside Detroit as her backdrop.
Manufacturing retains its powerful hold on the American imagination for good reason. In the years after World War II, factory work created a broadly shared prosperity that helped make the American middle class. People without college degrees could buy a home, raise a family, buy a station wagon, take some nice vacations. It makes perfect sense that voters would want to return to those times.
From an economic perspective, however, there can be no revival of American manufacturing, because there has been no collapse. Because of automation, there are far fewer jobs in factories. But the value of stuff made in America reached a record high in the first quarter of 2016, even after adjusting for inflation. The present moment, in other words, is the most productive in the nation’s history.
Politicians of all persuasions have tried to turn back time through a wide range of programs best summarized as “throwing money at factory owners.” ... By and large, those strategies haven’t helped. ...
This myopic focus on factory jobs distracts from another, simpler way to help working Americans: Improve the conditions of the work they actually do. Fast-food servers scrape by on minimum wage; contract workers are denied benefits; child-care providers have no paid leave to spend with their own children. ...
In all likelihood, many more of Mr. Trump’s supporters are people who once worked in those kinds of jobs, or whose parents did. They are now caregivers, retail workers and customer-service representatives. When will they start to demand that candidates address the lives they actually lead?
Posted by Mark Thoma on Tuesday, October 4, 2016 at 10:46 AM in Economics, Productivity, Technology |
Posted by Mark Thoma on Tuesday, October 4, 2016 at 12:06 AM in Economics, Links |
Arindrajit Dube, Chris Boone, Lucas Goodman, and Ethan Kaplan:
Unemployment Insurance Generosity and Aggregate Employment: Abstract We estimate the impact of unemployment insurance (UI) extensions on aggregate employment during the Great Recession. Using a border discontinuity design, we compare employment dynamics in border counties of states with longer maximum UI benefit duration to contiguous counties in states with shorter durations between 2007 and 2014. ... Using either the baseline or the “refined” border design, we find no statistically significant impact of increasing unemployment insurance generosity on aggregate employment. Similar results obtain from instrumental variables estimates that only use variation in UI benefit duration induced by national-level policy changes—namely the 2008 benefit extension and the subsequent 2014 expiration of the Emergency Unemployment Compensation program. Our point estimates vary in sign, but are uniformly small in magnitude and most are estimated with sufficient precision to rule out substantial impacts of the policy. Based on the confidence intervals of all of our preferred specifications, we can reject negative impacts on the employment-to-population ratio exceeding 1.2 percentage points from an increase in maximum UI benefit duration from 26 to 99 weeks. Our more precise estimates rule out decreases in excess of 0.5 percentage points from the policy expansion. Overall, our macro employment estimates from the UI benefit extention can be rationalized with a small, negative labor supply effect from the UI benefit expansion—as suggested by a number of recent studies—along with a moderately sized fiscal multiplier.
Also, our results differ substantially from Hagedorn, Karahan, Manovskii and Mitman (2015) and Hagedorn, Manovskii and Mitman (2016) despite employing apparently similar strategies. In an online Appendix, we compare our results to those papers and discuss in detail what accounts for the substantial differences in our respective estimates, and decompose the differences due to choice of dataset and specifications.
Here is the link to the paper: http://bit.ly/2dq1IYA.
Here is a link to a media advisory with a synopsis of the study: http://bit.ly/2dLTrkX.
Posted by Mark Thoma on Monday, October 3, 2016 at 01:27 PM in Economics, Social Insurance, Unemployment |
One of the many "Facts of Economic Growth" in an 80 page paper from Charles I. Jones:
The Facts of Economic Growth: ... One of the most obvious and readily quantified measures of government involvement in the economy is taxes. It is easy to write down models in which governments that tax heavily reduce the long-run success of their economies. The facts, however, are not so clear.
Figure 33 shows the growth rate of real GDP per person in the United States since 1980 as well as the total government tax revenues (including state and local) as a share of GDP... The stunning fact that emerges from this graph is that taxes have increased enormously, from around 10 percent of GDP in 1929 to more than 30 percent of GDP at their peak in 2000. But as we already noted earlier, growth rates over the 20th century were remarkably stable — if anything, they were higher after 1950 than before.
Figure 34 shows a related fact by looking across the countries of the world: tax revenues as a share of GDP are positively correlated with economic success, not negatively correlated.
Of course, these are just simple correlations, and they have an obvious interpretation. Governments do not simply throw the tax revenue that they collect into the ocean. Instead, this revenue — at least to some extent — is used to fund the good purposes that governments serve: providing a stable rule of law, a judicial system, education, public health, highways, basic research, and so on. ...
Posted by Mark Thoma on Monday, October 3, 2016 at 01:17 PM in Economics, Productivity, Taxes, Technology |
Out of Prison, Out of Work: ...A single variable -- having a criminal record -- is a key missing piece in explaining why work rates and LFPRs [labor-force participation rates] have collapsed much more dramatically in America than other affluent Western societies over the past two generations. This single variable also helps explain why the collapse has been so much greater for American men than women and why it has been so much more dramatic for African American men and men with low educational attainment...
[T]he great incarceration wave that began in the 1970s has produced millions of ex-convicts who are ill-prepared for jobs or are discriminated against by employers even when they are prepared. ...
This is on the one hand tragic: millions of American men who were imprisoned in the 1970s through 1990s have been thrust into a labor market that really doesn't want them. On the other hand, it is at least potentially fixable. Job displacement by technology is probably unstoppable, but how we punish crime is a public-policy choice. Incarceration rates have already been falling with the big declines in crime since the early 1990s, and the past few years have seen the growth of a bipartisan consensus (interrupted by the current presidential campaign, to be sure) that the U.S. throws too many people in prison for too long and doesn't do nearly enough to rehabilitate them. Prison and sentencing reform might actually be the country's best shot at thwarting that "linear trend" that would put a quarter of prime-age men out of work by 2050.
Posted by Mark Thoma on Monday, October 3, 2016 at 01:00 PM in Economics, Unemployment |
Don't waste your vote:
Trump’s Fellow Travelers, by Paul Krugman, NY Times: Donald Trump has just had an extraordinarily bad week, and Hillary Clinton an extraordinarily good one... But both Mrs. Clinton’s virtues and Mr. Trump’s vices have been obvious all along. How, then, did the race manage to get so close on the eve of the debate?
A lot of the answer, I’ve argued, lies in the behavior of the news media... But let us not let everyone else off the hook. Mr. Trump couldn’t have gotten as far as he has without the support, active or de facto, of many people who understand perfectly well ... what his election would mean, but have chosen not to take a stand.
Let’s start with the Republican political establishment, which is supporting Mr. Trump just as if he were a normal presidential nominee...
While almost all Republican officeholders have endorsed Mr. Trump, the same isn’t true of ... the G.O.P. intelligentsia..., policy experts, opinion writers, and so on. For the most part,... members of this group haven’t spoken up in support of this year’s Republican nominee. ...
But if you think that electing Mr. Trump would be a disaster, shouldn’t you be urging your fellow Americans to vote for his opponent, even if you don’t like her? After all, not voting for Mrs. Clinton — whether you don’t vote at all, or make a purely symbolic vote for a third-party candidate — is, in effect, giving half a vote to Mr. Trump.
To be fair, quite a few conservative intellectuals have accepted that logic, especially among foreign-policy types... But there have also been many who balked at doing the right thing...
And the response from sane Republican economists has been especially disappointing. Only charlatans and cranks have endorsed Mr. Trump, but only a handful have ... been willing to say that if keeping him out of the White House is important, you need to vote for Mrs. Clinton.
Finally, it’s dismaying to see the fecklessness of those on the left supporting third-party candidates. ... If polls are to be believed, something like a third of young voters intend to, in effect, opt out of this election. If they do, Mr. Trump might yet win.
In fact, the biggest danger from Mr. Trump’s terrible week is that it might encourage complacency and self-indulgence among voters who really, really wouldn’t want to see him in the White House. So remember: Your vote only counts if you cast it in a meaningful way.
Posted by Mark Thoma on Monday, October 3, 2016 at 10:00 AM in Economics, Politics |
Posted by Mark Thoma on Monday, October 3, 2016 at 12:06 AM in Economics, Links |
How Seriously Should We Take the New Keynesian Model?: Nick Rowe continues his long twilight struggle to try to take the New Keynesian-DSGE seriously, to understand what the model says, and to explain what is really going on in the New Keynesian DSGE model to the world. I said that I think this is a Sisyphean task. Let me expand on that here...
In the basic New Keynesian model, you see, the central bank “sets the nominal interest rate” and that, combined with the inflation rate, produces the real interest rate that people face when they use their Euler equation to decide how much less (or more) than their income they should spend. When the interest rate high, saving to spend later is expensive and so people do less of it and spend more now. When the interest rate is low, saving to spend later is cheap and so people do more of it and spend less now.
But how does the central bank “set the nominal interest rate” in practice? What does it physically (or, rather, financially) do?
In a normal IS-LM model, there are three commodities:
- currently-produced goods and services,
- bonds, and
In a normal IS-LM model, the central bank raises the interest rate by selling some of the bonds it has in its portfolio for cash and burns the cash it thus collects (for cash is, remember, nothing but a nominal liability of the central bank). It thus creates an excess supply (at the previous interest rate) for bonds and an excess demand (at the previous interest rate) for cash. Those wanting to hold more cash slow down their purchases of currently-produced goods and services (thus creating an excess supply of currently produced goods and services) and sell some of their bonds (thus decreasing the excess supply of bonds). Those wanting to hold fewer bonds sell bonds for cash. Thus the interest rate rises, the flow quantity of currently-produced goods and services falls, and the sticky price of currently-produced goods and services stays where it is. Adjustment continues until supply equals demand for both money and bonds at the new equilibrium interest rate and at a new flow quantity of currently produced goods and services.
In the New Keynesian model?…
Nick Rowe: Cheshire Cats and New Keynesian Central Banks:
How can money disappear from a New Keynesian model, but the Central Bank still set a nominal rate of interest and create a recession by setting it too high?…
Ignore what New Keynesians say about their own New Keynesian models and listen to me instead. I will tell you how it is possible…. The Cheshire Cat has disappeared, but its smile remains. And its smile (or frown) has real effects. The New Keynesian model is a model of a monetary exchange economy, not a barter economy. The rate of interest is the rate of interest paid on central bank money, not on bonds. Raising the interest rate paid on money creates an excess demand for money which creates a recession. Or it makes no sense at all.
I will take “it makes no sense at all” for $2000, Alex…
Either there is a normal money-supply money-demand sector behind the model, which is brought out whenever it is wanted but suppressed whenever it raises issues that the model builders want ignored, or it makes no sense at all…
Posted by Mark Thoma on Sunday, October 2, 2016 at 09:37 AM in Economics, Macroeconomics |
Posted by Mark Thoma on Saturday, October 1, 2016 at 12:06 AM in Economics, Links |
Hillary Clinton "got Gored":
How the Clinton-Trump Race Got Close, by Paul Krugman, NY Times: Monday’s presidential debate was a blowout... Hillary Clinton was knowledgeable, unflappable and — dare we say it? — likable. Donald Trump was ignorant, thin-skinned and boorish.
Yet on the eve of the debate, polls showed a close race. How ... could someone like Mr. Trump have been in striking position for the White House? (He may still be there, since we have yet to see what effect the debate had on the polls.)
Part of the answer is that a lot more Americans than we’d like to imagine are white nationalists... Indeed, implicit appeals to racial hostility have long been at the core of Republican strategy...
But while racially motivated voters are a bigger minority than we’d like to think, they are a minority. And as recently as August Mrs. Clinton held a commanding lead. Then her polls went into a swoon.
What happened? ... As I’ve written before, she got Gored. That is, like Al Gore in 2000, she ran into a buzz saw of adversarial reporting from the mainstream media, which treated relatively minor missteps as major scandals, and invented additional scandals out of thin air.
Meanwhile, her opponent’s genuine scandals and various grotesqueries were downplayed or whitewashed...
I still don’t fully understand this hostility, which wasn’t ideological. Instead, it had the feel of the cool kids in high school jeering at the class nerd. Sexism was surely involved but may not have been central, since the same thing happened to Mr. Gore.
In any case, those of us who remember the 2000 campaign expected the worst would follow the first debate: Surely much of the media would declare Mr. Trump the winner even if he lied repeatedly. ...
Then came the debate itself, which was almost unspinnable. Some people tried...
But ... tens of millions of Americans saw the candidates in action, directly, without a media filter. For many, the revelation wasn’t Mr. Trump’s performance, but Mrs. Clinton’s: The woman they saw bore little resemblance to the cold, joyless drone they’d been told to expect.
How much will it matter? My guess — but I could very well be completely wrong — is that it will matter a lot. ...
But things should never have gotten to this point, where so much depended on defying media expectations over the course of an hour and a half. And those who helped bring us here should engage in some serious soul-searching.
Posted by Mark Thoma on Friday, September 30, 2016 at 09:32 AM in Politics |
Posted by Mark Thoma on Friday, September 30, 2016 at 12:06 AM in Economics, Links |
The decline of the middle class is causing even more economic damage than we realized: I have just come across an International Monetary Fund working paper on income polarization in the United States that makes an important contribution to the secular stagnation debate. The authors ... find that polarization has reduced consumer spending by more than 3 percent or about $400 billion annually. If these findings stand up to scrutiny, they deserve to have a policy impact.
This level of reduction in spending is huge. For example, it exceeds by a significant margin the impact in any year of the Obama stimulus program. Alone it would be enough to account for a significant reduction in neutral real interest rates. If consumers were spending 3 percent more, there would be scope to maintain full employment at interest rates much closer to normal. And there would be much less of a problem of monetary policy’s inability to respond to the next recession.
What is the policy implication? Principally, it is the macroeconomic importance of supporting middle class incomes. This can be done in a range of ways from promoting workers right to collectively bargain to raising spending on infrastructure to making the tax system more progressive. ...
Posted by Mark Thoma on Thursday, September 29, 2016 at 10:13 AM in Economics, Income Distribution |
Trumponomics: Regular readers of this blog know that I often disagree with Paul Krugman. But I come here today agree with a recent post of his on the analysis put out by two Trump economic advisers. The Trump advisers' analysis is truly disappointing (though perhaps not surprisingly so, given what the candidate has said over the course of the campaign).
Their analysis of trade deficits, starting on page 18, boils down to the following: We know that GDP=C+I+G+NX. NX is negative (the trade deficit). Therefore, if we somehow renegotiate trade deals and make NX rise to zero, GDP goes up! They calculate this will bring in $1.74 trillion in tax revenue over a decade.
But of course you can't model an economy just using the national income accounts identity. Even a freshman at the end of ec 10 knows that trade deficits go hand in hand with capital inflows. So an end to the trade deficit means an end to the capital inflow, which would affect interest rates, which in turn influence consumption and investment. ...
Posted by Mark Thoma on Thursday, September 29, 2016 at 10:13 AM in Economics, International Trade, Politics |
A General Theory Of Austerity?: Simon Wren-Lewis has an excellent new paper trying to explain the widespread resort to austerity in the face of a liquidity trap, which is exactly the moment when such policies do the most harm. His bottom line is that austerity was the result of right-wing opportunism, exploiting instinctive popular concern about rising government debt in order to reduce the size of the state.
I think this is right; but I would emphasize more than he does the extent to which both the general public and Very Serious People always assume that reducing deficits is the responsible thing to do. ...
Meanwhile, as someone who was in the trenches during the US austerity fights, I was struck by how readily mainstream figures who weren’t especially right-wing in general got sucked into the notion that debt reduction was THE central issue. Ezra Klein documented this phenomenon with respect to Bowles-Simpson:
For reasons I’ve never quite understood, the rules of reportorial neutrality don’t apply when it comes to the deficit. On this one issue, reporters are permitted to openly cheer a particular set of highly controversial policy solutions. At Tuesday’s Playbook breakfast, for instance, Mike Allen, as a straightforward and fair a reporter as you’ll find, asked Simpson and Bowles whether they believed Obama would do “the right thing” on entitlements — with “the right thing” clearly meaning “cut entitlements.” ...
Posted by Mark Thoma on Thursday, September 29, 2016 at 10:12 AM in Economics, International Trade, Politics |
Posted by Mark Thoma on Thursday, September 29, 2016 at 12:06 AM in Economics, Links |
VAT of Deplorables: I’ve been writing about Donald Trump’s claim that Mexico’s value-added tax is an unfair trade policy, which is just really bad economics. ...
But it turns out that Trump wasn’t saying ignorant things off the top of his head: he was saying ignorant things fed to him by his incompetent economic advisers. Here’s the campaign white paper on economics. The VAT discussion is on pages 12-13 — and it’s utterly uninformed.
And it’s not the worst thing: there’s lots of terrible stuff in the white paper, at every level.
Should we be reassured that Trump wasn’t actually winging it here, just taking really bad advice? Not at all. This says that if he somehow becomes president, and decides to take the job seriously, it won’t help — because his judgment in advisers, his notion of who constitutes an expert, is as bad as his judgment on the fly.
Posted by Mark Thoma on Wednesday, September 28, 2016 at 10:04 AM in Economics, International Trade, Politics |
Marcus Noland at PIIE:
Scoring the Trump Trade Plan: Magical Thinking: Back in the 1970s, Gabriel Garcia Marquez, Isabelle Allende, and other Latin American writers developed a literary style featuring wild juxtapositions and metaphysical leaps that came to be known as magical realism. “Scoring the Trump Economic Plan: Trade, Regulatory, and Energy Policy Impacts (link is external),” by Peter Navarro and Wilbur Ross owes much to the genre.
It is a political document. The challenge for the authors is that ... Donald Trump will cost the US government $2.6 trillion in revenue over 10 years. Mr. Trump wants his tax proposal to be “revenue neutral” so his advisors need to fill that hole.
By their own reckoning they come close, finding $2.374 trillion in additional revenue. They do this by imputing positive growth effects to various trade, regulatory, and energy reforms and then calculating the tax raised on these increments to GDP. The imputed trade policy component of additional revenue is $1.74 trillion or almost three-quarters of the projected total. So trade policy is central to the Trump story.
Unfortunately, the thinking that gets them the $1.74 trillion figure is truly magical. The authors observe that between 1947 and 2001 (the good old days, when America was great), the economy grew at 3.5 percent annually. Since then it has grown at an average of 1.9 percent. They allude to the idea that demographics ... might have something to do with it, only to dismiss this explanation. They entirely ignore the ongoing debate about the sources of productivity growth and the possibility that the rate of technological change is slowing. Instead, they focus on trade. Or more specifically, “disastrous” trade agreements.
And how do they get that $1.74 trillion in revenue? They observe that the United States has a $500 billion deficit in merchandise goods and services…and then they make it disappear! (Luis Borges would be proud.) But don’t believe me, here it is in their own words (link is external)
Maybe it reads better in Spanish.
Economists generally believe that the magnitude of a nation’s trade deficit fundamentally reflects the difference between saving and investment—if you are consuming more than you produce, you run a deficit, if you produce more than you consume you run a surplus. Trade policy can affect the sectoral and geographic composition of the deficit, but in the long run, the trade balance is determined by the saving-investment balance. If you want to lower the nation’s trade deficit, increasing the saving rate, not launching a trade war would be the right place to start. But there is not a word of this in “Scoring the Trump Economic Plan: Trade, Regulatory, and Energy Policy Impacts.” It’s all perfidious foreigners and incompetent trade negotiators instead. Maybe that makes for a better plot. But it does not constitute a persuasive defense of a questionable tax plan or a solution to the trade deficit. Quite the opposite—it’s another instance of the type of magical thinking best reserved for fictional realities.
Posted by Mark Thoma on Wednesday, September 28, 2016 at 10:03 AM in Economics, International Trade, Politics |
Robert Rich, Joseph Tracy, and Ellen Fu at the NY Fed's Liberty Street Economics:
U.S. Real Wage Growth: Slowing Down With Age: In Monday’s post, we described the estimation of real wage growth rates for different cohorts of U.S. workers. We showed that the life-cycle pattern of real wage growth is characterized by high growth early in a worker’s career, little to no growth in mid-career, and negative growth as workers near retirement. We also documented that a growing fraction of the U.S. adult population is transitioning into the flat to negative real wage growth phases of their careers. Here, we turn our attention to estimating the effect of this demographic shift on the economy-wide average real wage growth rate. Our analysis shows that this economy-wide average real wage growth rate has declined by a third since the mid-1980s.
As discussed in our recent post, real wages, holding constant any cyclical effects, show positive growth that is concentrated early in a worker’s career. By age 40, real wage growth has typically declined to around zero. The following chart, reproduced from Monday’s post, depicts this pattern for the five cohorts of white males born in the 1950s by different education levels.
This life-cycle pattern of real wage growth combined with the aging of the U.S. adult population suggests that average real wage growth in the economy would be slowing. How fast and pronounced is this slowing due to changing demographics? To answer this question, we need to be careful to “hold constant” the state of the labor market over time by removing the effects of cyclical factors. Why do this? There are two channels through which the state of the labor market can affect average real wage growth for the economy. The first is that tighter labor markets, all else the same, should increase real wage growth for workers relative to what would be expected from a neutral or slack labor market. The second is that the degree of tightness or slackness in the labor market affects the likelihood that different types of workers are employed. For example, workers with less education and at an earlier career stage are more likely to experience unemployment in a slack labor market. Therefore, we need to control for both of these channels to isolate the economy-wide impact of demographics on real wage growth. We derive our assessment of the effect of population aging on real wage growth under the condition of a neutral labor market. It turns out that this is an especially convenient benchmark now because most current assessments suggest that the U.S. labor market is very close to neutral.
In Monday’s post, we explained how our methodology for estimating the 140 cohort-specific real wage profiles controls for cyclical factors relating to tight or slack labor markets. Consequently, the real wage growth rates for the five cohorts shown above should be interpreted as what workers in those cohorts would expect to experience on average at each age in a neutral labor market.
To derive the “cyclically neutral” aggregate average real wage growth, we also need the likelihood that individuals would be working at each age within a neutral labor market. In an earlier post assessing labor market slack, we discussed how to estimate these employment rate profiles so that they reflect a neutral labor market. The next chart shows the resulting employment rate profiles for our earlier five cohorts.
Employment rates increase with the level of an individual’s education and tend to peak early in the career. As an individual approaches retirement, the employment rate declines at an increasing rate.
We now have the necessary pieces to construct the cyclically neutral aggregate average real wage growth series, with our estimate based on the following procedure. For each year and month, we use our sample of individuals from the Current Population Survey (CPS) described in Monday’s post. For each individual, we use his/her cohort and age to identify an expected employment rate and an expected real wage growth rate. Since the CPS is a random sample, each worker is assigned a sample weight reflecting how many people in the population that individual represents. We combine these three elements by multiplying the individual’s employment rate, real wage growth rate, and sample weight.
For illustrative purposes, consider an individual from the CPS who according to the sample weight represents 100,000 people in the U.S. population. Regardless of this individual’s actual employment status at the time of the survey, we assign a predicted employment rate to the individual based on his/her cohort and age. If we assume this employment rate is 0.6, then this person would represent 60,000 employed individuals in a neutral labor market. Next, we assign the predicted real wage growth rate based on this person’s cohort and age to each of these 60,000 individuals. Averaging across all individuals in the CPS survey for that month gives us the expected economy-wide real wage growth rate associated with a neutral labor market at that point in time. We then repeat this exercise for each year/month in our estimation period.
The following chart provides the answer to the question of how changing demographics affect real wage growth over time. The analysis suggests that this cyclically neutral aggregate real wage growth rate peaked in the mid-1980s at around 1.8 percent. Over the subsequent thirty years, the changing demographics and aging of the U.S. adult population has reduced this real wage growth rate to around 1.2 percent—a 33 percent decline.
The analysis also suggests that the pace of the decline has not been uniform over the three decades with the average leveling out in the 2000s. Readers should keep in mind that this measure is an average of individual real wage growth rates, which is not the same as the growth rate of an index tracking an average real wage. Thus, the aggregate average real wage growth series we derive is not directly comparable to growth rates in real compensation per hour, average hourly earnings, or the employment cost index.
So what does all of this mean? We have shown that U.S. real wage growth has been slowing down over the past thirty-five years with the aging of our workforce. Abstracting from cyclical factors impacting the labor market, this slowing is likely to continue in the years ahead as more individuals near retirement and experience negative real wage growth. Again, it is important to keep in mind that the degree of this slowing is specific to our measure of average real wage growth. Moreover, real wage growth should reflect labor productivity growth over long periods of time. An important component of labor productivity growth reflects job matching and on-the-job learning which is front-loaded in a worker’s career. Consequently, the aging of the U.S. population will continue to act as a headwind to labor productivity and wage growth.
The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.
Posted by Mark Thoma on Wednesday, September 28, 2016 at 10:03 AM in Economics |
Posted by Mark Thoma on Wednesday, September 28, 2016 at 12:06 AM in Economics, Links |
Trump On Trade: For the most part,... the media consensus seems to be that Clinton won. This is a big deal: you know, just know, that they were primed to declare Trump the winner... But he was so bad and she so good that they couldn’t. ...
Trump on trade was ignorance all the way.
There were specifics: China is “devaluing” (not so — it was holding down the yuan five years ago, but these days it’s intervening to keep the yuan up, not down.) There was this, on Mexico:
Let me give you the example of Mexico. They have a VAT tax. We’re on a different system. When we sell into Mexico, there’s a tax. When they sell in — automatic, 16 percent, approximately. When they sell into us, there’s no tax. It’s a defective agreement. It’s been defective for a long time, many years, but the politicians haven’t done anything about it.
Gah. A VAT is basically a sales tax. It is levied on both domestic and imported goods, so that it doesn’t protect against imports — which is why it’s allowed under international trade rules, and not considered a protectionist trade policy. I get that Trump is not an economist — hoo boy, is he not an economist — but this is one of his signature issues, so you might have expected him to learn a few facts.
More broadly, Trump’s whole view on trade is that other people are taking advantage of us — that it’s all about dominance, and that we’re weak. And even if you think we’ve pushed globalization too far, even if you are worried about the effects of trade on income distribution, that’s just a foolish way to think about the problem.
So don’t score Trump as somehow winning on trade. Yes, he blustered more confidently on that subject than on anything else. But he was talking absolute garbage even there.
Posted by Mark Thoma on Tuesday, September 27, 2016 at 09:15 AM in Economics, International Trade, Politics |
Why Study Economics?: I am very pleased to visit today with the students and faculty of the Howard University Economics Department. First, a fact that you know but others may not: The Howard University Economics Department is the only producer of economics Ph.D.'s among the nation's historically black colleges and universities, and it has been teaching economics to undergraduates for nearly a century.1
Speaking as one economist to a group among whom I hope will be many future economists, let me start by saying that pursuing a degree in economics can bring many rewards. First, an economics degree provides many possible career paths. The discipline's logical, structured approach to problem solving is valued in many settings, including academia, banking, business, consulting, government, and law. Economics majors typically receive salaries that represent a good return on their educational investment. Second, in addition to career prospects and financial rewards, economics offers a means of engaging in many of society's most pressing issues. The study of economics provides a rigorous, analytic perspective on human behavior. It commands respect and has the ability to influence policies that address important issues. A degree in economics will help you understand and participate in these policy debates, putting you in a good position to change the world for the better.
Next, I would like to discuss two current questions that economists are actively debating: First, why is participation in our nation's labor force declining? And, second, what can be done to improve economic mobility (the ability to climb the economic ladder) for children from all groups and from all areas of the country? By doing so, I hope to illustrate the relevance of economics to important, real-life issues.
The proportion of adults participating in the labor force--that is, either holding jobs or actively searching for employment--has declined substantially over the past decade. The decline has reflected, in part, the severe economic recession. Millions of people lost their jobs, and many of them experienced great difficulty finding new employment. Some of these people became discouraged and stopped looking for work. In other words, they dropped out of the labor force. However, much of the decline in labor force participation reflects factors that precede the recession.2 Most significantly, our population is aging, and older people participate in the labor market at lower rates than younger adults. In addition, the labor force participation of prime-age males--that is, individuals aged 25 through 54--has been declining since the mid-1960s, particularly among those with only a high school degree or less education, and has continued to decline in the years since the last recession.
Economists are examining a number of reasons why prime-age males are falling out of the labor force. Here there are differences among economists. Some economists have emphasized the role of public assistance programs, such as disability insurance. Some evidence suggests that public assistance income has likely played a role. Other economists have put more emphasis on the effects of the reduction over time in the demand for lower-skilled labor.3 Indeed, the wages of high school graduates have fallen sharply in comparison with the wages of college graduates over the past 40 years. Many economists believe that the decline in demand for lower-skilled workers reflects technological changes.4 For instance, the introduction of information technology such as desktop computers may have boosted the wages of highly skilled workers by more than the wages of workers with fewer skills. The slump in demand for lower-skilled labor likely also reflects the effects of globalization, including competition from goods produced and imported from abroad.5
My second current question concerns economic mobility: How likely is a child from a low-income family to move up to a higher income level as an adult? Over the past few years, economists have made important findings using newly available data. First, economic mobility varies substantially across the United States. For example, the odds of a child from the bottom quintile of the income distribution reaching the top quintile of income as an adult are 11 percent here in the Washington, D.C., area but only 4 percent in the Charlotte, North Carolina, region. Second, mobility is significantly lower in areas with greater residential segregation in terms of both race and income. Mobility is also lower in areas with greater income inequality, less family stability, and lower-quality schools.6 However, we need further study and analysis to understand whether these factors cause lower mobility or are merely correlated with it. Thus, despite the gains in our knowledge in recent years, significant gaps remain in our understanding of what factors help and hinder economic mobility.
I will conclude by discussing diversity in the economics profession. Our profession currently is not very diverse, but it needs to be. Only about one-fourth of tenured and tenure-track faculty members in U.S. academic economics departments are women, and only around 5 percent are African American or Hispanic. Yet research conducted by economists as well as other social scientists suggests that a diversity of perspectives and ideas lead to better decisions and increased productivity.7 In my own experience, economic policy decisions are better when informed by a wide range of views and experiences. You all here today are crucial to the future of our profession.
Indeed, I hope that by obtaining your degrees and working on economic problems, you will help change the field of economics itself. As in many other fields, economics undergoes continual redesign by its practitioners. We need--and by that I mean society as a whole needs--a more diverse set of practitioners in economics, practitioners who may perceive different questions to be important and different answers to be more persuasive. And so, by joining the profession you can acquire the power to change not only the field, but also the broad set of societal institutions that are influenced by the work of economists.
Economists tend to respond to the results of research. And the research shows the importance of diversity in decisionmaking. As a result, many organizations are working very seriously to become more diverse. At the Federal Reserve Board, these efforts include developing connections with the Economics Department here at Howard. Our economists have recently served as visiting faculty at Howard or have given guest lectures here. During the past spring semester, Board economists served as mentors to Howard master's degree and Ph.D. students. This fall, we are offering a class on statistical programming methods through the university. On October 25th, we will host an open house with the undergraduate economics association here at Howard for students who are interested in learning more about the Federal Reserve. I encourage you to attend. I would also like to make you aware that the Board offers internships to qualified students, including Howard students studying economics. Moreover, the Federal Reserve Board's Office of Diversity and Inclusion is coordinating an effort to increase the diversity of our staff.8 Everyone at the Board with responsibility for recruiting, hiring, management, and promotion is involved. But I want to emphasize that these are steps on what will be a long road.
Finally, Board economists are also working to increase our understanding of the diverse economic experiences of different groups in the economy. For example, staff economists have recently been examining the disparities in wealth across families using our Survey of Consumer Finances. Wealth is an important measure of household well-being; it can be used to start a new business, cover expenses when household income unexpectedly falls, and provide an inheritance to children--all factors that influence opportunities for economic advancement. One study finds that factors such as educational attainment and inheritances almost entirely explain the gap between the wealth of white families and that of Hispanic families. Although these factors also explain most of the gap in wealth between white families and black families, a substantial portion of this gap cannot be explained by such factors.9 Additional research is required to fully explain the difference in wealth across white and African American households.
Thank you for inviting me to speak to you. It would be great to see some of you who are here today going on to influence the direction of the country on any number of issues. To put it in a nutshell, I firmly believe that a degree in economics will equip you for a personally productive and rewarding career, will position you to help make progress on some of society's toughest issues, and will change the field of economics itself.
Thank you for listening--and may you all both enjoy and succeed in your future careers, especially in economics.
1. I am grateful to Andrew Cohen and Byron Lutz of the Federal Reserve Board staff for their assistance. Views expressed are mine and are not necessarily those of the Federal Reserve Board or the Federal Open Market Committee.
2. See Stephanie Aaronson, Tomaz Cajner, Bruce Fallick, Felix Galbis-Reig, Christopher Smith, and William Wascher (2014), "Labor Force Participation: Recent Developments and Future Prospects (PDF) ," Brookings Papers on Economic Activity (Fall), pp. 197-255.
3. See John Bound, Stephan Lindner, and Timothy Waidmann (2014), "Reconciling Findings on the Employment Effect of Disability Insurance ," IZA Journal of Labor Policy, vol. 3 (11), pp. 1-23. For an opposing view that concludes that disability insurance has significantly suppressed the labor force participation of the less skilled, see David H. Autor and Mark G. Duggan (2003), "The Rise in the Disability Rolls and the Decline in Unemployment," Quarterly Journal of Economics, vol. 118 (February), pp. 157-205.
4. See Daron Acemoglu (2002), "Technical Change, Inequality, and the Labor Market," Journal of Economic Literature, vol. 40 (March), pp. 7-72.
5. See David H. Autor, David Dorn, and Gordon H. Hanson (2013), "The China Syndrome: Local Labor Market Effects of Import Competition in the United States," American Economic Review, vol. 103 (October), pp. 2121-68.
6. See Raj Chetty, Nathaniel Hendren, Patrick Kline, and Emmanuel Saez (2014), "Where Is the Land of Opportunity? The Geography of Intergenerational Mobility in the United States ," Quarterly Journal of Economics, vol. 129 (November), pp. 1553-1623.
7. See, for example, Amanda Bayer and Cecilia Elena Rouse (forthcoming), "Diversity in the Economics Profession: A New Attack on an Old Problem," Journal of Economic Perspectives.
8. See Board of Governors of the Federal Reserve System (2015), Report to the Congress on the Office of Minority and Women Inclusion (PDF) (Washington: Board of Governors, March).
9. See Jeffrey P. Thompson and Gustavo A. Suarez (2015), "Exploring the Racial Wealth Gap Using the Survey of Consumer Finances (PDF)," Finance and Economics Discussion Series 2015-076 (Washington: Board of Governors of the Federal Reserve System, September).
Posted by Mark Thoma on Tuesday, September 27, 2016 at 09:14 AM in Economics, Education |
Posted by Mark Thoma on Tuesday, September 27, 2016 at 12:06 AM in Economics, Links |
Robin Bravender at Scientific American (originally at ClimateWire):
Trump Picks Top Climate Skeptic to Lead EPA Transition: Donald Trump has selected one of the best-known climate skeptics to lead his U.S. EPA transition team... Myron Ebell, director of the Center for Energy and Environment at the conservative Competitive Enterprise Institute, is spearheading Trump’s transition plans for EPA, the sources said. ... Ebell’s role is likely to infuriate environmentalists and Democrats but buoy critics of Obama’s climate rules.
Ebell ... is known for his prolific writings that question what he calls climate change “alarmism.” ...
Ebell has called the Obama administration’s Clean Power Plan for greenhouse gases illegal and said that Obama joining the Paris climate treaty “is clearly an unconstitutional usurpation of the Senate’s authority.”
He told Vanity Fair in 2007, “There has been a little bit of warming ... but it’s been very modest and well within the range for natural variability, and whether it’s caused by human beings or not, it’s nothing to worry about.”
Ebell’s views appear to square with Trump’s when it comes to EPA’s agenda. Trump has called global warming “bullshit” and he has said he would “cancel” the Paris global warming accord and roll back President Obama’s executive actions on climate change...
Posted by Mark Thoma on Monday, September 26, 2016 at 09:48 AM in Economics, Environment, Politics |
"An attempt to focus on the problems of the real America":
Progressive Family Values, by Paul Krugman, NY Times: Here’s what happens every election cycle: pundits demand that politicians offer the country new ideas. Then, if and when a candidate actually does propose innovative policies, the news media pays little attention, chasing scandals or, all too often, fake scandals instead. Remember the extensive coverage last month, when Hillary Clinton laid out an ambitious mental health agenda? Neither do I. ...
Still, there really are some interesting new ideas coming from one of the campaigns, and they arguably tell us a lot about how Mrs. Clinton would govern.
Wait... Aren’t Republicans also offering new ideas? Well, I guess proposing to round up and deport 11 million people counts as a new idea. And Republicans ... seem to have moved past ... proposing tax cuts that deliver most of their benefits to the wealthy. Now they are, instead, proposing tax cuts that deliver all of their benefits to the 1 percent — O.K., actually just 99.6 percent, but who’s counting?
Back to Mrs. Clinton: Much of her policy agenda could be characterized as a third Obama term, building on the center-left policies of the past eight years. ... For example..., her proposed enhancements to the Affordable Care Act would extend health coverage to around 10 million more people, whereas Donald Trump’s proposed repeal ... would cause around 20 million people to lose coverage.
In addition..., Mrs. Clinton is pushing a distinctive agenda centered around support for working parents. ... One piece ... involves 12 weeks of paid family leave to care for new children, help sick relatives, or recover from illness or injury. ...
Another, even more striking piece involves helping families with young children in several ways, especially ... to hold down the cost of child care (the campaign sets a target of no more than 10 percent of income.) ...
But why should helping working parents be such a priority? It looks to me like an attempt to focus on the problems of the real America — not the white, rural “real America” of right-wing fantasies... And that America is one in which ... stay-at-home mothers are a distinct minority, and in which the problem of how to take care of children while making ends meet is central to many people’s lives. ...
So anyone who complains that there aren’t big new ideas in this campaign simply isn’t paying attention. One candidate, at least, has ideas that would make a big, positive difference to millions of American families.
Posted by Mark Thoma on Monday, September 26, 2016 at 09:15 AM in Economics, Politics |
December Looking Good. But..., by Tim Duy: FOMC doves squeezed out another victory at last week’s meeting. But can they do it again in December?
As was widely expected, the Fed held rates steady at the September FOMC meeting. That said, the meeting was clearly divisive, with three dissents, all from regional bank presidents. And the accompanying statement leaned in a hawkish direction – the committee noted that near-term risks were “balanced” and that the case for a rate hike had “strengthened.” Moreover, only three of the participants did not expect a rate hike before year end.
And if that was not enough, during her press conference, Federal Reserve Chair Janet Yellen suggested the bar to a December rate hike was low:
…most participants do expect that one increase in the federal funds rate will be appropriate this year and I would expect to see that if we continue on the current course of labor market improvement and there are no major new risks that develop and we simply stay on the current course.
Sounds like December is a go. But markets are not entirely convinced, with participants pricing in a roughly 60% chance of a rate hike. Perhaps this pricing reflects post-election economic risk. Or perhaps it reflects the possibility that the doves can stare down the hawks one more time before the composition of the Board changes next year.
Can they? That question requires understanding what happened to squash the parade of Fed presidents looking for a rate hike in September. What happened were Federal Reserve Governors Lael Brainard and Daniel Tarrullo. Brainard in particular laid down the intellectual framework ahead of the FOMC meeting, arguing that the potential for further labor market improvement and asymmetric policy risks justified a steady hand at this meeting. Yellen and the rest of the Board bought into this story. The hawks could squawk all they wanted, but the votes just weren’t going to go in their favor.
This episode provided two important lessons. The first is that if you haven’t been taking Brainard seriously this past year – ever since her bombshell speech last October – you have been doing it wrong. The second is that a small group of governors can have a much larger influence on policy than a large group of presidents. There are lots of presidents, and they talk a lot, so their message is louder. But the power rests in the Board.
Indeed, this asymmetry of power is why the relative lack of speeches from Board members is one of the Fed’s biggest communication failures. The people driving policy shouldn’t be waiting until the Friday before the blackout period to begin delivering their message.
Now consider the dots. There remain three “no hike” dots for 2016. I think it is reasonable to believe those three dots belong to Tarullo, Brainard, and Chicago Federal Reserve President Charles Evans. If true, that suggests that Tarullo and Brainard are at the present time considering making another dovish stand at the December meeting. To do so, they need to keep Yellen on their side.
During the press conference, Yellen revealed that she remains attached to a preemptive view of policy. Since monetary policy operates with long lags, it is important that policy responds to inflationary threats before they emerge. She also rejected a “whites of their eyes” approach to policy, or the suggestion by Evans that they Fed waits until core inflation hits two percent before they hike rates. These concerns are balanced against Brainard’s argument that they can’t be sure they have yet achieved full employment.
Hence, and as I said ahead of the meeting, I think that if unemployment dips between now and December, or progress on underemployment resumes, or inflation moves closer to target, the hawks will win as Yellen’s support will shift toward a rate hike. And these things can all be reasonably expected given the current course of job growth, which is in excess of the Fed’s estimate of what is necessary to absorb labor force growth. For the doves to have a decent chance of holding back the hawks one more time, progress on these points needs to remain stalled.
Regardless of a December hike or not, the Fed continues to mark down the expected path of policy. The median projected Fed funds rate dropped 50bp for both 2017 and 2018, continuing the pattern of the Fed moving toward the market rather than vice-versa. And note that the changing composition of the FOMC next year will allow for this dovish message to come through. This meeting’s dissenters will all be replaced with presidents that are on average more dovish. Consider this ordering of monetary policy makers via Julia Coronado of Graham Capital, modified to show the shift of voters for next year:
Voting presidents will be more aligned with the preferences of the governors. This should help ease some of the recent communications challenges even if the governors maintain their relative silence.
Bottom Line: Doves on the Board continue to delay the preemptive strike on inflation. Stalling gains on unemployment and underemployment gave them the ammunition to stand their ground. If those gains resume, doves will fall prey to the hawks at the next meeting. But they will have an easier time maintaining a shallow path of policy next year, and hopefully are better set to communicate that path.
Posted by Mark Thoma on Monday, September 26, 2016 at 09:06 AM in Economics, Fed Watch, Monetary Policy |
Posted by Mark Thoma on Monday, September 26, 2016 at 12:06 AM in Economics, Links |
Posted by Mark Thoma on Sunday, September 25, 2016 at 12:06 AM in Economics, Links |
A colleague, Bruce Blonigen, has a new paper at the Economic Journal:
When Industrial Policy Harms Performance: Evidence from the World Steel Industry, by Romesh Vaitilingam RES: The use of industrial policies to support a country’s steel sector has damaging effects on the export competitiveness of downstream manufacturing sectors that make use of steel. That is the central finding of research by Professor Bruce Blonigen, published in the September 2016 issue of the Economic Journal.
His cross-country analysis indicates that sectors in which steel is a major input, such as fabricated metals and machinery, suffer particularly badly. He also finds that export subsidies and government ownership are the industrial policies that have the most harmful effects on downstream export competitiveness – and the effects are most evident in less developed countries. He concludes:
‘My results are concerning given the popularity of industrial policies, but they are consistent with a couple of possible explanations.’
‘The first is that governments are not seeking to improve the welfare of their country, but have other objectives in mind, such as responding to political lobbies.’
‘The other possibility is that policy-makers do not understand or recognize the entire range of industrial policy effects and the need to coordinate overlapping policies so they are not at cross-purposes. This may be why the harmful effects seem to be largest in less developed countries.’
Throughout history, governments have used industrial policies to guide the development of key sectors in their economies and to spur economic development. These policies can vary substantially from subsidizing production to limiting import competition to promoting export sales.
One practical concern is that a layering of industrial policies often accumulates over time, leading to the presence of multiple policies at cross-purposes with each other. An additional concern is that targeted industrial policies may result from political pressure by particular sectors without regard to how they will affect other parts of the economy.
Recent efforts by the South African government to target industrial policies at its lagging manufacturing sector illustrate these concerns. The government found that a prior policy program targeted at its steel sector, which is a source of key inputs to many manufacturing sectors, had led to uncompetitive steel prices and hurt downstream manufacturing sectors. Rather than eliminate the industrial policies in their steel sector, the government layered additional policies in the steel-using sectors in the hope of restoring the health of these downstream sectors.
Is this South African example typical? Evidence is scant to non-existent on the net effects of industrial policies on economic growth and development. While there are many studies of the effects of specific industrial policies, particularly import tariffs, the difficulty of collecting the wide variety of industrial policies in a consistent fashion has hindered systematic analysis.
Using a new hand-collected database of industrial policies used in the steel sector in major steel-producing countries, the author of this new study is able to overcome a number of these data difficulties and provide estimates of industrial policy effects in one of the sectors most often targeted by governments for industrial policies.
Because steel is a primary input in so many manufactured goods, the research focuses on how industrial policies in a country’s steel sector affect the export competitiveness of downstream manufacturing sectors that use steel. Professor Blonigen finds that:
• The use of industrial policies is harmful to downstream sectors. A one standard deviation increase in steel industrial policy usage leads to an immediate 1.2% decline in export competitiveness for the average downstream manufacturing sector.
• This effect is five times higher (or roughly 6%) for major steel-using downstream sectors, such as fabricated metals and machinery.
• The long-run effect of increased industrial policy usage for the average downstream sector is over a 15% decline in their exports.
• These industrial policy effects on downstream export performance are largely driven by less developed countries in the sample, though country-by-country regressions show a negative and significant effects of steel industry policies on downstream competitiveness in a few developed countries as well.
• In general, the negative effect of industrial policies on downstream export values operates through lowered export quantities. But there is also evidence that export prices increase (or do not fall as much) in differentiated goods sectors from higher input prices from the steel industry policies, which is most likely due to market power effects.
• Exploring the heterogeneous effects of different types of industrial policy, the research finds that export subsidies and government ownership have the most harmful effects on downstream export competitiveness.
Posted by Mark Thoma on Saturday, September 24, 2016 at 12:07 PM in Economics, Policy |
Posted by Mark Thoma on Saturday, September 24, 2016 at 12:06 AM in Economics, Links |
The press needs to tell the truth about lies:
The Lying Game, by Paul Krugman, NY Times: Here’s what we can be fairly sure will happen in Monday’s presidential debate: Donald Trump will lie repeatedly and grotesquely, on a variety of subjects. Meanwhile, Hillary Clinton might say a couple of untrue things. Or she might not.
Here’s what we don’t know: Will the moderators step in when Mr. Trump delivers one of his well-known, often reiterated falsehoods? If he claims, yet again, to have opposed the Iraq war from the beginning ... will he be called on it? If he claims to have renounced birtherism years ago, will the moderators note that he was still at it just a few months ago? (In fact, he already seems to be walking back his admission last week that President Obama was indeed born in America.) If he says one more time that America is the world’s most highly taxed country — which it isn’t — will anyone other than Mrs. Clinton say that it isn’t? And will media coverage after the debate convey the asymmetry of what went down?
You might ask how I can be sure that one candidate will be so much more dishonest than the other. ... PolitiFact has examined 258 Trump statements and 255 Clinton statements and classified them on a scale ranging from “True” to “Pants on Fire.” ... And they show two candidates living in different moral universes when it comes to truth-telling. Mr. Trump had 48 Pants on Fire ratings, Mrs. Clinton just six; the G.O.P. nominee had 89 False ratings, the Democrat 27. ...
And if the debate looks anything like the campaign so far, we know what that will mean: a news analysis that devotes at least five times as much space to Mr. Trump’s falsehoods as to Mrs. Clinton’s.
If your reaction is, “Oh, they can’t do that — it would look like partisan bias,” you have just demonstrated the huge problem with news coverage during this election. For I am not calling on the news media to take a side; I’m just calling on it to report what is actually happening, without regard for party. In fact, any reporting that doesn’t accurately reflect the huge honesty gap between the candidates amounts to misleading readers, giving them a distorted picture that favors the biggest liar. ...
I’m not calling on the news media to take sides; journalists should simply do their job, which is to report the facts. ...
Posted by Mark Thoma on Friday, September 23, 2016 at 09:34 AM in Economics, Politics |
I have a new column:
4 Reasons Trump’s Economic Policies Would Be a Disaster: Donald Trump’s chances of becoming president are higher than I ever expected them to be, and there is a chance that he will be able to put his economic plans into place. He claims his economic policies will be good for the working class, but in reality his plans for high income tax cuts and deregulation adhere closely to standard Republican ideology that has favored the wealthy and powerful. Even his plans for international trade, an area where he claims populist support, would hurt far more people than it would help. Here are the four areas where Trump’s economic plans concern me the most...
[One of the four echoes what I wrote about yesterday at CBS.]
Posted by Mark Thoma on Friday, September 23, 2016 at 09:08 AM in Economics, Fiscal Times, Politics |
Posted by Mark Thoma on Friday, September 23, 2016 at 12:06 AM in Economics, Links |
Caroline Freund at PIIE:
Estate Tax a Key Tool for Fighting US Inequality: This year marks the 100th anniversary of the US estate tax, which affects only the ultra-wealthy. Given the rising focus on American income inequality, the tax should be on solid ground. Not so.
Republican presidential candidate Donald Trump has vowed to eliminate the estate tax, while Democrat candidate Hillary Clinton wants to revive it ...
There are good reasons to support this tax:
As I have pointed out previously, there is no productive activity in inheriting a large sum of money, so it does little to distort the economy.
Estate taxes also raise revenue and redistribute wealth. ...
Historically such taxes have worked well in the United States. ...
The future of the estate tax will depend heavily on the upcoming presidential election. Donald Trump would like to see it gone. This is not unthinkable, since in a largely symbolic vote last year the House of Representatives voted to abolish it. ...
Hillary Clinton proposes higher estate tax brackets as wealth increases, reaching 65 percent for a billionaire couple. My guess is that if people really understood the incidence of the tax, 99.8 percent of the population would support her proposal.
Posted by Mark Thoma on Thursday, September 22, 2016 at 03:15 PM in Economics, Income Distribution, Taxes |
The Curious Confidence of Charlatans and Cranks: Brad DeLong tells us about a letter being circulated by economists for Trump — although, as he notes, they don’t dare say that, and describe themselves only as critics of Clinton. Several things are notable about the letter, including the absence of many usually reliable Republican hired guns economists. But they do have a Nobelist, Eugene Fama, at the top. And the substance of the letter — government bad! taxes and regulation bad! free markets rool like Reagan! — is pretty standard.
What’s curious is why, exactly, anyone should believe this story. In recent memory, GW Bush failed to deliver the promised Bush boom and eventually presided over disaster; the Obama economy has not been all one might have hoped, but as many have noted, the job growth of the past three years and the income growth that has finally emerged would have been hailed as triumphs if Mitt Romney were president. Taking the longer view, Clinton > Reagan and Obama > Bush, by almost any measure. Why doesn’t this reality seem to register?
One big answer, I think, lies in profound ignorance, in the insistence that history is what it was supposed to be, not what it was. ...
And let’s be clear: this is a problem that won’t go away even if Trump goes down to defeat. People like Paul Ryan are barely more in touch with reality...
Posted by Mark Thoma on Thursday, September 22, 2016 at 10:01 AM in Economics, Politics |
At MoneyWatch, why I think Social Security and Medicare will be in danger of large cuts if Trump is elected:
Don't believe Trump’s tax and spending plans: Donald Trump’s new tax plan will increase the national debt between $4.4 trillion and $5.9 trillion over a decade, and that’s according to estimates from the conservative Tax Foundation. That range of $1.5 trillion is due to uncertainty about how Trump would levy some types of business taxes and how his tax cuts would be paid for.
First, the Republican candidate says, higher economic growth from lower taxes and deregulation will pay for most of the increase in the debt. According to Trump, his plan will boost output substantially, and the higher tax revenue that comes with it will offset most of the lost revenue.
Second, his “penny plan” would make up the rest of the revenue lost to his tax cuts. This plan would cut spending on nondefense programs funded by annual appropriations by 1 percent each year.
Since the cuts would affect only a part of the budget (defense and entitlement programs such as Medicare and Social Security are excluded), the plan would reduce spending on programs such as“veterans’ medical care…, scientific and medical research, border enforcement, education, child care, national parks, air traffic control, housing assistance for low-income families, and maintenance of harbors, dams, and waterways,” according to the Center on Budget and Policy Priorities. The total spending reduction would be approximately 25 percent over 10 years.
You should be skeptical of both claims. ...
Posted by Mark Thoma on Thursday, September 22, 2016 at 09:28 AM in Economics, Fiscal Policy, Politics, Social Insurance, Social Security, Taxes |
Posted by Mark Thoma on Thursday, September 22, 2016 at 12:06 AM in Economics, Links |
Several Fed presidents wanted a rate hike, but the Board stayed united:
Press Release, Release Date: September 21, 2016, For release at 2:00 p.m. EDT: Information received since the Federal Open Market Committee met in July indicates that the labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year. Although the unemployment rate is little changed in recent months, job gains have been solid, on average. Household spending has been growing strongly but business fixed investment has remained soft. Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Jerome H. Powell; and Daniel K. Tarullo. Voting against the action were: Esther L. George, Loretta J. Mester, and Eric Rosengren, each of whom preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.
Posted by Mark Thoma on Wednesday, September 21, 2016 at 11:14 AM in Economics, Monetary Policy |
Trouble with Macroeconomics, Update: My new working paper, The Trouble with Macroeconomics, has generated some interesting reactions. Here are a few responses...
Posted by Mark Thoma on Wednesday, September 21, 2016 at 10:44 AM in Economics, Macroeconomics, Methodology |
The latest from the Bank of Japan: The Bank of Japan’s (BOJ) policy announcement today had two main parts. First, the BOJ committed itself to continue expanding the monetary base until the inflation rate “exceeds the price stability target of 2 percent and stays above the target in a stable manner.” That is, the BOJ says it wants not only to reach its 2 percent inflation target but to overshoot it. Second, in a significant change, the BOJ will begin targeting the yield on ten-year Japanese government debt (JGBs), initially at about zero percent (that is, setting a target price for bonds). ..
I think the announcements are good news overall, since they include a recommitment to the goal of ending deflation in Japan and the establishment of a new framework for pursuing that goal. ... The follow-through will indeed be crucial: Japan has made significant progress toward ending deflation, but that progress could still be lost if the public questions the BOJ’s commitment to its inflation objective. ...
The most surprising, and interesting, part of the announcement was the decision to target the ten-year JGB yield. ... Targeting a long-term yield is closely related to quantitative easing... Pegging a long-term yield ... amounts to setting a target price rather than a target quantity. ...
In general, pegging a long-term rate carries some risks. Notably, in defending a peg, a central bank gives up control over the size of its balance sheet... In the extreme case, a central bank trying to hold down yields could find itself owning most or all of the eligible securities. That risk is particularly acute if the peg is not credible ... because then bondholders will have a strong incentive to sell as quickly as possible..., in the Japanese context these risks are probably manageable. ....
The BOJ’s announcement referred to “synergy effects” between Japanese monetary and fiscal policies, but in public statements Governor Kuroda has expressed his opposition to explicit monetary financing of government spending, so-called “helicopter money.” Exactly what constitutes helicopter money is a semantic debate, but a policy of keeping the government’s borrowing rate at zero indefinitely has some elements of monetary finance. ... The resemblance would become even more pronounced if the BOJ began targeting rates on very long JGBs (the Japanese government borrows at maturities out to forty years). I suspect that the BOJ is happy for now with “synergy,” as opposed to explicit fiscal-monetary cooperation. Whether such cooperation will emerge in the future will depend on whether the new framework proves powerful enough to decisively end deflation in Japan.
See also David Beckworth.
Posted by Mark Thoma on Wednesday, September 21, 2016 at 10:43 AM in Economics, Monetary Policy |
Posted by Mark Thoma on Wednesday, September 21, 2016 at 12:06 AM in Economics, Links |